National SemiConductor

Notes

NSM

 

 

 

November 4, 2002 11:30 AM

A look at Foveon

 

 

We have not printed much research on NSM.  It is our understanding that NSM owns 40 % of Foveon.  We asked NSM about the fundamentals and financials of Foveon and they would not disclose that information. Interestingly enough, we searched and found that a Public company named Synaptics (SYNA) also owns a portion of Foveon. The following are the Foveon mentions in Synaptics 10K for fiscal 2001.

 

We attended NSM's analyst conference last month, but we are really not ready to disclose our research.

 

 

 
 
http://www.shareholder.com/synaptics/EdgarDetail.cfm?CompanyID=SYNA&CIK=817720&FID=950153-02-1553&SID=02-00
 
"  Equity Losses. During Fiscal 2000, we recorded equity losses of $2,712,000, representing our share of losses incurred by Foveon. The total amount of the equity losses recognized were determined on the basis of our ownership interest in Foveon’s convertible preferred shares and our proportionate share of new funds provided to Foveon in exchange for convertible promissory notes and have been limited to the maximum of our total investment. Accordingly, the carrying value of our investment in Foveon has been reduced to zero at the end of fiscal 2000. "
 
" During fiscal 2000, net cash used in operating activities was $40,000, reflecting our net loss of $2.0 million, offset by the combination of the following items: (1) adjustments for non-cash charges, including our proportionate share of equity losses in an affiliated company, Foveon, which totaled $2.7 million, a write-off of $855,000 of in-process research and development, $1.2 million of amortization and depreciation, and $137,000 of stock based compensation; and (2) increases in accounts receivable, inventories, and accounts payable of $3.7 million, $1.5 million, and $2.5 million, respectively, relating to our increased business activities. "
 
" Investing activities typically relate to purchases of government-backed securities and investment-grade fixed income instruments and capital assets, which totaled $20.9 million for the year ended June 30, 2002. Investing activities for years ended June 30, 2000 and 2001, typically related purchases of capital assets, which totaled $982,000 and $1.1 million, respectively. In addition, we advanced $2.7 million in fiscal 2000 in the form of convertible promissory notes to Foveon, an affiliated company, and invested $1.5 million in cash in the October 1999 acquisition of ASL, which together with the capital assets purchases referred to above resulted in total cash used in investing activities of $5.3 million in fiscal 2000. We also issued 652,025 shares of our common stock in connection with the acquisition of ASL. In connection with the May 1999 acquisition of the sales representative workforce of our former outside sales agent in Taiwan, we issued 37,500 shares of our common stock and were obligated to issue an additional 37,500 shares if certain covenants were fulfilled. In fiscal 2001, we issued the remaining 37,500 shares upon fulfillment of those covenants. "
 
" The long-term note payable to National  Semiconductor represents limited-recourse debt that is secured solely by a portion of our preferred stockholdings in Foveon, Inc., in which National Semiconductor is also an investor. We do not anticipate making any payments under the limited-recourse loan with National Semiconductor, either prior to or at maturity, unless Foveon is participating in a liquidity event, such as an initial public offering of its equity securities or a merger, through which we would be able to receive amounts in excess of our $1.5 million long-term note payable plus accrued interest expense. "
 
" We did not audit the financial statements of Foveon, Inc., which statements reflect net losses of $13,807,000 for the year ended July 1, 2000. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the losses from the affiliated company under the equity method and other data included for Foveon, Inc., is based solely on the report of the other auditors. "
 
" During the year ended June 30, 1998, we entered into agreements with National Semiconductor Corporation (“National”), a related party, with respect to the formation of a development stage company, Foveonics, Inc. (now known as Foveon, Inc.), which was formed to develop and produce digital imaging products. We contributed technology for which we had no accounting basis for a 30% interest in Foveon in the form of voting convertible preferred stock. Under the agreements, we had the right to acquire additional shares of convertible preferred stock at a specified price in exchange for a limited-recourse loan from National. National loaned us $1,500,000 under a limited-recourse note, which we utilized to purchase additional preferred shares of Foveon, which increased our ownership interest in Foveon to 43%. The note matures in 2007 and bears interest at 6.0% per annum. If the note and related accrued interest are not repaid, National’s sole remedy under the loan is to require us to return to National a portion of Foveon shares purchased with the proceeds of the loan and held by us.

         During the year ended June 30, 1998, we recorded our share of losses incurred by Foveon under the equity accounting method on the basis of our proportionate ownership of voting convertible preferred stock and reduced the carrying value of this equity investment to nil as our share of losses incurred by Foveon exceeded the carrying value of the investment. No equity losses were recorded during the year ended June 30, 1999 as we did not have any carrying value associated with the investment.

         During the year ended June 30, 2000, we advanced to Foveon a total of $2,712,000 in return for convertible promissory notes. The notes were convertible into shares of Foveon preferred stock in accordance with the defined terms, had a term of ten years, and bore interest at rates ranging from 6.5% to 6.85%, payable at maturity. During the year ended June 30, 2000, we recorded our share of losses incurred by Foveon on the basis of our proportionate share of funding provided to Foveon by us and National and accordingly recorded additional equity losses limited to the then maximum carrying value of our total investment, which was $2,712,000, including the ownership of convertible debt securities issued by Foveon. Accordingly, as of June 30, 2000, 2001, and 2002, the carrying value of our investment in Foveon had been reduced to nil as our share of losses incurred by Foveon exceeded the carrying value of the investment. We are not obligated to provide additional funding to Foveon.

         In August 2000, the convertible promissory notes we held and related accrued interest were automatically converted into 443,965 shares of Foveon preferred stock in connection with an equity financing completed by Foveon.

         In connection with the issuance of the convertible promissory notes, we also received warrants to purchase 106,718 shares of Foveon Series B preferred stock and warrants to purchase 22,918 shares of Foveon Series C preferred stock at exercise prices of $5.88 and $6.76 per share, respectively. The preferred shares are convertible into common shares upon a firm underwritten public offering of Foveon common stock for proceeds of at least $20 million and a pre-offering market capitalization of at least $225 million. The voting rights of preferred stock were restricted as to the election of board of directors and certain protective provisions with respect to the sale of Foveon or substantially all the assets of Foveon. The preferred stockholders also have the right of first refusal in connection with the purchase of new securities to be offered by Foveon. "

 

"

The following is a summary of Foveon’s financial information as of and for the years ended June 30, 2000, 2001, and 2002 (in thousands):

                         
    June 30,
   
    2000   2001   2002
   
 
 
Current assets
          $ 10,132     $ 36,545  
 
 
 
 
Total assets
            11,074       38,209  
 
 
 
 
Current liabilities
            1,769       1,473  
 
 
 
 
Total liabilities
            1,769       2,014  
 
 
 
 
Net loss
  $ (13,807 )     (13,606 )     (14,093 )

 

 

 

FOVEON, INC.

(A Development Stage Enterprise)
Balance Sheets
June 30, 2002 and 2001

                 
    2002   2001
   
 
    (Unaudited)   (Unaudited)
Assets
               
 
 
 
 
Current assets:
               
 
 
 
 
   Cash and cash equivalents
  $ 36,289,363       9,765,055  
 
 
 
 
   Accounts receivable
    41,577       72,965  
 
 
 
 
   Inventories
    8,124       51,899  
 
 
 
 
   Prepaid expenses
    192,836       94,511  
 
 
 
 
   Other current assets
    13,064       147,635  
 
   
     
 
      Total current assets
    36,544,964       10,132,065  
 
 
 
 
Property and equipment, net
    1,663,661       941,454  
 
   
     
 
      Total assets
  $ 38,208,625       11,073,519  
 
   
     
 
Liabilities, Convertible Preferred Stock and Shareholders’ Deficit
               
 
 
 
 
Current liabilities:
               
 
 
 
 
   Accounts payable
  $ 497,284       725,627  
 
 
 
 
   Accrued liabilities
    632,179       630,706  
 
 
 
 
   Current portion of capital lease obligations
    281,038       255,599  
 
 
 
 
   Deferred revenue
    62,717       156,727  
 
   
     
 
      Total current liabilities
    1,473,218       1,768,659  
 
 
 
 
Capital lease obligations, excluding current portion
    541,205       —  
 
   
     
 
      Total liabilities
    2,014,423       1,768,659  
 
   
     
 
Commitments
               
 
 
 
 
Convertible preferred stock:
               
 
 
 
 
   Series A, $0.001 par value; 6,300,000 shares authorized, issued, and outstanding (aggregate liquidation preference of $6,890,625)
    6,890,625       6,890,625  
 
 
 
 
   Series B, $0.001 par value; 2,855,401 shares authorized; 2,580,000 shares issued and outstanding (aggregate liquidation preference of $15,176,463)
    14,160,708       14,160,708  
 
 
 
 
   Series C, $0.001 par value; 4,097,704 shares authorized; 3,979,418 shares issued and outstanding (aggregate liquidation preference of $26,913,675)
    26,391,732       26,391,732  
 
 
 
 
   Series D, $0.001 par value; 6,750,000 shares authorized; 5,249,677 shares issued and outstanding as of June 30, 2002 (aggregate liquidation preference of $40,999,977)
    40,885,407       —  
 
 
 
 
Shareholders’ deficit:
               
 
 
 
 
   Common stock, $0.001 par value; 40,000,000 shares authorized; 1,516,092 and 1,337,797 shares issued and outstanding as of June 30, 2002 and 2001, respectively
    1,516       1,338  
 
 
 
 
   Additional paid-in capital
    2,092,055       1,995,094  
 
 
 
 
   Shareholder receivable
    (675 )     (675 )
 
 
 
 
   Deficit accumulated during the development stage
    (54,227,166 )     (40,133,962 )
 
   
     
 
      Total shareholders’ deficit
    (52,134,270 )     (38,138,205 )
 
   
     
 
      Total liabilities and shareholders’ deficit
  $ 38,208,625       11,073,519  
 
   
     
 

See accompanying notes to financial statements.

F-29

 

 

Table of Contents

 

FOVEON, INC.

(A Development Stage Enterprise)
Statements of Operations

                                 
 
 
                            Period from
                            July 9, 1997
    Years ended   (inception) to
    June 30, 2002   June 30, 2001   July 1, 2000   June 30, 2002
   
 
 
 
    (Unaudited)   (Unaudited)           (Unaudited)
Net revenue
  $ 589,119       1,275,512       311,043       2,175,674  
 
   
     
     
     
 
Costs and expenses:
                               
 
 
 
 
   Cost of revenue
    51,899       1,679,914       720,726       2,452,539  
 
 
 
 
   Research and development
    9,892,207       7,206,279       5,834,902       31,453,303  
 
 
 
 
   General and administrative
    2,330,567       2,034,711       1,815,413       8,275,622  
 
 
 
 
   Sales and marketing
    2,673,416       4,367,109       4,993,297       14,264,791  
 
   
     
     
     
 
      Total costs and expenses
    14,948,089       15,288,013       13,364,338       56,446,255  
 
   
     
     
     
 
      Operating loss
    (14,358,970 )     (14,012,501 )     (13,053,295 )     (54,270,581 )
 
 
 
 
Interest expense
    (22,323 )     (263,022 )     (850,046 )     (1,549,839 )
 
 
 
 
Interest income
    288,089       669,821       96,806       1,593,254  
 
   
     
     
     
 
      Net loss
  $ (14,093,204 )     (13,605,702 )     (13,806,535 )     (54,227,166 )
 
   
     
     
     
 

See accompanying notes to financial statements.

F-30

 

 

Table of Contents

 

FOVEON, INC.

(A Development Stage Enterprise)
 

STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ DEFICIT
 

Period from July 9, 1997 (inception) to June 30, 2002
(Unaudited, except for the year ended July 1, 2000)
 
                                                                 
    Convertible preferred stock
   
    Series A   Series B   Series C   Series D
   
 
 
 
    Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount
   
 
 
 
 
 
 
 
Issuance of Series A preferred stock in exchange for intellectual property rights in August 1997
    1,728,571     $ 1,890,625       —     $ —       —     $ —       —     $ —  
 
 
 
 
Issuance of Series A preferred stock for cash in August 1997
    4,571,429       5,000,000       —       —       —       —       —       —  
 
 
 
 
Issuance of warrant to purchase Series B preferred stock in August 1997
    —       —       —       —       —       —       —       —  
 
 
 
 
Issuance of restricted common stock in August 1997
    —       —       —       —       —       —       —       —  
 
 
 
 
Issuance of restricted common stock in March 1998
    —       —       —       —       —       —       —       —  
 
 
 
 
Issuance of restricted common stock in July 1998
    —       —       —       —       —       —       —       —  
 
 
 
 
Net loss
    —       —       —       —       —       —       —       —  
 
    
     
     
     
     
     
     
     
 
Balances as of July 3, 1998
    6,300,000       6,890,625       —       —       —       —       —       —  
 
 
 
 
Issuance of restricted common stock in July 1998
    —       —       —       —       —       —       —       —  
 
 
 
 
Issuance of Series B preferred stock from exercise of warrant in August 1998
    —       —       514,047       3,023,804       —       —       —       —  
 
 
 
 
Exercise of common stock options in September 1998
    —       —       —       —       —       —       —       —  
 
 
 
 
Issuance of restricted common stock in January 1999
    —       —       —       —       —       —       —       —  
 
 
 
 
Issuance of restricted common stock in June 1999
    —       —       —       —       —       —       —       —  
 
 
 
 
Net loss
    —       —       —       —       —       —       —       —  
 
    
     
     
     
     
     
     
     
 
Balances as of July 2, 1999
    6,300,000       6,890,625       514,047       3,023,804       —       —       —       —  
 
 
 
 
Repurchase of restricted common stock in October 1999
    —       —       —       —       —       —       —       —  
 
 
 
 
Issuance of warrants in November 1999 in connection with notes payable
    —       —       —       —       —       —       —       —  
 
 
 
 
Issuance of warrants in December 1999 in connection with notes payable
    —       —       —       —       —       —       —       —  
 
 
 
 
Exercise of common stock options in January 2000
    —       —       —       —       —       —       —       —  
 
 
 
 
Exercise of common stock options in March 2000
    —       —       —       —       —       —       —       —  
 
 
 
 
Issuance of common stock in March 2000
    —       —       —       —       —       —       —       —  
 
 
 
 
Issuance of Series B preferred stock for cash in March 2000
    —       —       30,000       176,471       —       —       —       —  
 
 
 
 
Issuance of warrants in March 2000 in connection with notes payable
    —       —       —       —       —       —       —       —  
 
 
 
 
Exercise of common stock options in April 2000
    —       —       —       —       —       —       —       —  
 
 
 
 
Issuance of common stock in April 2000
    —       —       —       —       —       —       —       —  
 
 
 
 
Common stock repurchase in May 2000