Exhibit 99.1
UNISPHERE NETWORKS, INC.
FINANCIAL STATEMENTS
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
Consolidated Balance Sheets
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
2000 2001 2002
------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents $ 634 $ 26,879 $ 26,943
Accounts receivable, net of allowances of $1,890, $3,462
and $4,569 at September 30, 2000 and 2001 and
March 31, 2002, respectively 181 3,125 4,197
Accounts receivable from related parties 6,989 5,112 8,332
Inventories 12,412 31,068 12,289
Prepaid expenses and other current assets 4,307 3,431 5,358
Current assets of discontinued operations 3,755 4,427 3,685
------------ ------------ ------------
Total current assets 28,278 74,042 60,804
Property and equipment, net 21,610 30,357 30,645
Long-term deposit 9,250 884 1,046
Goodwill, net 246,040 177,054 177,054
Non-current assets of discontinued operations 166,776 126,017 123,351
------------ ------------ ------------
Total assets $ 471,954 $ 408,354 $ 392,900
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,728 $ 20,126 $ 11,461
Accounts payable to related parties 1,071 -- --
Accrued expenses 14,590 17,283 21,694
Deferred revenue 8,347 40,725 17,220
Convertible promissory note and accrued interest due to related party -- 70,476 113,630
Current liabilities of discontinued operations 5,555 7,960 5,910
------------ ------------ ------------
Total current liabilities 42,291 156,570 169,915
Stockholders' Equity:
Common stock, $.0l par value; 115,360,661 shares authorized;
90,284,760, 90,638,974 and 90,665,017 shares issued and
outstanding at September 30, 2000 and 2001 and March 31, 2002,
respectively 903 906 907
Additional paid-in capital 1,324,683 1,335,159 1,329,153
Accumulated deficit (818,735) (1,031,434) (1,066,212)
Notes receivable from officers (28,323) (26,879) (26,879)
Deferred compensation (48,865) (25,904) (13,710)
Accumulated other comprehensive loss -- (64) (274)
------------ ------------ ------------
Total stockholders' equity 429,663 251,784 222,985
------------ ------------ ------------
Total liabilities and stockholders' equity $ 471,954 $ 408,354 $ 392,900
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
Consolidated Statements of Operations
JANUARY
12, 1999
(DATE OF
INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED YEAR ENDED MARCH 31,
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, ----------------------------
1999 2000 2001 2001 2002
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues:
Third parties $ -- $ 14,858 $ 102,169 $ 41,140 $ 71,678
Related parties 1,286 16,735 67,713 18,727 39,060
------------ ------------ ------------ ------------ ------------
Net revenues 1,286 31,593 169,882 59,867 110,738
Cost of revenues:
Cost of revenues, excluding stock-based
compensation 1,647 26,385 90,720 36,017 49,441
Stock-based compensation -- 644 411 257 280
------------ ------------ ------------ ------------ ------------
Total cost of revenues 1,647 27,029 91,131 36,274 49,721
------------ ------------ ------------ ------------ ------------
Gross profit (loss) (361) 4,564 78,751 23,593 61,017
Operating expenses:
Research and development (1) 47,950 72,462 55,700 25,247 32,176
Sales and marketing (1) 14,621 35,642 48,400 21,685 26,162
General and administrative (1) 12,163 13,208 11,596 5,359 5,507
Amortization of goodwill and intangible assets 43,645 83,870 68,987 34,493 --
Write-off of offering costs -- -- 2,691 -- --
Impairment of intangible assets -- 118,810 -- -- --
Purchased in-process research and development 138,100 -- -- -- --
Stock-based compensation -- 18,825 9,443 4,108 5,290
------------ ------------ ------------ ------------ ------------
Total operating expenses 256,479 342,817 196,817 90,892 69,135
------------ ------------ ------------ ------------ ------------
Loss from operations (256,840) (338,253) (118,066) (67,299) (8,118)
Other income (expense):
Other expense -- (2,164) (4,272) 32 (261)
Interest income (expense) 264 698 (621) 181 (2,487)
------------ ------------ ------------ ------------ ------------
Total other income (expense) 264 (1,466) (4,893) 213 (2,748)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations (256,576) (339,719) (122,959) (67,086) (10,866)
Loss from discontinued operations (128,477) (93,963) (89,740) (40,034) (23,912)
------------ ------------ ------------ ------------ ------------
Net loss $ (385,053) $ (433,682) $ (212,699) $ (107,120) $ (34,778)
============ ============ ============ ============ ============
Basic and diluted net loss per share:
Continuing operations $ (2.98) $ (3.93) $ (1.39) $ (0.76) $ (0.12)
Discontinued operations (1.49) (1.09) (1.01) (0.45) (0.27)
------------ ------------ ------------ ------------ ------------
Net loss $ (4.47) $ (5.02) $ (2.40) $ (1.21) $ (0.39)
============ ============ ============ ============ ============
Weighted average shares used in computing basic
and diluted net loss per share 86,133 86,399 88,601 88,254 89,453
============ ============ ============ ============ ============
(1) Excludes non-cash, stock-based compensation
expense as follows:
Research and development $ -- $ 6,555 $ 1,801 $ 70 $ 2,131
Sales and marketing -- 4,415 657 203 348
General and administrative -- 7,855 6,985 3,835 2,811
------------ ------------ ------------ ------------ ------------
$ -- $ 18,825 $ 9,443 $ 4,108 $ 5,290
============ ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------------ ------------ ------------ ------------
Net loss -- $ -- $ -- $ (385,053)
Issuance of common stock 86,133,333 861 257,540 --
Capital contribution from parent -- -- 741,550 --
------------ ------------ ------------ ------------
Balance, September 30, 1999 86,133,333 861 999,090 (385,053)
Net loss -- -- -- (433,682)
Capital contribution form parent -- -- 212,503 --
Sale of restricted common stock in
exchange for notes 2,700,000 27 28,323 --
Sale of restricted common stock 521,334 5 5,469 --
Issuance of common stock upon the
exercise of stock options 930,093 10 7,969 --
Deferred compensation on employee
stock grants -- -- 70,699 --
Amortization of compensation expense
related to employee stock options -- -- -- --
Deferred compensation related to
the issuance of stock options to non-
employees -- -- 630 --
Amortization of compensation expense
related to non-employee stock options -- -- -- --
------------ ------------ ------------ ------------
Balance, September 30, 2000 90,284,760 $ 903 $ 1,324,683 $ (818,735)
Net loss -- -- -- (212,699)
Foreign currency translation adjustment -- -- -- --
Comprehensive loss -- -- -- --
Capital contribution from parent -- -- 22,250 --
Exercise of stock options in exchange
for notes 66,666 -- 490 --
Repayment of notes receivable -- -- -- --
Repurchase of restricted common stock
from employee (137,500) (1) (1,443) --
Issuance of common stock upon the
exercise of stock options 425,048 4 3,661 --
Deferred compensation on employee
stock grants -- -- (15,741) --
Amortization of compensation expense
related to employee stock grants -- -- -- --
Deferred compensation related to the
issuance of stock options to
non-employees -- -- 1,259 --
Amortization of compensation expense
related to non-employee stock options -- -- -- --
------------ ------------ ------------ ------------
Balance, September 30, 2001 90,638,974 $ 906 $ 1,335,159 $ (1,031,434)
Net loss (unaudited) -- -- -- (34,778)
Foreign currency translation adjustment (unaudited) -- -- -- --
Comprehensive loss (unaudited) -- -- -- --
Issuance of common stock upon the
exercise of stock options (unaudited) 26,043 1 303 --
Deferred compensation on employee
stock grants (unaudited) -- -- (6,329) --
Amortization of compensation expense
related to employee stock grants (unaudited) -- -- -- --
Deferred compensation related to the
issuance of stock options to
non-employees (unaudited) -- -- 20 --
Amortization of compensation expense
related to non-employee stock options (unaudited) -- -- -- --
------------ ------------ ------------ ------------
Balance, March 31, 2002 (unaudited) 90,665,017 $ 907 $ 1,329,153 $ (1,066,212)
============ ============ ============ ============
ACCUMULATED
OTHER TOTAL
NOTES DEFERRED COMPREHENSIVE STOCKHOLDERS'
RECEIVABLE COMPENSATION LOSS EQUITY
------------ ------------ ------------ ------------
Net loss $ -- $ -- $ -- $ (385,053)
Issuance of common stock -- -- -- 258,401
Capital contribution from parent -- -- -- 741,550
------------ ------------ ------------ ------------
Balance, September 30, 1999 -- -- -- 614,898
Net loss -- -- -- (433,682)
Capital contribution form parent -- -- -- 212,503
Sale of restricted common stock in
exchange for notes (28,323) -- -- 27
Sale of restricted common stock -- -- -- 5,474
Issuance of common stock upon the
exercise of stock options -- -- -- 7,979
Deferred compensation on employee
stock grants -- (70,699) -- --
Amortization of compensation expense
related to employee stock options -- 21,834 -- 21,834
Deferred compensation related to
the issuance of stock options to non-employees -- (630) -- --
Amortization of compensation expense
related to non-employee stock options -- 630 -- 630
------------ ------------ ------------ ------------
Balance, September 30, 2000 $ (28,323) $ (48,865) $ -- $ 429,663
Net loss -- -- -- (212,699)
Foreign currency translation adjustment -- -- (64) (64)
------------
Comprehensive loss -- -- -- (212,763)
Capital contribution from parent -- -- -- 22,250
Exercise of stock options in exchange
for notes (490) -- -- --
Repayment of notes receivable 490 -- -- 490
Repurchase of restricted common stock
from employee 1,444 -- -- --
Issuance of common stock upon the
exercise of stock options -- -- -- 3,665
Deferred compensation on employee
stock grants -- 15,741 -- --
Amortization of compensation expense
related to employee stock grants -- 7,220 -- 7,220
Deferred compensation related to the
issuance of stock options to
non-employees -- (1,259) -- --
Amortization of compensation expense
related to non-employee stock options -- 1,259 -- 1,259
------------ ------------ ------------ ------------
Balance, September 30, 2001 $ (26,879) $ (25,904) $ (64) $ 251,784
Net loss (unaudited) -- -- -- (34,778)
Foreign currency translation adjustment (unaudited) -- -- (210) (210)
------------
Comprehensive loss (unaudited) -- -- -- (34,988)
Issuance of common stock upon the
exercise of stock options (unaudited) -- -- -- 304
Deferred compensation on employee
stock grants (unaudited) -- 6,329 -- --
Amortization of compensation expense
related to employee stock grants (unaudited) -- 5,865 -- 5,865
Deferred compensation related to the
issuance of stock options to
non-employees (unaudited) -- (20) -- --
Amortization of compensation expense
related to non-employee stock options (unaudited) -- 20 -- 20
------------ ------------ ------------ ------------
Balance, March 31, 2002 (unaudited) $ (26,879) $ (13,710) $ (274) $ 222,985
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
Consolidated Statements of Cash Flows
JANUARY
12, 1999
(DATE OF
INCEPTION)
THROUGH YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 2000 2001
------------ ------------ ------------
(IN THOUSANDS)
Cash flows from operating activities:
Loss from continuing operations $ (256,576) $ (339,719) $ (122,959)
Adjustments to reconcile loss to net cash
provided by (used in) operating activities:
Purchased in-process research and development 138,100 -- --
Depreciation and amortization 45,032 93,976 83,078
Amortization of deferred compensation on employee
stock grants -- 18,839 8,595
Amortization of deferred compensation on
non-employee stock grants -- 630 1,259
Impairment of intangible assets -- 118,810 --
Write-off of offering costs -- -- 2,691
Loss on disposal of fixed assets -- 2,164 4,985
Changes in operating assets and liabilities
(net of acquired balances in 1999):
Accounts receivable 131 (122) 2,944
Related party accounts receivable (2,939) (4,050) 1,877
Inventories 12 (12,004) (18,656)
Prepaid expenses and other current assets 59 (3,989) (876)
Long-term deposit -- (9,250) 8,366
Accounts payable 1,709 9,089 7,398
Related party accounts payable 3,992 (2,921) (1,071)
Accrued milestone payments 47,717 (27,717) --
Accrued expenses 5,877 6,308 6,169
Deferred revenue -- 8,347 32,378
------------ ------------ ------------
Net cash provided by (used in)
operating activities (16,886) (141,609) 16,178
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (4,631) (26,694) (28,923)
Proceeds from sale of assets -- 174 1,100
------------ ------------ ------------
Net cash used in investing
activities (4,631) (26,520) (27,823)
------------ ------------ ------------
Cash flows from financing activities:
Capital contributions from parent 49,951 212,503 22,250
Proceeds from convertible promissory note due to
related party -- -- 67,000
Cash contributed with acquired companies by parent 27,054 -- --
Repayment of capital lease obligation (2,067) -- --
Repayment of note receivable from officer -- -- 490
Proceeds from sales of restricted common stock -- 5,501 --
Proceeds from exercise of stock options -- 7,979 3,665
------------ ------------ ------------
Net cash provided by financing activities 74,938 225,983 93,405
------------ ------------ ------------
Net increase in cash and cash equivalents 53,421 57,854 81,760
Effect of exchange rate changes on cash -- -- (64)
Net cash used in discontinued operations (44,339) (66,302) (55,451)
Cash and cash equivalents, beginning of period -- 9,082 634
------------ ------------ ------------
Cash and cash equivalents, end of period $ 9,082 $ 634 $ 26,879
============ ============ ============
Non cash activities:
Common stock issued and additional capital
contribution recorded upon receipt of
acquired companies from parent $ 950,000 $ -- $ --
============ ============ ============
Increase (decrease) to deferred compensation
and additional paid-in-capital related
to stock options $ -- $ 71,329 $ (14,482)
============ ============ ============
Increase to additional paid-in capital and
notes receivable upon the sale of
restricted common stock and exercise of
stock options in exchange for notes $ -- $ 28,323 $ 490
============ ============ ============
Decrease to common stock, additional paid-in
capital and notes receivable upon the
repurchase of restricted common stock $ -- $ -- $ 1,444
============ ============ ============
SIX MONTHS ENDED
MARCH 31,
-----------------------------
2001 2002
------------ ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
Cash flows from operating activities:
Loss from continuing operations $ (67,086) $ (10,866)
Adjustments to reconcile loss to net cash
provided by (used in) operating activities:
Purchased in-process research and development -- --
Depreciation and amortization 41,493 5,973
Amortization of deferred compensation on employee
stock grants 4,198 5,550
Amortization of deferred compensation on
non-employee stock grants 167 20
Impairment of intangible assets -- --
Write-off of offering costs -- --
Loss on disposal of fixed assets -- 344
Changes in operating assets and liabilities
(net of acquired balances in 1999):
Accounts receivable (6,891) (1,072)
Related party accounts receivable 2,892 (3,220)
Inventories (18,336) 18,779
Prepaid expenses and other current assets (8,553) (1,927)
Long-term deposit 50 (162)
Accounts payable 15,811 (8,665)
Related party accounts payable (494) --
Accrued milestone payments -- --
Accrued expenses 2,589 7,565
Deferred revenue 15,469 (23,505)
------------ ------------
Net cash provided by (used in)
operating activities (18,691) (11,186)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (10,189) (6,809)
Proceeds from sale of assets -- --
------------ ------------
Net cash used in investing
activities (10,189) (6,809)
------------ ------------
Cash flows from financing activities:
Capital contributions from parent 22,250 --
Proceeds from convertible promissory note due to
related party 67,000 40,000
Cash contributed with acquired companies by parent -- --
Repayment of capital lease obligation -- --
Repayment of note receivable from officer -- --
Proceeds from sales of restricted common stock -- --
Proceeds from exercise of stock options 3,268 304
------------ ------------
Net cash provided by financing activities 92,518 40,304
------------ ------------
Net increase (decrease) in cash and cash equivalents 63,638 22,309
Effect of exchange rate changes on cash (131) (210)
Net cash provided by (used in) discontinued operations (16,855) (22,035)
Cash and cash equivalents, beginning of period 634 26,879
------------ ------------
Cash and cash equivalents, end of period $ 47,286 $ 26,943
============ ============
Non cash activities:
Common stock issued and additional capital
contribution recorded upon receipt of
acquired companies from parent $ -- $ --
============ ============
Increase (decrease) to deferred compensation
and additional paid-in-capital related
to stock options $ (6,941) $ (6,309)
============ ============
Increase to additional paid-in capital and
notes receivable upon the sale of
restricted common stock and exercise of
stock options in exchange for notes $ -- $ --
============ ============
Decrease to common stock, additional paid-in
capital and notes receivable upon the
repurchase of restricted common stock $ -- $ --
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
(In thousands, except per share amounts)
(1) NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Unisphere Networks, Inc. (the "Company") was incorporated in Delaware on
January 12, 1999 as Unisphere Solutions, Inc. and is an indirect
majority-owned subsidiary of Siemens AG. The Company changed its name from
Unisphere Solutions, Inc. to Unisphere Networks, Inc. in September 2000.
The Company develops, markets and supports data and voice networking
products for the delivery of integrated voice and high speed data services
to businesses and residential users. In March 1999, Siemens purchased
Argon Networks, Inc. ("Argon"). In April 1999, Siemens purchased Castle
Networks, Inc. ("Castle") and Redstone Communications, Inc. ("Redstone").
All three companies were development-stage companies engaged in research
and development of next generation products for the networking industry.
In April 1999, Siemens contributed a research and development group for
voice switching products to the Company as an equity contribution (net
assets were equal to zero). In June 1999, Siemens contributed the stock of
Argon, Castle and Redstone to the Company. In accordance with AICPA
Interpretation AIN-APB 16, #39, Transfers and Exchanges Between Companies
Under Common Control, the assets and liabilities of the businesses
contributed to Unisphere were recorded at historical cost. The results of
operations of Argon, Castle and Redstone are included in the consolidated
financial statements of the Company from the respective dates of
acquisition. The Company considers Redstone and Castle to be the
predecessor business as these two businesses represent the primary ongoing
business operations of the Company (See Note 14).
The Company is subject to risks common to technology-based companies
including, but not limited to, the development of new technology,
development of markets and distribution channels, dependence on key
personnel, and the ability to obtain additional capital as needed to meet
its product plans. The Company has a limited operating history and has
never achieved profitability. To date the Company has been funded by
Siemens.
On April 30, 2002, the Company sold its Voice product line ("Voice") to
Siemens Information and Communication Networks, Inc. ("Siemens ICN")
pursuant to the terms of a Stock Purchase Agreement (the "Agreement"),
between the Company and Siemens ICN, as of the effective date ("Effective
Date") of April 1, 2002. In connection with the sale of Voice, Siemens ICN
paid $210 million to the Company's stockholders of record as of May 20,
2002. The net assets and liabilities of Voice were transferred to Siemens
ICN at historical cost in accordance with AICPA Interpretation AIN-APB 16,
#39, Transfers and Exchanges Between Companies Under Common Control. The
accompanying consolidated financial statements and related notes present
the financial position, results of operations and cash flows of Voice as
discontinued operations for all periods presented. See Note 14.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of the Company reflect
the application of certain significant accounting policies as described
below.
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Unisphere Networks, Inc. and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim consolidated financial data as of March 31, 2002 and for
the six months ended March 31, 2001 and 2002 is unaudited; however,
in the opinion of the Company, the interim data includes all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim
periods. The results for the interim periods are not necessarily
indicative of the results for the entire year.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents.
(d) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
basis) or market (net realizable value).
(e) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated or
amortized over the estimated useful lives of the assets using the
straight-line method, based upon the following asset lives:
Computer and telecommunications equipment 2 to 3 years
Furniture and office equipment 5 years
Leasehold improvements Shorter of lease term or useful life of asset
The cost of significant additions and improvements is capitalized
and depreciated while expenditures for maintenance and repairs are
charged to expense as incurred. Upon retirement or sale, the cost
and related accumulated depreciation of the assets are removed from
the accounts and any resulting gain or loss is reflected in the
determination of net income or loss.
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
(f) INTANGIBLE ASSETS
Intangible assets include goodwill and other intangible assets
resulting from business combinations accounted for using the
purchase method of accounting. Goodwill was amortized on a
straight-line basis over five years and other intangible assets were
amortized on a straight-line basis over three years. The Company has
adopted the provisions of Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 141 "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets."
Accordingly, the Company reclassified the workforce intangible asset
to goodwill and ceased the ratable amortization of goodwill on
October 1, 2001.
(g) IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Intangible assets, including goodwill
prior to the adoption of SFAS No. 142, are reviewed continually to
determine whether events and circumstances warrant revised estimates
of useful life. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net undiscounted cash flows expected to be generated by the
asset. Recoverability of goodwill is measured by a comparison of the
carrying amount of goodwill to future net undiscounted cash flows
expected to be generated by the business to which the goodwill
relates. If such assets or goodwill are considered to be impaired,
the impairment to be recognized is measured by the amount by which
the carrying amount of the assets or goodwill exceeds the related
fair value. Estimated fair value is generally based on either
appraised value or measured by discounted estimated future cash
flows. Considerable management judgment is necessary to estimate
discounted future cash flows.
During the second quarter of fiscal 2000, management of the Company
cancelled Argon's original development effort of its gigabit switch
router, which was the primary focus of Argon. The cancellation of
the project was due to continuing technology problems, major delays
and insufficient technical features for the competitive marketplace.
The cancellation of this development effort included discarding and
abandoning all software development and substantially all hardware
components.
As a result of the cancellation of the Argon gigabit switch router,
the Company performed an impairment review of the goodwill generated
from the Argon acquisition. At the time this impairment review was
performed, it was determined that there would be no future cash
flows generated from the Argon development concept. Accordingly, the
Company recorded an impairment charge of $118,495 for the writedown
of the remaining unamortized value of the Argon goodwill during the
year ended September 30, 2000.
The Company also performed an impairment review of the workforce
intangible asset generated from the Argon acquisition. At the time
this impairment review was performed, it was determined that there
was a partial impairment of this asset, based on the higher than
expected level of employee turnover experienced to date.
Accordingly, the Company recorded an impairment charge of $315 for
the writedown of a portion of the unamortized value of the Argon
workforce intangible asset during the year ended September 30, 2000.
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
(h) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses and the convertible
promissory note approximate their fair values due to the short-term
nature of these instruments.
(i) REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment provided that
there are no uncertainties regarding customer acceptance, persuasive
evidence of an arrangement exists, the sales price is fixed or
determinable and collectibility is deemed probable. If uncertainties
exist, revenue is recognized when such uncertainties are resolved. A
significant portion of the Company's sales are made through
value-added resellers, including various Siemens sales entities.
Under these arrangements, value-added resellers do not have a right
of return and they purchase products from the Company after they
have secured a sale to an end-user. Revenue from professional
services is recognized when the services are completed. Revenue from
technical support and maintenance contracts is recognized ratably
over the period of the related agreements.
A provision for sales returns and allowances is recorded at the time
of revenue recognition based on estimated future returns and
allowances. In addition, the Company records a warranty liability
for parts and labor on its products at the time of revenue
recognition. Warranty periods are generally one year from
installation date.
(j) RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
The Company's products are highly technical in nature and require a
large and continuing research and development effort. All research
and development costs are expensed as incurred. Software development
costs incurred prior to the establishment of technological
feasibility are charged to expense. Software development costs
incurred subsequent to the establishment of technological
feasibility are capitalized until the product is available for
general release to customers. Amortization is based on the
straight-line method over the remaining estimated life of the
product. To date, the period between achieving technological
feasibility and the general availability of the related products has
been short and software development costs qualifying for
capitalization have not been material. Accordingly, the Company has
not capitalized any software development costs.
(k) ADVERTISING COSTS
The Company expenses advertising costs in the period in which they
are incurred. Advertising costs for the period ended September 30,
1999 and for the years ended September 30, 2000 and 2001 were $736,
$7,482 and $2,495, respectively.
(l) OTHER INCOME (EXPENSE)
Other income (expense) consists of interest income, interest expense
and other expenses. The Company recorded $0, $2,164 and $4,985 of
losses on disposal of property and equipment for the period ended
September 30, 1999 and for the years ended September 30, 2000 and
2001, respectively.
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
(m) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company does not file separate income tax returns, but rather is
included in the consolidated income tax returns of its parent,
Siemens Corporation, a majority-owned subsidiary of Siemens AG. The
Company has entered into a tax sharing agreement with Siemens
Corporation. Under this agreement, the Company will reimburse
Siemens Corporation for the Company's federal and state income tax
liability computed as if its tax returns were filed on a stand alone
basis. The Company may use the tax benefits of net operating losses
and credits generated by the Company solely to reduce its liability
to Siemens Corporation. Siemens Corporation is not obligated to
reimburse the Company for any tax benefits in excess of the
aggregate liability to Siemens Corporation up to the date of an
initial public offering ("IPO") of the Company's stock. Subsequent
to the date of an IPO, Siemens Corporation will reimburse the
Company for any tax attributes utilized by Siemens Corporation when
the Company could have used them on a separate return basis. The
Company is obligated to pay Siemens Corporation for any adjustment
made by a taxing authority in a consolidated tax year, the benefit
of which is subsequently realized by the Company in a
non-consolidated tax year.
(n) NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss for
the period by the weighted average number of unrestricted common
shares outstanding during the period. Diluted net loss per share is
computed by dividing the net loss for the period by the weighted
average number of common and common equivalent shares outstanding
during the period, if dilutive. Common equivalent shares are
composed of restricted common shares and incremental common shares
issuable upon the exercise of stock options. There were no dilutive
common equivalent shares for the period ended September 30, 1999,
the years ended September 30, 2000 and 2001 and the six months ended
March 31, 2001 and 2002.
At September 30, 2000 and 2001, options to purchase 14,139 and
19,726 shares of common stock, respectively, at an average exercise
price of $9.64 and $10.20 per share, respectively, and restricted
common shares of 2,741 and 1,552, respectively, have not been
included in the computation of diluted net loss per share as their
effect would have been anti-dilutive.
(o) STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
Employees," ("APB No. 25") and complies with the disclosure
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123").
The Company amortizes deferred stock-based employee compensation
expense for fixed awards using the straight-line method over the
respective employees' vesting periods.
(p) SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which requires companies to report selected
information about operating segments, as well as enterprise-wide
disclosures about products, services, geographic areas, and major
customers. The Company has determined that it conducts its
operations in one business segment.
(q) CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash
equivalents and receivables. The Company invests its excess cash
primarily in deposits with commercial banks.
(r) RISKS AND UNCERTAINTIES
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 at the dates
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from these estimates.
Certain components and parts used in the Company's products are
procured from a single source. The Company obtains some of its parts
from one vendor only, even where multiple sources are available, to
maintain quality control and enhance working relationships with
suppliers. These purchases are made on a purchase order basis. In
addition, the majority of the Company's products are manufactured by
a single contract manufacturer. The failure of a supplier or the
contract manufacturer to deliver on schedule could delay or
interrupt the Company's delivery of products and thereby adversely
affect the Company's revenue and results of operations.
The Company is subject to the rapid technological change inherent in
the networking industry. This change includes new product
introduction, changes in customer requirements and new technologies.
The Company works closely with its customers to understand its
customers and the industry requirements. A delay in product and
feature introductions could adversely affect the Company's results
of operations.
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
(3) ACQUISITIONS
On April 27, 1999, Siemens purchased Redstone. Under the terms of the
Agreement, Siemens purchased all outstanding securities of Redstone for
$450,000 in cash. The transaction was accounted for as a purchase. In
conjunction with the acquisition, Siemens entered into a Milestone
Incentive Compensation Plan whereby if certain performance criteria and
development milestones were achieved, Siemens would compensate the
employees of Redstone with cash incentives. In June 1999, Siemens
contributed the stock of Redstone to the Company, which has accounted for
the acquisition and Redstone's results of operations from the date of
acquisition, as if the Company had effectively acquired Redstone. During
the period ended September 30, 1999 and the year ended September 30, 2000,
the Company expensed $35,000 and $15,000, respectively, related to the
Milestone Incentive Compensation Plan for milestones which had been
achieved as of those dates. No additional milestone payments remained as
of September 30, 2000.
On April 20, 1999, Siemens acquired Castle. Under the terms of the
Agreement, Siemens purchased all outstanding securities of Castle for
$300,000 in cash. The transaction was accounted for as a purchase. In June
1999, Siemens contributed the stock of Castle to the Company, which has
accounted for the acquisition and Castle's results of operations from the
date of acquisition, as if the Company had effectively acquired Castle.
On March 12, 1999, Siemens acquired Argon. Under the terms of the
Agreement, Siemens purchased all outstanding securities of Argon for
$200,000 in cash. The transaction was accounted for as a purchase. In
conjunction with the acquisition, Siemens entered into a Milestone
Incentive Compensation Plan whereby if certain performance criteria and
development milestones were achieved, Siemens would compensate the
employees of Argon with cash incentives. In June 1999, Siemens contributed
the stock of Argon to the Company, which has accounted for the acquisition
and Argon's results of operations from the date of acquisition, as if the
Company had effectively acquired Argon. No development milestones had been
achieved during the period ended September 30, 1999, therefore no costs
were accrued. At the time of acquisition, Siemens also initiated a
retention bonus plan, for which the Company expensed $2,140 and $11,133 of
cost related to time-based payments in the period ended September 30, 1999
and the year ended September 30, 2000, respectively. No additional
retention bonus plan payments remained as of September 30, 2000.
The amounts allocated to purchased in-process research and development was
determined through established valuation techniques in the high-technology
communications industry and were expensed upon acquisition, because
technological feasibility had not been established and no future
alternative uses existed.
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
Summary of purchase transactions:
ALLOCATED TO
PURCHASED ALLOCATED NET
IN-PROCESS TO ALLOCATED TANGIBLE TOTAL
RESEARCH AND ASSEMBLED TO ASSETS PURCHASE
DEVELOPMENT WORKFORCE GOODWILL ACQUIRED PRICE
------------ ---------- ---------- ---------- ----------
Entity Acquired
Continuing operations:
Redstone Communications $ 101,700 $ 1,130 $ 342,127 $ 5,043 $ 450,000
Argon Networks 36,400 990 148,119 14,491 200,000
------------ ---------- ---------- ---------- ----------
Total 138,100 2,120 490,246 19,534 650,000
------------ ---------- ---------- ---------- ----------
Discontinued operations:
Castle Networks 79,300 870 214,363 5,467 300,000
------------ ---------- ---------- ---------- ----------
Total $ 217,400 $ 2,990 $ 704,609 $ 25,001 $ 950,000
============ ========== ========== ========== ==========
All payments related to the milestone incentive compensation plans and
retention plan were recorded as expense in the consolidated financial
statements of Unisphere in the periods following the acquisitions. The
expense was recorded as the milestones were achieved for the milestone
plans and ratably over the retention period for the retention plan.
For the period from January 12, 1999 (date of inception) to September 30,
1999 and for the years ended September 30, 2000 and 2001, aggregate
expense of $37,140, $26,133 and $0, respectively, was recorded as follows
in the accompanying consolidated statements of operations:
JANUARY
12, 1999
(DATE OF
INCEPTION)
THROUGH
SEPTEMBER 30, YEAR ENDED YEAR ENDED
1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 2001
------------ ------------------ ------------------
Cost of revenues $ 511 $ 951 $ --
Research and development 27,157 21,873 --
Sales and marketing 2,794 678 --
General and administrative 6,678 2,631 --
------------ ------------------ ------------------
$ 37,140 $ 26,133 $ --
============ ================== ==================
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
(4) FINANCIAL STATEMENT DETAILS
The following table summarizes balance sheet items by major component:
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
2000 2001 2002
------------ ------------ ------------
Inventories:
Component parts $ 3,796 $ 1,750 $ 2,656
Finished goods 8,616 29,318 9,633
------------ ------------ ------------
$ 12,412 $ 31,068 $ 12,289
============ ============ ============
Prepaid expenses and other current assets:
Deposits $ 1,085 $ -- $ --
Non-trade receivables 574 205 1,085
Service contracts 142 361 485
Offering costs 1,209 -- --
Interest receivable from officers 322 1,940 2,415
Other 975 925 1,373
------------ ------------ ------------
Prepaid and other current assets, net $ 4,307 $ 3,431 $ 5,358
============ ============ ============
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
2000 2001 2002
------------ ------------ ------------
Property and equipment:
Computer and telecommunications equipment $ 23,039 $ 27,286 $ 34,294
Evaluation and service components 5,396 -- --
Furniture and office equipment 1,560 2,084 --
Leasehold improvements 1,750 11,758 12,023
------------ ------------ ------------
31,745 41,128 46,317
Less: accumulated depreciation and amortization (10,135) (10,771) (15,672)
------------ ------------ ------------
Property and equipment, net $ 21,610 $ 30,357 $ 30,645
============ ============ ============
Intangible assets:
Goodwill $ 343,812 $ 343,812 $ 343,812
Less: accumulated amortization (97,772) (166,758) (166,758)
------------ ------------ ------------
Intangible assets, net $ 246,040 $ 177,054 $ 177,054
============ ============ ============
Accrued expenses:
Accrued employee-related expenses $ 6,977 $ 6,450 $ 7,047
Accrued professional fees 2,413 936 837
Accrued warranty 2,283 3,008 4,285
Other liabilities 2,917 6,889 9,525
------------ ------------ ------------
$ 14,590 $ 17,283 $ 21,694
============ ============ ============
(5) CONVERTIBLE PROMISSORY NOTE
The Company issued an amended and restated $67,000 convertible promissory
note to Siemens in February 2001. In November 2001, the Company issued a
second amended and restated convertible promissory to Siemens, pursuant to
which the principal amount was increased to $147,000. Siemens has advanced
$67,000 and $107,000 to the Company as of September 30, 2001 and March 31,
2002, respectively. The note accrues interest at 7.25% per year. The
Company has recorded $3,476 and $3,154 of accrued interest for the year
ended September 30, 2001 and the six months ended March 31, 2002. The
principal and accrued interest is due or will convert into shares of the
Company's common stock at the earlier of November 16, 2002 or the closing
of an initial public offering of the Company's common stock. The Company's
obligations under the note may be accelerated if an event of default
occurs under the note. The number of shares to be issued upon such
conversion is equal to the sum of the principal amount of the note plus
accrued interest divided by the Company's per share initial public
offering price. Upon the
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
November 16, 2002 due date or any accelerated due date, if not earlier
converted, Siemens has the option to convert the note at the then fair
market value of the Company's common stock. See Note 15.
(6) WRITE-OFF OF OFFERING COSTS
The Company recorded $1,209 and $1,482 of deferred costs directly
attributable to its initial public offering of common stock during the
years ended September 30, 2000 and 2001. In accordance with applicable
accounting guidance, during the year ended September 30, 2001, the Company
wrote off $2,691 of deferred offering costs based upon management's view
that market conditions have postponed the Company's offering by more than
90 days.
(7) COMMITMENTS AND CONTINGENCIES
The Company's primary office facilities are leased under noncancelable
operating leases that expire at various times through 2011. Rent expense
under operating leases was $1,077, $3,927 and $5,152 for the period from
inception through September 30, 1999 and for the years ended September 30,
2000 and 2001, respectively. At September 30, 2001, future minimum lease
payments under all non-cancelable operating leases were as follows for
fiscal years ending September 30:
2002 $ 4,822
2003 4,569
2004 4,305
2005 3,945
2006 4,347
Thereafter 19,748
--------
Total future minimum lease payments $ 41,736
========
(8) RELATED PARTY TRANSACTIONS
The Company has been funded since inception by Siemens. The funding was
provided based on the Company's operating needs and was accounted for as a
capital contribution through November 11, 2000. Total capital
contributions from Siemens includes the contribution of the stock of
Argon, Castle and Redstone, valued at $950,000, and capital contributions
to fund operations of $49,951, $212,503 and $22,250 for the period ended
September 30, 1999 and for the years ended September 30, 2000 and 2001,
respectively. Subsequent to November 11, 2000, Siemens has provided
funding to the Company in the form of a convertible promissory note (see
Note 5).
The Company has transactions in the normal course of business with Siemens
group companies. Balances resulting from these transactions are reflected
on the balance sheet as accounts receivable from related parties and
accounts payable to related parties. Transactions included in the
statement of operations for the period ended September 30, 1999 and for
the years ended September 30, 2000 and 2001 are as follows:
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
JANUARY 12, 1999 YEAR ENDED YEAR ENDED
(DATE OF INCEPTION) SEPTEMBER 30, SEPTEMBER 30,
THROUGH SEPTEMBER 30, 1999 2000 2001
-------------------------- ------------ ------------
Sales to related parties $ 1,286 $ 16,735 $ 67,713
Engineering expenses 1,100 7,968 1,301
Rent expenses 269 381 --
Other expenses 806 538 --
(9) STOCKHOLDERS' EQUITY
(a) COMMON STOCK
The Company has authorized 115,361 shares of common stock, $.01 par
value, of which 86,133, 90,285 and 90,639 shares were outstanding at
September 30, 1999, 2000 and 2001, respectively. The holders of the
common stock are entitled to one vote for each share held.
On April 21, 2000, the Board of Directors approved a 1-for-3 reverse
stock split. The accompanying financial statements reflect the
effects of this reverse split for all periods presented. In April
2001, the Board of Directors increased the authorized common stock
to 115,361 shares and increased the common stock reserved for
issuance pursuant to the 1999 Stock Incentive Plan to 29,227 shares.
(b) NOTES RECEIVABLE FROM OFFICERS
In connection with the sale of restricted stock and in accordance
with the original terms of the awards, the Company accepted
promissory notes from two officers in the amounts of $26,225 and
$2,098, respectively, in August 2000. The notes are secured by the
purchased shares and have recourse to the general assets of the
officers with respect to 25% of the principal balance and 100% of
the accrued interest on the notes. Interest paid is not refundable
to the officers. The notes mature in January 2004 and bear interest
at the six-month LIBOR index rate plus fifty basis points per annum
(4.1% at September 30, 2001).
In connection with the exercise of 67 stock options to purchase
common stock and in accordance with the original terms of the award,
the Company accepted a promissory note from one officer in the
amount of $490 in December 2000. The note is secured by the
purchased shares and has recourse to the general assets of the
officer with respect to 25% of the principal balance and 100% of the
accrued interest on the note. Interest paid is not refundable to the
officer. In June 2001, the officer repaid the principal and interest
on the note.
In connection with the termination of one officer in July 2001, the
Company repurchased 138 shares of restricted common stock and
cancelled $1,444 of the balance of the promissory note. As of
September 30, 2001, $138 of accrued interest is recorded in other
current assets.
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
(10) INCOME TAXES
The Company prepared its tax provision as if it filed tax returns on a
stand-alone basis. No current provision for federal or state income taxes
has been recorded as the Company has incurred net operating losses since
inception. The following table reconciles the federal statutory income tax
rate to the Company's effective income tax rate:
JANUARY 12, 1999
(DATE OF
INCEPTION)
THROUGH YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 2000 2001
---------------- ------------- -------------
Income taxes at federal statutory rate 34.0% 34.0% 34.0%
Write-off of acquired in-process research and development (18.3) -- --
Non-deductible goodwill amortization (5.8) (8.3) (18.9)
Write-off of impaired intangible assets -- (11.9) --
Tax benefit utilized by parent company (9.4) (11.5) (13.9)
Change in valuation allowance and other (0.5) (2.3) (1.2)
------ ------ ------
--% --% --%
====== ====== ======
At September 30, 2000 and 2001, the Company had net operating loss and tax
credit carryforwards resulting from current operations and from its
acquisitions of Redstone, Castle and Argon. The Company has recorded a
full valuation allowance against these net operating loss and tax credit
carryforwards, as well as the net deferred tax assets since management
believes that, after considering all the available objective evidence,
both positive and negative, it is more likely than not that these assets
will not be realized. No deferred income tax provision has been recorded
because of the valuation allowance. Temporary differences between the
financial statement carrying amounts and tax bases of assets and
liabilities that give rise to significant portions of deferred tax assets
and liabilities are comprised of the following:
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
SEPTEMBER 30, SEPTEMBER 30,
2000 2001
------------ ------------
Deferred tax assets:
Net operating loss and credit carryforwards $ 20,531 $ 28,352
Employee-related costs 7,570 5,990
Accrued compensation 286 498
Amortizable offering costs -- 1,084
Amortizable start-up costs 471 312
Inventory reserves 3,611 4,672
Bad debt reserves 961 1,394
Warranty reserves 798 1,111
Other 854 1,054
------------ ------------
Total gross deferred tax asset 35,082 44,467
Less valuation allowance (34,695) (44,299)
------------ ------------
Net deferred tax asset 387 168
------------ ------------
Deferred tax liabilities:
Basis differences in acquired intangible assets 341 116
Depreciation 46 52
------------ ------------
Total gross deferred tax liability 387 168
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
Subsequently reported tax benefits relating to the valuation allowance for
deferred tax assets as of September 30, 2001 will be allocated as follows:
SEPTEMBER 30,
2001
------------
Income tax benefit that would be reported in the statement of operations $ 39,234
Income tax benefit that would be reported as a decrease to goodwill 5,065
------------
$ 44,299
============
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
The Company has no federal and $370,107 of state net operating loss
carryforwards as of September 30, 2001. The state net operating loss
carryforwards will expire from 2002 through 2005. In addition, the Company
has federal and state tax credit carryforwards of approximately $1,070 and
$6,176, respectively, as of September 30, 2001 which will expire from 2011
through 2018. The utilization of the net operating losses may be limited
pursuant to Internal Revenue Code Section 382 as a result of prior and
future ownership changes. In addition, to the extent these net operating
losses can be utilized by Siemens Corporation, the Company is not entitled
to any reimbursement under the existing tax sharing arrangement and the
Company will not receive any current or future income tax benefit related
to these net operating losses.
(11) STOCK-BASED COMPENSATION
In July 1999, the Company adopted the 1999 Stock Incentive Plan (the
"Plan"). The Plan provides for the granting of stock options to acquire
common stock to employees, advisors and consultants of the Company.
Options granted under the Plan may be either incentive stock options or
non-statutory (i.e., nonqualified) stock options. Incentive stock options
("ISO") may be granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may
be granted to Company employees, non-employee directors, advisors and
consultants. The Company reserved 29,227 shares of common stock for
issuance under the Plan as of September 30, 2001 and March 31, 2002.
Options under the Plan may be granted for periods of up to ten years and
at prices to be determined by the Board of Directors, provided, however,
that (i) the exercise price of an ISO shall not be less than 100% of the
estimated fair value of the shares on the date of grant, and (ii) the
exercise price of an ISO granted to a 10% shareholder shall not be less
than 110% of the estimated fair value of the shares on the date of grant.
Options granted generally vest over four years.
A restricted stock award provides for the issuance of common stock to
directors, officers, consultants and other key personnel at prices
determined by the Board of Directors or a Committee selected by the Board
of Directors. Participants' unvested shares are subject to repurchase by
the Company at the original sale price. Generally, vesting occurs over a
three to four year period. As of September 30, 2001 and March 31, 2002,
the Company had the right to repurchase up to 1,552 and 1,070 unvested
shares at the original sale price of $10.50 per share.
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
The following table presents activity under the Plan for the period from
January 12, 1999 (date of inception) to September 30, 1999 and for the
years ended September 30, 2000 and 2001:
SHARES STOCK RESTRICTED WEIGHTED
AVAILABLE OPTIONS STOCK AVERAGE
FOR GRANT OUTSTANDING OUTSTANDING EXERCISE PRICE
----------- ----------- ----------- --------------
Shares authorized 4,533 -- -- $ --
Options granted (3,104) 3,104 -- 7.35
Options terminated 208 (208) -- 7.35
----------- ----------- -----------
Balance at September 30, 1999 1,637 2,896 -- 7.35
----------- ----------- -----------
Shares authorized 15,157 -- -- --
Options and restricted stock granted (16,592) 13,371 3,221 10.02
Options exercised -- (930) -- 8.58
Restricted stock purchased -- -- (3,221) 10.50
Options terminated 1,198 (1,198) -- 7.79
----------- ----------- -----------
Balance at September 30, 2000 1,400 14,139 -- 9.64
----------- ----------- -----------
Shares authorized 9,537 -- -- --
Options granted (8,437) 8,437 -- 11.23
Options exercised -- (492) -- 8.47
Options terminated 2,358 (2,358) -- 10.43
Restricted stock repurchased 138 -- -- 10.50
----------- ----------- -----------
Balance at September 30, 2001 4,996 19,726 -- 10.20
=========== =========== ===========
The following table summarizes stock options outstanding and exercisable
at September 30, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
EXERCISE NUMBER REMAINING LIFE AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------ ----------- ---------------- -------------- -------------- --------------
$7.35-$10.50 18,032 8.70 $ 9.55 4,333 $ 9.29
$17.10 1,694 9.00 17.10 136 17.10
----------- --------------
19,726 8.70 10.20 4,469 9.53
=========== ==============
The weighted average grant date fair value of options granted in the
period ended September 30, 1999 and the years ended September 30, 2000 and
2001 was $0.00, $4.85, and $7.71, respectively. The weighted average
modification date fair value of stock options modified in April 2000, as
discussed below, was $3.62. Had compensation cost for the Company's
stock-based compensation plan been determined based on the fair value at
the grant dates for the awards under a method prescribed by SFAS No. 123,
the Company's loss from continuing operations would have been $256,576,
$336,568 and $129,551 and basic and diluted net loss per share from
continuing operations would have been $2.98, $3.90 and $1.46 for the
period ended September 30, 1999 and for the years ended September 30, 2000
and 2001, respectively.
The Company calculated the fair value of each option on the date of grant
using the Black-Scholes pricing model with the following weighted average
assumptions:
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
JANUARY 12, 1999
(DATE OF INCEPTION)
THROUGH YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 2000 2001
------------------- ------------ ------------
Expected life (years) 5 5 5
Risk free interest rate 6.93% 6.25% 5.42%
Volatility -- 65% 85%
Dividend yield -- -- --
During the year ended September 30, 2000, the Company issued 176
non-qualified stock options to non-employees for services rendered and has
valued these stock options using a Black-Scholes option pricing model. The
Company used a volatility factor of 65%, a risk free interest rate of
6.03%, a dividend rate of zero and the contractual lives of the grants,
which ranged from one to ten years. During the year ended September 30,
2001, the Company issued 54 non-qualified stock options to non-employees
for services rendered and has valued these stock options using a
Black-Scholes option pricing model. The Company used a volatility factor
of 65%, a risk free interest rate of 6.00%, a dividend rate of zero and
the contractual lives of the grants of ten years. The Company had 176 and
230 non-qualified stock options outstanding to non-employees at September
30, 2000 and 2001, respectively. The Company has fully amortized the
deferred compensation expense of $630 and $167 during the years ended
September 30, 2000 and 2001, respectively.
During the year ended September 30, 2000, the Company sold 3,221 shares of
restricted common stock and granted 4,530 stock options to purchase common
stock at amounts lower than the estimated fair market value. Accordingly,
the Company has recorded deferred compensation related to the restricted
common stock and common stock options that were sold or issued at amounts
less than estimated fair market value. During fiscal 2000, the Company
recorded $48,045 in deferred compensation related to restricted common
stock and stock options issued to employees of the Company. In addition,
the Company recorded compensation expense of $9,308 and $677 in continuing
and discontinued operations, respectively, in fiscal 2000 and $12,680 and
$535 in continuing and discontinued operations, respectively, in fiscal
2001, related to the amortization of deferred compensation over the
vesting period.
In April 2000, the Company changed the exercise price of 2,344 employee
stock options to purchase common stock. At September 30, 2000, stock
options for the purchase of 370 shares of common stock had been exercised
and 146 stock options had been cancelled. At September 30, 2001, stock
options for the purchase of 532 shares of common stock had been exercised
and 345 stock options had been cancelled. The remaining 1,467 stock
options will become exercisable over a four-year period. During the year
ended September 30, 2000, the Company recorded $22,654 in deferred
compensation and $8,887 and $2,962 of non-cash expense in continuing and
discontinued operations, respectively, related to these stock options.
During the year ended September 30, 2001, the Company recorded a $15,741
decrease in deferred compensation and $4,496 and $1,449 of non-cash income
in continuing and discontinued operations, respectively, related to these
stock options due to a decrease in the fair market value of the Company's
common stock. Deferred compensation amounts are being amortized over the
vesting periods of the
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
applicable stock options. The Company cannot estimate the effect of
stock-based compensation related to employee stock options for which the
exercise price was changed since determination of variable stock-based
compensation expense is based on the fair market value of the Company's
common stock in future periods.
During the year ended September 30, 2001, the Company recorded $1,092 of
deferred compensation related to the acceleration of vesting on 311 stock
options to employees upon termination from the Company. The Company has
fully amortized the deferred compensation of $1,092 into expense during
the year ended September 30, 2001.
(12) EMPLOYEE BENEFIT PLAN
The Company sponsors several defined contribution plans covering
substantially all of its employees which are designed to be qualified
under Section 401(k) of the Internal Revenue Code. Eligible employees are
permitted to contribute to the 401(k) plans through payroll deductions
within statutory and plan limits. The Company recorded expense of $13, $0
and $0, related to the plans in the period from January 12, 1999 (date of
inception) to September 30, 1999 and for the years ended September 30,
2000 and 2001, respectively.
(13) GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
The Company operates in a single industry segment encompassing the design,
development, manufacture, marketing, and technical support of networking
products and services.
In the period ended September 30, 1999, the years ended September 30, 2000
and 2001 and the six months ended March 31, 2002, Siemens accounted for
approximately 79.9%, 64.4%, 44.8% and 37.3%, respectively, of net
revenues. In addition, the Company had two customers who accounted for
28.6% and 19.3% of net revenues for the year ended September 30, 2000. Two
other customers accounted for 17.9% and 14.7% of net revenues for the year
ended September 30, 2001. In addition, two customers accounted for 37.7%
and 13.1% of net revenues for the six months ended March 31, 2002.
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
Geographic revenues, which are attributed to countries based on the
location of the customer, are as follows:
JANUARY 12, 1999
(DATE OF
INCEPTION) SIX MONTHS
THROUGH YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1999 2000 2001 2002
---------------- ------------ ------------- -------------
United States $ 1,442 $ 11,138 $ 42,500 $ 18,981
International
Asia Pacific 229 9,886 53,381 65,003
South and Latin America -- 711 1,165 176
Europe 564 9,858 72,836 26,578
---------------- ------------ ------------- -------------
Total international 793 20,455 127,382 91,757
---------------- ------------ ------------- -------------
Total net revenues $ 2,235 $ 31,593 $ 169,882 $ 110,738
================ ============ ============= =============
There were no significant long-lived assets located in foreign countries
at September 30, 2000 and 2001, and March 31, 2002.
(14) DISCONTINUED OPERATIONS
The Company divested its Voice product line pursuant to a definitive
agreement signed on April 30, 2002 between the Company and Siemens ICN.
The Company distributed net assets of the Voice product line to Castle
and sold the stock of Castle to Siemens ICN for $210,000. The $210,000
proceeds were used to pay a $210,000 dividend to Company stockholders in
May 2002.
Voice is accounted for as a discontinued operation. Accordingly, its net
assets and liabilities have been segregated from continuing operations in
the accompanying consolidated balance sheets, and its operating results
are segregated and reported as discontinued operations in the accompanying
consolidated statements of operations and cash flows, and related notes.
For the period ended September 30, 1999, the years ended September 30,
2000 and 2001, and the six months ended March 31, 2001 and 2002, the
results of discontinued operations were as follows:
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
JANUARY 12,
1999
(DATE OF
INCEPTION) SIX MONTHS SIX MONTHS
THROUGH YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, MARCH 31, MARCH 31,
1999 2000 2001 2001 2002
------------ ------------ ------------ ------------ ------------
Third party revenue $ 1,027 14,427 7,185 6,804 3,316
Related party revenue 500 3,608 8,347 -- --
------------ ------------ ------------ ------------ ------------
Net revenues $ 1,527 $ 18,035 $ 15,532 $ 6,804 $ 3,316
------------ ------------ ------------ ------------ ------------
Loss from
discontinued operations $ (128,477) $ (93,963) $ (89,740) (40,034) (23,912)
The assets and liabilities identified as part of the disposition of Voice
are recorded as assets and liabilities of discontinued operations; the
cash flow of Voice is reported as net cash used in discontinued
operations; and the results of operations of Voice is reported as loss
from discontinued operations. Assets and liabilities of discontinued
operations consist of the following:
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
2000 2001 2002
------------ ------------ ------------
Current assets:
Accounts receivable, net $ 1,243 $ 906 $ 395
Inventories 1,948 2,494 2,661
Other current assets 564 1,027 629
------------ ------------ ------------
Total current assets of discontinued operations 3,755 4,427 3,685
------------ ------------ ------------
Non-current assets:
Goodwill, net 154,086 110,923 110,923
Other 12,690 15,094 12,428
------------ ------------ ------------
Total assets of discontinued operations $ 170,531 $ 130,444 $ 127,036
============ ============ ============
Total current liabilities of discontinued operations $ 5,555 $ 7,960 $ 5,910
============ ============ ============
(15) SUBSEQUENT EVENT
On July 1, 2002, the stock of the Company was sold to Juniper Networks,
Inc. ("Juniper") pursuant to the terms of an Agreement and Plan of Merger
("Merger Agreement"). The total purchase price was approximately $630,000
including $375,000 in cash and 36,500
UNISPHERE NETWORKS, INC.
(An indirect majority-owned subsidiary of Siemens AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of and for the six months ended March 31, 2001 and 2002
is unaudited)
shares of Juniper common stock. Additionally, in connection with the terms
of the convertible promissory note (See Note 5), the Company converted the
balance of the convertible promissory note at July 1, 2002 into 12,657
shares of the company's common stock prior to the sale. Adjustments, if
any, related to the sale of the company have not been reflected in the
accompanying consolidated financial statements and related notes.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Unisphere Networks, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Unisphere
Networks, Inc. and Subsidiaries (an indirect majority-owned subsidiary of
Siemens AG) as of September 30, 2000 and 2001, and the related consolidated
statements of operations, stockholders' equity and cash flows for the period
from January 12, 1999 (date of inception) to September 30, 1999 and for the
years ended September 30, 2000 and 2001. 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
audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
As discussed in Note 15, the Company was sold to Juniper Networks, Inc. on July
1, 2002.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Unisphere Networks,
Inc. and Subsidiaries as of September 30, 2000 and 2001, and the results of
their operations and their cash flows for the period from January 12, 1999 (date
of inception) to September 30, 1999 and for the years ended September 30, 2000
and 2001, in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
Boston, Massachusetts
April 30, 2002, except as to Note 15,
which is as of July 1, 2002