EXHIBIT 99.1
TELECOM TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Redeemable Common Stock and
Stockholders' Deficit..................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
telecom technologies, inc.:
We have audited the accompanying consolidated balance sheets of telecom
technologies, inc. (a Texas corporation) as of December 31, 1999 and 2000, and
the related consolidated statements of operations, redeemable common stock and
stockholders' deficit and cash flows for the years ended December 31, 1998, 1999
and 2000. These consolidated financial statements are the responsibility of the
telecom technologies, inc. 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. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of telecom technologies, inc. as
of December 31, 1999 and 2000, and the results of its operations and its cash
flows for the years ended December 31, 1998, 1999 and 2000 in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 5, 2001
(except with respect to the matter discussed
in Note 2 as to which the date is June 6, 2001)
F-2
TELECOM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------
1999 2000
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 533 $ 586
Accounts receivable, net of allowance of $150 and $400 at
December 31, 1999 and 2000, respectively................ 5,587 2,128
Inventories............................................... 2,410 4,191
Deferred tax asset........................................ 399 399
Income tax receivable..................................... 740 780
Other current assets...................................... 292 210
------- --------
Total current assets.................................. 9,961 8,294
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization.............................................. 2,122 4,718
OTHER ASSETS................................................ 799 --
------- --------
$12,882 $ 13,012
======= ========
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Note payable to bank...................................... $ 4,000 $ 7,000
Accounts payable.......................................... 2,489 4,862
Accrued expenses.......................................... 1,685 4,422
Deferred revenue.......................................... 2,430 2,977
Current portion of capital lease obligations.............. 192 553
------- --------
Total current liabilities............................. 10,796 19,814
CAPITAL LEASE OBLIGATIONS, less current portion............. 673 1,292
COMMITMENTS (Note 7)
REDEEMABLE COMMON STOCK, no par value:
Issued and outstanding--7,777,780 shares of Class A voting
common stock and 2,222,220 shares of Class B non-voting
common stock, at redemption value (Note 8).............. 7,226 50,500
STOCKHOLDERS' DEFICIT:
Class A voting common stock, no par value:
Authorized--180,000,000 shares
Issued and outstanding--70,000,000 shares............... 1 1
Class B non-voting common stock, no par value:
Authorized--50,000,000 shares
Issued and outstanding--20,000,000 shares............... -- --
Capital in excess of par value............................ -- 10,993
Accumulated deficit....................................... (5,814) (60,542)
Deferred compensation..................................... -- (9,046)
------- --------
Total stockholders' deficit........................... (5,813) (58,594)
------- --------
$12,882 $ 13,012
======= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
TELECOM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
--------- -------- ---------
REVENUES:
Product................................................... $ 6,012 $ 9,846 $ 21,264
Professional services..................................... 8,732 9,486 7,367
-------- ------- --------
Total revenues........................................ 14,744 19,332 28,631
Cost of product and services(1)............................. 11,083 11,637 14,381
-------- ------- --------
GROSS PROFIT................................................ 3,661 7,695 14,250
OPERATING EXPENSES:
Research and development(1)............................... 1,389 7,486 14,735
Sales and marketing(1).................................... 1,183 3,287 5,090
General and administrative(1)............................. 1,344 1,960 3,586
Stock-based compensation.................................. -- -- 1,947
-------- ------- --------
Total operating expenses.............................. 3,916 12,733 25,358
-------- ------- --------
LOSS FROM OPERATIONS........................................ (255) (5,038) (11,108)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (188) (132) (511)
Interest income........................................... 25 58 118
Sale of product line...................................... -- 5,500 --
Other income.............................................. 8 815 47
-------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... (410) 1,203 (11,454)
Provision (benefit) for income taxes........................ (145) 336 --
-------- ------- --------
NET INCOME (LOSS)........................................... $ (265) $ 867 $(11,454)
======== ======= ========
PER SHARE INFORMATION:
Basic and diluted net income (loss) per share
(Note 1(n))............................................... $ (0.00) $ 0.01 $ (0.11)
======== ======= ========
Shares used in computation................................ 100,000 100,000 100,000
======== ======= ========
- ------------------------
(1) Excludes non-cash stock-based
compensation expense as follows:
Cost of product and services........................... $ 35
Research and development............................... 82
Sales and marketing.................................... 1,429
General and administrative............................. 401
--------
$ 1,947
========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
TELECOM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK AND STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
CLASS A AND B -------------------------------------------------------------------
REDEEMABLE
COMMON STOCK ORDINARY CLASS A CLASS B
------------------------ ------------------- --------------------- ---------------------
REDEMPTION PAR PAR PAR
SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE
---------- ----------- -------- -------- ---------- -------- ---------- --------
BALANCE, DECEMBER 31, 1997... 2,000 $ 949 18,000 $ 1 -- $ -- -- $ --
Reorganization............. 9,998,000 -- (18,000) (1) 70,000,000 1 20,000,000 --
Accretion of increase in
value of redeemable
common stock............. -- 1,332 -- -- -- -- -- --
Net loss................... -- -- -- -- -- -- -- --
---------- ------- ------- ----- ---------- ----- ---------- ----
BALANCE, DECEMBER 31, 1998... 10,000,000 2,281 -- -- 70,000,000 1 20,000,000 --
Accretion of increase in
value of redeemable
common stock............. -- 4,945 -- -- -- -- -- --
Net income................. -- -- -- -- -- -- -- --
---------- ------- ------- ----- ---------- ----- ---------- ----
BALANCE, DECEMBER 31, 1999... 10,000,000 7,226 -- -- 70,000,000 1 20,000,000 --
Accretion of increase in
value of redeemable
common stock............. -- 43,274 -- -- -- -- -- --
Deferred compensation
related to stock
option grants............ -- -- -- -- -- -- -- --
Amortization of deferred
compensation............. -- -- -- -- -- -- -- --
Compensation related to
stock options granted
to non-employees......... -- -- -- -- -- -- -- --
Net loss................... -- -- -- -- -- -- -- --
---------- ------- ------- ----- ---------- ----- ---------- ----
BALANCE, DECEMBER 31, 2000... 10,000,000 $50,500 -- $ -- 70,000,000 $ 1 20,000,000 $ --
========== ======= ======= ===== ========== ===== ========== ====
CAPITAL
IN TOTAL
EXCESS OF ACCUMULATED DEFERRED STOCKHOLDERS'
PAR VALUE DEFICIT COMPENSATION DEFICIT
--------- ------------ ------------- -------------
BALANCE, DECEMBER 31, 1997... $ -- $ (139) $ -- $ (138)
Reorganization............. -- -- -- --
Accretion of increase in
value of redeemable
common stock............. -- (1,332) -- (1,332)
Net loss................... -- (265) -- (265)
------- -------- ------- --------
BALANCE, DECEMBER 31, 1998... -- (1,736) -- (1,735)
Accretion of increase in
value of redeemable
common stock............. -- (4,945) -- (4,945)
Net income................. -- 867 -- 867
------- -------- ------- --------
BALANCE, DECEMBER 31, 1999... -- (5,814) -- (5,813)
Accretion of increase in
value of redeemable
common stock............. -- (43,274) -- (43,274)
Deferred compensation
related to stock
option grants............ 10,262 -- (10,262) --
Amortization of deferred
compensation............. -- -- 1,216 1,216
Compensation related to
stock options granted
to non-employees......... 731 -- -- 731
Net loss................... -- (11,454) -- (11,454)
------- -------- ------- --------
BALANCE, DECEMBER 31, 2000... $10,993 $(60,542) $(9,046) $(58,594)
======= ======== ======= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
TELECOM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (265) $ 867 $(11,454)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization........................... 99 324 798
Deferred income taxes................................... (2,288) 153 --
Stock-based compensation................................ -- -- 1,947
Changes in operating assets and liabilities:
Accounts receivable................................... (651) (1,368) 3,459
Inventories........................................... 11 (1,590) (1,781)
Income tax receivable................................. 1,256 (740) (40)
Other current assets.................................. 423 (176) 82
Other assets.......................................... (375) (280) 799
Accounts payable and accrued expenses................. (142) 2,464 5,110
Deferred revenue...................................... 1,465 965 547
------- ------- --------
Net cash (used in) provided by operating
activities.......................................... (467) 619 (533)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (743) (592) (2,085)
Cash paid for acquisition................................. -- (904) --
------- ------- --------
Net cash used in investing activities............... (743) (1,496) (2,085)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from note payable to bank.................... 3,000 1,000 3,000
Payments on capital lease obligations..................... -- (110) (329)
Payments on related party note............................ (1,660) -- --
------- ------- --------
Net cash provided by financing activities........... 1,340 890 2,671
------- ------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 130 13 53
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 390 520 533
------- ------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 520 $ 533 $ 586
======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes................................ $ 600 $ 1,000 $ 40
======= ======= ========
Cash paid for interest.................................... $ 228 $ 147 $ 447
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Equipment obtained under capital lease obligations........ $ -- $ 975 $ 1,309
======= ======= ========
Software contributed in acquisition....................... $ -- $ 150 $ --
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS RELATED TO
ACQUISITION:
Fair value of assets acquired, excluding cash............. $ -- $ 1,054 $ --
Software paid as consideration............................ -- (150) --
------- ------- --------
Cash used for acquisition................................. $ -- $ (904) $ --
======= ======= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
TELECOM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
telecom technologies, inc. (TTI) was incorporated on November 24, 1993 as a
Texas corporation and is a provider of software products and services for
network and service providers, offering end-to-end solutions for next
generation, carrier-grade, multi-service networks. TTI's professional services
include network design and planning, implementation, system integration, testing
and support. On January 18, 2001, Sonus Networks, Inc. (Sonus) acquired TTI (see
Note 2).
The market for TTI's products and services is characterized by rapidly
changing technology, evolving industry standards and new product introductions.
TTI's market is intensely competitive. TTI's success will depend on its ability
to enhance and market existing products and services and introduce new products,
features and services to meet changing customer requirements and evolving
standards.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying consolidated financial statements and notes.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
TTI and its wholly owned subsidiary. All material intercompany transactions and
balances have been eliminated.
(B) CASH EQUIVALENTS
Cash equivalents are stated at cost plus accrued interest, which
approximates market value and have original maturities of three months or less.
(C) CONCENTRATION OF CUSTOMERS AND CREDIT RISK AND LIMITED SUPPLIERS
Financial instruments that potentially subject TTI to concentrations of
credit risk are cash and cash equivalents and accounts receivable. TTI has no
significant off-balance-sheet concentrations such as foreign exchange contracts,
options contracts or other foreign hedging arrangements. The majority of TTI's
cash is maintained with a commercial bank.
TTI's customers are generally large companies in the United States operating
in the telecommunications industry. Concentration of credit risk with respect to
such customers is limited due to the size and financial strength of those
customers who generally represent individually significant balances. TTI
establishes an allowance for doubtful accounts as necessary based upon factors
surrounding the credit risk of customers, historical trends, and other relevant
information. TTI's receivables are generally unsecured.
Certain software licenses from third-parties used in TTI products are
procured from a single source. The termination of any such license could
interrupt TTI's delivery of products and thereby adversely affect TTI's revenues
and operating results.
For the years ended December 31, 1998, 1999 and 2000, three, two, and two
customers, each of whom contributed more than 10% of revenue, collectively
accounted for an aggregate of 63%, 51%, and 58%, respectively, of TTI's
revenues. As of December 31, 1999 and 2000, two and five customers accounted for
66% and 91%, respectively, of TTI's accounts receivable.
(D) INVENTORIES
Inventories consist of finished goods and are stated at the lower of cost
(first-in, first-out basis) or market.
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Expenditures for maintenance and repairs are charged to
expense as incurred, whereas major betterments are capitalized as additions to
property and equipment. TTI records depreciation of property and equipment using
the straight-line method over the estimated useful lives of the assets.
F-7
TELECOM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(F) REVENUE RECOGNITION
Revenue from software license agreements is recognized upon execution of the
contract and shipment of the software provided that there are no uncertainties
regarding acceptance, persuasive evidence of an arrangement exists, the fee is
fixed or determinable and collection of the related receivable is considered
probable. If uncertainties exist, TTI recognizes revenue when those
uncertainties are resolved. In multiple element arrangements, TTI uses the
residual method of accounting in accordance with Statements of Position 97-2 and
98-9.
Service revenue consists primarily of contract engineering and consulting
services. TTI also provides consulting services to customize its software
products on a contract basis. Services are provided on both a time-and-materials
basis and a fixed fee basis. Revenue with respect to time-and-materials
contracts is recognized as services are provided. Revenue from services on fixed
fee contracts is recognized under the terms of the contract based upon when the
services have been provided and accepted by the customer, if required.
Provisions for losses on service contracts are recorded in the period in which
they first become determinable. Amounts collected prior to satisfying the
revenue recognition criteria are reflected as deferred revenue.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. TTI's
revenue recognition policy complies with this pronouncement.
(G) SOFTWARE DEVELOPMENT COSTS
TTI accounts for its software development costs in accordance with Statement
of Financial Accounting Standards (SFAS) No. 86, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. Accordingly, the
costs for the development of new software and substantial enhancements to
existing software are expensed as incurred until technological feasibility has
been established, at which time any additional costs would be capitalized. TTI
has determined that technological feasibility is established at the time a
working model of the software is completed. Because TTI believes its current
process for developing software is essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized to
date.
F-8
TELECOM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(H) INCOME TAXES
TTI has computed its provision for income taxes using the liability method.
Under the liability method, deferred income tax assets and liabilities are
determined based on differences between financial reporting and income tax bases
of assets and liabilities and are measured using the enacted tax rates and laws.
(I) STOCK-BASED COMPENSATION
TTI uses the intrinsic value-based method of Accounting Principles Board
(APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, to account for
its employee stock-based compensation plan and uses the fair value method to
account for all nonemployee stock-based compensation.
(J) COMPREHENSIVE INCOME (LOSS)
TTI applies SFAS No. 130, REPORTING COMPREHENSIVE INCOME. The comprehensive
income (loss) for the years ended December 31, 1998, 1999 and 2000 does not
differ from the reported income (loss).
(K) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of TTI's financial instruments, which include cash
equivalents, accounts receivable, accounts payable, accrued expenses and
long-term obligations, approximate their fair value.
(L) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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 these estimates.
(M) NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as
amended by SFAS No. 138, which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. Pursuant to SFAS No. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE
EFFECTIVE DATE OF SFAS NO. 133, SFAS No. 133 is effective in fiscal year 2001.
SFAS No. 133 is not expected to have a material impact on TTI's financial
condition or results of operations.
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF ACCOUNTING
PRINCIPLES BOARD OPINION NO. 25 (Interpretation No. 44). Interpretation No. 44
clarifies the application of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. Interpretation No. 44 is effective July 1, 2000 but is retroactive
for certain events occurring after December 15, 1998. Interpretation No. 44 did
not have a material impact on TTI's consolidated financial condition or results
of operations.
F-9
TELECOM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(N) NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
for the year by the weighted average number of common shares outstanding during
the year. Diluted net income (loss) per share is computed by dividing net income
(loss) for the year by the weighted average number of common shares and
potential common stock outstanding during the year, if dilutive. Basic and
diluted net income (loss) per share are the same, as any common stock to be
issued upon the exercise of stock options is to be contributed by the majority
stockholder and therefore is not dilutive (see Note 9(b)).
(O) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, establishes standards for reporting information regarding operating
segments and related disclosures about products, services and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief
operating decision maker, or decision making group, in making decisions
regarding resource allocation and assessing performance. To date, TTI has viewed
its operations and manages its business as principally one operating segment.
(2) ACQUISITION BY SONUS NETWORKS
On January 18, 2001, Sonus acquired TTI. Upon the closing of this
acquisition, an aggregate of 10,800,000 shares of Sonus common stock (Merger
Shares) were exchanged for all outstanding shares of TTI common stock. Of the
Merger Shares, 1,200,000 shares were placed into escrow as security for TTI's
indemnity obligations under the merger agreement and will be released to TTI
stockholders upon expiration of those indemnity obligations, expected to be on
the first anniversary of the closing date. In addition to the Merger Shares, the
former TTI stockholders will have the right to receive up to an aggregate of
4,200,000 additional shares of Sonus common stock, which have been issued and
placed in escrow and will be released if certain specified business expansion
and product development milestones are achieved by TTI from time to time prior
to December 31, 2002. On June 6, 2001, 2,400,000 of the escrowed shares were
released to the former TTI stockholders upon achievement of specified
milestones. Sonus has also agreed to make contingent awards of up to 3,000,000
shares of common stock to certain employees of TTI who became employees of Sonus
as a result of the merger.
F-10
TELECOM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following, in thousands:
ESTIMATED DECEMBER 31,
USEFUL -------------------
LIFE 1999 2000
------------- -------- --------
Equipment and software...................................... 5 years $ 2,350 $5,744
Furniture and fixtures...................................... 7 years 113 113
Leasehold improvements...................................... Life of lease 91 91
------- ------
2,554 5,948
Less accumulated depreciation and amortization.............. (432) (1,230)
------- ------
$ 2,122 $4,718
======= ======
Included in property and equipment are $975,000 and $2,284,000 of equipment
purchased under capital lease obligations at December 31, 1999 and 2000,
respectively.
(4) BALANCE SHEET DATA
(A) ACCRUED EXPENSES
Accrued expenses consist of the following, in thousands:
DECEMBER 31,
-------------------
1999 2000
-------- --------
Employee compensation and related costs..................... $1,168 $1,980
Accrued professional fees................................... 40 1,160
Accrued taxes............................................... 210 342
Other....................................................... 267 940
------ ------
$1,685 $4,422
====== ======
(B) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is an analysis of TTI's allowance for doubtful accounts, in
thousands:
CHARGED
BALANCE, TO COSTS BALANCE,
BEGINNING AND END OF
OF YEAR EXPENSES DEDUCTIONS YEAR
---------- ---------- ----------- ---------
December 31, 1999......................... $100 $ 73 $ (23) $150
December 31, 2000......................... 150 250 -- 400
(5) NOTE PAYABLE TO BANK
TTI has a $10,000,000 demand line of credit with a bank, bearing interest at
the bank's prime rate (9.5% at December 31, 2000), available through March 31,
2001. The borrowings are based upon 80% of eligible accounts receivable
(Formula) and all of TTI's assets are pledged as collateral under the agreement.
Borrowings in excess of the Formula, up to $4,000,000, have been personally
F-11
TELECOM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
guaranteed by certain officers of TTI and the majority shareholder. At
December 31, 1999 and 2000, TTI had outstanding borrowings of $4,000,000 and
$7,000,000, respectively. At December 31, 2000, TTI had available borrowings
under the line of credit of $3,000,000, based upon the guarantee by certain
officers and the majority shareholder.
(6) INCOME TAXES
The provision (benefit) for income taxes consist of the following, in
thousands:
YEAR ENDED
DECEMBER 31,
-------------------
1998 1999
-------- --------
Current:
Federal.................................................. $(1,960) $ 144
State.................................................... (277) 39
------- -----
(2,237) 183
Deferred:
Federal.................................................. 2,087 134
State.................................................... 295 19
------- -----
2,382 153
------- -----
$ (145) $ 336
======= =====
TTI's effective tax rate differs from the statutory federal income tax rate
due to the following:
YEAR ENDED
DECEMBER 31,
-----------------------
1998 1999
-------- --------
Statutory federal rate..................................... (34)% 34%
Research and development credit............................ -- (11)
Non-deductible expenses.................................... 2 2
State income taxes, net of federal tax provision
(benefit)................................................ (3) 3
--- ---
Effective tax rate....................................... (35)% 28%
=== ===
Deferred tax assets (liabilities) consist of the following, in thousands:
DECEMBER 31,
-------------------
1999 2000
-------- --------
Deferred tax assets (liabilities):
Deferred revenue....................................... $ 2,450 $ 4,072
Net operating loss carryforwards....................... -- 1,047
Tax credit carryforwards............................... -- 650
Cash to accrual differences............................ (914) (457)
Depreciation........................................... (34) (69)
Non-deductible reserves................................ 37 148
Other temporary differences............................ (74) 352
Valuation allowance.................................... (1,066) (5,344)
------- -------
Net deferred tax asset............................... $ 399 $ 399
======= =======
F-12
TELECOM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TTI records a valuation allowance against its deferred tax assets to the
extent management believes it is more likely than not that the asset will not be
realized. At December 31, 2000, TTI had net deferred tax assets of approximately
$399,000, which will be realized through the utilization of available net
operating loss carrybacks.
As of December 31, 2000, TTI had net operating loss carryforwards for income
tax purposes of approximately $2,829,000, which expire through 2020. TTI also
has available research and development credit carryforwards of approximately
$650,000 that expire through 2020. The Internal Revenue Code contains provisions
that limit the net operating loss and tax credit carryforwards available to be
used in any given year in the event of certain circumstances, including
significant changes in ownership interests. TTI has incurred an ownership change
upon the completion of the acquisition by Sonus which may have an impact on its
ability to use its net operating loss and tax carryforwards.
(7) COMMITMENTS
TTI leases office space and certain equipment under various noncancelable
operating and capital leases. The capital leases are due in monthly installments
expiring at various dates through March 2005 and accrue interest at annual rates
ranging from 4.62% to 14.39%. TTI's future minimum annual payment obligations as
of December 31, 2000 under such leases are as follows, in thousands:
OPERATING CAPITAL
---------- --------
2001................................................... $ 1,964 $ 657
2002................................................... 3,232 640
2003................................................... 2,509 536
2004................................................... 2,418 195
2005................................................... 2,339 29
Thereafter............................................. 6,898 --
------- ------
Total minimum lease payments........................... $19,360 2,057
=======
Less amount representing interest...................... (212)
------
Present value of minimum payments...................... 1,845
Less current portion................................... (553)
------
Long-term portion...................................... $1,292
======
Rent expense for all operating leases was approximately $596,000, $780,000
and $1,249,000 for the years ended December 31, 1998, 1999 and 2000,
respectively. Certain property and equipment has been pledged as security under
TTI's lease agreement for the corporate headquarters located in Richardson,
Texas.
F-13
TELECOM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) REDEEMABLE COMMON STOCK
During 1997, the majority stockholder of TTI sold 10% of the common stock of
TTI to an outside investor for $4,000,000. Under the terms of a stockholders'
agreement, the investor has a redemption option that became exercisable on
April 15, 2000. The redemption option allows the investor to require either the
majority stockholder or TTI to purchase all or any part of the shares held by
the investor at the then current fair market value as determined by an
independent appraiser. The redemption option terminates in the event TTI
receives an offer to purchase all of the outstanding common stock for at least
$100,000,000 which the majority stockholder elects to accept but which the
investor elects not to accept.
In accordance with accounting principles generally accepted in the United
States, the carrying value of the redeemable common stock has been increased
based on changes in the fair market value of the common stock of TTI and has
been shown as a liability. Accordingly, during the years ended December 31,
1998, 1999 and 2000, TTI recorded a charge to accumulated deficit of $1,332,000,
$4,945,000 and $43,274,000, respectively, for the increase in the value of the
redeemable common stock. For purposes of these financial statements, the
estimated value of the redeemable common stock held by the investor of
$50,500,000 at December 31, 2000 is based upon the value of the TTI common stock
in the acquisition discussed in Note 2 using the closing sale price of Sonus
common stock on December 31, 2000. Upon consummation of the acquisition, the
redemption feature of this common stock terminated.
(9) STOCKHOLDERS' EQUITY
(A) COMMON STOCK
On March 31, 1998, the Board of Directors approved an amendment to the
articles of incorporation that changed the common stock structure through an
exchange of all outstanding ordinary stock for Class A voting, no par and
Class B non-voting, no par, common stock. Through this amendment, the 1,000
common shares then outstanding were replaced with 3,888,889 Class A and
1,111,111 Class B shares.
During 1999, TTI's Board of Directors approved an increase in the number of
authorized shares of common stock and two stock splits (which aggregated to a
20-for-1 split), increasing the number of issued and outstanding shares of
Class A common stock to 77,777,780 and increasing outstanding shares of Class B
common stock to 22,222,220. All common stock, stock options and per share
amounts in the accompanying consolidated financial statements and notes thereto
have been retroactively adjusted to reflect the stock splits.
F-14
TELECOM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(B) EQUITY INCENTIVE PLAN
On April 8, 1998, the Board of Directors adopted the telecom
technologies, inc. Equity Incentive Plan (the 1998 Plan). The 1998 Plan provides
for a maximum of 20,000,000 options for the purchase of Class B non-voting
common stock to be granted to employees and consultants with exercise prices
equal to the fair market value of the stock as of the date of grant. Under the
1998 Plan, TTI may grant incentive or non-qualified stock options. The options
generally vest ratably over a period of two to four years and expire after five
years.
A summary of activity under the 1998 Plan is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE EXERCISE
SHARES PRICE PRICE
---------- ---------- --------
Outstanding, December 31, 1997............................ -- $ -- $ --
Granted................................................. 3,300,000 0.80 0.80
Canceled................................................ (320,000) 0.80 0.80
----------
Outstanding, December 31, 1998............................ 2,980,000 0.80 0.80
Granted................................................. 9,919,800 0.80-1.00 0.91
Canceled................................................ (220,000) 0.80-1.00 0.80
----------
Outstanding, December 31, 1999............................ 12,679,800 0.80-1.00 0.89
Granted................................................. 4,121,270 1.00-2.00 1.22
Canceled................................................ (423,905) 0.80 0.80
Exercised............................................... (361,670) 0.80 0.80
----------
Outstanding, December 31, 2000............................ 16,015,495 $0.80-2.00 $0.97
========== ========== =====
Exercisable, December 31, 2000............................ 3,790,694 $0.80-1.00 $0.87
========== ========== =====
The fair value weighted average per share of options granted during the
years ended December 31, 1998, 1999 and 2000 was $0.35, $0.40 and $0.54,
respectively. The grant date fair values were estimated using the Black-Scholes
option pricing model. The weighted average remaining life of the options
outstanding at December 31, 2000 was approximately 3.7 years.
During 1997, the majority stockholder of TTI sold 10% of her then 100%
ownership of the common stock of TTI to an outside investor. In connection with
the sale, TTI, the majority stockholder and the investor agreed that the
investor would not be diluted below 10% ownership of TTI from the issuance of
additional equity in TTI, including stock options.
In order to prevent the exercise of options under the 1998 Plan from
diluting the investor below 10% ownership, the majority stockholder agreed to
fund option exercises from her personal holdings of class B non-voting common
stock. Accordingly, as stock options are exercised, the proceeds are collected
by TTI and remitted to the majority stockholder, who in turn transfers the
number of shares for which the option has been exercised to TTI for delivery to
the option holder. TTI acts only as a facilitator for the transfer of stock from
its majority stockholder to its option holders upon the exercise of options. No
new equity is issued by TTI as the result of any option exercises.
F-15
TELECOM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(C) STOCK-BASED COMPENSATION
Stock-based compensation expenses includes the amortization of deferred
employee compensation and other equity related expenses for non-employees.
In connection with certain employee stock option grants for the year ended
December 31, 2000, TTI recorded deferred compensation of $10,263,000. This
represents the aggregate difference between the exercise price and the fair
value of the common stock on the date of grant for accounting purposes. The
deferred compensation will be recognized as an expense over the vesting period
of the underlying stock options. TTI recorded compensation expense of $1,216,000
for the year ended December 31, 2000, related to these options. Based on the
grant of these stock options, TTI expects to record approximately $4,761,000,
$2,488,000, $1,302,000 and $496,000 in employee compensation expense for the
years ending December 31, 2001, 2002, 2003 and 2004, respectively.
TTI has valued the stock options granted to non-employees based upon the
Black-Scholes option pricing model. As of December 31, 1999 and 2000, TTI had
25,000 and 575,000 stock options, respectively, outstanding to non-employees.
Stock-based compensation expense for the grant of options to non-employees was
not material for the year ended December 31, 1999. TTI has recorded stock-based
compensation expense of $731,000 for the grant of options to non-employees for
the year ended December 31, 2000. In accordance with Emerging Issues Task Force
96-18, TTI will record the value as the services are provided.
TTI has computed the pro forma disclosures required under SFAS No. 123 for
options granted to employees for the years ended December 31, 1998, 1999 and
2000, using the Black-Scholes option pricing model with an assumed risk-free
interest rate of 5.0%, 60% volatility and an expected life of 3 years with the
assumption that no dividends will be paid. Had compensation expense been
determined consistent with SFAS No. 123, the pro forma net income (loss) and pro
forma net income (loss) per share would have been as follows:
YEAR ENDED
DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Net income (loss), in thousands--
As reported............................................... $ (265) $ 867 $(11,454)
Pro forma................................................. $ (436) $ 372 $(12,454)
Basic and diluted net income (loss) per share--
As reported............................................... $(0.00) $0.01 $ (0.11)
Pro forma................................................. $(0.00) $0.00 $ (0.12)
(10) RELATED-PARTY TRANSACTION
In June 1999, TTI issued a demand note receivable to its majority
stockholder for $1,486,000. This note accrued interest at 9.75% annually and was
repaid in full in November 1999.
F-16
TELECOM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) 401(K) PLAN
TTI sponsors a defined contribution pension plan covering substantially all
employees. TTI's contributions to this plan are based on percentages of
participants' wages. During the years ended December 31, 1998, 1999 and 2000,
TTI made contributions totaling approximately $29,000, $210,000 and $280,000,
respectively.
(12) ACQUISITIONS AND DISPOSITIONS
(A) PURCHASE OF SEQUEL SYSTEMS
On August 31, 1999, TTI purchased substantially all of the assets of Sequel
Systems, Inc. (Sequel) for cash of $889,000 and a software license valued at
$150,000. Additional direct cash costs of the acquisition totaled approximately
$15,000. Sequel provided professional services related to data conversion, data
migration and circuit design in connection with telecommunication systems
software industry specializing in open computing technology solutions and
methodology. The transaction was accounted for under the purchase method of
accounting, whereby the assets and liabilities of Sequel were recorded by TTI at
their fair value at the time of acquisition. In connection with the acquisition,
TTI recorded accounts receivable and property and equipment of $828,000 and
$226,000, respectively. The Sequel results of operations have been included in
TTI's consolidated financial statements beginning with the date of acquisition.
(B) SALE OF PRODUCT LINE
In December 1998, TTI entered into an agreement to sell the assets related
to its network testing software product line for $5,500,000. As part of the
agreement, the purchaser agreed to purchase, at fair market value, research and
development and manufacturing services from TTI for a minimum of two years.
These service agreements were not renewed upon the expiration of the initial
term in January 2001. TTI has also agreed to provide consulting and support
services for end users on a time and materials basis. In addition, the purchaser
has agreed to pay royalties on future sales of the product line.
The revenue from this transaction was recorded in 1999, as the sale was
contingent upon the execution of the research and development and manufacturing
agreements, which were signed on January 11, 1999. These future services are not
essential to the functionality of the assets being sold and have been contracted
at their fair value.
The proceeds from the sale of this product line are presented in other
income in the accompanying consolidated statements of operations. Employees and
certain assets associated with the network testing software product line were
retained by TTI for the purposes of fulfilling TTI's obligations under the
research and development and contract manufacturing agreements. For the years
ended December 31, 1999 and 2000, revenues under these agreements included in
product revenues in the accompanying consolidated statements of operations
totaled $7,372,000 and $7,033,000, respectively.
(13) INSURANCE SETTLEMENT
In April 1999, TTI received a settlement of approximately $620,000 under the
terms of a business interruption insurance policy applicable to a prior-year
claim. This amount has been included in other income in the accompanying
consolidated statements of operations. Approximately $420,000 and $100,000 was
paid to TTI during 1999 and 2000, respectively, with the remaining $100,000 to
be paid during 2001.
F-17