EXHIBIT 99.2
Financial Statements
Cadant, Inc.
Years ended December 31, 2001 and 2000
With Report of Independent Auditors
Cadant, Inc.
Financial Statements
Years Ended December 31, 2001 and 2000
CONTENTS
Report of Independent Auditors............................................................................1
Financial Statements
Balance Sheets............................................................................................2
Statements of Operations..................................................................................3
Statements of Shareholders' Equity (Deficit)..............................................................4
Statements of Cash Flows..................................................................................5
Notes to Financial Statements.............................................................................6
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Cadant, Inc.
We have audited the accompanying financial statements of Cadant, Inc. (the
"Company") as of December 31, 2001 and 2000 and for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at December 31,
2001 and 2000, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2 to
the financial statements, the Company has incurred recurring operating losses
from operations and has a working capital deficiency. In addition, the Company
has not complied with certain covenants of its loan and lease agreements. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
January 19, 2002
Atlanta, Georgia
Cadant, Inc.
Balance Sheets
DECEMBER 31
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 331,158 $ 3,055,223
Accounts receivable 148,141 --
Prepaid expenses and other current assets 159,376 249,585
------------ ------------
Total current assets 638,675 3,304,808
Property and equipment, net 4,280,630 4,745,141
Deferred financing costs and other assets 56,960 213,280
------------ ------------
Total assets $ 4,976,265 $ 8,263,229
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 6,394,142 $ 2,472,958
Accrued payroll and benefits 550,254 375,150
Other accrued expenses 1,661,618 460,854
Deferred gain on sale-leaseback 93,890 --
Bridge loans 24,060,277 --
Capital lease obligations in default, net 2,722,169 --
Long-term debt in default, net 3,418,205 --
Current portion of capital lease obligations, net -- 700,819
Current portion of long-term debt, net -- 957,392
------------ ------------
Total current liabilities 38,900,555 4,967,173
Commitments and Contingencies
Deferred gain on sale-leaseback -- 212,944
Capital lease obligations, net -- 1,440,988
Long-term debt, net -- 2,574,429
------------ ------------
Total liabilities 38,900,555 9,195,534
Redeemable convertible preferred stock:
$0.0001 par value; 37,500,000 shares authorized, 7,539,608
shares issued and outstanding as of December 31, 2001 and 2000 10,390,010 10,390,010
Shareholders' deficit:
Common stock, $0.0001 par value; 80,000,000 and
60,000,000 shares authorized; 20,550,329 and 20,365,954
shares issued and outstanding as of December 31, 2001 and 2000,
respectively 2,055 2,037
Additional paid-in capital 25,366,206 21,840,624
Deferred unearned compensation (604,478) (1,879,526)
Accumulated deficit (69,078,083) (31,285,450)
------------ ------------
Total shareholders' deficit (44,314,300) (11,322,315)
------------ ------------
Total liabilities and shareholders' deficit $ 4,976,265 $ 8,263,229
============ ============
See accompanying notes.
2
Cadant, Inc.
Statements of Operations
YEARS ENDED DECEMBER 31,
2001 2000
------------ ------------
Revenues $ 337,268 $ --
Costs and expenses:
Cost of sales 218,036 --
General and administrative 17,002,183 9,693,557
Research and development 13,739,466 10,726,973
Amortization of unearned
compensation 996,771 2,960,564
------------ ------------
Total costs and expenses 31,956,456 23,381,094
------------ ------------
Loss from operations (31,619,188) (23,381,094)
Other income (expense):
Interest income and other income 106,492 547,041
Interest expense (6,279,937) (280,680)
------------ ------------
(6,173,445) 266,361
------------ ------------
Net loss (37,792,633) (23,114,733)
Deductions for accretion dividends -- (3,068,147)
------------ ------------
Net loss available to common shareholders $(37,792,633) $(26,182,880)
============ ============
Weighted average common shares outstanding:
Basic and diluted 20,517,892 20,287,252
============ ============
Loss per share - Basic and diluted $ (1.84) $ (1.29)
============ ============
See accompanying notes.
3
Cadant, Inc.
Statements of Shareholders' Equity (Deficit)
ADDITIONAL DEFERRED
COMMON STOCK PAID-IN SUBSCRIPTIONS UNEARNED ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION DEFICIT
------------- ------------ --------------- ---------------- ---------------- ---------------
Balance at January 1, 2000 20,208,534 $ 2,021 $ 12,735,000 $(1,629,304) $(2,499,977) $ (5,102,570)
Issuance of common stock for
cash at $1.785 per share 50,420 5 (40,401) 1,629,304 -- --
Issuance of common stock upon
exercise of options 107,000 11 18,430 -- -- --
Issuance of warrants -- -- 3,719,335 -- -- --
Accretion of redeemable
convertible preferred stock -- -- 3,068,147 -- -- (3,068,147)
Issuance of options to
non-employees for services -- -- 1,165,243 -- (1,165,243) --
Issuance of options below fair
market value -- -- 1,174,870 -- (1,174,870) --
Amortization of unearned
compensation -- -- -- -- 2,960,564 --
Net loss -- -- -- -- -- (23,114,733)
---------- ---------- ------------ ----------- ----------- ------------
Balance at December 31, 2000 20,365,954 2,037 21,840,624 -- (1,879,526) (31,285,450)
Issuance of common stock upon
exercise of options 184,375 18 18,787 -- -- --
Issuance of warrants in
conjunction with Bridge Loans
-- -- 3,785,072 -- -- --
Fair value adjustment for
non-vested options to
non-employees -- -- (278,277) -- 278,277 --
Amortization of unearned
compensation -- -- -- -- 996,771 --
Net loss -- -- -- -- -- (37,792,633)
---------- ---------- ------------ ----------- ----------- ------------
Balance at December 31, 2001 20,550,329 $ 2,055 $25,366,206 $ -- $ (604,478) $(69,078,083)
========== ========== ============ =========== =========== ============
TOTAL
--------------
Balance at January 1, 2000 $ 3,505,170
Issuance of common stock for
cash at $1.785 per share 1,588,908
Issuance of common stock upon
exercise of options 18,441
Issuance of warrants 3,719,335
Accretion of redeemable
convertible preferred stock --
Issuance of options to
non-employees for services --
Issuance of options below fair
market value --
Amortization of unearned
compensation 2,960,564
Net loss (23,114,733)
------------
Balance at December 31, 2000 (11,322,315)
Issuance of common stock upon
exercise of options 18,805
Issuance of warrants in
conjunction with Bridge Loans
3,785,072
Fair value adjustment for
non-vested options to
non-employees --
Amortization of unearned
compensation 996,771
Net loss (37,792,633)
------------
Balance at December 31, 2001 $(44,314,300)
============
See accompanying notes.
4
Cadant, Inc.
Statements of Cash Flows
YEARS ENDED DECEMBER 31,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(37,792,633) $(23,114,733)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 2,298,545 1,180,424
Amortization of unearned compensation 996,771 2,960,564
Amortization of discount on debt an capital leases 4,070,254 101,910
Amortization of deferred gain on sale/leaseback (119,054) --
Amortization of deferred financing costs 56,680 7,084
Change in operating assets and liabilities:
Accounts receivable (148,141) --
Prepaid and other current assets 90,209 (237,437)
Other assets 99,639 (99,639)
Accounts payable 3,921,184 2,177,785
Accrued expenses 1,721,145 338,129
------------ ------------
Net cash used in operating activities (24,805,401) (16,685,913)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (860,543) (3,905,665)
Proceeds from sale-leaseback transaction -- 1,572,216
------------ ------------
Net cash used in investing activities (860,543) (2,333,449)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 3,936,251
Payments on long-term debt (350,489) --
Proceeds from Note -- 88,496
Payments on Note -- (554,908)
Proceeds from bridge loans 23,715,000 --
Payments on capital leases (441,437) (31,023)
Proceeds from stock subscriptions -- 1,629,304
Proceeds from issuance of preferred stock -- 13,458,157
Proceeds from issuance of common stock, net of issuance costs 18,805 (21,954)
------------ ------------
Net cash from financing activities 22,941,879 18,504,323
------------ ------------
Net decrease in cash and cash equivalents (2,724,065) (515,039)
Cash and cash equivalents, beginning of period 3,055,223 3,570,262
------------ ------------
Cash and cash equivalents, end of period $ 331,158 $ 3,055,223
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 371,767 $ 92,927
Noncash investing & financing activities:
Issuance of stock options below fair market value -- 1,174,870
Exchange of assets for fixed assets 91,518 --
Issuance of stock options to non-employees 3,785,072 1,165,243
Issuance of warrants in connection with the issuance of debt -- 651,187
See accompanying notes.
5
Cadant, Inc.
Notes to Financial Statements
December 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Cadant, Inc. (the "Company"), located in Lisle, Illinois, was incorporated on
May 13, 1998 under the laws of the state of Maryland, but did not commence
operations until March 1999. In a stockholders' meeting held on December 2,
2000, the common and preferred stockholders approved the reincorporation of the
Company from Maryland to Delaware. The Company is a developer of next-generation
Cable Modem Termination Systems ("CMTS"), which are critical components of the
broadband cable network that aggregate and manage the broadband connections of
high-speed cable modem service subscribers.
From inception to June 2001, the Company was in the development stage. In June
2001, the Company commenced its principal operations and during the year
achieved total sales of $337,268.
BASIS OF PRESENTATION
Since inception, the Company's efforts have been directed principally toward
development of its products and establishment of a market for its products. As a
result of these efforts, the Company has experienced significant losses from
operations. During 2001, the Company was dependent upon additional financing to
meet its operational needs. Additionally, the Company is in default under
certain of its loan and lease agreements as of December 31, 2001, which affords
the various creditors the ability to demand payment of the obligations. Due to
the lack of additional capital and to satisfy these obligations, the Company
sold all of its assets, including developed technology, to ARRIS Group, Inc.
("ARRIS"), on January 8, 2002 in exchange for 5.25 million common shares and the
assumption of various liabilities totaling approximately $17 million. As such,
the Company currently has no assets to generate sales in 2002. Accordingly, the
Company intends to liquidate the ARRIS common stock to repay its outstanding
obligations. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates and such
differences may be material to the financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid instruments with an original
maturity of three months or less from the date of purchase. Included in cash and
cash equivalents is restricted cash of $60,132 and $100,873 at December 31, 2001
and 2000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of assets generally ranging
from three to seven years.
6
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED)
The Company reviews its long-lived assets for impairment at each balance sheet
date or whenever events or changes in circumstances indicate that the carrying
amount of an asset should be assessed.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock issued to Employees," and complies with the
disclosure provisions of the Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense is based on the intrinsic value, if any, on the date of
grant between the fair value of the Company's stock and the exercise price.
Deferred compensation expense results from the granting of stock options with
exercise prices deemed to be below fair market value. Options and warrants
granted to non-employees are valued at fair market value and generally charged
to expense as services are performed.
INCOME TAXES
The Company uses the liability method in accounting for income taxes. Under this
method, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amounts
expected to be realized.
STOCK SPLITS
On August 9, 2000, the Company's Board of Directors authorized a 2-for-1 stock
split of its common stock effective for stockholders of record on that date. All
share data in the accompanying financial statements and notes thereto have been
adjusted for the split.
On December 2, 2000, the holders of the Company's Series A Preferred Stock
authorized a 2-for-1 split of the Series A Preferred Stock. All share data in
the accompanying financial statements and notes thereto have been adjusted for
the split.
REVENUE RECOGNITION
Revenues from the sales of CMTS's are recognized upon shipment.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments which potentially expose the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, accounts receivable
and debt. The carrying amounts reported on the balance sheets for these
instruments approximate their fair values.
ADVERTISING EXPENSE
Advertising and sales promotion costs are expensed as incurred. Advertising
expense was approximately $38,000 and $154,000 for the years ended December 31,
2001 and 2000, respectively.
7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION
Certain reclassifications have been made to the 2000 financial statements to
conform with the 2001 presentation.
EARNINGS PER SHARE
Basic and diluted net loss per common share are presented in conformity with
SFAS No. 128, "Earnings Per Share," for all periods presented. In accordance
with SFAS No. 128, basic net loss per common share has been computed using the
weighted-average number of shares of common stock outstanding during the period.
The Company has excluded all redeemable convertible preferred stock, convertible
debt, warrants, outstanding stock options and shares subject to repurchase by
the Company from the calculation of diluted loss per common share because all
such securities are anti-dilutive for all periods presented. The total number of
shares excluded from the calculation of diluted loss per share was 35,158,997 in
2001 and 20,963,742 in 2000.
2. RELATED PARTIES
The Company procured professional services from several service providers that
are stockholders of the Company. Total expenses related to these services were
$553,033 and $519,866 for the years ended December 31, 2001 and 2000,
respectively.
Mr. Walker joined the Board of Directors of Cadant in January, 2001 in his
capacity as a representative of JPMorgan Partners ("JPMP") and Access Technology
Partners, LLC ("Access"). In May, 2001, Mr. Walker was appointed the Interim CEO
of Cadant, and departed JPMP and Access, but in connection therewith, retained
an economic interest in the historical portfolios of each that existed prior to
February 1, 2001. Mr. Walker owns an indirect and immaterial interest in Cadant
(substantially less than 1%) through these portfolios.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
2001 2000
----------- -----------
Office equipment $ 2,007,054 $ 1,714,063
Computer software 1,909,816 1,453,403
Furniture and fixtures 373,190 354,725
Lab and test equipment 3,320,164 2,253,999
----------- -----------
7,610,224 5,776,190
Less accumulated depreciation (3,329,594) (1,031,049)
----------- -----------
Property and equipment, net $ 4,280,630 $ 4,745,141
=========== ===========
8
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
On September 8, 2000, the Company entered into a $7.0 million financing
agreement ("Financing Agreement") with a third party lender (the "Lender"). The
financing consists of a $4.0 million subordination agreement which bears
interest at a rate of 11.5% and a $3.0 million equipment lease line which bears
interest ranging from 8.4% to 8.5%. The $4.0 million subordinated loan matures
September 2003. The amounts borrowed under the lease line mature in June and
December 2003. The debt is secured by substantially all the Company's assets.
Under the terms of the agreement, the Lender was issued 644,258 warrants to
purchase the Company's Preferred Stock. The fair value of the warrants,
$651,187, was recorded as a discount on the loan and lease equipment line and is
being amortized as additional interest expense over the terms of the respective
borrowings.
In December 2000, under the Financing Agreement, the Company entered into a
sale-leaseback transaction where the Company sold equipment to the Lender for
approximately $1,572,000 in cash and immediately leased the equipment back. The
leased equipment is accounted for as a capital lease. A gain of $212,944 has
been deferred and is being recognized as a reduction to the lease expense over
the term of the lease in connection with this transaction.
The cost of equipment acquired under the equipment lease line has been
capitalized by the Company. Assets acquired under capital leases have
transferred the rights and risks of ownership to the Company and are depreciated
principally on the same basis as other similar assets or over the lease term, if
shorter, and are included in depreciation expense on the statements of
operations.
The original cost and related accumulated depreciation on equipment under
capital leases included in property and equipment on the balance sheets are as
follows:
DECEMBER 31,
2001 2000
----------- -----------
Cost $ 2,209,338 $ 2,094,911
Accumulated depreciation (764,103) (40,581)
----------- -----------
Net book value $ 1,445,235 $ 2,054,330
=========== ===========
As of December 31, 2001, the Company was in default under the Financing
Agreement and certain of its other capital leases. As such, the outstanding
balances of its capital lease obligations and the subordinated loan have been
classified as current liabilities on the balance sheet.
5. BRIDGE LOANS
On February 1, 2001, the Company entered into a Convertible Secured Bridge Loan
Agreement ("Bridge Loan") with a group of lenders (collectively "the Bridge
Lenders") for $11 million. The Bridge Loan, which is secured by substantially
all of the Company's assets (subordinate to the Financing Agreement), has a
stated maturity date of May 17, 2001. The Bridge Loan bears interest at a rate
of 10% per annum payable at maturity; however, in the event of default, the
interest rate increases to 13%. The Bridge Lenders have the option of converting
the outstanding balance into shares of the Series A Preferred Stock at a
conversion price of $1.785 per share at maturity or upon a Qualifying Financing,
as defined, at the lowest issuance price paid. In connection with the Bridge
Loan, the Company issued to the Bridge Lenders warrants exercisable for ten
years to purchase an aggregate of 2,750,000 shares of common stock at a purchase
price of $l.00 per share. A portion of the proceeds was allocated to the value
of the warrants, on a relative fair value basis, on the date of grant using a
Black-Scholes valuation model. Accordingly, the warrants were recorded as a
discount to the principal balance of the Bridge Loan and an increase to
additional paid- in capital based on their relative fair value of $1,965,092.
The relative fair value of the warrants was amortized as additional interest
expense over the original term of the Bridge Loan.
9
5. BRIDGE LOANS (CONTINUED)
On May 25, 2001, the Company amended the Bridge Loan to extend the maturity date
to August 25, 2001 and to increase the liquidation value to 150% of the
outstanding principal, plus all accrued interest, upon a change of control.
Additionally, the Company received an additional commitment for a Series B
Bridge Loan ("Series B Loan") to borrow an additional $9 million from certain
lenders (collectively "Series B Lenders"). The Series B Loan has a stated
maturity date of August 25, 2001, and bears interest at a rate of 10% per annum,
unless the Company defaults and then the interest rate is 13%. The Series B Loan
is secured by substantially all of the Company's assets; however, it is
subordinate to the Financing Agreement. The Series B Loan is convertible upon an
Equity Financing, in which the Series B Lenders have the ability to convert into
the Company's preferred stock at the lowest price that the securities are being
issued, or upon a change in control, in which the Series B Lender has the option
to convert into Series A Preferred Stock at the lesser of $1.785 per share or
the aggregate consideration per share received by the Company or stockholders
calculated on a fully-diluted basis. Upon a change of control, the Bridge
Lenders would receive a liquidation preference in the amount of 200% of the
outstanding principal, plus all accrued interest. In connection with the Series
B Loan, the Company issued to the Series B Lenders warrants exercisable for ten
years to purchase an aggregate of 4,500,000 shares of common stock at a purchase
price of $0.50 per share. A portion of the proceeds was allocated to the value
of the warrants, on a relative fair value basis, on the date of grant using a
Black-Scholes valuation model. Accordingly, the warrants were recorded, as a
discount to the Series B Loan and an increase to additional paid-in capital
based on the warrant's relative fair value of $1,592,593. The relative fair
value of the warrants was amortized as additional interest expense over the
original term of the Series B Loan.
On July 25, 2001, the Company amended the Convertible Secured Bridge Loan
Agreement and increased the Company's borrowing capacity by $2 million, with the
same terms as the Series B Lenders. The Company borrowed a total of $1,285,000
of the $2 million commitment. The Company issued additional warrants to purchase
an aggregate of 642,500 shares of common stock at a purchase price of $0.50 per
share. The warrants are exercisable for a ten-year period. The relative fair
value of the warrants, $227,287, was recorded as a discount to the loan and an
increase to additional paid-in capital. The relative fair value of the warrants
was amortized as additional interest expense over the original term of the loan.
On December 8, 2001, the Company amended the Bridge Loan in order to borrow an
additional amount of up to $4 million from one additional lender ("Series C
Lender"). Although the Series C Loan bears interest at 15%, it has substantially
the same terms as the Series B Loan. The amendment extended the maturity dates
of all the outstanding bridge loans to January 31, 2002.
6. COMMITMENTS
The Company has entered into noncancelable operating leases for its corporate
offices through March 31, 2005, and for the use of its office equipment through
September 2003. Each lease provides for an extension of the lease at the option
of the Company.
Rental expense under these operating leases was $582,026 and $360,838 for the
years ended December 31, 2001 and 2000, respectively. Future minimum lease
payments under these leases as of December 31, 2001 are as follows:
2002 $ 578,527
2003 580,380
2004 299,205
2005 57,164
2006 --
--------------
$ 1,515,276
==============
10
6. COMMITMENTS (CONTINUED)
During the year ended December 31, 2001, the Company purchased a total of
approximately $2.6 million of goods for the development of the CMTS under a $4
million purchase commitment. As of December 31, 2001, the Company is still
committed to purchase approximately $1.4 million of additional components under
this commitment.
7. REDEEMABLE PREFERRED STOCK
On January 21, 2000, Cadant issued 7,539,608 shares of Series A Preferred Stock
for $13.5 million to the "Series A Holders". The Series A Preferred Stock is
convertible into 7,539,608 shares of Common Stock, reflecting a $1.785 per share
conversion price. The Series A Holders are entitled to an annual dividend of
$0.28 per share when and if declared by the Board of Directors. Dividends are
non-cumulative. Upon any liquidation, dissolution, winding down, or sale of the
Company, the Series A shareholders are entitled to receive an amount equal to
the original purchase price per share plus any declared but unpaid dividends.
The liquidation preference was $13.5 million at December 31, 2001.
In connection with the closing of the Series A Preferred Stock, the Company
entered into a warrant agreement with one of the Series A Holders, granting the
shareholder the right to purchase 4,000,000 shares of Common Stock at $1.00 per
share. A portion of the proceeds were allocated to the value of the warrants,
$3,068,147, on a relative fair value basis on the date of grant using a
Black-Scholes valuation model. The relative fair value of the warrant was
recorded by reducing the carrying amount of the Redeemable Preferred Stock and
increasing additional paid-in capital.
As a result of the allocation of a portion of the proceeds to the warrants, the
effective conversion price of the Series A Preferred Stock is less than the fair
market value of common stock on the date of grant, resulting in a beneficial
conversion option of $3,068,147. The Company has accreted the discount on Series
A Preferred Stock attributable to the beneficial conversion feature similar to a
preferred stock dividend upon the issuance of the securities as the Series A
Preferred Stock is immediately convertible.
The Series A Holders are entitled to one vote for each share of common stock
that the holder would receive upon conversion of the Series A Preferred Stock.
8. WARRANTS
As of December 31, 2001, the Company had approximately 12.1 million and 0.6
million warrants to purchase Common Stock and Series A Preferred Stock
outstanding, respectively, all of which were exercisable and have a contractual
life of ten years. As of December 31, 2001, the outstanding warrants are as
follows:
NUMBER OF
WARRANTS
WARRANT TO PURCHASE OUTSTANDING EXERCISE PRICE
---------------------------- ---------------------- ---------------
Series A Preferred 644,258 $1.785
Common Stock 252,100 $1.785
Common Stock 6,750,000 $1.00
Common Stock 5,142,500 $0.50
----------
12,788,858
==========
11
9. STOCK-BASED COMPENSATION
During 2000, options were granted to non-employees for services rendered. The
granting of these options resulted in an expense of $0 and $886,966 for the
years ended December 31, 2001 and 2000, respectively. The Company did not
exchange equity for services in 2001.
In March 1999, the Company and its Board of Directors approved the Cadant, Inc.
1999 Stock Option Plan (the "1999 Plan"). Under the 1999 Plan, the Company
reserved 5,000,000 shares of Common Stock for issuance upon exercise of stock
options granted to employees and consultants who provide significant services to
the Company and its affiliates. Stock options granted to employees vest annually
over a three or four-year period on the anniversary date of the option grant.
All employee options expire 10 years from the date of grant.
During 2000, the Company, its Board of Directors and stockholders approved the
Cadant, Inc. 2000 Stock Option Plan (the "2000 Plan"). Under the 2000 Plan, the
Company reserved 9,800,000 shares of Common Stock for issuance upon exercise of
stock options granted to employees and consultants who provide significant
services to the Company and its affiliates. Stock options granted to employees
vest over a three or four-year period; the first one-fourth of options vest on
the anniversary date of the option grant with the remaining vesting monthly
until fully vested. The vesting of non-employees is determined on an individual
basis. All employee options expire 10 years from the date of grant and the
expiration for options to non-employees is determined on an individual basis. As
of December 31, 2001, an aggregate of 9,509,000 shares remain reserved for
issuance under the Plans.
During 2000 the Company issued 1,352,000 options to employees with an exercise
price below the fair market value on the date of grant. The Company did not
issue any options below fair market value in 2001. As a result, the Company
recognized compensation expense of $996,771 and $2,073,598 during the years
ended December 31, 2001 and 2000, respectively.
A summary of the stock option activity under the 1999 Plan and 2000 Plan is as
follows:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ------------------
Balance, January 1, 2000 3,880,000 $0.005
Granted 7,790,000 1.378
Exercised (107,000) 0.172
Canceled (2,475,000) 0.297
----------
Balance, December 31, 2000 9,088,000 1.089
Granted 2,172,100 0.500
Exercised (184,375) 0.102
Canceled (1,847,435) 1.431
----------
Balance, December 31, 2001 9,228,290 $0.758
==========
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9. STOCK-BASED COMPENSATION (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ----------------------------------
WEIGHTED
AVERAGE
NUMBER OF REMAINING WEIGHTED WEIGHTED
OPTIONS CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------- ------------------ ----------------- ----------------- ----------------- ----------------
$0.005 1,575,373 7.5 $0.005 1,026,368 $0.005
0.450 1,530,000 7.5 0.450 996,808 0.450
0.500 1,875,182 9.3 0.500 54,682 0.500
1.000 1,964,500 8.5 1.000 1,039,986 1.000
1.785 2,283,235 8.5 1.785 853,657 1.785
--------- ---------
9,228,290 3,971,501
========= =========
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the disclosure
of a pro forma net income or loss amount as if the Company had adopted the fair
value method of accounting for stock options. Under SFAS No. 123, the fair value
of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including expected time to
exercise, which greatly affect the calculated values. The Company's calculations
were made using the following weighted average assumptions for 2001 and 2000:
risk-free interest rates of 4.96% and 6.02%, respectively; volatility of 86% and
73%, respectively, no dividend yield; and an expected life of an option of 5
years.
The weighted average fair value per option granted in 2001 and 2000 was $0.35
and $1.13, respectively. If the Company had elected to recognize compensation
cost based on the fair value of the options granted at grant date as prescribed
by SFAS No. 123, the net loss available for common shareholders for the years
ended December 31, 2001 and 2000 would have been increased to the pro forma
amount indicated in the table below:
2001 2000
------------ ------------
Net loss available to common shareholders:
As reported $(37,792,633) $(26,182,880)
============ ============
Pro Forma $(38,918,994) $(27,028,008)
============ ============
Net loss per share - basic and diluted
As reported
$ (1.84) $ (1.29)
============ ============
Pro forma
$ (1.90) $ (1.33)
============ ============
10. EMPLOYEE BENEFIT PLAN
The Company maintains a voluntary savings plan (the "Plan") for all eligible
employees under Section 401(k) of the Internal Revenue Code whereby participants
may contribute up to 15% of their compensation on a pretax basis, subject to
certain limitations. The Company may elect to contribute to the Plan at its
discretion. The Plan was created in 1999 and there were no Company contributions
for the years ended December 31, 2001 or 2000.
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11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
DECEMBER 31
2001 2000
------------ -------------
Deferred tax assets:
Net operating loss carryforward $ 17,606,807 $ 4,520,687
Sales and use tax accrual 95,000 38,000
Amortization of stock compensation 1,989,476 1,658,581
Vacation accrual 192,757 118,072
Depreciation 513,247 513,247
Start-up costs 3,055,487 3,819,358
------------ ------------
23,452,774 10,667,945
Valuation allowance (23,452,774) (10,667,945)
------------ ------------
$ -- $ --
============ ============
At December 31, 2001 the Company has total net operating loss carryforwards for
federal and state income tax purposes of approximately $46.3 million that begin
expiring in 2019. Utilization of the Company's net operating loss carryforwards
may be subject to an annual limitation due to the "change of ownership"
provisions of the Internal Revenue Code and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization. For financial reporting purposes, a valuation allowance has
been recognized to reduce the net deferred tax assets to zero due to
uncertainties with respect to the Company's ability to generate taxable income
in the future sufficient to realize the benefit of deferred income tax assets.
12. COMMITMENTS AND CONTINGENCIES
Certain of the Company's stockholders have sued certain other shareholders and
officers of the Company alleging securities fraud and breach of fiduciary
responsibilities. The Company denies that it has violated any of its obligations
under the federal securities laws and believes that meritorious defenses exist
in the lawsuits. Management believes the ultimate resolution of these lawsuits
will not have a material adverse effect on the Company's financial position or
results of operations.
13. SUBSEQUENT EVENTS
On January 8, 2002, all of the tangible and intangible assets of the Company
were acquired by ARRIS Group, Inc. in exchange for 5.25 million shares of ARRIS
Group, Inc. common stock and the assumption of approximately $17 million of the
Company's outstanding indebtedness. The shareholders of the Company could
receive an additional 2 million shares if certain revenue levels are achieved by
the Company in 2002.
14