UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended May 25, 2003 OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from to . Commission File Number: 1-6453
NATIONAL SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2095071
(State of incorporation) (I.R.S. Employer
Identification Number)
2900 SEMICONDUCTOR DRIVE, P.O. BOX 58090
SANTA CLARA, CALIFORNIA 95052-8090
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 721-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Common stock, par value New York Stock Exchange
$0.50 per share Pacific Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes . No X .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X . No .
The aggregate market value of voting stock held by non-affiliates of National as
of November 22, 2002, was approximately $2,635,415,828 based on the last
reported sale price on that date. Shares of common stock held by each officer
and director and by each person who owns 5 percent or more of the outstanding
common stock have been excluded because these persons may be considered to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares outstanding of the registrant's common stock, $0.50 par
value, as of June 20, 2003, was 183,806,274.
PART II.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EXPLANATORY NOTE
As discussed in our Form 10-K filed on July 21, 2003, pursuant to Item 3-09 of
Regulation S-X, we are required to file the separate financial statements of
iReady Corporation as part of our Form 10-K for the year ended May 25, 2003,
because our share in the net losses of iReady in the amount of $8.5 million
exceeded 20 percent of our reported loss before income taxes of $23.3 million
for fiscal 2003. iReady's fiscal year ended September 30, 2003. We are filing
this amendment on Form 10-K/A to amend Item 8 to include the audited
consolidated financial statements of iReady as of and for the year ended
September 30, 2003 and unaudited consolidated financial statements as of and for
the fiscal year ended September 30, 2002. Neither iReady's losses nor its
financial condition or cash flows had a material effect on our results of
operations, financial condition or cash flows in fiscal 2003. The financial
statements of National Semiconductor Corporation as originally included in our
Form 10-K have not changed and we are incorporating them herein by reference.
Except as expressly stated herein, this Form 10-K/A continues to speak as of the
date of the original filing of the Annual Report and we have not updated the
disclosures contained therein to reflect any events that occurred at a later
date.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements of iReady Corporation and Subsidiary: Page
Independent Auditors' Report F1
Consolidated Balance Sheets at September 30, 2003 and 2002 F2
Consolidated Statements of Operations for the years ended
September 30, 2003 and 2002 F3
Consolidated Statements of Mandatorily Redeemable
Convertible Preferred Stock and Stockholder's
Deficit for the years ended September 30, 2003 and 2002 F4
Consolidated Statements of Cash Flows for the years
ended September 30, 2003 and 2002 F5
Notes to Consolidated Financial Statements F6-F27
iREADY CORPORATION
AND SUBSIDIARY
Consolidated Financial Statements
September 30, 2003 and 2002 (Unaudited)
(With Independent Auditors' Report Thereon)
iReady Corporation
and SUBSIDIARy
Table of Contents
Page
Independent Auditors' Report F1
Consolidated Balance Sheets F2
Consolidated Statements of Operations F3
Consolidated Statements of Mandatorily Redeemable
Convertible Preferred Stock and Stockholders' Deficit F4
Consolidated Statements of Cash Flows F5
Notes to Consolidated Financial Statements F6
Independent Auditors' Report
The Board of Directors
iReady Corporation:
We have audited the accompanying consolidated balance sheet of iReady
Corporation and subsidiary as of September 30, 2003, and the related
consolidated statements of operations, mandatorily redeemable convertible
preferred stock and stockholders' deficit, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of iReady
Corporation and subsidiary as of September 30, 2003, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in note 2 to the accompanying consolidated financial statements,
the consolidated balance sheet as of September 30, 2003 and the related
consolidated statements of operations, mandatorily redeemable convertible
preferred stock and stockholders' deficit, and cash flows for the year ended
September 30, 2003 have been restated.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1(b) to
the consolidated financial statements, the Company has suffered recurring losses
from operations and has a stockholders' deficit that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 1(b). The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG LLP
February 18, 2004
iREADY CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 2003 and 2002
Assets 2003 2002
----------- ------------
(As restated)
(Unaudited)
Current assets:
Cash and cash equivalents $ 870,867 5,047,131
Restricted cash 2,088 211,390
Accounts receivable - related party 22,029 -
Accounts receivable 9,990 -
Prepaid expenses 90,781 122,750
Prepaid maintenance fees 97,993 151,175
Other current assets 67,405 27
----------- ------------
Total current assets 1,161,153 5,532,473
Property and equipment, net 565,680 1,307,929
Other assets - 16,402
----------- ------------
Total assets $1,726,833 6,856,804
=========== ============
Liabilities, Mandatorily Redeemable Convertible
Preferred Stock, and Stockholders' Deficit
Current liabilities:
Accounts payable $ 572,746 624,063
Accrued compensation 558,636 546,677
Accrued liabilities - related party 340,000 -
Convertible subordinated promissory notes - related parties 6,045,015 -
Other accrued liabilities 215,389 135,519
Restructuring accruals - 50,000
Note payable to related party 4,000,000 4,000,000
Obligations under capital lease, current portion 165,636 286,223
----------- ------------
Total current liabilities 11,897,422 5,642,482
Obligations under capital lease, less current portion 5,512 123,645
----------- ------------
Total liabilities 11,902,934 5,766,127
----------- ------------
Commitments
Mandatorily redeemable convertible preferred stock:
9% Series A-1 through A-4 preferred stock, par value $0.001 per share.
Authorized 2,112,749 shares; issued and outstanding 2,007,368 shares;
aggregate liquidation preference of $42,661,446 48,461,391 44,395,889
9% Series B-1 and B-2 preferred stock, par value $0.001 per share.
Authorized 9,997,587 shares; issued and outstanding 9,904,894 shares;
aggregate liquidation preference of $48,043,996 35,738,249 30,662,864
Stockholders' deficit:
Common stock, par value $0.001. Authorized 30,000,000 shares; issued
and outstanding 119,956 shares 120 120
Additional paid-in capital 1,129,060 1,129,060
Accumulated deficit (95,504,921) (75,097,256)
----------- ------------
Total stockholders' deficit (94,375,741) (73,968,076)
----------- ------------
Total liabilities, mandatorily redeemable convertible
preferred stock, and stockholders' deficit $ 1,726,833 6,856,804
=========== ============
See accompanying notes to consolidated financial statements.
iREADY CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended September 30, 2003 and 2002
2003 2002
------------ ------------
(As restated)
(Unaudited)
Royalty revenues $ 67,631 76,412
------------ ------------
Operating expenses:
Research and development 8,566,018 7,389,234
Sales and marketing 1,094,295 1,031,304
General and administrative 1,637,242 2,155,157
------------ ------------
Total operating expenses 11,297,555 10,575,695
------------ ------------
Loss from operations (11,229,924) (10,499,283)
Interest income 44,426 42,672
Interest expense (406,475) (10,698,638)
Other income, net 325,195 15,887
------------ ------------
Net loss (11,266,778) (21,139,362)
Accretion on mandatorily redeemable convertible preferred stock (9,140,887) 6,033,636
------------ ------------
Net loss applicable to common stockholders $(20,407,665) (15,105,726)
============ ============
See accompanying notes to consolidated financial statements.
iREADY CORPORATION
AND SUBSIDIARY
Consolidated Statements of Mandatorily Redeemable Convertible Preferred Stock
and Stockholders' Deficit
Years ended September 30, 2003 and 2002
Mandatorily redeemable Addi- Warrants to
convertible preferred stock Common stock tional purchase Total
------------------------ ------------------ paid-in preferred Accumulated stockholders'
Shares Amount Shares Amount capital stock deficit deficit
----------- ----------- --------- -------- ------- ------- ----------- ------------
(As restated) (As restated)(As restated)
Balance as of September 30, 2001
(unaudited) 13,418,975 $52,724,482 4,839,029 $415,460 713,728 713,728 (59,991,530) (58,862,342)
Accretion of mandatorily redeemable
convertible preferred stock up to
March 28, 2002 (unaudited) - 2,276,185 - - - - (2,276,185) (2,276,185)
Reversal of accretion of mandatorily
redeemable convertible preferred
stock (unaudited) - (12,594,332) - - - - 12,594,332 12,594,332
Reincorporation to iReady Corporation,
Delaware (unaudited) (13,418,975) (42,406,335) (4,839,029)(415,452) - (713,728) - (1,129,180)
Payout of partial share dollars
(unaudited) - - - (8) - - - (8)
----------- ----------- --------- ------- ------- ------- ----------- ------------
Balance as of March 28, 2002
(unaudited) - $ - - $ - - - (49,673,383) (49,673,383)
=========== =========== ========= ======= ======= ======= =========== ============
Incorporation of iReady Delaware,
March 28, 2002 (unaudited) - $ - - $ - - - (49,673,383) (49,673,383)
Warrants assumed by iReady Delaware
(unaudited) - - - - 713,728 - - 713,728
Conversion of common stock (unaudited) - - 119,956 120 415,332 - - 415,452
Conversion of Series A preferred stock
into Series A-1 preferred stock, net of
issuance costs of $25,444 (unaudited) 145,231 1,474,556 - - - - - -
Conversion of Series B preferred stock
into Series A-2 preferred stock, net of
issuance costs of $43,520 (unaudited) 462,758 7,125,901 - - - - - -
Conversion of Series C preferred stock
into Series A-3 preferred stock, net of
issuance costs of $72,427 (unaudited) 701,850 13,927,556 - - - - - -
Conversion of Series D preferred stock
into Series A-4 preferred stock, net of
issuance costs of $111,309 (unaudited) 697,529 19,878,320 - - - - - -
Issuance of iReady Delaware Series B-1
preferred stock for cash of $8,040,000
and upon conversion of bridge loan
interest of $384,420, net of issuance
costs of $805,515 (unaudited) 2,106,105 7,618,905 - - - - - -
Issuance of iReady Delaware Series B-2
preferred stock upon conversion of
bridge loan, net of issuance costs
of $47,749, as restated (unaudited) 7,798,789 10,350,600 - - - - - -
Value of beneficial conversion feature
of convertible bridge loan, as
restated (unaudited) - 10,398,404 - - - - - -
Accretion of mandatorily redeemable
convertible preferred stock to
redemption value, as restated
(unaudited) - 4,284,511 - - - - (4,284,511) (4,284,511)
Net and comprehensive loss, as restated
(unaudited) - - - - - - (21,139,362) (21,139,362)
----------- ----------- --------- ------- ------- ------- ----------- ------------
Balance as of September 30, 2002, as
restated (unaudited) 11,912,262 75,058,753 119,956 120 1,129,060 - (75,097,256) (73,968,076)
Accretion of mandatorily redeemable
convertible preferred stock to
redemption value, as restated - 9,140,887 - - - - (9,140,887) (9,140,887)
Net and comprehensive loss - - - - - - (11,266,778) (11,266,778)
----------- ----------- --------- ------- ------- ------- ----------- ------------
Balance as of September 30, 2003,
as restated 11,912,262 $84,199,640 119,956 $ 120 1,129,060 - (95,504,921) (94,375,741)
=========== =========== ========= ======= ======= ======= =========== ============
See accompanying notes to consolidated financial statements.
iREADY CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 2003 and 2002
2003 2002
------------- -------------
(As restated)
(Unaudited)
Cash flows from operating activities:
Net loss $ (11,266,778) (21,139,362)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 997,228 791,261
Amortization of the discount on convertible promissory notes - 10,398,404
Loss on disposal of assets - 2,137
Accrued interest on convertible promissory note from related parties 204,811 -
Accrued interest on notes payable to related party 175,888 9,137
Changes in operating assets and liabilities:
Accounts receivable - related party (22,029) -
Accounts receivable (9,990) 21,434
Prepaid expenses 31,969 (87,037)
Prepaid maintenance fees 53,182 (115,124)
Other current assets (67,378) 273,929
Other assets 16,402 -
Accounts payable (51,317) 34,329
Accrued compensation 11,959 298,180
Accrued liabilities - related party 340,000 -
Other accrued liabilities (96,018) 9,267
Restructuring accrual (50,000) (540,000)
------------- -------------
Net cash used in operating activities (9,732,071) (10,043,445)
------------- -------------
Cash flows from investing activities:
Restricted cash 209,302 233,338
Acquisition of property and equipment (184,341) (828,225)
------------- -------------
Net cash provided by (used in) investing activities 24,961 (594,887)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of mandatorily redeemable convertible
preferred stock, net - 7,182,735
Repurchase of common stock - (8)
Proceeds from loan from related party - 4,000,000
Proceeds from issuance of convertible debt 5,840,204 2,398,404
Payment on capital lease obligations (309,358) (176,605)
------------- -------------
Net cash provided by financing activities 5,530,846 13,404,526
------------- -------------
Net (decrease) increase in cash and cash equivalents (4,176,264) 2,766,194
Cash and cash equivalents, beginning of year 5,047,131 2,280,937
------------- -------------
Cash and cash equivalents, end of year $ 870,867 5,047,131
------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 24,613 15,901
Noncash investing and financing activities:
Accretion on mandatorily redeemable convertible preferred stock 9,140,887 6,560,696
Reversal of accretion on mandatorily redeemable convertible
preferred stock as a result of recapitalization - (12,594,332)
Beneficial conversion feature of convertible note - 10,398,404
Conversion of convertible debenture and interest to mandatorily
redeemable convertible preferred stock - 8,384,420
Property and equipment acquired under capital lease 70,638 370,034
See accompanying notes to consolidated financial statements.
iready corporation
and subsidiary
Notes to Consolidated Financial Statements
September 30, 2003 and 2002
(Amounts as of and for the year ended September 30, 2002
and prior periods are unaudited)
(1) Organization and Summary of Significant Accounting Policies
iReady Corporation (the Company) was incorporated in California on January
8, 1996. In March 2002, the Company was reincorporated in Delaware and
recapitalized (see note 6). The Company develops highly integrated
semiconductor products that incorporate TCP/IP offload technology and
support the iSCSI and IPsec protocols. The Company is developing chips,
software, and related board-level products for use in high-performance
networking applications such as enterprise servers and network storage
devices. These products are being marketed under the EthernetMAXTM brand
and are initially targeted for use in 1 Gb Ethernet network.
From 1996 through 2001, the Company's TCP/IP offload technology was
designed and licensed for use in office equipment, consumer electronics,
home appliances, and other business and consumer applications so that those
products could access the Internet. The Company licensed its technology to
several customers. In 2001, the Company shifted its business model from a
technology licensing company to a fabless semiconductor company, and its
market focus from Internet appliances to high-speed networking. To date,
all of the Company's revenues have come from the licensing of TCP/IP
offload technologies.
The Company's products and services are designed for an emerging market.
Some of the Company's products utilize changing and emerging technologies.
Demand and market acceptance of the Company's products are subject to a
high level of uncertainty. Market acceptance of the Company's products is
critical to the Company's success. The Company has limited operating
history as a fabless semiconductor company. The Company's operating results
may fluctuate significantly in the future as a result of a variety of
factors, including, but not limited to, the timing of product announcements
by the Company or its competitors and general economic conditions. With the
shift in its business model, the Company is subject to a number of risks,
including, but not limited to, the need for additional financing to fund
its future growth and development of its principal products, uncertain
profitability and competition from larger companies, and the ability to
attract and retain employees.
(a) Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary iReady Corporation, a
California corporation (iReady California). All material intercompany
accounts and transactions have been eliminated.
(b) Liquidity
The accompanying consolidated financial statements have been prepared
on a going-concern basis. The Company has a stockholders' deficit of
$(94,375,741) as of September 30, 2003. As of September 30, 2003, the
Company has $870,867 of available cash and cash equivalents, and the
Company used cash in operations of $9,732,071 and $10,043,445
(unaudited) in the years ended September 30, 2003 and 2002,
respectively. Management of the Company has prepared a business plan
that indicates that because of its working capital requirements, its
future cash needs cannot be met entirely from funds generated
internally from operations, if any. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The
Company plans on obtaining outside capital through debt and/or equity
financings in order to maintain its present and anticipated level of
operations, but no assurances can be made that such capital will be
available on terms acceptable to the Company. The consolidated
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
(c) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates,
and such differences may be material to the consolidated financial
statements.
(d) Cash Equivalents
Cash equivalents consist of short-term highly liquid financial
instruments with insignificant interest rate risk that are readily
convertible to cash and that have maturities of three months or less
from the date of purchase. Cash equivalents consist principally of a
money market account that is stated at cost, which approximates fair
value. The Company deposits cash and cash equivalents with what it
believes to be high-credit quality financial institutions.
(e) Restricted Cash
As of September 30, 2003 and 2002, the Company had restricted cash of
$2,088 and $211,390 (unaudited), respectively. At 2002, the balance
includes amounts pledged as collateral on outstanding letters of
credit relating to a building lease agreement and restricted for
certain employee benefit obligations. At 2003, the balance represents
collateral for cash restricted for certain employee benefit
obligations.
(f) Concentration of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of cash
and cash equivalents and accounts receivable. The Company's cash and
cash equivalents as of September 30, 2003 are on deposit with two
financial institutions. At times, such amounts may be in excess of
federal deposit insurance limits. The Company has not experienced any
losses on its deposits of cash and cash equivalents. Historically,
accounts receivable are a result of royalties from licensees in the
United States and Japan. As of September 30, 2003, all accounts
receivable are associated with the sale of Alpha boards for initial
evaluation of the Company's one-gigabit transport offload engine chip,
and $22,029 is receivable from a related party. Ongoing evaluations
are performed on iReady's customers' financial condition. The Company
evaluates the collectibility of accounts receivable and establishes an
allowance for doubtful accounts as warranted. As of September 30,
2003, no allowance for doubtful accounts has been established.
For the year ended September 30, 2003, two customers in Japan
accounted for 84% and 16% of total revenue, respectively. For the year
ended September 30, 2002, two customers in Japan accounted for 84%
(unaudited) and 15% (unaudited) of total revenue, respectively.
(g) Property and Equipment, Net
Property and equipment are carried at historical cost, less
accumulated depreciation. Property and equipment are depreciated over
the estimated useful lives of the assets, generally two to five years,
using the straight-line method. Equipment under capital leases is
amortized on a straight-line basis over the shorter of the lease term
or the lives of the respective assets, generally two to five years.
Capitalized software is amortized over the estimated useful life of
the software, generally two to three years.
(h) Impairment of Long-Lived Assets
In the year ended September 30, 2002, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, under which the Company
identifies and records impairment losses on long-lived assets used in
operations when events and circumstances indicate that assets might be
impaired and when projected undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of the
assets. If these conditions are present, the impairment loss is
measured as the amount by which the carrying amount of these assets
exceeds their fair value. No such impairments have been identified as
of September 30, 2003, with respect to the Company's long-lived
assets, which consist primarily of property and equipment. Long-lived
assets classified as held for sale are recorded at the lower of
carrying amount or fair value, less cost to sell.
(i) Revenue Recognition
In prior years, the Company entered into nonexclusive technology
license agreements with its customers. These agreements provided a
license to use semiconductor products that embed the TCP/IP networking
protocol in silicon (the iReady Chip Design) and to receive related
engineering implementation services, customer support, training, and
enhancements. In connection with these agreements, the Company
typically received a one-time license fee and ongoing unit royalties.
In the years ended September 30, 2003 and 2002, all revenue was
derived from royalty payments in connection with the above licensing
arrangements. Royalty revenue is recognized when a customer's product,
encompassing the Company's product, has been shipped or transferred to
a third party and iReady's customer has reported such sell-through to
the Company.
In the year ended September 30, 2003, the Company shipped Alpha boards
to several customers. The Alpha board payments, totaling $38,332, were
offset against research and development expense, as the boards were
prototypes and were not available for commercial release.
(j) Other Income
For the year ended September 30, 2003, other income includes a payment
from the state of Hawaii for a research and development incentive in
the amount of $339,008.
(k) Research and Development Expenses
Research and development expenses are charged to operations as
incurred.
(l) Stock-Based Compensation
The Company accounts for employee stock-based compensation using the
intrinsic-value method under Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations.
Options granted to nonemployees are accounted for in accordance with
SFAS No. 123 and Emerging Issues Task Force (EITF) Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services. Nonemployee awards with future performance requirements that
are subject to vesting are periodically remeasured to their current
fair value, with the resulting value charged to expense over the
period the related services are rendered. Nonemployee awards with no
future performance requirements that are fully vested are valued at
the date of grant and expensed in the period of grant.
The Company has adopted SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, which amends SFAS No. 123,
Accounting for Stock-Based Compensation. Had compensation expense for
stock options granted to employees been determined based on the fair
value of the related options at the grant dates, consistent with SFAS
No. 123, the Company's net loss applicable to common stock would have
increased to the pro forma amounts indicated below:
2003 2002
-------------- ------------
(Unaudited)
Net loss applicable to holders
of common stock:
As reported $ (20,407,665) (15,105,726)
Add back stock-based
compensation included in net loss - -
Deduct stock-based compensation
calculated in accordance with the
fair-value method (4,100) (23,383)
-------------- ------------
Pro forma $ (20,411,765) (15,129,109)
============== ============
The Company calculated the fair value of each option on the grant date
using the Black-Scholes option-pricing model under the minimum-value
method with the following weighted average assumptions:
2003 2002
-------------- ------------
(Unaudited)
Expected life (years) 5 5
Risk-free interest rate 2.71% 4.40%
Volatility 0.0% 0.0%
Dividend yield 0.0% 0.0%
The fair value of options granted during the years ended September 30,
2003 and 2002 was $0.03 and $0.01 (unaudited) per share, respectively.
(m) Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a
business enterprise during a period from transactions and other events
and circumstances from nonowner sources. To date, the Company has not
had any material items other than net loss that are required to be
reported in comprehensive income (loss), and as a result, the
Company's net loss is the same as its comprehensive loss for all
periods presented.
(n) Income Taxes
The accompanying financial statements reflect the provisions of SFAS
No. 109, Accounting for Income Taxes. Accordingly, income taxes are
accounted for using an asset and liability approach. Deferred income
tax assets and liabilities are determined based on the difference
between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to affect taxable
income. In addition, deferred tax assets are recorded for the future
benefit of utilizing net operating loss and research and development
credit carryforwards. A valuation allowance is provided against
deferred tax assets unless it is more likely than not that they will
be realized.
(o) Advertising Expense
The cost of advertising is expensed as incurred. Advertising costs
were $12,644 in the year ended September 30, 2003 and $1,543
(unaudited) in the year ended September 30, 2002.
(p) Reclassifications
Certain prior year amounts have been reclassified to conform to the
fiscal 2003 presentation.
(q) New Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring), and must be applied
beginning January 1, 2003. SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when
the liability is incurred rather than when the exit or disposal plan
is approved. The adoption of SFAS No. 146 did not have a material
effect on the Company's consolidated financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. SFAS No. 148
amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition to SFAS No. 123's fair-value
method of accounting for stock-based employee compensation. SFAS No.
148 also amends the disclosure provisions of SFAS No. 123 to require
more prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. While SFAS No. 148 does
not amend SFAS No. 123 to require companies to account for employee
stock options using the fair-value method, the disclosure provisions
of SFAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that
compensation using the fair-value method of SFAS No. 123 or the
intrinsic-value method of APB Opinion No. 25. The Company will
continue to use the intrinsic-value method described in APB Opinion
No. 25, Accounting for Stock Issued to Employees, in accounting for
the fair value of stock awards issued to employees.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. This statement established standards for how an issuer
classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that
embody obligations for the issuer are required to be classified as
liabilities. For the Company, the statement was effective for
instruments entered into or modified after May 31, 2003 and otherwise
will be effective October 1, 2005. The Company currently does not have
any financial instruments, other than mandatorily redeemable
convertible preferred stock, that are within the scope of this
statement.
In November 2002, the EITF reached a consensus on EITF Issue No.
00-21, Revenue Arrangements with Multiple Deliverables, which provides
guidance on the timing and method of revenue recognition for
arrangements that include the delivery of more than one product or
service. EITF Issue No. 00-21 is effective for arrangements entered
into in periods beginning after June 15, 2003. The adoption of this
consensus did not to have a material impact on the Company's
consolidated financial position or results of operations.
(2) Restatement of Financial Statements
In connection with a re-audit of the Company's 2003 consolidated financial
statements in February 2004, the Company adjusted the accounting for its
recapitalization and convertible promissory notes that converted into
Series B-2 preferred stock during fiscal 2002, to properly record a
contingent beneficial conversion feature that existed at the date of note
issuance, resulting in a restatement of the Company's consolidated
financial statements for the years ended September 30, 2003 and 2002. The
effect of the adjustment included recognition of the beneficial conversion
features in equity and recognition of interest expense to record the note
discount upon conversion of the note into Series B-2 preferred stock during
fiscal 2002. Adjustments relating to fiscal 2002 and 2003 were also
recorded to properly accrete the carrying value of the preferred stock to
its mandatorily redeemable amount over the applicable redemption period.
The following balance sheet and statement of operations amounts were
restated as a result of this change:
As previously
reported As restated
------------- ------------
Fiscal 2002 (unaudited):
------------------------
Interest expense $ 300,234 10,698,638
Accretion on mandatorily redeemable
convertible preferred stock (26,874,635) 6,033,636
Net loss (10,740,958) (21,139,362)
Net loss applicable to common stockholders (37,615,593) (15,105,726)
9% Series B-1 and B-2 preferred stock 40,578,399 30,662,864
Accumulated deficit (85,012,791) (75,097,256)
Fiscal 2003:
------------
Accretion on mandatorily redeemable
convertible preferred stock (7,958,357) (9,140,887)
Net loss applicable to common stockholders (19,225,135) (20,407,665)
9% Series B-1 and B-2 preferred stock 44,471,254 35,738,249
Accumulated deficit (104,237,926) (95,504,921)
Items related to these captions reported in the consolidated statements of
cash flows and mandatorily redeemable convertible preferred stock and
stockholders' deficit were also restated to reflect these changes. The
restatements had no impact on cash flows used in, or provided by,
operating, investing or financing activities.
(3) Property and Equipment
Property and equipment as of September 30, 2003 and 2002 are stated at cost
and consisted of the following:
2003 2002
----------- -----------
(Unaudited)
Property and equipment:
Research and development equipment $1,416,794 1,563,981
Software 969,051 1,111,328
Office furniture 316,271 313,333
Office equipment 664,984 792,247
Equipment under capital leases 520,187 570,486
Leasehold improvements 180,553 159,029
----------- -----------
4,067,840 4,510,404
Less accumulated depreciation
and amortization 3,502,160 3,202,475
----------- -----------
$ 565,680 1,307,929
=========== ===========
(4) Debt and Capital Lease Obligations
(a) Note Payable to Related Party
As of September 30, 2003, the Company had $4,000,000 outstanding under
a secured promissory note with National Semiconductor (NSC), a related
party. The amount payable under this note will be reduced by royalty
payments, if any, due from NSC to the Company. The note is secured by
the assets of the Company. The note accrued interest at a rate of
3.97% per annum and was due on August 30, 2003. As of September 30,
2003, the entire amount was outstanding, and as provided for in the
note, the interest rate was increased to 9% per annum until the note
and accrued interest expense are repaid in full. The note is currently
due and payable upon demand by NSC. Accrued interest as of September
30, 2003 and 2002 was $185,025 and $9,137 (unaudited), respectively,
and is included in other accrued liabilities in the accompanying
consolidated balance sheets. NSC owns 2,000,000 shares of Series B-1
preferred stock (Series B-1) (note 11) and holds convertible secured
subordinated promissory notes with a principal balance of $1,007,365
(note 4(b)) as of September 30, 2003.
(b) Convertible Subordinated Promissory Notes
In May, June, and July 2001, the Company issued convertible unsecured
subordinated promissory notes (the Notes) in an aggregate principal
amount of $8,000,000 (unaudited). In the year ended September 30,
2002, the Company issued additional Notes in an aggregate principal
amount of $2,398,404 (unaudited). The interest rate on the Notes was
6% (unaudited) per annum. As a result of the Series B financing during
the year ended September 30, 2002, the Notes were converted into
7,798,789 shares (unaudited) of Series B-2 preferred stock (Series
B-2) at a conversion price of $1.33 (unaudited) per share. On the date
of conversion, a beneficial conversion feature of $10,398,404
(unaudited) (measured as the difference between the principal value of
the note and the fair value of the preferred stock obtained upon
conversion, limited to the carrying value of the note) was recorded as
interest expense and credited to the carrying value of Series B-2
preferred stock. Substantially all accrued interest on the Notes of
$384,420 (unaudited) was paid through the issuance of 96,105
(unaudited) shares of Series B-1 preferred stock.
In February, March, and April 2003, the Company issued convertible
secured subordinated promissory notes (the 2003 Notes) to related
parties in an aggregate principal amount of $5,840,204. The terms of
the 2003 Notes provide for automatic conversion upon the next round of
financing where at least $15,000,000 is raised into the number of
securities issued equal to the principal amount drawn under the 2003
Notes divided by the issuance price determined at the closing of the
financing, with a liquidation preference of no less than two and one
half times the principal amount of the 2003 Notes. As of September 30,
2003, $204,811 of accrued interest was included in the carrying value
of the 2003 Notes. The interest rate on the 2003 Notes is 6% per
annum. The 2003 Notes are due on February 28, 2004 and are secured by
substantially all of the assets of the Company. The 2003 Notes are
subordinate to the NSC note above.
(c) Capital Lease Obligations
The Company has equipment under capital lease that requires payments
of principal and interest as follows:
Year ending September 30:
2004 $ 171,684
2005 4,287
2006 1,429
------------------
Total minimum lease payments 177,400
Less amount representing interest 6,252
------------------
Principal value of capital
lease obligations 171,148
Less current portion 165,636
-----------------
Long-term portion of capital
lease obligation $ 5,512
==================
Property and equipment includes $520,187 and $570,486 (unaudited) of
equipment as of September 30, 2003 and 2002, respectively, that was
acquired under capital lease. As of September 30, 2003 and 2002,
accumulated amortization associated with this equipment totaled
$354,380 and $237,620 (unaudited), respectively.
(5) Commitments
The Company leases office space and equipment under noncancelable operating
leases with various expiration dates through fiscal 2006. Rent expense
amounted to $479,430 and $586,596 (unaudited) for the years ended
September 30, 2003 and 2002, respectively.
In August 2001, the Company reached an agreement to terminate its office
lease under a plan of restructure (see note 8) and vacated the facility on
November 15, 2001, at which point the Company entered into a new office
lease agreement.
In June 2003, the Company renegotiated the Santa Clara office lease
agreement to increase the space under lease, extend the term of the lease,
and reduce the rental rate per square foot. The Company has the right to
renew the Santa Clara office lease for an additional year at market rates.
In April 2003, the Company entered into a three-year operating lease for
phone equipment. At the end of the three-year period, the Company has the
right to renew the operating lease for an additional three years at half
the current monthly rate.
Future minimum lease payments under operating lease agreements with initial
terms of one year or more were as follows as of September 30, 2003:
Year ending September 30:
2004 $ 275,448
2005 14,715
2006 7,358
-----------
Total minimum lease payments $ 297,521
===========
(6) Recapitalization and Mandatorily Redeemable Convertible Preferred Stock
In July 1996, the Company issued 1,000,000 (unaudited) shares of Series A
preferred stock at $1.50 (unaudited) per share for total net proceeds of
$1,474,556 (unaudited), net of issuance of costs of $25,444 (unaudited). In
November 1997, the Company issued 3,032,253 (unaudited) shares of Series B
preferred stock at $1.86 (unaudited) per share for total net proceeds of
$5,596,472 (unaudited), net of issuance costs of $43,520 (unaudited). In
addition, $1,500,000 (unaudited) of convertible debentures with accrued
interest was converted into 822,275 (unaudited) shares of Series B
preferred stock in November 1997. In January and February 1999, the Company
issued 4,697,981 (unaudited) shares of Series C preferred stock at the
price of $2.98 (unaudited) per share for total net proceeds of $13,927,556
(unaudited), net of issuance costs of $72,427 (unaudited). In February
2000, the Company issued 2,885,419 (unaudited) shares of Series D preferred
stock at the price of $5.17 (unaudited) per share for total net proceeds of
$14,806,307 (unaudited), net of issuance costs of $111,309 (unaudited). In
addition, $4,993,885 (unaudited) of convertible promissory notes with
accrued interest was converted into 981,047 (unaudited) shares of Series D
preferred stock in February 2000.
In connection with the Company's reincorporation in Delaware in March 2002,
the Company simultaneously recapitalized the equity structure of the
Company. As part of the recapitalization, outstanding shares of common
stock and Series A, B, C, and D preferred stock were exchanged for common
stock and Series A-1, A-2, A-3, and A-4 preferred stock, respectively, at
the exchange ratios as follows:
Revised
Number of Exchange number of
shares ratio shares
---------- --------- ----------
(Unaudited)(Unaudited) (Unaudited)
Common stock 4,839,029 0.024789 Common stock 119,956
Series A preferred 1,000,000 0.145232 Series A-1 preferred 145,231
stock stock
Series B preferred 3,854,528 0.120058 Series A-2 preferred 462,758
stock stock
Series C preferred 4,697,981 0.149397 Series A-3 preferred 701,850
stock stock
Series D preferred 3,866,466 0.180410 Series A-4 preferred 697,529
stock stock
Warrants - common 1,290 0.024789 Warrants - common 31
Warrants - Series B 241,936 0.120058 Warrants - Series A-2 29,045
Warrants - Series C 16,778 0.149397 Warrants - Series A-3 2,506
Warrants - Series D 408,985 0.180410 Warrants - Series B-1 73,782
Options outstanding 2,653,124
Options available for 1,272,344 Options available for 4,000,000
grant grant
In March 2002, subsequent to the recapitalization, the Company issued
7,798,789 (unaudited) shares of Series B-2 at approximately $1.33
(unaudited) per share upon the conversion of $10,398,404 (unaudited) in
bridge loans, excluding accrued interest (see note 4). As part of the
bridge loan agreement, these shares have an aggregate liquidation
preference of $31,195,047 (unaudited), or $4.00 (unaudited) per share.
Additionally in March 2002, the Company issued 1,250,000 (unaudited) shares
of Series B-l at $4.00 (unaudited) per share to NSC for total net proceeds
of $4,194,485 (unaudited), net of issuance costs of $805,515 (unaudited).
In April 2002, the Company also issued an additional 96,105 (unaudited)
shares of Series B-l at $4.00 (unaudited) per share in exchange for the
cancellation of $384,420 (unaudited) in bridge loan interest payable. In
May 2002, the Company issued an additional 375,000 (unaudited) shares of
Series B-l to NSC at $4.00 (unaudited) per share for total net proceeds of
$1,500,000 (unaudited) upon the attainment of certain milestones indicated
in the Series B-l agreement. In July 2002, the Company issued 385,000
(unaudited) additional shares of Series B-l to NSC and another investor at
$4.00 (unaudited) per share for total net proceeds of $1,540,000
(unaudited) upon the attainment of certain additional milestones indicated
in the Series B-l preferred stock purchase agreement.
As of September 30, 2003, mandatorily redeemable convertible preferred
stock consisted of the following:
Mandatory
Shares redemption
Shares issued and value per Carrying Redemption
authorized outstanding share value value
------------------- ------------------- ------------------- ------------------- -------------------
Series A-l 145,232 145,231 $ 15.90 1,693,263 2,309,173
Series A-2 491,815 462,758 23.86 8,143,903 11,041,406
Series A-3 704,369 701,850 30.71 15,911,047 21,553,814
Series A-4 771,333 697,529 44.13 22,713,178 30,781,955
Series B-l 2,198,784 2,106,105 (1) 8,970,741 12,875,385
Series B-2 7,798,803 7,798,789 6.15 26,767,508 47,962,552
------------------- ------------------- ------------------- -------------------
12,110,336 11,912,262 $ 84,199,640 126,524,285
=================== =================== =================== ===================
(1) Mandatory redemption value per share is $6.15, $6.14, $6.07,
and $6.03 for 1,250,000, 96,105, 375,000, and 385,000
shares, respectively.
The Series A-1, A-2, A-3, A-4, B-1, and B-2 preferred stock have certain
rights, preferences, and restrictions with respect to dividends,
conversion, liquidation, voting, and redemption as follows:
(a) Dividends
The holders of Series A-1, A-2, A-3, A-4, B-1, and B-2 shares are
entitled to receive noncumulative preferential dividends of $0.93,
$1.39, $1.80, $2.58, $0.36, and $0.36 per share per annum,
respectively, when and if declared by the board of directors . No
dividends have been declared or paid through September 30, 2003.
(b) Conversion
Each share of Series A-1, A-2, A-3, A-4, B-1, and B-2 is convertible
into one share of common stock, subject to certain adjustments for
dilutive issuances and other events. Such conversion is automatic upon
the completion of a public offering of the Company's common stock for
which the aggregate proceeds equal or exceed $15 million and the per
share offering price equals or exceeds $8.00 or at such time as the
holders of the majority of the outstanding Series A or B shares (each
voting as a separate class) elect to convert such shares into common
stock. A total of 12,110,336 shares of common stock have been reserved
for issuance upon the conversion of the preferred stock.
(c) Liquidation
In the event of any liquidation or winding up of the Company or upon
consolidation, merger, or sale of all or substantially all of the
assets of the Company, Series B-l stockholders are entitled to a per
share distribution in preference to all other preferred or common
stockholders equal to two times the issue price of $4.00 per share,
plus any declared but unpaid dividends. After the payment in full of
the Series B-l liquidation preference, Series B-2 stockholders are
entitled to a per share distribution in preference to Series A-l, A-2,
A-3, or A-4 preferred or common stockholders equal to the issue price
of $4.00 per share, plus any declared but unpaid dividends.
After the payment in full of Series B-2 liquidation preference, Series
A-l, A-2, A-3, and A-4 stockholders are entitled to a per share
distribution, on a pro rata basis, in preference to the holders of
common stock equal to the issue price per share of $10.33, $15.49,
$19.95, and $28.66, respectively, plus any declared but unpaid
dividends. In the event that funds remain after the full preferential
amounts are paid as described above, additional funds will be
distributed pro rata among the holders of the common and preferred
stock on an as-converted basis until each holder of Series A-l, A-2,
A-3, and A-4 shares has received an amount equal to 0.19 times the
issue price per share of its respective Series A-l, A-2, A-3, or A-4
shares and each holder of Series B-l or B-2 shares has received an
amount equal to the issue price per share of its respective Series B-l
or B-2 shares. Thereafter, any remaining funds and assets will be
distributed pro rata solely among the holders of the common stock.
(d) Voting
The preferred stockholders have the right to one vote for each share
of common stock into which the Series A-l, A-2, A-3, A-4, B-l, and B-2
could be converted. The preferred stockholders have full voting rights
and powers equal to the voting rights and powers of the holders of
common stock.
As long as 500,000 shares of Series A are outstanding, the holders of
Series A-l through A-4, voting together as a class, are entitled to
elect one director of the Company, and as long as 500,000 shares of
Series B are outstanding, the holders of Series B-l and B-2, voting
together as a class, are entitled to elect one director of the
Company. As long as 1,000,000 shares of preferred stock are
outstanding, the holders of preferred stock, voting together as a
separate class, are entitled to elect one director of the Company. The
holders of common stock, voting as a single class, shall be entitled
to elect one director of the Company. The holders of common and
preferred stock, voting together as a single class, shall be entitled
to elect any additional directors of the Company.
(e) Other Rights
The holders of Series A and B have certain piggyback and demand
registration rights, which terminate six years after an initial public
offering by the Company. The holders of preferred stock have the
right, in the event the Company proposes to offer equity securities to
any person, to purchase a portion of the shares so as to maintain
their percentage ownership of common stock (on an as converted to
common stock basis). The holders of preferred stock also have a right
of first refusal on a pro rata basis with respect to sales by certain
holders of shares of the Company's common stock. These rights
terminate upon an initial public offering by the Company.
(f) Mandatory Redemption
In the absence of a liquidation event or initial public offering,
after March 31, 2007 (the redemption date), for Series A-l, A-2, A-3,
A-4, B-l, and B-2, the Company can be required by a vote of the
holders of a majority of the preferred stock to redeem, out of funds
legally available, 33%, 50%, and all remaining shares outstanding
following 1 month, 13 months, and 25 months, respectively, after the
redemption date. The redemption price for each share of preferred
stock shall be an amount equal to the issue price of the appropriate
series of preferred stock plus an additional amount equal to 9% per
year of such issue price, compounded annually, calculated for each day
such share of preferred stock is outstanding. The difference between
the redemption value on March 31, 2007 and the gross proceeds from
issuance is being accreted to the accumulated deficit through
March 31, 2007 for Series A-l, A-2, A-3, A-4, B-l, and B-2. If funds
legally available to redeem such stock are insufficient to redeem all
shares of preferred stock then scheduled to be redeemed, any such
unredeemed shares shall be carried forward and shall be redeemed on
the first day of the next fiscal quarter, to the full extent of
available funds of the Company at such time, and any such unredeemed
shares shall continue to be so carried forward until redeemed. As of
September 30, 2003, management believes the probability of the holders
requiring redemption is remote.
The carrying value of the Company's mandatorily redeemable convertible
preferred stock is increased by periodic accretions so that the
carrying amount will equal the redemption amount at the redemption
date. These increases are reflected as an additional charge in the
consolidated statements of operations to derive the amount of the net
loss applicable to common stockholders. Accretion recorded on Series
A, B, C, and D was $2,276,185 (unaudited) from October 1, 2001
to March 28, 2002, the date of reincorporation and recapitalization.
In connection with the Company's recapitalization, the accumulated
accretion for iReady California's Series A, B, C, and D preferred
stock, $12,594,332 (unaudited), was reversed and the redemption date
reset. Accretion recorded on Series A-l, A-2, A-3, A-4, B-l, and B-2
was $4,284,511 (unaudited) for the period from March 29, 2002 to
September 30, 2002 and $9,140,887 for the year ended September 30,
2003.
For the years ended September 30, 2003 and 2002, the Company has
accreted the following amounts:
2003 2002
------------------- -------------------
(Unaudited)
Series A $ - 102,127
Series B - 437,603
Series C - 745,433
Series D - 991,022
Series A-1 146,265 72,442
Series A-2 683,472 334,529
Series A-3 1,332,129 651,363
Series A-4 1,903,635 931,222
Series B-1 948,364 403,474
Series B-2 4,127,022 1,891,481
Reversal of accumulated
accretion - (12,594,332)
------------------- -------------------
$ 9,140,887 (6,033,636)
=================== ===================
(7) Stockholders' Deficit
(a) Restricted Stock
During the years ended September 30, 2003 and 2002, no shares were
repurchased. As of September 30, 2003, no shares subject to repurchase
were outstanding.
(b) Common Stock
The Company's certificate of incorporation authorizes the Company to
issue 30,000,000 shares of common stock. The Certificate of
Incorporation provides that the Company shall at all times reserve
such number of its shares of common stock as shall be sufficient to
effect the conversion of all outstanding shares of its preferred stock
as well as exercises of warrants and employee and consultant options
granted under the 2002 Stock Option Plan (the 2002 Plan). Shares
reserved total 12,110,336 for preferred stock conversions and warrant
exercises and 4,000,000 for stock option exercises and future option
grants as of September 30, 2003.
(c) Common Stock Warrants
In the year ended September 30, 2000, the Company issued warrants to a
vendor to purchase 1,290 (unaudited) shares of common stock at $6.20
(unaudited) per share. The common stock warrants were exercisable
immediately. The warrants were accounted for in accordance with EITF
Issue No. 96-18 using the Black-Scholes option-pricing model, and the
fair value was determined to be immaterial. In connection with the
recapitalization, these warrants were adjusted to 31 shares
(unaudited) at an exercise price of $250 (unaudited). On September 30,
2003, these common stock warrants expired unexercised.
(d) Equity Incentive Plans
In conjunction with the recapitalization and reorganization, the
Company's 1996 and 1999 stock option plans, and all related options
outstanding, were canceled. In connection with the recapitalization,
the Company adopted the 2002 Plan, under which 4,000,000 shares of
common stock are reserved for issuance. The 2002 Plan permits the
Company to sell or award restricted common stock or to grant incentive
and nonqualified stock options for the purchase of common stock to
employees, directors, and consultants. Under the 2002 Plan, restricted
common stock awards vest based on the terms of each award. Options
typically vest 25% 12 months from the vesting commencement date, and
1/36th of the remaining options vest each month thereafter.
In connection with the cancellation of the 1996 and 1999 plans on
March 28, 2002, the Company issued replacement grants to employees
under the 2002 Plan. The new options were granted on April 11, 2002,
at the then-current fair market value, and the vesting terms were
carried forward from the original stock option grants. In accordance
with FASB Interpretation (FIN) No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25, since the replacement options were granted within six
months after the original award was canceled, these options are
subject to variable accounting until the awards are exercised,
forfeited, or expire unexercised. The replacement options to purchase
1,468,900 (unaudited) shares are subject to variable accounting
prospectively whereby stock-based compensation for the options will be
remeasured quarterly and recorded in the consolidated statement of
operations for each reporting period. Management believes there had
been no increase in the value of the Company or the underlying value
of the common stock since the recapitalization, and accordingly, there
was no compensation expense recorded related to the stock options in
the years ended September 30, 2003 or 2002.
Option and restricted common stock activity under the 2002 Plan is as
follows:
Options outstanding
--------------------------------------------------------------
Weighted
Shares average
available Number of Exercise exercise
for grant shares price price
------------------- ------------------ ------------------ ------------------
Balance as of September 30, 2001
(unaudited) 1,482,344 2,443,124 $ 0.075 - 2.90 $ 0.72
Option grants (unaudited) (210,000) 210,000 0.50 0.50
Options canceled (unaudited) - (2,653,124) 0.075 - 2.90 0.70
Option plan canceled (unaudited) (1,272,344) - - -
------------------- ------------------
Balance as of March 28, 2002
(unaudited) - - - -
Additional shares reserved
(unaudited) 4,000,000 - - -
Option grants (unaudited) (3,920,200) 3,920,200 0.20 0.20
Options canceled (unaudited) 49,000 (49,000) 0.20 0.20
------------------- ------------------
Balance as of September 30, 2002
(unaudited) 128,800 3,871,200 0.20 0.20
Option grants (164,000) 164,000 0.20 0.20
Options canceled 342,105 (342,105) 0.20 0.20
------------------- ------------------
Balance as of September 30, 2003 306,905 3,693,095 0.20 0.20
=================== ==================
In the year ended September 30, 2000, the Company granted 33,735
(unaudited) options to purchase shares of common stock to nonemployees
in exchange for services to be rendered. These option grants vested as
services were performed. The options were accounted for in accordance
with SFAS No. 123 and EITF Issue No. 96-18 using the Black-Scholes
option-pricing model. For the year ended September 30, 2001, the
consulting expense associated with the vested options was immaterial.
In conjunction with the recapitalization and reorganization, these
options were canceled. In April 2002, the Company granted options to
purchase 35,000 (unaudited) shares of common stock to nonemployees in
exchange for services to be rendered. The options were accounted for
in accordance with SFAS No. 123 and EITF Issue No. 96-18 using the
Black-Scholes option-pricing model. For the years ended September 30,
2003 and 2002 (unaudited), the consulting expense associated with the
vested options was immaterial.
As of September 30, 2003, the 2002 Plan had options to purchase
3,693,095 shares of common stock outstanding at an exercise price of
$0.20, with a weighted average remaining contractual life of 8.59
years. Options vested and exercisable as of September 30, 2003 are
2,108,297, with a weighted average exercise price of $0.20.
In February 2002, the Company adopted the iReady Employee Retention
and Participation Plan (Retention Plan). In the event of a sale or
merger of the Company, the Retention Plan complements the common stock
option plan and provides employees with a share of the sale or merger
proceeds. The Retention Plan creates a pool equal to between 5% and
20% of acquisition proceeds for the benefit of employees. The employee
proceeds are split among employees based on each employee's percentage
ownership of the pool.
(e) Preferred Stock Warrants
In connection with certain debt arrangements entered into in the years
ended September 30, 1999, 2000, and 2001, the Company issued preferred
stock warrants. In connection with the recapitalization, these
warrants were adjusted similarly to the adjustments made to the
original underlying preferred stock based on conversion rates ranging
from 0.14 (unaudited) to 0.18 (unaudited) of the original number of
warrants granted. The Company has issued the following warrants to
purchase shares of preferred stock:
Number of Number of
warrants Exercise warrants Expiration
Description issued price outstanding date
------------------ ----------------- ----------------- ----------------- -------------------------------
(Unaudited) (Unaudited) (Unaudited)
Series A-3 2,506 $ 19.95 2,506 November 2005
Series B-1 73,782 3.60 73,782 October 2007 and May 2008
----------------- -----------------
76,288 76,288
================= =================
(8) Restructuring Charges
For the year ended September 30, 2000, the Company recorded a $1,834,317
(unaudited) restructuring charge, which consisted of severance of $279,769
(unaudited) to terminate 13 employees and $1,554,548 (unaudited) related to
abandoning its network services product initiative and the related disposal
of equipment, software, leasehold improvements, and certain vendor
arrangements associated with the project. Severance costs include severance
benefits, notice pay, and outplacement services. All terminations and
termination benefits were communicated to the affected employees prior to
September 30, 2000, and all remaining severance benefits were paid in the
year ended September 30, 2001.
For the year ended September 30, 2001, the Company recorded a $649,197
(unaudited) restructuring charge, which consisted of $590,000 (unaudited)
related to early lease termination fees and restoration costs associated
with a terminated lease facility and $59,197 (unaudited) related to the
abandonment of equipment and leasehold improvements. As of September 30,
2003, all the lease termination payments have been paid.
The following table summarizes the Company's restructuring accrual activity
during the years ended September 30, 2003 and 2002:
Excess
facilities
-----------------
Balance as of September 30, 2001
(unaudited) $ 590,000
Cash payments (unaudited) (540,000)
-----------------
Balance as of September 30, 2002
(unaudited) 50,000
Cash payments (50,000)
-----------------
Balance as of September 30, 2003 $ -
=================
(9) Income Taxes
The Company had no income tax expense (benefit) for all periods presented.
The differences between income taxes computed by applying the statutory
federal income tax rate of 34% to loss before taxes and the amounts
reported in the consolidated statements of operations for the year ended
September 30, 2003 are summarized as follows:
Income tax benefit computed at statutory rate $ 3,830,705
Permanent differences (4,063)
Net operating losses and credits not benefited, net (3,826,642)
------------------
Total income taxes $ -
==================
The components of deferred tax assets as of September 30, 2003 are as
follows:
Deferred tax assets:
Tax credit carryforwards $ 1,445,241
Net operating loss carryforwards 25,444,690
Accrued liabilities 540,202
------------------
Gross deferred tax assets 27,430,133
Less valuation allowance 27,430,133
------------------
Net deferred tax assets $ -
==================
As of September 30, 2002, the Company had gross deferred tax assets of
approximately $22,910,000 (unaudited) and a valuation allowance for the
full amount. Realization of the deferred tax assets is dependent upon
future taxable income, if any, the amount and timing of which are
uncertain. Accordingly, the gross deferred tax assets have been fully
offset by a valuation allowance. The net valuation allowance increased by
approximately $4,520,000 and $2,595,000 (unaudited) during the years ended
September 30, 2003 and 2002, respectively.
As of September 30, 2003, the Company had federal and state net operating
loss carryforwards of approximately $65,447,000 and $53,213,000,
respectively. The federal tax loss carryforwards will expire in varying
amounts in the fiscal years 2010 through 2023. State tax loss carryforwards
will expire in varying amounts in the fiscal years 2004 through 2014. The
state of California has temporarily suspended the ability to utilize
California net operating loss carryforwards for the 2003 tax year. The
Company also had federal and state research and development tax credit
carryforwards of approximately $931,000 and $514,000, respectively. If not
utilized, the federal tax credit carryforward will expire in various years
from fiscal 2011 through 2013. The state tax credits will carry forward
indefinitely.
Utilization of the net operating loss carryforwards and credits may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
(10) Retirement Plan
The Company sponsors a defined contribution retirement plan (the Plan),
which qualifies under Section 401 (k) of the Internal Revenue Code of 1986.
The Plan covers essentially all employees. Eligible employees may make
voluntary contributions to the Plan up to 20% of their annual compensation,
and the Company is allowed to make discretionary contributions. For the
years ended September 30, 2003 and 2002, the Company made no discretionary
contributions.
(11) Related Party Transactions
NSC beneficially owns approximately 16.6% of the Company's outstanding
common stock, assuming conversion of preferred stock, which consists of
2,000,000 shares of Series B-l preferred stock. In September 2002, NSC
loaned $4,000,000 to the Company in the form of a note payable (note 4).
The amount payable under this note is to be reduced by royalty payments due
from NSC to the Company. The note accrues interest at a rate of 3.97% per
annum and was due on August 30, 2003. Effective August 30, 2003, pursuant
to the note terms, the interest rate was increased to, and will remain at,
9% per annum until the note and interest expense are repaid in full. As of
September 30, 2003, the entire note is due and payable upon demand by NSC.
Telos Venture Partners (Telos) beneficially owns approximately 27.7% of the
Company's outstanding common stock, assuming conversion of preferred stock,
which consists of 145,231 shares of Series A-l preferred stock, 98,087
shares of Series A-2 preferred stock, 168,232 shares of Series A-3
preferred stock, 35,431 shares of Series A-4 preferred stock, 35,144 shares
of Series B-l preferred stock, and 2,851,344 shares of Series B-2 preferred
stock. Cadence Design Systems (Cadence) holds a limited partnership
interest in Telos. In the year ended September 30, 2002, the Company
licensed certain software tools from Cadence totaling $281,200 (unaudited),
and in the year ended September 30, 2003, the Company had contracted with
Cadence for design services estimated at $340,000. Subsequent to September
30, 2003, all amounts owed by the Company to Cadence for services rendered
as referenced above equal to an aggregate of $340,000 were converted into
convertible subordinated secured promissory notes pursuant to a note
purchase agreement dated November 14, 2003.
The notes are secured by the assets of the Company and are expressly
subordinated in the right of payment to the prior payment in full of all of
the Company's senior indebtedness. The notes accrue interest at a rate of
6% per annum and are due on November 7, 2004.
(12) Subsequent Event
On December 8, 2003, the Company closed a bridge loan with an aggregate
principal amount of approximately $3.6 million (December Notes). The
interest rate on the December Notes is 6% per annum. The December Notes are
due between November 14, 2004 and December 8, 2004 and are secured by the
assets of the Company. The December Notes are subordinate to the NSC note
and are senior to the 2003 Notes (see note 4).
The following holders of the December Notes are related parties: NSC holds
approximately 18.7% of the notes; Telos holds approximately 27.8% of the
notes; and Cadence Design Systems holds approximately 9.7% of the notes.
PART IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements Pages in this document
iReady Corporation Financial Statements
Refer to Index in Item 8 F1-F27
(a)3. Exhibits
The exhibits listed in the accompanying Index to Exhibits on page 6 of
this report are filed as part of, or incorporated by reference into,
this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATIONAL SEMICONDUCTOR CORPORATION
Date: March 4, 2004
\s\ BRIAN L. HALLA *
---------------------------------
Brian L. Halla
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities stated and on the 4th day of March 2004.
Signature Title
/S/ BRIAN L. HALLA* Chairman of the Board, President
Brian L. Halla and Chief Executive Officer
(Principal Executive Officer)
/S/ LEWIS CHEW* Senior Vice President, Finance
Lewis Chew and Chief Financial Officer
(Principal Financial Officer)
/S/ ROBERT E. DEBARR * Controller
Robert E. DeBarr. (Principal Accounting Officer)
/S/ STEVEN R. APPLETON * Director
Steven R. Appleton
/S/ GARY P. ARNOLD * Director
Gary P. Arnold
/S/ RICHARD J. DANZIG * Director
Richard J. Danzig
/S/ ROBERT J. FRANKENBERG * Director
Robert J. Frankenberg
/S/ E. FLOYD KVAMME* Director
E. Floyd Kvamme
/S/ MODESTO A. MAIDIQUE * Director
Modesto A. Maidique
/S/ EDWARD R. McCRACKEN * Director
Edward R. McCracken
* By /S/ LEWIS CHEW
Lewis Chew, Attorney-in-fact
INDEX TO EXHIBITS
Item 14(a)(3)
The following documents are filed as part of this report:
1. Financial Statements: reference is made to the Financial Statements of
iReady Corporation described under Part IV, item 14(a)(1)
2. Other Exhibits:
23.1 Independent Auditors' Consent.
24.1 Power of Attorney (incorporated by reference from the Exhibits to our Form
10-K for the fiscal year ended May 25, 2003 filed July 21, 2003.)
31. Rule 13a - 14(a)/15d - 14(a) Certifications
32. Section 1350 Certifications