Exhibit 99.1
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors ........................................ F-1
Consolidated Balance Sheets ........................................... F-2
Consolidated Statements of Operations ................................. F-3
Consolidated Statements of Stockholders' Deficit ...................... F-4
Consolidated Statements of Cash Flows ................................. F-5
Notes to the Consolidated Financial Statements ........................ F-6
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Pictos Technologies, Inc.
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, stockholders' deficit, and cash flows
present fairly, in all material respects, the financial position of Pictos
Technologies, Inc. (formerly Zing Network, Inc.) and it's subsidiaries at
December 27, 2002 and December 31, 2001, and the consolidated results of their
operations, and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 and Note 4 in the consolidated financial statements,
effective January 1, 2002 the Company changed its method of accounting for
goodwill in accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As described in Note 1 to the
consolidated financial statements, the Company has incurred significant losses
from operations and has an accumulated deficit that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to this matter are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/S/ PricewaterhouseCoopers LLP
San Jose, California
August 25, 2003
F-1
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
CONSOLIDATED BALANCE SHEETS
MARCH 28, DECEMBER 27, DECEMBER 31,
2003 2002 2001
(in thousands, except per share amount) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 7,357 $ 9,310 $ 1,655
Short-term investments -- 2,250 --
Accounts receivable 657 653 163
Inventory 877 376 --
Prepaid expenses and other current assets 269 365 90
-------- -------- --------
Total current assets 9,160 12,954 1,908
Property and equipment, net 697 832 190
Intangible assets 3,675 4,083 --
Goodwill 9,048 9,048 --
Other assets -- -- 3
-------- -------- --------
Total assets $ 22,580 $ 26,917 $ 2,101
-------- -------- --------
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 4,615 $ 2,827 $ 291
Accrued liabilities 1,415 1,875 506
Deferred revenue 136 583 --
Notes payable -- -- 1,817
-------- -------- --------
Total current liabilities 6,166 5,285 2,614
-------- -------- --------
Commitments (Note 7)
Redeemable convertible preferred stock
Par value $0.001, 65,500 authorized, issued and outstanding 40,822 and
154,546 at December 27, 2002 and December 31, 2001, respectively (aggregate
liquidation value $40,822 and $56,636 at December 27, 2002 and
December 31, 2001, respectively) 40,826 40,821 56,511
Stockholders' deficit
Common stock
Par value $0.001, 80,000 shares authorized, issued and outstanding 550
and 594 at December 27, 2002 and December 31, 2001, respectively 1 1 --
5,662 5,649 5,568
Additional paid-in capital -- 17 --
Cumulative other comprehensive income (30,075) (24,856) (62,592)
Accumulated deficit -------- -------- --------
(24,412) (19,189) (57,024)
Total stockholders' deficit -------- -------- --------
Total liabilities, redeemable convertible preferred stock $ 22,580 $ 26,917 $ 2,101
and stockholders' deficit -------- -------- --------
The accompanying notes are an integral part
of these financial statements.
F-2
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE THREE
MONTHS MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
MARCH 28, MARCH 31, DECEMBER 27, DECEMBER 31,
2003 2002 2002 2001
(in thousands) (UNAUDITED)
Net revenues $ 1,268 $ 26 $ 4,021 $ 2,546
Cost of goods sold 1,156 -- 3,963 230
-------- -------- -------- --------
Gross profit 112 26 58 2,316
-------- -------- -------- --------
OPERATING EXPENSES
Research and development 2,968 218 6,833 6,617
Sales and marketing 1,177 1 1,992 947
General and administrative 883 616 6,433 3,451
Amortization of goodwill and other intangible assets 408 -- 817 3,228
Impairment of goodwill and other intangible assets -- -- -- 5,213
In-process research and development -- -- 2,900 --
Loss on disposal and impairment of property and equipment -- 4 107 1,519
-------- -------- -------- --------
Total operating expenses 5,436 839 19,082 20,975
-------- -------- -------- --------
Loss from operations (5,324) (813) (19,024) (18,659)
Other income (expense) 105 40 61 (120)
Gain on extinguishment of notes payable -- -- 728 --
Gain on sale of subsidiary -- -- 727 --
Settlement with suppliers -- -- -- 2,576
-------- -------- -------- --------
Net loss $ (5,219) $ (773) $(17,508) $(16,203)
-------- -------- -------- --------
The accompanying notes are an integral part
of these financial statements.
F-3
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
ADDITIONAL OTHER TOTAL
COMMON STOCK PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
(in thousands) SHARES AMOUNTS CAPITAL INCOME DEFICIT DEFICIT
BALANCE AT JANUARY 1, 2001 646 $ 6,218 $ -- $- $(46,389) $(40,171)
Issuance of stock for exercise of stock options 4 10 -- -- -- 10
Return of shares in exchange for
sale of subsidiary (55) (660) -- -- -- (660)
Net loss -- -- -- -- (16,203) (16,203)
-------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2001 595 5,568 -- -- (62,592) (57,024)
Exchange of all outstanding shares of redeemable
convertible preferred stock Series A, B, C, D
and E for redeemable convertible preferred stock
Series AA and BB -- -- -- -- 51,923 51,923
Exchange of redeemable convertible preferred
stock Series AA with redeemable convertible
preferred stock Series A in connection with the
reincorporation as a Delaware company -- -- -- -- 3,321 3,321
Cancelation of all outstanding common
stock in connection with the reincorporation
as a Delaware company (595) (5,568) 5,568 -- -- --
Issuance of common stock for services 550 1 54 -- -- 55
Warrant for common stock issued for services -- -- 27 -- -- 27
Unrealized gain on short term investment -- -- -- 17 -- 17
Net loss -- -- -- -- (17,508) (17,508)
-------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 27, 2002 550 1 5,649 17 (24,856) (19,189)
Warrant for common stock issued for services
(unaudited) -- -- 13 -- -- 13
Realized gain (unaudited) -- -- -- (17) -- (17)
Net loss (unaudited) -- -- -- -- (5,219) (5,219)
-------- -------- -------- -------- -------- --------
BALANCE AT MARCH 28, 2003 (UNAUDITED) 550 $ 1 $ 5,662 $- $(30,075) $(24,412)
-------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these financial statements.
F-4
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE THREE
MONTHS MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
MARCH 28, MARCH 31, DECEMBER 27, DECEMBER 31,
2003 2002 2002 2001
(in thousands) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,219) $ (773) $(17,508) $(16,203)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on disposal and impairment of property and equipment -- 4 107 1,519
Impairment of goodwill and intangible other assets -- -- -- 5,213
Gain on extinguishment of debt -- -- (728) --
Depreciation and amortization 158 32 374 1,882
Amortization of goodwill and other intangible assets 408 -- 817 3,228
Write-off of in-process research and development -- -- 2,900 --
Non cash stock-based compensation 13 -- 2,118 --
Changes in operating assets and liabilities:
Accounts receivable (4) 2 (490) 556
Inventory (501) -- 1,624 --
Prepaid expenses and other current assets 96 59 (17) 751
Other long term assets -- 1 3 3,542
Accounts payable 1,788 (92) 2,536 (2,654)
Accrued liabilities (460) (169) 951 (2,092)
Deferred revenue (447) -- 583 --
-------- -------- -------- --------
Net cash used in operating activities (4,168) (936) (6,730) (4,258)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (23) -- (188) (811)
Purchase of short-term investments -- -- (5,571) --
Proceeds on sale of fixed assets -- -- -- 811
Cash transfer upon sale of subsidiary -- -- -- (159)
Proceeds on sales and maturity of short-term investments 2,233 -- 3,338 --
Acquisition, net of cash acquired -- -- 4,927 --
-------- -------- -------- --------
Net cash provided by (used in) financing activities 2,210 -- 2,506 (159)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations -- -- -- (1,000)
Borrowings (repayment of) long-term debt -- 26 (543) 178
Issuance of redeemable convertible preferred stock 5 -- 12,422 10
-------- -------- -------- --------
Net cash provided by (used in) financing activities 5 26 11,879 (812)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,953) (910) 7,655 (5,229)
Cash and cash equivalents, beginning of period 9,310 1,655 1,655 6,884
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 7,357 $ 745 $ 9,310 $ 1,655
-------- -------- -------- --------
Cash paid for interest $ -- $ -- $ 59 $ --
The accompanying notes are an integral part of these financial statements.
F-5
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND LIQUIDITY
NATURE OF BUSINESS
Zing Network, Inc., formerly known as Streamix Corporation, was
incorporated in California on June 20, 1996 as a provider of embedded
application connectivity and media sharing software. In June 2002, Zing
Network reincorporated in Delaware under the name of Pictos Technologies,
Inc. (the "Company," or "Pictos"). In July 2002, the Company acquired
substantially all of the assets of Conexant Systems, Inc.'s (a publicly
listed semiconductor company) Digital Imaging business (CDI) for equity
consideration of approximately $25 million. After the acquisition the
Company designs, manufactures and markets digital imaging semiconductor
products.
In 2002, Pictos changed its fiscal year to end on the Saturday closest to
December 31, 2002. When referred to the year ended December 27, 2002, we
refers to the 361 day period from January 1, 2002 to December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been successful in completing eight rounds of private
equity financing which raised approximately $69 million to date (see Note
8). However, the Company has incurred losses and negative cash flows from
operations for every fiscal period since inception. For the year ended
December 27, 2002, the Company incurred a net loss of approximately $18
million and negative cash flows from operations of approximately $7
million. Management's plan is to generate sufficient revenues, raise
additional capital or if necessary reduce certain discretionary spending
in future periods. Failure to achieve these plans could have a material
adverse effect on the Company's ability to fund its operations and achieve
its intended business objectives. Since there is no assurance that
management will successfully complete their plans, there is substantial
doubt about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that may result from
the outcome of this uncertainty. As described in Note 14, in June 2003,
the Company was acquired by ESS Technology, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in the consolidation process.
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 and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
STOCK SPLIT
In January 2002, the Company initiated a 60 for 1 reverse stock split for
its common stock, all shares and per share amounts in these financial
statements have been retroactively adjusted to give effect to the reverse
stock split.
BUSINESS RISKS AND CREDIT CONCENTRATIONS
The success of the Company in the semiconductor business is dependent
upon, among other things, the Company's ability to raise capital, continue
developing its products and generate significant customer sales.
The Company's concentration of credit risk consists principally of cash
and cash equivalents. The Company's cash and cash equivalents are
maintained at six major U.S. and international financial institutions
which management believes to be of high credit quality. Such deposits may
at times exceed federally insured limits.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid monetary instruments with an
original maturity or remaining maturity at the day of purchase of three
months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivables, accounts
payable and accrued liabilities approximate fair value due to their short
maturities. The reported amounts of loans payable approximate fair value
due to the market interest rates, which these debts bear.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are
charged to operations as incurred. Depreciation and amortization are
determined on the straight-line method over the estimated useful lives of
the related assets, which range from three to five years. When assets are
retired or otherwise disposed of, the cost and accumulated depreciation
and amortization are removed from the accounts, and any resulting gain or
loss is reflected in operations in the period realized.
F-6
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, no significant obligations with regard to
implementation or integration exist, the fee is fixed or determinable and
collectibility is reasonably assured.
In 2001 and early 2002 the Company's revenues were derived from product
sales via the internet and banner and sponsorship advertisements. Product
sales are recognized upon shipment and transfer of title. Advertising
revenues on both banner and sponsorship contracts are recognized as
"impressions", or times that an advertisement appears in pages viewed by
users of the Company's online properties, are delivered. Furthermore,
advertising revenue is recognized provided that no significant Company
obligations remain at the end of a period and collection of the resulting
receivable is probable. Company obligations typically include guarantees
of minimum number of impressions; to the extent minimum guaranteed
impressions are not met, the Company defers recognition of the
corresponding revenues until the remaining guaranteed impression levels
are achieved.
In 2002, the majority of the Company's revenue came from the sales of the
Company's digital imaging semiconductor products. The revenue is
recognized upon the delivery of the product, provided no acceptance or
returns provision exists. The Company markets its products both directly
to end customers, generally producers of digital imaging equipments, and
through distributors. The distributors would generally have certain return
provisions in their agreement. As a result the Company has deferred
revenue for products shipped to distributors until the product is
delivered to the end customer.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
OTHER INTANGIBLES
Other intangibles represent assets arising from contractual or other
legal rights acquired in business combinations accounted for as a
purchase. Other intangibles also represent intangible assets acquired in
a business combination accounted for as a purchase that are separable from
the acquired entity. Purchased intangible assets, including existing
technology, are being amortized over the estimated useful lives of three
years.
GOODWILL
Goodwill represents the excess of the aggregate purchase price over the
fair market value of the net tangible and intangible assets acquired in
business combinations accounted for as a purchase. In accordance with SFAS
No. 142, Goodwill and Other Intangible Assets, goodwill is no longer being
amortized effective January 1, 2002.
IMPAIRMENT OF GOODWILL
On January 1, 2002, the Company adopted Statement of Accounting Financial
Standard No. 142 ("SFAS No. 142"), which requires companies to stop
amortizing goodwill. Instead, SFAS No. 142 requires that goodwill be
reviewed for impairment upon adoption of SFAS No. 142 and annually
thereafter. The Company performs its annual impairment review during
the second quarter of each year, commencing the second quarter of
2002. Under SFAS No. 142, goodwill impairment is deemed to exist if the
net book value of a reporting unit exceeds its estimated fair value. The
Company currently operates in one reportable segment, which is also the
only reporting unit for purposes of SFAS No. 142. Since the Company
currently only has one reporting unit, all of the goodwill has been
assigned to the enterprise as a whole.
SFAS No. 142 also requires that the Company test goodwill for impairment
on an interim basis when circumstances indicate a possible impairment.
IMPAIRMENT OF OTHER LONG-LIVED ASSETS
The Company continually monitors events and changes in circumstances
for indications that carrying amounts of long-lived assets, including
intangible assets, may not be recoverable. When such events or changes in
circumstances occur, the Company assesses the recoverability of long-lived
assets by determining whether the carrying value of such assets will be
recovered through undiscounted expected future cash flows. If the total of
the future cash flows was less than the carrying amount of those assets,
the Company would record an impairment charge based on the excess of the
carrying amount over the fair value of the assets.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related
interpretations, Financial Accounting Standards Board ("FASB")
Interpretation No. 44, ("FIN 44") and complies with the disclosure
provisions of Statements of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123").
F-7
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Under APB 25, compensation expense is based on the difference, if any, on
the date of the grant, between the deemed fair value of the Company's
stock and the exercise price. SFAS 123 defines a "fair value" based method
of accounting for an employee stock option or similar equity instruments.
The pro forma disclosures of the difference between compensation cost
included in net loss and the related cost measured by the fair value
method are presented below.
THREE THREE
MONTHS MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
MARCH 28, MARCH 31, DECEMBER 27, DECEMBER 31,
2003 2002 2002 2001
(in thousands) (UNAUDITED)
NET LOSS
As reported $ (5,219) $ (773) $ (17,508) $ (16,203)
Stock-based compensation expense
that would have been included in the
determination of net loss had the
fair value method been applied 7 -- 35 --
--------- --------- ------------ ------------
Pro forma net loss $ (5,226) $ (773) $ (17,543) $ (16,203)
========= ========= ============ ============
These pro forma effects may not be representative of the effects on
reported results of operations for future years as options vest over
several years and additional awards are generally made each year.
The fair value of each employee stock option grant has been estimated on
the date of grant using the minimum value method using the following
assumptions:
DECEMBER 27, DECEMBER 31,
2002 2001
Risk-free interest rate 2.42% 4.24%
Expected life of options 4 years 4 years
Expected dividends 0% 0%
The weighted average fair value of options granted for the year ended
December 27, 2002 and December 31, 2001 were $0.023 and $0.050,
respectively.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123, Emerging Task Force 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
("EITF 96-18"). Under SFAS 123 and EITF 96-18, stock options and warrants
issued to non-employees are accounted for at their fair value at the
measurement date, generally when services are complete, calculated using
the Black-Scholes option pricing model.
INCOME TAXES
The Company accounts for income taxes using the liability method under
which deferred tax assets and liabilities are determined based on
differences between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or
Disposal Activities ("SFAS No. 146"). SFAS 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs that
are associated with exit and disposal activities, including restructuring
activities that are currently accounted for under EITF No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring).
The scope of SFAS No. 146 also includes costs related to terminating a
contract that is not a capital lease and termination benefits that
employees who are involuntarily terminated receive under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract. SFAS No. 146 will be
effective for exit or disposal activities that are initiated after
December 31, 2002. The provisions of EITF No. 94-3 shall continue to apply
for an exit activity initiated under an exit plan that met the criteria of
EITF No. 94-3 prior to the adoption of SFAS 146. The effect upon adoption
of SFAS No. 146 will be to change on a prospective basis the timing of
when restructuring charges are recorded, from a commitment date approach
to the date when the liability is incurred. The adoption of SFAS 146 is
not expected to have a material impact on the Company's financial position
or on its results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure an amendment of FASB Statement No.
123, ("SFAS No. 148"). SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also
requires prominent disclosures of the pro forma effect of using the fair
value method of accounting for stock-based employee compensation in both
annual and interim financial statements. The disclosure requirements of
SFAS No. 148 have been adopted in these financial statements. The
transition requirements of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The adoption of SFAS No. 148 is not
expected to have a material impact on the Company's financial position or
on its results of operations or cash flows.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 ("SFAS No. 150"), Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. The Statement
improves the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. The new Statement
requires that those instruments be classified as liabilities in statements
of financial position. This statement is effective for interim periods
beginning after June 15, 2003. The Company is currently assessing what
impact the adoption of SFAS No. 150 would have upon its financial
position, results of operations and cash flows.
3. IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS
During the second half of 2001 the Company experienced deteriorating
market condition. As a result the Company began a strategic shift of its
operations away from an internet based business model towards a business
model of an embedded software and chip manufacture. As a result of the
deteriorating market condition and strategic changes of the operations,
the Company conducted an impairment test of its remaining goodwill and
other intangible assets balances from the previous acquisitions of
Pix.com, and FotoNation E-Frame, all of which were completed during the
years ended December 31, 2000 and 1999. Based on the results of the
analysis of future cash flows, the remaining balances of goodwill and
other intangibles were considered impaired, resulting in a charge of $5.2
million in the year ended December 31, 2001.
In November 2002, the Company sold its software assets including the
capital stock of FotoNation Ireland for $750,000 in cash and recognized a
gain of $727,000.
4. ACQUISITION OF CONEXANT CDI DIVISION
On July 1, 2002, in order to complement the Company's technology with an
established semiconductor production capability and customer base, the
Company acquired substantially all of the assets of Conexant Systems,
Inc.'s Digital Imaging business ("CDI") in exchange for 3.1 million of
preferred shares Series A and 21.4 million of preferred shares Series A-1
valued at approximately $24.6 million. The Company incurred approximately
$373,000 in transaction related expenses. The results of operations of CDI
have been included in the Company's financial statements from July 1,
2002.
The Company has accounted for the acquisition of CDI using the purchase
method of accounting in accordance with SFAS 141. The allocation of the
purchase price to the tangible and identifiable intangible assets acquired
and liabilities assumed is summarized below. The allocation was based on
an appraisal and estimate of fair value.
F-9
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Current assets $ 7,558
Property and equipment 935
In-process research and development 2,900
Identifiable intangible assets:
Purchased technology 4,300
Customer contracts and related relationship 600
Goodwill 9,048
--------
Total assets acquired 25,341
Current liabilities (418)
--------
Net assets acquired $ 24,923
========
The intangible assets will be amortized on a straight-line basis over
their estimated useful lives of 3 years for purchased technology and
customer contracts and related relationships.
The Company identified 6 research projects in areas for which
technological feasibility had not been established and no alternative
future uses existed. $2.9 million of the purchase price was allocated to
acquired in-process research and development technology ("IPR&D") and
written off upon the acquisition. The value for each of the projects was
determined by estimating the expected cash flows from the projects once
commercially viable, discounting the net cash flows to their present
value, and then applying a percentage of completion to the calculated
value. Key assumptions utilized in determining these values include:
- a discount rate of 40%, representing the cost of capital as related
to the estimated time to complete the projects and the level of
risks involved; and
- the percentage of completion for the projects, determined using
costs incurred by the Company prior to the acquisition date compared
to the remaining research and development to be completed to bring
the projects to technological feasibility. The Company estimated
that as of the acquisition date, on average the percentage of
completion was 69%. The percentage of completion for the individual
projects varied from 17% to 94%.
The estimated costs to complete the projects were approximately $3.7
million in the aggregate. The estimated completion dates for the projects
ranged from August 2002 to February 2003.
OTHER INTANGIBLE ASSETS
The table below summarizes the gross carrying value and accumulated
amortization of the Company's intangible assets as of December 27, 2002.
All intangible assets from acquisitions prior to December 31, 2001 were
fully written off in the year ended December 31, 2001.
DECEMBER 27, 2002
--------------------------------------
GROSS
AMORTIZATION CARRYING ACCUMULATED
PERIOD AMOUNT AMORTIZATION NET
Purchased technology 36 months $4,300,000 $ 716,667 $3,583,333
Customers and contracts 36 months 600,000 100,000 500,000
---------- ------------ ----------
$4,900,000 $ 816,667 $4,083,333
========== ============ ==========
F-10
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Estimated future amortization expense is as follows:
(in thousands)
FISCAL YEAR
2003 $1,633
2004 1,633
2005 817
------
$4,083
======
Actual results for the year ended December 27, 2002 and December 31, 2001
and the three month period ended March 28, 2003 and March 31, 2002, had
the company applied non-amortization provision of SFAS No. 142 are as
follows:
MARCH 28, MARCH 31, DECEMBER 27, DECEMBER 31,
2003 2002 2002 2001
(in thousands) (UNAUDITED)
Net loss as reported $ 5,219 $ 773 $ 17,508 $ 16,203
Adjustment for goodwill amortization -- (253) -- (1,012)
--------- --------- ------------ ------------
Adjusted net loss $ 5,219 $ 520 $ 17,508 $ 15,191
========= ========= ============ ============
5. PROPERTY AND EQUIPMENT, NET
MARCH 28, DECEMBER 27, DECEMBER 31,
(in thousands) 2003 2002 2001
(UNAUDITED)
Equipment $ 318 $ 318 $ --
Computer equipment 603 580 323
Software and licenses 42 42 953
Leasehold improvements 28 28 17
Furniture and fixtures 70 70 25
--------- ------------ ------------
1,061 1,038 1,318
Less: Accumulated depreciation
and amortization (364) (206) (1,128)
--------- ------------ ------------
$ 697 $ 832 $ 190
========= ============ ============
Depreciation and amortization expense was $374,000 and $1,389,000 for the
year ended December 27, 2002 and December 31, 2001, respectively.
Depreciation and amortization expense for the quarter ended March 28, 2003
and March 31, 2002 was $158,000 (unaudited) and $32,000 (unaudited),
respectively.
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENTS
DECEMBER 27, 2002
-----------------------------------------------
GROSS GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAINS LOSSES VALUE
Money Market Funds $ 5,020 $ -- $ -- $ 5,020
Government Securities 3,236 19 -- 3,255
Corporate Debt 496 4 -- 500
--------- ---------- ---------- ---------
$ 8,752 $ 23 $ -- $ 8,775
========= ========== ========== =========
All of the Company's short-term investments have a maturity date of less
than one year and are classified as available for sale in accordance with
SFAS No. 115, Accounting for Certain Investments in Debt or Equity
Securities. As of December 31, 2001, the Company did not have any
short-term investments.
7. COMMITMENTS
NOTES PAYABLE
In conjunction with the acquisition of Pix.com the Company issued certain
notes payable to the stockholders of Pix.com in the amount of $2 million.
The outstanding balance of the notes payable at December 31, 2001 was
approximately $1.8 million. In 2002 the Company entered into a debt
settlement agreement with certain note holders, pursuant to which the note
holders received a cash payment of approximately $480,000 and shares of
preferred stock Series DD valued at approximately $440,000 and were
granted the right to exchange their previously received shares of
preferred stock Series BB for shares of preferred stock Series AA. The
exchange right had a value of approximately $110,000. As a result of the
exchange, the Company recorded a gain on extinguishment of debt of
approximately $730,000. Certain note holders with an outstanding balance
of approximately $60,000 elected not to participate in the settlement.
This balance was paid back in accordance with the original terms in
December 2002.
OPERATING LEASE
The Company entered into various non-cancelable operating leases with
expiration dates in June 2003, with the option to continue occupying the
space on a month-to-month basis at the Company's discretion.
The future commitments under non-cancelable operating leases are as
follows:
(in thousands)
YEAR ENDING DECEMBER 27, 2003 $ 303
=========
PRODUCT WARRANTIES
The Company's standard warranty period for its products is one to two
years and includes repair or replacement guarantees for units with product
defects. The Company estimates the accrual for future warranty costs based
upon its historical experience and its current and anticipated product
failure rates. If actual product failure rates or replacement costs differ
from its estimates, revisions to the estimated warranty obligations would
be required. However the Company concluded that no adjustment to
pre-existing warranty accruals were necessary in the year ended December
27, 2002 and the three months ended March 28, 2003. A reconciliation of
the changes to the Company's warranty accrual as of December 27, 2002 and
March 28, 2003 (unaudited) is as follows:
F-12
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE
MONTHS
ENDED YEAR ENDED
MARCH 28, DECEMBER 27,
(in thousands) 2003 2002
Beginning balance $ 62 $ --
Accruals for warranties issued 47 100
Settlements made during the period -- (38)
---------- ------------
Ending balance $ 109 $ 62
========== ============
GUARANTEES AND INDEMNIFICATION AGREEMENTS
The Company is required under Financial Accounting Standards Board
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others
("FIN 45"), to disclose and recognize a liability for the fair value of
the obligation it assumes under a guarantee upon issuance of such
guarantee. The initial recognition and measurement requirement of FIN 45
is effective for guarantees issued or modified after December 31, 2002. As
of March 28, 2003, the Company's guarantees that were issued or modified
after December 31, 2002 were not material (unaudited).
The Company enters into standard indemnification agreements in the
ordinary course of business. Pursuant to these agreements, the Company,
indemnifies, holds harmless, and agrees to reimburse the indemnified
parties for losses suffered or incurred by the indemnified parties,
generally the Company's business partners or customers, in connection with
any U.S. patent, or any copyright or other intellectual property
infringement claim by any third party with respect to the Company's
products. The term of these indemnification agreements is generally
perpetual anytime after the execution of the agreement. The maximum
potential amount of future payments the Company could be required to make
under these agreements is unlimited. The Company has never incurred costs
to defend lawsuits or settle claims related to these indemnification
agreements. As a result, the Company believes the estimated fair value of
these agreements is minimal.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
ISSUANCE AND EXCHANGES OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
In January 2002, upon the approval of the stockholders, the Company
exchanged all outstanding preferred shares of Series A, B, C and E at 60
shares for 1 shares of new Series AA of redeemable convertible preferred
stock. Each share of Series AA has a liquidation preference of $2.0598 per
share or approximately $4.6 million in aggregate. Every 60 shares of
common stock were exchanged into one share of common stock and one share
of redeemable convertible preferred stock Series CC. Holders of Series CC
share pro rata together with the holders of Series AA a liquidation
preference of $50 million in the aggregate, behind the initial $4.6
million Series AA liquidation preference. Every 60 shares of redeemable
convertible preferred stock Series D were exchanged for one share of
redeemable convertible preferred stock Series BB. Every share of
redeemable convertible preferred stock Series BB has a liquidation
preference of $2.0598 per share, in order behind the Series AA preference
and the shared $50 million Series AA liquidation and Series CC liquidation
preference.
As a result of the exchange the new outstanding Series AA, BB and CC were
issued, based on the guidance in EITF Topic D 42, The effect on the
calculation of earnings per share for the redemption or induced conversion
of preferred stock, at their respective fair value resulting in a decrease
in the value of preferred stock of approximately $52 million and a similar
decrease in accumulated deficit.
In June 2002, the Company completed a round of financing where
approximately 4.1 million shares of redeemable convertible preferred stock
Series DD were issued at $1 per share. Each share of redeemable
convertible preferred stock Series DD had liquidation preference of $1.50.
Out of the shares issued, approximately 290,000 of the shares were issued
as consideration for the note settlement described in Note 6. The share
consideration was valued at the fair value of the redeemable convertible
preferred stock Series DD of $1.50 per share. The remaining 3.9 million
shares of redeemable convertible preferred stock were issued for cash at
$1.00 per share for net cash proceeds of $3.9 million. As a result of this
transaction, the Company recorded a $1.9 million charge which is included
in general and administrative expense for the year ended December 27,
2002, representing the difference between the stated value and the fair
value of the preferred stock.
F-13
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to the financing in June 2002 and in connection with the
reincorporation as a Delaware company, the Company exchanged all
outstanding shares of Series DD for approximately 6.2 million shares of
Redeemable Convertible Preferred Stock Series A and exchanged all the
outstanding shares of Redeemable Convertible Preferred Stock Series AA for
approximately 1.3 million shares of redeemable convertible preferred stock
Series A.
As a result of the exchange the new outstanding Series A were issued,
based on the guidance in EITF Topic D 42, at their fair value resulting in
a decrease in the value of preferred stock of approximately $3.2 million
and a similar decrease in accumulated deficit.
In July 2002, as consideration for the business combination transaction
described in Note 4 the Company issued 3.1 million shares of [redeemable
convertible preferred stock] Series A and 21.4 million of [redeemable
convertible preferred stock] Series A-1 (for terms see below).
In July 2002, the Company issued approximately 8.0 million shares of
redeemable convertible preferred stock Series A for net cash proceeds of
approximately $8.0 million.
In September 2002, the Company issued approximately 580,000 shares of
redeemable convertible preferred stock Series A for net cash proceeds of
approximately $580,000.
In December 2002, the Company issued 35,000 shares of redeemable
convertible preferred stock Series A to an employee of the Company in
exchange for employment services, resulting in a charge to general and
administrative expense of approximately $40,000.
TERMS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK SERIES A AND A-1
Series A and Series A-1 redeemable convertible preferred stock as of
December 27, 2002 comprise the following:
(in thousands, except share amounts) PROCEEDS
SHARES PER SHARE NET OF
SHARES ISSUED AND DIVIDEND LIQUIDATION ISSUANCE
SERIES AUTHORIZED OUTSTANDING AMOUNT AMOUNT COST
Series A 43,500,000 19,400,050 $ 0.07 $ 19,401 $ 19,401
Series A-1 22,000,000 21,421,950 $ 0.07 21,422 21,422
---------- ----------- ----------- ----------
65,500,000 40,822,000 $ 40,822 $ 40,822
========== =========== =========== ==========
Dividends
The preferred stockholders are entitled to receive prior to, and in
preference of common stock, when and if declared by the Board of
Directors, out of funds legally available, a preferential, non-cumulative
annual dividend at a rate of $0.07 per share. (Subject to adjustment for
any stock dividends, splits, recapitalizations and similar events.)
Voting
Each holder of Series A of redeemable convertible preferred stock shall
have full voting rights and powers equal to the voting rights and powers
of the holders of common stock. The number of votes equals the number of
whole shares of common stock into which each holder's Series A preferred
shares could be converted. The Company is required to obtain affirmative
vote or written consents from 50% or more of the outstanding shares of
Series A in order to:
o Amend, alter or repeal any provision of, or add any provision to,
the articles of incorporation or bylaws so as to adversely change
the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of the redeemable convertible
preferred stock;
o Authorize or issue any shares of any new class of series of stock
having any preference or priority superior to the redeemable
convertible preferred stock (other than voting rights);
o Authorize or pay any dividend or declare any distribution on any
other class or Series of preferred stock;
o Approve the purchase, redemption or other acquisition of any shares
of common stock other than repurchase at the original price paid for
such shares upon the termination of the service or employment of a
consultant, director or employee; or
o Voluntarily initiate a dissolution or liquidation of the Company.
F-14
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Each holder of Series A-1 of redeemable convertible preferred stock shall
not be entitled to vote, except as required by law and as outlined below.
The Company is required to obtain affirmative vote or written consents
from 50% or more of the outstanding shares of Series A-1 in order to:
- Amend, alter or repeal any provision of, or add any provision to,
the articles of incorporation or bylaws so as to adversely change
the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of the redeemable convertible
preferred stock Series A-1;
- Authorize or issue any shares of any new class of series of stock;
having any preference or priority superior to the redeemable
convertible preferred stock Series A-1 (other than voting rights);
or
- Authorize or pay any dividend or declare any distribution on any
other class or series of preferred stock.
Conversion
Each share of redeemable convertible preferred stock is convertible into
common stock at the option of the holder, at any time after the date of
issuance. The conversion rate is the quotient obtained by dividing the
original issue price by the conversion price. The conversion price is the
original issue price as adjusted for certain common stock events, issuance
of additional common stock, subdivision of the outstanding shares of
common stock or a combination of the outstanding shares of common stock.
Preferred stock will automatically convert into common stock, at the then
applicable conversion price, immediately upon the earlier of (i) the
consummation of a firm commitment underwritten public offering of common
stock registered under the Securities Act of 1933, at a public offering
price of not less than $3.00 per shares (adjusted to reflect common stock
events), resulting in gross proceeds to the Company of not less than $50
million; (ii) at the election of the holders of greater than 50% of the
then outstanding redeemable convertible preferred stock, (on an as
converted to common stock basis); (iii) when the number of outstanding
shares of redeemable convertible preferred stock is reduced below 10% of
the originally issued shares of redeemable convertible preferred stock.
In the event that any redemption, repurchase or cancellation of common
stock or redeemable convertible preferred stock, or any other event,
results in Conexant Systems, Inc., together with its affiliates, holding
greater than 18% of the aggregate number of voting securities of the
Company, a number of shares of redeemable convertible preferred stock
Series A held by Conexant Systems, Inc., sufficient to cause Conexant
Systems, Inc., together with its affiliates, to hold less than 18% of the
aggregate number of outstanding voting securities of the Company shall
automatically be converted into an equal number of shares of redeemable
convertible preferred stock Series A-1.
Liquidation
In the event of any liquidation, dissolution, or winding up of the
Company, either voluntary or involuntary, a merger or consolidation with
any other corporation, or a sale of assets where the beneficial owners of
the Company's common stock and convertible preferred stock own less than
50% of the resulting voting power of the surviving entity, the holders of
Series A and Series A-1 are entitled to a distribution in preference to
common stockholders of $1.00 per share, plus all accrued but unpaid
dividends. The remaining assets, if any, shall be distributed among the
holders of common stock and redeemable convertible preferred stock pro
rata based on the number of shares held by each holder.
If the Company's assets are insufficient to provide for the full
preference amount for the Series A and Series A-1 redeemable convertible
preferred stock outstanding, then such assets will be distributed among
the holders of then outstanding Series A and Series A-1 redeemable
convertible preferred stock pro rata, according to the aggregate
preferential amount to which each holder is entitled.
9. COMMON STOCK
As of December 27, 2002, the Company has authorized 80,000,000 shares of
common stock.
Each share of common stock has the right to one vote. The holders of
common stock are also entitled to receive dividends whenever funds are
legally available and when declared by the Board of Directors, subject to
the prior rights of holders of the Company's convertible preferred stock.
No dividends have been declared paid through December 2002.
The Company has reserved sufficient shares of common stock for issuance of
common stock subject to the conversion of preferred shares of Series A and
A-1, the exercise of options under the stock option plans, and the
exercise of warrants for common stock.
The Company has reserved shares of common stock for issuance as follows:
F-15
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27,
(in thousands) 2002
Conversion of Series A 43,500
Conversion of Series A-1 22,000
Exercise of options under the stock option plans 8,500
Exercise of warrants issued for common stock and preferred stock 89
Unassigned 5,911
------------
80,000
============
10. EMPLOYEE BENEFIT PLANS
401(K) SAVINGS PLAN
The Company maintains a 401(k) employee savings plan covering
substantially all employees. The 401(k) plan year is January 1 through
December 31. Employee contributions, limited to 12% of compensation, are
matched by the Company at the discretion of the Board of Directors. No
contributions were made to the plan to date.
11. STOCK OPTION PLAN
The Company has established a stock option plan (the "Plan") under which
the Board of Directors may grant common stock options to employees,
directors and consultants. Under the Plan, options generally vest 25% one
year from the vesting commencement date with an additional 2% vesting each
month thereafter. A total of 8,500,000 shares of the Company's common
stock have been reserved for issuance under the Plan. Shares sold under
the Plan are subject to various restrictions as to resale and right of
repurchase by the Company.
Options under the Plan may be either incentive stock options ("ISO") or
nonqualified stock options (NQSO) as defined under Section 422 of the
Internal Revenue Code. Options shall be exercisable within the periods or
upon the events determined by the Board of Directors or a committee
appointed by the Board of Directors as set forth by a written stock option
grant, provided however, that no option shall become exercisable after the
expiration of 10 years from the date the option is granted. Additionally,
no option granted to a person who directly or by attribution owns more
than 10% of the total combined voting power of all classes of stock of the
Company shall be exercisable after the expiration of such option which is
five years from the date the option is granted.
Vested options held by individuals upon termination of their relationship
with the Company may be exercised no later than 30 days following the date
of termination or twelve months following death or disability until
expiration of the option.
The exercise price of an NQSO shall not be less than 85% of the fair
market value of the shares on the date the option is granted. The exercise
price of an ISO shall not be less than 100% of the fair market value of
the shares on the date the option is granted. The exercise price of any
ISO granted to a person owning more than 10% of the total combined voting
power of all classes of stock of the Company shall not be less than 110%
of the fair market value of the shares on the date the option is granted.
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes option activity under the Company's stock
option plan.
OPTIONS OUTSTANDING
---------------------
WEIGHTED
SHARES NUMBER AVERAGE
AVAILABLE OF EXERCISE
FOR GRANT SHARES PRICE
BALANCE, DECEMBER 31, 2000 272,451 546,466 $ 0.0021
Options granted (67,774) 67,774 $ 0.0014
Options cancelled 374,795 374,795 $ 0.0020
Options exercised -- 4,294 $ 0.0007
---------- ----------
BALANCE, DECEMBER 31, 2001 579,472 993,329 $ 0.0020
Cancellation of Zing 96 stock option plan (579,472) (993,329) $ --
Options authorized 8,500,000 -- $ --
Options granted (5,344,350) 5,344,350 $ 0.10
Options cancelled 443,150 (443,150) $ 0.10
Options exercised -- -- $ --
---------- ----------
BALANCE, DECEMBER 27, 2002 3,598,800 4,901,200 $ 0.10
Options granted (unaudited) (1,176,000) 1,176,000 $ 0.10
Options cancelled (unaudited) 1,216,250 (1,216,250) $ 0.10
Options exercised (unaudited) -- -- $ --
---------- ----------
BALANCE, MARCH 28, 2003 (UNAUDITED) 3,639,050 4,860,950 $ 0.10
========== ==========
The following table summarizes information with respect to stock options
outstanding at December 27, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF REMAINING AVERAGE OUTSTANDING AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE AND EXERCISE
PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
$ 0.10 4,901,200 7.67 $ 0.10 -- $ --
The Company applies APB 25 and related interpretations in accounting for
employee and director options granted under the Plan. The alternative fair
value accounting provided for under Financial Accounting Standards Board
Statement No. 123, Accounting for Stock-Based Compensation ("SFAS 123"),
requires the use of option valuation models that were not developed for
use in valuing employee stock options. Under APB 25, when the exercise
price of the Company's employee stock options equal the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
F-17
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
OPTIONS TO NONEMPLOYEES
During fiscal year 2002, the Company granted options to certain
non-employees to purchase 1,000,000 shares of the Company's common
stock in exchange for services rendered. The options vest over four
years. These options are subject to variable plan accounting, with fair
value, as determined using the Black-Scholes pricing model,
remeasurement at the end of each year-end reporting period. For the
year ended December 27, 2002 and the three month period ended March 28,
2002 the Company incurred 27,000 and 13,000 (unaudited), respectively
in stock option compensation charges for this grant.
The fair value of the options was estimated using the Black-Scholes
option pricing model under the following assumptions: 100% volatility
factor, ten-year option term, 0% dividend yield and a risk-free
interest rate of 5.28%. Stock-based compensation expense related to
stock options granted to non-employees is recognized as the options
vest.
12. INCOME TAXES
At December 27, 2002, the Company had approximately $56,000,000 of
federal net operating loss carryforwards available and $31,000,000 of
state net operating loss carryforwards available to offset future
taxable income. The carryforwards expire in varying amounts beginning
in 2006. Under the Tax Reform Act of 1986, the amounts of and benefits
from net operating loss carryforwards may be impaired or limited in
certain circumstances. Events which cause limitations in the amount of
net operating losses that the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change of more
than 50%, as defined, over a three year period.
No provision (benefit) for income taxes has been recorded in the
financial statements as the Company has incurred net losses since
inception.
The components of the net deferred tax assets are as follows:
DECEMBER 27, DECEMBER 31,
(in thousands) 2002 2001
NON-CURRENT DEFERRED TAX ASSETS
Net operating loss carryforwards $ 21,386 $ 17,353
Fixed assets 175 349
Accrued liabilities, reserves and other 695 13
-------- --------
Gross deferred tax asset 22,256 17,715
-------- --------
Acquired intangibles (1,626) --
Valuation allowance (20,630) (17,715)
-------- --------
Net deferred tax asset $ -- $-
-------- --------
Due to the uncertainties surrounding the realization of favorable tax attributes
in future tax returns, the Company has placed a full valuation allowance against
its net deferred tax assets.
The Company has research and development credit carryforwards of approximately
$367,000 and $313,000 for federal and state in income tax purposes,
respectively. If not utilized, the federal credits will expire beginning 2017.
The state credit can be carried forward indefinitely.
For federal and state income tax purposes, all or a portion of the benefits from
net operating loss carryforwards may be subject to certain limitations on annual
utilization in case of changes in ownership, as defined by federal and state tax
laws.
F-18
PICTOS TECHNOLOGIES, INC.
(FORMERLY ZING NETWORK, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED PARTIES
For purposes of governing certain of the ongoing relationships between
the Company and Conexant Systems, Inc. ("Conexant") after the purchase
of the CDI division and to provide for an orderly transition, the
Company and Conexant have entered into various agreements, including
the Separation Agreement and other agreements outlined below
("Ancillary Agreements"). A brief description of each of the agreements
follows:
WAFER SUPPLY AND PROBE SERVICES AGREEMENT
The Wafer Supply and Probe Services Agreement establishes the terms and
conditions on which Conexant will supply Wafers and related services to
Pictos. The agreement lasts for 36 months following the acquisition
with certain of the services provided by Conexant to be terminated
earlier.
DEVICE PACKAGING SERVICE AGREEMENT
The Device Packaging Service Agreement establishes the terms and
conditions on which Conexant will supply the Packaged Devices and
Processing Services to Pictos. The agreement lasts for 12 months
following the acquisition.
INTELLECTUAL PROPERTY AGREEMENT
Under the Intellectual Property Agreement, Conexant transferred to
Pictos its rights in specified patents, specified trademarks,
copyrights, related goodwill and other technology related to Pictos'
current business and research and development efforts.
TECHNOLOGY ESCROW AGREEMENT
The Technology Escrow Agreement provides the terms of the escrow
required under the Intellectual Property Agreement. The escrow
agreement could last for a maximum of 5 years following the
acquisition.
TRANSITION SERVICE AGREEMENT
The Transition Service Agreement outlines individual transitional
services that Pictos requested Conexant to provide after the
acquisition in order to conduct the Company's business. The agreement
provides the time period for each service, a summary of the service to
be provided and a description of the service. Generally, The Company
will pay Conexant based on specified charges per type of service, meant
to reflect Conexant's actual cost. The agreement covers services
relating primarily to research and development, finance, human
resources, sales support and international sales offices. The agreement
will last from 6 months to a year following the acquisition.
INFORMATION TECHNOLOGY SERVICE AGREEMENT
The Information Technology Service Agreement outlines information
technology services that Pictos requested Conexant to provide after the
acquisition in order to conduct the Company's business. The agreement
provides the time period for each service, a summary of the IT services
to be provided and a description of the service. Generally, the Company
will pay Conexant based on specified charges per type of service, meant
to reflect Conexant's actual cost. The agreement will last 3 years
following the acquisition.
SUBLEASE BETWEEN PICTOS AND CONEXANT WITH RESPECT TO NEWPORT BEACH
OFFICE FACILITIES
This agreement regulates Pictos sublease of the facility in Newport
Beach, California. The agreement lasts until June 2003 and can be
renewed up to June 2004.
The following table outlines the charges made by Conexant for goods and
services provided to the Company in the year ended December 27, 2002
and the three-month period ended March 28, 2003:
MARCH 28, DECEMBER 27,
(in thousands) 2003 2002
(UNAUDITED)
Cost of goods sold $1,483 $1,039
Research and development expense 865 402
Sales and marketing expense 394 107
General and administrative expense 296 108
------ ------
$3,038 $1,656
------ ------
F-19
As of December 27, 2002 and March 28, 2003 the Company had an
outstanding accounts payable balance to Conexant of $1,186,000 and
$1,356,000 (unaudited), respectively.
14. SUBSEQUENT EVENTS (UNAUDITED)
In June 2003 the Company entered into a settlement agreement with
Conexant, agreeing to pay $1,503,238 in settlement for accounts payable
with a book value of $1,743,328.
On June 9, 2003 ESS Technology, Inc. a publicly listed company "ESS"
purchased all the outstanding shares of the Company for $27 million, in
cash out of which 10% is held in escrow to compensate the acquiror for
certain indemnifications made by the Company. The escrow period is
expected to last approximately 12 months.
In connection with the acquisition of the Company by ESS, the Company
terminated 8 employees resulting in a severance charge of approximately
$449,000. The Company may incur other expenses as a result of the
acquisition.
F-20