<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 2000
REGISTRATION NO. 333-44030
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 7
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TRANSMETA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3674 77-0402448
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
3940 FREEDOM CIRCLE
SANTA CLARA, CALIFORNIA 95054
(408) 919-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DAVID R. DITZEL, CHIEF EXECUTIVE OFFICER
TRANSMETA CORPORATION
3940 FREEDOM CIRCLE
SANTA CLARA, CALIFORNIA 95054
(408) 919-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
LAIRD H. SIMONS III, ESQ. JEFFREY D. SAPER, ESQ. MERLE A. MCCLENDON
MARK A. LEAHY, ESQ. KAREN A. DEMPSEY, ESQ. CHIEF FINANCIAL OFFICER
FENWICK & WEST LLP WILSON SONSINI GOODRICH & ROSATI TRANSMETA CORPORATION
TWO PALO ALTO SQUARE PROFESSIONAL CORPORATION 3940 FREEDOM CIRCLE
PALO ALTO, CALIFORNIA 94306 650 PAGE MILL ROAD SANTA CLARA, CALIFORNIA 95054
(650) 494-0600 PALO ALTO, CALIFORNIA 94304 (408) 919-3000
(650) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) FEE(3)
------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.00001 par
value per share............. 14,950,000 $18.00 $269,100,000 $51,309
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 1,950,000 shares that the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act of 1933.
(3) Previously paid. Pursuant to Rule 457(a), no additional filing fee is
required as a result of the change in the proposed offering price.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and we are not soliciting offers to buy
these securities in any state where the offer or sale is not permitted.
Filed Pursuant to Rule 424(a)
Registration No. 333-44030
PROSPECTUS (Subject to Completion)
Issued November 6, 2000
13,000,000 Shares
[TRANSMETA LOGO]
COMMON STOCK
------------------------
TRANSMETA CORPORATION IS OFFERING 13,000,000 SHARES OF ITS COMMON STOCK. THIS IS
OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR
SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $16
AND $18 PER SHARE.
------------------------
OUR COMMON STOCK HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "TMTA."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS TRANSMETA
-------- ------------- -----------
<S> <C> <C> <C>
Per Share................................. $ $ $
Total..................................... $ $ $
</TABLE>
Transmeta has granted the underwriters the right to purchase up to an additional
1,950,000 shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 2000.
------------------------
MORGAN STANLEY DEAN WITTER DEUTSCHE BANC ALEX. BROWN
SALOMON SMITH BARNEY
BANC OF AMERICA SECURITIES LLC
SG COWEN
, 2000
<PAGE> 3
[ARTWORK]
<PAGE> 4
DESCRIPTION OF FRONT COVER ARTWORK
Inside Front Cover Page:
- The Crusoe Logo is superimposed over a sky blue background covering
the top two-thirds of the page.
- The words "We rethought the microprocessor... for a new world of
mobility" are superimposed over a sandy beach background covering the
bottom one third of the page.
Description of Gatefold Graphics:
- A sandy beach background.
- Centered across the top of the gatefold is the phrase "Transmeta Enables
Mobile Internet Computing"
- On the left-hand side of the gatefold below the caption superimposed
over the sky are a set of words and graphics arranged like an
addition equation.
- The first part of the equation is the phrase
"Code Morphing Software" followed by an addition sign.
- Centered below this phrase are the words:
- "Provides PC Software Compatibility"
- "Optimizes for Longer Battery Life"
- "Optimizes for Higher Performance"
- The second part of the equation is the phrase "Silicon
Hardware" above a graphic of the Crusoe Microprocessor.
- Centered below the Crusoe Microprocessor are the words:
- "Very Long Instruction Word Microprocessor"
- "Simple and Fast"
- "Fewer Transistors"
- The text "Crusoe is the sum of" is centered above the
two parts of the equation.
- The equation is followed by an equal sign and a set of
overlapping vertical balls.
- The words "Low Power," "x86 PC Software Compatibility" and "PC
Performance" are centered in each of the three balls.
- On the right-hand side of the gatefold below the caption superimposed
over the sky are two columns of text.
- Under the first column are the words:
- "Technologies for Mobile Computing" in bold header text
- "Crusoe Microprocessors"
- "LongRun Power Management"
- "Two Chips Integrated Into One"
- "Mobile Linux Operating System"
- "PC System Design Expertise"
- Under the second column are the words:
- "Benefits for Mobile Computers" in bold header text
- "Longer Battery Life"
- "Lighter Weight"
- "Cool and Quiet"
- "High Performance"
- "x86 PC Software Compatible (Windows, Linux, Internet
Applications)"
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 4
Risk Factors.......................... 7
Special Note Regarding Forward-Looking
Statements.......................... 19
Use of Proceeds....................... 20
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 22
Selected Consolidated Financial
Data................................ 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business.............................. 33
Management............................ 47
Related Party Transactions............ 58
Principal Stockholders................ 60
Description of Capital Stock.......... 62
Shares Eligible for Future Sale....... 65
Underwriters.......................... 67
Legal Matters......................... 69
Experts............................... 69
Where You Can Find More Information... 69
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of any
sale of the common stock. Unless otherwise indicated, all information in this
prospectus:
- assumes that the underwriters do not exercise their over-allotment
option;
- gives effect to our reincorporation in Delaware on October 26, 2000; and
- reflects a two-for-one split of our common stock effective October 26,
2000.
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
For investors outside the United States: Neither we nor any of the
underwriters have done anything that would permit this offering or possession or
distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to inform
yourselves about and to observe any restrictions relating to this offering and
the distribution of this prospectus.
3
<PAGE> 6
PROSPECTUS SUMMARY
You should read the following summary together with the entire prospectus,
including the more detailed information in our consolidated financial statements
and related notes appearing elsewhere in this prospectus. You should carefully
consider, among other things, the matters discussed in "Risk Factors."
Transmeta develops and sells software-based microprocessors and develops
additional hardware and software technologies for Mobile Internet Computers,
which are portable computing and communication devices designed to provide an
Internet experience comparable to that traditionally provided by a desktop
personal computer, or PC. Our Crusoe family of microprocessors is targeted at
the notebook and Internet appliance segments of the Mobile Internet Computer
market, and we provide Crusoe microprocessors to suit both existing and emerging
products within these market segments. We believe that our microprocessors are
also well suited for other developing markets requiring low power consumption,
including a variety of home electronic devices connected to the Internet.
As people are becoming increasingly mobile, they are dependent on use of
the Internet from remote locations to conduct their business and personal lives.
In addition, the emergence of high-speed wired and wireless Internet access is
enabling a new generation of notebook and Internet appliance products that offer
significant improvements in portability and provide users with a full-featured
Internet experience. International Data Corporation, or IDC, forecasts that the
market for notebook computers will grow to 35 million units in 2003, while the
market for Internet appliances and similar devices that access the Internet will
grow to more than 75 million units in the same time frame.
Rather than using the traditional method of designing microprocessors
primarily with hardware, we have developed a novel approach that incorporates a
substantial portion of microprocessor functionality into our software. We
believe that our approach to designing microprocessors allows us to provide the
first microprocessor solution that simultaneously satisfies a wide range of user
requirements for Mobile Internet Computers, including compatibility with PC
software, long battery life and performance comparable to a desktop PC.
The primary components of our Crusoe microprocessors are as follows:
CODE MORPHING SOFTWARE. Our Code Morphing software provides a compatibility
bridge between PC software and our own proprietary instruction set, using a
translation process that is indiscernible to the end user. In addition, Code
Morphing software continuously learns about and re-optimizes software
applications a user is running to improve power usage and performance.
VERY LONG INSTRUCTION WORD (VLIW) PROCESSOR HARDWARE. Our VLIW processor
hardware provides for parallel processing of instructions to achieve high
performance. Because we use Code Morphing software to perform much of the
functionality typically found in hardware, our microprocessors use a relatively
simple hardware design that is optimized for low power consumption in addition
to speed.
We are focused on extending our leadership in software-based microprocessor
technologies and expanding the number of products and end markets that use
Crusoe microprocessors. We have assembled a team of engineers with comprehensive
systems expertise to help manufacturers quickly resolve any system design issues
and achieve rapid time-to-market for next generation products built with our
Crusoe microprocessors. In addition, we have established, and intend to continue
to establish, relationships with computer manufacturers to design and develop
next generation Mobile Internet Computers.
We introduced our first Crusoe microprocessors in January 2000 and
recognized our first product revenue from these products in the first half of
2000. Through June 30, 2000, we had manufactured only limited quantities of our
products. In September 2000, we began volume shipments. As of September 30,
2000, we had shipped products in volume only to Sony Electronics and Fujitsu
Ltd. Sony Electronics has announced that it will use our Crusoe microprocessor
in its new VAIO PictureBook C1VN notebook computer. Fujitsu has announced that
it will use our Crusoe microprocessor in its new FM Biblo Loox T and FM Biblo
Loox S notebook computers. Hitachi has announced three notebook computers and an
Internet appliance incorporating Crusoe. Gateway has announced that it will use
Crusoe in Internet appliances still under development with America Online. NEC
has announced that it will use our Crusoe microprocessor in its new LaVie MX
notebook computer.
We have a history of substantial losses, and at September 30, 2000, we had
an accumulated deficit of approximately $147.5 million.
4
<PAGE> 7
THE OFFERING
Common stock offered by Transmeta..... 13,000,000 shares
Common stock to be outstanding after
this offering......................... 127,752,858 shares
Use of proceeds....................... We intend to use the net proceeds
from this offering to increase
working capital and for other general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol......... TMTA
The number of shares of our common stock to be outstanding immediately
after this offering is based on the number of shares outstanding on September
30, 2000 and assumes the conversion of our outstanding shares of preferred stock
into 73,174,342 shares of common stock and the conversion of a convertible
promissory note into 1,200,000 shares of common stock upon the closing of this
offering.
The number of shares of our common stock that will be outstanding
immediately after this offering excludes:
- 14,775,142 shares of common stock issuable upon exercise of options
outstanding at September 30, 2000 with a weighted average exercise price
of $3.68 per share;
- 2,066,432 shares of common stock issuable upon exercise of warrants
outstanding at September 30, 2000 with a weighted average exercise price
of $1.15 per share; and
- 10,007,414 additional shares available for issuance under our stock
purchase and option plans.
We were incorporated in California in March 1995 and reincorporated in
Delaware in October 2000. Our principal executive offices are located at 3940
Freedom Circle, Santa Clara, California 95054, and our telephone number at that
address is (408) 919-3000. Transmeta()(TM), the Transmeta logo, Crusoe()(TM),
the Crusoe logo, Code Morphing()(TM) and LongRun()(TM) are trademarks of
Transmeta Corporation in the United States and other countries. All other
trademarks or trade names appearing in this prospectus are the property of their
respective owners.
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables provide summary consolidated financial data and should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the related notes appearing elsewhere in this prospectus. The pro forma
information in the tables below reflects the conversion of our outstanding
shares of preferred stock into 73,174,342 shares of common stock and the
conversion of a convertible promissory note into 1,200,000 shares of common
stock upon the closing of this offering. The pro forma as adjusted column of
consolidated balance sheet data also reflects the sale of 13,000,000 shares of
common stock offered by us at an assumed initial public offering price of $17.00
per share, after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us. The financial data as of September
30, 2000 and for the nine months ended September 30, 1999 and 2000, and the pro
forma data, are derived from financial statements that are unaudited.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 3, 1995
(DATE OF NINE MONTHS
INCORPORATION) ENDED
THROUGH YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ----------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Product revenue............................. $ 250 $ -- $ -- $ 326 $ 76 $ 76 $ 3,817
License revenue............................. -- -- 1,400 28,000 5,000 5,000 --
Total revenue............................. 250 -- 1,400 28,326 5,076 5,076 3,817
Gross profit................................ 250 -- 1,400 28,255 5,058 5,058 1,512
Total operating expenses.................... 1,295 7,640 17,412 36,083 46,151 32,517 76,670
Operating loss.............................. (1,045) (7,640) (16,012) (7,828) (41,093) (27,459) (75,158)
Net loss.................................... (1,009) (7,471) (16,187) (10,090) (41,089) (27,990) (71,464)
Net loss per share -- basic and diluted..... $ (.05) $ (.37) $ (.79) $ (.44) $ (1.51) $ (1.05) $ (2.26)
Weighted average shares outstanding -- basic
and diluted............................... 20,000 20,000 20,576 23,074 27,236 26,707 31,652
Pro forma net loss per share -- basic and
diluted (unaudited)....................... $ (.52) $ (.71)
Pro forma weighted average shares
outstanding -- basic and diluted
(unaudited)............................... 79,564 100,030
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 64,076 $ 64,076 $268,106
Working capital............................................. 75,171 75,171 279,201
Total assets................................................ 149,426 149,426 353,456
Long-term obligations, net of current portion............... 26,192 25,770 25,770
Total stockholders' equity.................................. 94,652 95,074 299,104
</TABLE>
6
<PAGE> 9
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the following risk factors, as well as other information
contained in this prospectus, before deciding to invest in shares of our common
stock. If any of the following risks actually occurs, our business, financial
condition and results of operations would suffer. In this case, the trading
price of our common stock could decline and you might lose all or part of your
investment in our common stock.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE HAVE A HISTORY OF LOSSES, EXPECT TO INCUR FURTHER SIGNIFICANT LOSSES AND
MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY.
We have a history of substantial losses, expect to incur further
significant losses, and do not expect to achieve profitability in the near
future. We incurred net losses of $10.1 million in 1998, $41.1 million in 1999
and $71.5 million in the first nine months of 2000. As of September 30, 2000, we
had an accumulated deficit of approximately $147.5 million. We intend to
significantly increase our product development, sales and marketing, and
administrative expenses. We also expect to incur substantial non-cash charges
relating to the amortization of deferred stock compensation, which will serve to
increase our net losses further. We cannot assure you that our revenue will
increase, and we may never achieve profitability. Even if we achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or an annual basis.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE RECOGNIZED OUR FIRST
PRODUCT REVENUE IN THE FIRST HALF OF 2000.
We introduced our first Crusoe microprocessors in January 2000 and
recognized our first product revenue from these products in the first half of
2000. Through June 30, 2000, we had manufactured only limited quantities of our
products. In September 2000, we began volume shipments. Thus, we have only a
very limited operating history with all of our products. This limited history
makes it difficult to evaluate our business. We derived substantially all of our
revenue for 1997, 1998 and 1999 from license fees, but do not expect any license
fee revenue in the foreseeable future. As a result, we need to generate
substantial future revenue from product sales, but our ability to manufacture
our products in production quantities and the revenue and income potential of
our products and business are unproven. You should consider our chances of
financial and operational success in light of the risks, uncertainties,
expenses, delays and difficulties associated with new businesses in highly
competitive technology fields, many of which may be beyond our control. If we
fail to address these risks, uncertainties, expenses, delays and difficulties,
the value of your investment would decline.
WE DEPEND ON INCREASING DEMAND FOR OUR CRUSOE MICROPROCESSORS.
We expect to derive virtually all of our revenue for the foreseeable future
from the sale of our Crusoe microprocessors, which we only began to ship in
volume in September 2000. Therefore, our future operating results will depend on
the demand for Crusoe by future customers. If Crusoe is not widely accepted by
the market due to performance, price, compatibility or any other reason, or if,
following acceptance, we fail to enhance Crusoe in a timely manner, demand for
our products may fail to increase. If demand for our Crusoe products does not
increase, our revenue will not increase.
OUR FUTURE REVENUE DEPENDS UPON OUR ABILITY TO PENETRATE THE NOTEBOOK
COMPUTER MARKET.
Our success depends upon our ability to sell our Crusoe microprocessors in
volume to makers of notebook computers, which consist of a small number of OEMs.
Due to our software-based approach to microprocessor design, we have been
required, and expect to continue to be required, to devote substantial resources
to educate prospective customers in the notebook computer market about the
benefits of our Crusoe products and to assist potential customers with their
designs. In addition, since computer products generally are designed to
incorporate a specific microprocessor, OEMs must design new products to utilize
different microprocessors such as our Crusoe products. Given the complexity of
these computer products and their
7
<PAGE> 10
many components, designing new products requires significant investments. For
instance, OEMs may need to design new computer casings, basic input/output
system software and motherboards. Our target customers may not choose our
products for technical, performance, packaging, novelty, design cost or other
reasons. For example, IBM showed a technology demonstration at a trade show in
June 2000 using the Crusoe microprocessor in an existing ThinkPad model 240
notebook computer, but has since decided not to proceed with the project. If our
Crusoe products fail to achieve widespread acceptance in the notebook computer
market, we may never achieve revenue sufficient to sustain our business and the
value of your investment would decline significantly.
THE GROWTH OF OUR BUSINESS DEPENDS IN PART ON THE GROWTH OF THE INTERNET
APPLIANCE MARKET AND OUR ABILITY TO MEET THE NEEDS OF THIS MARKET.
The growth of our business depends in part on increased acceptance and use
of Internet appliances. We depend on the ability of our target customers to
develop new products and enhance existing products for the Internet appliance
market that incorporate our products and to introduce and promote their products
successfully. The market for Internet appliances depends in part upon the
deployment of wireless technologies that enable the delivery of Internet content
at a speed comparable to that of a desktop computer. The wireless technologies
currently under development might not fully address the needs of mobile Internet
users. If the use of Internet appliances does not grow as we anticipate, or our
target customers do not incorporate our products into theirs, our growth would
be impeded. In addition, the market for Internet appliances is new and evolving.
Internet appliance manufacturers are likely to have varying requirements. To
meet the requirements of different Internet appliance manufacturers, we may be
required to change our product design or features, sales methods or pricing
policies. The costs of addressing these requirements could be substantial and
could delay or prevent any improvement in our operating results.
OUR OPERATING RESULTS ARE DIFFICULT TO PREDICT IN ADVANCE AND MAY FLUCTUATE
SIGNIFICANTLY, AND A FAILURE TO MEET THE EXPECTATIONS OF SECURITIES
ANALYSTS OR INVESTORS WOULD LIKELY RESULT IN A SUBSTANTIAL DECLINE IN OUR
STOCK PRICE.
There is little historical financial information that is useful in
evaluating our business, prospects and future operating results. You should not
rely on quarter-to-quarter comparisons of our results of operations as an
indication of our future performance. We expect our future operating results to
fluctuate significantly from quarter to quarter. If our operating results fail
to meet or exceed the expectations of securities analysts or investors, our
stock price would likely decline substantially.
Because a large portion of our expenses, including rent, salaries and
capital leases, is fixed and difficult to reduce, if our revenue does not meet
our expectations, the adverse effect of the revenue shortfall will be magnified
by the fixed nature of our expenses.
COMPETITION IN THE SEMICONDUCTOR MARKET IS INTENSE; MANY OF OUR COMPETITORS
AND POTENTIAL COMPETITORS ARE MUCH LARGER THAN WE ARE AND HAVE
SIGNIFICANTLY GREATER RESOURCES; WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The market for microprocessors is intensely competitive, rapidly evolving
and subject to rapid technological change. We believe that competition will
become more intense in the future and may cause price reductions, reduced gross
margins and loss of market share, any one of which could significantly reduce
our future revenue and increase our losses. Significant competitors that offer
microprocessors for the notebook computer market include Advanced Micro Devices
and Intel. Significant competitors that offer microprocessors for the Internet
appliance market include manufacturers of reduced instruction set computer, or
RISC, microprocessors such as licensees of technology from ARM Holdings plc and
from MIPS Technologies, Inc. In addition, Intel recently announced that it is
developing a RISC microprocessor for release by the end of 2000. We also face
competition from providers of x86 compatible microprocessors for the Internet
appliance market, including National Semiconductor.
8
<PAGE> 11
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, product development and
marketing resources, greater name recognition and significantly larger customer
bases than we do. Our competitors may be able to develop products comparable or
superior to those we offer, adapt more quickly than we do to new technologies,
evolving industry trends and customer requirements, and devote greater resources
to the development, promotion and sale of their products than we can. Many of
our competitors also have well-established relationships with our existing and
prospective customers and suppliers. As a result of these factors, many of our
competitors, either alone or with other companies, have significant influence in
our target markets that could outweigh any advantage that we may possess. For
example, negotiating and maintaining favorable customer and strategic
relationships are and will continue to be critical to our business. If our
competitors use their influence to negotiate strategic relationships on more
favorable terms than we are able to negotiate, or if they structure
relationships that impair our ability to form strategic relationships, our
competitive position and our business would be substantially damaged.
Furthermore, a number of these competitors may merge or form strategic
relationships that would enable them to offer, or bring to market earlier,
products that are superior to ours in terms of features, quality, pricing or
other factors. We expect additional competition from other established and
emerging companies and technologies. We may not be able to compete effectively
against current and potential competitors, especially those with significantly
greater resources and market leverage.
OUR PRODUCTS MAY HAVE DEFECTS, WHICH COULD DAMAGE OUR REPUTATION, DECREASE
MARKET ACCEPTANCE OF OUR PRODUCTS, CAUSE US TO LOSE CUSTOMERS AND REVENUE,
AND RESULT IN LIABILITY TO US.
Highly complex products such as our microprocessors may contain hardware or
software defects or bugs. Often, these defects and bugs are not detected until
after the products have been shipped. If any of our products contains defects,
or has reliability, quality or compatibility problems, our reputation might be
damaged significantly and customers might be reluctant to buy our products,
which could result in the loss of or failure to attract customers. In addition,
these defects could interrupt or delay sales. We may have to invest significant
capital and other resources to correct these problems. If any of these problems
are not found until after we have commenced commercial production of a new
product, we might incur substantial additional development costs. If we fail to
provide solutions to the problems, such as software upgrades or patches, we
could also incur product recall, repair or replacement costs. These problems
might also result in claims against us by our customers or others. In addition,
these problems might divert our technical and other resources from other
development efforts. Moreover, we would likely lose, or experience a delay in,
market acceptance of the affected product or products, and we could lose
credibility with our current and prospective customers. This is particularly
significant as we are a new entrant to a market dominated by large
well-established companies.
WE EXPECT TO DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM A SMALL
NUMBER OF CUSTOMERS, AND OUR REVENUE WOULD DECLINE SIGNIFICANTLY IF ANY
MAJOR CUSTOMER CANCELS, REDUCES OR DELAYS A PURCHASE OF OUR PRODUCTS.
We expect that a small number of OEM customers and distributors will
account for a significant portion of our revenue. For the nine months ended
September 30, 2000, sales to Sony Electronics accounted for 50.2% of our product
revenue and sales to Fujitsu Ltd. accounted for 20.3% of our product revenue.
Our future success will depend upon the timing and size of future purchase
orders, if any, from these customers and new customers and, in particular:
- the success of our customers in marketing products that incorporate our
products;
- the product requirements of our customers; and
- the financial and operational success of our customers.
We have entered into two distributor agreements, both of which are
exclusive in large territories, one in Taiwan, Hong Kong and China and the other
in North America. These agreements do not contain minimum purchase commitments.
Any distributor that fails to emphasize sales of our products, chooses to
emphasize alternative products or promotes products of our competitors might not
sell a significant or any amount of our
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products. We expect that our sales to OEM customers will be made on the basis of
purchase orders rather than long-term commitments. In addition, customers can
delay, modify or cancel orders without penalty. Many of our customers and
potential customers are significantly larger than we are and have sufficient
bargaining power to demand reduced prices and favorable nonstandard terms. The
loss of any major customer, or the delay of significant orders from these
customers, could reduce or delay our recognition of product revenue.
IF WE FAIL TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH KEY PARTICIPANTS IN
OUR TARGET MARKETS, WE MAY HAVE DIFFICULTY SELLING OUR PRODUCTS.
In addition to our customers, we will need to establish and maintain
relationships with companies that develop technologies that work in conjunction
with our microprocessors. These technologies include operating systems, basic
input/output systems, graphics chips, dynamic random access memory, or DRAM, and
other hardware components and software that are used in computers. If we fail to
establish and maintain these relationships, it would be more difficult for us to
develop and market products with features that address emerging market trends.
IF OUR PRODUCTS ARE NOT COMPATIBLE WITH THE OTHER COMPONENTS THAT OUR
CUSTOMERS DESIGN INTO THEIR SYSTEMS, SALES OF OUR PRODUCTS COULD BE DELAYED
OR CANCELLED AND A SUBSTANTIAL PORTION OF OUR PRODUCTS COULD BE RETURNED.
Our products are designed to function as components of a system. We
anticipate that our customers will use our products in systems that have
differing specifications and that require various other components, such as
dynamic random access memory, or DRAM, and other semiconductor devices. If our
customers' systems are to function properly, all of the components must be
compatible with each other. If our customers experience system-level
incompatibilities between our products and the other components in their
systems, we could be required to modify our products to overcome the
incompatibilities or delay shipment of our products until the manufacturers of
other components modify their products or until our customers select other
components. These events would delay purchases of our products, cause orders for
our products to be cancelled or result in product returns. System level
incompatibilities that are significant, or are perceived to be significant,
could also result in negative publicity and could significantly damage our
business.
IF OUR CUSTOMERS ARE NOT ABLE TO OBTAIN THE OTHER COMPONENTS NECESSARY TO
BUILD THEIR SYSTEMS, SALES OF OUR PRODUCTS COULD BE DELAYED OR CANCELLED.
Suppliers of other components incorporated into our customers' systems may
experience shortages, which could reduce the demand for our products. For
example, from time to time, the semiconductor industry has experienced shortages
of some materials and devices, including dynamic random access memory, or DRAM.
Our customers could defer or cancel purchases of our products if they are not
able to obtain the other components necessary to build their systems.
THERE MAY BE SOFTWARE APPLICATIONS OR OPERATING SYSTEMS THAT ARE NOT
COMPATIBLE WITH OUR PRODUCTS, WHICH MAY PREVENT OUR PRODUCTS FROM ACHIEVING
MARKET ACCEPTANCE AND PREVENT US FROM RECEIVING SIGNIFICANT PRODUCT
REVENUE.
Software applications, games or operating systems with machine-specific
routines programmed into them can result in specific incompatibilities. If a
particular software application, game or operating system is programmed in a
manner that makes it unable to respond correctly to our microprocessor, it will
appear to users of that software that our microprocessor is not compatible with
PC software. We might encounter incompatibilities in the future. If any
incompatibilities are significant or perceived to be significant, our products
may never achieve market acceptance and we may not receive significant revenue
from product sales.
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OUR RECENT GROWTH COULD PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT
SYSTEMS, INFRASTRUCTURE AND OTHER RESOURCES, AND OUR BUSINESS MAY NOT
SUCCEED IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY.
Our ability to implement our business plan in a rapidly evolving market
requires an effective planning and management process. Until this year, we
focused primarily on the development of our products. We have recently increased
our number of employees substantially and plan to increase the scope of our
operations and the size of our direct sales force domestically and
internationally. The number of employees that we and our subsidiaries employ
increased from 193 at January 1, 2000 to 364 at September 30, 2000. We expect to
expand our facilities in proportion to any expansion in the number of our
employees. This growth could place a significant strain on our management
systems, infrastructure and other resources. In addition, we expect that we will
need to continue to improve our financial and managerial controls and
procedures. We will also need to expand, train and manage our workforce
worldwide. Furthermore, we expect that we will be required to manage an
increasing number of relationships with suppliers, manufacturers, customers and
other third parties. If we fail to manage our growth effectively, our
employee-related costs and employee turnover could increase, which would
jeopardize our ability to execute on our business plan.
OUR LENGTHY AND VARIABLE SALES CYCLES MAKE IT DIFFICULT FOR US TO PREDICT
WHEN AND IF A DESIGN WIN WILL RESULT IN VOLUME SHIPMENTS.
We depend upon companies designing our microprocessors into their products,
which we refer to as design wins. Many of our targeted customers consider the
choice of a microprocessor to be a strategic decision. Our targeted customers
may take a long time to evaluate our products, and many individuals may be
involved in the evaluation process. We anticipate that the length of time
between our initial contact with a customer and the time when we recognize
revenue from that customer will vary. We expect our sales cycles to range from
six to twelve months from the time we achieve a design win to the time the
customer begins volume production of products that incorporate our
microprocessors. We do not have historical experience selling our products that
is sufficient for us to determine how our sales cycles will affect the timing of
our revenue. Variations in the length of our sales cycles could cause our
revenue to fluctuate widely from period to period. While potential customers are
evaluating our products and before they place an order with us, we may incur
sales and marketing expenses and expend significant management and engineering
resources without any assurance of success. The value of any design win depends
upon the commercial success of our customers' products. Therefore, we take risks
related to project cancellations or changed product plans, which could result in
the loss of anticipated sales. We can offer no assurance that we will achieve
further design wins or that the products for which we achieve design wins will
be commercially successful.
IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGE, OUR PRODUCTS MAY NOT BE
COMPETITIVE AND OUR REVENUE AND OPERATING RESULTS MAY SUFFER.
The semiconductor industry is characterized by rapid technological change,
frequent new product introductions and enhancements, and ongoing customer
demands for greater performance. In addition, the average selling price of any
particular microprocessor product has historically decreased over its life, and
we expect that trend to continue. As a result, our products may not be
competitive if we fail to introduce new products or product enhancements that
meet evolving customer demands. The development of new products is complex, and
we may not be able to complete development in a timely manner, or at all. To
introduce products on a timely basis, we must:
- accurately define and design new products to meet market needs;
- design features that continue to differentiate our products from those of
our competitors;
- transition our products to new manufacturing process technologies;
- identify emerging technological trends in our target markets;
- anticipate changes in end-user preferences with respect to our customers'
products;
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- bring products to market on a timely basis at competitive prices; and
- respond effectively to technological changes or product announcements by
others.
We believe that we will need to continue to enhance our products and
develop new products to keep pace with competitive and technological
developments and to achieve market acceptance for our products.
OUR DEPENDENCE ON THIRD PARTIES TO FABRICATE WAFERS LIMITS OUR CONTROL OVER
THE PRODUCTION, SUPPLY AND DELIVERY OF OUR PRODUCTS.
The cost, quality and availability of third-party manufacturing operations
are essential to the successful production of our products. We currently rely
exclusively on IBM to fabricate our wafers. Our contract with IBM does not
obligate IBM to provide us with any specified number of wafers at any specified
price until IBM has accepted a purchase order. The absence of dedicated capacity
under our agreement means that, with little or no notice, IBM could refuse to
continue to fabricate all or some of the wafers that we require or change the
terms under which it fabricates wafers. If IBM were to stop manufacturing for
us, we would likely be unable to replace the lost capacity on a timely basis.
Transferring to another manufacturer would require a significant amount of time,
and a smooth and timely transition would be unlikely. As a result, we could lose
potential sales and fail to meet existing obligations to our customers. In
addition, if IBM were to change the terms under which it manufactures for us,
our manufacturing costs could increase.
We recently qualified Taiwan Semiconductor Manufacturing Co., or TSMC, to
fabricate wafers for Crusoe microprocessors. We do not have a manufacturing
agreement with TSMC or a guaranteed level of production capacity or any
particular price from TSMC. We place orders on a purchase order basis and TSMC
may allocate capacity to other companies' products while reducing deliveries to
us on short notice. Any inability of TSMC to fabricate our wafers could result
in significant delays and increase production costs of our microprocessors.
Our reliance on third-party manufacturers exposes us to the following risks
outside our control:
- unpredictability of manufacturing yields and production costs;
- interruptions in shipments;
- potential lack of adequate capacity to fill all or part of the services
we require;
- inability to control quality of finished products;
- inability to control product delivery schedules; and
- potential lack of access to key fabrication process technologies.
OUR DEPENDENCE ON THIRD PARTIES TO PROVIDE ASSEMBLY AND TEST SERVICES
LIMITS OUR CONTROL OVER PRODUCTION COSTS AND PRODUCT SUPPLY.
We rely on IBM for substantially all of our assembly and test services. As
a result, we do not directly control our product delivery schedules. This lack
of control could result in product shortages as IBM manufactures our current
products in volume and, in the future, as we introduce new products. Product
shortages could increase our costs or delay delivery of our products. We do not
have a contract with IBM for test and assembly services, and we typically
procure these services from IBM on a per order basis. Therefore, we may not be
able to obtain assembly and testing services for our products on acceptable
terms, or at all. If we are required to find and qualify alternative assembly or
testing services, we could experience delays in product shipments or a decline
in product quality.
WE MAY NOT ACHIEVE ACCEPTABLE MANUFACTURING YIELDS, WHICH COULD INCREASE
THE COST AND REDUCE THE SUPPLY OF OUR PRODUCTS.
The fabrication of wafers for our microprocessors is a highly complex and
precise process that requires production in a tightly controlled, clean room
environment. Minute impurities, difficulties in the fabrication
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process, defects in the masks used to print circuits on a wafer or other factors
can cause numerous die on each wafer to be nonfunctional. The proportion of
functional die expressed as a percentage of total die on a wafer is referred to
as product "yield." Semiconductor companies frequently encounter difficulties in
achieving expected product yields. If we do not achieve expected yields, our
product costs would increase. Even with functional die, normal variations in
wafer fabrication can cause some die to run faster than others. Variations in
speed yield could lead to excess inventory of slower products and insufficient
inventory of faster products, depending upon customer demand. Further, we may
experience yield problems as we migrate our manufacturing processes to smaller
geometries. Yield problems may not be identified and resolved until a product
has been manufactured and can be analyzed and tested, if ever. As a result,
yield problems are often difficult, time consuming and expensive to correct.
Yield problems could hamper our ability to deliver our products to our customers
in a timely manner.
IF WE FAIL TO FORECAST DEMAND FOR OUR PRODUCTS ACCURATELY, WE COULD LOSE
SALES AND INCUR INVENTORY LOSSES.
Because we only introduced our products in January 2000, we have little
historical information about demand for our products. We expect that the demand
for our products will depend upon many factors and be difficult to forecast. We
expect that it will become more difficult to forecast demand as we introduce a
larger number of products and as competition in the markets for our products
intensifies. Significant unanticipated fluctuations in demand could cause
problems in our operations.
The lead time required to fabricate large volumes of wafers is often longer
than the lead time our customers provide to us for delivery of their product
requirements. Therefore, we often must place our orders in advance of expected
purchase orders from our customers. As a result, we have only a limited ability
to react to fluctuations in demand for our products, which could cause us to
have either too much or too little inventory of a particular product. If demand
does not develop as we expect, we could have excess production. Excess
production would result in excess inventories of finished products, which would
use cash and could result in inventory write-offs. We have limited capability to
reduce ongoing production once wafer fabrication has commenced. Excess materials
would likely result in excess or obsolete inventory. If demand exceeds our
expectations, IBM may not be able to fabricate wafers as quickly as we need
them. In that event, we would need to increase production rapidly at IBM or
find, qualify and begin production at additional manufacturers, which may not be
possible within a time frame acceptable to our customers. The inability of IBM
to increase production rapidly enough could cause us to fail to meet customer
demand. In addition, rapid increases in production levels to meet unanticipated
demand could result in higher costs for manufacturing and other expenses. These
higher costs could lower our gross margins.
OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MAY CAUSE US TO BECOME SUBJECT TO EXPENSIVE LITIGATION, CAUSE US TO INCUR
SUBSTANTIAL DAMAGES, REQUIRE US TO PAY SIGNIFICANT LICENSE FEES OR PREVENT
US FROM SELLING OUR PRODUCTS.
Our industry is characterized by the existence of a large number of patents
and frequent claims and related litigation regarding patent and other
intellectual property rights. We cannot be certain that our products do not and
will not infringe issued patents, patents to be issued in the future, or other
intellectual property rights of others. In addition, leading companies in the
semiconductor industry have extensive portfolios with respect to semiconductor
technology. From time to time, third parties, including these leading companies,
may assert exclusive patent, copyright, trademark and other intellectual
property rights to technologies and related methods that are important to us. We
expect that we may become subject to infringement claims as the number of
products and competitors in our target markets grows and the functionality of
products overlaps. We have received, and may in the future receive,
communications from third parties asserting patent or other intellectual
property rights covering our products. Litigation may be necessary in the future
to defend against claims of infringement or invalidity, to determine the
validity and scope of the proprietary rights of others, to enforce our
intellectual property rights, or to protect our trade secrets. We may also be
subject to claims from customers for indemnification. Any resulting litigation,
regardless of its resolution, could result in substantial costs and diversion of
resources.
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If it were determined that our products infringe the intellectual property
rights of others, we would need to obtain licenses from these parties or
substantially reengineer our products in order to avoid infringement. We might
not be able to obtain the necessary licenses on acceptable terms or at all, or
to reengineer our products successfully. Moreover, if we are sued for
infringement and lose the suit, we could be required to pay substantial damages
or be enjoined from licensing or using the infringing products or technology.
Any of the foregoing could cause us to incur significant costs and prevent us
from selling our products.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, OUR
COMPETITORS MAY GAIN ACCESS TO OUR TECHNOLOGY AND WE MIGHT NOT COMPETE
SUCCESSFULLY IN OUR MARKET.
We believe that our success will depend in part upon our proprietary
technology. We rely on a combination of patents, copyrights, trademarks, trade
secret laws and contractual obligations with employees and third parties to
protect our proprietary rights. These legal protections provide only limited
protection and may be time consuming and expensive to obtain and enforce. If we
fail to adequately protect our proprietary rights, our competitors may gain
access to our technology. As a result, our competitors might offer similar
products and we might not be able to compete successfully in our market.
Moreover, despite our efforts to protect our proprietary rights, unauthorized
parties may copy aspects of our products and obtain and use information that we
regard as proprietary. Also, our competitors may independently develop similar,
but not infringing, technology, duplicate our products, or design around our
patents or our other intellectual property. In addition, other parties may
breach confidentiality agreements or other protective contracts with us, and we
may not be able to enforce our rights in the event of these breaches.
Furthermore, we expect that we will increase our international operations in the
future, and the laws of many foreign countries do not protect our intellectual
property rights to the same extent as the laws of the United States. We may be
required to spend significant resources to monitor and protect our intellectual
property rights.
Our pending patent and trademark applications may not be approved. Even if
our pending patent applications are approved, the resulting patents may not
provide us with any competitive advantage or may be challenged by third parties.
If challenged, our patents might not be upheld or their claims could be
narrowed. Any litigation surrounding our rights could force us to divert
important financial and other resources away from our business operations.
WE MIGHT NOT BE ABLE TO EXECUTE ON OUR BUSINESS PLAN IF WE LOSE KEY
MANAGEMENT AND TECHNICAL PERSONNEL, ON WHOSE KNOWLEDGE, LEADERSHIP AND
TECHNICAL EXPERTISE WE RELY.
Our success depends heavily upon the continued contributions of our key
management and technical personnel, whose knowledge, leadership and technical
expertise would be difficult to replace. Several of these personnel have been
with us for a number of years. All of our executive officers and key personnel
are employees at-will. We have no employment contracts and maintain no key
person insurance on any of our personnel. We might not be able to execute on our
business plan if we were to lose the services of any of our key personnel.
WE WILL NOT BE ABLE TO GROW OUR BUSINESS IF WE ARE UNABLE TO HIRE, TRAIN
AND RETAIN ADDITIONAL SALES, MARKETING, OPERATIONS, ENGINEERING AND FINANCE
PERSONNEL.
To grow our business successfully and maintain a high level of quality, we
will need to recruit, train, retain and motivate additional highly-skilled
sales, marketing, engineering and finance personnel. In particular, we will need
to expand our sales and marketing organizations in order to increase market
awareness of our products and to increase revenue. In addition, as a company
focused on the development of complex products, we will need to hire additional
engineering staff of various experience levels in order to meet our product
roadmap. Competition for skilled employees, particularly in the San Francisco
Bay Area, is intense. We may have even greater difficulty recruiting potential
employees after this offering if prospective employees perceive the equity
component of our compensation package to be less valuable after this offering
than before this offering.
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SEVERAL OF OUR EXECUTIVES AND OTHER EMPLOYEES HAVE JOINED US ONLY RECENTLY,
AND IF THEY ARE UNABLE TO WORK TOGETHER EFFECTIVELY, WE MAY NOT BE ABLE TO
MANAGE OUR GROWTH AND OPERATIONS.
Several of our executives and other employees joined us only recently and
have had only a limited time to work together. Mark K. Allen, our President and
Chief Operating Officer, joined us in January 2000; David P. Jensen, our Vice
President of Operations, joined us in February 2000; Merle A. McClendon, our
Chief Financial Officer, joined us in March 2000; John O. Horsley, our General
Counsel, joined us in July 2000; and Barry L. Rubinson, our Vice President of
Software, joined us in August 2000. Our management team might not be able to
work effectively together or with the rest of our employees to develop our
technology and manage our growth and continuing operations.
WE MAY MAKE ACQUISITIONS, WHICH COULD PUT A STRAIN ON OUR RESOURCES, CAUSE
DILUTION TO OUR STOCKHOLDERS AND ADVERSELY AFFECT OUR FINANCIAL RESULTS.
We may acquire companies to expand our business. Integrating newly acquired
organizations and technologies into our company could put a strain on our
resources and be expensive and time consuming. We may not be successful in
integrating acquired businesses or technologies and may not achieve anticipated
revenue and cost benefits. In addition, future acquisitions could result in
potentially dilutive issuances of equity securities or the incurrence of debt,
contingent liabilities or amortization expenses related to goodwill and other
intangible assets, any of which could adversely affect our balance sheet and
operating results. Moreover, we may not be able to identify future suitable
acquisition candidates or, if we are able to identify suitable candidates, we
may not be able to make these acquisitions on commercially reasonable terms or
at all.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY COULD CREATE FLUCTUATIONS
IN OUR OPERATING RESULTS.
The semiconductor industry has historically been cyclical, and
characterized by wide fluctuations in product supply and demand. From time to
time, the industry has also experienced significant downturns, often in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions. Industry downturns have been characterized by
diminished product demand, production overcapacity and accelerated decline of
average selling prices, and in some cases have lasted for more than a year. A
downturn of this type occurred in 1997 and 1998. Our operating results could
fluctuate if industry-wide fluctuations occur in the future.
WE PLAN TO EXPAND OUR INTERNATIONAL OPERATIONS, AND THE SUCCESS OF OUR
INTERNATIONAL EXPANSION IS SUBJECT TO SIGNIFICANT UNCERTAINTIES.
We believe that we must expand our international sales and distribution
operations to be successful. We expect to sell a significant portion of our
products to customers overseas. As part of our international expansion, we have
opened an office in Taiwan to provide sales and customer support, and expect to
do the same in Japan during 2001. In addition, we have appointed a distributor
to sell products in Taiwan, Hong Kong and China. In attempting to conduct and
expand business internationally, we are exposed to various risks that could
adversely affect our international operations and, consequently, our operating
results, including:
- difficulties and costs of staffing and managing international operations;
- fluctuations in currency exchange rates;
- unexpected changes in regulatory requirements, including imposition of
currency exchange controls;
- longer accounts receivable collection cycles;
- import or export licensing requirements;
- potentially adverse tax consequences;
- political and economic instability; and
- potentially reduced protection for intellectual property rights.
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In addition, because we have suppliers that are located outside of the
United States, we are subject to risks generally associated with contracting
with foreign suppliers and may experience problems in the timeliness and the
adequacy or quality of product deliveries.
RISKS RELATED TO THIS OFFERING
THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR STOCK; THE STOCKS OF
TECHNOLOGY COMPANIES HAVE EXPERIENCED EXTREME PRICE AND VOLUME
FLUCTUATIONS; AND OUR STOCK PRICE MAY BE VOLATILE.
Before this offering, there has been no public market for our common stock.
An active public market for our common stock may not develop or be sustained
after this offering. The price of our common stock in any such market may be
higher or lower than the price you pay. If you purchase shares of common stock
in this offering, you will pay a price that was not established in a competitive
market. Rather, you will pay the price that we negotiated with the
representatives of the underwriters. Many factors could cause the market price
of our common stock to rise and fall, including:
- variations in our quarterly results;
- announcements of technological innovations by us or by our competitors;
- introductions of new products or new pricing policies by us or by our
competitors;
- acquisitions or strategic alliances by us or by our competitors;
- recruitment or departure of key personnel;
- the gain or loss of significant orders;
- the gain or loss of significant customers;
- changes in the estimates of our operating performance or changes in
recommendations by any securities analysts that elect to follow our
stock; and
- market conditions in our industry, the industries of our customers and
the economy as a whole.
In addition, stocks of technology companies have experienced extreme price
and volume fluctuations that often have been unrelated or disproportionate to
these companies' operating performance. Public announcements by companies in our
industry concerning, among other things, their performance, accounting practices
or legal problems could cause the market price of our common stock to decline
regardless of our actual operating performance.
In the past, securities class action litigation has often been brought
against a company following a period of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
OUR OFFICERS, DIRECTORS AND AFFILIATED ENTITIES OWN A LARGE PERCENTAGE OF
OUR COMPANY AND COULD SIGNIFICANTLY INFLUENCE THE OUTCOME OF ACTIONS IN
WAYS THAT COULD CAUSE OUR STOCK PRICE TO DECLINE.
We anticipate that our executive officers, directors, entities affiliated
with them and other 5% or greater stockholders will, in total, beneficially own
approximately 36.4% of our outstanding common stock after this offering. These
stockholders, acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors. Thus, actions might be taken even if other stockholders, including
those who purchase shares in this offering, oppose them. This concentration of
ownership might also have the effect of delaying or preventing a change of
control of our company, which could cause our stock price to decline.
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MANAGEMENT WILL HAVE DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING
AND COULD SPEND OR INVEST THOSE PROCEEDS IN WAYS WITH WHICH YOU MIGHT NOT
AGREE.
We do not have a definitive quantified plan for the use of the net proceeds
of this offering. Our management will have broad discretion with respect to the
use of the net proceeds from this offering, and you will be relying on the
judgment of our management regarding the application of these proceeds. We
currently expect to use these proceeds to increase working capital and for other
general corporate purposes. In addition, we may use a portion of the net
proceeds to acquire or invest in complementary businesses, products or
technologies. These investments may not yield a favorable return.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO
DECLINE.
The market price of our common stock could decline as a result of sales of
a large number of shares of our common stock in the market after this offering
or the perception that these sales could occur. Based on shares outstanding as
of September 30, 2000, and assuming the conversion of a convertible promissory
note into 1,200,000 shares of common stock upon completion of this offering, we
will have outstanding 127,752,858 shares of common stock, or 129,702,858 shares
if the underwriters' over-allotment option is exercised in full. Of these
shares, the common stock sold in this offering will be freely tradeable except
for any shares purchased by our "affiliates" as defined in Rule 144 under the
Securities Act of 1933 and shares purchased through the directed share program
in this offering. In addition, up to 749,648 shares of our common stock subject
to warrants will be available for public sale on the date of this prospectus,
assuming the net exercise of the warrants. All of the 114,752,858 remaining
shares of common stock held by our existing stockholders will be subject to
180-day lock-up agreements with the underwriters or with us. In addition, the
shares sold through our directed share program will be subject to 180-day
lock-up agreements with the underwriters. Morgan Stanley & Co. Incorporated, in
its sole discretion, may release any portion of the securities subject to these
lock-up agreements. After the 180-day lock-up period, these shares may be sold
in the public market, subject to prior registration or qualification for an
exemption from registration, including, in the case of shares held by
affiliates, compliance with volume restrictions. After the lock-up period,
109,219,896 of these shares, plus up to approximately 910,000 shares sold
through our directed share program, will be immediately available for sale in
the public market without registration under Rule 144. The remaining shares held
by our existing stockholders will become available for sale under Rule 144 at
varying times following the end of the 180-day lock-up period. Stockholders
owning 75,595,126 shares are entitled, pursuant to contracts providing for
registration rights, to require us to register our securities owned by them for
public sale. In addition, based on options and warrants outstanding as of
September 30, 2000, after this offering, 16,841,574 shares will be subject to
outstanding options and warrants, approximately 6,654,412 of which will be
vested and exercisable 180 days after this offering. We intend to file a
registration statement to register for resale shares issuable upon the exercise
of outstanding stock options and shares reserved for future issuance under our
stock option and stock purchase plans, as well as 6,482,080 shares previously
issued upon exercise of options.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE
BOOK VALUE OF THE SHARES YOU PURCHASE IN THIS OFFERING.
If you purchase shares of common stock in this offering, you will
experience immediate and substantial dilution of $14.88 per share, based on an
assumed initial public offering price of $17.00 per share. This dilution arises
because our earlier investors paid substantially less than the public offering
price when they purchased their shares of common stock. You will also experience
dilution upon the exercise of outstanding stock options or warrants to purchase
our common stock. As of September 30, 2000, there were options and warrants
outstanding to purchase 16,841,574 shares of common stock with a weighted
average exercise price of $3.37 per share.
17
<PAGE> 20
OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE LAW CONTAIN
PROVISIONS THAT COULD DISCOURAGE OR PREVENT A TAKEOVER, EVEN IF AN
ACQUISITION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Provisions of our certificate of incorporation and bylaws, as well as
provisions of Delaware law, could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. These
provisions include:
- establishing a classified board of directors so that not all members of
our board may be elected at one time;
- providing that directors may only be removed "for cause" and only with
the approval of 66 2/3% of our stockholders;
- requiring super-majority voting to amend some provisions in our
certificate of incorporation and bylaws;
- authorizing the issuance of "blank check" preferred stock that our board
could issue to increase the number of outstanding shares and to
discourage a takeover attempt;
- limiting the ability of our stockholders to call special meetings of
stockholders;
- prohibiting stockholder action by written consent, which requires all
stockholder actions to be taken at a meeting of our stockholders;
- eliminating cumulative voting in the election of directors; and
- establishing advance notice requirements for nominations for election to
our board or for proposing matters that can be acted upon by stockholders
at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law may
discourage, delay or prevent a change in control.
IF WE NEED ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO RAISE FURTHER
FINANCING OR IT MAY ONLY BE AVAILABLE ON TERMS UNFAVORABLE TO US OR OUR
STOCKHOLDERS.
We believe that our available cash resources, combined with the net
proceeds from this offering, will be sufficient to meet our anticipated working
capital and capital expenditure requirements for at least twelve months after
the date of this prospectus. We might need to raise additional funds, however,
to respond to business contingencies, which could include the need to:
- fund more rapid expansion;
- fund additional marketing expenditures;
- develop new products or enhance existing products;
- enhance our operating infrastructure;
- hire additional personnel;
- respond to competitive pressures; or
- acquire complementary businesses or technologies.
If we raise additional funds through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders would be reduced,
and these newly issued securities might have rights, preferences or privileges
senior to those of our then-existing stockholders, including those acquiring
shares in this offering. Additional financing might not be available on terms
favorable to us, or at all. If adequate funds were not available or were not
available on acceptable terms, our ability to fund our operations, take
advantage of unanticipated opportunities, develop or enhance our products or
otherwise respond to competitive pressures would be significantly limited.
18
<PAGE> 21
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and in other sections of this prospectus
that are forward-looking statements. In some cases, you can identify these
statements by forward-looking words such as "may," "might," "will," "should,"
"expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or
"continue," the negative or plural of these words and other comparable
terminology. These forward-looking statements, which are subject to risks,
uncertainties and assumptions about us, may include, among other things,
projections of our future financial performance, our anticipated growth
strategies and anticipated trends in our business and the markets in which we
operate. These statements are only predictions, based on our current
expectations and projections about future events. Although we believe the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause our actual results,
levels of activity, performance or achievements to differ materially from the
results, levels of activity, performance or achievements expressed or implied by
the forward-looking statements, including those factors discussed under the
caption entitled "Risk Factors." You should specifically consider the numerous
risks outlined under "Risk Factors."
19
<PAGE> 22
USE OF PROCEEDS
We estimate that the net proceeds from this offering will be approximately
$204.0 million, at an assumed initial public offering price of $17.00 per share,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us. If the underwriters exercise their
over-allotment option in full, we estimate that our net proceeds will be
approximately $234.9 million.
The principal purposes of this offering are to obtain additional capital,
establish a public market for our common stock and facilitate our future access
to public capital markets. We currently expect to use the net proceeds from this
offering to increase working capital and for other general corporate purposes.
In addition, we anticipate using $2.5 million of the net proceeds from this
offering to make a payment to IBM that is payable within 30 days of this
offering. Further, we anticipate using $1.1 million of the net proceeds to repay
indebtedness to Quickturn Design Systems Incorporated we incurred for equipment
purchases in 1998.
The amount and timing of what we actually spend for these purposes may vary
significantly and will depend on a number of factors, including our future
revenue and cash generated by operations and the other factors described in
"Risk Factors." Therefore, we will have broad discretion in the way we use the
net proceeds. Additionally, if appropriate opportunities arise, a portion of the
net proceeds of this offering may be used for acquiring, or investing in,
businesses, products or technologies or establishing joint ventures. We have no
current agreements or commitments with respect to any acquisition or investment,
and we currently are not engaged in negotiations with respect to any acquisition
or investment. Pending these uses, we intend to invest the net proceeds in
short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently expect to retain all available funds and any future earnings to
finance the growth and development of our business. Therefore, we do not
anticipate declaring or paying cash dividends on our common stock in the
foreseeable future.
20
<PAGE> 23
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2000.
Our capitalization is presented (1) on an actual basis, (2) on a pro forma basis
to reflect the conversion of our outstanding shares of preferred stock into
73,174,342 shares of common stock and the conversion of a convertible promissory
note into 1,200,000 shares of common stock upon the closing of this offering,
and (3) on a pro forma as adjusted basis to reflect the sale of 13,000,000
shares of common stock offered by us at an assumed initial public offering price
of $17.00 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us. The 1,200,000 shares
issuable upon conversion of the convertible promissory note (which had a net
present value of $422,000 at September 30, 2000) are shown as outstanding in the
pro forma and pro forma as adjusted columns because we have received
notification from the holder of the note that it wishes to convert the note in
connection with this offering.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------- ------------- ---------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term debt and capital lease obligations, net of
current portion....................................... $ 4,522 $ 4,522 $ 4,522
Deposits received under subleasing agreements........... 138 138 138
Payable to a development partner under license
agreement............................................. 21,532 21,110 21,110
--------- --------- ---------
Total long-term obligations, net of current portion... 26,192 25,770 25,770
--------- --------- ---------
Stockholders' equity:
Convertible preferred stock, $.00001 par value at
amounts paid in; 28,159,835 shares authorized,
issued and outstanding, at September 30, 2000;
5,000,000 shares authorized and no shares issued
and outstanding, pro forma and pro forma as
adjusted........................................... 222,922 -- --
Common stock, $.00001 par value at amounts paid in;
160,000,000 shares authorized; 40,378,516 shares
issued and outstanding, at September 30, 2000;
160,000,000 shares authorized, 114,752,858 shares
issued and outstanding, pro forma; 1,000,000,000
shares authorized, 127,752,858 shares issued and
outstanding, pro forma as adjusted................. 68,085 291,429 495,459
Notes receivable from stockholders.................... (17,841) (17,841) (17,841)
Deferred stock compensation........................... (31,028) (31,028) (31,028)
Accumulated other comprehensive loss.................. (16) (16) (16)
Accumulated deficit................................... (147,470) (147,470) (147,470)
--------- --------- ---------
Total stockholders' equity......................... 94,652 95,074 299,104
--------- --------- ---------
Total capitalization............................. $ 120,844 $ 120,844 $ 324,874
========= ========= =========
</TABLE>
The number of shares shown as issued and outstanding in the table above
excludes the following:
- 14,775,142 shares of common stock issuable upon exercise of options
outstanding at September 30, 2000 with a weighted average exercise price
of $3.68 per share;
- 2,066,432 shares of common stock issuable upon exercise of warrants
outstanding at September 30, 2000 with a weighted average exercise price
of $1.15 per share; and
- 10,007,414 additional shares available for issuance under our stock
purchase and option plans.
Please read the capitalization table together with the sections of this
prospectus entitled "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes included elsewhere in
this prospectus.
21
<PAGE> 24
DILUTION
Our pro forma net tangible book value as of September 30, 2000 was
approximately $66.6 million, or $.58 per share of common stock. Our pro forma
net tangible book value per share represents our total tangible assets less
total liabilities divided by the number of shares of our common stock
outstanding on September 30, 2000 and assumes the conversion of our outstanding
shares of preferred stock into 73,174,342 shares of common stock and the
conversion of a convertible promissory note into 1,200,000 shares of common
stock upon the closing of this offering.
Without taking into account any changes in pro forma net tangible book
value after September 30, 2000, other than to give effect to the sale of
13,000,000 shares of common stock offered by us at an assumed initial public
offering price of $17.00 per share, after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us, our pro
forma net tangible book value as of September 30, 2000 would have been
approximately $270.7 million, or $2.12 per share of common stock. This amount
represents an immediate increase in pro forma net tangible book value of $1.54
per share to our existing stockholders and an immediate dilution in pro forma
net tangible book value of $14.88 per share to new investors purchasing shares
in this offering. The following table illustrates the dilution in pro forma net
tangible book value per share to new investors.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $17.00
Pro forma net tangible book value per share as of
September 30, 2000..................................... $ .58
Increase per share attributable to new investors.......... 1.54
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.12
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $14.88
======
</TABLE>
If all of the outstanding options and warrants were exercised, the pro
forma net tangible book value as of September 30, 2000 would have been $123.4
million and the pro forma net tangible book value would have been $.94 per
share, causing dilution to new investors of $14.74.
The following table summarizes, as of September 30, 2000 on the pro forma
basis described above, the number of shares of common stock purchased from us,
the total consideration paid to us, and the average price per share paid to us
by existing stockholders and to be paid by new investors purchasing shares of
common stock in this offering at an assumed initial public offering price of
$17.00 per share, before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 114,752,858 89.8% $224,461,000 50.4% $ 1.96
New investors................... 13,000,000 10.2 221,000,000 49.6 17.00
------------ ----- ------------ -----
Total......................... 127,752,858 100.0% $445,461,000 100.0%
============ ===== ============ =====
</TABLE>
The above information excludes:
- 14,775,142 shares of common stock issuable upon exercise of options
outstanding at September 30, 2000 with a weighted average exercise price
of $3.68 per share;
- 2,066,432 shares of common stock issuable upon exercise of warrants
outstanding at September 30, 2000 with a weighted average exercise price
of $1.15 per share; and
- 10,007,414 additional shares available for issuance under our stock
purchase and option plans.
22
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, our consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The consolidated statement of
operations data for the years ended December 31, 1997, 1998 and 1999, and the
consolidated balance sheet data as of December 31, 1998 and 1999, are derived
from our consolidated financial statements included elsewhere in this
prospectus, which have been audited by Ernst & Young LLP, independent auditors.
The consolidated statement of operations data for the period from March 3, 1995
(date of incorporation) through December 31, 1995 and for the year ended
December 31, 1996, and the consolidated balance sheet data as of December 31,
1995, 1996 and 1997, are derived from financial statements not included in this
prospectus, which have been audited by Ernst & Young LLP. The consolidated
statement of operations data for the nine months ended September 30, 1999 and
September 30, 2000, and the consolidated balance sheet data as of September 30,
2000, are derived from unaudited consolidated financial statements included
elsewhere in this prospectus. We have prepared the unaudited information on the
same basis as the audited consolidated financial statements and have included
all adjustments, consisting only of normal recurring adjustments, that we
consider necessary for a fair presentation of our financial position and
operating results as of this date and for these periods. These historical
results are not necessarily indicative of results to be expected in any future
period, and results for the nine months ended September 30, 2000 are not
necessarily indicative of results to be expected for the full fiscal year.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 3, 1995 NINE MONTHS
(DATE OF INCORPORATION) ENDED
THROUGH YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ---------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
----------------------- ------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
Product............................... $ 250 $ -- $ -- $ 326 $ 76 $ 76 $ 3,817
License............................... -- -- 1,400 28,000 5,000 5,000 --
------- ------- -------- -------- -------- -------- --------
Total revenue....................... 250 -- 1,400 28,326 5,076 5,076 3,817
Cost of product revenue................. -- -- -- 71 18 18 2,305
------- ------- -------- -------- -------- -------- --------
Gross profit............................ 250 -- 1,400 28,255 5,058 5,058 1,512
Operating expenses:
Research and development.............. 1,135 5,800 12,828 23,467 33,122 23,579 43,649
Selling, general and administrative... 160 1,840 4,584 12,616 12,811 8,938 18,484
Amortization of deferred charges under
license agreements.................. -- -- -- -- 218 -- 7,430
Amortization of deferred stock
compensation........................ -- -- -- -- -- -- 7,107
------- ------- -------- -------- -------- -------- --------
Total operating expenses............ 1,295 7,640 17,412 36,083 46,151 32,517 76,670
------- ------- -------- -------- -------- -------- --------
Operating loss.......................... (1,045) (7,640) (16,012) (7,828) (41,093) (27,459) (75,158)
Interest and other income............. 36 200 96 892 2,456 1,464 4,967
Interest expense...................... -- (31) (271) (1,154) (1,952) (1,495) (1,273)
------- ------- -------- -------- -------- -------- --------
Loss before income taxes................ (1,009) (7,471) (16,187) (8,090) (40,589) (27,490) (71,464)
Provision for income taxes.............. -- -- -- 2,000 500 500 --
------- ------- -------- -------- -------- -------- --------
Net loss................................ $(1,009) $(7,471) $(16,187) $(10,090) $(41,089) $(27,990) $(71,464)
======= ======= ======== ======== ======== ======== ========
Net loss per share -- basic and
diluted............................... $ (.05) $ (.37) $ (.79) $ (.44) $ (1.51) $ (1.05) $ (2.26)
======= ======= ======== ======== ======== ======== ========
Weighted average shares
outstanding -- basic and diluted...... 20,000 20,000 20,576 23,074 27,236 26,707 31,652
======= ======= ======== ======== ======== ======== ========
Pro forma net loss per share -- basic
and diluted (unaudited)............... $ (.52) $ (.71)
======== ========
Pro forma weighted average shares
outstanding -- basic and diluted
(unaudited)........................... 79,564 100,030
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------ SEPTEMBER 30,
1995 1996 1997 1998 1999 2000
------ ------ ------ ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $6,951 $3,639 $5,342 $27,809 $46,645 $ 64,076
Working capital............................................. 6,933 3,063 2,732 21,909 58,912 75,171
Total assets................................................ 7,153 4,509 8,740 43,497 99,443 149,426
Long-term obligations, net of current portion............... -- 6,911 1,823 10,798 27,020 26,192
Total stockholders' equity.................................. 7,045 3,346 3,764 24,032 63,083 94,652
</TABLE>
23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations with the consolidated financial statements and related
notes appearing elsewhere in this prospectus. This discussion and analysis
contains forward-looking statements that involve risks, uncertainties and
assumptions. Actual results may differ materially from those anticipated in
these forward-looking statements as a result of many factors, including those
discussed under "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We develop and sell software-based microprocessors and develop additional
hardware and software technologies that enable computer manufacturers to build
computers that simultaneously offer long battery life, high performance and x86
compatibility. We rely on independent, third-party contractors to perform
manufacturing, assembly and test functions. Our fabless approach allows us to
focus on designing, developing and marketing our products and significantly
reduces the amount of capital we need to invest in manufacturing products.
From our inception in March 1995 through June 30, 2000, we were in the
development stage and engaged primarily in research and development. In 1999, we
began focusing on achieving design wins with original equipment manufacturers,
or OEMs, in addition to our ongoing development activities. In January 2000, we
introduced our Crusoe family of microprocessors, and we began recognizing
product revenue from sales of these microprocessors in the first half of 2000.
Through June 30, 2000, product shipments consisted of development systems and
prototypes. We expect to be dependent on sales of Crusoe microprocessors and
successive generations of these products for the foreseeable future. Since we
introduced our products, we have been engaged in marketing and selling efforts,
pre-production activities and continued research and development. We began
volume shipments of products in September 2000, and we are no longer in the
development stage.
License fees from IBM and Toshiba constituted substantially all of our
revenue in 1997, 1998 and 1999. We negotiated a technology license agreement
with IBM in December 1997 and a technology license agreement with Toshiba in
February 1998. Under these agreements, we received license fees, access to
technology, engineering and test services, photomasks used to print circuits on
a wafer, and wafer and other production services. In exchange, we granted IBM
and Toshiba nonexclusive rights to manufacture, market and sell both x86
compatible products and other types of products, in each case incorporating the
licensed technology. We entered into these agreements to facilitate our research
and development efforts and to generate incremental revenue from any sales by
IBM and Toshiba of x86 compatible products incorporating the licensed
technology. At the time we entered into these agreements, our business model
included both seeking royalty revenue from the sale by third parties of x86
compatible products using our technology and generating revenue from our own
sales of x86 compatible products. Over time, we decided to focus on the Mobile
Internet Computer segment of the x86 compatible market. We sought amendment of
these agreements to allow us to expand our business without IBM or Toshiba
potentially offering products using our technology in our targeted market. The
IBM agreement was amended in November 1999 and September 2000 and the Toshiba
agreement was amended in February 2000, in each case such that we reacquired
rights we previously granted to IBM and Toshiba to manufacture, market and sell
x86 compatible products incorporating our technology. IBM retains a nonexclusive
license until December 2003 and Toshiba retains a nonexclusive license until
February 2003, in each case, to manufacture, market and sell non-x86 compatible
products incorporating the licensed technology. In connection with amending the
IBM agreement, we agreed to pay IBM a total of $38.0 million over the next four
years and fixed the conversion rate of a convertible promissory note issued to
IBM at 1,200,000 shares of our common stock. In connection with amending the
Toshiba agreement, we issued 1,200,000 shares of our common stock to Toshiba. We
are entitled to future royalties under these amended license agreements for
sales by IBM or Toshiba of non-x86 compatible products that incorporate the
licensed technology. We have no indication from IBM or Toshiba that either will
sell non-x86 compatible products that incorporate the licensed technology. As a
result, we do not expect to receive any royalties under these agreements.
24
<PAGE> 27
We recognized license revenue when earned, which occurred when agreed-upon
deliverables were provided, or milestones were met and confirmed by our
licensees. Also, license revenue was recognized only if payments received were
non-refundable and not subject to any future performance obligation by us. The
timing of license revenue reflects significant deliverables provided and
milestones achieved in 1998. The final IBM milestone was achieved and the
related final license payment was made to us in 1998. The final Toshiba
milestone was achieved and the related final license payment was made to us in
1999.
We expect to sell our products primarily to OEMs and, to a lesser extent,
through distributors. We anticipate that a relatively small number of OEMs and
distributors will account for a substantial percentage of our revenue. Although
we expect to derive a significant portion of our product revenue from customers
in Asia, these customers ultimately will sell their products to major PC
manufacturers in the United States and Japan. All of our sales to date have been
denominated in U.S. dollars, and we expect that most of our sales in the future
will be denominated in U.S. dollars.
In August 2000, we entered into a distribution agreement with Siltrontech
Electronics Corporation in Taiwan to support our sales and marketing activities
in the Far East market. We appointed Siltrontech Electronics as the exclusive
distributor of our products in Taiwan, Hong Kong and China until December 31,
2002, other than the right to sell products to OEMs and major notebook computer
manufacturers. In September 2000, we appointed All American Semiconductor as the
exclusive distributor of our products in North America until December 31, 2002,
other than the right to sell products to OEMs and major notebook computer
manufacturers. These agreements specify inventory levels and price protection
and contain provisions regarding rights of return.
We generally recognize revenue from product sales upon transfer of title,
typically upon shipment, and provide for expected returns and warranty costs at
that time. With respect to products shipped to distributors, we defer
recognition of product revenue until the distributors sell our products to their
customers.
Cost of product revenue consists primarily of the costs of manufacturing,
assembly and test of our silicon chips, and compensation and associated costs
related to manufacturing support, logistics and quality assurance personnel.
Research and development expenses consist primarily of salaries and related
overhead costs associated with employees engaged in research, design and
development activities, as well as the cost of masks, wafers and other materials
and related test services and equipment used in the development process.
Selling, general and administrative expenses consist of salaries and related
overhead costs for sales, marketing and administrative personnel and legal and
accounting services. They will also include commissions paid to internal and
external sales representatives, once volume shipments increase. We have incurred
no sales commission costs to date.
In connection with the grant of stock options to our employees in 2000, we
recorded deferred stock compensation of approximately $36.8 million through
September 30, 2000, representing the difference between the estimated fair value
of our common stock for accounting purposes and the exercise price of these
options at the date of grant. Deferred stock compensation is presented as a
reduction of stockholders' equity and is amortized on the graded vesting method.
In addition, we recorded $1.3 million of deferred compensation charges in the
first quarter of 2000 related to a severance agreement with a former employee.
We will incur substantial expense in future periods as a result of the
amortization of the deferred stock compensation.
Historically, we have incurred significant losses. As of September 30,
2000, we had an accumulated deficit of $147.5 million. We expect to incur
substantial losses for the foreseeable future. We also expect to incur
significant research and development and selling, general and administrative
expenses. As a result, if our revenue does not increase substantially, our
operating results will be adversely affected, and we will not achieve
profitability.
25
<PAGE> 28
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
Revenue. Revenue in the nine months ended September 30, 1999 included both
license revenue from the Toshiba license agreement and product revenue. No
future license revenue will be recognized in connection with this agreement.
Revenue in the nine months ended September 30, 2000 was comprised of product
revenue derived from sales of our microprocessors, which were introduced in
January 2000. We began volume shipments of products in September 2000, and we
are no longer in the development stage. Total revenue decreased from $5.1
million for the nine months ended September 30, 1999 to $3.8 million for the
nine months ended September 30, 2000 due to completion of the payments under the
Toshiba license agreement. Product revenue increased from $76,000 in the first
nine months of 1999 to $3.8 million in the first nine months of 2000, reflecting
the first volume product shipments as well as increased shipments of prototypes
and development systems. For the nine months ended September 30, 2000, sales to
Sony Electronics accounted for 50.2% of our product revenue and sales to Fujitsu
Ltd. accounted for 20.3% of our product revenue.
Gross Profit. Product gross profit, which equals product revenue less cost
of product revenue, increased from $58,000 in the nine months ended September
30, 1999 to $1.5 million in the nine months ended September 30, 2000. These
product gross profit amounts reflect volume sales of microprocessors as well as
sales of prototypes and development systems. We expect our gross margin, which
is product gross profit as a percentage of product revenue, to change in future
quarters as volume shipments increase. In addition, we expect our gross margin
to vary from period to period due to the mix of products sold, the stage in the
life cycle of each of our products and expenses in connection with the
manufacturing process. For example, newly-introduced products generally have
higher average selling prices, which typically decline over product life cycles
due to competitive pressures and technological advances.
Research and Development. Research and development expenses increased from
$23.6 million in the nine months ended September 30, 1999 to $43.6 million in
the nine months ended September 30, 2000. The majority of this increase, or
$14.3 million, was due to increased prototype wafer costs, costs of other
foundry services, costs of photomasks used to print circuits on a wafer and
costs of development systems used internally. In addition, we incurred $4.8
million in increased costs for additional development personnel and related
facility and other allocable expenses, primarily benefits and recruiting costs.
We expect that research and development expenses will increase in absolute
dollars in future quarters as we develop new products, engage in other product
development initiatives and increase our number of research and development
personnel.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $8.9 million in the nine months ended September 30, 1999
to $18.5 million, excluding amortization of deferred stock compensation expense
of $4.8 million, in the nine months ended September 30, 2000. Total selling,
general and administrative expenses, including amortization of deferred stock
compensation expense, were $23.3 million in the nine months ended September 30,
2000. The hiring of additional personnel and a resulting increase in salaries
and related facility and other allocable expenses, primarily benefits, accounted
for $4.1 million of the year over year nine month increase. Other increases
related primarily to costs of expanding our marketing and branding activities
including outside consultant costs. We expect that selling, general and
administrative expenses will increase in absolute dollars in future quarters as
we hire additional personnel, expand our sales and marketing efforts, begin to
pay sales commissions and incur the costs associated with being a public
company.
Amortization of Deferred Charges Under License Agreements. In connection
with the renegotiation of our technology license agreement with IBM in November
1999, we agreed to pay a total of $33.0 million over the next four years in
order to reacquire license rights previously granted to IBM. We recorded the
present value of these payments, $18.9 million, as a liability with a
corresponding deferred charge. We also fixed the conversion rate of the IBM
convertible promissory note at 1,200,000 shares of common stock. We recorded the
fair value of the embedded beneficial conversion feature of the amended
convertible promissory note, $3.2 million, as common stock with a corresponding
deferred charge. In September 2000, we agreed to a
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further amendment of our technology license agreement with IBM. IBM relinquished
the right to receive future contingent payments in exchange for our fixed
commitment to pay $5.0 million. This liability was recorded in the quarter ended
September 30, 2000, also with a corresponding deferred charge. These deferred
charges are being amortized on a straight-line basis over the remaining license
term during which the reacquired rights were originally in effect.
In connection with the renegotiation of our technology license agreement
with Toshiba in February 2000, we issued 1,200,000 shares of common stock to
Toshiba. The deemed fair value of the shares issued, $6.8 million, is also being
amortized on a straight-line basis over the license buyback period.
Future amortization in connection with the IBM and Toshiba license
agreement amendments will be $3.0 million in the fourth quarter of 2000, $12.6
million in 2001, $12.5 million in 2002, $10.2 million in 2003 and $2.1 million
in 2004. We recorded amortization of deferred charges of $7.4 million in
connection with these agreements in the nine months ended September 30, 2000.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation was $7.1 million in the nine months ended September 30, 2000. In
connection with stock option grants through September 30, 2000, we expect to
record $5.4 million as an expense on our statement of operations in the fourth
quarter of 2000, $16.0 million in 2001, $6.5 million in 2002 and the balance in
future years. We expect to incur additional deferred stock compensation
amortization in connection with stock option grants made after September 30,
2000 and prior to the date of this offering.
Interest Income. Interest income reflects interest earned on cash and cash
equivalents and short-term investment balances. Interest income increased from
$1.5 million in the nine months ended September 30, 1999 to $5.0 million in the
nine months ended September 30, 2000. The increase was due to larger average
invested cash balances resulting from the closing of an equity offering in April
2000.
Interest Expense. Interest expense consists of interest on our long-term
debt and capital lease obligations used to finance capital expenditures.
Interest expense decreased from $1.5 million in the nine months ended September
30, 1999 to $1.3 million in the nine months ended September 30, 2000. This
decrease was due to lower average debt balances.
Provision for Income Taxes. We recorded a tax provision of $500,000 for the
nine months ended September 30, 1999 relating to foreign taxes. These taxes were
withheld from license revenue received from Toshiba under the United
States-Japan tax treaty. No tax provision was recorded for the nine months ended
September 30, 2000.
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Revenue. Revenue, substantially all of which was license revenue, increased
from $1.4 million in 1997 to $28.3 million in 1998, and declined to $5.1 million
in 1999. This revenue was earned in connection with the technology license
agreements with IBM and Toshiba executed in 1997 and 1998. The significant
increase in 1998 was due to payments from Toshiba.
We did not have any product revenue during the year ended December 31,
1997. Product revenue was $326,000 in 1998 and $76,000 in 1999 and related to
the sale of prototypes and development systems. Product revenue decreased from
1998 to 1999 primarily due to one-time requirements in 1998 for development
systems used by licensees.
Gross Profit. Product gross profit decreased from $255,000 in 1998 to
$58,000 in 1999. Product gross profit in 1998 and 1999 reflects sales of small
volume prototypes and development systems.
Research and Development. Research and development expenses increased from
$12.8 million in 1997 to $23.5 million in 1998 and $33.1 million in 1999. These
increases were primarily a result of hiring additional development personnel,
prototype wafer costs and services, costs of photomasks used to print circuits
on a wafer and depreciation and amortization expenses arising from significant
purchases of computer aided design and other software tools. Specifically,
expenses related to recruiting and retaining development personnel increased by
$5.1 million in 1998 compared to 1997. We also incurred $2.0 million of
additional charges
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relating to equipment additions in 1998 compared to 1997. Finally, prototype
wafer and related costs increased by $1.6 million in 1998. The increase from
1998 to 1999 was principally due to increased expenses related to recruiting and
retaining development personnel of $3.2 million and $2.2 million of increased
prototype wafer and related costs.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $4.6 million in 1997 to $12.6 million in 1998 and $12.8
million in 1999. The significant increase in 1998 was primarily due to doubling
the number of selling and administrative personnel in 1998, resulting in
approximately $4.6 million of additional costs for personnel and office
equipment, and to implementation of our enterprise resource planning system,
resulting in approximately $1.2 million of expenditures. SAP, our enterprise
resource planning system, is the information system we use to manage production,
sales, distribution and finance activities. The increase in 1999 was largely due
to $1.6 million of costs related to additional personnel, partially offset by
the planning system expenses not incurred in 1999 compared to 1998.
Amortization of Deferred Charges Under License Agreements. We recorded
amortization of $218,000 in 1999 in connection with the renegotiation of the IBM
technology license agreement.
Interest Income. Interest income increased from $96,000 in 1997 to $892,000
in 1998 and $2.5 million in 1999. Interest income increased primarily due to the
timing of equity financings and resulting changes in average cash equivalent and
short-term investment balances.
Interest Expense. Interest expense increased from $271,000 in 1997 to $1.2
million in 1998 and $2.0 million in 1999. These increases were primarily due to
increasing average debt balances and capital expenditure financing activity as
we expanded our operating activities.
Provision for Income Taxes. In 1998 and 1999, we recorded tax provisions of
$2.0 million and $500,000, respectively, relating to foreign taxes in Japan
withheld on license revenue from Toshiba. No tax provision was recorded in 1997.
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QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited quarterly statement of
operations data for the four quarters of 1999 and the first three quarters of
2000. We believe that this information has been prepared on the same basis as
our audited consolidated financial statements and that all necessary
adjustments, consisting only of normal recurring adjustments, have been included
to present fairly the selected quarterly information. This information should be
read in conjunction with our audited consolidated financial statements and the
notes to those statements included elsewhere in this prospectus. Our quarterly
results of operations for these periods are not necessarily indicative of future
results of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30,
1999 1999 1999 1999 2000 2000 2000
-------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product......................... $ 61 $ 13 $ 2 $ -- $ 4 $ 354 $ 3,459
License......................... 5,000 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total revenue................. 5,061 13 2 -- 4 354 3,459
Cost of product revenue........... 13 3 2 -- 4 219 2,082
-------- -------- -------- -------- -------- -------- --------
Gross profit...................... 5,048 10 -- -- -- 135 1,377
Operating expenses:
Research and development........ 7,976 8,167 7,436 9,543 11,477 15,072 17,100
Selling, general and
administrative................ 2,761 3,044 3,133 3,873 5,666 5,781 7,037
Amortization of deferred charges
under license agreements...... -- -- -- 218 2,249 2,614 2,567
Amortization of deferred stock
compensation.................. -- -- -- -- 1,126 2,014 3,967
-------- -------- -------- -------- -------- -------- --------
Total operating expenses...... 10,737 11,211 10,569 13,634 20,518 25,481 30,671
-------- -------- -------- -------- -------- -------- --------
Operating loss.................... (5,689) (11,201) (10,569) (13,634) (20,518) (25,346) (29,294)
Interest and other income....... 283 224 957 992 938 2,007 2,022
Interest expense................ (499) (502) (494) (457) (450) (426) (397)
-------- -------- -------- -------- -------- -------- --------
Loss before income taxes.......... (5,905) (11,479) (10,106) (13,099) (20,030) (23,765) (27,669)
Provision for income taxes........ 500 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net loss.......................... $ (6,405) $(11,479) $(10,106) $(13,099) $(20,030) $(23,765) $(27,669)
======== ======== ======== ======== ======== ======== ========
</TABLE>
Revenue in the quarter ended September 30, 2000 reflected the first volume
shipments of our Crusoe microprocessors. Cost of product revenue increased in
the quarter ended September 30, 2000, reflecting the cost of volume production.
Operating expenses have generally increased over the seven quarters ended
September 30, 2000. After September 30, 1999, research and development expenses
increased primarily due to increased costs for wafers, services, photomask sets
used to print circuits onto a wafer and development systems. In addition, costs
of additional development personnel and related facility and other allocable
expenses increased. The increases in selling, general and administrative
expenses were primarily due to increased salaries and related costs and
increased costs related to expanding our marketing and branding activities in
the nine months ended September 30, 2000, as well as increased facility and
other allocable expenses.
There is little historical financial information that is useful in
evaluating our business, prospects and future operating results. You should not
rely on quarter-to-quarter comparisons of our results of operations as an
indication of our future performance. We expect our future operating results to
vary significantly from quarter to quarter. Our results could fluctuate because
of the amount of revenue we recognize or the amount of cash we spend in a
particular period. For example, our results could fluctuate due to the following
factors:
- the gain or loss of significant customers or significant changes in
purchasing volume;
- the amount and timing of our operating expenses and capital expenditures;
- pricing concessions on volume sales;
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<PAGE> 32
- the effectiveness of our product cost reduction efforts and those of our
suppliers;
- changes in the average selling prices of our microprocessors or the
products that incorporate them;
- our ability to specify, develop, complete, introduce and market new
products and technologies and bring them to volume production in a timely
manner; and
- changes in the mix of products we sell.
Our reliance on third parties for wafer fabrication, assembly and test
services also could contribute to fluctuations in our quarterly results, based
on factors such as the following:
- fluctuations in manufacturing yields;
- cancellations, changes or delays of deliveries to us by our manufacturer;
- the cost and availability of manufacturing, assembly and test capacity;
and
- problems or delays due to shifting our products to smaller geometry
process technologies and designing our products to achieve higher levels
of design integration.
In addition, our results could fluctuate from quarter to quarter due to
factors in our industry that are outside of our control, including the following
factors:
- the timing, rescheduling or cancellation of customer orders;
- the varying length of our sales cycles;
- the availability and pricing of competing products and technologies and
the resulting effect on sales and pricing of our products;
- fluctuations in the cost and availability of components, such as dynamic
random access memory, or DRAM, that our customers require to build
systems that incorporate our products;
- fluctuations in the cost and availability of raw materials, such as
wafers, chip packages and chip capacitors;
- the rate of adoption and acceptance of new industry standards in our
target markets;
- seasonality in some of our target markets;
- changes in demand by the end users of our customers' products; and
- variability of our customers' product life cycles.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
private sales of convertible preferred stock and, to a lesser extent, from
license revenue and lease financing.
Net cash used in operating activities was $14.0 million in 1997, $5.2
million in 1998, $36.4 million in 1999 and $53.8 million in the nine months
ended September 30, 2000. In 1997, net cash used in operating activities was
attributable to our net loss of $16.2 million, partially offset by increases in
accounts payable and accrued liabilities. In 1998, 1999 and the nine months
ended September 30, 2000, net cash used in operating activities was attributable
to our net losses, partially offset by non-cash depreciation and amortization
charges and increases in accounts payable and accrued liabilities. Increases in
accounts payable and accrued liabilities were due to the general continued
growth in business activity during 1998, 1999 and 2000. The increase in accounts
payable in the nine months ended September 30, 2000 was also due to
inventory-related purchases.
Net cash used in investing activities was $2.6 million in 1997, $15.9
million in 1998, $19.2 million in 1999 and $14.9 million in the nine months
ended September 30, 2000. Net cash used in investing activities consisted of
capital expenditures on property and equipment and, in 1999 and 2000, net
purchases of investments. Capital expenditures were $2.6 million in 1997, $13.9
million in 1998 and $1.4 million in 1999
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and consisted primarily of property, equipment and software. We used cash of
$4.2 million to purchase property, equipment and other assets in the nine months
ended September 30, 2000. Net purchases of investments were $5.5 million in the
nine months ended September 30, 2000. We loaned a total of $5.3 million to our
founders in May 2000. The purpose of these loans was to provide an incentive to
these founders to remain as employees. The loans bear 6.4% interest, compounded
annually, and are due in May 2005. The loans are evidenced by non-recourse
promissory notes that are secured by a total of 1,050,000 shares of our common
stock.
Net cash provided by financing activities was $18.3 million in 1997, $43.5
million in 1998, $74.4 million in 1999 and $86.2 million in the nine months
ended September 30, 2000. In 1997, net cash provided by financing activities was
primarily attributable to net proceeds from the sale of convertible preferred
stock. In 1998, net cash provided by financing activities was primarily
attributable to net proceeds from the sale of convertible preferred stock and
the issuance of debt. Debt issued in 1998 consisted of promissory notes issued
to financing companies totaling $3.5 million and a $1.1 million note issued to a
supplier in connection with an equipment purchase. Debt issued in 1999 consisted
of promissory notes issued to a financing company totaling $1.4 million. In
addition, the portion of our capital expenditures subsequently financed with
leasing companies was $7.4 million in 1998 and $1.4 million in 1999. In 1999 and
the nine months ended September 30, 2000, net cash provided by financing
activities was primarily attributable to net proceeds from the sale of
convertible preferred stock.
At September 30, 2000, we had $64.1 million in cash and cash equivalents
and $25.2 million in short and long-term investments. We lease our facilities
under non-cancelable operating leases expiring in 2008, and we lease equipment
and software under non-cancelable leases with terms ranging from 36 to 48
months. At September 30, 2000, we had total minimum lease payments of $34.2
million under our operating leases and $7.4 million under our capital leases. We
also are obligated to pay IBM a total of $38.0 million -- $5.0 million in 2000,
$4.0 million in 2001, $6.0 million in 2002, $7.0 million in 2003 and $16.0
million in 2004 -- in connection with amendments to our technology license
agreement. Finally, our foundry relationship with IBM allows us to cancel all
outstanding purchase orders, but requires us to pay the foundry for expenses it
has incurred in connection with the purchase orders through the date of
cancellation. As of September 30, 2000, IBM had incurred approximately $16.1
million of manufacturing expenses on our outstanding purchase orders. We also
had minimum aggregate principal payments of $4.8 million under our long-term
debt. As of September 30, 2000, we had a $1.5 million commitment for a capital
expenditure. We anticipate that capital expenditures will be required as we grow
our business.
We believe that existing cash, cash equivalents and short-term investments
balances will be sufficient to fund our operations for at least the next twelve
months as we expand our business and increase commercial production and sales of
our products. After this period, capital requirements will depend on many
factors, including the rate of sales growth, market acceptance of our products,
costs of securing access to adequate manufacturing capacity, the timing and
extent of research and development projects and increases in our operating
expenses. To the extent that funds generated by this offering, together with
existing cash, cash equivalents and short-term investments balances and any cash
from operations, are insufficient to fund our future activities, we may need to
raise additional funds through public or private equity or debt financing.
Although we are currently not a party to any agreement or letter of intent with
respect to a potential acquisition or strategic arrangement, we may enter into
acquisitions or strategic arrangements in the future, which also could require
us to seek additional equity or debt financing. Additional funds may not be
available on terms favorable to us or at all.
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS
Interest Rate Risk. Our cash equivalents and short-term investments are
exposed to financial market risk due to fluctuations in interest rates, which
may affect our interest income. As of September 30, 2000, our cash equivalents
and short-term investments included money market funds, Federal agency discount
notes and commercial paper and earned interest at an average rate of 6.8%. Due
to the short-term nature of our investment portfolio, we would not expect our
operating results or cash flows to be affected to any significant
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<PAGE> 34
degree by a sudden change in market interest rates. We do not use our investment
portfolio for trading or other speculative purposes.
Foreign Currency Exchange Risk. All of our sales and substantially all of
our expenses are denominated in U.S. dollars. As a result, we have relatively
little exposure to foreign currency exchange risk. We do not currently enter
into forward exchange contracts to hedge exposures denominated in foreign
currencies or any other derivative financial instruments for trading or
speculative purposes. However, in the event our exposure to foreign currency
risk increases, we may choose to hedge those exposures.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133, as amended, establishes methods for recording
derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. We are required to adopt SFAS
133 effective January 1, 2001. Because we currently do not hold any derivative
instruments and do not engage in hedging activities, we do not currently believe
that the adoption of SFAS 133, as amended, will have a significant impact on our
consolidated financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101. SAB 101 summarizes certain areas of the staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. We believe that our current revenue
recognition principles comply with SAB 101.
In March 2000, the Emerging Issues Task Force of the FASB issued EITF Issue
00-2, "Accounting for Website Development Costs." The issue addresses how an
entity should account for costs incurred to develop a website. The total
capitalizable costs associated with the development of our website have been
immaterial to date and have not been capitalized.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, Interpretation of APB Opinion
No. 25." Interpretation No. 44 clarifies the application of Accounting Principle
Board Opinion No. 25 to certain issues including: (1) the definition of employee
for purposes of applying APB Opinion No. 25, (2) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (3) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award, and (4) the accounting for an exchange of stock compensation
awards in business combinations. We adopted Interpretation No. 44 in July 2000.
The adoption of Interpretation No. 44 did not have a material effect on our
consolidated financial position or results of operations.
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BUSINESS
OVERVIEW
Transmeta Corporation develops and sells software-based microprocessors and
develops additional hardware and software technologies used to build Mobile
Internet Computers, which are portable computing and communication devices that
are compatible with PC software and provide sufficient performance to run
demanding Internet media applications while also offering long battery life.
Mobile Internet Computers include traditional notebook computers and newly
emerging Internet appliances. We believe that Mobile Internet Computers using
our products will allow users to access the Internet virtually anywhere and
anytime, and to benefit from the same full-featured computing experience that
they currently enjoy with their desktop PCs. Crusoe is the name for our
software-based family of microprocessors that operate with low power
consumption, offer high performance and are compatible with software designed
for IBM x86 PC compatible computers. Transmeta offers Crusoe microprocessors
suitable for a broad set of existing and emerging end markets.
INDUSTRY BACKGROUND
THE EVOLUTION OF THE DESKTOP PERSONAL COMPUTER TOWARD MOBILE INTERNET
COMPUTING
The desktop personal computer, or PC, is widely used for business and
personal activities and is commonly found in both the workplace and the home.
Although the PC was originally developed to run software applications on a
standalone basis, the emergence of the Internet has dramatically changed how
people use the PC. The PC is now commonly used for communication and
collaboration over the Internet in addition to computation and word processing
functions. Electronic mail, or email, is a widely used means of communication
and information delivery. Many PC users spend a significant portion of their PC
usage time browsing the World Wide Web. The Internet has also become an
efficient means of conducting personal and business transactions, primarily
through business-oriented websites and online business exchanges. Internet usage
has proliferated to the point where, out of a United States population of 273
million people, International Data Corporation, or IDC, estimates that more than
100 million access the Internet.
People are becoming increasingly mobile in their business and personal
activities, and are using the Internet to connect remotely to their businesses,
family and friends. As people become more dependent upon email and visiting
their favorite sites on the World Wide Web, they want to have Internet access
wherever they go. Notebook computers enable people to bring the PC experience
with them when they are away from their homes and offices. The notebook computer
market is expected to grow as people use the Internet for web access, email and
other forms of communication, in addition to running business and personal
software applications. According to IDC, approximately 20 million notebook
computers were shipped during 1999 and this number is forecasted to grow to
approximately 35 million in 2003.
As users seek access to the Internet anytime and anywhere, we believe they
will want the same portable convenience that they currently enjoy from cellular
phones. Until recently, most users have accessed the Internet through a wired
Internet connection in office environments or through dial-up modems in home
environments. However, consumer demand has caused the proliferation of Internet
connections to many locations, such as airports and hotels, where a mobile
Internet user may need them. Wireless modem technologies currently exist to help
mobile users reach the Internet when these land-based connections are
unavailable. We believe that the emergence of new wireless technologies will
further increase demand for Internet access from battery-powered mobile devices.
As mobile computer users increasingly use wireless technologies to access
the Internet, they are likely to expect the same full Internet experience that
they currently have with a desktop PC. We believe this ability to access the
entire Internet, anywhere and anytime, with mobile computing devices will change
people's view of communication like cellular telephones changed how people use
the telephone. We refer to these devices, which include notebook computers and
newly emerging devices such as full-featured Internet appliances, as "Mobile
Internet Computers."
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The demand for Internet access has spawned an emerging market for simpler
computing devices dedicated to Internet applications. Often referred to as
"Internet appliances," these devices are designed to provide the user with an
Internet experience comparable to that delivered by a desktop PC. These
appliances may take many forms, such as a handheld tablet computer in which a
touchpad is incorporated in the screen or a computer consisting of a flat panel
display with all of the electronics behind the display panel. As these devices
proliferate throughout the home and office, other types of Internet appliances
are emerging. Examples of these Internet appliances include systems that bring
the Internet into the home or office and distribute it to a number of other
computers. These devices include set-top boxes and residential gateways. Some of
these devices will transform the wired Internet connection into radio-based
communication for other Internet appliances in the home. For example, new
wireless radio standards are being used to provide high-speed wireless Internet
connections in the home. Today the market for Internet appliances is in its
infancy, but is predicted to grow rapidly. IDC forecasts that the market for
Internet appliances and other similar devices that access the Internet will grow
to more than 75 million units in 2003.
The personal computer has improved tremendously since the introduction of
the first 64KB 5-MHz IBM x86 PC in 1981. While hardware performance and memory
capacity have each increased by a factor of about one thousand since the
original IBM x86 PC, software compatibility has remained largely unchanged.
Personal computers that retained software compatibility with the x86 computer
instruction language have thrived, while those that tried to use other
microprocessors incompatible with the x86 PC have not sustained significant
market share. Adherence to IBM x86 PC compatibility has been critical for the
success of both new PCs and thousands of PC-oriented software applications.
Microsoft's Windows95, Windows98 and Windows Millennium Edition operating
systems, for example, are only available for x86 compatible PCs.
Beyond compatibility with standalone x86 PC software, the ability to access
the entire Internet and obtain the full Internet experience usually requires x86
compatibility. Software developers and developers of websites often presume that
users will be accessing the Internet through an x86 compatible PC. Software
developers will often use new multimedia and animation techniques in order to
attract people to their websites. Often these new techniques are delivered
through small software programs, called plug-ins, that extend the functionality
of a web browser. Most plug-ins are composed of small x86 compatible software
programs downloaded over the Internet. This means that an x86 plug-in will not
run unless the web browser is running on an x86 compatible microprocessor.
Without plug-in functionality, sections of a website dependent on a plug-in are
inaccessible, denying the user the full Internet experience. Full compatibility
with the Internet demands x86 software compatibility.
DESIRABLE FEATURES FOR MOBILE INTERNET COMPUTERS
Today's mobile computers can still be improved in many ways. For users to
obtain a truly satisfying Internet computing experience and for the markets for
notebook computers and Internet appliances to reach their full potential, a wide
range of user requirements must be simultaneously satisfied. To date, no
technology has enabled the full mobile Internet experience that incorporates the
wide range of features that users desire. We believe that the successful
evolution of Mobile Internet Computers will require a single solution that
addresses all of the following user desires:
LONGER BATTERY LIFE. As users become increasingly mobile in their business
and personal lives, their ability to plug their Internet computing devices into
an electrical socket becomes increasingly constrained. To mitigate this problem,
Mobile Internet Computing devices need to run several hours on battery power
alone, significantly longer than the one to two hours often experienced with
existing notebook computers. In addition, because mobile users tend to run the
same high performance applications whether their computers are plugged into an
electric socket or running on battery power, they will want several hours of
battery life without noticeably sacrificing performance or portability. For
example, the ability of a battery to last for the entire duration of a
transatlantic airline flight would greatly increase the utility of notebook
computers.
LIGHTER WEIGHT. Lighter and thinner notebook computers have grown in
popularity as people who need to stay connected to the Internet have become less
willing to travel regularly with heavy notebook computers. Notebook computers
can weigh as much as 8 or 9 pounds, making them cumbersome to carry. One of the
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heaviest components of notebook computers is the battery, but reducing the
battery size to reduce weight also reduces the computer's running time before it
must be recharged.
COMPARABLE PERFORMANCE. Most people are accustomed to accessing the
Internet through an x86 desktop PC. Playing a DVD movie, downloading an MPEG-4
streaming video movie or running a Macromedia Flash plug-in, for example,
requires levels of performance comparable to that of a typical 400 MHz desktop
x86 PC. As mobile computing becomes a more integral part of daily business and
personal life, users will expect comparable levels of performance from their
Mobile Internet Computers.
FULL X86 SOFTWARE AND INTERNET COMPATIBILITY. The majority of Internet
sites presume the user has an x86 notebook computer or desktop PC. Users will
expect the same full-featured Internet experience from any new Mobile Internet
Computer as they enjoy with their desktop PC. Internet users require x86-based
plug-in applications and general application software in order to enjoy an
experience comparable to that of the desktop PC. Thus, we believe that
compatibility with the x86 instruction set and basic PC system infrastructure
will be important for any Mobile Internet Computer.
COST EFFECTIVE. For Mobile Internet Computers to proliferate, they must be
priced at levels that are suitable for consumer electronic devices. Particularly
in the Internet appliance market, consumers are expected to look for moderately
priced alternatives to the desktop PC and notebook computer to be used
throughout the home and office.
COOL AND QUIET. As Mobile Internet Computers become more consumer-oriented,
issues such as cooling fan noise and surface heat will become increasingly
important to minimize the annoyance and discomfort associated with loud fans and
hot notebook computers. Ideally, Mobile Internet Computers will remain cool
without requiring a noisy fan.
THE INDUSTRY MICROPROCESSOR DILEMMA
Within a notebook computer or Internet appliance, the microprocessor
usually dictates the characteristics of the entire computer system.
Unfortunately, no single microprocessor has simultaneously enabled all of the
characteristics users desire for full-featured Mobile Internet Computers. These
limitations force system designers to make choices among various features such
that only a subset of user requirements is satisfied when using any traditional
microprocessor. For example, a common tradeoff in existing products is that x86
compatibility is sacrificed in order to achieve longer battery life.
Two types of microprocessor architectures dominate today's marketplace.
They are generically known as reduced instruction set computer, or RISC, and
complex instruction set computer, or CISC. RISC is represented by a variety of
different microprocessor architectures such as those licensed from ARM Holdings
and MIPS Technologies, Power PC from IBM and Motorola, and SPARC from Sun
Microsystems. CISC is typically represented by microprocessors found in x86 PCs.
RISC microprocessors were developed in the 1980s as a way to use a simpler
microprocessor design to provide higher performance. However, RISC instruction
sets are not compatible with x86 PC software, and systems that use this
architecture have much more limited software availability. Over recent years,
CISC microprocessor design teams have found that they were able to achieve
levels of performance similar to RISC chips by adding further complexity to
their designs. However, more complex designs have a number of other drawbacks,
including additional power usage and larger, more costly chips. When considering
alternatives among commonly available microprocessors, system designers
typically have the following choices and tradeoffs:
- HIGH PERFORMANCE, HIGH POWER X86 COMPATIBLE MICROPROCESSORS. These are
microprocessors typically used in a mobile or desktop PC. For a Mobile
Internet Computer, the most important user disadvantages of these
microprocessors are high power consumption and limited battery life.
- LOW-PERFORMANCE X86 COMPATIBLE MICROPROCESSORS. These devices are usually
based on an older generation microprocessor, such as a 486 generation
design. The cost of these older designs is usually very low, but
performance is often not sufficient to run modern multimedia applications
such as MPEG-4 video movies.
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- HIGH PERFORMANCE, HIGH POWER RISC MICROPROCESSORS. These microprocessors
are often found in RISC workstations and do not provide compatibility
with x86 PC application software or x86 plug-ins.
- LOW POWER RISC MICROPROCESSORS. There are several low power RISC
microprocessors that can provide excellent battery life, but the lack of
x86 compatibility limits their ability to provide the full-featured
Internet experience, which requires the ability to run PC software and
x86 plug-ins.
We believe that no single microprocessor to date has provided enough of the
desired characteristics for Mobile Internet Computers to satisfy user
requirements and to achieve their full market potential. As a result, systems
developers must compromise their designs and speculate regarding the features
consumers might be willing to sacrifice as part of their Mobile Internet
Computing experience.
TRANSMETA'S SOLUTION
Transmeta develops and sells software-based microprocessors and develops
additional hardware and software technologies that enable computer manufacturers
to build computers that simultaneously offer long battery life, high performance
and x86 compatibility. Our Crusoe microprocessors are unique because, unlike
traditional microprocessors that are built entirely with silicon hardware, they
are composed of both a software and a hardware component.
The software component of our Crusoe microprocessors is called Code
Morphing software. The primary function of Code Morphing software is to provide
a compatibility bridge between standard x86 PC software and our hardware chip
with its own proprietary instruction set. Code Morphing software dynamically
translates the ones and zeros of the x86 software instructions into a
functionally equivalent but simpler set of ones and zeros for our hardware chip
to decode and execute. This translation process is undetectable to the end user.
In addition, Code Morphing software continuously learns about the programs run
by a user in order to re-optimize the operation of those programs so that they
run on Crusoe with the lowest possible power usage and highest possible
performance.
The hardware component of our Crusoe microprocessors is a silicon chip
using a Very Long Instruction Word, or VLIW, architecture. It has a proprietary
instruction set with instructions up to 128-bits long. This chip provides the
basic processing units, registers and cache memory. Our VLIW architecture allows
us to achieve high performance with a relatively simple internal design
primarily optimized for speed and low power. Responsibility for complex control
and instruction scheduling functions, which is normally found in hardware, is
transferred to the Code Morphing software. Moving these functions from hardware
into software results in a design with fewer logic transistors, and hence a
smaller die size, to achieve a given level of performance.
Our novel software-based microprocessor approach can help computers built
with Crusoe microprocessors to achieve the following benefits:
- LONGER BATTERY LIFE. Crusoe microprocessors consume less power than other
x86 microprocessors -- around 1 watt or less in typical applications.
Existing x86 microprocessors with features comparable to those of Crusoe
may range in power usage from 6 to 10 watts or more in similar
applications. Since the microprocessor is often the largest user of
overall system power, Crusoe's lower power consumption translates into
longer battery life for a given battery size.
- LIGHTER WEIGHT. The battery is often the heaviest single component in a
mobile computer. Because Crusoe microprocessors use less power than
typical hardware-based microprocessors, system designers have the option
to build lighter weight computers with smaller batteries. Crusoe's lower
power consumption also means that systems can be designed without heavy
components used to eliminate heat, such as a fan or heat pipe, which add
additional weight and thickness.
- COMPARABLE PERFORMANCE. Crusoe microprocessors provide performance
comparable to that of a typical x86 desktop PC. For example, Crusoe
microprocessors offer sufficient performance for highly computational
multimedia tasks such as software decoding a DVD movie.
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- FULL X86 AND INTERNET SOFTWARE COMPATIBILITY. Crusoe microprocessors are
compatible with software written for the x86 PC and the Internet. This
allows Crusoe microprocessors to run x86-based Internet software such as
browser plug-ins, as well as the wide range of software applications
familiar to users of desktop PCs. Crusoe microprocessors are compatible
with operating systems, basic input/output systems and applications
software that normally run on x86 PCs.
- COST-EFFECTIVE APPROACH. By moving functionality from hardware into
software, Crusoe's hardware uses fewer logic transistors than other x86
PC microprocessors, resulting in a chip with a less complex and smaller
die. Smaller chips cost less to manufacture than larger chips. Our small
die size has also allowed us to integrate additional functionality, which
can save space on the motherboard and provide OEMs with the cost
advantages of a one-chip solution compared to a two-chip solution.
- COOL AND QUIET. Because Crusoe microprocessors consume low power,
computers using Crusoe generally do not require a cooling fan. This
eliminates fan noise, fan weight, fan cost and power consumption by the
fan itself. We believe that cool and quiet computers will be increasingly
valued as Internet appliances become more common in the home.
- DOWNLOADABLE OVER THE INTERNET. Because Crusoe is implemented with
software, we can send new versions of Code Morphing software over the
Internet. We can use this feature to send product updates to customers,
as well as to provide specialized versions with additional diagnostic
capabilities, or even to fix bugs that may be found at a future time.
We believe that we have one of the foremost combined hardware and software
engineering teams involved with microprocessor design. David Ditzel, our Chief
Executive Officer and a co-founder of Transmeta, is a pioneer designer in the
microprocessor arena. Over the last 25 years, he co-developed reduced
instruction set computer, or RISC, microprocessor technology while employed at
AT&T's Bell Laboratories, and was director of SPARC Laboratories and Chief
Technical Officer of Sun Microsystems' Microelectronics division. We have
recruited a talented engineering staff in both hardware and software areas
consisting of many well respected senior engineers. For example, we employ Linus
Torvalds, the originator of the Linux operating system, to work on a variety of
software projects within the Crusoe solution. At September 30, 2000, at least
109 of our employees had post-graduate degrees, of which 41 had Ph.Ds.
STRATEGY
Our objective is to provide industry-leading low power processing solutions
combined with x86 software compatibility at a variety of compelling cost and
performance points. Key elements of our strategy include:
Extending Our Expertise in Software-Based Microprocessor Technologies. We
plan to extend our expertise in software-based microprocessor technology to
provide differentiated products to the market. We intend to develop successive
generations of hardware architectures and Code Morphing software optimizations
to further enhance power management and performance, while maintaining x86
software compatibility. We also intend to exploit the unique characteristics of
software to continue to move additional hardware features into software. We plan
to extend the ability of our Code Morphing software to "learn" about the
characteristics of an application program while it is running, and to use this
knowledge to further improve performance and lower power consumption.
Focusing on the Notebook Computer and Mobile Internet Appliance
Markets. Our initial goal is to target our Crusoe microprocessors at growing
markets where low power, mobility and x86 PC software compatibility are
paramount, such as in the Mobile Internet Computing market. We believe that we
are well positioned to be the leading microprocessor solution for Mobile
Internet Computing devices, which are at the convergence point between
communications and computing. Our initial products are focused on the growing
light weight notebook computer market, which seeks long battery life combined
with high performance. We are also focused on the evolving Internet appliance
market, where low power consumption and low cost are important.
Developing Additional Low Power Markets Beyond Mobile Computing. We believe
that there are a number of new market opportunities for our Crusoe
microprocessors where low power and x86 software compatibility are particularly
important, but where mobility and battery life may not be a factor. Next
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generation cable television set-top boxes, for example, will need x86
compatibility to provide Internet connectivity and web browsing, and sufficient
performance to deliver streaming media in a home environment where a cool and
quiet system without a noisy fan will be desired. As people acquire multiple
computers or Internet appliances in the home, they will need a facility for
connecting them to each other and to the Internet. These devices are often
called home network servers and residential gateways. We also see a developing
interest in a new type of web server, where the critical factor is the number of
microprocessors per unit volume. This is an application for which Crusoe's low
power features are particularly attractive.
Developing Relationships With Companies and Communities That Enhance Our
Business. We are working aggressively to develop relationships with others that
enhance our respective businesses and allow us to focus on our core
competencies. We work closely with our OEM customers to collaborate on the
specifications for our next generation products. We have developed a working
relationship with Microsoft to ensure compatibility with their software products
and to collaborate on future products. We also work closely with the Linux
community to develop new features for our customized version of Linux, called
Mobile Linux, and we intend to share those improvements with the open source
community. We use IBM to fabricate silicon wafers using advanced process
technologies rather than developing our own manufacturing facilities. We believe
that these relationships will enable computer manufacturers to bring
Crusoe-based computers to market quickly.
Developing Expertise Across the Entire Computer System. To speed the
adoption of our technology and improve our customers' time-to-market, we often
provide potential customers with complete reference computer system solutions.
By building an entire computer system, we can innovate across all the components
of a computer system and help our customers resolve system design issues. We are
committed to bringing expertise to our customers not only in microprocessors,
but also in the engineering know-how of motherboard design, porting of basic
input/output system software, operating system bring up, compatibility testing,
power management tuning and thermal design issues. We believe that our ability
to provide comprehensive systems expertise will continue to improve our
customers' time-to-market and accelerate the adoption of the Crusoe solution.
CORE COMPETENCIES AND TECHNOLOGIES
We are involved in the research, design, product development and system
integration of many of the software and hardware technologies that make up a
complete x86 PC compatible computer system. In addition to the microprocessor,
the quality of the final computer system depends on the successful integration
and optimization of all of the various hardware and software components in the
computer. Our understanding of the complete computer system and our ability to
provide and improve an optimized total platform solution for our customers are
the result of our core competencies and technologies.
CRUSOE MICROPROCESSOR DEVELOPMENT. Our approach to microprocessor design
implements substantial portions of the microprocessor with software. Each of our
Crusoe microprocessors consists of both a software component and a hardware
component. When combined, these two components form a single microprocessor
solution that is compatible with software programs designed for x86 PC
compatible computers, operates using less power than other x86 microprocessors
and runs applications with performance levels comparable to those of desktop
computers.
We believe that there are several technical and business benefits to this
approach. By partitioning the complex problem of designing a microprocessor into
two pieces, each piece is individually simpler to implement. A substantial
portion of the functionality of our microprocessor is implemented with software,
which allows the remaining functionality to be implemented in a relatively
simple semiconductor chip. We have developed substantial technical expertise and
technology in developing the following components in our microprocessor.
- CODE MORPHING SOFTWARE. The software component of our Crusoe
microprocessors is called Code Morphing software, because it dynamically
translates, or morphs, x86 instructions into instructions for our very
long instruction word processors. Code Morphing software dynamically
translates from the ones and zeros of the x86 software instructions into
a functionally equivalent but simpler set of ones
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and zeros for our hardware chip to decode and execute. The technology
involved in Code Morphing software is similar to that used in advanced
compilers, but with the input being binary programs rather than
high-level language source code. Code Morphing software translates small
groups of instructions incrementally, on an as-needed basis. Because of
the incremental approach, the Code Morphing process happens so quickly
that it is not detectable to the end user. Once a group of instructions
is translated, those translated instructions are cached for successive
executions without the need for further translation. Since instructions
in an application often execute millions of times or more, performance
costs associated with translation are quickly amortized. Code Morphing
software constantly monitors the programs a user is running in order to
re-optimize the operation of the program sections so that they run on the
Crusoe microprocessor with the lowest possible power consumption and
highest possible performance.
- VERY LONG INSTRUCTION WORD (VLIW) PROCESSOR HARDWARE. The hardware
component of our Crusoe microprocessors is a VLIW processor chip. Our
VLIW chip is responsible for basic arithmetic computation, and the
control and caching functions. It currently supports both 128-bit and
64-bit wide instructions. Each of these wide instructions can control
multiple functional units in parallel for high performance under software
control. For example, a single 128-bit VLIW instruction might
simultaneously control an integer addition, an integer subtraction, a
memory load and a branch. Our microprocessors currently employ a number
of advanced features. Crusoe microprocessors have relatively large Level
1 instruction caches and large Level 1 data caches. Our high-end Crusoe
microprocessors also contain on-chip Level 2 caches that improve
performance by reducing the average time to access data from memory, and
also help reduce power by decreasing the number of power-burning memory
accesses to dynamic random access memory, or DRAM.
- INTEGRATED NORTHBRIDGE CHIPSET. Because we have moved many traditional
chip functions from hardware into software, the basic processor requires
a relatively small chip area. This provides the opportunity to integrate
a full PCI bus controller, a synchronous DRAM, or SDRAM, memory
interface, and, on some Crusoe microprocessors, a double data rate SDRAM,
or DDR SDRAM, memory interface. A PCI bus connects a processor to user
input/output devices such as a graphics controller or modem. These
functions have been traditionally provided in a second chip, called a
northbridge. Crusoe microprocessors integrate this northbridge
functionality onto the same silicon die as the processor. This increased
level of integration reduces both power requirements and motherboard
area, which are critical resources in small mobile devices.
- LONGRUN POWER MANAGEMENT. Our proprietary LongRun technology is enabled
by the monitoring and optimization capabilities of Code Morphing
software. LongRun monitors levels of user activity to determine how much
performance is actually needed. Our chip has special purpose hardware
that allows LongRun to rapidly adjust the frequency and voltage of the
chip to a variety of levels to closely match the needed level of
performance. Reducing frequency and voltage can substantially reduce the
power consumed by the Crusoe microprocessor, which in turn leads to
longer battery life.
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The following diagram illustrates how applications and operating systems
run on top of our Crusoe microprocessor:
[DIAGRAM]
PC DESIGN EXPERTISE. We design and build PC-compatible computer systems
based on our Crusoe microprocessors. We build these systems for internal
engineering use in order to test our Crusoe microprocessors in a real system
environment. We do not build these systems for commercial sale, but we believe
that the detailed design specifications are valuable to our customers as known
working reference designs. By providing schematics, motherboard layout and
extensive design notes, we can help our customers save time to market. We have a
systems engineering department that has already completed reference designs
suitable for use in notebook computers, mobile Internet appliances and home
electronic devices connected to the Internet. We also use these systems for many
in-house purposes, such as testing new Code Morphing software, testing basic
input/output systems, benchmarking and compatibility testing. We also take an
active role in helping our customers debug and optimize the design of their
platforms for longest battery life and best performance.
BIOS DEVELOPMENT. The BIOS software, or basic input/output system software,
is usually the lowest level of software and the first software to execute x86
instructions in a PC. The BIOS controls low-level hardware functions, set-up of
peripheral devices, some power management functions and a host of miscellaneous
system housekeeping operations. Different BIOS code is needed for each unique
motherboard and microprocessor combination, for Crusoe and other microprocessors
as well, in order to make each of the components in the computer system work
properly together. Knowing how to make changes to the BIOS requires detailed
expertise about the individual motherboard and microprocessor characteristics.
Our team of BIOS experts works with BIOS providers and customers to customize
their BIOS code to the Crusoe microprocessor, Crusoe power management features
and particular motherboard features. We then provide these changes back to the
BIOS providers, so that they can provide Crusoe-supported BIOS ports to the
computer manufacturers. This enables the computer manufacturer to save many
months of time and substantial expense compared to doing a BIOS port on its own.
In addition, our BIOS staff also assists our customers in the power-on and
bring-up of new products.
POWER MANAGEMENT EXPERTISE. Power management in a computer system requires
substantial technical expertise. We have developed tools, methodologies and
techniques that allow us to provide power management expertise to our customers.
This expertise in power management is used to tune the computer system for the
longest possible battery life.
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THERMAL MANAGEMENT EXPERTISE. Electronic devices operating in a closed box
can generate excessive heat if not managed carefully. We use our expertise in
thermal management to advise our customers about thermal solutions for their
notebook and other Crusoe-based computers. Our chips incorporate thermal
sensors, which can be used in conjunction with a Crusoe port for basic
input/output system software and Code Morphing software to allow the Crusoe
microprocessor to operate at the peak performance allowed by the thermal
solution of the computer system. We use advanced computer aided design tools to
do thermal modeling of individual computer systems to assure our customers that
Crusoe will work reliably in their systems. Our goal is to help our customers
avoid the use of fans. Eliminating fans can reduce noise and, by decreasing
power usage, increase battery life.
MICROSOFT WINDOWS SUPPORT. We expect most notebook computers using Crusoe
to run a version of the Microsoft Windows operating system. We work with
Microsoft to ensure that our products are compatible with products of Microsoft
and our mutual customers. Microsoft meets most of the operating system needs of
computer manufacturers directly. Transmeta occasionally provides expertise for
special software, such as "device drivers," that allow Windows or the basic
input/output system to communicate with Crusoe. For example, we have provided
our customers with a special device driver that allows them to use a graphical
user interface to control our LongRun power management. We also work with
Microsoft and computer manufacturers in testing Crusoe and customer platforms
using Microsoft's Windows Hardware Quality Lab tests. We do not expect our
relationship with Microsoft to be a direct source of revenue for us.
MOBILE LINUX. Particularly for Internet appliances, we find that our
potential customers desire customized versions of the Linux operating system. We
have substantial expertise in the Linux operating system. Linus Torvalds, the
creator of Linux, and several other well-known contributors to Linux and Linux
standards are employees of Transmeta. We use this expertise to work with our
customers to port, customize and otherwise provide enhancements to Linux that
work with the different Crusoe-powered Internet appliance devices that our
customers are designing. We have developed a customized version of Linux, called
Mobile Linux, that enhances the Linux operating system to add power management
functions, to operate without a hard disk drive and to use a compressed file
system, so that programs can be stored more efficiently in memory. Following the
open source model, we intend to release our changes for the Mobile Linux source
code to the Linux community.
COMPATIBILITY TESTING. We have invested substantial resources in developing
tools, expertise and test environments for compatibility testing. We test
compatibility across three major areas: x86 compatibility, hardware
compatibility, and full operating system and application compatibility. To test
Crusoe microprocessors for compatibility with the x86 instruction set, we have
purchased substantial microprocessor test suites, and had teams of programmers
write individual compatibility test programs. We have also purchased and built
computer programs that automatically generate further compatibility tests. For
hardware interface compatibility, we test Crusoe's PCI bus interface for
compatibility with the industry-standard definitions for the PCI bus. A PCI bus
connects a processor to user input/output devices such as a graphics controller
or modem. We test Crusoe's ability to communicate with standard components, such
as graphics chips, southbridge chips and other controller chips, that
communicate with the PCI bus. We test a variety of synchronous DRAMs, or SDRAMs,
and double data rate SDRAMs, or DDR SDRAMs, for compatibility with Crusoe
hardware. We also test other components on the motherboard, such as power supply
chips and clock generator chips, to make sure that they work with Crusoe. We
have established a systems compatibility test laboratory that tests
approximately 30 different PC operating systems and hundreds of different PC
applications with Crusoe.
INTERNAL MICROPROCESSOR DEVELOPMENT SOFTWARE TOOLS. We have developed a set
of software tools including a C Compiler, a C++ Compiler, an assembler, a
linker, a loader and various advanced debugging tools that give us a unique view
into the execution of both Code Morphing software and translated user programs.
This capability allows us to isolate bugs quickly in x86 code and watch the
real-time operation of programs so that we can tune them for better performance
and lower power characteristics. These tools also have proven valuable in
bringing up new hardware systems with our customers because, even before the
first x86 instruction is executed, Code Morphing software has already executed
millions of instructions that can assist in probing different sections of the
system.
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PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
In January 2000, we introduced our Crusoe family of microprocessors. We
expect to use the name Crusoe to represent current and future products, and to
use this single brand name to represent characteristics of long battery life,
x86 PC software compatibility and high performance. The different microprocessor
models in the Crusoe family offer different levels of performance and different
cost structures. We have found that the marketplace divides Mobile Internet
Computing into two distinct markets: notebook computers and Internet appliances.
Notebook computers usually run a version of the Microsoft Windows operating
system. This market demands higher performance, longer battery life and x86
compatibility and is less price sensitive than the Internet appliance market. To
address the notebook computer market, we have developed the TM5x00 series of
Crusoe microprocessors. In the market for Internet appliances, compatibility
with the x86 instruction set is important, but cost can take a higher level of
importance. We have seen a growing interest in the Linux operating system for
this market. To address the Internet appliance market, we have developed the
TM3x00 series of Crusoe microprocessors.
The table below shows a comparison of many of the key features and
differences of six different Crusoe microprocessors in our product roadmap,
three of which are currently in production, and three of which we expect to
introduce in 2001. The three products that we have not yet introduced are the
TM3300, TM3400 and TM5800, each of which is identified with an asterisk in the
chart below. The features of products not yet in production are subject to
change.
<TABLE>
<CAPTION>
TM3X00 SERIES FOR TM5X00 SERIES FOR
INTERNET APPLIANCES NOTEBOOK COMPUTERS
------------------------------------- ---------------------------------------
TM3200 TM3300* TM3400* TM5400 TM5600 TM5800*
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Typical maximum MHz range..... 400 400 400 - 500 500 - 700 600 - 800 600 - 1000
Instruction compatibility..... x86 x86 x86 x86 x86 x86
Level 1 data cache............ 32 KB 64 KB 64 KB 64 KB 64 KB 64 KB
Level 1 instruction cache..... 64 KB 64 KB 64 KB 64 KB 64 KB 64 KB
Level 2 cache................. none none 256 KB 256 KB 512 KB 512 KB - 1 MB
PCI bus interface............. Yes Yes Yes Yes Yes Yes
SDR SDRAM controller.......... Yes Yes Yes Yes Yes Yes
DDR SDRAM controller.......... No No No Yes Yes Yes
Standard PC power management.. Yes Yes Yes Yes Yes Yes
LongRun power management...... No No Yes Yes Yes Yes
VLIW full instruction
length...................... 128-bits 128-bits 128-bits 128-bits 128-bits 128-bits
Technology generation......... .22 micron .18 micron .18 micron .18 micron .18 micron .13 micron
Production status............. Now 2001 2001 Now Now 2001
</TABLE>
---------------
* Not yet in production.
The expected price range for our TM3x00 series for Internet appliances is
$50 to $100 per microprocessor. The expected price range for our TM5x00 series
for notebook computers is $100 to $200 per microprocessor. The price ranges of
these products are subject to change.
TM3X00 SERIES FOR INTERNET APPLIANCES. The TM3200 is a Crusoe
microprocessor intended for Internet appliance computers running the Linux
operating system. This microprocessor is composed of Transmeta's Code Morphing
software and a 128-bit very long instruction word, or VLIW, chip. The VLIW chip
runs at up to 400 MHz, contains a processing engine capable of executing up to
four basic operations every clock cycle, and has a 64 KB Level 1 instruction
cache and a 32 KB Level 1 data cache. In addition to the basic processor, the
TM3200 also contains a PCI bus interface and a single data rate synchronous
DRAM, or SDR SDRAM, controller. A PCI bus connects a processor to user
input/output devices such as a graphics controller or modem. The PCI bus
interface and SDR SDRAM controller, often collectively referred to as a
northbridge, are integrated directly onto the Crusoe microprocessor.
The TM3200 is produced using a .22 micron CMOS technology. For the TM3300
and TM3400 microprocessor, we have redesigned the parts to move from a .22
micron technology into a .18 micron CMOS
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technology. We expect these products to become available during 2001. We expect
this technology shrink to improve operating frequency, reduce power consumption
and reduce costs.
TM5X00 SERIES FOR NOTEBOOK COMPUTERS. The TM5400 is a high performance
Crusoe microprocessor intended for notebook computers running the Windows
operating system. This microprocessor is composed of Transmeta's Code Morphing
software and a 128-bit VLIW microprocessor. The TM5400 is a superset of the
TM3200, and has an increased Level 1 data cache of 64 KB. The TM5400 adds a
number of new features such as a 256 KB Level 2 cache, LongRun power management
and a double data rate synchronous DRAM, or DDR SDRAM, controller. The TM5400 is
produced using a .18 micron CMOS technology.
In May 2000, we began sampling the TM5600 Crusoe microprocessor to our
customers. The TM5600 is similar to the TM5400, but has an increased Level 2
cache of 512 KB. The increased Level 2 cache improves the performance and
reduces the power consumption of the TM5600 relative to the TM5400. The TM5600
is produced using a .18 micron CMOS technology.
As yields improve and customer performance demands increase, we expect to
introduce the TM5800 Crusoe microprocessor. We expect that this microprocessor
may have increased Level 2 cache of up to 1 MB, and use more advanced
semiconductor technology, moving to a .13 micron CMOS technology as soon as it
is available during 2001.
CUSTOMERS
We expect to sell our products primarily to end manufacturers of computer
equipment. In September 2000, we began volume shipments. Before that, we had
only manufactured limited quantities of our products. As of September 30, 2000,
we had shipped products in volume only to Sony Electronics and Fujitsu Ltd. Sony
Electronics has announced that it will use our Crusoe microprocessor in its new
VAIO PictureBook C1VN notebook computer. Fujitsu has announced that it will use
our Crusoe microprocessor in its new FM Biblo Loox T and FM Biblo Loox S
notebook computers. Hitachi has announced three notebook computers and an
Internet appliance incorporating Crusoe. Gateway has announced that it will use
Crusoe in Internet appliances still under development with America Online. NEC
has announced that it will use our Crusoe microprocessor in its new LaVie MX
notebook computer.
SALES AND MARKETING
We sell our products through a variety of channels, including a direct
sales force, sales representatives and distributors. A marketing staff supports
our sales effort. In addition, we have field applications engineers who work
directly with our customers. We have opened an office in Taiwan to provide sales
and customer support, and expect to do the same in Japan during 2001. We also
expect to sell our products in Asia through distributors. In August 2000, we
entered into a distributor agreement to support our sales and marketing
activities in the Far East market. Under this agreement, we appointed
Siltrontech Electronics as the exclusive distributor of our products in Taiwan,
Hong Kong and China until December 31, 2002, other than the right to sell
products to OEMs and major notebook computer manufacturers. In September 2000,
we appointed All American Semiconductor as the exclusive distributor of our
products in North America until December 31, 2002, other than the right to sell
products to OEMs and major notebook computer manufacturers.
We expect to dedicate sales managers to principal customers to promote
close cooperation and communication. We work with our potential customers to
select, integrate and tune hardware and software system components that make up
the final computer system. We also provide potential customers with reference
platform designs, which we believe will enable our customers to achieve easier
and faster transitions from the initial prototype designs through final
production releases. We believe these reference platform designs also will
enhance our targeted customers' confidence that our products will meet their
market requirements and product introduction schedules.
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MANUFACTURING
We use third-party manufacturers for wafer fabrification. By subcontracting
our manufacturing, we focus our resources on product design and eliminate the
high cost of owning and operating a semiconductor fabrication facility. This
fabless business model also allows us to take advantage of the research and
development efforts of manufacturers, and permits us to work with those
manufacturers that offer the most advanced manufacturing processes and
competitive prices.
IBM, at its manufacturing plant in Vermont, has manufactured all of our
products to date. We have entered into a manufacturing agreement with IBM, which
expires no sooner than December 30, 2003. We may cancel any outstanding purchase
orders, but we must pay IBM for expenses it has incurred in connection with the
purchase orders through the date of cancellation. Our agreement with IBM does
not guarantee any level of production capacity or any particular price. Any
inability of IBM to provide the necessary capacity or output could result in
significant production delays. If IBM experiences capacity constraints, it may
allocate its available capacity to its other customers. If IBM suffers any
damage to its facility, or there is any other disruption of its manufacturing
capacity, we may not be able to qualify alternative manufacturing sources for
our products and bring them to volume production in a timely manner.
We recently qualified TSMC in Taiwan to fabricate wafers for Crusoe
microprocessors. We expect TSMC to be operational for fabrication of wafers in
production quantities during 2001. We place orders with TSMC on a purchase order
basis. We do not have a manufacturing agreement with TSMC or a guaranteed level
of production capacity or any particular price from TSMC. TSMC may allocate
capacity to other companies and reduce deliveries to us on short notice.
Our designs are compatible with industry-standard CMOS manufacturing
processes. We believe this compatibility will permit us to qualify additional
manufacturers to mitigate the risk of using a single source for a product. Our
products are now primarily fabricated using .18 micron process technologies. We
continuously evaluate the benefits, on a product by product basis, of migrating
to a smaller geometry process technology to reduce costs and increase the
performance of our microprocessors.
IBM also performs the initial testing of the silicon wafers that contain
our microprocessors. After initial testing, the silicon wafers are cut into
individual semiconductors and assembled into packages. All testing is performed
on standard test equipment using proprietary test programs developed by our test
engineering group. We periodically audit our test facilities to ensure that
their procedures remain consistent with those required for the production of our
products. We rely upon IBM, at a site located in Canada, to assemble and test
substantially all of our products. This reliance on IBM could result in product
shortages or delays in the future. If these shortages or delays were
significant, our customers might seek alternative sources of supply, which could
harm our operating results and reputation. We are in the process of qualifying
alternative assembly and test contractors in Asia.
We participate in quality and reliability monitoring through each stage of
the production cycle by reviewing data from our wafer fabrication plants and
assembly subcontractor. We closely monitor wafer fabrication plant production to
enhance product quality and reliability and yield levels.
COMPETITION
The market for microprocessors is intensely competitive, rapidly evolving
and subject to rapid technological change. We believe that competition will
become more intense in the future and may cause price reductions, reduced gross
margins and loss of market share, any one of which could significantly reduce
our future revenue and increase our losses. Significant competitors that offer
microprocessors for the notebook computer market include Advanced Micro Devices
and Intel. Significant competitors that offer microprocessors for the Internet
appliance market include manufacturers of reduced instruction set computer, or
RISC, microprocessors such as licensees of technology from ARM Holdings and MIPS
Technologies. In addition, Intel recently announced that it is developing a RISC
microprocessor for release by the end of 2000. We also face competition from
providers of x86 compatible microprocessors for the Internet appliance market,
including National Semiconductor.
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<PAGE> 47
We compete on the basis of a variety of factors, including:
- technical innovation;
- performance of our products, including their power usage, product system
compatibility, speed, reliability and density;
- product price;
- product availability;
- reputation and branding; and
- technical support.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, product development and
marketing resources, greater name recognition and larger customer bases than we
do. Many of our competitors also have significant influence in the industry. We
may not be able to compete effectively against current and potential
competitors, especially those with significantly greater resources and market
leverage.
INTELLECTUAL PROPERTY
Our success depends in part upon our ability to maintain the proprietary
aspects of our technology and to operate without infringing the proprietary
rights of others. We rely on a combination of patents, copyrights, trademarks,
trade secret laws and contractual restrictions on disclosure to protect our
intellectual property rights. We have six U.S. patents with expiration dates
ranging from 2016 to 2017. Our patents principally cover microprocessors,
software, components for microprocessors and systems including microprocessors.
We have applied for 31 additional U.S. patents and have filed foreign patent
applications based on selected U.S. patents and patent applications of ours. It
is possible that no patents will issue from our pending patent applications.
Even if additional patents are issued, taken together with our existing patents,
they may not provide sufficiently broad protection to protect our proprietary
rights. We hold a number of trademarks, including Transmeta, Crusoe, LongRun and
Code Morphing.
Legal protections afford only limited protection for our technology.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we
regard as proprietary. In addition, leading companies in the semiconductor
industry have extensive portfolios with respect to semiconductor technology.
From time to time, third parties, including these leading companies, may assert
exclusive patent, copyright, trademark and other intellectual property rights to
technologies and related methods that are important to us. We have received, and
may in the future receive, communications from third parties asserting patent or
other intellectual property rights covering our products. There are currently no
material third party claims pending regarding our patents or our other
intellectual property rights. In the future, however, litigation may be
necessary to defend against claims of infringement or invalidity, to determine
the validity and scope of the proprietary rights of others, to enforce our
intellectual property rights, or to protect our trade secrets.
EMPLOYEES
At September 30, 2000, we and our subsidiaries employed 364 people in the
United States and Taiwan. Of these employees, 253 were engaged in research and
development, 48 were engaged in sales and marketing, 28 were engaged in
professional services and technical support and 35 were engaged in finance and
other administrative departments.
Seven of our employees are located in Asia. In addition, at September 30,
2000, 14 people in the United States, Japan and Europe worked for us on a
contract basis. None of our employees is subject to any collective bargaining
agreements. We believe our employee relations are good.
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<PAGE> 48
FACILITIES
We lease a total of approximately 137,475 square feet of office space in
five buildings in a business park complex located in Santa Clara, California. We
lease space in these buildings under four separate leases and one sublease, four
of which expire in June 2008 and one of which expires in July 2001. We sublease
a total of approximately 49,680 square feet of office space in two of the
buildings to three different subtenants. These subleases expire between
September 2001 and July 2002. We also lease office space in Taiwan to support
our sales and marketing personnel worldwide. We intend to expand our operations
significantly and therefore may discontinue subleasing space to others and may
require additional facilities in the future.
LEGAL PROCEEDINGS
From time to time, we may be subject to legal proceedings and claims in the
ordinary course of business. We are not currently involved in any material legal
proceedings.
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<PAGE> 49
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table shows information about our executive officers and
directors. Ages are as of September 30, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David R. Ditzel............................ 43 Director and Chief Executive Officer
Mark K. Allen.............................. 45 Director, President and Chief Operating Officer
James N. Chapman........................... 51 Senior Vice President of Sales and Marketing
Douglas A. Laird........................... 44 Senior Vice President of Product Development
Merle A. McClendon......................... 45 Chief Financial Officer and Secretary
David P. Jensen............................ 52 Vice President of Operations
Barry L. Rubinson.......................... 55 Vice President of Software
John O. Horsley............................ 39 General Counsel
Murray A. Goldman.......................... 62 Chairman of the Board of Directors
R. Hugh Barnes............................. 54 Director
Larry R. Carter............................ 57 Director
Paul M. McNulty............................ 38 Director
William P. Tai............................. 38 Director
T. Peter Thomas............................ 54 Director
</TABLE>
David R. Ditzel is a co-founder of Transmeta. Mr. Ditzel has served as
Chief Executive Officer and a director of Transmeta since March 1995. From March
1995 to January 2000, Mr. Ditzel also served as President and, from March 1995
to November 1998, Mr. Ditzel also served as Vice President of Engineering of
Transmeta. From 1987 to 1995, Mr. Ditzel was employed at Sun Microsystems, where
he held a variety of positions, most recently as Director of SPARC Laboratories
and Chief Technical Officer of the Microelectronics division. From 1978 to 1987,
Mr. Ditzel was employed at AT&T Bell Laboratories, where he was a Member of
Technical Staff. Mr. Ditzel holds a B.S. in electrical engineering and a B.S. in
computer science from Iowa State University and an M.S. in electrical
engineering and computer science from the University of California at Berkeley.
Mark K. Allen has served as President, Chief Operating Officer and a
director of Transmeta since January 2000. From October 1998 to November 1999,
Mr. Allen served as Vice President of Operations of NVIDIA, Inc., a designer and
developer of 3D graphics processors, graphics processing units and related
software for semiconductor companies focusing on graphics chips. From February
1995 to October 1998, Mr. Allen served as Senior Vice President of Operations of
C-Cube Microsystems, a digital video technology company. From March 1987 to
February 1993, Mr. Allen served as Vice President of Worldwide Manufacturing
Operations of Cypress Semiconductor, a manufacturer and supplier of integrated
circuits. Mr. Allen holds a B.S. in electrical engineering from Purdue
University.
James N. Chapman has served as Senior Vice President of Sales and Marketing
of Transmeta since February 2000. Prior to that, he served as Vice President of
Sales and Marketing of Transmeta from November 1998 to January 2000 and Vice
President of Sales of Transmeta from August 1997 to November 1998. Mr. Chapman
joined Cyrix Corporation, a semiconductor company, in November 1991 and served
as Vice President of Sales and Marketing of Cyrix from October 1993 to August
1996. From April 1981 to October 1991, Mr. Chapman was employed at Intel, where
he held a variety of positions, most recently as Director of Marketing of the
Entry-Level Products Group. Mr. Chapman attended the University of Illinois.
Douglas A. Laird is a co-founder of Transmeta. Mr. Laird has served as the
Senior Vice President of Product Development of Transmeta since February 2000.
Prior to that, he served as Vice President of Product Development from November
1998 to January 2000, and as Vice President of VLSI Engineering from October
1995 to November 1998. From 1992 to March 1995, Mr. Laird was employed at Sun
Microsystems, where he held a variety of positions, most recently as Manager of
Advanced Development. Before joining Sun,
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<PAGE> 50
Mr. Laird was employed by LSI Logic, where he held a variety of positions, most
recently as Manager of SPARC Development. He holds a B.S. in electrical
engineering from the Rochester Institute of Technology and an M.S. in computer
science from Santa Clara University.
Merle A. McClendon has served as Chief Financial Officer and Secretary of
Transmeta since March 2000. From January 1997 to March 2000, Ms. McClendon
served as Vice President of Finance and Chief Financial Officer of NeoMagic, a
supplier of multimedia accelerators for notebooks. From March 1993 to January
1997, Ms. McClendon served as Vice President and Corporate Controller of S3
Incorporated, a semiconductor company. From November 1980 to March 1993, Ms.
McClendon was employed by Deloitte & Touche, most recently as a Senior Manager.
Ms. McClendon is a Certified Public Accountant and holds a B.S. in business
administration from San Jose State University.
David P. Jensen has served as Vice President of Operations of Transmeta
since February 2000. From January 1999 to January 2000, Mr. Jensen served as
Director of Foundry Operations of NVIDIA, Inc. From 1983 to January 1999, Mr.
Jensen was employed at National Semiconductor Corp., where he held a variety of
positions, most recently as Senior Product Engineering Manager. Mr. Jensen holds
a B.S. in mechanical engineering and a B.S. in aeronautical engineering from
California Polytechnic State University.
Barry L. Rubinson has served as Vice President of Software of Transmeta
since August 2000. From August 1999 to July 2000, Mr. Rubinson was employed at
AltaVista, an Internet search services company, where he held a variety of
positions, most recently as Vice President of Engineering and then as Chief
Technology Officer of the AltaVista search division. From June 1998 to August
1999, Mr. Rubinson was employed at Compaq Computer Corporation, a computer
manufacturer, as Vice President of Engineering. From April 1974 until June 1998,
Mr. Rubinson was employed at Digital Equipment Corporation, a computer
manufacturer, where he held a variety of positions, most recently as Corporate
Consulting Engineer. Mr. Rubinson holds a B.S. in Management Science and an M.S.
in Computer Engineering from Case Western Reserve University.
John O. Horsley has served as General Counsel of Transmeta since July 2000.
From November 1997 to July 2000, Mr. Horsley served at the Federal Trade
Commission in appointed positions within the Bureau of Competition, most
recently as Chief Counsel for Intellectual Property and Technology Matters. From
October 1988 to October 1997, Mr. Horsley practiced law as an associate and
partner with Pillsbury Madison & Sutro, where he specialized in litigation and
strategic counseling in intellectual property, antitrust and securities law
matters. Mr. Horsley holds a B.A. in Philosophy and a B.A. in English from the
University of Utah, and a J.D. from the University of California at Berkeley.
Murray A. Goldman has served as Chairman of the Board of Directors of
Transmeta since November 1998. Dr. Goldman served as a business advisor to
Transmeta from March 1997 to November 1998. From July 1969 to January 1997, Dr.
Goldman was employed at Motorola, where he held a variety of positions, most
recently as Executive Vice President and Assistant General Manager of the
Semiconductor Products Sector. Dr. Goldman also serves on the boards of
directors of ZiLOG, Inc., a semiconductor company, and several privately held
companies. Dr. Goldman holds a B.S. in electrical engineering from the
University of Pittsburgh and an M.S. and a Ph.D. in electrical engineering from
New York University.
R. Hugh Barnes has served as a director of Transmeta since November 1998.
Mr. Barnes served as a business advisor to Transmeta from March 1997 to November
1998. From April 1984 to January 1997, Mr. Barnes was employed at Compaq
Computer, where he held a variety of positions, most recently as Vice President
and Chief Technical Officer. Mr. Barnes also serves on the boards of directors
of several privately held companies. Mr. Barnes holds a B.S. in electrical
engineering from Iowa State University.
Larry R. Carter has served as a director of Transmeta since October 2000.
Since January 1995, he has worked for Cisco Systems, a computer networking
products company. He has served as Senior Vice President, Finance and
Administration, Chief Financial Officer and Secretary of Cisco Systems since
July 1997. From January 1995 to July 1997, he served as Vice President, Finance
and Administration, Chief Financial Officer and Secretary of Cisco Systems. In
July 2000, he was appointed to the board of directors of Cisco Systems. From
July 1992 to January 1995, he served as Vice President and Corporate Controller
of Advanced Micro
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<PAGE> 51
Devices. Prior to that, he was with VLSI Technology for four years where he held
the position of Vice President, Finance and Chief Financial Officer. Mr. Carter
also serves on the boards of directors of eSpeed, a provider of
business-to-business electronic marketplace solutions, Network Appliance, a high
performance network attached storage and access devices company, and QLogic, a
provider of storage area network infrastructure components. Mr. Carter holds a
B.S. in Business Administration and Accounting from Arizona State University.
Paul M. McNulty has served as a director of Transmeta since July 1999.
Since September 1999, Mr. McNulty has served as President and Managing Member of
Five Points Capital, Inc., a hedge fund. From January 1996 to August 1999, Mr.
McNulty served as Managing Director at Soros Fund Management. From January 1993
to December 1995, Mr. McNulty served as the sector analyst responsible for
technology stocks at Soros Fund Management. Mr. McNulty also serves on the
boards of directors of several privately held companies. Mr. McNulty holds an
A.B. in Fine Arts from Harvard College and an M.B.A. from Stanford University.
William P. Tai has served as a director of Transmeta since December 1995.
Since July 1997, Mr. Tai has served as a general partner and managing director
of Institutional Venture Partners, a venture capital firm. From August 1995 to
February 1998, he served as founding Chief Executive Officer of iAsiaWorks,
Inc., a provider of co-location and hosting services in Asia. He also served as
Chairman of the Board of iAsiaWorks from August 1995 to August 1999. From August
1991 to July 1997, Mr. Tai was affiliated with Walden Group of Venture Capital
Funds, a venture capital firm. Mr. Tai also serves on the boards of directors of
iAsia Works, Microtune, a provider of broadband wireless components, Netergy
Networks, a provider of IP telephony solutions, and imGO Limited, a Hong Kong
listed company which focuses on investments in the wireless sector, as well as
several privately held companies. Mr. Tai holds a B.S. in electrical engineering
from the University of Illinois and an M.B.A. from the Harvard Graduate School
of Business.
T. Peter Thomas has served as a director of Transmeta since December 1995.
Since November 1985, Mr. Thomas has served as a general partner of Institutional
Venture Partners. Mr. Thomas serves on the boards of directors of Atmel Corp.
and Telcom Semiconductor, as well as several privately held companies. Mr.
Thomas holds a B.S. in electrical engineering from Utah State University and an
M.S. in computer science from Santa Clara University.
Each executive officer serves at the discretion of our board of directors.
Each of our executive officers and directors, other than nonemployee directors,
devotes his or her full time to our affairs. Our nonemployee directors devote
the amount of time necessary to discharge their duties to us. There are no
family relationships among any of our directors or executive officers.
BOARD OF DIRECTORS
Our bylaws currently provide for a board of directors consisting of eight
persons. All directors hold office until the next annual meeting of stockholders
and until their successors have been duly elected and qualified. All of our
current directors except Mr. Carter were elected pursuant to a voting agreement
that we entered into with some of our principal stockholders. The holders of our
Series B preferred stock and Series C preferred stock, voting together,
designated Messrs. Tai and Thomas for election to our board. Quantum Industrial
Partners LDC, one of the holders of our Series F preferred stock, designated Mr.
McNulty for election to our board. Upon the closing of this offering, these
board representation rights will terminate and no stockholders will have any
special rights with respect to board representation.
Our board will be divided into three classes, serving staggered three-year
terms: Class I, whose term will expire at the first annual meeting of
stockholders following this offering; Class II, whose term will expire at the
second annual meeting of stockholders following this offering; and Class III,
whose term will expire at the third annual meeting of stockholders following
this offering. As a result, only one class of directors will be elected at each
annual meeting of stockholders, with the other classes continuing for the
remainder of their respective terms. Messrs. Barnes and McNulty have been
designated as Class I directors; Messrs. Ditzel, Goldman and Thomas have been
designated as Class II directors; and Messrs. Allen, Carter and Tai have been
designated as Class III directors.
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<PAGE> 52
BOARD COMMITTEES
The audit committee consists of Messrs. McNulty, Tai and Thomas. The audit
committee:
- reviews our financial statements and accounting practices;
- reviews and recommends to our board the selection of independent
auditors; and
- reviews the results and scope of the audit and other services provided by
our independent auditors.
The compensation committee consists of Messrs. Barnes and Thomas. The
compensation committee:
- reviews and recommends to our board the compensation and benefits of all
of our officers and directors; and
- reviews general policy relating to compensation and benefits.
Our board currently administers the issuance of stock options and other
awards under our 1997 Equity Incentive Plan. Our board has delegated to Mr.
Ditzel the non-exclusive authority to grant options under our 1997 Equity
Incentive Plan, subject to certain restrictions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our compensation committee has at any time been an
officer or employee of Transmeta. None of our executive officers serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board or
compensation committee.
DIRECTOR COMPENSATION
Mr. Goldman, the chairman of our board of directors, is paid an annual base
salary of $150,000. Other than Mr. Goldman, our directors are not compensated
for their services as directors other than reimbursement for travel expenses
related to board meeting attendance and the grant of stock options. Directors
have been eligible to participate in our 1997 Equity Incentive Plan.
In December 1997, we granted Mr. Tai a nonqualified option to purchase
120,000 shares of our common stock at a price of $.13 per share. In July 1998,
Mr. Tai exercised this option. Mr. Tai's shares are fully vested. In July 1997,
June 1998, November 1998 and March 1999, we granted Mr. Goldman nonqualified
options to purchase 80,000, 80,000, 300,000 and 500,000 shares of our common
stock at prices of $.13, $.50, $.65 and $.65 per share. In December 1998, March
1999 and February 2000, Mr. Goldman exercised these options. The shares received
upon exercise vest over periods of either three years and nine months or four
years. As of September 30, 2000, 407,506 of the shares issued to Mr. Goldman
were unvested and subject to repurchase by us upon termination of Mr. Goldman's
service to us. In July 1997, we granted Mr. Barnes a nonqualified option to
purchase 80,000 shares of our common stock at a price of $.13 per share, and in
November 1998 we granted Mr. Barnes a nonqualified option to purchase 120,000
shares of our common stock at a price of $.65 per share. In December 1998 and
June 1999, Mr. Barnes exercised these options. The shares received upon exercise
vest over periods of either three years and nine months or four years. As of
September 30, 2000, 75,002 of the shares issued to Mr. Barnes were unvested and
subject to repurchase by us upon termination of Mr. Barnes's service to us. In
October 2000, we granted Mr. Carter a nonqualified option to purchase 60,000
shares of our common stock and Messrs. McNulty and Thomas each a nonqualified
option to purchase 30,000 shares of our common stock, at a price of $9.50 per
share. The options become exercisable and the shares vest as to 33 1/3% of the
shares after one year from the grant date and 2.77778% of the shares each month
after that. In the event of our dissolution or liquidation or a change in
control transaction, the options granted to Messrs. Carter, McNulty and Thomas
will become 100% vested and exercisable in full. The exercise price of each
option granted to Messrs. Tai, Goldman, Barnes, Carter, McNulty and Thomas was
equal to the fair market value of our common stock as determined by our board at
the time of grant.
Each director will be eligible to participate in our 2000 Equity Incentive
Plan. Under this plan, option grants to directors who are not our employees, or
employees of a parent or subsidiary of ours, will be automatic
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<PAGE> 53
and non-discretionary. Each non-employee director who is a member of our board
of directors before the date of this offering and who has not received a prior
option grant will receive an option to purchase 30,000 shares of our common
stock effective upon this offering. Each non-employee director who becomes a
member of our board of directors on or after the date of this offering will be
granted an option to purchase 30,000 shares of our common stock as of the date
that director joins the board. Immediately after each annual meeting of our
stockholders, each non-employee director will automatically be granted an
additional option to purchase 15,000 shares of our common stock, as long as the
non-employee director is a member of our board on that date and has served
continuously as a member of our board for at least twelve months since the last
option grant to that non-employee director. If less than twelve months has
passed, then the number of shares subject to the option granted after the annual
meeting will be equal to 15,000 multiplied by a fraction, the numerator of which
is the number of days that have elapsed since the last option grant to that
director and the denominator of which is 365 days.
Each option will have an exercise price equal to the fair market value of
our common stock on the date of grant. The options will have ten-year terms and
will terminate three months after the date the director ceases to be a director
or consultant or twelve months if the termination is due to death or disability.
All options granted to non-employee directors will vest over a three-year period
at a rate of one-third of the total shares granted on the first anniversary of
the date of grant, and 2.77778% of the total shares granted at the end of each
full succeeding month, so long as the non-employee director continuously remains
our director or consultant. In the event of our dissolution or liquidation or a
change in control transaction, options granted to our non-employee directors
under the plan will become 100% vested and exercisable in full.
EXECUTIVE COMPENSATION
The following table presents information about the compensation awarded to,
earned by or paid to our chief executive officer and each of our other executive
officers at December 31, 1999 whose salary and bonus for 1999 equaled or
exceeded $100,000.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ----------------------
------------------- SHARES OF COMMON STOCK
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS
--------------------------- -------- -------- ----------------------
<S> <C> <C> <C>
David R. Ditzel
Chief Executive Officer............................ $170,615 $110,554 500,000
James N. Chapman
Senior Vice President of Sales and Marketing....... 155,907 73,889 500,000
Douglas A. Laird
Senior Vice President of Product Development....... 154,364 74,564 500,000
Daniel E. Steimle(1)
Former Chief Financial Officer..................... 155,349 76,589 500,000
</TABLE>
------------
(1) Mr. Steimle's employment with us terminated as of March 15, 2000.
Mark K. Allen, our President and Chief Operating Officer, was hired in
January 2000 at an annual base salary of $233,000. Merle A. McClendon, our Chief
Financial Officer and Secretary, was hired in March 2000 at an annual base
salary of $210,000. David P. Jensen, our Vice President of Operations, was hired
in February 2000 at an annual base salary of $170,000. John O. Horsley, our
General Counsel, was hired in July 2000 at an annual base salary of $155,000.
Barry L. Rubinson, our Vice President of Software, was hired in August 2000 at
an annual base salary of $200,000. Each of these officers was granted an option
as described below.
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<PAGE> 54
OPTION GRANTS IN 1999
The following table presents information about grants of stock options
during 1999 to the executive officers listed in the above summary compensation
table.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION -------------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
---- ---------- ------------ -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
David R. Ditzel........ 500,000 6.2% $.65 3/18/2009 $13,521,000 $21,722,000
James N. Chapman....... 500,000 6.2 .65 3/18/2009 13,521,000 21,722,000
Douglas A. Laird....... 500,000 6.2 .65 3/18/2009 13,521,000 21,722,000
Daniel E. Steimle...... 500,000 6.2 .65 3/18/2009 13,521,000 21,722,000
</TABLE>
In 1999, we granted to our employees options to purchase a total of
8,067,000 shares of common stock.
Potential realizable values are calculated by:
- multiplying the number of shares of common stock subject to a given
option by $17.00, which is the assumed initial public offering price;
- assuming that the amount derived from that calculation compounds at the
annual 5% or 10% rates shown in the table for the entire ten-year term of
the option; and
- subtracting from that result the total option exercise price.
The 5% and 10% assumed annual rates of stock price appreciation are required by
the rules of the Securities and Exchange Commission and do not reflect our
estimate or projection of future stock price growth.
The options granted to Messrs. Ditzel, Chapman and Laird in 1999 were
immediately exercisable nonqualified stock options and were exercised before
December 31, 1999. We retain the right to repurchase at cost any shares that
remain unvested at the time the officer ceases to be employed by us. Our right
of repurchase lapses with respect to 20% of the shares after one year from the
grant date, 2% of the shares each month during the second year and 2.333% of the
shares each month during the third and fourth years. The option granted to Mr.
Steimle in 1999 was an immediately exercisable nonqualified stock option and was
exercised before December 31, 1999. The shares issued upon exercise of this
option were subject to our right of repurchase, which lapsed with respect to 25%
of the shares after one year from the grant date and 2.083% of the shares each
month after that.
In addition, during 2000, we have granted options to purchase shares of
common stock to the following executive officers: In January 2000, we granted
Mark K. Allen an option to purchase 2,000,000 shares at a price of $3.00 per
share. In March 2000, we granted David P. Jensen an option to purchase 550,000
shares at a price of $3.63 per share. In July 2000, we granted Merle A.
McClendon an option to purchase 1,100,000 shares at a price of $6.00 per share
and we granted John O. Horsley an option to purchase 120,000 shares at a price
of $6.00 per share. In August 2000, we granted Barry L. Rubinson an option to
purchase 600,000 shares at a price of $6.00 per share. In September 2000, we
granted Mr. Horsley an option to purchase 80,000 shares at a price of $8.25 per
share. All of these options, except Mr. Horsley's options, are immediately
exercisable nonqualified stock options. Shares issued upon exercise of an
immediately exercisable option are subject to our right of repurchase, which
lapses as the shares vest. Mr. Horsley's options become exercisable as the
shares vest. Under all of these options, the shares vest as to 25% of the shares
after one year from the grant date and 2.083% of the shares each month after
that. Mr. Allen's option is also subject to accelerated vesting upon a change in
control of our company.
The options discussed in this section expire ten years from the date of
grant. They were granted at an exercise price equal to the fair market value of
our common stock as determined by our board on the date of grant.
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<PAGE> 55
AGGREGATED OPTION EXERCISES IN 1999
The following table presents the number of shares acquired and the value
realized upon exercise of stock options during 1999 by the executive officers
listed in the above summary compensation table. None of these executive officers
holds any unexercised options.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME ACQUIRED ON EXERCISE VALUE REALIZED
---- -------------------- --------------
<S> <C> <C>
David R. Ditzel........................................... 500,000 $ --
James N. Chapman.......................................... 500,000 --
Douglas A. Laird.......................................... 500,000 --
Daniel E. Steimle(1)...................................... 500,000 --
</TABLE>
------------
(1) Of the 500,000 shares Mr. Steimle purchased in 1999, 340,000 were
repurchased by us on March 15, 2000 when Mr. Steimle's employment with us
terminated.
In January 2000, Mark K. Allen exercised his option to purchase 2,000,000
shares of common stock. In March 2000, David P. Jensen exercised his option to
purchase 550,000 shares of common stock. In August 2000, Merle A. McClendon
exercised her option to purchase 1,100,000 shares of common stock. All of the
shares issued to Mr. Allen, Mr. Jensen and Ms. McClendon upon exercise of their
stock options are subject to repurchase by us upon termination of their
employment. This repurchase right lapses over four years after the date of the
option grant.
CHANGE IN CONTROL ARRANGEMENT
Mr. Allen, our President and Chief Operating Officer, has purchased shares
of common stock under an agreement that provides for accelerated vesting under
specified circumstances following a change in control of Transmeta. Upon a
change in control transaction followed within twelve months by a non-justified
termination of Mr. Allen's employment or his resignation for good reason,
vesting will accelerate as to 50% of any unvested portion of the 2,000,000
shares of common stock that he holds. Mr. Allen may be terminated with
justification if he commits any willful act of material fraud or dishonesty or
gross misconduct against Transmeta or its subsidiaries or is indicted or
convicted for certain felonies, or in the event of his death or disability. Mr.
Allen may resign with good reason if, after a change of control, his salary is
reduced, his workplace is relocated more than 50 miles from his original
workplace or his responsibilities are substantially changed.
SEVERANCE AGREEMENT
In March 2000, we entered into a severance agreement with Daniel E.
Steimle, our former Chief Financial Officer. Mr. Steimle's employment with us
terminated as of March 15, 2000. Under this agreement, we paid Mr. Steimle a
severance payment of $110,000 and repurchased 637,920 shares of common stock
from him for a price of $.65 per share. Mr. Steimle's remaining 140,206 unvested
shares continued to vest until September 23, 2000, when they became vested in
full. The agreement also provides for the extension until December 31, 2001 of
the maturity date of two secured full recourse promissory notes with unpaid
principal amounts of $163,852 and $104,000, together with interest compounded
semi-annually on the unpaid principal at rates of 4.47% and 4.77%, which were
issued by Mr. Steimle to exercise his options.
EMPLOYEE BENEFIT PLANS AND OPTION GRANTS
1995 EQUITY INCENTIVE PLAN AND 1997 EQUITY INCENTIVE PLAN
As of September 30, 2000, options to purchase 755,512 shares of our common
stock were outstanding under our 1995 Equity Incentive Plan and no shares were
available for future option grants. These options had a weighted average
exercise price of $.04 per share. As of September 30, 2000, options to purchase
13,119,630 shares of our common stock were outstanding under our 1997 Equity
Incentive Plan and 1,007,414 shares of our common stock remained available for
future option grants. The options outstanding under the 1997 Equity Incentive
Plan as of September 30, 2000 had a weighted average exercise price of $3.74 per
share. In addition, in May 1998, we issued a total of 68,000 shares of common
stock to 34 employees under our 1997 Equity
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<PAGE> 56
Incentive Plan. Our 2000 Equity Incentive Plan will become effective on the date
of this prospectus. No options will be granted under our 1997 Equity Incentive
Plan after this offering. However, any outstanding options under our 1995 Equity
Incentive Plan or 1997 Equity Incentive Plan will remain outstanding and subject
to our 1995 Equity Incentive Plan or 1997 Equity Incentive Plan, as applicable,
and related stock option agreements until they are exercised or until they
terminate or expire by their terms. Options granted under our 1995 Equity
Incentive Plan or 1997 Equity Incentive Plan are subject to terms substantially
similar to those described below with respect to options granted under our 2000
Equity Incentive Plan.
NON-PLAN GRANTS
From November 1, 1998 through September 30, 2000, we granted options to
purchase a total of 9,020,000 shares of our common stock, with a weighted
average exercise price of $2.11 per share, to a number of our employees,
including officers and directors, outside of any option plan. As of September
30, 2000, options to purchase a total of 7,120,000 shares had been exercised,
and options to purchase a total of 900,000 shares were outstanding.
2000 EQUITY INCENTIVE PLAN
In September 2000, our board adopted and our stockholders approved our 2000
Equity Incentive Plan. The 2000 Equity Incentive Plan will become effective on
the date of this prospectus and will serve as the successor to our 1997 Equity
Incentive Plan. The 2000 Equity Incentive Plan authorizes the award of options,
restricted stock and stock bonuses.
The 2000 Equity Incentive Plan will be administered by the compensation
committee of our board, each member of which is an outside director as defined
under applicable federal tax laws. The compensation committee will have the
authority to interpret this plan and any agreement entered into under the plan,
grant awards and make all other determinations for the administration of the
plan.
Our 2000 Equity Incentive Plan provides for the grant of both incentive
stock options that qualify under Section 422 of the Internal Revenue Code and
nonqualified stock options. The incentive stock options may be granted only to
our employees or employees of any of our subsidiaries. The nonqualified stock
options, and all awards other than incentive stock options, may be granted to
our employees, officers, directors, consultants, independent contractors and
advisors and those of any of our subsidiaries. However, consultants, independent
contractors and advisors are only eligible to receive awards if they render bona
fide services not in connection with the offer and sale of securities in a
capital-raising transaction. The exercise price of incentive stock options must
be at least equal to the fair market value of our common stock on the date of
grant. The exercise price of incentive stock options granted to 10% stockholders
must be at least equal to 110% of the fair market value of our common stock on
the date of grant.
The maximum term of the options granted under our 2000 Equity Incentive
Plan is ten years. The awards granted under this plan may not be transferred in
any manner other than by will or by the laws of descent and distribution and may
be exercised during the lifetime of the optionee only by the optionee. The
compensation committee may allow exceptions to this restriction for awards that
are not incentive stock options. Options granted under our 2000 Equity Incentive
Plan generally expire three months after the termination of the optionee's
service to us or to a parent or subsidiary of ours, or twelve months if the
termination is due to death or disability. In the event of a liquidation,
dissolution or change in control transaction, except for options granted to
non-employee directors, the options may be assumed or substituted by the
successor company. Except for options granted to non-employee directors, options
that are not assumed or substituted will expire on the transaction at the time
and on the conditions as the compensation committee will determine.
We have reserved 7,000,000 shares of our common stock for issuance under
the 2000 Equity Incentive Plan. The number of shares reserved for issuance under
this plan will be increased by:
- the number of shares of our common stock reserved under our 1997 Equity
Incentive Plan that are not issued or subject to outstanding grants on
the date of this prospectus;
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<PAGE> 57
- the number of shares of our common stock issued under our 1995 Equity
Incentive Plan and our 1997 Equity Incentive Plan that we repurchase at
the original purchase price; and
- the number of shares of our common stock issuable upon exercise of
options granted under our 1995 Equity Incentive Plan and our 1997 Equity
Incentive Plan that expire or become unexercisable at any time after this
offering without having been exercised in full.
In addition, under the terms of the 2000 Equity Incentive Plan, the number
of shares of our common stock reserved for issuance under the plan will increase
automatically on January 1 of each year starting in 2001 by an amount equal to
5% of our total outstanding shares as of the immediately preceding December 31.
Shares available for grant and issuance under our 2000 Equity Incentive
Plan include:
- shares of our common stock issuable upon exercise of an option granted
under this plan that is terminated or cancelled before the option is
exercised;
- shares of our common stock issued upon exercise of any option granted
under this plan that we repurchase at the original purchase price;
- shares of our common stock subject to awards granted under this plan that
are forfeited or that we repurchase at the original issue price; and
- shares of our common stock subject to stock bonuses granted under this
plan that otherwise terminate without shares being issued.
During any calendar year, no person will be eligible to receive more than
4,000,000 shares, or 6,000,000 shares in the case of a new employee, under the
2000 Equity Incentive Plan. The 2000 Equity Incentive Plan will terminate in
September 2010, unless it is terminated earlier by our board.
2000 EMPLOYEE STOCK PURCHASE PLAN
In September 2000, our board adopted and our stockholders approved our 2000
Employee Stock Purchase Plan. The 2000 Employee Stock Purchase Plan will become
effective on the first day on which price quotations are available for our
common stock on the Nasdaq National Market. The employee stock purchase plan is
designed to enable eligible employees to purchase shares of our common stock at
a discount on a periodic basis.
Our compensation committee will administer the 2000 Employee Stock Purchase
Plan. Our employees generally will be eligible to participate in this plan if
they are employed by us, or a subsidiary of ours that we designate, for more
than 20 hours per week and more than five months in a calendar year. Our
employees are not eligible to participate in our 2000 Employee Stock Purchase
Plan if they are 5% stockholders or would become 5% stockholders as a result of
their participation in the plan. Under the 2000 Employee Stock Purchase Plan,
eligible employees may acquire shares of our common stock through payroll
deductions, or through a single lump sum cash payment in the case of the first
offering period. Our eligible employees may select a rate of payroll deduction
between 1% and 15% of their cash compensation. For the first offering period,
employees will automatically be granted an option based on 15% of their cash
compensation during the first purchase period. An employee's participation in
this plan will end automatically upon termination of employment for any reason.
No participant will be able to purchase shares having a fair market value
of more than $25,000, determined as of the first day of the applicable offering
period, for each calendar year in which the employee participates in the 2000
Employee Stock Purchase Plan. Except for the first offering period, each
offering period will be for two years and will consist of four six-month
purchase periods. The first offering period is expected to begin on the first
day on which price quotations are available for our common stock on the Nasdaq
National Market. The first purchase period may be more or less than six months
long. After that, the offering periods will begin on February 1 and August 1.
The purchase price for shares of our common stock purchased under the 2000
Employee Stock Purchase Plan will be 85% of the lesser of the fair market value
of our common stock on the first day of the applicable offering period or the
last day of each purchase period. Our compensation committee will have the power
to change the starting date of any later offering period, the
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<PAGE> 58
purchase date of a purchase period and the duration of any offering period or
purchase period without stockholder approval if this change is announced before
the relevant offering period or purchase period. Our 2000 Employee Stock
Purchase Plan is intended to qualify as an employee stock purchase plan under
Section 423 of the Internal Revenue Code.
We have reserved 2,000,000 shares of our common stock for issuance under
the 2000 Employee Stock Purchase Plan. The number of shares reserved for
issuance under the plan will increase automatically on January 1 of each year,
starting in 2001, by an amount equal to 1% of our total outstanding shares as of
the immediately preceding December 31. Our board or compensation committee may
reduce the amount of the increase in any particular year. The 2000 Employee
Stock Purchase Plan will terminate in September 2010, unless it is terminated
earlier by our board.
401(k) PLAN
We sponsor a defined contribution plan intended to qualify under Section
401 of the Internal Revenue Code, or a 401(k) Plan. Employees who are at least
21 years old are generally eligible to participate and may enter the 401(k) Plan
as of the first day of any month. Participants may make pre-tax contributions to
the plan of up to 15% of their eligible earnings, subject to a statutorily
prescribed annual limit. Each participant is fully vested in his or her
contributions and the investment earnings. We may make matching contributions on
a discretionary basis to the 401(k) Plan but had not done so as of September 30,
2000. Contributions by the participants or us to the plan, and the income earned
on these contributions, are generally not taxable to the participants until
withdrawn. Contributions by us, if any, would generally be deductible by us when
made. Contributions are held in trust as required by law. Individual
participants may direct the trustee to invest their accounts in authorized
investment alternatives.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATION ON LIABILITY
Our certificate of incorporation includes a provision that eliminates the
personal liability of a director for monetary damages resulting from breach of
his or her fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to Transmeta or its
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful stock repurchases,
redemptions or other distributions; or
- for any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that:
- we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law, subject to
limited exceptions where indemnification is not permitted by applicable
law;
- we are required to advance expenses, as incurred, to our directors and
officers in connection with a legal proceeding to the fullest extent
permitted by the Delaware General Corporation Law, subject to limited
exceptions; and
- the rights conferred in the bylaws are not exclusive.
In addition to the indemnification required in our certificate of
incorporation and bylaws, we have entered into indemnification agreements with
each of our current directors and officers. These agreements will provide for
the indemnification of our officers and directors for all expenses and
liabilities incurred in connection with any action or proceeding brought against
them by reason of the fact that they are or were agents of Transmeta. We have
obtained directors' and officers' insurance to cover our directors, officers and
some of our employees for liabilities, including liabilities under securities
laws. We believe that these indemnification provisions and agreements and this
insurance are necessary to attract and retain qualified directors and officers.
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<PAGE> 59
The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. They
may also reduce the likelihood of derivative litigation against directors and
officers, even though an action, if successful, might benefit us and other
stockholders. Furthermore, a stockholder's investment may be adversely affected
to the extent we pay the costs of settlement and damage awards against directors
and officers as required by these indemnification provisions. At present, there
is no pending litigation or proceeding involving any of our directors, officers
or employees for which indemnification is sought, nor are we aware of any
threatened litigation that may result in claims for indemnification.
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RELATED PARTY TRANSACTIONS
Since January 1, 1997, we have not been a party to, and we have no plans to
be a party to, any transaction or series of similar transactions in which the
amount involved exceeded or will exceed $60,000 and in which any current
director, executive officer or holder of more than 5% of our common stock had or
will have an interest, other than as described where required under "Management"
and the transactions described below.
STOCK PURCHASES
The following table summarizes purchases of our common stock since January
1, 1997 by our executive officers, directors and holders of more than 5% of our
common stock.
<TABLE>
<CAPTION>
NUMBER OF TOTAL PURCHASE DATE OF
PURCHASER SHARES PRICE PURCHASE
--------- --------- -------------- --------
<S> <C> <C> <C>
David R. Ditzel........................................ 500,000 $ 325,000 3/24/99
Mark K. Allen.......................................... 2,000,000 6,000,000 1/17/00
Merle A. McClendon..................................... 1,100,000 6,600,000 8/03/00
James N. Chapman....................................... 800,000 100,000 12/09/97
500,000 325,000 3/24/99
Douglas A. Laird....................................... 500,000 325,000 3/24/99
David P. Jensen........................................ 550,000 1,993,750 3/06/00
Murray A. Goldman...................................... 200,000 130,000 12/18/98
100,000 65,000 12/18/98
500,000 325,000 3/24/99
80,000 40,000 2/18/00
80,000 10,000 2/18/00
R. Hugh Barnes......................................... 120,000 78,000 12/18/98
80,000 10,000 6/15/99
William P. Tai......................................... 120,000 15,000 7/30/98
</TABLE>
The following table summarizes purchases of our preferred stock since
January 1, 1997 by our directors and holders of more than 5% of our common
stock. Upon completion of this offering, each share of Series D preferred stock
will automatically convert into four shares of common stock and each share of
Series E, Series F and Series G preferred stock will automatically convert into
two shares of common stock.
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK
--------------------------------------------------
PURCHASER SERIES D SERIES E SERIES F SERIES G
--------- ------------ ----------- ---------- --------
<S> <C> <C> <C> <C>
William P. Tai(1).............................. 60,000 -- -- 19,200
Entities affiliated with Five Points
Capital(2)................................... -- -- -- 120,000
Entities affiliated with Institutional Venture
Partners(3).................................. 809,818 1,666,666 -- --
Entities affiliated with Walden................ 758,736 -- 40,000
Vulcan Ventures Incorporated................... 3,036,000 233,333 525,000 160,000
Date(s) of Purchase............................ 4/97 - 11/97 6/98 - 7/98 7/99 4/00
Price per share................................ $2.50 $6.00 $10.00 $12.50
</TABLE>
------------
(1) Represents shares held of record by WT Technology, which Mr. Tai, one of our
directors, and his family members may be deemed to beneficially own.
(2) Mr. McNulty, a director of Transmeta, is the president of Five Points
Capital.
(3) Messrs. Tai and Thomas, directors of Transmeta, are general partners of
Institutional Venture Partners.
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REGISTRATION RIGHTS
We have entered into an investors' rights agreement with each of the
purchasers of preferred stock. Under this agreement, these and other
stockholders are entitled to registration rights with respect to their shares of
common stock issuable upon conversion of their preferred stock. Following this
offering, holders of 73,174,342 shares of common stock issuable upon conversion
of our preferred stock, the holder of a convertible promissory note to purchase
1,200,000 shares of our common stock, the holder of 80,000 shares of common
stock issued upon exercise of a warrant and holders of warrants to purchase
1,140,784 shares of our common stock will be entitled to registration rights for
their shares of common stock. See "Description of Capital Stock -- Registration
Rights."
LOANS TO EXECUTIVE OFFICERS AND DIRECTORS
In connection with the option exercises described under
"Management -- Director Compensation" and "Management -- Executive
Compensation," the following executive officers and directors delivered full
recourse promissory notes, each with a five-year term, bearing interest
semi-annually on the principal amounts as indicated in the table below.
<TABLE>
<CAPTION>
PRINCIPAL INTEREST LOAN
BORROWER AMOUNT RATE DATE
-------- ---------- -------- --------
<S> <C> <C> <C>
David R. Ditzel............................................. $ 325,000 4.77% 3/24/99
Mark K. Allen............................................... 6,000,000 6.12 1/17/00
Merle A. McClendon.......................................... 6,600,000 6.23 8/03/00
James N. Chapman............................................ 100,000 5.93 12/09/97
325,000 4.77 3/24/99
Douglas A. Laird............................................ 325,000 4.77 3/24/99
David P. Jensen............................................. 1,993,750 6.69 3/06/00
Murray A. Goldman........................................... 130,000 4.47 12/18/98
65,000 4.47 12/18/98
325,000 4.77 3/24/99
24,167 6.46 2/18/00
2,709 6.46 2/18/00
R. Hugh Barnes.............................................. 78,000 4.47 12/18/98
10,000 5.30 6/15/99
</TABLE>
In addition, on May 17, 2000, we loaned $750,000 to each of David R. Ditzel
and Douglas A. Laird. Mr. Ditzel and Mr. Laird each delivered a promissory note
secured by shares of common stock held by them. Each note has a five-year term
and bears interest annually at 6.4% on the principal amount.
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<PAGE> 62
PRINCIPAL STOCKHOLDERS
The following table presents information about the beneficial ownership of
our common stock as of September 30, 2000, and as adjusted to reflect the sale
of the shares in this offering, for:
- each person or entity known by us to own beneficially more than 5% of our
common stock;
- each of the executive officers named in the summary compensation table
above;
- each of our directors; and
- all executive officers and directors as a group.
The percentage of beneficial ownership for the following table is based on
114,752,858 shares of common stock outstanding as of September 30, 2000,
assuming the conversion of all outstanding shares of our preferred stock into
73,174,342 shares of our common stock and the conversion of a convertible
promissory note into 1,200,000 shares of common stock, which will occur upon the
closing of this offering. The percentage of beneficial ownership after the
offering is based on 13,000,000 shares of our common stock issued in connection
with this offering, assuming no exercise of the underwriters' over-allotment
option.
To our knowledge, except under community property laws or as otherwise
noted, the persons named in the table have sole voting and sole investment power
with respect to all shares beneficially owned. Unless otherwise indicated, each
5% stockholder listed below maintains a mailing address of c/o Transmeta
Corporation, 3940 Freedom Circle, Santa Clara, California 95054.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and does not necessarily indicate beneficial
ownership for any other purpose. Under these rules, beneficial ownership
includes those shares of common stock over which the stockholder has sole or
shared voting or investment power. It also includes shares of common stock that
the stockholder has a right to acquire within 60 days after September 30, 2000
through the exercise of any option, warrant or other right. The percentage
ownership of the outstanding common stock, however, is based on the assumption,
expressly required by the rules of the Securities and Exchange Commission, that
only the person or entity whose ownership is being reported has converted
options or warrants into shares of our common stock.
<TABLE>
<CAPTION>
PERCENTAGE
SHARES SUBJECT TO BENEFICIALLY OWNED
NUMBER OF SHARES A RIGHT OF -------------------
OF COMMON STOCK REPURCHASE AS BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OF SEPTEMBER 30, 2000 OFFERING OFFERING
------------------------ ------------------ --------------------- -------- --------
<S> <C> <C> <C> <C>
T. Peter Thomas(1)............................ 14,577,696 -- 12.7% 11.4%
Entities affiliated with Institutional
Venture Partners
William P. Tai(2)............................. 10,163,158 -- 8.9 8.0
Entities affiliated with Walden(3)............ 9,618,076 -- 8.4 7.5
Paul G. Allen(4).............................. 7,908,666 -- 6.9 6.2
Vulcan Ventures Incorporated
David R. Ditzel............................... 4,420,000 340,000 3.9 3.5
Douglas A. Laird(5)........................... 2,736,944 340,000 2.4 2.1
James N. Chapman(6)........................... 1,300,000 540,000 1.1 1.0
Murray A. Goldman(7).......................... 960,000 407,506 * *
Daniel E. Steimle............................. 412,080 -- * *
Paul M. McNulty(8)............................ 240,000 -- * *
Entities affiliated with Five Points
Capital, Inc.
R. Hugh Barnes................................ 200,000 75,002 * *
All executive officers and directors as a
group (13 persons)(9)....................... 35,547,800 5,352,508 31.0 27.9
</TABLE>
------------
* Less than 1%.
(1) Includes 224,888 shares held by Institutional Venture Management VI, L.P.,
10,569,704 shares held by Institutional Venture Partners VI, L.P. and
483,106 shares held by IVP Founders Fund I, L.P. Each of T. Peter Thomas,
Samuel D. Colella, Reid W. Dennis, Mary Jane Elmore, Norman A. Fogelsong,
Ruthann Quindlen, L. James Strand
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<PAGE> 63
and Geoffrey Y. Yang is a general partner of Institutional Venture
Management VI, L.P., which is a general partner of each of Institutional
Venture Partners VI, L.P. and IVP Founders Fund I, L.P. Also includes 26,666
shares held by Institutional Venture Management VII, L.P. and 1,293,332
shares held by Institutional Venture Partners VII, L.P. Each of T. Peter
Thomas, William P. Tai, Samuel D. Colella, Reid W. Dennis, Mary Jane Elmore,
Norman A. Fogelsong, Ruthann Quindlen, L. James Strand and Geoffrey Y. Yang
is a general partner of Institutional Venture Management VII, L.P., which is
a general partner of Institutional Venture Partners VII, L.P. Also includes
1,950,000 shares held by Institutional Venture Partners VIII, L.P., 21,000
shares held by IVM Investment Fund VIII, LLC and 9,000 shares held by IVM
Investment Fund VIII-A, LLC. Each of T. Peter Thomas, William P. Tai, Samuel
D. Colella, Reid W. Dennis, Ruthann Quindlen, L. James Strand, Geoffrey Y.
Yang, R. Thomas Dyal, Timothy M. Haley and Rebecca B. Robertson is a
managing director of the general partner of each of Institutional Venture
Partners VIII, L.P., and a managing director of the manager of IVM
Investment Fund VIII, LLC and IVM Investment Fund VIII-A, LLC. Each of these
general partners disclaims beneficial ownership of the shares held by these
funds except to the extent of his or her pecuniary interest in these shares.
The address of Institutional Venture Partners is 3000 Sand Hill Road,
Building Two, Suite 290, Menlo Park, California 94025.
(2) Represents 120,000 shares held by Mr. Tai and 158,400 shares held by WT
Technology, which Mr. Tai controls, and he and his family members may be
deemed to own beneficially. Also includes 3,299,998 shares held by entities
affiliated with Institutional Venture Partners, as to which Mr. Tai shares
voting and dispositive power, and 6,584,760 shares held by entities
affiliated with Walden. The address of WT Technology is c/o Institutional
Venture Partners, 3000 Sand Hill Road, Building Two, Suite 290, Menlo Park,
California 94025.
(3) Represents 1,599,792 shares held by Walden-SBIC, L.P., 1,459,276 shares held
by Walden Investors, 1,122,472 shares held by International Venture Capital
Investment Corporation; 1,096,448 shares held by Walden International III,
C.V.; 1,006,560 shares held by OCBC, Wearnes & Walden Investments
(Singapore) Ltd.; 730,276 shares held by Walden Ventures; 685,736 shares
held by O,W&W Pacrim Investments Ltd.; 641,648 shares held by BI Walden
Ventures Kedua Sdn. Bhd.; 388,312 shares held by Seed Ventures II Limited;
375,452 shares held by Walden Capital Partners, L.P.; 227,604 shares held by
Walden Technology Ventures II, L.P.; 204,500 shares held by O,W&W
Investments Limited; and 80,000 shares held by WIIG Japan Partners II, L.P.
George Sarlo, Art Berliner and Lip-Bu Tan are general partners of each of
Walden-SBIC, L.P., Walden Investors, Walden International III, C.V. and
Walden Technology Ventures II, L.P. George Sarlo and Art Berliner are
general partners of each of Walden Ventures and Walden Capital Partners,
L.P. Lip-Bu Tan is the president of International Venture Capital Investment
Corporation. Lip-Bu Tan is director of each of OCBC, Wearnes & Walden
Investments (Singapore) Ltd., O,W&W Pacrim Investments Ltd., BI Walden
Ventures Kedua Sdn Bhd., Seed Ventures II Limited, O,W&W Investments Limited
and WIIG Japan Partners II, L.P. Each of Messrs. Sarlo, Berliner and Tan
disclaims beneficial ownership of the shares held by the funds managed by
Walden except to the extent of his pecuniary interest in these shares. Mr.
Tai is a limited partner in the general partner of funds managed by Walden
and a shareholder in International Venture Capital Investment Corporation,
and as such may be deemed to be the beneficial owner of shares held by
Walden-SBIC, L.P., Walden International III, C.V., Walden Technology
Ventures II Limited, International Venture Capital Investment Corporation,
OCBC, Wearnes & Walden Investments (Singapore) Ltd., O,W&W Pacrim
Investments Ltd., BI Walden Ventures Kedua Sdn. Bhd. and O,W&W Investments
Limited. Mr. Tai disclaims beneficial ownership of these shares except for
his pecuniary interest in these shares. The address of these stockholders is
750 Battery Street, San Francisco, California 94111.
(4) Paul G. Allen is the sole owner and chief executive officer of Vulcan
Ventures Incorporated.
(5) Represents 2,476,944 shares held of record jointly by Mr. Laird and his
wife, as trustees for the Douglas A. & Joan G. Laird Trust dated August 30,
1989 and 260,000 shares held of record by the D and J Laird Family Limited
Partnership, of which Mr. Laird and his wife are each a general partner.
(6) Includes 200,000 shares held of record by Chapman Family Ventures, LLC, of
which Mr. Chapman is the sole owner.
(7) Includes 177,496 shares held of record by Murray A. Goldman, as trustee for
the Murray A. Goldman Irrevocable Deed of Trust dated February 29, 2000.
(8) Represents 172,000 shares held by Five Points Fund, L.P. and 68,000 shares
held by Five Points Offshore Fund, Ltd. Mr. McNulty, one of our directors,
is the president of Five Points Capital, Inc., which is the management
company of each of Five Points Fund, L.P. and Five Points Offshore Fund,
Ltd.
(9) Includes the shares held by Institutional Venture Partners described in note
1, the shares held by WT Technology and Walden described in note 2 and the
shares held by Five Points Capital described in note 8. Also includes
600,000 shares subject to an exercisable option held by one executive
officer.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Immediately following the closing of this offering, our authorized capital
stock will consist of 1,000,000,000 shares of common stock, $.00001 par value
per share, and 5,000,000 shares of undesignated preferred stock, $.00001 par
value per share. As of September 30, 2000, we had outstanding 114,752,858 shares
of common stock, assuming the conversion of all outstanding preferred stock into
common stock and the conversion of a convertible promissory note into 1,200,000
shares of common stock, which will occur upon the closing of this offering. As
of September 30, 2000, we had approximately 374 shareholders.
COMMON STOCK
DIVIDEND RIGHTS
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to received dividends out of assets legally available at the times and
in the amounts that our board may determine from time to time.
VOTING RIGHTS
Each holder of common stock is entitled to one vote for each share of
common stock held on all matters submitted to a vote of stockholders. We have
not provided for cumulative voting for the election of directors in our
certificate of incorporation. This means that the holders of a majority of the
shares voted can elect all of the directors then standing for election. In
addition, our certificate of incorporation and bylaws require the approval of
two-thirds, rather than a majority, of the shares entitled to vote for some
matters. For a description of these matters, see "-- Anti-Takeover Effects of
Delaware Law and our Certificate of Incorporation and Bylaws" below.
NO PREEMPTIVE, CONVERSION OR REDEMPTION RIGHTS
Our common stock is not entitled to preemptive rights and is not subject to
conversion or redemption.
RIGHT TO RECEIVE LIQUIDATION DISTRIBUTIONS
Upon a liquidation, dissolution or winding-up of our company, the holders
of common stock are entitled to share in all assets remaining after payment of
all liabilities and the liquidation preferences of any outstanding preferred
stock. Each outstanding share of common stock is, and all shares of common stock
to be issued in this offering when they are paid for will be, fully paid and
nonassessable.
PREFERRED STOCK
Following this offering, we will be authorized, subject to limitations
imposed by Delaware law, to issue up to a total of 5,000,000 shares of preferred
stock in one or more series, without stockholder approval. Our board is
authorized to establish from time to time the number of shares to be included in
each series, and to fix the rights, preferences and privileges of the shares of
each wholly unissued series and any of its qualifications, limitations or
restrictions. Our board can also increase or decrease the number of shares of
any series, but not below the number of shares of that series then outstanding,
without any further vote or action by the stockholders.
The board may authorize the issuance of preferred stock with voting or
conversion rights that could harm the voting power or other rights of the
holders of the common stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, have the effect of delaying, deferring or
preventing a change in control of Transmeta and might harm the market price of
our common stock and the voting and other rights of the holders of common stock.
We have no current plans to issue any shares of preferred stock.
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<PAGE> 65
WARRANTS
As of September 30, 2000, we had outstanding warrants to purchase 2,066,432
shares of our common stock at a weighted average exercise price of $1.15 per
share. The warrants are exercisable at any time up to their expiration date and
expire variously from August 2001 through April 2008.
CONVERTIBLE PROMISSORY NOTE
As of September 30, 2000, we had outstanding a promissory note in favor of
IBM in the principal amount of $600,000. The note does not bear interest and
will be converted into 1,200,000 shares of our common stock upon the closing of
this offering.
REGISTRATION RIGHTS
The holders of 73,174,342 shares of common stock issuable upon conversion
of our preferred stock have the right to require us to register their shares
with the Securities and Exchange Commission so that those shares may be publicly
resold or to include their shares in any registration statement we file. In
addition, the holder of 80,000 shares of common stock issued upon exercise of a
warrant and the holders of 2,340,784 shares of common stock issuable upon
exercise of warrants or the conversion of the promissory note in favor of IBM
have piggyback registration rights.
DEMAND REGISTRATION RIGHTS
At any time six months after the closing of this offering, the holders of
at least 20% of our shares of common stock having demand registration rights
have the right to require that we register all or a portion of their shares. We
are only obligated to file two registration statements in response to these
demand registration rights. The first demand registration right exercised must
cover a sale of securities with a total public offering price of at least $25
million and the second demand registration right exercised must cover a sale of
at least $15 million of securities. We may postpone the filing of a registration
statement for up to 120 days once in a 12-month period if we determine that the
filing would be seriously detrimental to us and our stockholders. The
underwriters of any underwritten offering will have the right to limit the
number of shares to be included in a registration statement filed in response to
the exercise of these demand registration rights due to marketing reasons.
PIGGYBACK REGISTRATION RIGHTS
If we register any securities for public sale, the stockholders with
registration rights will have the right to include their shares in this
registration, subject to specified exceptions. The underwriters of any
underwritten offering will have the right to limit the number of shares
registered by these holders under specified conditions.
FORM S-3 REGISTRATION STATEMENTS
The holders of the shares having demand registration rights can request
that we register their shares if we are eligible to file a registration
statement on Form S-3 and if the total price of the shares of common stock
offered to the public is at least $500,000. These holders may only require us to
file one Form S-3 Registration Statement in any 12-month period. We may postpone
the filing of any registration statement for up to 120 days if we determine that
the filing would be seriously detrimental to us and our stockholders, although
we may exercise this right only once in any 12-month period.
We will pay all expenses related to any demand or piggyback registration
and up to two registrations on Form S-3, except for underwriters' discounts and
commissions, which will be paid by the selling stockholders. The registration
rights described above will expire eight years following the completion of this
offering.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND
BYLAWS
The provisions of Delaware law, our certificate of incorporation and our
bylaws may have the effect of delaying, deferring or discouraging another party
from acquiring control of us.
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<PAGE> 66
DELAWARE LAW
We will be subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. This section prevents some Delaware corporations
from engaging, under some circumstances, in a business combination, which
includes a merger or sale of more than 10% of the corporation's assets, with any
interested stockholder, which is a stockholder who owns 15% or more of the
corporation's outstanding voting stock, as well as affiliates and associates of
the stockholder, for three years following the date that the stockholder became
an "interested stockholder" unless:
- the transaction is approved by the board before the interested
stockholder attained that status;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
- the business combination is approved by the board and authorized at a
meeting of stockholders by at least two-thirds of the outstanding voting
stock that is not owned by the interested stockholder.
A Delaware corporation may opt out of this provision either in its original
certificate of incorporation or in an amendment to its certificate of
incorporation or bylaws approved by its stockholders. However, we have not opted
out of this provision. The statute could prohibit or delay mergers or other
takeover or change in control attempts and, accordingly, may discourage attempts
to acquire us.
CHARTER AND BYLAWS
Our certificate of incorporation and bylaws provide that:
- no action can be taken by stockholders except at an annual or special
meeting of the stockholders called in accordance with our bylaws and
stockholders may not act by written consent;
- the approval of holders of two-thirds of the shares entitled to vote at
an election of directors will be required to adopt, amend or repeal our
bylaws or amend or repeal the provisions of our certificate of
incorporation regarding the election and removal of directors and the
ability of stockholders to take action;
- stockholders may not call special meetings of the stockholders or fill
vacancies on the board;
- our board of directors will be divided into three classes serving
staggered three-year terms. This means that only one class of directors
will be elected at each annual meeting of stockholders, with the other
classes continuing for the remainder of their respective terms;
- directors may only be removed for cause by the holders of two-thirds of
the shares entitled to vote at an election of directors; and
- we will indemnify officers and directors against losses that they may
incur in investigations and legal proceedings resulting from their
services to us, which may include services in connection with takeover
defense measures.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services.
LISTING
Our common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "TMTA."
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<PAGE> 67
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock, including shares issued
upon exercise of outstanding options and warrants, in the public market after
this offering could cause the prevailing market price of our common stock to
fall or impair our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 127,752,858
shares of our common stock, or 129,702,858 shares if the underwriters'
over-allotment option is exercised in full, assuming that there are no exercises
of outstanding options or warrants after September 30, 2000. Of these shares,
all of the 13,000,000 shares sold in this offering will be freely tradable in
the public market without restriction or further registration under the
Securities Act, unless these shares are held by "affiliates," as that term is
defined in Rule 144 under the Securities Act or are purchased through the
directed share program in this offering. For purposes of Rule 144, an
"affiliate" of an issuer is a person that, directly or indirectly through one or
more intermediaries, controls, or is controlled by or is under common control
with, the issuer. Shares purchased by an affiliate may not be resold except
pursuant to an effective registration statement or an exemption from
registration, including the exemption under Rule 144 of the Securities Act.
Shares purchased through the directed share program in this offering will be
subject to the lock-up agreement described below. Up to approximately 910,000
shares are reserved for the directed share program. The remaining 114,752,858
shares of our common stock held by existing stockholders are restricted
securities. These restricted securities may be sold in the public market only if
they are registered or if they qualify for an exemption from registration under
Rule 144 or 701 under the Securities Act. These rules are summarized below.
Subject to the lock-up agreements described below and the provisions of Rule 144
and Rule 701, these restricted securities will be available for sale in the
public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ----
<S> <C>
No shares.................................. On the date of this prospectus
109,219,896 shares......................... 180 days after the date of this prospectus
5,532,962 shares........................... At various times beginning more than 180 days after
the date of this prospectus
</TABLE>
In addition, based on options and warrants outstanding as of September 30,
2000, after this offering, 16,841,574 shares will be subject to outstanding
options and warrants, of which approximately 6,654,412 will be vested and
exercisable 180 days after this offering. Of these shares, up to 749,648 shares
subject to warrants will be available for public sale on the date of this
prospectus, assuming the net exercise of the warrants.
LOCK-UP AGREEMENTS
Our officers and directors, substantially all of our stockholders and the
participants in our directed share program have agreed, subject to limited
exceptions, not to offer, pledge, sell or otherwise transfer or dispose of,
directly or indirectly, any of their shares of common stock or any securities
convertible into or exercisable or exchangeable for shares of common stock
during the period ending 180 days after the date of this prospectus without the
prior written consent of Morgan Stanley & Co. Incorporated. Morgan Stanley & Co.
Incorporated, however, may at its sole discretion, at any time without notice,
release all or any portion of the shares subject to lock-up agreements. In
addition, we may release all or any portion of the shares subject to lock-up
agreements with us, at any time without notice.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year from the later of the date those shares of
common stock were acquired from us or from an affiliate of ours would be
entitled to sell, within any three-month period, a number of shares that is not
more than the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 1,277,528 shares immediately after this offering; or
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<PAGE> 68
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the
sale on Form 144 is filed.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us.
RULE 144(k)
In addition, under Rule 144(k), a person who is not one of our affiliates
at any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years from the later of
the date these shares of common stock were acquired from us or from an affiliate
of ours, including the holding period of any prior owner other than an
affiliate, is entitled to sell those shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted pursuant to the lock-up agreements, those
shares may be sold immediately upon the completion of this offering.
RULE 701
In general, under Rule 701 as currently in effect, subject to specified
exceptions, our employees, consultants or advisors who purchased shares from us
in connection with a compensatory stock plan or other written agreement can
resell, unless otherwise restricted pursuant to the lock-up agreements, those
shares 90 days after the date of this prospectus in reliance on Rule 144, but
without complying with some of the restrictions, including the holding period,
contained in Rule 144.
REGISTRATIONS
After this offering, based on options granted as of September 30, 2000, we
intend to file a registration statement on Form S-8 under the Securities Act
covering 24,782,556 shares of our common stock subject to options outstanding
under our 1995 Equity Incentive Plan, 1997 Equity Incentive Plan and non-plan
grants or reserved for issuance under our 2000 Equity Incentive Plan and 2000
Employee Stock Purchase Plan and 6,482,080 shares issued upon exercise of
options by employees. This registration statement is expected to be filed as
soon as practicable after this offering. However, none of the shares registered
will be eligible for resale until expiration of the 180-day lock-up restriction
to which they are subject. In addition, the holders of 73,174,342 shares of
common stock issuable upon conversion of the preferred stock, the holder of
80,000 shares of common stock issued upon exercise of a warrant and the holders
of 2,340,784 shares of common stock issuable upon exercise of warrants and the
conversion of a promissory note have contractual registration rights to require
us to register our securities owned by them for public sale.
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<PAGE> 69
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Deutsche Bank Securities Inc., Salomon
Smith Barney Inc., Banc of America Securities LLC and SG Cowen Securities
Corporation are acting as representatives, have severally agreed to purchase,
and we have agreed to sell to them, severally, the number of shares indicated
below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ----------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Deutsche Bank Securities Inc. ..............................
Salomon Smith Barney Inc. ..................................
Banc of America Securities LLC..............................
SG Cowen Securities Corporation.............................
----------
Total..................................................... 13,000,000
==========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered by this prospectus are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered by this prospectus if any such shares are taken.
However, the underwriters are not required to take or pay for the shares covered
by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price listed on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the initial
public offering price. Any underwriter may allow, and such dealers may reallow,
a concession not in excess of $ a share to other underwriters or to
certain dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives of the underwriters.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 1,950,000
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the option is exercised,
each underwriter will become obligated, subject to certain conditions, to
purchase about the same percentage of the additional shares of common stock as
the number listed next to the underwriter's name in the preceding table bears to
the total number of shares of common stock listed next to the names of all
underwriters in the preceding table. If the underwriters' option is exercised in
full, the total price to the public would be $ , the total
underwriters' discounts and commissions would be $ and the total
proceeds to us would be $ .
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "TMTA."
We and our directors, executive officers and substantially all of our
stockholders and holders of rights to acquire our common stock have agreed that,
without the prior written consent of Morgan Stanley & Co.
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<PAGE> 70
Incorporated on behalf of the underwriters, we and they will not, during the
period ending 180 days after the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock,
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise.
The restrictions described in this paragraph do not apply to:
- the sale of shares to the underwriters;
- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares;
- the transfer of shares of common stock or any security convertible into
common stock by gift, if no filing under Section 16 of the Exchange Act
is required; and
- the distribution of shares of common stock or any security convertible
into common stock to limited partners, members or stockholders, if no
filing under Section 16 of the Exchange Act is required.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may sell more shares
than they are obligated to purchase under the underwriting agreement, creating a
short position. A short sale is covered if the short position is no greater than
the number of shares available for purchase by the underwriters under the
over-allotment option. The underwriters can close out a covered short sale by
exercising the over-allotment option or purchasing shares in the open market. In
determining the source of shares to close out a covered short sale, the
underwriters will consider, among other things, the open market price of shares
compared to the price available under the over-allotment option. The
underwriters may also sell shares in excess of the over-allotment option,
creating a naked short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the common stock in the open market after
pricing that could adversely affect investors who purchase in the offering. As
an additional means of facilitating the offering, the underwriters may bid for,
and purchase, shares of common stock in the open market to stabilize the price
of the common stock. The underwriting syndicate may also reclaim selling
concessions allowed to an underwriter or a dealer for distributing the common
stock in the offering, if the syndicate repurchases previously distributed
common stock to cover syndicate short positions or to stabilize the price of the
common stock. These activities may raise or maintain the market price of the
common stock above independent market levels or prevent or retard a decline in
the market price of the common stock. The underwriters are not required to
engage in these activities, and may end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
DIRECTED SHARE PROGRAM
At our request, the underwriters have reserved for sale, at the initial
offering price, up to approximately 910,000 shares of common stock offered
hereby for directors, officers, employees, business associates and other persons
related to us. There can be no assurance that any of the reserved shares will be
purchased. The number of shares of common stock available for sale to the
general public will be reduced to the extent these
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<PAGE> 71
parties purchase the reserved shares. Any reserved shares that are not so
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered by this prospectus.
Certain entities and individuals affiliated with Morgan Stanley & Co.
Incorporated, Deutsche Bank Securities Inc. and SG Cowen Securities Corporation
own 266,666, 1,425,764 and 64,566 shares of preferred stock, respectively, which
were purchased in private placements on the same terms and conditions as the
other investors in each respective private placement, including the price per
share.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the shares of
common stock. The initial public offering price will be determined by
negotiations between us and the representatives of the underwriters. Among the
factors to be considered in determining the initial public offering price will
be:
- our future prospects and our industry in general;
- sales, earnings and certain other financial and operating information in
recent periods; and
- the price-earnings ratios, price-sales ratios and market prices of
securities and financial and operating information of companies engaged
in activities similar to ours.
The estimated initial public offering price range set forth on the cover
page of this preliminary prospectus is subject to change as a result of market
conditions and other factors.
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will pass upon the validity of
the common stock that we are selling in this offering. Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California, will pass upon legal
matters for the underwriters. An investment partnership affiliated with Fenwick
& West LLP holds a total of 101,764 shares of our common stock.
EXPERTS
Our consolidated financial statements as of December 31, 1998 and 1999, and
for each of the three years in the period ended December 31, 1999, appearing in
this prospectus and registration statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits, under the Securities Act with respect
to the common stock to be sold in this offering. This prospectus, which
constitutes a part of the registration statement, does not contain all of the
information in the registration statement or the exhibits. Statements made in
this prospectus regarding the contents of any contract, agreement or other
document are only summaries. With respect to each contract, agreement or other
document filed as an exhibit to the registration statement, we refer you to the
exhibit for a more complete description of the matter involved. You may read and
copy all or any portion of the registration statement or any reports, statements
or other information in the files at the following public reference facilities
of the Commission:
<TABLE>
<S> <C> <C>
Room 1024, Judiciary Plaza Seven World Trade Center 500 West Madison Street
450 Fifth Street, N.W Suite 1300 Suite 1400
Washington, D.C., 20549 New York, New York 10048 Chicago, Illinois 60661
</TABLE>
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You can request copies of these documents upon payment of a duplicating fee
by writing to the Commission. You may call the Commission at 1-800-SEC-0330 for
further information on the operation of its public reference rooms. Our filings,
including the registration statement, will also be available to you on the
website maintained by the Commission at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
consolidated financial statements audited by our independent auditors, and to
make available to our stockholders quarterly reports for the first three
quarters of each year containing unaudited interim consolidated financial
statements.
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<PAGE> 73
TRANSMETA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 74
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Transmeta Corporation
We have audited the accompanying consolidated balance sheets of Transmeta
Corporation as of December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Transmeta Corporation at December 31, 1998 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with generally accepted accounting
principles in the United States.
As discussed more fully in the third and fourth paragraphs of Note 1,
Summary of Significant Accounting Policies, Transmeta Corporation has reassessed
its accounting for the embedded beneficial conversion feature of a convertible
note and, accordingly, has restated the financial statements for the fiscal year
ended December 31, 1999 to reflect this change.
/s/ Ernst & Young LLP
Palo Alto, California
February 17, 2000,
except for the third and fourth paragraphs of Note 1, as to
which the date is October 13, 2000, and except for
the second and third paragraphs of Note 11,
as to which the date is October 30, 2000.
F-2
<PAGE> 75
TRANSMETA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, LIABILITIES AND
--------------------- SEPTEMBER 30, STOCKHOLDERS' EQUITY
1998 1999 2000 AT SEPTEMBER 30, 2000
--------- --------- ------------- ---------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 27,809 $ 46,645 $ 64,076
Restricted cash......................................... 1,990 -- --
Short-term investments.................................. -- 19,799 22,244
Accounts receivable..................................... 114 -- 3,067
Inventories............................................. -- -- 10,766
Prepaid expenses and other current assets............... 663 1,808 3,600
-------- -------- ---------
Total current assets................................ 30,576 68,252 103,753
Property and equipment, net............................... 12,489 8,537 8,088
Deferred charges under license agreements................. -- 22,143 28,428
Loans to founders......................................... -- -- 5,362
Other assets.............................................. 432 511 3,795
-------- -------- ---------
Total assets........................................ $ 43,497 $ 99,443 $ 149,426
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 802 $ 853 $ 8,053
Accrued compensation and related compensation
liabilities........................................... 850 1,113 1,538
Other accrued liabilities............................... 2,154 1,880 7,820
Borrowing under line of credit agreement................ 1,575 -- --
Payable to a development partner under license
agreement, current portion............................ -- -- 5,000
Current portion of long-term debt and capital lease
obligations........................................... 3,286 5,494 6,171
-------- -------- ---------
Total current liabilities........................... 8,667 9,340 28,582
Long-term debt and capital lease obligations, net of
current portion......................................... 10,356 7,256 4,522
Deposits received under subleasing agreements............. 99 231 138
Payable to a development partner under license
agreement............................................... 343 19,533 21,532 $ 21,532
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.00001 par value at
amounts paid in; 13,427,374 shares authorized at
December 31, 1998, 21,119,835 shares authorized at
December 31, 1999, and 28,159,835 shares authorized at
September 30, 2000; 13,427,335, 21,119,835 and
28,159,835 shares issued and outstanding at December
31, 1998 and 1999, and at September 30, 2000,
respectively; aggregate liquidation preference of
$58,224,603, $135,149,603, and $219,629,603 at
December 31, 1998 and 1999, and September 30, 2000,
respectively, (none pro forma)........................ 58,149 134,980 222,922 --
Common stock, $0.00001 par value at amounts paid in;
160,000,000 shares authorized; 29,883,480, 34,179,904
and 40,378,516 shares issued and outstanding at
December 31, 1998 and 1999, and at September 30, 2000,
respectively (160,000,000 shares authorized and
113,552,858 shares issued and outstanding pro
forma)................................................ 1,761 7,183 68,085 291,007
Notes receivable from stockholders...................... (961) (3,071) (17,841) (17,841)
Deferred stock compensation............................. -- -- (31,028) (31,028)
Accumulated other comprehensive loss.................... -- (3) (16) (16)
Accumulated deficit..................................... (34,917) (76,006) (147,470) (147,470)
-------- -------- --------- ---------
Total stockholders' equity.......................... 24,032 63,083 94,652 $ 94,652
-------- -------- --------- =========
Total liabilities and stockholders' equity.......... $ 43,497 $ 99,443 $ 149,426
======== ======== =========
</TABLE>
(See accompanying notes)
F-3
<PAGE> 76
TRANSMETA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------------------
1997 1998 1999 1999 2000
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product......................................... $ -- $ 326 $ 76 $ 76 $ 3,817
License......................................... 1,400 28,000 5,000 5,000 --
-------- -------- -------- -------- --------
Total revenue........................... 1,400 28,326 5,076 5,076 3,817
Cost of product revenue........................... -- 71 18 18 2,305
-------- -------- -------- -------- --------
Gross profit...................................... 1,400 28,255 5,058 5,058 1,512
-------- -------- -------- -------- --------
Operating expenses:
Research and development(1)..................... 12,828 23,467 33,122 23,579 43,649
Selling, general and administrative(2).......... 4,584 12,616 12,811 8,938 18,484
Amortization of deferred charges under license
agreements................................... -- -- 218 -- 7,430
Amortization of deferred stock compensation..... -- -- -- -- 7,107
-------- -------- -------- -------- --------
Total operating expenses................ 17,412 36,083 46,151 32,517 76,670
-------- -------- -------- -------- --------
Operating loss.................................... (16,012) (7,828) (41,093) (27,459) (75,158)
Interest and other income....................... 96 892 2,456 1,464 4,967
Interest expense................................ (271) (1,154) (1,952) (1,495) (1,273)
-------- -------- -------- -------- --------
Loss before income taxes.......................... (16,187) (8,090) (40,589) (27,490) (71,464)
Provision for income taxes...................... -- 2,000 500 500 --
-------- -------- -------- -------- --------
Net loss.......................................... $(16,187) $(10,090) $(41,089) $(27,990) $(71,464)
======== ======== ======== ======== ========
Net loss per share -- basic and diluted........... $ (0.79) $ (0.44) $ (1.51) $ (1.05) $ (2.26)
======== ======== ======== ======== ========
Weighted average shares outstanding -- basic and
diluted......................................... 20,576 23,074 27,236 26,707 31,652
======== ======== ======== ======== ========
Pro forma net loss per share -- basic and diluted
(unaudited)..................................... $ (0.52) $ (0.71)
======== ========
Pro forma weighted average shares
outstanding -- basic and diluted (unaudited).... 79,564 100,030
======== ========
</TABLE>
------------
(1) Excludes $2,304 in amortization of deferred stock compensation for the nine
months ended September 30, 2000.
(2) Excludes $4,803 in amortization of deferred stock compensation for the nine
months ended September 30, 2000.
(See accompanying notes)
F-4
<PAGE> 77
TRANSMETA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NOTES ACCUMULATED TOTAL
CONVERTIBLE RECEIVABLE DEFERRED OTHER STOCKHOLDERS'
PREFERRED COMMON FROM STOCK COMPREHENSIVE ACCUMULATED EQUITY
STOCK STOCK STOCKHOLDERS COMPENSATION LOSS DEFICIT (DEFICIT)
----------- ------- ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996........................ 5,521 33 -- -- -- (8,640) (3,086)
Issuance of 2,057,732 shares
of common stock to
employees under option
exercises................. -- 155 (124) -- -- -- 31
Issuance of 1,081,920 shares
of Series C convertible
preferred stock in January
1997 to investors for cash
at $2.50 per share upon
exercise of warrants...... 2,705 -- -- -- -- -- 2,705
Issuance of 3,999,962 shares
of Series D convertible
preferred stock to
investors for cash at
$5.00 per share........... 20,000 -- -- -- -- -- 20,000
Issuance of equity purchase
right included in non-
interest-bearing
convertible note in
connection with
development agreement..... -- 302 -- -- -- -- 302
Net loss.................... -- -- -- -- -- (16,187) (16,187)
-------- ------- -------- -------- -------- --------- --------
Balance at December 31,
1997........................ 28,226 490 (124) -- -- (24,827) 3,765
Issuance of warrants to
purchase 735,032 shares of
common stock in connection
with lease financing...... -- 78 -- -- -- -- 78
Issuance of 7,757,748 shares
of common stock to
employees under option
exercises, net of
repurchases............... -- 1,167 (837) -- -- -- 330
Issuance of 68,000 shares of
common stock to employees
under bonus plan.......... -- 26 -- -- -- -- 26
Issuance of 4,999,999 shares
of Series E convertible
preferred stock to
investors for cash at
$6.00 per share, net of
issuance costs............ 29,923 -- -- -- -- -- 29,923
Net loss.................... -- -- -- -- -- (10,090) (10,090)
-------- ------- -------- -------- -------- --------- --------
Balance at December 31,
1998........................ $ 58,149 $ 1,761 $ (961) $ -- $ -- $ (34,917) $ 24,032
</TABLE>
(See accompanying notes)
F-5
<PAGE> 78
TRANSMETA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NOTES ACCUMULATED TOTAL
CONVERTIBLE RECEIVABLE DEFERRED OTHER STOCKHOLDERS'
PREFERRED COMMON FROM STOCK COMPREHENSIVE ACCUMULATED EQUITY
STOCK STOCK STOCKHOLDERS COMPENSATION LOSS DEFICIT (DEFICIT)
----------- ------- ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of 7,692,500 shares
of Series F convertible
preferred stock to
investors for cash at
$10.00 per share, net of
issuance costs............ $ 76,831 $ -- $ -- $ -- $ -- $ -- $ 76,831
Issuance of 20,000 shares of
common stock to
consultants in connection
with Series F financing... -- 35 -- -- -- -- 35
Embedded beneficial
conversion feature of the
amended convertible
note...................... -- 3,216 -- -- -- -- 3,216
Issuance of 4,276,424 shares
of common stock to
employees under option
exercises, net of
repurchases............... -- 2,154 (2,110) -- -- -- 44
Issuance of warrants to
purchase 68,000 shares of
common stock in connection
with consulting
agreement................. -- 17 -- -- -- -- 17
Other comprehensive
loss -- unrealized loss on
available-for-sale
investments, net.......... -- -- -- -- (3) -- (3)
Net loss.................... -- -- -- -- -- (41,089) (41,089)
--------
Comprehensive loss.......... -- -- -- -- -- -- (41,092)
-------- ------- -------- -------- -------- --------- --------
Balance at December 31,
1999........................ 134,980 7,183 (3,071) -- (3) (76,006) 63,083
Issuance of 7,040,000 shares
of Series G convertible
preferred stock to
investors for cash at
$12.50 per share, net of
issuance costs
(unaudited)............... 87,942 -- -- -- -- -- 87,942
Issuance of 4,918,612 shares
of common stock to
employees under option
exercises, net of
repurchases (unaudited)... -- 14,992 (14,770) -- -- -- 222
Issuance of 80,000 shares of
common stock upon exercise
of a warrant
(unaudited)............... -- 50 -- -- -- -- 50
Stock compensation in
connection with severance
arrangement (unaudited)... -- 945 -- -- -- -- 945
Issuance of warrants to
purchase 8,000 shares of
common stock in connection
with consulting agreement
(unaudited)............... -- 30 -- -- -- -- 30
Issuance of 1,200,000 shares
of common stock to a
development partner
(unaudited)............... -- 6,750 -- -- -- -- 6,750
Deferred stock compensation
(unaudited)............... -- 38,135 -- (38,135) -- -- --
Amortization of deferred
stock compensation
(unaudited)............... -- -- -- 7,107 -- -- 7,107
Other comprehensive
loss -- unrealized loss on
available-for-sale
investments, net
(unaudited)............... -- -- -- -- (13) -- (13)
Net loss (unaudited)........ -- -- -- -- -- (71,464) (71,464)
--------
Comprehensive loss
(unaudited)............... -- -- -- -- -- -- (71,477)
-------- ------- -------- -------- -------- --------- --------
Balance at September 30, 2000
(unaudited)................. $222,922 $68,085 $(17,841) $(31,028) $ (16) $(147,470) $ 94,652
======== ======= ======== ======== ======== ========= ========
</TABLE>
(See accompanying notes)
F-6
<PAGE> 79
TRANSMETA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------------
1997 1998 1999 1999 2000
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(16,187) $(10,090) $(41,089) $(27,990) $ (71,464)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred stock compensation............... -- -- -- -- 7,107
Depreciation and amortization............................. 493 3,809 5,275 3,883 4,350
Fair value of equity instruments issued for services...... -- 20 52 52 30
Stock compensation in connection with severance
agreement............................................... -- -- -- -- 945
Amortization of deferred charges under license
agreements.............................................. -- -- 218 -- 7,430
Accretion of interest payable to a development partner.... -- 45 45 39 33
Changes in operating assets and liabilities:
Accounts receivable..................................... -- (114) 114 114 (3,067)
Inventories............................................. -- -- -- -- (10,766)
Prepaid expenses and other current assets............... (434) (121) (1,145) (1,175) (1,904)
Accounts payable and accrued liabilities................ 2,092 1,168 40 (675) 13,565
Deposits received under subleasing agreements........... -- 99 132 27 (93)
-------- -------- -------- -------- ---------
Net cash used in operating activities....................... (14,036) (5,184) (36,358) (25,725) (53,834)
-------- -------- -------- -------- ---------
Cash flows used in investing activities:
Purchase of available-for-sale investments................ -- -- (57,312) (28,613) (234,793)
Change in restricted cash................................. -- (1,990) 1,990 1,990 --
Proceeds from sale or maturity of available-for-sale
investments............................................. -- -- 37,510 25,970 229,335
Purchase of property and equipment........................ (2,486) (13,543) (1,323) (1,069) (3,900)
Loans to founders......................................... -- -- -- -- (5,250)
Other assets.............................................. (101) (332) (79) (80) (284)
-------- -------- -------- -------- ---------
Net cash used in investing activities....................... (2,587) (15,865) (19,214) (1,802) (14,892)
-------- -------- -------- -------- ---------
Cash flows from financing activities:
Net proceeds from sale of preferred stock................. 16,273 29,923 76,831 76,831 87,942
Advance proceeds from sale of preferred stock............. -- -- -- -- --
Common stock issued under stock option plans.............. 30 356 44 7 222
Issuance of common stock upon exercise of a warrant....... -- -- -- -- 50
Issuance of debt and capital lease obligations............ 1,685 11,989 2,773 2,328 1,223
Repayment of debt and capital lease obligations........... (262) (327) (3,665) (2,647) (3,280)
Proceeds from bridge loan................................. -- -- -- -- --
Redemption of convertible preferred stock................. -- -- -- -- --
Borrowings under line of credit........................... -- 1,575 (1,575) (1,575) --
Net proceeds from issuance of convertible promissory
note.................................................... 600 -- -- -- --
-------- -------- -------- -------- ---------
Net cash provided by financing activities................... 18,326 43,516 74,408 74,944 86,157
-------- -------- -------- -------- ---------
Change in cash and cash equivalents......................... 1,703 22,467 18,836 47,417 17,431
Cash and cash equivalents at beginning of period............ 3,639 5,342 27,809 27,809 46,645
-------- -------- -------- -------- ---------
Cash and cash equivalents at end of period.................. $ 5,342 $ 27,809 $ 46,645 $ 75,226 $ 64,076
======== ======== ======== ======== =========
Supplemental disclosure of cash paid during the period:
Cash paid for interest.................................... $ 174 $ 1,080 $ 1,846 $ 1,148 $ 1,184
Cash paid for taxes....................................... 1 2,105 500 500 1
Supplemental disclosure of noncash financing and investing
activities:
Issuance of warrants...................................... -- 78 17 17 30
Issuance of common stock to consultants in connection with
Series F financing...................................... -- -- 35 35 --
Issuance of common stock to employees for notes
receivable.............................................. 124 837 2,123 2,043 14,801
Issuance of payable to development partner................ -- -- 18,927 -- 5,000
Conversion of bridge loan to Series D preferred stock..... 6,432 -- -- -- --
Common stock issued in connection with license
agreement............................................... -- -- -- -- 6,750
</TABLE>
(See accompanying notes)
F-7
<PAGE> 80
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Transmeta Corporation ("Transmeta" or the "Company") develops and sells
software-based microprocessors and develops additional hardware and software
technologies that enable computer manufacturers to build computers that
simultaneously offer long battery life, high performance and x86 compatibility.
Transmeta was incorporated in California as Transmeta Corporation on March
3, 1995, and was principally engaged in research and development, marketing,
sales, raising capital, establishing sources of supplies, commencing production
and building its management team. Through December 31, 1999, substantially all
of Transmeta's revenue was derived from technology license agreements with
development partners. In January 2000, the Company introduced its Crusoe family
of microprocessors. Revenue for the nine months ended September 30, 2000, was
derived from sales of microprocessor products, prototypes and development
systems. The Company began shipping production units in the third quarter of
2000 and emerged from the development stage during that period.
REASSESSMENT OF ACCOUNTING FOR EMBEDDED BENEFICIAL CONVERSION FEATURE
In November 1999, IBM Corporation relinquished certain of its world-wide
rights previously obtained from Transmeta under a technology license agreement.
As partial consideration for the relinquished rights, Transmeta amended the
terms of an existing note payable to IBM. The note payable is interest free, and
the amended terms provided IBM with the ability to convert the face amount of
the $600,000 note payable into 1,200,000 shares of Transmeta's common stock upon
the sale of Transmeta or upon completion of its initial public offering. The
fair value of Transmeta's common stock was $3.00 per share at the time of the
note amendment. The Company had previously determined that the intrinsic value
of the embedded beneficial conversion feature as of the date of the amendment
should be recorded only if Transmeta was sold or upon completion of its initial
public offering.
The Company has reassessed its accounting and has determined that the fair
value of the embedded beneficial conversion feature should be recorded as of the
date of the amendment to the note payable in November 1999. As a result, the
Company estimated the fair value of the embedded beneficial conversion feature
to be $3.2 million using a Black-Scholes valuation model, and has recorded an
adjustment to increase the previously reported deferred charges under licensing
agreements at December 31, 1999, from $18.9 million to $22.2 million, and to
increase common stock from $4.0 million to $7.2 million at December 31, 1999.
FISCAL YEAR
Transmeta changed its fiscal year-end during 1999 to end on the last Friday
in December. For ease of presentation, the accompanying financial statements
have been shown as ending on December 31 and calendar quarter ends for all
annual and quarterly financial statement captions. Fiscal years 1997, 1998 and
1999 each consisted of 52 weeks and ended on December 31. Fiscal year 2000 will
end on December 29. The first nine months of fiscal 1999 ended on October 1,
1999, and the first nine months of fiscal 2000 ended on September 29, 2000.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The financial information at September 30, 2000, and for the nine months
ended September 30, 1999 and 2000, is unaudited but includes all adjustments
(consisting of only normal recurring adjustments) that the Company considers
necessary for a fair presentation of its financial position at such date and its
operating
F-8
<PAGE> 81
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
results and cash flows for those interim periods. Results for the nine months
ended September 30, 2000, are not necessarily indicative of results that may be
expected for the year ending December 31, 2000.
USE OF ESTIMATES
The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates. Significant
estimates made in preparing the financial statements include estimates of
potentially excess and obsolete inventory after considering forecasted demand
and average selling prices and income tax valuation allowances.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the financial
statements of Transmeta and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated on consolidation.
RISK FACTORS AND CONCENTRATIONS
Transmeta is subject to various risks similar to other companies in a
comparable stage of growth, including dependence on key individuals, competition
from substitute products and larger companies and the continued successful
development and marketing of its products.
Financial instruments that subject the Company to credit risk consist
primarily of cash equivalents, short-term investments and notes receivable from
certain founders and stockholders. Substantially all of the Company's cash
equivalents are invested in highly liquid money market funds and commercial
securities with high-quality financial institutions in the United States.
Short-term investments consist of U.S. government and commercial bonds and
notes.
Transmeta sells its products principally to original equipment
manufacturers and their subcontract manufacturers. Revenue from two customers
represents $1.9 million and $775,000, respectively, of the Company's product
revenue for the nine months ended September 30, 2000 (unaudited). The Company
performs ongoing credit evaluations of its customers, maintains an allowance for
potential credit losses and does not generally require collateral.
The Company currently relies exclusively on IBM to fabricate its wafers and
provide assembly and test services.
REVENUE RECOGNITION
Transmeta recognizes revenue from product sales upon transfer of title to
its customers, typically upon shipment. The Company accrues for estimated
warranty costs, sales returns, and other allowances at the time of shipment.
Certain of the Company's product sales are made to distributors under agreements
allowing for price protection and/or right of return on unsold products.
Accordingly, the Company defers recognition of revenue on these sales until the
products are sold by the distributors.
Transmeta recognizes license revenue from technology license agreements
when earned, which generally occurs when agreed-upon deliverables are provided,
or milestones are met and confirmed by licensees. Also license revenues are
recognized only if payments received are non-refundable and not subject to any
future performance obligation by the Company. Transmeta recognized $1.4 million,
$28.0 million and $5.0 million of
F-9
<PAGE> 82
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
license revenue in 1997, 1998 and 1999, respectively, in connection with
technology license agreements (see Note 2). No license revenue was recognized
for the nine months ended September 30, 2000 (unaudited).
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Highly liquid debt securities with insignificant interest rate risk and
original maturities of three months or less are classified as cash equivalents.
Debt securities with maturities greater than three months and remaining
maturities less than one year are classified as short-term investments.
Transmeta's policy is to minimize principal risk by investing in high
credit-quality financial instruments and earning returns based on current
interest rates.
All of Transmeta's marketable investments were classified as
available-for-sale as of the balance sheet dates and, accordingly, were reported
at fair value with unrealized gains and losses recorded in stockholders' equity.
Fair values of cash and cash equivalents approximated cost due to the short
period of time to maturity. The cost of securities sold is based on the specific
identification method. Realized gains or losses and declines in value, if any,
judged to be other than temporary on available-for-sale securities are reported
in interest income or expense.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The Company did not have inventories as of December 31, 1998 and 1999.
The components of inventories as of September 30, 2000, were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C>
Work in progress.................................... $ 5,301
Finished goods...................................... 5,465
-------
$10,766
=======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization
have been provided on the straight-line method over the related asset's
estimated useful life ranging from three to five years. Leasehold improvements
and assets recorded under capital leases are amortized on a straight-line basis
over the lesser of the related asset's estimated useful life or the remaining
lease term.
IMPAIRMENT OF LONG-LIVED ASSETS
Transmeta evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If an asset is considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
F-10
<PAGE> 83
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
RESEARCH AND DEVELOPMENT
Costs to develop Transmeta's products are expensed as incurred in
accordance with the Financial Accounting Standards Board's ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 2, "Accounting for Research and
Development Costs," which establishes accounting and reporting standards for
research and development costs.
Transmeta accounts for software development costs in accordance with the
FASB's SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed," which requires capitalization of certain
software development costs once technological feasibility for the software
component is established and research and development activities for the
hardware component are completed. Based on Transmeta's development process, the
time period between the establishment of technological feasibility and
completion of the hardware component and the release of the product is short and
capitalization of internal development costs has not been material to date.
SOFTWARE DEVELOPMENT COST
Costs of software developed internally by the Company for use in its
operations are accounted for under the American Institute of Certified Public
Accountant's Statement of Position ("SOP") 98-1, "Internal Use Software," which
the Company adopted on January 1, 1999. Under SOP 98-1, the Company expenses
costs of research, including pre-development efforts prior to establishing
technological feasibility, and costs incurred for training and maintenance.
Software development costs are capitalized when technological feasibility has
been established, it is probable that the project will be completed and the
software will be used as intended. Costs incurred during the application
development stage were insignificant, and accordingly no costs related to
internal use software have been capitalized through September 30, 2000.
INCOME TAXES
Transmeta accounts for income taxes in accordance with the FASB's SFAS No.
109, "Accounting for Income Taxes" ("SFAS 109"), which requires the use of the
liability method in accounting for income taxes. Under SFAS 109, deferred tax
assets and liabilities are measured based on differences between the financial
reporting and tax bases of assets and liabilities using enacted tax rates and
laws that will be in effect when differences are expected to reverse.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of Transmeta's cash equivalents, short-term investments,
accounts receivable, prepaid expenses and other current assets, and accounts
payable and accrued liabilities approximate their carrying values due to the
short-term nature of those instruments.
The fair values of short-term and long-term capital lease obligations are
estimated based on current interest rates available to Transmeta for debt
instruments with similar terms, degrees of risk and remaining maturities. The
carrying values of these obligations approximate their respective fair values.
The fair values of long-term assets are valued on the basis of present
value calculations and are amortized over the useful life of these assets.
WARRANTY
Transmeta typically provides a warranty that includes factory repair
services as needed for replacement parts on its products for a period of one
year from shipment. Transmeta records a provision for estimated
F-11
<PAGE> 84
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
warranty costs upon shipment of its products. Warranty costs have been within
management's expectations to date and have not been material.
DEFERRED CHARGES UNDER LICENSE AGREEMENTS AND RELATED PAYMENT OBLIGATIONS
Transmeta has capitalized the cost of intangibles associated with license
agreements with third-party developers (see Note 2). These intangibles are
amortized over their estimated useful lives. Payment obligations under the
license agreement with IBM are accreted using the effective interest method over
the payment period.
SEGMENT INFORMATION
Transmeta has adopted the FASB's SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information" ("SFAS 131"). Transmeta operates
solely in one segment, the development, marketing and sale of hardware and
software technologies for the mobile computing market. The Company also
currently operates in one geographic region and is evaluated by management on a
single segment basis. Therefore, there was no impact on Transmeta's consolidated
financial statements from the adoption of SFAS 131.
ADVERTISING EXPENSES
All advertising costs are expensed as incurred. To date, advertising costs
have not been material.
STOCK-BASED COMPENSATION
Transmeta accounts for its stock options and equity awards in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and has elected to follow the
"disclosure only" alternative prescribed by the FASB's SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). Expense associated with stock-based
compensation is amortized on an accelerated basis over the vesting period of the
individual award consistent with the method described in FASB Interpretation No.
28. Accordingly, approximately 59% of the unearned deferred compensation is
amortized in the first year, 25% in the second year, 12% in the third year, and
4% in the fourth year following the date of grant. Pursuant to SFAS 123,
Transmeta discloses the pro forma effect of using the fair value method of
accounting for its stock-based compensation arrangements.
Options and warrants granted to consultants and vendors are accounted for
at fair value determined by using the Black-Scholes method in accordance with
Emerging Issues Task Force consensus No. 96-18. The assumptions used to value
stock-based awards to consultants and vendors are similar to those used for
employees except that a volatility of 0.80 was used (see Note 8 for pro forma
disclosures of stock-based compensation pursuant to SFAS 123).
NET LOSS PER SHARE
Basic and diluted net loss per share is presented in conformity with the
FASB's SFAS No. 128, "Earnings Per Share" ("SFAS 128"), for all periods
presented. Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued or granted
for nominal consideration prior to the anticipated effective date of the
Company's initial public offering must be included in the calculation of basic
and diluted net loss per share as if they had been outstanding for all periods
presented (see Note 8).
In accordance with SFAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock outstanding
during each period, less shares subject to
F-12
<PAGE> 85
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
repurchase. Pro forma basic and diluted net loss per share, as presented in the
statements of operations, has been computed as described above and also gives
effect, under Securities and Exchange Commission guidance, to the conversion of
the convertible preferred stock (using the if-converted method) from the
original date of issuance.
On October 26, 2000, the Company effected a 2-for-1 stock split of its
common stock (see Note 11).
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended,
establishes methods for recording derivative financial instruments and hedging
activities related to those instruments, as well as other hedging activities.
The Company is required to adopt SFAS 133 effective January 1, 2001. Because
Transmeta currently does not hold any derivative instruments and does not engage
in hedging activities, it does not currently believe that the adoption of SFAS
133, as amended, will have a significant impact on its consolidated financial
position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. Transmeta believes that its current revenue
recognition principles comply with SAB 101.
In March 2000, the Emerging Issues Task Force ("EITF") of the FASB issued
EITF Issue 00-2, "Accounting for Website Development Costs." The issue addresses
how an entity should account for costs incurred to develop a website. The total
capitalizable costs associated with the development of Transmeta's website have
been immaterial to date and have not been capitalized.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, Interpretation of APB Opinion
No. 25" ("FIN 44"). FIN 44 clarifies the application of Accounting Principle
Board Opinion No. 25 to certain issues including: (i) the definition of employee
for purposes of applying APB Opinion No. 25, (ii) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (iii) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award and (iv) the accounting for an exchange of stock compensation
awards in business combinations. Transmeta adopted FIN 44 in July 2000. The
adoption of FIN 44 did not have a material effect on Transmeta's consolidated
financial position or results of operations.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to the current
year's presentation.
2. TECHNOLOGY LICENSE AGREEMENTS
In December 1997, Transmeta entered into a technology license agreement
with IBM Corporation ("IBM"), which was amended in 1999 as described below. The
term of the original agreement was five years. Under the original agreement,
Transmeta granted to IBM a worldwide non-exclusive license to certain technology
developed and under development by Transmeta. In return, Transmeta received $2.0
million in cash and issued IBM a non-interest-bearing convertible promissory
note in the face amount of $600,000. The note is contingently convertible into
common stock of Transmeta upon completion of an initial public offering of
common stock or upon certain defined acquisition or merger transactions
involving Transmeta. In 1997, Transmeta recognized $1.4 million of revenue and
the net present value of the note, $298,000, was recorded as a payable to a
development partner under license agreement on the balance sheet. The difference
between the
F-13
<PAGE> 86
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
face amount and the present value of the note was credited to common stock. The
carrying value of the note is being accreted to its future value using the
effective interest method at a rate of approximately 15% per annum to its
maturity on December 31, 2003. As of December 31, 1999, the value of the note as
recorded on the balance sheet was $388,195. The agreement also entitled
Transmeta to earn royalties on sales by IBM of products incorporating the
licensed technology.
During 1998, IBM made additional license payments of $8.0 million upon the
Company's meeting certain milestones. In addition, IBM agreed to perform certain
engineering and production services without charge and to provide credits
against future sales to Transmeta in connection with the agreement.
In November 1999, the parties amended the technology license agreement. IBM
relinquished certain of the worldwide license rights previously obtained in
exchange for commitments by Transmeta. These commitments included paying a total
of $33.0 million to IBM. The commitment to IBM at December 31, 1999 was as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Due on or before December 15,
2001........................................................ $ 4,000
2002........................................................ 6,000
2003........................................................ 7,000
2004........................................................ 16,000
--------
Total minimum payments................................. 33,000
Less unamortized discounts.................................. (13,855)
--------
Present value as recorded on the balance sheet.............. $ 19,145
========
</TABLE>
In addition, Transmeta committed to pay IBM a total of $4.3 million for
engineering and production services ($1.4 million in 1999 and $2.9 million in
2000). Transmeta's payments to IBM for expenses related to the engineering and
production services are expensed as incurred. In addition, the convertibility of
the convertible promissory note described above was fixed at 1,200,000 shares of
Transmeta's common stock upon completion of an initial public offering. The fair
value of the embedded beneficial conversion feature of the amended convertible
promissory note was estimated to be $3.2 million based on the Black-Scholes
method using a dividend yield of 0%, a risk-free interest rate of 6.35%, an
expected life of four years and a volatility factor of 0.8. The fair value was
recorded as a deferred charge under license agreements and was credited to
common stock. The deferred charges under license agreements are being amortized
on a straight-line basis over the remaining period of the original license
agreement through December 2003. The IBM agreement was amended again in
September 2000 (see Note 12).
The net present value of the $33.0 million commitment (approximately $18.9
million) was recorded on the balance sheet as an element of deferred charges
under license agreements with a corresponding liability. This liability is being
accreted to its future value using the effective interest method at a rate of
approximately 15% per annum and is being recorded as part of deferred charges
under license agreements. The deferred charges under license agreements are
being amortized on a straight-line basis over the remaining period of the
original license agreement through December 2003. Management assesses the
realizability of the intangible asset at each balance sheet date.
In February 1998, Transmeta also entered into a technology license
agreement with Toshiba Corporation ("Toshiba"). Under this agreement, Transmeta
granted to Toshiba a worldwide non-exclusive license to certain technology
developed and under development by Transmeta. In return, Transmeta received
nonrefundable cash payments totaling $20.0 million and $5.0 million upon the
attainment of certain milestones in 1998
F-14
<PAGE> 87
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
and 1999, respectively. The agreement also entitles Transmeta to earn royalties
on sales by Toshiba of products incorporating the licensed technology. This
agreement was amended in February 2000 (see Note 11).
3. AVAILABLE-FOR-SALE INVESTMENTS
All cash equivalents and short-term investments as of December 31, 1998,
1999 and September 30, 2000 (unaudited) were classified as available-for-sale
securities and consisted of the following:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
As of December 31, 1999:
Money market funds.................................... $21,994 $ -- $ -- $ 21,994
Federal agency discount notes......................... 29,032 5 3 29,034
Bank obligations...................................... 14,630 2 7 14,625
------- -------- -------- --------
Total available-for-sale securities................... $65,656 $ 7 $ 10 $ 65,653
======= ======== ========
Less amounts classified as cash equivalents........... (45,854)
--------
Total short-term investments.......................... $ 19,799
========
As of September 30, 2000: (unaudited)
Money market funds (unaudited)........................ $24,300 $ -- $ -- $ 24,300
Commercial paper (unaudited).......................... 61,876 -- 16 61,860
------- -------- -------- --------
Total available-for-sale securities (unaudited)....... $86,176 $ -- $ 16 $ 86,160
======= ======== ========
Less amounts classified as cash equivalents
(unaudited)......................................... (63,916)
--------
Total short-term investments (unaudited).............. $ 22,244
========
</TABLE>
The Company did not have any short-term investments as of December 31,
1998. Cash equivalents of $27,372,000 were stated at cost, which approximated
fair value.
Available-for-sale securities with a fair value at the date of sale of
$37.5 million and $229.3 million were sold during the year ended December 31,
1999 and the nine months ended September 30, 2000 (unaudited), respectively. No
securities were sold in 1998.
Transmeta held a federal agency discount note at September 30, 2000, that
matures in more than one year. Its fair value of $3.0 million (unaudited)
approximates cost at September 30, 2000, and is included in other assets on the
balance sheet.
F-15
<PAGE> 88
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1998 1999 2000
------- ------- -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures..................................... $ 1,344 $ 1,368 $ 1,522
Computer equipment......................................... 8,096 8,438 11,348
Computer software.......................................... 6,574 7,236 7,897
Leasehold improvements..................................... 745 1,040 1,216
------- ------- --------
16,759 18,082 21,983
Less accumulated depreciation and amortization............. (4,270) (9,545) (13,895)
------- ------- --------
Total...................................................... $12,489 $ 8,537 $ 8,088
======= ======= ========
</TABLE>
5. LEASES AND COMMITMENTS
OPERATING LEASES
Transmeta leases its facilities and certain equipment under noncancelable
operating leases expiring through 2008.
Gross operating lease and rental expenses were $1,981,000, $4,283,000,
$5,335,000 and $4,013,000 during the years ended December 31, 1997, 1998 and
1999 and the nine months ended September 30, 2000 (unaudited), respectively.
During 1998, 1999 and 2000, Transmeta subleased a portion of its
facilities. The subleases extend through 2002. Sublease income was $105,000,
$1,065,000 and $869,000 for the years ended December 31, 1998 and 1999 and the
nine months ended September 30, 2000 (unaudited), respectively.
Future minimum rentals to be received under the facilities subleases at
September 30, 2000 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Three months ending December 31,
2000 (unaudited).......................................... $ 327,000
Years ending December 31,
2001 (unaudited).......................................... 1,204,000
2002 (unaudited).......................................... 125,000
----------
$1,656,000
==========
</TABLE>
CAPITAL LEASES
Transmeta finances certain equipment and other assets under noncancelable
lease agreements subsequent to original purchase that are accounted for as
capital leases.
The net book value of equipment recorded under capital lease arrangements,
included in property and equipment, was $6,202,000, $3,926,000 and $2,848,000 as
of December 31, 1998 and 1999 and September 30,
F-16
<PAGE> 89
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
2000 (unaudited), respectively. At December 31, 1999, future minimum payments
for the obligations described above were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Years ending December 31,
2000.................................................... $ 3,395 $ 5,457
2001.................................................... 3,624 4,054
2002.................................................... 1,397 3,661
2003.................................................... 13 4,135
2004.................................................... -- 4,241
Thereafter.............................................. -- 16,018
------- -------
Total minimum lease payments.................. 8,429 $37,566
=======
Less amount representing interest....................... (1,343)
-------
Present value of capital lease obligations.............. 7,086
Less current portion.................................... (2,553)
-------
Noncurrent portion...................................... $ 4,533
=======
</TABLE>
COMMITMENTS
As of September 30, 2000 (unaudited), the Company had non-cancelable
outstanding purchase commitments of approximately $22.3 million in connection
with the manufacturing services performed by IBM. These commitments are due in
the six months ending March 31, 2001.
6. DEBT
Transmeta opened a $3.0 million revolving line of credit with a bank during
July 1998. The line of credit bore interest at the bank's reference rate plus 2%
(7.0% at December 31, 1998), and was payable monthly and was due to expire in
July 2001. Borrowings against this line at December 31, 1998 were $1,575,000.
The line was secured by $1,990,000 of cash held as collateral at the bank.
Borrowings under this line of credit were repaid and the line was closed in
January 1999.
In 1998 and 1999, Transmeta issued promissory notes to financing companies
in the principal amounts of $3,473,000 and $1,368,000, respectively, which
mature through January 2003. These notes bear interest at 10.5% and are secured
by certain tangible assets with an aggregate net book value of approximately
$1,872,000 as of December 31, 1999. No notes were issued during the nine months
ended September 30, 2000 (unaudited).
Transmeta signed a note during 1998 with a supplier in the principal amount
of $1,116,000 in connection with an equipment purchase. The note is due on the
earlier of December 30, 2000 or the closing of an initial public offering.
Interest will begin to accrue on any unpaid principal balance at the rate of 10%
per annum, starting on the date of the initial public offering. The note is
secured by the equipment financed.
In connection with the notes issued to the financing companies and the
supplier, Transmeta issued to the note holders warrants to purchase 735,032
shares of common stock. Warrants to purchase 685,032 shares of common stock were
issued with an exercise price of $1.25 and expire between March 2004 and April
2008. Warrants to purchase 50,000 shares of common stock were issued with an
exercise price of $3.00 and expire in
F-17
<PAGE> 90
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
May 2005. These warrants were assigned an aggregate value of $78,000 on the
basis of Black-Scholes valuation models using the contractual lives ranging from
six to ten years and a volatility of 0.80. The value of the warrants was
recorded as a discount against the respective borrowings and is being amortized
over the respective terms of the notes. The remaining discount on the notes of
$13,000 at September 30, 2000 (unaudited) is being accreted as additional
financing (interest) expense over the term of each respective note. The amount
of discount accreted and recorded as interest expense for the years ended
December 31, 1998 and 1999 and the nine months ended September 30, 2000
(unaudited) was $19,000, $26,000 and $20,000, respectively.
At December 31, 1999, aggregate future minimum principal payments on the
obligations described above were as follows:
<TABLE>
<CAPTION>
NOTES PAYABLE
--------------
(IN THOUSANDS)
<S> <C>
Years ending December 31,
2000........................................................ $ 2,941
2001........................................................ 1,775
2002........................................................ 950
2003........................................................ 31
-------
Total minimum principal payments....................... 5,697
Less current portion........................................ (2,941)
Less unamortized discounts.................................. (33)
-------
Noncurrent portion.......................................... $ 2,723
=======
</TABLE>
Additionally, as discussed in Note 2, Transmeta issued a convertible
promissory note in the face amount of $600,000 in December 1997. The present
value of the note at September 30, 2000 (unaudited) was $422,000 and is recorded
on the balance sheet as a payable to a development partner under license
agreement. Interest will accrete to its maturity on December 31, 2003, or until
the note is converted subsequent to completion of an initial public offering or
upon certain defined acquisition or merger transactions.
7. STOCKHOLDERS' EQUITY
NONCUMULATIVE CONVERTIBLE PREFERRED STOCK
Transmeta has sold shares of several series of its convertible preferred
stock since its inception, as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PRICE DIVIDEND LIQUIDATION
ISSUED AND PER NET PER PREFERENCES
SERIES OUTSTANDING SHARE PROCEEDS SHARE PER SHARE
------ ----------- ------ ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
A......................... -- $ 1.65 $ 2,500,000 N/A N/A
B......................... 3,345,454 $ 1.65 $ 5,521,082 $0.132 $ 1.65
C......................... 1,081,920 $ 2.50 $ 2,704,800 $0.20 $ 2.50
D......................... 3,999,962 $ 5.00 $19,999,810 $0.40 $ 5.00
E......................... 4,999,999 $ 6.00 $29,923,374 $0.48 $ 6.00
F......................... 7,692,500 $10.00 $76,831,141 $0.80 $10.00
</TABLE>
Transmeta's original financing was from the sale of 1,515,151 shares of
Series A preferred stock for $2.5 million in July 1995. In November 1996,
Transmeta repurchased all of the outstanding shares of Series A preferred stock
from the Series A investors for $2.7 million. The difference of $160,000 between
the
F-18
<PAGE> 91
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
repurchase price and the original amount paid by these investors has been
charged to the deficit accumulated during the development stage.
In connection with the sale of Series B preferred stock during 1995,
Transmeta sold warrants to purchase 1,081,920 shares of Series C preferred stock
with an exercise price of $2.50 per share at a purchase price of $0.001 per
warrant. These warrants were exercised in 1997, resulting in proceeds to the
Company of $2,705,000.
Each share of Series B, C and D preferred stock is convertible at the
holder's option into four shares of common stock, and this conversion ratio is
subject to adjustment under antidilution provisions as stated in the Company's
Certificate of Incorporation. Each share of Series E and F preferred stock is
convertible at the holders' option into two shares of common stock, and this
conversion ratio is subject to adjustment under antidilution provisions as
stated in the Certificate of Incorporation. Each share of preferred stock will
automatically convert into shares of common stock at the then-effective
conversion price immediately upon the closing of the sale of the Company's
common stock in a firm commitment, underwritten public offering registered under
the Securities Act of 1933 at an offering price to the public equal to or
exceeding $1.25 per share of common stock for Series B and C preferred stock,
equal to or exceeding $3.75 per share of common stock for Series D and E
preferred stock, equal to or exceeding $5.00 per share of common stock for
Series F preferred stock and resulting in aggregate gross proceeds to the
Company of at least $15 million.
The holder of each share of Series B, C, D, E and F preferred stock is
entitled to receive, when and as declared by the board of directors,
noncumulative dividends. Through September 30, 2000 (unaudited), no dividends
had been declared.
The Series B, C, D, E and F preferred stockholders are entitled to
liquidation preferences, adjusted for any combinations, consolidations or stock
splits with respect to their shares and, in addition, an amount equal to all
declared but unpaid dividends for each share of Series B, C, D, E and F
preferred stock then held. After payment of these liquidation preferences, any
remaining assets would be distributed to the holders of common stock and Series
B, C, D, E and F preferred stock on a pro rata basis as if the Series B, C, D, E
and F preferred stock were converted into common stock at the then applicable
conversion price for each respective series of preferred stock until the holders
of the preferred stock received an aggregate amount equal to $3.50, $5.303,
$10.606, $12.7272 and $21.2121, respectively, per preferred share (plus an
amount equal to all declared but unpaid dividends on that share).
The holders of preferred shares are entitled to the number of votes that
they would have upon conversion of their preferred shares into common shares.
In April 2000, Transmeta sold Series G preferred stock (see Note 12).
F-19
<PAGE> 92
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
COMMON STOCK WARRANTS
Transmeta has periodically granted warrants in connection with certain
lease and bank agreements. The Company had the following warrants outstanding to
purchase common stock at December 31, 1999:
<TABLE>
<CAPTION>
EXERCISE
NUMBER PRICE
ISSUANCE DATE OF SHARES PER SHARE EXPIRATION DATE
------------- --------- --------- ---------------
<S> <C> <C> <C>
October 1995........................... 277,284 $ 0.41 October 2005
March 1996............................. 328,364 $ 0.41 March 2006
May 1996............................... 96,968 $ 0.41 December 2001
August 1996............................ 80,000 $ 0.63 August 2001
September 1996......................... 38,784 $ 0.41 December 2001
April 1997............................. 160,000 $ 1.25 March 2003
April 1997............................. 144,000 $ 1.25 April 2007
August 1997............................ 160,000 $ 1.25 August 2007
January 1998........................... 125,032 $ 1.25 December 2007
April 1998............................. 240,000 $ 1.25 April 2008
April 1998............................. 320,000 $ 1.25 March 2004
May 1998............................... 50,000 $ 3.00 May 2005
March 1999............................. 68,000 $ 3.00 March 2004
</TABLE>
All warrants have been valued using the Black-Scholes valuation model based
on the assumptions used for stock-based awards to employees (see Note 8) except
that a volatility of 0.80 was used. Assigned values of $78,000 and $17,000
associated with these warrant issuances were recorded as common stock in 1998
and 1999, respectively and are being amortized as interest expense over the term
of the lease and bank agreements. Costs associated with earlier periods were
immaterial.
In connection with consulting services, the Company issued warrants to
purchase 8,000 and 50,000 shares in January and February 2000, respectively
(unaudited). The warrants expire in January and February 2005, respectively, and
have an exercise price of $5.00 per share. The aggregate assigned value of
$30,000 associated with the warrant issued in January 2000 was computed using
the Black-Scholes valuation model and was amortized over the period the services
were rendered. The fair value of the warrant issued in February 2000 to purchase
50,000 shares will be computed as the warrant vests upon achieving certain
performance milestones and accordingly no value was assigned upon issuance of
this warrant.
COMMON STOCK
At the inception of the Company, certain founders, employees, directors and
consultants purchased 20,000,000 shares of the Company's common stock. Transmeta
has not paid dividends with respect to the common stock. In the event of
liquidation of the Company, the holders of common stock are entitled to
distributions on a pro rata basis with the preferred stockholders, subject to a
cap in the case of preferred stockholders, after the preferred stockholders have
received their preferential amounts.
F-20
<PAGE> 93
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
Transmeta's Certificate of Incorporation provides that the Company must at
all times reserve a number of shares of its common stock that would be
sufficient to effect the conversion of all outstanding shares of preferred stock
as well as exercises of outstanding warrants and employee and consultant options
granted. Shares reserved for future issuance are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
Preferred stock conversion......................... 59,094,342 73,174,342
Warrants outstanding............................... 2,088,432 2,066,432
Options outstanding................................ 8,694,960 14,775,142
Future option grants............................... 6,094,136 1,007,414
---------- ----------
75,971,870 91,023,330
========== ==========
Shares subject to repurchase....................... 5,296,994 6,343,916
========== ==========
</TABLE>
Transmeta's equity incentive plans permit holders of options granted prior
to March 1999 and holders of non-plan grants to exercise stock options before
they are vested. Common stock issued in connection with these exercises is
subject to repurchase at the exercise price until vesting occurs. Notes issued
by employees to exercise stock options bear interest at rates ranging from 4.47%
to 6.69% and have terms of five years. All notes are full recourse and are
recorded as a reduction of stockholders' equity when issued.
8. STOCK-BASED COMPENSATION
STOCK OPTION PLANS
Transmeta has two stock option plans. The 1995 Equity Incentive Plan and
the 1997 Equity Incentive Plan (the "Plans") were adopted on September 5, 1995
and July 11, 1997, respectively. The Plans provide for the grant to employees of
incentive stock options ("ISOs") and the grant to employees, directors and
consultants of nonstatutory stock options. As of September 30, 2000 (unaudited),
the maximum number of common shares available under the Plans was 26.0 million.
Options granted under the Plans may be designated as "ISO," or
"nonstatutory stock options" at the discretion of Transmeta, with exercise
prices not less than the fair market value at the date of grant. Options
generally vest 25% on the first anniversary of the vesting start date and then
monthly over the next three years. Options expire ten years from the grant date.
NON-PLAN GRANTS
Transmeta has from time to time granted options outside of the Plans
("non-plan stock options"). There were non-plan stock options for an aggregate
of 970,000, 3,470,000 and 8,020,000 shares of common stock authorized and
granted as of December 31, 1998 and 1999 and September 30, 2000 (unaudited),
respectively.
In connection with a severance agreement, the Company extended repayment
terms of a note receivable secured by shares exercised from options previously
granted. In accordance with FIN 44, the Company remeasured the value of the
options based upon the then fair value of the stock as determined by the Board
of Directors. The resulting additional charge of $945,000 was expensed as
compensation and recorded as common stock.
F-21
<PAGE> 94
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
STOCK OPTION SUMMARY
The following is a summary of the Company's stock option activity under the
Plans and outside the Plans, and related information:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------
WEIGHTED WEIGHTED
SHARES AVERAGE AVERAGE
AVAILABLE NUMBER EXERCISE GRANT DATE
FOR GRANT OF SHARES PRICE FAIR VALUE
----------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996................ 600,000 7,400,000 $0.04
Additional shares reserved................ 4,000,000 --
Options granted........................... (4,531,800) 4,531,800 $0.16 $ 0.05
Options exercised......................... -- (2,057,732) $0.08
Options canceled.......................... -- (60,000) $0.05
----------- ----------
Balance at December 31, 1997................ 68,200 9,814,068 $0.07
Additional shares reserved................ 4,970,000 --
Options granted........................... (4,602,000) 4,602,000 $0.54 $ 0.10
Options exercised......................... -- (7,757,748) $0.15
Options canceled.......................... 129,998 (348,334) $0.12
Bonus shares distributed.................. (68,000) --
----------- ----------
Balance at December 31, 1998................ 498,198 6,309,986 $0.31
Additional shares reserved................ 12,500,000 --
Options granted........................... (8,067,000) 8,067,000 $0.95 $ 0.25
Options exercised......................... -- (4,832,696) $0.47
Options canceled.......................... 606,666 (849,330) $0.56
Options repurchased....................... 556,272 --
----------- ----------
Balance at December 31, 1999................ 6,094,136 8,694,960 $0.79
Additional shares reserved (unaudited).... 7,550,000 --
Options granted (unaudited)............... (12,974,000) 12,974,000 $5.21 $ 4.78
Options exercised (unaudited)............. -- (5,616,034) $2.75
Options canceled (unaudited).............. 277,776 (1,277,784) $3.66
Options repurchased (unaudited)........... 59,502 --
----------- ----------
Balance at September 30, 2000 (unaudited)... 1,007,414 14,775,142 $3.68
=========== ==========
</TABLE>
F-22
<PAGE> 95
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
The exercise prices for options outstanding and exercisable as of December
31, 1999 and their weighted average remaining contractual lives were as follows:
<TABLE>
<CAPTION>
OUTSTANDING
-----------------------------------------
WEIGHTED AVERAGE WEIGHTED EXERCISABLE
REMAINING AVERAGE ------------------------------
SHARES CONTRACTUAL LIFE EXERCISE SHARES WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ---------------- -------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
As of December 31, 1999:
$0.04 1,130,926 6.3 $0.04 1,130,926 $0.04
$0.13 - $0.19 863,934 7.8 $0.14 380,856 $0.13
$0.50 - $1.25 5,651,100 9.1 $0.65 462,650 $0.62
$2.50 - $3.00 1,049,000 9.8 $2.87 -- $ --
--------- ---------
$0.04 - $3.00 8,694,960 8.7 $0.79 1,974,432 $0.19
========= =========
</TABLE>
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee and director stock-based awards
because, as discussed below, the alternative fair value accounting provided for
under SFAS 123, requires use of option valuation models that were not developed
for use in valuing employee stock-based awards. Under APB Opinion No. 25, the
Company generally recognizes no compensation expense with respect to awards if
the exercise price equals or exceeds the fair value of the underlying security
on the date of grant and other terms are fixed. The Company recorded deferred
stock compensation of $38.1 million during the nine months ended September 30,
2000 (see Note 12).
The fair value for these awards was estimated at the date of grant using an
option pricing model. Option pricing models were developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's stock-based awards have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock-based awards. The fair value of options granted was
determined using the minimum value method and the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Expected volatility................................ N/A N/A N/A
Expected life of options in years.................. 4 4 4
Risk-free interest rate............................ 6.0% 4.70% 6.10%
Expected dividend yield............................ 0 0 0
</TABLE>
F-23
<PAGE> 96
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the option's vesting period. Pro forma
information follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss
As reported.............................. $(16,187) $(10,090) $(41,089)
Pro forma................................ $(16,212) $(10,196) $(41,601)
Net loss per share -- basic and diluted
As reported.............................. $ (0.79) $ (0.44) $ (1.51)
Pro forma................................ $ (0.79) $ (0.44) $ (1.53)
</TABLE>
The following table presents the computation of basic and diluted and pro
forma basic and diluted net loss per share:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------------
1997 1998 1999 1999 2000
-------- -------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic and diluted:
Net loss.......................... $(16,187) $(10,090) $(41,089) $(27,990) $(71,464)
======== ======== ======== ======== ========
Basic and diluted:
Weighted average shares
outstanding.................... 20,636 25,402 33,154 32,709 37,984
Less: Weighted average shares
subject to repurchase.......... (60) (2,328) (5,918) (6,002) (6,332)
-------- -------- -------- -------- --------
Weighted average shares used in
computing basic and diluted net
loss per share................. 20,576 23,074 27,236 26,707 31,652
======== ======== ======== ======== ========
Net loss per share -- basic and
diluted........................... $ (0.79) $ (0.44) $ (1.51) $ (1.05) $ (2.26)
======== ======== ======== ======== ========
Pro forma basic and diluted:
Shares used above................. 27,236 31,652
Pro forma adjustment to reflect
weighted-average effect of the
assumed conversion of
convertible preferred stock.... 52,328 68,378
-------- --------
Shares used in computing pro forma
net loss per share............. 79,564 100,030
======== ========
Pro forma net loss per
share -- basic and diluted..... $ (0.52) $ (0.71)
======== ========
</TABLE>
The Company has excluded all outstanding stock options and shares subject
to repurchase from the calculation of basic and diluted net loss per share
because these securities are antidilutive for all periods presented. Options and
warrants to purchase 11,224,500, 8,330,418, 10,783,392, 10,018,431 and
12,112,503 shares of common stock, determined using the treasury stock method,
for the years ended December 31, 1997, 1998 and 1999 and the nine months ended
September 30, 1999 (unaudited) and 2000 (unaudited), respectively, were not
included in the computation of diluted net loss per share because the effect
would be
F-24
<PAGE> 97
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
antidilutive. These securities, had they been dilutive, would have been included
in the computation of diluted net loss per share using the treasury stock
method.
9. INCOME TAXES
In 1998 and 1999, the Company recorded tax provisions of $2.0 million and
$500,000, respectively. These taxes were withheld from license revenue received
from Toshiba in accordance with the United States-Japan tax treaty. No tax
provision was recorded during the nine months ended September 30, 2000
(unaudited). The Company has incurred operating losses in all periods that have
not been tax benefited.
Deferred income taxes reflect the net tax effect of operating loss and tax
credit carryforwards and temporary differences between the carrying amount of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes, and consist of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Federal operating loss carryforwards........................ $ 8,300 $ 18,900
State operating loss carryforwards.......................... 1,300 2,200
Federal tax credit carryforwards............................ 1,200 2,200
State tax credit carryforwards.............................. 900 1,450
Non-deductible reserves and capitalized expenses............ 740 960
-------- --------
12,440 25,710
Valuation allowance......................................... (12,440) (25,710)
-------- --------
Net deferred tax assets..................................... $ -- $ --
======== ========
</TABLE>
Based upon the weight of available evidence, which includes the Company's
historical operating performance, the Company has always provided a full
valuation allowance against its net deferred tax assets as it is not more likely
than not that the deferred tax assets will be realized. The valuation allowance
increased by $3.0 million and $13.3 million during 1998 and 1999, respectively.
The federal operating loss and tax credit carryforwards listed above will
expire between 2010 and 2019, if not previously utilized. The state operating
loss and tax credit carryforwards will expire beginning in 2003, if not
previously utilized. Because of certain ownership change rules under federal and
state tax rules, approximately $5.0 million of the December 31, 1999
tax-effected amounts of federal and state operating loss and tax credit
carryforwards listed above are not immediately available to offset future tax
liabilities. These amounts will be available through 2002. The Company's planned
initial public offering should not result in further limitations on the use of
tax carryforwards.
10. EMPLOYEE BENEFIT PLAN
Transmeta has an Employee Savings and Retirement Plan (the "Benefit Plan")
under Section 401(k) of the Internal Revenue Code for its eligible employees.
The Benefit Plan is available to all of Transmeta's employees who meet minimum
age requirements, and provides employees with tax deferred salary deductions and
alternative investment options. Employees may contribute up to 15% of their
eligible earnings, subject to certain limitations. There have been no matching
contributions by the Company under the Benefit Plan.
F-25
<PAGE> 98
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
11. SUBSEQUENT EVENTS
TOSHIBA TECHNOLOGY LICENSE AGREEMENT AMENDMENT
On February 17, 2000, Transmeta and Toshiba amended their technology
license agreement. Toshiba relinquished certain of the worldwide license rights
previously obtained from Transmeta in exchange for 1,200,000 shares of Transmeta
common stock. The value of the stock, $6,750,000, has been recorded on the
balance sheet as a deferred charge under license agreement and is being
amortized on a straight-line basis over the remaining initial license term of
three years.
REINCORPORATION
Effective October 26, 2000, Transmeta reincorporated as a Delaware
corporation. Share capital information for all periods has been retroactively
adjusted to reflect the par value of common and preferred stock and amounts of
additional paid-in-capital.
STOCK SPLIT
On October 26, 2000, Transmeta effected a 2 for 1 stock split of its common
stock. Common share amounts, per common share amounts, and the preferred stock
conversion rates retroactively reflect the stock split. As a result of the stock
split, the preferred stock is convertible to common stock at the following
split-adjusted ratios: Series B, C, and D at 4 for 1, and Series E, F and G at 2
for 1.
12. SUBSEQUENT EVENTS (UNAUDITED)
REGISTRATION STATEMENT
On August 14, 2000, the Board of Directors authorized the Company to file a
registration statement with the U.S. Securities and Exchange Commission for an
initial public offering ("IPO") of its common stock.
If the offering is consummated under the terms presently anticipated, all
of the convertible preferred stock outstanding as of September 30, 2000 will
convert into 73,174,342 shares of common stock upon the closing of the IPO. The
effect of this conversion has been reflected in unaudited pro forma
stockholders' equity in the accompanying consolidated balance sheet at September
30, 2000.
DEFERRED COMPENSATION
Transmeta has recorded deferred stock compensation of $38,135,000 during
the nine months ended September 30, 2000, representing the aggregate difference
between the exercise prices of the options and the deemed fair values of common
stock subject to the options as of the respective measurement dates. These
amounts are being amortized by charges to operations, using the graded vesting
method, over the four year vesting periods of the individual stock options.
During the nine month period ended September 30, 2000, the Company recorded
$7,107,000 of amortization expense related to deferred stock compensation.
RELATED PARTY TRANSACTIONS
Certain founders of Transmeta received loans from the Company in May 2000.
The notes received as consideration for these loans, aggregating $5,250,000, are
non-recourse and are secured by a total of 1,050,000 shares of common stock held
by the founders. The shares were originally issued and vested in 1995. The notes
accrete interest, compounded annually, at 6.4% and are due in May 2005.
F-26
<PAGE> 99
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
NONCUMULATIVE CONVERTIBLE PREFERRED STOCK
Transmeta sold shares of Series G preferred stock subsequent to December
31, 1999. The particulars are as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PRICE DIVIDEND
ISSUED AND PER NET PER LIQUIDATION
SERIES OUTSTANDING SHARE PROCEEDS SHARE PREFERENCES
------ ----------- ------ ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
G 7,040,000 $12.50 $87,942,000 $1.00 $12.50
</TABLE>
Each share of Series G preferred stock is convertible at the holder's
option into two shares of common stock, and this conversion ratio is subject to
adjustment under antidilution provisions as stated in the Company's Certificate
of Incorporation. Each share of preferred stock will automatically convert into
a share of common stock at the then-effective conversion price immediately upon
the closing of the sale of the Company's common stock in a firm commitment,
underwritten public offering registered under the Securities Act of 1933 at an
offering price to the public equal to or exceeding $6.70 per share of common
stock and resulting in aggregate gross proceeds to the Company of at least $25
million.
The holder of each share of Series G preferred stock is entitled to
receive, when and as declared by the Board of Directors, noncumulative
dividends. Through September 30, 2000 (unaudited), no dividends had been
declared.
The Series G preferred stockholders are entitled to liquidation
preferences, adjusted for any combinations, consolidations or stock splits with
respect to their shares and, in addition, an amount equal to all declared but
unpaid dividends for each share of Series G preferred stock then held. After
payment of these liquidation preferences, any remaining assets would be
distributed to the holders of common stock and Series B, C, D, E, F and G
preferred stock on a pro rata basis as if the Series B, C, D, E, F and G
preferred stock were converted into common stock at the then applicable
conversion price for each respective series of preferred stock until the holders
of the preferred stock received an aggregate amount equal to $3.50, $5.303,
$10.606, $12.7272, $21.2121 and $26.5151, respectively, per share (plus an
amount equal to all declared but unpaid dividends on the preferred stock).
The holders of preferred shares are entitled to the number of votes that
they would have upon conversion of their preferred shares into common shares.
2000 EMPLOYEE STOCK PURCHASE PLAN
Transmeta adopted the 2000 Employee Stock Purchase Plan (the "Purchase
Plan") in September 2000. It allows employees to designate up to 15% of their
total compensation to purchase shares of the Company's common stock at 85% of
fair market value. The Company has reserved 2,000,000 shares of common stock for
issuance under the Purchase Plan.
2000 EQUITY INCENTIVE PLAN
Transmeta adopted the 2000 Equity Incentive Plan in September 2000 which
will serve as the successor to the 1997 Equity Incentive Plan. The 2000 Equity
Incentive Plan authorizes the award of options, restricted stock and stock
bonuses and provides for the grant of both incentive stock options that qualify
under Section 422 of the Internal Revenue Code and nonqualified stock options.
The exercise price of the incentive stock options must be at least equal to the
fair market value of the common stock on the date of grant. The exercise price
of incentive stock options granted to 10% stockholders must be at least equal to
110% of the fair
F-27
<PAGE> 100
TRANSMETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
market value of the common stock on the date of grant. The maximum term of the
options granted is ten years. The Company has reserved 7,000,000 shares of
common stock under this plan.
LEASE AGREEMENTS
On July 15, 2000, Transmeta entered into a lease agreement for additional
building space. The lease agreement is for one year with no option to renew.
Monthly payments are $56,000 over the lease term.
IBM TECHNOLOGY LICENSE AGREEMENT AMENDMENT
On September 28, 2000, Transmeta and IBM agreed to a further amendment to
their technology license agreement. IBM relinquished the right to receive
certain contingent payments in exchange for a fixed commitment to pay $5.0
million, of which $2.5 million is due on October 31, 2000, and $2.5 million is
due on the earlier of the completion of this offering or March 31, 2001. These
payments will be recorded as additional deferred charges under license
agreements and will be amortized over the then remaining term of the original
license agreement through December 2003.
F-28
<PAGE> 101
[TRANSMETA LOGO]
<PAGE> 102
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses, other than the
underwriting discounts and commissions, payable by us in connection with the
sale and distribution of the securities being registered. All amounts shown are
estimates, except the Securities and Exchange Commission registration fee, the
National Association of Securities Dealers, Inc. filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 52,800
National Association of Securities Dealers, Inc. filing
fee....................................................... 27,410
Nasdaq National Market listing fee.......................... 95,000
Blue sky and NASD expenses.................................. 5,000
Transfer agent and registrar fees........................... 15,000
Accounting fees and expenses................................ 550,000
Legal fees and expenses..................................... 500,000
Printing expenses........................................... 250,000
Miscellaneous............................................... 4,790
----------
Total..................................................... $1,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers under certain circumstances and subject to certain limitations. The
terms of Section 145 of the Delaware General Corporation Law are sufficiently
broad to permit indemnification under certain circumstances for liabilities,
including reimbursement of expenses incurred, arising under the Securities Act
of 1933 (the "Securities Act").
As permitted by the Delaware General Corporation Law, the Registrant's
certificate of incorporation includes a provision that eliminates the personal
liability of a director for monetary damages resulting from breach of his
fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to the Registrant or its
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
- for any transaction from which the director derived an improper personal
benefit.
As permitted by the Delaware General Corporation Law, the Registrant's
bylaws provide that:
- the Registrant is required to indemnify its directors and officers to the
fullest extent permitted by the Delaware General Corporation Law, subject
to limited exceptions where indemnification is not permitted by
applicable law;
- the Registrant is required to advance expenses, as incurred, to its
directors and officers in connection with a legal proceeding to the
fullest extent permitted by the Delaware General Corporation Law, subject
to certain very limited exceptions; and
- the rights conferred in the bylaws are not exclusive.
In addition, the Registrant has entered into indemnity agreements with each
of its current directors and officers. These agreements will provide for the
indemnification of the Registrant's officers and directors for all expenses and
liabilities incurred in connection with any action or proceeding brought against
them by reason of the fact that they are or were agents of the Registrant.
II-1
<PAGE> 103
The Registrant has obtained directors' and officers' insurance to cover its
directors, officers and some of its employees for certain liabilities, including
public securities matters.
Reference is also made to Sections 7 and 8 of the Underwriting Agreement
(Exhibit 1.01 hereto), which provides for indemnification by the Underwriters of
the Registrant and its executive officers and directors for certain liabilities,
including liabilities arising under the Securities Act, in connection with
matters specifically provided in writing by the Underwriters for inclusion in
the Registration Statement.
See also the undertakings set out in response to Item 17.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT NUMBER
---------------- ------
<S> <C>
Underwriting Agreement...................................... 1.01
Registrant's Certificate of Incorporation................... 3.01
Form of Registrant's First Amended and Restated Certificate
of Incorporation.......................................... 3.03
Form of Registrant's Second Amended and Restated Certificate
of Incorporation to be effective after the closing of this
offering.................................................. 3.04
Registrant's Bylaws as adopted July 31, 2000................ 3.05
Form of Registrant's Bylaws to be effective prior to
completion of this offering............................... 3.06
Fifth Restated Investors' Rights Agreement dated March 31,
2000, between Registrant, certain stockholders and a
convertible note holder named therein..................... 4.02
Form of Indemnity Agreement................................. 10.01
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years prior to the filing of this Registration Statement, the
Registrant issued and sold the following unregistered securities, all of which
reflect the two-for-one common stock split effected in May 1998 and the
two-for-one common stock split to be effected before this offering:
1. In September and November 1997, the Registrant issued and sold a
total of 2,462,400 shares of Series D preferred stock to a group of 8
venture capital and investment funds for a total purchase price of
$6,156,000, all of which was paid in cash.
2. In June and July 1998, the Registrant issued and sold a total of
4,999,999 shares of Series E preferred stock to a group of 48 investors,
consisting of 19 individual investors, one corporate investor and 28
venture capital and investment funds for a total purchase price of
$29,999,994, all of which was paid in cash.
3. In March 1999, the Registrant issued a warrant to Aisys Corporation
to purchase up to 68,000 shares of common stock at $3.00 per share as
partial consideration for consulting services. The warrant is exercisable
until March 18, 2004.
4. In July 1999, the Registrant issued and sold a total of 7,692,500
shares of Series F preferred stock to a group of 36 investors, consisting
of 13 individual investors and 23 venture capital and investment funds for
a total purchase price of $76,925,000, all of which was paid in cash.
5. In December 1997, the Registrant issued a Convertible Promissory
Note to IBM in the principal amount of $600,000. The note was convertible
into $6 million of common stock at a conversion price equal to the initial
public offering price. In October 1999, the Registrant exchanged this note
with a Restated and Amended Convertible Promissory Note in the principal
amount of $600,000. The Amended and Restated Convertible Promissory Note is
convertible into 1,200,000 shares of common stock.
6. In July 1999, the Registrant issued 20,000 shares of common stock,
valued at $1.75 per share, to George Bolton in consideration for consulting
services rendered.
II-2
<PAGE> 104
7. In January 2000, the Registrant issued a warrant to IDEO Product
Development Inc. to purchase up to 8,000 shares of common stock at $5.00
per share, exercisable upon the delivery by January 17, 2000 of a product
concept model using the Registrant's product as described in the warrant.
The warrant expires January 14, 2005.
8. In February 2000, the Registrant issued a warrant to Uniwill
Corporation to purchase up to 50,000 shares of common stock at $5.00 per
share, exercisable in various amounts from September 30, 2000 to February
28, 2001 upon the completion of development milestones as described in the
warrant. The warrant expires February 1, 2005.
9. In February 2000, the Registrant issued and sold 1,200,000 shares
of common stock to Toshiba Corporation in consideration for entering into
the Restated and Amended Technology License Agreement dated February 17,
2000.
10. In April 2000, the Registrant issued and sold a total of 7,040,000
shares of Series G preferred stock to a group of 71 investors, consisting
of 22 individual investors, 14 corporate investors including a company
controlled by one of the Registrant's directors and 35 venture capital and
investment funds for a total purchase price of $88,000,000, all of which
was paid in cash.
11. Since January 1, 1997, the Registrant has granted each of the
following lenders a warrant to purchase shares of common stock as presented
in the table below, as partial consideration for the financing of equipment
used by the Registrant:
<TABLE>
<CAPTION>
PER SHARE
WARRANT EXERCISE DATE OF EXPIRATION
WARRANT HOLDER SHARES PRICE ISSUANCE DATE
-------------- ------- -------------- -------- ----------
<S> <C> <C> <C> <C>
Venture Lending & Leasing, Inc............. 160,000 $1.25 4/07/97 03/31/03
Comdisco, Inc.............................. 144,000 $1.25 4/05/97 04/05/07
Phoenix Leasing Incorporated............... 160,000 $1.25 8/15/97 08/15/07
Quickturn Design Systems Incorporated...... 125,032 $1.25 1/16/98 12/31/07
Venture Lending & Leasing, Inc............. 96,000 $1.25 4/29/98 03/31/04
Venture Lending & Leasing II, Inc.......... 224,000 $1.25 4/29/98 03/31/04
Pentech Financial Services, Inc............ 240,000 $1.25 4/01/98 04/01/08
Transamerica Business Credit Corporation... 50,000 $3.00 5/21/98 05/21/05
</TABLE>
12. Since January 1, 1997, the Registrant issued and sold to each of
the following officers, directors and employees of Registrant, on the
exercise dates below, the number of shares of common stock shown below
pursuant to exercises of non-plan options granted on the dates shown below:
<TABLE>
<CAPTION>
EXERCISE NUMBER PRICE PROMISSORY OPTION
NAME DATE OF SHARES PER SHARE NOTE AMOUNT DATE
---- -------- --------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
R. Hugh Barnes.................... 12/18/98 100,000 $ .65 $ 65,000 11/20/98
12/18/98 20,000 $ .65 $ 13,000 11/20/98
Murray A. Goldman................. 12/18/98 100,000 $ .65 $ 65,000 11/20/98
12/18/98 200,000 $ .65 $ 130,000 11/20/98
3/24/99 500,000 $ .65 $ 325,000 3/19/99
Daniel E. Steimle................. 12/18/98 550,000 $ .65 $ 357,500 11/23/98
3/24/99 500,000 $ .65 $ 325,000 3/19/99
David R. Ditzel................... 3/24/99 500,000 $ .65 $ 325,000 3/19/99
Douglas A. Laird.................. 3/24/99 500,000 $ .65 $ 325,000 3/19/99
James N. Chapman.................. 3/24/99 500,000 $ .65 $ 325,000 3/19/99
Mark K. Allen..................... 1/17/00 2,000,000 $3.00 $6,000,000 1/04/00
David P. Jensen................... 3/06/00 550,000 $3.63 $1,933,750 2/18/00
Merle A. McClendon................ 8/03/00 1,100,000 $6.00 $6,600,000 7/21/00
</TABLE>
II-3
<PAGE> 105
13. In August 2000, the Registrant issued 80,000 shares of common
stock to CPU Technology, Inc. upon exercise of a warrant that was granted
in August 1996 as partial consideration for services. The exercise price of
$.63 per share was paid in cash.
14. As of September 30, 2000, the Registrant had issued 6,871,400
shares of common stock to its employees, directors, consultants and other
service providers upon exercise of options under the Registrant's 1995
Equity Incentive Plan, with exercise prices ranging from $.03 to $.04 per
share.
15. As of September 30, 2000, the Registrant had issued 6,272,810
shares of common stock to its employees, directors, consultants and other
service providers upon exercise of options under the Registrant's 1997
Equity Incentive Plan, with exercise prices ranging from $.13 to $3.00 per
share. In addition, in May 1998, the Registrant issued a total of 68,000
shares of common stock to 34 of its employees under the Registrant's 1997
Equity Incentive Plan.
The sales and issuances of securities listed above, other than the sales
and issuances in Items 14 and 15 were determined to be exempt from registration
under Section 4(2) of the Securities Act or Regulation D thereunder as
transactions by an issuer not involving a public offering. The sales and
issuances of securities listed above in Items 14 and 15 were deemed to be exempt
from registration under the Securities Act by virtue of Rule 701 promulgated
under Section 3(b) of the Securities Act as transactions pursuant to
compensation benefits plans and contracts relating to compensation. All of the
foregoing securities are deemed restricted securities for purposes of the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.*
3.01 Registrant's Certificate of Incorporation.*
3.02 Amendment to Registrant's Certificate of Incorporation.*
3.03 Registrant's First Amended and Restated Certificate of
Incorporation.*
3.04 Form of Registrant's Second Amended and Restated Certificate
of Incorporation to be effective after the closing of this
offering.*
3.05 Registrant's Bylaws.*
3.06 Registrant's Restated Bylaws.*
4.01 Specimen Common Stock Certificate.*
4.02 Fifth Restated Investors' Rights Agreement dated March 31,
2000, between Registrant, certain stockholders and a
convertible note holder named therein.*
4.03 Form of Piggyback Registration Rights Agreement.*
5.01 Opinion of Fenwick & West LLP.*
10.01 Form of Indemnity Agreement.*
10.02 Registrant's 1995 Equity Incentive Plan.*
10.03 Registrant's 1997 Equity Incentive Plan.*
10.04 Registrant's 2000 Equity Incentive Plan.*
10.05 Registrant's 2000 Employee Stock Purchase Plan.*
10.06 Form of Option granted to Mark K. Allen and related
documents.*
10.07 Agreement for Purchase and Sale of Custom Semiconductor
Products, effective December 12, 1997, between International
Business Machines Corporation and Registrant.+*
10.08 Lease Agreement, dated November 1, 1995, between John
Arrillaga, as trustee of John Arrillaga Family Trust,
Richard T. Peery, as trustee of Richard T. Peery Separate
Property Trust, and Registrant, as amended by Amendment No.
1, dated January 29, 1997, and Amendment No. 2, dated April
2, 1998, between John Arrillaga, as trustee of John
Arrillaga Survivor's Trust (successor in interest to the
Arrillaga Family Trust), Richard T. Peery, as trustee of
Richard T. Peery Separate Property Trust, and Registrant.*
</TABLE>
II-4
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.09 Lease Agreement, dated January 29, 1997, between John
Arrillaga, as trustee of John Arrillaga Family Trust,
Richard T. Peery, as trustee of Richard T. Peery Separate
Property Trust, and Registrant, as amended by Amendment No.
1, dated April 2, 1998, between John Arrillaga, as trustee
of John Arrillaga Survivor's Trust (successor in interest to
the Arrillaga Family Trust), Richard T. Peery, as trustee of
Richard T. Peery Separate Property Trust, and Registrant.*
10.10 Lease Agreement, dated April 2, 1998, between John
Arrillaga, as trustee of John Arrillaga Survivor's Trust,
Richard T. Peery, as trustee of Richard T. Peery Separate
Property Trust, and Registrant.*
10.11 Lease Agreement, dated April 2, 1998, between John
Arrillaga, as trustee of John Arrillaga Survivor's Trust,
Richard T. Peery, as trustee of Richard T. Peery Separate
Property Trust, and Registrant.*
10.12 Sublease Agreement, dated as of October 28, 1998, between
Registrant and Mitel, Inc.*
10.13 Sublease Agreement, dated as of April 28, 1999, between
Registrant and Xuan Nguyen dba World Marketing Alliance.*
10.14 Sublease Agreement, dated as of November 1, 1999, between
Registrant and Moscape, Inc.*
10.15 Sublease Agreement, dated as of June 15, 2000, between
Registrant and Bitlocker, Inc.*
10.16 Right of First Offer and Observation Rights Agreement, dated
as of June 17, 1998, between Registrant and Van Wagoner
Capital Management.*
10.17 Form of Stock Option Agreement under Registrant's 2000
Equity Incentive Plan.*
10.18 Form of Stock Option Agreement (for Non-Employee Directors)
under Registrant's 2000 Equity Incentive Plan.*
21.01 Subsidiaries of the Registrant.*
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).*
23.02 Consent of Ernst & Young LLP, independent auditors.
24.01 Power of Attorney.*
24.02 Power of Attorney.*
27.01 Financial Data Schedule.*
</TABLE>
------------
* Previously filed.
+ Confidential treatment has been requested for portions of this exhibit. These
portions have been omitted from this filing and have been filed separately
with the Securities and Exchange Commission.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the consolidated financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under "Item
14 -- Indemnification of Directors and Officers" above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-5
<PAGE> 107
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 108
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California, on the 3rd day of November, 2000.
TRANSMETA CORPORATION
By: /s/ MERLE A. MCCLENDON
------------------------------------
Merle A. McClendon
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this Amendment to
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
* Chief Executive Officer November 3, 2000
----------------------------------------------------- and Director [Principal
David R. Ditzel Executive Officer]
/s/ MERLE A. MCCLENDON Chief Financial Officer and November 3, 2000
----------------------------------------------------- Secretary
Merle A. McClendon [Principal Financial
Officer and Principal
Accounting Officer]
* President, Chief Operating November 3, 2000
----------------------------------------------------- Officer and Director
Mark K. Allen
* Director November 3, 2000
-----------------------------------------------------
R. Hugh Barnes
* Director November 3, 2000
-----------------------------------------------------
Murray A. Goldman
* Director November 3, 2000
-----------------------------------------------------
Paul M. McNulty
* Director November 3, 2000
-----------------------------------------------------
William P. Tai
* Director November 3, 2000
-----------------------------------------------------
T. Peter Thomas
* Director November 3, 2000
-----------------------------------------------------
Larry R. Carter
*By: /s/ MERLE A. MCCLENDON Attorney-in-fact November 3, 2000
------------------------------------------------
Merle A. McClendon
</TABLE>
II-7
<PAGE> 109
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.*
3.01 Registrant's Certificate of Incorporation.*
3.02 Amendment to Registrant's Certificate of Incorporation.*
3.03 Registrant's First Amended and Restated Certificate of
Incorporation.*
3.04 Form of Registrant's Second Amended and Restated Certificate
of Incorporation to be effective after the closing of this
offering.*
3.05 Registrant's Bylaws.*
3.06 Registrant's Restated Bylaws.*
4.01 Specimen Common Stock Certificate.*
4.02 Fifth Restated Investors' Rights Agreement dated March 31,
2000, between Registrant, certain stockholders and a
convertible note holder named therein.*
4.03 Form of Piggyback Registration Rights Agreement.*
5.01 Opinion of Fenwick & West LLP.*
10.01 Form of Indemnity Agreement.*
10.02 Registrant's 1995 Equity Incentive Plan.*
10.03 Registrant's 1997 Equity Incentive Plan.*
10.04 Registrant's 2000 Equity Incentive Plan.*
10.05 Registrant's 2000 Employee Stock Purchase Plan.*
10.06 Form of Option granted to Mark K. Allen and related
documents.*
10.07 Agreement for Purchase and Sale of Custom Semiconductor
Products, effective December 12, 1997, between International
Business Machines Corporation and Registrant.+*
10.08 Lease Agreement, dated November 1, 1995, between John
Arrillaga, as trustee of John Arrillaga Family Trust,
Richard T. Peery, as trustee of Richard T. Peery Separate
Property Trust, and Registrant, as amended by Amendment No.
1, dated January 29, 1997, and Amendment No. 2, dated April
2, 1998, between John Arrillaga, as trustee of John
Arrillaga Survivor's Trust (successor in interest to the
Arrillaga Family Trust), Richard T. Peery, as trustee of
Richard T. Peery Separate Property Trust, and Registrant.*
10.09 Lease Agreement, dated January 29, 1997, between John
Arrillaga, as trustee of John Arrillaga Family Trust,
Richard T. Peery, as trustee of Richard T. Peery Separate
Property Trust, and Registrant, as amended by Amendment No.
1, dated April 2, 1998, between John Arrillaga, as trustee
of John Arrillaga Survivor's Trust (successor in interest to
the Arrillaga Family Trust), Richard T. Peery, as trustee of
Richard T. Peery Separate Property Trust, and Registrant.*
10.10 Lease Agreement, dated April 2, 1998, between John
Arrillaga, as trustee of John Arrillaga Survivor's Trust,
Richard T. Peery, as trustee of Richard T. Peery Separate
Property Trust, and Registrant.*
10.11 Lease Agreement, dated April 2, 1998, between John
Arrillaga, as trustee of John Arrillaga Survivor's Trust,
Richard T. Peery, as trustee of Richard T. Peery Separate
Property Trust, and Registrant.*
10.12 Sublease Agreement, dated as of October 28, 1998, between
Registrant and Mitel, Inc.*
10.13 Sublease Agreement, dated as of April 28, 1999, between
Registrant and Xuan Nguyen dba World Marketing Alliance.*
10.14 Sublease Agreement, dated as of November 1, 1999, between
Registrant and Moscape, Inc.*
10.15 Sublease Agreement, dated as of June 15, 2000, between
Registrant and Bitlocker, Inc.*
10.16 Right of First Offer and Observation Rights Agreement, dated
as of June 17, 1998, between Registrant and Van Wagoner
Capital Management.*
10.17 Form of Stock Option Agreement under Registrant's 2000
Equity Incentive Plan.*
10.18 Form of Stock Option Agreement (For Non-Employee Directors)
under Registrant's 2000 Equity Incentive Plan.*
</TABLE>
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
21.01 Subsidiaries of the Registrant.*
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).*
23.02 Consent of Ernst & Young LLP, independent auditors.
24.01 Power of Attorney.*
24.02 Power of Attorney.*
27.01 Financial Data Schedule.*
</TABLE>
------------
* Previously filed.
+ Confidential treatment has been requested for portions of this exhibit. These
portions have been omitted from this filing and have been filed separately
with the Securities and Exchange Commission.
