<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-30556
PROSPECTUS
6,500,000 Shares
[LEXAR MEDIA LOGO]
Common Stock
This is the initial public offering of common stock by Lexar Media, Inc.
Lexar Media is selling 6,500,000 shares of common stock. The initial public
offering price is $8.00 per share.
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Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol LEXR.
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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Initial public offering price............................ $8.00 $52,000,000
Underwriting discounts and commissions................... $0.56 $ 3,640,000
Proceeds to Lexar Media, before expenses................. $7.44 $48,360,000
</TABLE>
Lexar Media has granted the underwriters an option for a period of 30 days
to purchase up to an additional 975,000 shares of common stock.
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Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page 9.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
Chase H&Q J.P. Morgan & Co.
SG Cowen Wit SoundView
August 14, 2000
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Cover Artwork
Inside Front Cover of Prospectus:
Caption on top right of page: "LEXAR MEDIA"
In the background at the center of the page is a screen capture of an
Internet browser displaying our webpage at http://www.digitalfilm.com. At the
bottom of this background is an expanded image of the "Download" icon button,
as it appears on an Internet browser menu bar. In the background at the bottom
left of the page is an expanded image of the "Print" icon button and arrow
cursor image, as they would appear on an Internet browser menu bar.
On the right side of the page is a Nikon digital camera, into which our
digital film is shown partially inserted.
In the middle of the page, below the background image, is an arrangement of
nine objects relating to our products (clockwise from top):
. our digital film, as it appears when removed from its retail packaging;
. a 3.5-inch computer diskette, labeled with our logo;
. our retail product packaging for our "Professional Digital Film Pack;"
. our retail product packaging for our 8x digital film;
. our retail product packaging for our 4x digital film;
. our retail product packaging for our digital film reader;
. our digital film reader as it appears when removed from its packaging;
. our digital film, as it appears when removed from its retail packaging.
To the right and below is a picture of a photograph enclosed in a standing
desk frame. Below this frame is an array of four photographs of children,
arranged on top of a mailing envelope.
At the bottom right of the page is the Lexar Media logo
Gate fold
Main Caption at Top of Page: "The BIG Picture"
Subcaption at Top of Page Below Main Caption: "Lexar Media's Digital
Photography Solution"
5 Bullet Points, each of which is accompanied with images, arrayed in a
circle on the page:
. "Consumer Education, Awareness, Branding" Above the bullet point labeled
"1" are two pictures of our print advertisements for our digital film;
. "A Wide Range of Digital Film for Every Digital Photographer" Above the
bullet point labeled "2" are pictures of our digital film;
. "Bringing the Ultimate Performance Out of Today's Leading Digital
Equipment" To the left of the bullet point labeled "3" is a picture of
our digital film and an arrow pointing from the card to a digital
camera, shown from the front. To the right of this picture is a picture
of a digital camera,
<PAGE>
shown from the side and behind, showing our digital film partially
inserted into the camera. Arrayed below this picture are two additional
digital cameras. Below and to the right of the bullet point is an array
of four photographs taken in time lapse, below which is a bracket and
the caption "0.8 seconds." Above this array, one of the photographs is
reproduced and enlarged with the caption "Keeper" and an arrow pointing
to it.
. "Award-Winning Connectivity Solutions Simplify the Image Download
Process" Above the bullet point labeled "4" is a picture of a computer
keyboard and terminal screen displaying a menu for editing and selecting
digital images on the computer. To the right of the bullet point is a
picture of our digital film reader, into which is inserted our digital
film, and which is shown connected by cable to the computer terminal.
. "PrintRoom.com: Transforming Pictures to Prints" To the left of the
bullet point labeled "5" is a picture of a photograph inside a standing
frame. Below the framed photo there is an array of four photographs of a
child, arranged on top of a mailing envelope.
In the background, at the lower left of the page is a picture of a digital
camera, into which is shown partially inserted our digital film.
In the background and across the bottom right of the page is an array of 6
logos of awards given to our products:
. "Best of What's New" logo
. "PEI cool2 award 1999" logo
. "The Eddy's: Dealerscope Editors' Choice Awards" logo
. "PC Photo Editors' Choice" logo
. "Popular Science Digital Focus Excellence in Imaging Award 1999" logo
. "Mobile Computing 100 Best Products of 1999" logo
Inside back cover of prospectus:
Caption at bottom center of page: "Taking Pictures at the Speed of Life."
Above the caption is a photograph of a child holding our digital film.
Back cover of prospectus:
Caption at bottom center of page: "Taking Pictures at the Speed of Life."
Above the caption is the Lexar Media logo.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 9
Forward-Looking Statements................................................ 25
Use of Proceeds........................................................... 25
Dividend Policy........................................................... 25
Capitalization............................................................ 26
Dilution.................................................................. 28
Selected Consolidated Financial Data...................................... 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 31
Business.................................................................. 42
Management................................................................ 54
Related Party Transactions................................................ 67
Principal Stockholders.................................................... 70
Description of Capital Stock.............................................. 72
Shares Eligible for Future Sale........................................... 76
Underwriting.............................................................. 78
Legal Matters............................................................. 80
Experts................................................................... 80
Additional Information.................................................... 81
Index to Consolidated Financial Statements................................ F-1
</TABLE>
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The Lexar Media name and logo are trademarks that are federally registered
in the United States. The titles and logos associated with our products
appearing in this prospectus, including JumpShot, are either federally
registered trademarks or are subject to pending applications for registration.
Our trademarks may also be registered in other jurisdictions. All other
trademarks or trade names appearing elsewhere in this prospectus are the
property of their respective owners.
3
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PROSPECTUS SUMMARY
The following summary contains basic information about our business and this
offering. It may not contain all of the information that is important to you.
You should read the entire prospectus, including "Risk Factors" and our
consolidated financial statements and notes to the financial statements, before
making an investment decision.
Lexar Media, Inc.
We are a leading designer, developer and marketer of high-performance
digital film and connectivity products for the digital photography market. Our
broad line of high-performance digital film combines flash memory, a type of
reprogrammable memory that does not require a constant power source, from
leading suppliers with our patented controller technology to address the needs
of professional, commercial and consumer photographers. Our connectivity
products make it easy to transfer digital images from digital film to a
personal computer. Our online photofinishing site, PrintRoom.com, provides
consumers with high-quality prints of digital images and photo sharing
services. Collectively, our products and services provide an end-to-end
solution for digital photographers.
Digital photography offers several advantages over traditional photography.
The photographer can immediately preview digital images, select the best
digital image from multiple shots and delete unwanted images. Photographers can
also transfer the digital images to a personal computer where they can be
easily edited and shared. These attributes, together with the growing presence
of personal computers in the home and the ability to transmit images to friends
and family over the Internet, are stimulating demand for digital cameras.
Our digital film is a removable and reusable storage device that captures
images from a digital camera. We currently offer digital film in the four
primary media formats currently used by digital cameras: CompactFlash,
SmartMedia, PC Card and Memory Stick. Our film is compatible with substantially
all digital cameras, including those manufactured by Agfa, Canon, Casio, Epson,
Fuji, Hewlett-Packard, Kodak, Konica, Minolta, Nikon, Olympus, Polaroid, Ricoh,
Sony and Yashica. Many professional photographers choose to use our digital
film over other brands. For example, Kodak packages our branded film with its
professional series cameras and professional photographers have cited the
merits of our digital film in the press.
Our digital film reader/writers are products that facilitate the transfer of
digital images to a personal computer and other devices without a direct
connection to the digital camera. Our new JumpShot cable connects the universal
serial bus, or USB, port to our USB-enabled CompactFlash digital film to
quickly and easily transfer images. It received the 1999 Best of What's New
Award from Popular Science and the Editor's Choice Award from PC Photo. We
protect the technology underlying our digital photography products through our
large patent portfolio consisting of 27 U.S. patents granted or allowed.
PrintRoom.com enables digital camera users to submit their digital images
for printing directly over the Internet to receive high-quality photographic
prints in the mail at prices competitive with traditional photofinishing
services. We also offer online photo sharing services through which our
customers are able to share their digital images with family and friends.
We are currently involved in significant and costly litigation with SanDisk
Corporation, our primary competitor, in which the Federal District Court has
found that some of our products, which accounted for approximately 80% of our
revenues in 1999 and the first six months of 2000, infringe one of SanDisk's
patents. In response to this ruling, we have commenced the redesign of these
products in a manner that we believe does not infringe SanDisk's patent. We
believe that we will be able to ship redesigned products prior to the
conclusion of the trial that is currently scheduled to commence on October 23,
2000.
4
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Our products and services offer the following benefits:
. Superior Speed. Our digital film records images faster than most other
digital film, particularly when used in advanced digital cameras that
have the ability to take advantage of the rate at which our film is able
to capture a digital image.
. Quick Connectivity. Our digital film reader/writers facilitate the
transfer of digital images to a personal computer and other devices
without a direct connection to the digital camera.
. High Capacity. Our digital film is available in capacities up to 320
megabytes to meet the requirements of high resolution digital cameras.
. Guaranteed Compatibility. Our extensive testing allows us to market our
entire line of digital film as "Digital Film Compliant," which is our
guarantee that our digital film will work seamlessly with any digital
camera that uses a particular format.
. Internet Photofinishing Services. PrintRoom.com offers a broad array of
photofinishing and photo sharing services over the Internet.
Our redesigned products are being tested in our labs and have met our
requirements for functionality, reliability and compatibility. Because we have
not completed our redesign efforts, however, we cannot be certain that the
redesigned products will be feasible to produce, commercially competitive or
have all the functionality, including the high write speed and storage
capacity, of our current products, or that they will not be found to infringe
SanDisk's patents or the patents of others. We believe that our redesign
efforts will not affect the connectivity or compatibility of our products.
We generate product revenues primarily from the sale of digital film and
connectivity products to the professional, commercial and consumer markets and,
to a lesser extent, from the sale of controllers to suppliers of flash memory
products. Our customers include distributors, consumer retailers, original
equipment manufacturers and private label resellers. Our products are widely
available to consumers through leading retailers such as B&H Photo, Best Buy,
Camera World, CompUSA, Target, Wal-Mart and Wolf Camera.
In addition to digital photography, our digital film technology can be
applied to a variety of consumer electronic applications, such as Internet
music players, laptop computers, personal digital assistants, telecommunication
and network devices and digital video recorders. In order to extend our digital
film technology into these markets, we intend to selectively license our
products and technology to third parties. We recently entered into an agreement
with Sony to combine our proprietary controller technology with their Memory
Stick media format. The Memory Stick is used in a wide variety of consumer
electronic products, including camcorders, personal computers, portable music
players, cameras and voice recorders.
Our objective is to establish our products and services as the industry
standard solution for capturing, storing, viewing, editing and distributing
digital images. We intend to capitalize on the anticipated growth and
development of the digital photography market by offering a broad range of
digital film and connectivity products and services and to leverage our
proprietary technology into other consumer product applications. We aim to:
. leverage our technology to enhance the digital photography experience;
. build our brand;
. extend our patented controller technology to address new market
opportunities;
. capitalize on supply flexibility for our key components; and
. expand our international presence.
5
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The Offering
Common stock offered by us............. 6,500,000 shares
Common stock to be outstanding after this offering.
59,031,830 shares
Use of proceeds........................ Repayment of debt and for general
corporate purposes, including working
capital and capital expenditures.
Nasdaq National Market symbol.......... LEXR
The number of shares of our common stock that will be outstanding after this
offering is based on 52,531,830 shares outstanding as of June 30, 2000. This
number assumes the conversion of all of our outstanding preferred stock into
37,224,049 shares of common stock and includes the exercise of outstanding
warrants to purchase 420,559 shares of our common stock prior to the completion
of this offering.
The number of shares of our common stock that will be outstanding after this
offering excludes:
. 3,239,684 shares of our common stock subject to options outstanding as
of June 30, 2000 at a weighted average exercise price of $3.65 per
share;
. 155,000 shares of our common stock subject to warrants outstanding as of
June 30, 2000 at a weighted average exercise price of $0.84 per share;
. 644,395 shares of our common stock subject to warrants issued to six of
our stockholders in May, June and July 2000 in connection with
promissory notes entered into with these stockholders. These warrants
have an exercise price of $3.09 per share. In addition, under the terms
of the promissory notes, these stockholders received warrants to
purchase additional shares of our common stock, in monthly installments,
at an exercise price of $8.00 per share for up to 12 months from the
issue date of the respective promissory notes so long as the principal
on the notes remain outstanding. Because we anticipate repaying the
promissory notes in full by September 15, 2000, these stockholders will
have the right to purchase an aggregate of up to an additional 310,660
shares of our common stock subject to the warrants;
. 9,703,453 additional shares of our common stock that have been reserved
for issuance upon future grants under our stock option and stock
purchase plans;
. up to 268,817 shares of our common stock that we would issue to Sony
upon conversion of the $2.0 million convertible promissory note that we
issued to Sony in March 2000, based upon the initial public offering
price of $8.00 per share; and
. 875,000 shares of our common stock subject to warrants issued in
connection with a $20.0 million revolving credit facility we entered
into with The Chase Manhattan Bank and a $10.0 million term loan we
entered into with Access Technology Partners, L.P., an affiliate of
Chase, in June 2000.
Except as otherwise indicated, all information in this prospectus assumes:
. the conversion of each outstanding share of our Series A preferred
stock, Series B preferred stock, Series C preferred stock and Series D
preferred stock into one share of our common stock and the conversion of
each outstanding share of our Series E preferred stock into 1.102 shares
of our common stock upon the completion of this offering; and
. no exercise of the underwriters' over-allotment option.
6
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Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
September 16,
1996 (date of Six Months Ended
inception) to Years Ended December 31, June 30,
December 31, -------------------------- -----------------
1996 1997 1998 1999 1999 2000
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(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Income Data:
Revenues:
Product sales......... $ 452 $ 1,938 $ 7,609 $ 29,219 $ 9,237 $ 40,816
Development fees...... -- 1,005 -- -- -- --
------- ------- ------- -------- ------- --------
Total revenues....... 452 2,943 7,609 29,219 9,237 40,816
------- ------- ------- -------- ------- --------
Gross margin............ 185 1,810 1,576 4,623 1,302 6,764
Operating expenses:
Research and
development (excludes
stock-based
compensation of $274,
$85 and $2,705 in
1999, and the
six months ended June
30,
1999 and June 30,
2000, respectively).. 726 3,931 3,101 4,141 1,963 3,551
Sales and marketing
(excludes stock-based
compensation of $285,
$32 and $1,185 in
1999, and the six
months ended June 30,
1999 and June 30,
2000, respectively).. 238 1,098 4,413 8,599 3,515 8,126
General and
administrative
(excludes stock-based
compensation of
$1,118, $171 and
$3,512 in 1999, and
the six months ended
June 30, 1999 and
June 30, 2000,
respectively)........ 709 1,650 2,733 5,241 2,370 5,860
In-process research
and development
write-off............ 3,047 -- -- -- -- --
Stock-based
compensation......... -- -- -- 1,806 298 8,168
------- ------- ------- -------- ------- --------
Total operating
expenses............ 4,720 6,679 10,247 19,787 8,146 25,705
------- ------- ------- -------- ------- --------
Loss from operations.... (4,535) (4,869) (8,671) (15,164) (6,844) (18,941)
------- ------- ------- -------- ------- --------
Net loss................ $(4,555) $(5,157) $(9,090) $(15,281) $(6,957) $(19,099)
======= ======= ======= ======== ======= ========
Net loss per common
share--basic and
diluted................ $ (0.27) $ (0.50) $ (2.57) $ (2.65) $ (1.33) $ (2.29)
======= ======= ======= ======== ======= ========
Shares used in net loss
per common share
calculation--basic and
diluted (see Note 2 to
the consolidated
financial statements).. 16,854 10,387 3,543 5,820 5,253 8,471
======= ======= ======= ======== ======= ========
Pro forma net loss per
common share--basic and
diluted (unaudited) ... $ (0.47) $ (0.42)
======== ========
Shares used in pro forma
net loss per common
share calculation--
basic and diluted
(unaudited) (see Note
12 to the consolidated
financial statements).. 32,663 45,695
======== ========
</TABLE>
7
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The pro forma consolidated balance sheet data below reflects the exercise of
outstanding warrants to purchase 420,559 shares of our common stock at a
weighted average exercise price of $1.93 per share which expire upon the
closing of this offering, the issuance of $1.5 million of promissory notes to a
stockholder in July 2000, the borrowing of an aggregate of $10.1 million under
our $20.0 million credit facility with The Chase Manhattan Bank and our $10.0
million term loan with Access Technology Partners, L.P., an affiliate of Chase,
in July 2000, the use of $5.2 million of these funds to repay notes payable to
three stockholders and the automatic conversion of all shares of preferred
stock into 37,224,049 shares of common stock upon the closing of this offering.
The pro forma as adjusted consolidated balance sheet data below reflects the
receipt of the net proceeds from the sale of the 6,500,000 shares of common
stock offered by us at the initial public offering price of $8.00 per share,
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
As of June 30, 2000
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Pro Pro Forma
Actual Forma As Adjusted
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<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........................ $ 13,792 $21,054 $67,814
Working capital.................................. 14,027 15,182 61,942
Total assets..................................... 56,896 61,018 107,778
Debt, current and non current portions........... 16,740 19,707 19,707
Mandatorily redeemable convertible preferred
stock .......................................... 53,414 -- --
Total stockholders' equity (deficit)............. (32,122) 22,447 69,207
</TABLE>
Our Corporate Information
We incorporated in California in September 1996 under the name Lexar
Microsystems, Inc. We changed our name to Lexar Media, Inc. in February 1998
and we reincorporated in Delaware in August 2000. Our principal executive
offices are located at 47421 Bayside Parkway, Fremont, California 94538, and
our telephone number is 510-413-1200.
8
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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the following 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 may lose all or part of your
investment in our common stock. The risks described below are not the only ones
that we face. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also harm our business.
Risks Related to Our Business
Because we have a limited operating history and because we operate in a new and
rapidly evolving market, you may have difficulty assessing our business and
future prospects.
We were organized in September 1996 and have a short operating history. We
began marketing and selling our digital film products in mid-1997, introduced
the latest versions of our digital film products in August 1999 and have only
recently begun offering photofinishing services over the Internet as the result
of our acquisition of PrintRoom.com in January 2000. Because we have only
recently introduced our products and services and have limited historical
financial data, it is difficult to evaluate our business and future prospects.
In addition, because of our limited operating history and because the market
for digital cameras, digital film and Internet photofinishing is still in an
emerging stage and is characterized by an increasing number of competitors and
competing technologies and formats, we have limited insight into trends that
may emerge and affect our business. Our business will not succeed if we are
unable to execute our business strategy or if we do not successfully address
the risks we face.
We have a history of losses, anticipate incurring losses for the foreseeable
future and may never become profitable.
We incurred net losses of approximately $5.2 million, $9.1 million, $15.3
million and $19.1 million for 1997, 1998, 1999 and the six months ended June
30, 2000, respectively. As of June 30, 2000, we had an accumulated deficit of
approximately $53.2 million. We will incur losses for this year and are likely
to incur losses in 2001. The size of our future losses and our ability to
become profitable substantially depend on the rate of growth of the market for
digital cameras and digital film and the extent to which our products and
services are accepted by this market. Therefore, we believe it is critical to
devote substantial resources to developing the brand awareness of our digital
film. In the future we expect sales and marketing, general and administrative
and research and development expenses to increase significantly as we pursue
our strategic objectives. We also expect to continue to incur significant
expenses in connection with our existing patent litigation discussed elsewhere
in this section and the prospectus. In addition, we have incurred non-cash
deferred charges of $28.5 million through June 30, 2000 relating to stock-based
compensation. In connection with our recent debt financing, credit facility and
term loan, we also issued warrants which will result in significant non-cash
interest expense charges during the period the debt is outstanding. As a
result, we will need to significantly increase our revenues in order to achieve
profitability. Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or an annual basis.
We are currently involved in significant and costly litigation with our primary
competitor in which the Federal District Court has found that our products
infringe our competitor's patent. If the court ultimately rules that this
patent is valid, we could be required to pay significant damages and royalties
and could be enjoined from making, selling or using the infringing products.
Since March 1998, we have been engaged in significant litigation with
SanDisk Corporation, our primary competitor in the digital film market. This
litigation, which is described in more detail in
9
<PAGE>
"Business--Legal Proceedings," relates to claims by SanDisk that certain of our
products infringe one of their patents. In its complaint, SanDisk alleges that
it will seek preliminary and permanent injunctions and damages for past
infringement relating to our CompactFlash and PC Card formats, as well as
increased damages for willful infringement up to treble damages, attorneys'
fees and costs. SanDisk has alleged that the operation of all of our
controllers infringe their patent. Approximately 80% of our revenues in 1999
and in the first six months of 2000 were from sales of our controllers and
products incorporating our controllers, and we expect this to be the case for
the next several years.
On March 30, 2000, the U.S. District Court for the Northern District of
California found that certain of our products infringe one of the claims of
SanDisk's patent. The court has set a trial date for October 23, 2000 to
determine whether we infringe any of the other claims of the patent and whether
the patent is valid. We intend to vigorously contest SanDisk's claims and the
validity of SanDisk's patent at trial, but to succeed we will have to overcome
by clear and convincing evidence the legal presumption that a patent is valid.
This is a difficult burden of proof and, as a result, patents are found to be
valid in the significant majority of cases.
In its complaint, SanDisk requests both a preliminary and a permanent
injunction. SanDisk could request a hearing upon its request for a preliminary
injunction against us at any time prior to trial. In the event a preliminary or
permanent injunction were granted, we would be unable to sell products found to
infringe SanDisk's patent. Such an injunction would result in our not being
able to ship a substantial portion of our products and might require us to
recall the infringing products from our customers, which would cause a
substantial reduction in our revenues, significant losses and loss of customer
goodwill for an extended period of time. As a result, we would face a
substantial depletion of our financial resources that could severely limit our
future business prospects or render us insolvent. Further, if at trial the
SanDisk patent is held to be valid, we could be required to pay significant
monetary damages to SanDisk, which, in the event of a finding of willful
infringement, would be subject to trebling and could also require us to pay
SanDisk's attorneys fees. We have also agreed to indemnify customers from
liability with respect to claimed infringement of the SanDisk patent, including
their costs and fees of defending themselves in such suits. The existence of
the SanDisk litigation has had and in the future could have an adverse effect
on our ability to attract and retain customers.
In the event of an injunction, we could seek a license from SanDisk to
enable us to continue selling our products, but SanDisk might not agree to
license its patents to us on reasonable terms, or at all. If available, such a
license may cause us to pay royalties on all our products, even those in the
future that may not infringe SanDisk's patent, and we might be required to
grant a license to SanDisk to utilize our technology for little or no royalty.
Accordingly, the terms of any license might adversely affect our margins and
our ability to compete with SanDisk and others. We are in the process of
redesigning our products in an effort to avoid infringement of SanDisk's
patent. However, we cannot assure you that these efforts will be successful.
Even if successful, these efforts may not result in a competitive product and
could require a substantial period of time to complete.
In connection with the SanDisk litigation, we have incurred approximately
$2.4 million in legal expenses, and expect to continue to incur, substantial
legal and other expenses. In addition, the SanDisk litigation has diverted, and
is expected to continue to divert, the efforts and attention of our management
and technical personnel. Patent litigation is highly complex and can extend for
a protracted period of time, which can substantially increase the cost of
litigation. Accordingly, the expenses and diversion of resources associated
with the SanDisk litigation could significantly increase our general and
administrative costs. Further, if the SanDisk patent litigation were to be
resolved by a settlement, we might need to make substantial upfront payments,
either in cash or equity, as well as ongoing royalties to SanDisk and grant a
license to SanDisk to utilize our technology, which could be harmful to our
business.
10
<PAGE>
We may be involved in additional litigation with SanDisk that could divert
management's time and attention, could be time-consuming and expensive and
could threaten our viability if we were to lose.
We believe that part of SanDisk's business strategy is to file intellectual
property lawsuits against its competitors and that SanDisk will initiate
additional litigation against us. SanDisk is the holder of a number of patents
relating to flash memory and flash memory storage devices such as CompactFlash.
Potential additional SanDisk litigation would likely involve different patents
with new method or system claims. In addition, new patent applications are
continually being filed and pending United States patent applications are
confidential until patents are issued. Thus, it is impossible to ascertain all
potential patent infringement problems. As with the current SanDisk litigation,
we cannot assure you that we would prevail in any such litigation and an
adverse decision could render us insolvent or severely impair our future
business prospects. In the past we have initiated litigation against SanDisk
and may do so in the future. Any future litigation would be time-consuming and
costly, and would likely divert the efforts and attention of our management and
technical personnel.
We have recently redesigned our products to avoid SanDisk's intellectual
property, but the redesigned products may not be feasible to produce,
commercially competitive or have all the functionality of our current and
future products or may be held to infringe SanDisk's patents or the patents of
others.
In response to the District Court's finding that certain of our products
infringe one of SanDisk's patents, we have commenced the redesign of those
products. In the opinion of our patent counsel, Haverstock & Owens LLP, the
redesign does not infringe the SanDisk patent that is the subject of the
current litigation. We have not yet finished the development of, or
commercially produced, these products, and therefore we may find that our
redesigned products will not be feasible to manufacture, commercially
competitive, as reliable as our current products or accepted by our customers.
Our redesigned products may be more costly than our current products, and we
may not be able to achieve our present functionality and future planned
functionality, including write speed and storage capacity, with our redesigned
products. SanDisk is seeking discovery with regard to our redesigned products.
Despite the opinion of Haverstock & Owens LLP, our redesigned products may be
found to infringe SanDisk's existing or future patents or the existing or
future patents of another party. If we are not able to produce our redesigned
products by the time the SanDisk trial is completed and we were enjoined from
shipping our current products, or if the redesigned products had been
determined to infringe SanDisk's patents, then it could render us insolvent or
severely impair our future business prospects. Customers may delay orders or
return merchandise to wait until our redesigned products are available. Because
we have diverted substantial engineering resources from our currently planned
research and development projects to redesign our products, we may experience a
delay in the introduction of future products.
We may become subject to additional intellectual property claims which could
divert management's time and attention, could be time-consuming and expensive
to defend and could limit our access to important technology.
We may become a party to litigation with other third parties in the future
to protect our intellectual property or as a result of an alleged infringement
of others' intellectual property. These lawsuits could subject us to
significant liability for damages and invalidate our proprietary rights. These
lawsuits, regardless of their outcome, would likely be time-consuming and
expensive to resolve and would divert management's time and attention. Any
potential intellectual property litigation also could force us to do one or
more of the following:
. stop selling products or using technology that contain the allegedly
infringing intellectual property;
. attempt to obtain a license to the relevant intellectual property, which
license may not be available on reasonable terms or at all; and
. attempt to redesign those products that contain the allegedly infringing
intellectual property.
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If we are forced to take any of the foregoing actions, we may be unable to
manufacture and sell our products.
Our quarterly operating results and gross margins may fluctuate significantly
in the future and are difficult to predict, and if our future results are below
the expectations of investors or securities analysts, the market price of our
common stock would likely decline significantly.
Our quarterly operating results and gross margins are likely to vary
significantly in the future based on a number of factors related to our
industry and the markets for our products. We will have little or no control
over many of these factors and any of these factors could cause the price of
our common stock to fluctuate significantly. These factors include, among
others:
. the rate of growth of the market for digital cameras, digital film and
Internet photofinishing;
. fluctuation and seasonality in demand for our products, as the demand
for our digital film has historically increased during the fourth
quarter of the calendar year;
. the timing and amount of orders and cancellations from existing and new
retailers, distributors and original equipment manufacturer customers;
. the timing and amount of expenses related to obsolescence of unsold
inventory;
. increases in costs charged by our component suppliers, particularly our
flash memory suppliers;
. the timing and amount of any reductions in the average selling prices of
our products and services;
. the difficulty of forecasting and managing our inventory levels;
. the availability and pricing of flash memory, particularly high-
performance flash memory with increased memory capacity;
. price reductions in key components, such as flash memory, could result
in charges related to previously purchased components held in inventory;
. the announcement or introduction of products and technologies by
competitors;
. changes in our customers and product mix;
. commencement of or involvement in litigation, including developments in
our current litigation with SanDisk;
. natural disasters, particularly earthquakes, affecting countries in
which we conduct our business or in which our products are manufactured;
and
. the evolution of industry standards.
In addition, as a result of our limited operating history and the emerging
nature of our market, we may be unable to accurately forecast our revenues and
gross margins. We incur expenses based predominantly on operating plans and
estimates of future revenues. Our expenses are to a large extent fixed and we
may not be able to adjust them quickly to meet a shortfall in revenues during
any particular quarter. Any significant shortfall in revenues in relation to
our expenses would decrease our net income or increase our operating losses and
would also harm our financial condition. Fluctuations in our operating results
or gross margins may cause us to fail to meet the expectations of investors or
securities analysts. If this were to happen, the market price for our common
stock would likely decline significantly.
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We primarily depend upon two sources for our supply of flash memory, and if
they are unable to provide us with sufficient quantities of flash memory in a
timely manner, we would not be able to manufacture and deliver digital film to
our customers in accordance with their volume and schedule requirements.
We purchase substantially all of our flash memory from Toshiba America
Electronic Corporation and Samsung Semiconductor, Inc. We expect that the
demand for flash memory over the next several years will be substantially
greater than in past periods due to the increasing acceptance of digital
cameras and other digital consumer products. If we are unable to obtain
sufficient quantities of flash memory from Toshiba, Samsung or another flash
memory supplier in a timely manner, we would not be able to manufacture and
deliver digital film to satisfy our customers' volume and schedule
requirements. If we are not able to satisfy the delivery requirements of our
customers, they may reduce any future orders or eliminate us as a supplier. Our
reputation would likely also be harmed and we may not be able to replace any
lost business with new customers. Even if we are able to obtain flash memory in
sufficient volume and on schedules that permit us to satisfy our delivery
requirements, we cannot assure you that the prices charged by these suppliers
will enable us to compete effectively in our market. Samsung and Toshiba are
both located in Asia, a region that has recently been, and in the future may
be, affected by economic and political instability that could adversely affect
the price and supply of flash memory. If we are unable to obtain flash memory
from our current suppliers or others at economical prices, our margins would
decline unless we could raise the prices of our products in a commensurate
manner. The existing competitive conditions may not permit us to do so, in
which case we may suffer increasing losses or reduced profits.
Our recent growth has placed a significant strain on our management systems and
resources, and the continued success of our business depends on our ability to
successfully manage future growth.
In recent periods, rapid growth and acceleration of our product development
and marketing efforts have imposed significant strains on our operations. Our
revenues have grown from $2.9 million for the year ended December 31, 1997 to
approximately $29.2 million for the year ended December 31, 1999 and
$40.8 million for the six months ended June 30, 2000. In addition, the number
of our employees has grown from 25 as of December 31, 1997, to 54 as of
December 31, 1998, to 106 as of December 31, 1999 and to 150 as of July 24,
2000, and we anticipate further significant increases in the number of our
employees as we continue to grow. Our current facility is not adequate to meet
our anticipated growth and we are seeking to relocate our principal executive
offices to a larger facility, which may disrupt our operations. We expect the
strains from this growth to increase, and our financial performance and ability
to compete effectively will depend, in large part, on our ability to manage
this growth effectively. To that end, we must continually develop our budgeting
and forecasting procedures, develop administrative, accounting and management
information systems and controls, manage our research and development efforts,
manage appropriate levels of inventory, improve coordination among our
engineering, accounting, finance, marketing and operations personnel and hire
and train additional qualified personnel.
The rate of any future expansion, in combination with a rapidly evolving
market for our products, will require a high level of managerial effectiveness
in anticipating, planning, coordinating and satisfying our operational needs
and the demands of our customers. The continued development of our operations
in diverse locations may also affect our ability to manage our growth. If we
are unable to manage our growth effectively, we may not be able to successfully
compete in our market.
If we are unable to develop and introduce on a timely basis new products or
services that are accepted by our customers and consumers, we will not be able
to compete effectively in our market.
We operate in an industry that is subject to evolving industry standards,
rapid technological changes, rapid changes in consumer demands and the rapid
introduction of new, higher performance products that shorten product life
cycles and tend to decrease average selling prices. To remain competitive in
this
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demanding market, we must continually design, develop and introduce new
products and services that meet the performance and price requirements of our
customers and consumers. Any significant delay or failure in releasing new
products or services would harm our reputation, provide a competitor a first-
to-market opportunity or allow a competitor to achieve greater market share. We
also cannot assure you that any products or services we do introduce will gain
market acceptance. The introduction of new products is inherently risky because
it is difficult to foresee advances in technology and the adoption of new
standards, to coordinate our technical personnel and strategic relationships
and to identify and eliminate design and products flaws. We may not be able to
recoup research and development expenditures if our new products or services
are not widely accepted.
We have only recently begun offering Internet photofinishing services and, if
this service is not rapidly accepted or used by consumers, our revenues may
fall short of our expectations.
We have only recently begun offering Internet photofinishing services
through our acquisition of PrintRoom.com in January 2000. We cannot be certain
that there will be customer demand for this service or that we will be
successful in penetrating this market. If we are unable to successfully
implement this new service or this service is not rapidly accepted or used by
consumers, our revenues may fall short of our expectations.
If we are unable to develop or maintain the strategic relationships necessary
to develop, sell and market products that are commercially viable and widely
accepted, the growth and success of our business may be limited.
We may not be able to develop and sell products that are commercially viable
and widely accepted if we are unable to anticipate market trends and the price,
performance and functionality requirements of digital camera and flash memory
manufacturers. We must continue to collaborate closely with our customers,
digital camera manufacturers, flash memory manufacturers and other suppliers to
ensure that critical development, marketing and distribution projects proceed
in a coordinated manner. This collaboration is also important because our
ability to anticipate trends and plan our development activities depends to a
significant degree upon our continued access to information derived from
strategic relationships we currently have with digital camera and flash memory
manufacturers. This collaboration can be difficult because many of these
companies are located overseas. If any of our current relationships terminate
or otherwise deteriorate, or if we are unable to enter into future alliances
that provide us with comparable insight into market trends, we will be hindered
in our product development efforts.
We depend on a few key customers and the loss of any of them could
significantly reduce our revenues.
Historically, a small number of our customers have accounted for a
significant portion of our product revenues. In 1997, 1998, 1999 and the six
months ended June 30, 2000, sales to the 10 customers from which we received
the greatest revenues accounted for approximately 99.7%, 83.7%, 79.2% and 77.2%
respectively, of our total revenues. Four customers, Ingram Micro, Kodak,
Impact Peripherals and Tech Data, accounted for 12.8%, 11.4%, 10.0% and 8.8% of
sales in 1999, respectively. We believe that a substantial majority of the
products we sold to Ingram Micro and Tech Data in 1999 and the first six months
of 2000 were resold by those parties to CompUSA. For the six months ended June
30, 2000, four customers, Kodak, Tech Data, Olympus and Wal-Mart, accounted for
17.6%, 13.9%, 12.1% and 9.7%, respectively, of product sales. In April 2000, we
acquired Impact Peripherals, which now operates as Lexar Media Europe. Our
revenues could decline if one or more of these customers were to significantly
reduce, delay or cancel their orders, decide to purchase digital film
manufactured by one of our competitors or develop and manufacture their own
digital film. In addition, any difficulty in collecting outstanding amounts due
from our customers, particularly customers who place larger orders, would also
reduce our revenues. Because our sales are made by means of standard purchase
orders rather than long-term contracts, we cannot assure you that these
customers will continue to purchase quantities of our products at current
levels, or at all.
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Furthermore, our revenues include sales to original equipment manufactures,
some of which may in the future decide to compete against us in the digital
film market. We expect our operating results for at least the next several
years to continue to depend on sales to a relatively small number of customers.
Our failure to successfully promote our brand and achieve strong brand
recognition in target markets could limit or reduce the demand for our products
and services.
We believe that brand recognition will be critical to our ability to be
successful as the digital photography market develops. We plan to significantly
increase our marketing expenditures to create and maintain prominent brand
awareness. If we fail to promote our brand successfully, or the expenses
associated with doing so become increasingly high, our business may not grow as
we anticipate. In addition, if our products exhibit poor performance or other
defects, our brand may be significantly diluted, which would inhibit our
ability to attract or retain customers.
Because many of our retail customers and distributors have rights of return, we
may be required to take back large quantities of unsold inventory which could
reduce our revenues in future periods.
Substantially all of our sales to end-users are made through distributors
and retailers. Our sales through these channels often include rights to return
unsold inventory. We generally recognize revenue upon shipment of our products,
although we establish reserves for estimated returns. Additionally, we permit
some of our customers to return products in their inventory for credit or in
exchange for new products. If there are significant inventories of old products
in our distribution channel when a new product is released, or if these
distributors and retailers are unsuccessful in selling our products, there
could be substantial product returns. If our reserves are insufficient to
account for these returns or if we are unable to resell these products on a
timely basis at similar prices, our revenues may be reduced in future periods.
Because the market for our products is rapidly evolving, we may not be able to
resell returned products at attractive prices or at all.
Because we protect many of our retail customers and distributors against the
effects of price decreases on their inventories of our products, we may be
required to make large price protection payments if we reduce our prices when
there are large quantities of our products in our distribution channel.
More than one-third of our sales in 1999 and more than one-fourth of our
sales in the six months ended June 30, 2000 were made through distributors and
retailers to whom we provide price protection guarantees. Accordingly, if we
reduce our prices, we will pay these distributors and retailers for the
difference between the new price and the price paid for the same product still
in their inventory. If our price protection reserves are insufficient to
account for these payments, our revenues may be reduced in future periods.
Because we depend on single suppliers for some key components, and do not have
long-term supply contracts with those suppliers, we are exposed to the risks of
a potential inability to obtain an adequate supply of components, price
increases, late deliveries and poor component quality.
ZETEX Semiconductors is the sole manufacturer of transistors for our
CompactFlash, PC Card and connectivity products. Because we depend on a single
supplier for these key components, and do not have a long-term supply contract
with this supplier, we face the risk of inadequate component supply, price
increases, late deliveries and poor component quality. ZETEX may terminate its
relationship with us or pursue other relationships with our competitors, and if
we were to lose our relationship with this single supplier, the lead time
required to qualify new suppliers could be as long as three months. Also, if we
lose our single supplier or this supplier is otherwise unable to satisfy our
volume and delivery schedule
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requirements, it may be difficult to locate any suppliers who have the ability
to develop, manufacture and deliver the specialized components we need for our
products. If we are unable to accurately predict our supply needs, or if our
supply of components is disrupted, our reputation may be harmed and we may lose
existing customers or be unable to attract new customers. In addition, some of
our products use tantulum capacitors. There has been a worldwide shortage of
these capacitors in 2000. If we were unable to obtain sufficient quantities of
tantulum capacitors in the future, our ability to ship products that
incorporate these capacitors would be adversely affected.
Our products are characterized by average selling prices that have historically
declined over relatively short time periods, and if we are unable to
effectively manage our inventories, reduce our costs, introduce new products
with higher average selling prices or increase our sales volumes, our gross
margins will decline.
Although consumers have recently begun to purchase digital cameras in
volume, they still exert pressure on digital camera manufacturers and on us to
lower prices of digital photography products, like our digital film, to prices
comparable to those of traditional photography products. Our competitors also
impose pricing pressures on us. In addition, because a large percentage of our
sales is to a small number of customers that are primarily large original
equipment manufacturers, retail consumer chains and distributors, these
customers have exerted, and we expect they will continue to exert, pressure on
us to make price concessions. Any reduction in prices by us will cause our
gross margins to decline, unless we can manage our inventories to minimize such
price declines and reduce our costs. If we are unable to reduce our costs to
offset declines in average selling prices or increase the sales volume of our
existing products, our gross margins will decline. We anticipate that our
average selling prices will continue to decline for the foreseeable future.
The solid-state storage market is evolving and future digital film formats may
not use our core technology or we may be forced to pay a royalty to sell
digital film in these formats.
Our products may become less useful to our customers if we are unable to
respond to technological advances in our industry or as innovative products
become available to our customers. Although many digital cameras currently use
Compact Flash or PC Cards, future digital cameras may use other digital film
formats, such as compact discs, rotating media or magneto-optical storage, that
may not use our controller technology. In addition, we may have to obtain a
license to manufacture some digital film formats. For example, a consortium led
by SanDisk, Matsushita and Toshiba recently introduced The Secure Digital Card
format. We may be unable to secure licensing arrangements for this or other
future technologies at reasonable rates or at all.
If we are unable to adequately protect our intellectual property, our
competitors may gain access to our technology which could harm our ability to
successfully compete in our market.
We regard our intellectual property as critical to our success. If we are
unable to protect our intellectual property rights, we may be unable to
successfully compete in our market. We rely on a combination of patent,
copyright, trademark and trade secret laws, as well as confidentiality
agreements and other methods to protect our proprietary technologies. We have
been granted patents in the United States and other countries and have a number
of pending United States and foreign patent applications. We cannot assure you,
however, that:
. any of our existing or future patents will not be invalidated;
. patents will be issued for any of our pending applications;
. any claims allowed from existing or pending patents will have sufficient
scope or strength; or
. our patents will be issued in the primary countries where our products
are sold.
It may also be possible for a third party to copy or otherwise obtain and
use our products or technology without authorization, develop similar
technology independently or design around our patents.
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We depend on a single third-party wafer foundry to manufacture all of our
controllers, and if we are unable to obtain sufficient quantities of
controllers at acceptable quality, yields and prices, and in a timely manner,
we may not be able to meet customer demand for our products, which could limit
the growth and success of our business.
We do not own or operate a semiconductor fabrication facility. Instead, we
rely on a single outside foundry to produce all of our controller products. Our
reliance on an independent foundry involves a number of significant risks,
including:
. reduced control over delivery schedules, quality assurance,
manufacturing yields and production costs;
. lack of guaranteed production capacity or product supply; and
. unavailability of, or delayed access to, next-generation or key process
technologies.
Our controller wafers are currently manufactured by United Microelectronics
Corporation, or UMC, in Taiwan. We do not have a long-term supply agreement
with UMC and instead obtain manufacturing services on a purchase order basis.
UMC has no obligation to supply products to us for any specific period, in any
specific quantity or at any specific price, except as set forth in a particular
purchase order. Our requirements represent a small portion of the total
production capacity of UMC, and UMC may reallocate capacity to other customers
on short notice, even during periods of high demand for our products. If UMC
were to become unable or unwilling to continue manufacturing our controllers in
the required volumes, at acceptable quality, yields and prices, and in a timely
manner, we may not be able to meet customer demand for our products, which
could limit the growth and success of our business. Although we have attempted
to diversify our sources of controllers by qualifying two other foundries,
Taiwan Semiconductor Manufacturing Co. Ltd. and Chartered Semiconductor
Manufacturing, we cannot assure you that these foundries will have sufficient
capacity to accommodate our demand at any particular time.
In addition, if competition for foundry capacity increases, we may incur
significant expenses to secure access to manufacturing services, which in turn
may cause our product costs to increase substantially. We expect that the
demand for capacity at these facilities will increase substantially in the near
future due to increasing demand for consumer electronic and industrial products
that depend on semiconductors manufactured at these facilities. All of these
foundries are located in an area of the world that may be subject to political
and economic instability, especially in light of the results of the recent
election in Taiwan, and natural disasters, particularly earthquakes. While the
recent earthquake in Taiwan did not have a significant impact on deliveries to
us from UMC, a similar event in the future at one of their foundries could have
a significant impact.
We depend solely on third-party subcontractors for assembly and testing of our
digital film products, which could result in product shortages or delays or
increase our costs of manufacturing, assembling or testing our products.
Substantially all of our digital film is currently assembled and tested by
Flash Electronics, Inc. in Fremont, California and Samsung Electro-Mechanical
in Korea. Although we have a written contract with Samsung, we do not have a
long-term agreement with Flash Electronics and typically obtain services from
them on a per order basis. Additionally, our controllers are assembled, tested
and packaged primarily by Advanced Semiconductor Engineering, Inc. in Taiwan.
Our reliance on these subcontractors involves risks such as reduced control
over delivery schedules, quality assurance and costs. These risks could result
in product shortages or increase our costs of manufacturing, assembling or
testing our products. If these subcontractors are unable or unwilling to
continue to provide assembly and test services and deliver products of
acceptable quality, at acceptable costs and in a timely manner, we would have
to identify and qualify additional substitute subcontractors. This could be
time-consuming and difficult and result in unforeseen operations problems.
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If we are unable to license our controller technology for application in other
products, the growth of our business may be limited.
We currently derive all of our revenues from the sale of products and
services related to our digital film and connectivity products. We believe,
however, that our future growth may depend on our ability to license our
proprietary controller technology for use in new digital photography
applications or applications in other markets, such as music and video. If we
fail to market and license our technology to third parties for new
applications, or fail to generate significant licensing or other revenue from
these activities, we may not grow our revenues and our business as planned.
Several key members of our senior management team have recently joined us and
their failure to integrate into our operations effectively and in a timely
manner could impede the execution of our business strategy.
We have recently hired a significant number of executive officers, including
our Chief Financial Officer, our Chief Operating Officer and our Vice President
of Operations. We have also recently hired several other individuals who serve
important operational, marketing and sales functions. These individuals have
had a short amount of time to work together and have limited experience with us
and our operations. Our success will depend to a significant extent on the
ability of our new officers to integrate themselves into our daily operations,
to gain the trust and confidence of other employees and to work effectively as
a team. If any of them fails to do so, our ability to execute our business
strategy would be impeded.
If we encounter difficulties in attracting and retaining qualified personnel,
we may not be able to successfully execute our business strategy and we may
need to grant large stock-based incentives that could be dilutive to our
stockholders and may be required to pay significant salaries which would
increase our general and administrative costs.
Our future success will depend to a significant extent on the continued
services of our key employees, including John H. Reimer, our President and
Chief Executive Officer, Petro Estakhri, our Chief Technology Officer and
Executive Vice President of Engineering, and Eric B. Stang, our Chief Operating
Officer. Our success will also depend on our ability to identify, attract and
retain qualified technical, sales, marketing, finance and managerial personnel.
Our need to hire qualified personnel in these areas has become particularly
acute as a result of a recent period of rapid growth. If we are unable to find,
hire and retain qualified individuals, we may have difficulty implementing
portions of our business strategy in a timely manner, or at all. Petro
Estakhri, Eric B. Stang, Ronald H. Bissinger, our Vice President, Finance and
Chief Financial Officer, and Mike Assar, our Senior Vice President, Technology,
are the only employees with whom we have entered into employment agreements. In
addition, we do not maintain key man life insurance on the members of our
senior management team, other than Mr. Reimer and Mr. Estakhri.
The competition for qualified personnel is particularly intense in our
industry and in northern California, where there is a high concentration of
established and emerging growth technology companies. This competition makes it
more difficult to retain our key personnel and to recruit new highly-qualified
personnel. To attract and retain qualified personnel, we may be required to
grant large option or other stock-based incentive awards, which may be highly
dilutive to existing stockholders. We may also be required to pay significant
base salaries and cash bonuses to attract and retain these individuals, which
could harm our operating results. We have experienced, and may continue to
experience, difficulty in hiring and retaining candidates with appropriate
qualifications. If we do not succeed in hiring and retaining candidates with
appropriate qualifications, we will not be able to grow our business.
Difficulty in identifying, acquiring and integrating acquisition candidates
could limit our growth or put a strain on our resources and, if financed by the
issuance of shares of our common stock, could cause dilution to our
stockholders.
We may supplement our internal growth by acquiring complementary businesses,
technologies, product lines or service offerings. For example, we recently
acquired PrintRoom.com and Impact Peripherals, and
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we must successfully integrate their operations into our business. We may be
unable to identify and acquire additional suitable candidates on reasonable
terms, if at all. We compete for acquisition candidates with other companies
that have substantially greater financial, management and other resources than
we do. Acquisitions, in particular multiple acquisitions over a short period of
time, involve a number of risks that may result in our failure to achieve the
desired benefits of the transaction. These risks include, among others, the
following:
. difficulties in assimilating the operations of the acquired businesses;
. potential disruption of our existing operations;
. an inability to integrate, train, retain and motivate key personnel of
the acquired business;
. diversion of management attention away from day-to-day operations;
. an inability to incorporate, develop, market or sell acquired
technologies or products;
. unexpected liabilities of the acquired business without sufficient
indemnification from the sellers;
. operating inefficiencies and difficulties associated with managing
companies in different geographical locations; and
. potential impairment of our relationships with our employees, customers,
suppliers and strategic partners.
We may finance acquisitions by issuing shares of our common stock, which
could dilute our existing stockholders. We may also use cash or incur
additional debt to pay for these acquisitions. In addition, we may be required
to expend substantial funds to develop acquired technologies and/or to amortize
significant amounts of goodwill and other intangible assets in connection with
future acquisitions.
If we are unable to obtain additional financing for our future capital needs,
we may be unable to develop or enhance our products, expand our operations or
respond to competitive pressures.
We expect the net proceeds from this offering, together with our credit
facility, term loan and our current cash and cash equivalents, will meet our
working capital and capital expenditure needs through the end of 2001. We may
need to raise additional funding at that time or earlier if we decide to
undertake more rapid expansion, including acquisitions of complementary
products or technologies, or if we increase our marketing and/or research and
development efforts in order to respond to competitive pressures. We cannot be
certain that we will be able to obtain additional financing on favorable terms,
if at all. We may obtain additional financing by issuing shares of our common
stock, which could dilute our existing stockholders. If we cannot raise needed
funds on acceptable terms, or at all, we may not be able to develop or enhance
our products or respond appropriately to competitive pressures.
If our products contain defects, we may incur unexpected and significant
operating expenses to correct the defects, we may be required to pay damages to
third parties and our reputation may suffer serious harm.
Although our digital film products are tested after they are assembled,
these products are extremely complex and may contain defects. These defects are
particularly likely when new versions or enhancements are released. The sale of
products with defects or reliability, quality or compatibility problems may
damage our reputation and our ability to retain existing customers and attract
new customers. For example, if there are defects in our products which cause
loss of data, customers may lose their digital images stored on our digital
film. In addition, product defects and errors could result in additional
development costs, diversion of technical and management resources, delayed
product shipments, increased product returns, and product liability claims
against us which may not be fully covered by insurance.
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Our significant sales outside the United States, recent acquisition of Impact
Peripherals and our brand launch in Japan subject us to increasing foreign
political and economic risks, including foreign currency fluctuations,
particularly in the British pound and Japanese yen.
Sales outside of the United States accounted for 8.7%, 25.4%, 27.6% and
37.0% of our revenues for 1997, 1998, 1999 and the six months ended June 30,
2000, respectively. We generated a majority of our international revenues in
1999 and the six months ended June 30, 2000 from product sales in Japan and the
United Kingdom. Both of these markets are intensely competitive, particularly
Japan. One of our principal growth strategies is to expand our presence in
these and other international markets both through increased international
sales and strategic relationships, as evidenced by our recent brand launch in
Japan. Consequently, we anticipate that sales outside of the United States will
continue to account for a significant portion of our revenue in future periods.
Accordingly, we are subject to international risks, including:
. foreign currency exchange fluctuations;
. political and economic instability, particularly in light of recent
economic volatility encountered by Japan;
. delays in meeting customer commitments due to difficulties associated
with managing an international distribution system;
. increased time to collect receivables caused by slower payment practices
that are common in many international markets;
. difficulties associated with managing export licenses, tariffs and other
regulatory issues pertaining to international trade;
. increased effort and costs associated with the protection of our
intellectual property in foreign countries;
. natural disasters, political uncertainties and changing regulatory
environments in foreign countries; and
. difficulties in hiring and managing employees in foreign countries.
The sales of our products are denominated primarily in United States
dollars. As a result, increases in the value of the United States dollar
relative to foreign currencies could cause our products to become less
competitive in international markets and could result in a reduction in sales
and profitability. As a result of our acquisition of Impact Peripherals, we
have product sales denominated in British pounds and anticipate that future
sales will also be denominated in the euro. In addition, we have sales to
customers denominated in Canadian dollars and Japanese yen. To the extent our
prices are denominated in foreign currencies, particularly the British pound
and Japanese yen, we will be exposed to increased risks of currency
fluctuations. We have no hedging policies in place to mitigate these potential
risks, and we cannot assure you that any policies or techniques implemented in
the future will be successful or that our business and financial condition will
not be harmed by exchange rate fluctuations.
Risks Related to Our Industry
Our business will not succeed unless the digital photography market continues
to grow and is accepted by professional, commercial and consumer users.
We currently depend on sales of digital film and connectivity products for
the substantial majority of our revenues, which exposes us to substantial risk
in the event the digital photography market does not grow rapidly. The digital
photography market is in an early stage of development and is rapidly evolving.
The success of this market depends on many factors, including:
. the ability of digital cameras to take high-quality photographs;
. the availability of digital cameras at prices and with performance
characteristics comparable to traditional cameras;
20
<PAGE>
. the availability of digital film that meet users' requirements with
respect to speed, connectivity, capacity and compatibility;
. the speed at which digital cameras are able to take successive
photographs;
. the ease with which digital files can be transferred to a personal
computer or printer; and
. the availability of digital image prints comparable in quality and price
to traditional photographs.
In addition to the above factors related to the digital photography market
as a whole, we believe the following additional factors will affect the
successful adoption of digital photography by consumers:
. marketing campaigns that increase brand awareness in end-user markets,
both domestically and internationally;
. increased association between brand names and attractive price and
performance characteristics; and
. heightened consumer confidence in digital photography technology.
If the digital photography market does not continue to grow and be accepted
by professional, commercial and consumer users, our business will not succeed.
If digital camera manufacturers do not develop and promote products that are
able to take advantage of our fastest digital film products, the growth and
success of our business may be limited.
We depend on the research and development, marketing and sales efforts of
digital camera manufacturers in developing, marketing and selling digital
cameras that can use our more advanced existing and future products. Most of
the digital cameras currently available on the market do not incorporate
technologies that can take advantage of the speed available in our fastest
digital film products. If digital camera manufacturers do not successfully
develop, market and sell digital cameras that take full advantage of our most
advanced products, from which we realize higher gross margins, the growth and
success of our business may be limited.
Increased competition in the digital film market may lead to a decrease in
revenues and market share.
We currently compete in an industry characterized by intense competition,
rapid technological change, evolving industry standards, declining average
selling prices and rapid product obsolescence. Our existing competitors include
many large domestic and international companies that have longer operating
histories and greater brand name recognition, greater access to flash memory,
substantially greater financial, technical, marketing and other resources,
broader product lines and longer standing relationships with customers. As a
result, these competitors may be able to adapt more quickly to new or emerging
technologies or devote greater resources to the promotion and sale of their
products than we may. This may lead to a decrease in sales, profits and market
share.
Our primary competitors are companies that sell digital film into the
consumer and original equipment manufacturer digital film markets. These
companies are primarily manufacturers with both controller and flash memory
capabilities, such as SanDisk and Hitachi Semiconductor (America), Inc. SanDisk
recently announced that it has entered into a non-binding memorandum of
understanding with Toshiba to jointly develop and manufacture high-performance
flash memory. Because flash memory represents a significant portion of the cost
of digital film, SanDisk may have a competitive advantage in that it will have
access to high-capacity flash memory at prices that may be substantially below
the prices that Toshiba or Samsung will charge us.
We also compete with manufacturers, package or card assemblers and resellers
who combine controllers and flash memory developed by others, such as Hitachi,
into flash memory cards, including Kingston
21
<PAGE>
Technology, Simple Technology, Smart Modular Technologies and Viking.
Additionally, Hitachi as well as flash controller developers such as Feiya
Technology, Tokyo Electronic and M-Systems compete with our controller sales.
Kodak and Fuji, the largest and best known manufacturers of traditional film
products, have not as yet entered the U.S. digital film market. Kodak is, in
fact, one of our largest customers for digital film. If either Kodak or Fuji
decide to acquire or develop the requisite technology and manufacture digital
film, their resources and worldwide brand recognition would likely make them
formidable competitors for our core business. We also expect to face
competition from existing or future competitors that design and market similar
or alternative data storage solutions that may be less costly or provide
additional features. If a manufacturer of digital cameras or other consumer
electronic devices designs one of these alternative competing standards into
its products, our digital film as currently configured will not be compatible
with that product and our revenues may decline.
Competition in the Internet photofinishing market is intense, and we may not be
able to maintain or expand our customer base which may make it difficult for us
to generate revenues and establish market share.
We are faced with growing competition in the area of Internet photofinishing
which could make it difficult for us to generate revenues and establish market
share. Our primary competitors in these areas are Internet digital
photofinishing companies such as EZ Prints, Kodak, Ofoto, PhotoAccess,
PhotoWorks.com, Shutterfly, Snapfish and Wolf Camera, which process digital
images transferred to them by customers over the Internet and mail finished
prints to them. These companies also provide traditional prints from scanned
traditional photographs, or digital camera images and photo-image management
services allowing consumers to archive, edit and share uploaded images and
create on-line photo albums. Additionally, digital imaging kiosks, such as
those from Kodak, Fuji, Pixel Magic and Telepix, allow consumers to scan
traditional images or download digital images for processing and output.
Traditional film processors with strong brand recognition such as Kodak will
pose a significant challenge if they begin to focus their efforts on direct
digital-to-paper photofinishing processing and leverage their advantage in
brand recognition. Moreover, Internet photo-image archiving and sharing
services such as Club Photo, PhotoIsland, PhotoLoft and Zing present additional
competition through their current and potential alliances with digital photo
labs to directly compete with the services we offer.
The manufacturing of our products is complex and subject to yield problems,
which could decrease available supply and increase costs.
The manufacture of flash memory and controllers is a complex process, and it
is often difficult for companies to achieve acceptable product yields. Reduced
flash memory yields could decrease available supply and increase costs.
Controller yields depend on both our product design and the manufacturing
process technology unique to the semiconductor foundry. Because low yields may
result from either design defects or process difficulties, we may not identify
yield problems until well into the production cycle, when an actual product
exists and can be analyzed and tested. In addition, many of these yield
problems are difficult to diagnose and time consuming or expensive to remedy.
Risks Related to this Offering
Management might apply the net proceeds from this offering to uses that do not
improve our operating results or increase the value of your investment.
The net proceeds from the sale of our common stock in this offering will be
added to our general working capital. We currently intend to repay $13.3
million in stockholder promissory notes with the net proceeds of the offering,
but have no definite plans to use the balance of the net proceeds from the
offering. Our management will therefore have significant flexibility in
applying the net proceeds of this offering and may apply those proceeds in ways
with which you may disagree. The net proceeds may be used for corporate
22
<PAGE>
purposes that do not improve our operating results or market value and you will
not have the opportunity to evaluate the economic, financial or other
information on which we base our decisions on how to use the proceeds. Pending
application of the proceeds, they might be placed in investments that do not
produce income or that lose value.
The liquidity of our common stock is uncertain because it has never been
publicly traded, and you may not be able to resell your shares at or above the
price you paid.
There has not been a public market for our common stock. As a result, the
initial public offering price was determined by negotiations among the
underwriters and us, and may not be indicative of prices that will prevail in
the public trading markets. We also cannot predict the extent to which a
trading market for our common stock will develop or how liquid that market will
be. You may not be able to resell your shares at or above the initial public
offering price.
The market price of our common stock may fluctuate significantly as a result of
market volatility, which could result in a decline in the value of your
investment.
We believe that the market price of our common stock, like that of other
early-stage technology companies, is likely to be highly volatile and may
fluctuate substantially. The price of the common stock that will prevail in the
market after the offering may be higher or lower than the price you pay,
depending on many factors, including:
. changes in financial estimates of our operating results by securities
analysts;
. announcements by us or our competitors of new products, significant
acquisitions or strategic partnerships;
. a loss of or decrease in sales to major customers or a failure to
complete significant transactions;
. additions or departures of key personnel; and
. commencement of or involvement in litigation, including developments in
our current litigation with SanDisk.
In addition, stock markets, particularly the Nasdaq National Market on which
our common stock has been approved for quotation, have from time to time
experienced significant price and volume fluctuations that have affected the
market prices for the securities of technology companies. As a result,
investors in our common stock may experience a decrease in the value of their
common stock regardless of our operating performance or prospects. The
fluctuations in the price of our common stock may affect our visibility and
credibility in the digital photography market and may affect our ability to
secure additional financing on acceptable terms, if at all.
We could be subject to securities class action litigation if our stock price is
volatile, which could be costly and time-consuming to defend and could damage
our reputation.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. Those companies, like us, that are involved in rapidly changing
technology markets are particularly subject to this risk. We may be the target
of litigation of this kind in the future. Any securities litigation could
result in substantial costs, divert management's attention and resources and
negatively affect our public image and reputations.
Future sales of our common stock by existing stockholders could cause the price
of our common stock to decline.
Sales of a large number of shares of our common stock in the market after
this offering, or the belief that these sales could occur, could cause a drop
in the market price of our common stock. Upon completion
23
<PAGE>
of this offering, we will have outstanding 59,031,830 shares of our common
stock. Of these shares, all of the 6,500,000 shares of our common stock sold in
this offering will be freely tradable, unless the shares are purchased by
"affiliates" as that term is defined in Rule 144 under the Securities Act.
The remaining 52,531,830 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. Our directors, executive officers and substantially
all of our stockholders have executed lock-up agreements in which they have
agreed not to sell or otherwise dispose of any shares of our common stock for a
period of at least 180 days after the date of this prospectus without the prior
written approval of Chase Securities Inc. When the lock-up agreements expire,
these shares will become eligible for sale, in some cases only subject to the
volume, manner of sale and notice requirements of Rule 144. The "restricted
securities" will be eligible for resale in the public market as follows:
. approximately 49,022,203 shares will become eligible for resale
beginning 180 days from the date of this prospectus; and
. approximately 3,509,627 additional shares will become eligible for
resale upon the expiration of applicable one-year holding periods under
Rule 144 and Rule 145 at various times after 180 days from the date of
this prospectus.
In addition, we intend to file a registration statement on Form S-8 under
the Securities Act after the date of this offering to register shares of our
common stock issued or reserved for issuance under our various stock plans.
Our executive officers, directors and principal stockholders will continue to
hold a substantial portion of our stock subsequent to the completion of this
offering, and, consequently, could make some transactions more difficult or
impossible to complete without their support.
Immediately after the offering, it is anticipated that our executive
officers, directors and principal stockholders will beneficially own or control
approximately 62.7% of the outstanding shares of our common stock or 61.7% if
the underwriters' overallotment option is exercised in full. Accordingly, if
these persons act together, they will significantly influence, and likely
control, the election of our directors and the outcome of any corporate
transaction or other matter submitted to the stockholders for approval,
including mergers, consolidations and the sale of all or substantially all of
our assets. The voting power of these persons could also have the effect of
delaying or preventing a change in control. The interests of these stockholders
may differ from the interests of the other stockholders.
Our charter documents and Delaware law could delay or prevent a takeover of us
that stockholders may consider favorable, which could cause the market price of
our common stock to decline.
There are provisions in our certificate of incorporation, bylaws and
Delaware law that may have the effect of delaying or preventing a change of
control or changes in our management that stockholders consider favorable or
beneficial. You should refer to the information in the section entitled
"Description of Capital Stock" for more information regarding these provisions.
If a change of control or change in management is delayed or prevented, the
market price of our common stock could suffer.
You will suffer immediate and substantial dilution in the book value of your
investment, which could negatively affect the value of your investment.
The initial public offering price per share of our common stock will
significantly exceed the net tangible book value per share. Accordingly,
investors purchasing shares in this offering will suffer immediate and
substantial dilution of $6.90 per share in their investment. In the past, we
issued options and warrants to acquire our common stock at prices significantly
below the initial offering price. To the extent these outstanding options and
warrants are ultimately exercised, there will be further dilution to investors
in this offering.
24
<PAGE>
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," "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,"
"could," "expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "projects," "potential" or "continue," the negative of these terms
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. These statements are
only predictions based on our current expectations and projections about future
events. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause our actual results,
level of activity, performance or achievements to differ materially from the
results, level 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."
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of
these forward-looking statements after the date of this prospectus to conform
our prior statements to actual results or revised expectations.
USE OF PROCEEDS
We estimate that the net proceeds from our sale of the 6,500,000 shares of
common stock we are offering will be approximately $46.8 million, based upon
the initial public offering price of $8.00 per share and after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by us. If the underwriters' over-allotment option is exercised in full, we
estimate that our net proceeds will be approximately $54.0 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 for repayment of debt, working capital and other general
corporate purposes. We currently anticipate using $13.3 million to repay
outstanding indebtedness under the promissory notes issued to our stockholders
in May, June and July 2000. These notes bear interest at a rate of 6% per year
and have a maturity date of May 31, 2001. We may also use a portion of the net
proceeds to acquire or invest in complementary businesses, technologies,
products or services. We have no present commitments or agreements 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 earnings, if any, to finance the growth and
development of our business. Therefore, we do not anticipate declaring or
paying cash dividends on our common stock for at least the next several years.
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<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 2000 our debt and
capitalization:
. on an actual basis;
. on a pro forma basis to reflect the exercise of outstanding warrants to
purchase 420,559 shares of our common stock which expire upon the
closing of this offering, the issuance of $1.5 million of promissory
notes to a stockholder in July 2000, the borrowing of an aggregate of
$10.1 million under our $20.0 million credit facility with The Chase
Manhattan Bank and $10.0 million term loan with Access Technology
Partners, L.P., an affiliate of Chase, in July 2000, the use of $5.2
million of these funds to repay notes payable to three stockholders and
the automatic conversion of all shares of preferred stock into
37,224,049 shares of common stock upon the closing of this offering; and
. on a pro forma as adjusted basis to reflect the sale of the 6,500,000
shares of our common stock offered by us at the initial public offering
price of $8.00 per share, after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
As of June 30, 2000
---------------------------
Pro
Pro Forma As
Actual Forma Adjusted
-------- ------- --------
(in thousands)
<S> <C> <C> <C>
Notes payable to stockholders(1).................. $ 14,710 $17,677 $ 17,677
Other notes payable(1)............................ 2,030 2,030 2,030
-------- ------- --------
16,740 19,707 19,707
Mandatorily redeemable convertible preferred
stock(2)......................................... 53,414 -- --
-------- ------- --------
Stockholders' equity (deficit):
Preferred stock, $0.0001 par value per share; no
shares authorized, issued or outstanding,
actual and pro forma; 10,000,000 shares
authorized, no shares issued or outstanding pro
forma as adjusted.............................. -- -- --
-------- ------- --------
Common stock, $0.0001 par value per share;
75,000,000 shares authorized, 14,887,222 shares
issued and outstanding, actual; 75,000,000
shares authorized, 52,531,830 shares issued and
outstanding, pro forma; 200,000,000 shares
authorized, 59,031,830 shares issued and
outstanding, pro forma as adjusted............. 1 5 6
Additional paid-in capital...................... 45,621 100,186 146,945
Unearned stock-based compensation............... (18,571) (18,571) (18,571)
Notes receivable from stockholders.............. (5,992) (5,992) (5,992)
Accumulated deficit............................. (53,181) (53,181) (53,181)
-------- ------- --------
Total stockholders' (deficit) equity.......... (32,122) 22,447 69,207
-------- ------- --------
Total capitalization........................ $ 38,032 $42,154 $ 88,914
======== ======= ========
</TABLE>
-------------------
(1) See Note 4 of notes to consolidated financial statements.
(2) See Note 6 of notes to consolidated financial statements.
The number of shares of our common stock outstanding set forth in the table
above excludes the following:
. 3,239,684 shares of our common stock subject to options outstanding as
of June 30, 2000 at a weighted average exercise price of $3.65 per
share;
. 155,000 shares of our common stock subject to warrants outstanding as of
June 30, 2000 at a weighted average exercise price of $0.84 per share;
26
<PAGE>
. 9,703,453 additional shares of our common stock at June 30, 2000 that
have been reserved for issuance upon future grants of options under our
stock option and stock purchase plans; and
. up to 268,817 shares of our common stock that we would issue to Sony
upon conversion of the $2.0 million convertible promissory note that we
issued to Sony in March 2000, based upon the initial public offering
price of $8.00 per share.
In May, June and July 2000, we issued warrants to purchase an aggregate of
644,395 shares of our common stock to six of our stockholders at an exercise
price of $3.09 per share in connection with promissory notes we entered into
with these stockholders. Under the terms of the promissory notes, these
stockholders received warrants to purchase additional shares of our common
stock, in monthly installments, at an exercise price of $8.00 per share for up
to 12 months from the issue date of the respective promissory notes so long as
the principal on the notes remain outstanding. Because we anticipate repaying
the promissory notes in full by September 15, 2000, these stockholders will
have the right to purchase an aggregate of up to an additional 310,660 shares
of our common stock subject to these warrants. We also issued warrants to
purchase 250,000 shares of our common stock to Chase Securities, Inc. in
connection with a $20.0 million revolving credit facility we entered into with
The Chase Manhattan Bank and warrants to purchase 625,000 shares of our common
stock in connection with a $10.0 million term loan we entered into with Access
Technology Partners, L.P., an affiliate of Chase Securities, Inc., in June
2000. Upon the completion of this offering, the warrant held by Chase
Securities, Inc. and the warrant held by Access with respect to 136,500 shares
subject to such warrant will have an exercise price equal to the initial public
offering price. With respect to the remaining 488,500 shares subject to the
Access warrant, the exercise price will be $8.00 per share. The warrants to
purchase shares of our common stock issued in connection with the stockholder
promissory notes and the credit facilities with Chase and Access are also
excluded from the outstanding number of shares of our common stock set forth in
the table on the preceding page.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was approximately
$18.4 million, or $0.35 per share of our common stock. Our pro forma net
tangible book value per share represents our total tangible assets less total
liabilities divided by the pro forma total number of shares of common stock
outstanding at such date, after giving effect to the exercise of warrants to
purchase 420,559 shares of our common stock and the conversion of all
outstanding shares of preferred stock into shares of common stock. Our
calculation of pro forma net tangible book value excludes the goodwill of $3.7
million arising from the PrintRoom.com acquisition and the goodwill of $546,000
arising from the Impact Peripherals acquisition. The dilution in pro forma net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of our common stock in this offering and the
net tangible book value per share of our common stock immediately following
this offering.
Without taking into account any changes in pro forma net tangible book value
after June 30, 2000, other than those changes outlined in the previous
paragraph and other than to give effect to the sale of the shares of common
stock offered by us at the initial public offering price of $8.00 per share,
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by us, our pro forma net tangible book value as of
June 30, 2000 would have been approximately $65.1 million or $1.10 per share of
common stock. This amount represents an immediate increase in pro forma net
tangible book value of $0.75 per share to the existing stockholders and an
immediate and substantial dilution in pro forma net tangible book value of
$6.90 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>
Initial public offering price per share......................... $8.00
Pro forma net tangible book value per share as of June 30,
2000......................................................... $0.35
Increase per share attributable to new investors.............. 0.75
-----
Pro forma net tangible book value per share after the offering.. 1.10
-----
Dilution per share to new investors............................. $6.90
=====
</TABLE>
The following table summarizes, as of June 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 by existing
stockholders and to be paid by new investors purchasing shares of common stock
in this offering at the initial public offering price of $8.00 per share,
before deducting 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... 52,531,830 89.0% $ 65,465,000 55.7% $1.25
New investors........... 6,500,000 11.0 52,000,000 44.3 8.00
---------- ----- ------------ ----- -----
Total................. 59,031,830 100.0% $117,465,000 100.0% $1.99
========== ===== ============ ===== =====
</TABLE>
The above information assumes no exercise of the underwriters' over-
allotment option and excludes exercises of stock options or warrants after June
30, 2000. As of June 30, 2000, we had outstanding options to purchase 3,239,684
shares of our common stock at a weighted average exercise price of $3.65 per
share and warrants to purchase 155,000 shares of our common stock at a weighted
average exercise price of $0.84 per share. The above information also excludes
up to 268,817 shares of our common stock that we would issue to Sony upon
conversion of the $2.0 million convertible promissory note that we issued to
Sony in March 2000, based upon the initial public offering price of $8.00 per
share. In addition, in May, June and July 2000, we issued warrants to purchase
644,395 shares of our common stock to six of our stockholders at an exercise
price of $3.09 per share in connection with promissory notes we entered into
with these stockholders. Under the terms of the promissory notes, these
stockholders received additional warrants to
28
<PAGE>
purchase additional shares of our common stock, in monthly installments, at an
exercise price of $8.00 per share for up to 12 months from the issue date of
the respective promissory notes so long as the principal on the notes remain
outstanding. Because we anticipate repaying the promissory notes in full by
September 15, 2000, these stockholders will have the right to purchase an
aggregate of up to an additional 310,660 shares of our common stock subject to
these warrants. We also issued warrants to purchase 250,000 shares of our
common stock to Chase Securities, Inc. in connection with a $20.0 million
revolving credit facility we entered into with The Chase Manhattan Bank and
warrants to purchase 625,000 shares of our common stock in connection with a
$10.0 million term loan we entered into with Access Technology Partners, L.P.,
an affiliate of Chase Securities, Inc., in June 2000. Upon the completion of
this offering, the warrant held by Chase Securities, Inc. and the warrant held
by Access with respect to 136,500 shares subject to such warrant will have an
exercise price equal to the initial public offering price. With respect to the
remaining 488,500 shares subject to the Access warrant, the exercise price will
be $8.00 per share. Assuming that the stockholder promissory notes remain
outstanding through September 15, 2000 and the exercise of all of these options
and warrants, our pro forma net tangible book value per share of common stock
after this offering would be $1.37.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
related notes thereto included elsewhere in this prospectus. The selected
consolidated balance sheet data as of December 31, 1998 and 1999, and the
selected consolidated statements of operations data for each of the three years
in the period ended December 31, 1999 have been derived from our consolidated
financial statements, which have been audited by PricewaterhouseCoopers LLP,
independent accountants, and are included elsewhere in this prospectus. The
selected consolidated balance sheet data as of June 30, 2000 and the selected
consolidated statements of operations data for the six months ended June 30,
1999 and June 30, 2000, have been derived from our unaudited consolidated
financial statements included elsewhere in this prospectus. The selected
consolidated balance sheet data as of December 31, 1996 and December 31, 1997
and the selected consolidated statements of operations data for the period from
September 16, 1996 (date of inception) to December 31, 1996 were derived from
audited financial statements that are not included in this prospectus.
<TABLE>
<CAPTION>
Period from
September 16,
1996 (date of Six Months Ended
inception) to Years Ended December 31, June 30,
December 31, -------------------------- -----------------
1996 1997 1998 1999 1999 2000
------------- ------- ------- -------- ------- --------
(in thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
Product sales.......... $ 452 $ 1,938 $ 7,609 $ 29,219 $ 9,237 $ 40,816
Development fees....... -- 1,005 -- -- -- --
-------- ------- ------- -------- ------- --------
Total revenues....... 452 2,943 7,609 29,219 9,237 40,816
-------- ------- ------- -------- ------- --------
Gross margin............ 185 1,810 1,576 4,623 1,302 6,764
Operating expenses:
Research and
development (excludes
stock-based
compensation of $274,
$85 and $2,705 in
1999, and the six
months ended June 30,
1999 and June 30,
2000, respectively)... 726 3,931 3,101 4,141 1,963 3,551
Sales and marketing
(excludes stock-based
compensation of $285,
$32 and $1,185 in
1999, and the six
months ended June 30,
1999 and June 30,
2000, respectively)... 238 1,098 4,413 8,599 3,515 8,126
General and
administrative
(excludes stock-based
compensation of
$1,118, $171 and
$3,512 in 1999, and
the six months ended
June 30, 1999 and
June 30, 2000,
respectively)......... 709 1,650 2,733 5,241 2,370 5,860
In-process research
and development
write-off............. 3,047 -- -- -- -- --
Stock-based
compensation.......... -- -- -- 1,806 298 8,168
-------- ------- ------- -------- ------- --------
Total operating
expenses............ 4,720 6,679 10,247 19,787 8,146 25,705
-------- ------- ------- -------- ------- --------
Loss from operations.... (4,535) (4,869) (8,671) (15,164) (6,844) (18,941)
-------- ------- ------- -------- ------- --------
Net loss................ $ (4,555) $(5,157) $(9,090) $(15,281) $(6,957) $(19,099)
======== ======= ======= ======== ======= ========
Net loss per common
share--basic and
diluted................ $ (0.27) $ (0.50) $ (2.57) $ (2.65) $ (1.33) $ (2.29)
======== ======= ======= ======== ======= ========
Shares used in net loss
per common share
calculation--basic and
diluted (see Note 2 to
the consolidated
financial statements).. 16,854 10,387 3,543 5,820 5,253 8,471
======== ======= ======= ======== ======= ========
Pro forma net loss per
common share--basic and
diluted (unaudited) ... $ (0.47) $ (0.42)
======== ========
Shares used in pro forma
net loss per common
share calculation--
basic and diluted
(unaudited) (see Note
12 to the consolidated
financial statements).. 32,663 45,695
======== ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of
------------------------------------ June 30,
1996 1997 1998 1999 2000
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents...... $ 94 $ 341 $ 9,824 $ 6,495 $ 13,792
Short-term investments......... -- -- -- 3,896 --
Working capital (deficit)...... (4,975) (751) 10,382 19,574 14,027
Total assets................... 1,048 2,102 16,814 38,274 56,896
Debt, current and non-current
portions...................... 3,500 6,461 5,393 5,320 16,740
Mandatorily redeemable
convertible preferred stock... -- 2,922 24,653 53,136 53,414
Total stockholders' deficit.... (4,446) (9,329) (18,411) (31,429) (32,122)
</TABLE>
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and notes thereto and other financial information
appearing elsewhere in this prospectus.
Overview
We design, develop and market high-performance digital film and connectivity
products for the digital photography market. Our products and services allow
customers to capture digital images and download them quickly to a personal
computer for editing, distributing and printing.
We were formed in September 1996 to purchase the Solid-State Storage
Business unit of Cirrus Logic, Inc. This business unit was started as a small
team of engineers in 1993. By September 1996, the group had grown to
approximately 30 employees conducting research and development. From the
inception of the business unit to September 1996, the business unit was engaged
principally in research and development activities and recorded approximately
$250,000 and $659,000 of revenues in 1995 and in the period from January 1,
1996 to September 15, 1996, respectively. The revenues for development work
generated by the business unit prior to its acquisition by us were
insignificant and were not representative in nature of our ongoing product
revenues. As a result, we believe that the presentation of selected financial
data for that period would not be meaningful to investors.
After the acquisition of the business unit in September 1996 and through the
middle of 1997, we focused primarily on the sale of controllers and PC Cards
for general flash memory applications. Commencing in the middle of 1997, we
began to focus our products, as well as marketing and sales efforts, on the
digital film market.
We acquired PrintRoom.com, our online photofinishing business, in January
2000 and in April 2000 we acquired Impact Peripherals, which now operates as
Lexar Media Europe, which distributes our products in Europe.
Revenues. We generate revenues primarily from the sale of digital film and
connectivity products for the professional, commercial and consumer markets.
Our digital film is offered in the four primary media formats currently used by
digital cameras: CompactFlash, PC Card, SmartMedia and Memory Stick. In 2000,
we expect to begin receiving a modest to small amount of revenues from the
licensing of our technology. In addition, as a result of our acquisition of
PrintRoom.com, we offer photofinishing services over the Internet and will
begin to recognize modest revenues from these services in 2000.
Our customers include original equipment manufacturers, private label
resellers, consumer retailers and distributors. Some of these customers have
return and price protection rights. We protect some of our customers against
the effects of price decreases on their inventories. Accordingly, if we reduce
our prices, we pay certain distributors and consumer retailers for the
difference between the new price and the price paid for the same product still
in their inventory. We permit some of our customers to return products still in
their inventory for credit or new products. We recognize revenue where there is
a contract or purchase order, upon shipment or delivery depending on the terms
of sale and collectibility of the resulting receivable is probable. We provide
for estimated future returns and price protection based on historical
experience at the time the corresponding revenue is recognized. At the time of
sale, we also provide for the estimated costs of meeting product warranty
obligations. For one of our distributors, revenues and cost of revenues are
deferred until the distributor has sold the product to its customers.
A majority of our sales have been to a limited number of customers. Product
sales to the 10 customers from which we received the greatest revenues
accounted for approximately 99.7% of our product sales in 1997, 83.7% in 1998,
79.2% in 1999 and 77.2% in the six months ended June 30, 2000. We expect that
sales of our products to a limited number of customers will continue to account
for a substantial portion of our product sales for at least the next several
years. Domestic sales account for the majority of our revenues.
31
<PAGE>
Product sales in the United States represented 74.6% of total revenues in 1998,
72.4% in 1999 and 63.0% in the six months ended June 30, 2000. We expect that
international sales, especially in Japan and the United Kingdom, will become a
larger percentage of our revenues in the future.
Cost of Revenues. Our cost of revenues consists primarily of material costs,
with flash memory accounting for most of those costs. We maintain relationships
with key suppliers, which we believe will be able to provide us with sufficient
quantities of flash memory during 2000. However, we expect to continue to face
price fluctuations for flash memory. In addition, cost of revenues includes
expenses related to materials procurement, inventory management and
manufacturing.
Research and Development. Our research and development expenses include
salaries and related expenses for research and development personnel, fees for
outside consultants, patent costs and prototype development costs. We believe
that continued investment in research and development is important to attain
our strategic objectives, and we anticipate that our research and development
expenses will continue to increase significantly in absolute dollars due to our
product development efforts.
Sales and Marketing. Our sales and marketing expenses include salaries and
related expenses for sales and marketing personnel, advertising, customer
service, technical support, distribution and travel and trade show expenses. We
expect sales and marketing expenses to increase significantly as we add sales
staff and expand our promotional and branding efforts, both domestically and
internationally, primarily in Japan and Europe.
General and Administrative. Our general and administrative expenses include
salaries and related expenses for executive, administrative and operational
personnel, fees for professional services and other corporate expenses. We have
incurred significant legal expenses related to patent litigation with SanDisk,
which we expect to continue in 2000. We expect general and administrative
expenses to increase significantly as we add personnel to support the expansion
of our operations, incur additional expenses related to the anticipated growth
of our business, assume the responsibilities of a public company and continue
to incur expenses in ongoing litigation.
Stock-based Compensation. Stock-based compensation related to options
granted to employees represents the aggregate difference, at the date of grant,
between the deemed fair market value of the stock underlying options and the
exercise prices of these options. Stock-based compensation related to options
granted to consultants is revalued at each reporting date using the Black-
Scholes option pricing model. Stock-based compensation is amortized over the
vesting period of the underlying options based on an accelerated vesting
method. The unamortized stock-based compensation recorded for all option grants
through June 30, 2000 totaled $28.5 million. The unamortized stock-based
compensation expense is expected to be amortized as follows: $7.2 million in
the remainder of 2000; $7.1 million in 2001; $3.3 million in 2002; and $1.0
million in 2003.
Interest Expense and Other. Interest expense and other has been comprised
principally of net interest income or expense and foreign currency
fluctuations. However, in the future, we expect to incur additional charges
related to the value of warrants issued in connection with debt financings that
occurred between April and July 2000. In June 2000, we obtained a revolving
credit facility for up to $20.0 million and a $10.0 million term loan with two
lenders. We also entered into a bridge loan facility with six of our
stockholders pursuant to which we obtained approximately $13.3 million of
financing. In connection with these facilities, we issued warrants to purchase
an aggregate of 1,519,395 shares of our common stock. In addition, so long as
the bridge loans remain outstanding, the six stockholders will have the right
to purchase additional shares of our common stock subject to the warrants.
Because we intend to repay these promissory notes in full by September 15,
2000, these stockholders will have the right to purchase up to 310,660 shares
of our common stock subject to the warrants. The proceeds from these financings
have been allocated to both the debt instruments and the warrants for common
stock based on their relative fair values. The value assigned to the warrants
we issued totals approximately $6.2 million, and represents a discount of the
face value of the debt instruments. The value of the warrants is being expensed
as an interest charge over the
32
<PAGE>
period the facilities are in place. The value assigned to the warrants to be
issued in the future depend on the fair value of our common stock at the time
they are issued.
SanDisk Litigation. We are currently involved in significant and costly
litigation with SanDisk in which the Federal District Court has found that some
of our products infringe one of SanDisk's patents. If the court ultimately
rules that the patent is valid, we could be required to pay significant damages
and royalties and could be enjoined from making, selling or using the
infringing products. While we continue to sell these products, SanDisk could
request a hearing for a preliminary injunction against us at any time prior to
trial. In the event an injunction is granted, it would prevent us from selling
our products that have been held to infringe SanDisk's patent and cause a
substantial reduction in revenues and significant losses, which could severely
limit our future business prospects. In the event of an injunction, we could
seek a license from SanDisk. If SanDisk were to agree to a license, it may
cause us to pay royalties on our products and we might be required to grant a
license to SanDisk to utilize our technology. Accordingly, the terms of any
license might adversely affect our margins.
SanDisk is also seeking damages for willful infringement of their patent,
which could require us to pay treble damages, attorney's fees and costs. In
order to obtain enhanced damages for willful infringement, SanDisk must, after
establishing that we have infringed a valid claim of its patent, prove by clear
and convincing evidence that our infringement of that valid claim was willful.
Whether infringement is willful is a question of intent, and a primary
determining factor is whether the infringer reasonably relied upon a competent
opinion of counsel in concluding either that it did not infringe the patent or
that the patent is likely to be found invalid. Because we consulted patent
counsel prior to litigation with SanDisk and because patent counsel advised us
that we do not infringe any claim of the SanDisk patent and that claim 10 of
the SanDisk patent is invalid, we believe that we have valid defenses to
SanDisk's claim of willful infringement. These defenses are applicable to
products we have sold both prior to and subsequent to the Court's partial
summary judgment ruling as the ruling was limited to infringement of claim 10
and did not address the validity of claim 10. Our intent and whether we
reasonably relied upon the opinion of patent counsel are questions of fact to
be determined by a jury. If the jury finds that we have willfully infringed
SanDisk's patent, the judge would then decide whether enhanced damages are
appropriate. Accordingly, we cannot predict whether we will be found to have
willfully infringed SanDisk's patent.
We continue to believe that SanDisk's patent is invalid and intend to
vigorously contest the validity of SanDisk's patent at trial. To succeed, we
will have to overcome by clear and convincing evidence the legal presumption
that a patent is valid. This is a difficult burden of proof and, as a result,
patents are found to be valid in the significant majority of cases.
We are in the process of redesigning our products, which could cause us to
incur additional research and development costs. Further, the costs of
continuing litigation with SanDisk are likely to be substantial and if the
litigation were to be resolved by a settlement, we might need to make
substantial upfront payments, either in cash or equity, as well as ongoing
royalties.
Our History of Losses
We have incurred significant losses to date. As of June 30, 2000, we had an
accumulated deficit of approximately $53.2 million. We intend to continue to
expend significant financial and management resources on developing additional
products and services, increasing sales and marketing activities, improving our
technologies and expanding our operations. As a result, we expect to continue
to incur additional losses and negative cash flow through 2000 and possibly
beyond. In view of the rapidly changing nature of our market and our limited
operating history, we believe that period-to-period comparisons of our revenues
and other operating results are not necessarily meaningful and should not be
relied upon as indications of future performance. Our historic revenue growth
rates are not necessarily sustainable or indicative of our future growth.
33
<PAGE>
Results of Operations
The following table sets forth our statement of operations data as a
percentage of total revenues for the years and periods indicated.
<TABLE>
<CAPTION>
Six Months
Years Ended Ended
December 31, June 30,
------------------------ -------------
1997 1998 1999 1999 2000
------ ------ ------ ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales..................... 65.9 % 100.0 % 100.0 % 100.0 % 100.0 %
Development fees.................. 34.1 -- -- -- --
------ ------ ------ ----- -----
Total revenues................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues.................... 38.5 79.3 84.2 85.9 83.4
------ ------ ------ ----- -----
Gross margin........................ 61.5 20.7 15.8 14.1 16.6 %
Operating expenses:
Research and development.......... 133.6 40.8 14.2 21.3 8.7
Sales and marketing............... 37.3 58.0 29.4 38.1 19.9
General and administrative........ 56.1 35.9 17.9 25.6 14.4
Stock-based compensation.......... -- -- 6.2 3.2 20.0
------ ------ ------ ----- -----
Total operating expenses......... 227.0 134.7 67.7 88.2 63.0
------ ------ ------ ----- -----
Loss from operations................ (165.5) (114.0) (51.9) (74.1) (46.4)
Interest expense and other.......... (9.7) (5.5) (0.4) (1.2) (0.4)
------ ------ ------ ----- -----
Net loss......................... (175.2)% (119.5)% (52.3)% (75.3)% (46.8)%
====== ====== ====== ===== =====
</TABLE>
Six Months Ended June 30, 1999 versus Six Months Ended June 30, 2000
Revenues. Total revenues increased 341.9% from $9.2 million in the six
months ended June 30, 1999 to $40.8 million in the six months ended June 30,
2000. This increase was primarily the result of continued increases in sales of
our digital film and connectivity products, including our USB-enabled
CompactFlash digital film and the JumpShot product, both of which were
introduced in the last half of 1999. In addition, revenues for the six months
ended June 30, 2000 reflect significant sales to customers added after June 30,
1999, the most significant of which were Olympus and Wal-Mart, and increased
sales to continuing customers. Product sales in the six months ended June 30,
1999 were predominantly to customers in the United States (77.1%), Japan (7.7%)
and the United Kingdom (14.1%). Product sales in the six months ended June 30,
2000 were predominantly to customers in the United States (63.0%), Japan
(23.4%) and the United Kingdom (12.5%). Two customers, Ingram Micro and Impact
Peripherals, accounted for 20.2% and 9.9% of product sales in the six months
ended June 30, 1999. Four customers, Kodak, Tech Data, Olympus and Wal-Mart,
accounted for 17.6%, 13.9%, 12.1% and 9.7% of product sales in the six months
ended June 30, 2000, respectively. We believe that a substantial portion of the
products sold to Ingram Micro and Tech Data were resold by those parties to
CompUSA. The change in our top customers from the six months ended June 30,
1999 to the six months ended June 30, 2000 relates to our increasing use of
Tech Data as a distributor for sales to CompUSA and the addition of Olympus and
Wal-Mart as customers subsequent to June 30, 1999.
In April 2000, we acquired Impact Peripherals, our European distributor.
Product sales to Impact Peripherals prior to the acquisition have been included
in our product sales. Impact Peripherals now operates as Lexar Media Europe,
and these results have been included in our financial results beginning in May
2000.
Cost of Revenues. Cost of revenues increased 329.1% from $7.9 million in the
six months ended June 30, 1999 to $34.0 million in the six months ended June
30, 2000. The increase in cost of revenues was primarily due to the increased
sales of our digital film and connectivity products. Overall cost of revenues
decreased from 85.9% of total revenues in the six months ended June 30, 1999 to
83.4% of total revenues in
34
<PAGE>
the six months ended June 30, 2000. Our gross margins increased due to a number
of factors, the most significant of which was the decrease in the cost of
controllers and flash memory in 2000 compared to 1999. In addition, competitive
pricing pressure, the introduction of new products while maintaining sales of
older products with varying price points, changes in product volumes shipped
through consumer and OEM channels and changes in our product mix, including
increased sales of high capacity cards and USB-enabled cards, contributed to
the increase. All of these factors were intertwined, making it impossible to
isolate the individual components.
Research and Development. Research and development expenses increased 80.9%
from $2.0 million in the six months ended June 30, 1999 to $3.6 million in the
six months ended June 30, 2000. The increase in research and development
expenses was primarily related to projects to develop higher speed and higher
capacity products and new connectivity products and to redesign existing
products, and includes the use of outside services related to these projects.
In addition, in the six months ended June 30, 2000, we expended approximately
$444,000 in connection with PrintRoom.com. Our research and development efforts
continue to focus on product enhancements and new product development and we
may continue to use consultants in the future from time to time. Research and
development expenses decreased from 21.3% of total revenues in the six months
ended June 30, 1999 to 8.7% of total revenues in the six months ended June 30,
2000.
Sales and Marketing. Sales and marketing expenses increased 131.2% from $3.5
million in the six months ended June 30, 1999 to $8.1 million in the six months
ended June 30, 2000. The increased level of expenditures was primarily due to
increases in advertising and marketing, increases in commissions as sales
increased, and increased personnel costs due to increased hiring. Overall,
sales and marketing costs decreased from 38.1% of total revenues in the six
months ended June 30, 1999 to 19.9% of total revenues in the six months ended
June 30, 2000.
General and Administrative. General and administrative expenses increased
147.3% from $2.4 million in the six months ended June 30, 1999 to $5.9 million
in the six months ended June 30, 2000. The increased level of expenditures was
primarily due to increases in personnel and facilities costs required to
support our growing operations and increased costs in connection with ongoing
litigation matters. General and administrative costs decreased from 25.7% of
total revenues in the six months ended June 30, 1999 to 14.4% of total revenues
in the six months ended June 30, 2000.
Stock-based Compensation. The unamortized stock-based compensation recorded
for all option grants through June 30, 2000 totaled $28.5 million. In the six
months ended June 30, 2000, we recognized $8.2 million in stock-based
compensation expense associated with these options. The remainder of the
unamortized stock-based compensation will be amortized as follows: $7.2 million
in the remainder of 2000; $7.1 million in 2001; $3.3 million in 2002; and $1.0
million in 2003.
Interest Expense and Other. Interest expense and other, which is comprised
primarily of net interest income or expense and foreign currency fluctuation,
increased from an expense of $113,000 in the six months ended June 30, 1999 to
an expense of $158,000 in the six months ended June 30, 2000. The net increase
was the result of lower interest earned on temporary deposits resulting from
lower average cash balances during the period and increased interest on
investor loans, including amortization of debt discount, in the last part of
the six months ended June 30, 2000.
Income Taxes. No provision for federal and state income taxes was recorded
since we incurred net operating losses from inception through June 30, 2000.
Year Ended December 31, 1998 versus Year Ended December 31, 1999
Revenues. Total revenues increased 284.2% from $7.6 million in 1998 to $29.2
million in 1999. This increase was the result of continued increases in sales
of our digital film and connectivity products, including our USB-enabled
CompactFlash digital film and the JumpShot product introduced in the last half
of the
35
<PAGE>
year. In addition, in 1999, we added several new customers that generated
significant sales, including Best Buy, Nikon, Tech Data and Wal-Mart. Product
sales in 1999 were predominantly to customers in the United States (72.4%),
Japan (14.6%) and the United Kingdom (11.7%). Product sales in 1998 were
predominantly to customers in the United States (74.6%) and Japan (19.3%). Four
customers, Ingram Micro, Kodak, Impact Peripherals and Tech Data, accounted for
12.8%, 11.4%, 10.0% and 8.8% of product sales in 1999. Four customers, Kodak,
ADTEC, Ingram Micro and Viking, accounted for 24.6%, 18.1%, 13.2% and 10.6% of
product sales in 1998. We believe that a substantial majority of the products
we sold to Ingram Micro and Tech Data were resold by those parties to CompUSA.
Cost of Revenues. Cost of revenues increased 310.0% from $6.0 million in
1998 to $24.6 million in 1999. The increase in cost of revenues was due to
increased sales of digital film and connectivity products and higher material
costs. Overall, cost of revenues increased from 79.3% of total revenues in 1998
to 84.2% of total revenues in 1999. Our gross margins decreased from 20.7% in
1998 to 15.8% in 1999 due to a number of factors, the most significant factor
related to price competition during the first three quarters of 1999 which
reduced average sales prices. Gross margins were also impacted in 1999 due to
the decline in sales of higher gross margin controllers. Finally, we
experienced higher product costs than anticipated related to the introduction
of certain new products in 1999.
Research and Development. Research and development expenses increased 33.5%
from $3.1 million in 1998 to $4.1 million in 1999. The increase in research and
development expenses was primarily due to an increase in the number of
development projects that we pursued and an increase in the use of outside
consultants. Our research and development efforts continue to focus on product
enhancement and new product development. Research and development expenses
decreased from 40.8% of total revenues in 1998 to 14.2% of total revenues in
1999.
Sales and Marketing. Sales and marketing expenses increased 94.9% from $4.4
million in 1998 to $8.6 million in 1999. The increased level of expenditures
was primarily due to increases in advertising and marketing, increase in
commissions as sales increased and personnel-related costs due to increased
hiring. Overall, sales and marketing expenses decreased from 58.0% of total
revenues in 1998 to 29.4% of total revenues in 1999.
General and Administrative. General and administrative expenses increased
91.8% from $2.7 million in 1998 to $5.2 million in 1999. This increase was the
result of increasing personnel and facilities costs to support our growing
operations and increased costs in connection with ongoing litigation matters.
General and administrative costs decreased from 35.9% of total revenues in 1998
to 17.9% of total revenues in 1999.
Stock-based Compensation. The unamortized stock-based compensation recorded
for all option grants through December 31, 1999 totaled $21.0 million. In 1999,
we recognized stock-based compensation of $1.8 million associated with these
options.
Interest Expense and Other. Interest expense and other, which is comprised
primarily of net interest expense and foreign currency fluctuation, decreased
72.1% from $419,000 in 1998 to $117,000 in 1999. The decrease was the result of
interest earned on temporary deposits resulting from the proceeds of our
preferred stock offerings.
Income Taxes. No provision for federal and state income taxes was recorded,
since we incurred net operating losses from inception through December 31,
1999. As of December 31, 1999, we had approximately $25.7 million of federal
and state net operating loss carryforwards, which expire in varying amounts
beginning in 2003 and ending in 2019, if not utilized. Due to the uncertainty
regarding the ultimate utilization of the net operating loss carryforwards, we
have not recorded any benefit for losses and a valuation allowance has been
recorded for the entire amount of the net deferred tax asset. In addition,
sales of our stock, including shares sold in this offering, may further
restrict our ability to utilize our net operating loss carryforwards.
36
<PAGE>
Year Ended December 31, 1997 versus Year Ended December 31, 1998
Revenues. Total revenues increased 162.1% from $2.9 million in 1997 to $7.6
million in 1998. The increase was the result of a 292.6% increase in product
revenues. No development fees were recognized in 1998. The product revenue
increase was due primarily to increasing sales from new media formats such as
CompactFlash, PC Card and SmartMedia for use in digital cameras. In 1998,
substantially all of our product sales related to sales of digital film whereas
in 1997 product sales related primarily to sales of controllers and, to a
lesser degree, digital film. Product sales in 1997 were substantially all to
customers in the United States. Product sales in 1998 were primarily to
customers in the United States (74.6%) and Japan (19.3%). Four customers,
Kodak, ADTEC, Ingram Micro and Viking, accounted for 24.6%, 18.1%, 13.2% and
10.6% of product sales in 1998. Three customers, Simple Technologies, Hitachi
and Mitsubishi, accounted for 47.8%, 20.4% and 14.9% of product sales in 1997.
We recognized $1.0 million in development fees in 1997 from three major
semiconductor manufacturers.
Cost of Revenues. The cost of development fee revenue for 1997 has been
included in research and development costs. These costs were not allocated to
cost of revenue as they represented internal research and development projects
that we were already undertaking as part of the development of our own core
technology. Accordingly, our gross margin has been measured based on a
percentage of product sales.
Cost of product revenues increased 445.4% from $1.1 million in 1997 to $6.0
million in 1998. The increase in cost of product revenues was primarily due to
increased sales of digital photography products and higher material costs for
our digital film. Cost of product revenues increased from 58.5% of product
sales in 1997 to 79.3% of product sales in 1998, largely due to changes in our
product mix.
Research and Development. Research and development expenses decreased 21.1%
from $3.9 million in 1997 to $3.1 million in 1998. The decrease was primarily
due to reductions in research and development personnel and the number of
development projects that we pursued. Research and development costs decreased
from 202.9% of product sales in 1997 to 40.8% of product sales in 1998.
Sales and Marketing. Sales and marketing expenses increased 301.9% from $1.1
million in 1997 to $4.4 million in 1998. The increase was primarily due to
higher expenses associated with selling and promoting our new digital film and
connectivity products in the U.S. market. Sales and marketing expenses
increased from 56.6% of product sales in 1997 to 57.9% of product sales in
1998.
General and Administrative. General and administrative expenses increased
65.6% from $1.7 million in 1997 to $2.7 million in 1998. This increase was the
result of increasing personnel and facilities costs to support our growing
operations. In addition, we incurred significant legal expenses in 1998 related
to our patent litigation with SanDisk. General and administrative costs
decreased from 85.2% of product sales in 1997 to 35.9% of product sales in
1998.
Interest Expense and Other. Net interest expense increased 45.5% from
$288,000 in 1997 to $419,000 in 1998. The increase was primarily due to the
timing of borrowings from related parties.
37
<PAGE>
Quarterly Results of Operations
The following table sets forth quarterly statement of operations data for
the ten quarters in the period ended June 30, 2000. This quarterly information
has been derived from our unaudited financial statements and, in the opinion of
management, includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods covered. The quarterly data should be read in conjunction with our
consolidated financial statements and related notes. The operating results for
any quarter are not necessarily indicative of the operating results for any
future period.
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1998 1998 1998 1998 1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Product sales.......... $ 215 $ 1,235 $ 2,072 $ 4,087 $ 3,726 $ 5,511 $ 8,176 $11,806 $16,050 $ 24,766
Cost of revenues....... 212 858 1,457 3,507 3,240 4,695 7,059 9,602 13,371 20,681
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Gross margin........... 3 377 615 580 486 816 1,117 2,204 2,679 4,085
Operating expenses:
Research and
development.......... 577 719 788 1,017 944 1,019 1,069 1,109 1,537 2,014
Sales and marketing... 661 873 1,151 1,728 1,757 1,758 2,260 2,824 2,997 5,129
General and
administrative....... 380 587 727 1,038 997 1,373 1,018 1,853 2,458 3,402
Stock-based
compensation......... -- -- -- -- 23 275 140 1,368 4,034 4,134
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Total operating
expenses........... 1,618 2,179 2,666 3,783 3,721 4,425 4,487 7,154 11,026 14,679
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Loss from operations... (1,615) (1,802) (2,051) (3,203) (3,235) (3,609) (3,370) (4,950) (8,347) (10,594)
Interest income
(expense) and other .. (129) (93) (134) (63) (20) (93) (54) 51 41 (199)
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Net loss............... $(1,744) $(1,895) $(2,185) $(3,266) $(3,255) $(3,702) $(3,424) $(4,899) $(8,306) $(10,793)
======= ======= ======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
The following table sets forth our statement of operations data as a
percentage of total revenues for the periods indicated.
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1998 1998 1998 1998 1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Product sales........... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues........ 98.6 69.4 70.3 85.8 87.0 85.2 86.3 81.3 83.3 83.5
------ ------ ------ ----- ----- ----- ----- ----- ----- -----
Gross margin............ 1.4 30.6 29.7 14.2 13.0 14.8 13.7 18.7 16.7 16.5
Operating expenses:
Research and
development........... 268.4 58.2 38.0 24.9 25.3 18.5 13.1 9.4 9.6 8.1
Sales and marketing.... 307.4 70.7 55.6 42.3 47.2 31.9 27.6 23.9 18.7 20.7
General and
administrative........ 176.7 47.6 35.1 25.4 26.8 24.9 12.5 15.7 15.3 13.7
Stock-based
compensation.......... -- -- -- -- 0.6 5.0 1.7 11.6 25.1 16.7
------ ------ ------ ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............ 752.5 176.5 128.7 92.6 99.9 80.3 54.9 60.6 68.7 59.2
------ ------ ------ ----- ----- ----- ----- ----- ----- -----
Loss from operations.... (751.1) (145.9) (99.0) (78.4) (86.9) (65.5) (41.2) (41.9) (52.0) (42.7)
Interest expense and
other.................. (60.0) (7.5) (6.5) (1.5) (0.5) (1.7) (0.7) 0.4 0.3 (0.8)
------ ------ ------ ----- ----- ----- ----- ----- ----- -----
Net loss................ (811.1)% (153.4)% (105.5)% (79.9)% (87.4)% (67.2)% (41.9)% (41.5)% (51.7)% (43.5)%
====== ====== ====== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Product sales have increased each of the past ten quarters, except for the
first quarter of 1999. We expect our quarterly operating results to fluctuate
significantly in the future as a result of a variety of factors,
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many of which are outside of our control. These factors include, for example,
changes in component costs, manufacturing yields, the prices at which we sell
our products and the mix of the products we sell. Historically, our quarterly
gross margins have varied significantly. For example, our gross margins for the
fourth quarter in 1999 were significantly higher than in previous quarters. We
believe our fourth quarter 1999 gross margin benefited from improved yields for
some of our components, stable prices, more favorable margins on recently
introduced USB products and a more favorable product mix. We do not anticipate
benefiting from all of these events at the same time in the foreseeable future.
For example, gross margins for the three months ended March 31, 2000 decreased
from the immediately prior quarter to 16.7% and decreased slightly in the three
months ended June 30, 2000 to 16.5%. We expect to continue to experience
fluctuations and pressure on our gross margins due to a number of factors,
including changes in our product and customer mix, flash memory costs and the
prices of competitive products and higher costs in the introduction of new
products.
We plan to significantly increase our research and development, sales and
marketing and general and administrative expenses in 2000 and beyond. Our
expenses are partially based on our expectations regarding future revenues, and
are largely fixed in nature, particularly in the short term. As a result, if
our revenues in a period do not meet our expectations, our financial results
will likely suffer. We believe that comparisons of our historical quarterly
operating results are neither meaningful nor predictive of future performance.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of our common stock and preferred stock, which through June 30, 2000
totaled approximately $57.8 million. Net cash used in operating activities was
approximately $4.6 million in 1997, $10.3 million in 1998, $26.3 million in
1999 and $9.2 in the six months ended June 30, 2000. Net cash used in operating
activities resulted primarily from our net losses, increases in inventory and,
in 1998, 1999 and the six months ended June 30, 2000, increases in accounts
receivable, offset in part by increases in accounts payable and accrued
liabilities.
Net cash used in investing activities was $738,000 in 1997, $631,000 in 1998
and $5.6 million in 1999. Net cash used in investing activities in 1997 and
1998 primarily represented purchases of property, investing activities resulted
from purchases of short-term investments and property, equipment and software.
In the six months ended June 30, 2000, net cash provided from investing
activities was $2.4 million, resulting primarily from proceeds from the sale of
short-term investments, offset by the purchase of property and equipment.
Net cash provided by financing activities was $5.6 million in 1997, $20.4
million in 1998, $28.5 million in 1999 and $14.1 million in the six months
ended June 30, 2000. Net cash provided by financing activities in 1997 was from
the proceeds of notes payable and other loans, offset by cash used to
repurchase stock. Net cash provided by financing activities in 1998 and 1999
consisted primarily of proceeds from preferred stock offerings and from new
investor loans later converted into preferred stock. Net cash provided by
financing activities in the first six months of 2000 consisted primarily of
proceeds from loans from some of our preferred stockholders and Sony and from
the exercise of stock options.
As of June 30, 2000, we had $13.8 million of cash, of which $2.2 million was
restricted. As of that date, our principal commitments consisted of obligations
outstanding under noncancelable operating leases for $3.0 million, including
contractual commitments of $300,000 for the remainder of 2000. We anticipate a
substantial increase in our lease commitments and our cash needs, consistent
with the anticipated growth in operations and infrastructure.
In May, June and July 2000, we issued promissory notes in the aggregate
amount of $13.3 million to six of our stockholders, with interest on the notes
accruing at a rate of 6.0% per year. In June 2000, we entered into credit
facilities with The Chase Manhattan Bank and Access Technology Partners, an
affiliate of Chase. These facilities include a $20.0 million revolving credit
line from Chase, with interest payable on any
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borrowings at a rate of LIBOR plus 3.0% per year, and a $10.0 million term loan
from Access, with interest payable on any borrowings at a rate of 12.0% per
year. The credit line from Access is subordinate in right of payment to the
credit line from Chase. We are permitted to draw down amounts from the Chase
revolving credit facility based upon our eligible receivables and inventory.
Our ability to draw down amounts from the Access term loan depends upon our
meeting milestones related to our litigation with SanDisk. We are currently
able to draw down $4.0 million from the Access term loan. As of July 21, 2000,
there was $6.1 million outstanding under the Chase credit facility and $4.0
million outstanding under the Access term loan. Our failure to satisfy
specified post-closing conditions, including delivery of subordination
agreements by our existing noteholders, would constitute an event of default
under the Chase and Access credit facilities.
We currently anticipate that the net proceeds of this offering, together
with our credit facility, term loan and our current balances of cash, cash
equivalents and short-term investments, will be sufficient to meet our
anticipated needs for working capital and capital expenditures through the end
of 2001. We may need to raise additional funds prior to the expiration of this
period if, for example, we pursue acquisitions or experience operating losses
that exceed our current expectations. We cannot be certain that additional
financing will be available to us on favorable terms when required, or at all.
Quantitative and Qualitative Disclosure of Market Risks
We sell our products primarily to customers in the U.S. and to a lesser
extent Japan, Canada and Europe. Most of our sales are currently denominated in
U.S. dollars; however we anticipate an increasing amount of sales to be
denominated in British pounds, the Japanese yen and possibly the euro. As a
result, it is possible that our future financial results could be directly
affected by changes in foreign currency exchange rates, and the prices of our
products would become more expensive in a particular foreign market if the
value of the U.S. dollar rises in comparison to the local currency, which may
make it more difficult to sell our products in that market. We will continue to
face foreign currency exchange risk in the future. Approximately 27.6% of our
total revenues for the year ended December 31, 1999 and 37.0% for the
six months ended June 30, 2000 were derived from countries other than the
United States. Therefore, our financial results could be directly affected by
weak economic conditions in foreign markets. These risks may change if we
acquire businesses outside the U.S. or if we sell in non-U.S. dollar
denominated currencies.
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest expense we must pay on
our outstanding debt instruments. The risk associated with fluctuating interest
expense is limited to the exposure related to those debt instruments and credit
facilities that are tied to market rates. We do not plan to use derivative
financial instruments in our investment portfolio. We plan to ensure the safety
and preservation of our invested principal funds by limiting default risk and
market risk. We plan to mitigate default risk by investing in investment-grade
securities. We have historically invested in investment-grade, short-term
securities that we have held until maturity to limit our market risk.
Year 2000 Readiness Disclosure
We have not experienced any Year 2000-related disruption in the operation of
our systems. Although most Year 2000 problems should have become evident on
January 1, 2000, additional Year 2000-related problems may become evident only
after that date. For example, some software programs may have difficulty
resolving the so-called "century leap year" algorithm which will also occur
during the Year 2000.
Recently Issued Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position 98-1, or SOP 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP 98-1 is effective for financial statements
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<PAGE>
for fiscal years beginning after December 15, 1998. The adoption of SOP 98-1
does not have a material impact on our financial statements.
In April 1998, AcSEC issued Statement of Position 98-5, or SOP 98-5,
"Reporting on the Costs of Start-Up Activities." This standard requires
companies to expense the costs of start-up activities and organization costs as
incurred. In general, SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. The adoption of SOP 98-5 does not have a material impact on
our results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities.
SFAS 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a components of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 will be effective for fiscal years beginning after June 15,
2000. We do not currently hold derivative instruments or engage in hedging
activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial
Statements" which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. We have
adopted SAB 101 and the adoption did not have a material impact on our
financial statements.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation." FIN 44 is an interpretation on APB Opinion No. 25 and
clarifies guidance for certain issues that arose in the application of APB
Opinion No. 25. Management believes that the adoption of FIN 44 does not have a
material impact on our financial statements.
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BUSINESS
We are a leading designer, developer and marketer of high-performance
digital film and connectivity products for the digital photography market. Our
broad line of high-performance digital film combines flash memory from leading
suppliers with our patented controller technology to address the needs of
professional, commercial and consumer photographers. Our connectivity products
make it easy to transfer digital images from digital film to a personal
computer. PrintRoom.com provides consumers with high-quality prints of digital
images and photo sharing services. Collectively, our products and services
provide an end-to-end solution for the digital photographer.
Our high-performance digital film can record images faster than most other
digital film. This performance advantage is particularly noticeable when used
in advanced digital cameras that take advantage of our write speed, or the rate
at which our film can capture a digital image. Many professional photographers
choose to use our digital film over other brands. We offer digital film for
substantially all digital cameras, including those manufactured by Agfa, Canon,
Casio, Epson, Fuji, Hewlett-Packard, Kodak, Konica, Minolta, Nikon, Olympus,
Polaroid, Ricoh, Sony and Yashica. We currently offer digital film in the four
primary media formats currently used by digital cameras: CompactFlash,
SmartMedia, PC Card and Memory Stick.
Our technology can be applied to a variety of consumer electronic
applications, including digital cameras, Internet music players, laptop
computers, personal digital assistants, telecommunication and network devices
and digital video recorders. As an example of how we intend to leverage our
digital film technology into some of these markets, we have an agreement with
Sony under which we combine our proprietary controller technology with their
Memory Stick media format and include the Memory Stick as one of our digital
film products. The Memory Stick is used in a wide variety of consumer
electronic products, including camcorders, personal computers, portable music
players, cameras and voice recorders. Under our agreement, we and Sony have
cross-licensed technology to each other. We have the right to manufacture and
sell the current version of the Memory Stick, and are obligated to pay a
royalty to Sony for each Memory Stick that we sell. We have agreed to
collaborate on technology development with Sony, including the development of a
high-speed Memory Stick through the use of our proprietary controller
technology. Sony is obligated to pay us royalties on Memory Sticks that it
sells that incorporate our technology. Our agreement with Sony will continue
indefinitely, unless earlier terminated for the material breach of the
agreement by either party or a party's bankruptcy-related event.
Industry Background
Traditional Photography Market. According to a joint report by
Photofinishing News and Lyra Research, the worldwide photography market,
consisting of cameras and ancillary products, film and photofinishing services,
exceeded $85 billion in 1998. Participants in this global market include
leading providers of traditional photography products and services, such as
Canon, Fuji, Kodak, Minolta, Nikon and Olympus. According to this report, over
60 million traditional film cameras were sold worldwide in 1998. In addition,
this report estimates that there were approximately 3.4 billion rolls of
traditional film sold during this period, resulting in approximately 88 billion
total exposures. We believe that over time, a significant portion of the
traditional photography market will migrate to digital photography.
Digital Photography. Digital photography offers several advantages over
traditional photography: the photographer can immediately preview digital
images, select the best digital image from multiple shots and easily edit the
image. Photographers can also transfer the digital images to a personal
computer where they can be easily edited and shared. Initially, the demand for
digital images was driven primarily by professional and commercial users in
such fields as photojournalism, advertising, publishing, insurance and real
estate. These users obtained digital images either by using digital scanners to
capture traditional film photographs or by using relatively expensive digital
cameras with high-resolution capabilities.
Although early digital cameras were typically too expensive or offered poor
resolution capabilities, recent technological improvements have resulted in
both reduced prices and improved image quality. The
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<PAGE>
growing presence of personal computers in the home and the increasing use of
the Internet by consumers to transmit images to friends and family are
stimulating the demand for and use of digital cameras. International Data
Corporation, or IDC, estimates that the number of Internet users worldwide will
increase from approximately 200 million in 1999 to approximately 500 million by
2003. This penetration could further increase if historical bandwidth
constraints are successfully addressed by improved delivery systems such as
digital cable, satellite and digital subscriber lines.
Digital Camera Market. IDC projects that the photo-quality digital camera
market will be the fastest growing digital camera segment from 1998 to 2003,
with an estimated compound annual growth rate of approximately 62% during this
period. It expects this segment to drive the growth of the entire digital
camera market. IDC defines photo-quality digital cameras as those cameras that
approximate both the cost and image quality of a traditional 35mm camera. The
sale of photo-quality digital cameras accounted for approximately 64% of total
digital camera sales in 1998 and is projected to account for nearly all digital
camera sales by the end of 2002. IDC projects that the number of photo-quality
digital camera units shipped will increase from approximately 2.0 million in
1998 to 21.8 million in 2003.
The Digital Film Market. Digital cameras typically store images on removable
and reusable flash memory cards called digital film. An integral part of most
digital film are the controllers that write the image onto the digital film.
Controllers either reside on the flash memory card or permanently in the
digital camera. The CompactFlash, Memory Stick and PC Card formats contain a
controller, while the SmartMedia format does not. When the controller resides
in the digital camera, as is the case with SmartMedia, the ability of that
camera to utilize the latest advances in flash memory technology is limited.
The inclusion of the controller on the flash memory card allows the latest
advances in controller technology to be combined with the latest advances in
flash memory technology. We believe this inclusion allows digital film
manufacturers to more quickly design and market digital film products with
higher capacity and faster write speeds. CompactFlash and PC Cards accounted
for approximately 77% of flash memory-based digital film market revenue in
1997.
We believe the increasing acceptance of digital cameras will continue to
drive the growth of the digital film market. Semico Research, Inc., a
technology market research firm, estimates that the digital film market will
increase from approximately $80 million in 1998 to over $1.2 billion in 2003,
representing an estimated compound annual growth rate of approximately 72%. The
acceptance of digital cameras depends in large part upon achieving lower prices
and higher resolution. It also depends on the availability of digital film
products and services that meet the following consumer needs:
. Speed. The speed with which a user can take successive photographs is a
critical element of digital photography. The factors that limit this
speed include image file size, the processing speed of the camera and
the sustained write speed of the digital film. As digital cameras with
faster processing speeds enter the market, we believe sustained write
capabilities will distinguish competing brands of digital film.
. Connectivity. According to IDC, the speed at which digital images can be
transferred to a personal computer or another device is one of the most
important characteristics for consumers when considering the overall
usability of a digital camera. Today, there are relatively few options
for quickly and easily transferring digital images to a personal
computer. The most common method, and also the slowest, is to transfer
images via the serial port on the camera, which can often take over 30
minutes to transmit 32 megabytes of digital images. Several digital
camera manufacturers have recently introduced cameras with connectivity
solutions utilizing the universal serial bus, or USB port, of the
personal computer. These solutions, however, are inherently complex and
require a direct physical connection between the digital camera and the
personal computer to transfer images. This connection draws from and
drains the power supply of the camera.
. Capacity. The emergence of digital cameras with increasingly higher
resolution capabilities is driving the need for higher capacity digital
film. The images produced by these high-resolution
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digital cameras have greater memory requirements, which limit the
storage capacity of existing digital film products to a few pictures.
Most digital cameras are currently shipped with an eight megabyte
storage card, which means that typically fewer than 10 to 15 pictures
can be stored from existing photo-quality cameras shooting at the
highest resolution.
. Compatibility. Not all digital film of a particular format is compatible
with each digital camera requiring that format. Accordingly, the
consumer who purchases a new digital camera or who owns multiple cameras
requires digital film that is compatible in terms of format and
functionality with each model.
Digital Photofinishing Market. Consumers currently obtain prints from
digital images primarily by home printing or through Internet sites offering
photofinishing services. The majority of consumers currently choose to use
traditional inkjet printers at home to print their digital images. These
printers produce prints that vary in image quality or resolution and can fade.
The industry has recently experienced a substantial increase in the number of
companies offering Internet photofinishing services. These services allow
consumers to submit their digital images online and receive photographic prints
in the mail. These services are convenient, cost-effective and produce high-
quality prints that are comparable to traditional photofinishing services. Many
of these Internet photofinishing services also provide image archiving and
sharing services. Additionally, digital imaging kiosks, such as those from
Kodak, Fuji, Pixel Magic and Telepix, allow consumers to scan traditional
images or download digital images for processing and output.
Our Solution
We provide an extensive array of digital film and connectivity products and
services that improve the overall digital photography experience. We combine
flash memory from leading suppliers with our patented controller technology to
offer a broad line of high-performance digital film that addresses the needs of
professional, commercial and consumer photographers. Our connectivity products
make it easy for consumers to transfer digital images from their camera to a
personal computer. We also offer high-quality photofinishing services over the
Internet. Our products and services offer the following benefits:
Superior Speed. Our digital film records images faster than most other flash
memory cards, particularly when used in advanced digital cameras that have the
ability to take advantage of our increased write speed. We currently offer
digital film with write speeds ranging from 600 kilobytes per second to
1.5 megabytes per second for our CompactFlash product. Currently, our
competitors generally offer speeds of 600 kilobytes per second or below. This
means that consumers using our digital film are able to take more pictures in
less time, increasing the likelihood of capturing the desired image. Higher
resolution cameras produce larger image files that must be stored in a short
amount of time in order to rapidly take successive pictures. We believe the
faster write speeds of our digital film will become increasingly important as
digital cameras incorporate higher resolution capabilities.
Quick Connectivity. We offer a line of digital film reader/writers that
facilitate the transfer of digital images to a personal computer and other
devices without a direct connection to the digital camera. Our connectivity
products include parallel port and USB port universal reader/writers that are
compatible with all types of digital film formats, as well as with the
Macintosh and PC platforms. Our USB-enabled CompactFlash product, which
received The 1999 Best of What's New award from Popular Science and The
Editor's Choice Award from PC Photo, was the first digital film product to
integrate the USB-protocol directly onto the controller of the digital film.
Our USB-enabled digital film combined with our JumpShot cable provide the
convenience of plug-and-play operation and image transfer rates up to 25 times
faster than connectivity products using the serial port of a digital camera.
High Capacity. Our ability to reprogram our controller allows us to purchase
flash memory from the manufacturer that offers the highest capacity flash
memory. We currently offer digital film with capacities of up to 320 megabytes
in the PC Card format, 160 megabytes in the CompactFlash format, 32 megabytes
in
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the SmartMedia format and up to 64 megabytes in the Memory Stick format. Our
high-capacity digital film addresses the needs of those consumers who wish to
replicate or surpass the number of pictures that can be captured with
traditional film products, particularly as digital cameras incorporating higher
resolution capabilities are introduced into market. For example, our
160 megabyte CompactFlash digital film is capable of storing the equivalent of
229 images using the Epson 850z digital camera in its highest resolution mode.
Guaranteed Compatibility. We offer digital film for substantially all
digital cameras, including those manufactured by Agfa, Canon, Casio, Epson,
Fuji, Hewlett-Packard, Kodak, Konica, Minolta, Nikon, Olympus, Polaroid, Ricoh,
Sony and Yashica. We currently offer digital film in the four primary media
formats currently used by digital cameras: CompactFlash, SmartMedia, PC Card
and Memory Stick. The patented programmability of our controller technology
allows us to meet a wide range of digital camera compatibility specifications
without physically altering our digital film. We maintain a laboratory where we
test prototypes of digital camera models from manufacturers prior to their
introduction to market to ensure their compatibility with our digital film.
This testing enables us to market our entire line of digital film as "Digital
Film Compliant," which is our guarantee that our digital film will work
seamlessly with any digital camera that uses the particular format.
Internet Photofinishing Services. Through our acquisition of PrintRoom.com,
we offer a broad array of photofinishing and ancillary services over the
Internet. Our service enables digital camera users to submit their digital
images for printing directly over the Internet and to receive high-quality
photographic prints in the mail at prices competitive with traditional
photofinishing services. We also offer online photo-sharing services through
which our customers are able to share their digital images with family and
friends over the Internet.
Our Strategy
Our objective is to establish our products and services as the industry
standard solution for capturing, storing, viewing, editing and distributing
digital images. We intend to capitalize on the anticipated growth and
development of the digital photography market by offering a broad range of
digital film and connectivity products and services and by leveraging our
proprietary technology into other consumer product applications. The key
elements of our business strategy include the following:
Leverage Our Technology to Enhance the Digital Photography Experience. Our
primary focus is to develop, market and sell digital film and connectivity
products and services. We intend to continue our research and development
efforts to further increase the performance of our digital film and
connectivity products and to work with digital camera manufacturers to improve
the design of their next generation cameras to take advantage of our high-speed
digital film. In addition, to enhance the overall digital photography
experience of our customers, we intend to combine our digital film and
connectivity products with our recently introduced Internet photo-sharing and
photofinishing services to create a seamless solution for our customers who
wish to capture, edit, distribute and print their digital images.
Build Our Brand. Many professional photographers choose to use our digital
film over other brands. We will continue to focus our marketing efforts on
leveraging this position and using our products' superior performance to extend
our brand recognition in the commercial and consumer markets. We actively
promote our brand in the commercial and consumer markets through merchandising,
packaging and print advertising. A number of digital camera manufacturers such
as Epson, Kodak, Minolta, Nikon, Olympus and Yashica have bundled our branded
digital film with their digital cameras. In addition, we actively work with
leading retailers such as B&H Photo, Best Buy, Camera World, CompUSA, Target,
Wal-Mart and Wolf Camera to promote our branded digital film by deploying joint
advertising campaigns, sponsoring in-store promotions and rebate programs,
designing product displays and demonstrations and training sales associates. To
promote PrintRoom.com, we intend to establish relationships with digital camera
manufacturers and retailers, as well as with online photography communities. We
intend to cross-promote our digital film and connectivity products and our
Internet photofinishing services to capitalize on our growing brand awareness.
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Extend Our Patented Controller Technology to Address New Market
Opportunities. Our controller technology and products can be licensed for use
in a number of significant emerging markets, outside of digital film, that
require high-speed digital memory. For example, Internet music players, laptop
computers, personal digital assistants, digital video recorders,
telecommunication and network devices and other consumer electronic products
utilize flash memory devices. We believe that many original equipment
manufacturers that address these markets will be attracted to the
programmability, compatibility, high-performance and ease of connectivity of
our controller. Our agreement with Sony demonstrates how we plan to leverage
our digital film technology into emerging markets. We intend to selectively
pursue similar relationships and licensing arrangements.
Capitalize on Supply Flexibility for Our Key Components. Our patented
programmable controller technology is compatible with multiple sources of flash
memory. This flexibility enables us to outsource and draw on the highest
capacity or otherwise available flash memory at competitive prices. We believe
that outsourcing, rather than internally designing, developing and
manufacturing components, allows us to focus on our core competencies of
product design and development. Furthermore, we are able to take advantage of
the substantial expenditures made, and economies of scale achieved, by our
suppliers as well as their direct and more timely access to advancing
technology. We are committed to maintaining strong relationships with leading
suppliers to provide technologically superior products.
Expand Our International Presence. We intend to rapidly expand our
international presence. We currently sell our products in Europe and Asia
primarily through distributors. As part of our European expansion, we recently
acquired Impact Peripherals Limited, our primary European distributor based in
the United Kingdom. In addition, we recently established a small sales group in
Japan and have significantly expanded our sales through our distribution
arrangement with Olympus. We have also recently launched our brand in Japan.
PrintRoom.com currently has a limited customer base of domestic and
international customers. We intend to rapidly expand our services in selected
international markets. When such markets achieve a certain size, we may
establish local photofinishing operations to serve our customers more quickly
and more cost-efficiently.
Our Products and Services
Digital Film. We offer digital film in a variety of speeds and capacities in
the CompactFlash, PC Card and SmartMedia formats. Through our recently
announced agreement with Sony, we now offer the Memory Stick media format. Our
entire line of digital film products is subjected to rigorous design and
testing procedures that we believe are more comprehensive than the standards
for compatibility set by the industry in general. These procedures guarantee
that our digital film will work seamlessly with any digital camera that uses
the particular format.
We label each of our digital film products for write speed performance in
which 1x is equal to a write speed of 150 kilobytes per second, nomenclature
similar to that used in the CD-ROM industry. For example, our 4x digital film
products are capable of sustained write speeds of at least 600 kilobytes per
second. Currently, we offer digital film products with write speeds ranging
from 4x to 10x.
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The table below provides information on our principal digital film products:
Digital Film Products
<TABLE>
<CAPTION>
Sustained Write Storage Capacity Target U.S. Suggested
Format Speed (Megabytes) Market Retail Price
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CompactFlash 4x 8, 16, 32, 48, 64 and 80 Consumer $69 to $299
------------------------------------------------------------------------------
8x 16, 32, 48, 64, 80, 128 and 160 Enthusiast $179 to $749
------------------------------------------------------------------------------
10x 128 and 160 Professional $649 to $799
-------------------------------------------------------------------------------------------
SmartMedia Not Rated 8, 16 and 32 Consumer $29 to $129
-------------------------------------------------------------------------------------------
PC Card 8x 160 and 320 Professional $629 to $1,199
-------------------------------------------------------------------------------------------
Memory Stick Not Rated 16, 32 and 64 Consumer $49 to $139
</TABLE>
We are currently redesigning the controller used in our digital film for the
CompactFlash and PC Card formats. These redesigned products are being tested in
our labs and have met our requirements for functionality, reliability and
compatibility. However, because we have not completed our redesign efforts, we
cannot be certain that the redesigned products will have the write speed or
storage capacity of our current products.
Connectivity Products. We offer a broad line of digital film reader/writers
that facilitate the transfer of digital images to a personal computer and other
devices without a direct connection to the digital camera. Our USB-enabled
CompactFlash digital film received the 1999 Best of What's New Award from
Popular Science and the Editor's Choice Award from PC Photo. With our
USB-enabled digital film, the consumer simply removes the digital film from the
camera and slips it into our JumpShot cable, which is then plugged into the
universal serial bus port of the computer. When used with our JumpShot cable,
our USB-enabled CompactFlash card functions as a removable drive, thus enabling
the consumer to easily transfer digital images from our digital film to a
personal computer.
The table below provides information on our connectivity products:
Connectivity Products
<TABLE>
<CAPTION>
U.S.
Suggested
Type of Product Description Retail Price
----------------------------------------------------------------------------------------
<C> <C> <S>
Digital Film Readers CompactFlash Adapter $11.99
-----------------------------------------------------------------
Universal (CompactFlash, SmartMedia and $49.00
PC Card) Reader/Writer for the Parallel Port
-----------------------------------------------------------------
CompactFlash Reader/Writer for the USB Port $99.00
----------------------------------------------------------------------------------------
JumpShot Connectivity Cable used to connect our USB-enabled
Kit* CompactFlash digital film to a personal
computer via a USB Port $19.95
</TABLE>
* Currently bundled with our USB-enabled CompactFlash digital film.
Photofinishing Services. Our Internet photofinishing services offer high-
quality digital prints as well as online photo-sharing capabilities. Through
PrintRoom.com, we enable our users to easily submit digital images over the
Internet and to receive high-quality photographic prints in one or more
destinations. Our photofinishing lab offers image enhancement and a full range
of print sizes ranging from wallet size to 8X10 inches. We also offer the
ability to create and share online albums and guest books with family and
friends.
47
<PAGE>
Sales and Marketing
We sell our digital film and connectivity products to end-users primarily
through original equipment manufacturer and consumer retail channels. The
original equipment manufacturer channel consists of digital camera
manufacturers and other private label resellers. The consumer channel includes
national and regional retailers and select corporate accounts. We use a direct
sales force, as well as distributors, value-added resellers and independent
sales representatives for the consumer market. Our direct sales force includes
11 individuals based in Fremont, California and three in Japan. We currently
distribute products directly in Japan and Europe and other parts of the world
through international distributors. We also market our products through our
website. In 1999, distributors, independent sales representatives, direct sales
force and resellers accounted for approximately 51%, 29%, 14% and 6%,
respectively, of our consumer revenues. In connection with the majority of our
distributor sales, we pay commissions to independent contractors based upon the
sales to their clients from our distributors.
To support our sales efforts, we conduct marketing programs designed to
educate our target markets about the differences in digital film offerings. Our
retail marketing programs include merchandising programs, in-store promotions,
trade events and print advertising. We also support our marketing strategy by
establishing and maintaining close relationships with original equipment
manufacturers. For example, several major digital camera manufacturers,
including Epson, Minolta, Nikon and Yashica, recently began bundling our Lexar
branded USB-enabled CompactFlash digital film with their digital cameras.
Customers
The following chart illustrates the consumer retailers, original equipment
manufacturers and private label resellers and distributors that sell our
products and accounted for more than $300,000 in total revenues in 1999.
<TABLE>
<CAPTION>
Original Equipment
Consumer Manufacturers and
Retailers Private Label Resellers Distributors
--------- ----------------------- ------------
<S> <C> <C>
Best Buy ADTEC Argraph
B&H Photo Epson Associated Press
Camera World Hagiwara Impact Peripherals
CompUSA Kodak Ingram Micro
Fry's Electronics Nikon Tech Data
Wal-Mart Viking
Widget
</TABLE>
In addition, we have recently begun shipments to Olympus, Target and Wolf
Camera. Four customers, Kodak, Tech Data, Olympus and Wal-Mart, accounted for
17.6%, 13.9%, 12.1% and 9.7%, respectively, of product sales for the six months
ended June 30, 2000. Four customers, Ingram Micro, Kodak, Impact Peripherals
and Tech Data, accounted for 12.8%, 11.4%, 10.0% and 8.8% of our product sales
in 1999, respectively. In April 2000, we acquired Impact Peripherals, which now
operates as Lexar Media Europe. Four customers, Kodak, ADTEC, Ingram Micro and
Viking, accounted for 24.6%, 18.1%, 13.2% and 10.6% of our product sales in
1998, respectively. We believe that a substantial majority of the products we
sold to Ingram Micro and Tech Data were resold by those parties to CompUSA.
We protect some of our customers against the effects of price decreases on
their inventories. Accordingly, if we reduce our prices, we pay certain
distributors and consumer retailers for the difference between the price paid
for the product still in their inventory and the new price. Additionally, we
permit some of our customers to return products still in their inventory for
credit or in exchange for new products.
48
<PAGE>
Competition
Our primary competitors are companies that sell digital film into the
consumer and original equipment manufacturer digital film markets. These
companies are primarily manufacturers with both controller and flash memory
capabilities, such as SanDisk and Hitachi. We believe that SanDisk is our
primary competitor. SanDisk currently holds the largest market share position
in the flash media market, selling primarily CompactFlash and PC Cards. We
believe that SanDisk's strategy is to sell flash memory products into a broad
range of storage applications, one of which is digital cameras. We expect to
compete with SanDisk both for retail accounts and in the original equipment
manufacturer market. SanDisk's products generally have lower prices than our
products. We believe the principal competitive factors in this market are
performance and price. We believe we compete favorably with SanDisk by offering
premium products with superior performance rather than low cost solutions.
SanDisk is larger than we are and, because it manufactures its own controllers
and flash memory, it does not depend as we do on third parties to supply it
with flash memory or assemble its final products. We are currently in
litigation with SanDisk regarding some of our products. You should refer to
"Business--Legal Proceedings" for a discussion of our current litigation with
SanDisk.
We also compete with manufacturers, package or card assemblers and resellers
that combine controllers and flash memory chips developed by others, such as
Hitachi, into flash storage cards, including Kingston Technology, Simple
Technology, Smart Modular Technologies and Viking. Some of these competitors,
however, from time to time are customers of ours because they either buy
digital film on a private label basis or controllers. Additionally, Hitachi, as
well as flash controller developers such as Feiya Technology, Tokyo Electronic
and M-Systems, compete with our controller sales.
Several companies have introduced competing technologies for use in digital
cameras. These include Iomega Corporation's Clik!, and IBM Corporation's
MicroDrive. In addition, a consortium consisting of SanDisk, Matsushita and
Toshiba have announced the Secure Digital Card, a new digital film format. Some
competing technologies are mechanically and electronically incompatible with
the CompactFlash, PC Card and SmartMedia formats, which means our products do
not work in digital cameras incorporating those technologies.
In addition to competition in our traditional markets, with our recent
acquisition of PrintRoom.com, we compete with a growing number of companies in
the areas of photofinishing and on-line photo-image management. Our primary
competitors in these areas are on-line digital photofinishing companies such as
EZ Prints, Kodak, Ofoto, PhotoAccess, PhotoWorks.com, Shutterfly, Snapfish and
Wolf Camera. These companies provide traditional prints from scanned
traditional photographs, or digital camera images and photo-image management
services allowing consumers to archive, edit and share downloaded images and
create on-line photo albums. Additionally, digital imaging kiosks, such as
those from Kodak, Fuji, Pixel Magic and Telepix, allow consumers to scan
traditional images or download digital images for processing and output.
Traditional film processors with strong brand recognition such as Kodak,
through its PhotoNet network, will pose a significant challenge if they begin
to focus their efforts in direct digital-to-paper photofinishing processing.
Moreover, Internet photo-image archiving and sharing services, such as Club
Photo, PhotoIsland, PhotoLoft and Zing, present additional competition through
their current and potential alliances with digital photofinishing companies.
Technology
Our technology is a result of over ten years of research and development.
Our engineering group initially developed controller devices to work with
magnetic and optical storage devices. This experience expanded our knowledge
and expertise in solid-state storage systems, and more specifically in flash
memory. Solid-state storage systems have no moving parts. As of June 30, 2000,
we have filed for 42 United States patents, of which 27 have been granted or
allowed while 15 are pending in the United States Patent and Trademark Office.
We have also filed 28 corresponding foreign applications. Most of our patents
revolve around our core expertise in developing and designing a programmable
controller.
49
<PAGE>
Our patented system and circuit technology and proprietary Space Manager
enable high write speed operations to the flash memory without long,
corresponding erase cycles. We achieve this by using our proprietary indirect
mapping methodology, or method for storing, accessing and erasing information
within a flash memory device. Our high-speed technology provides a major
advantage when used in applications requiring large amounts of data to be
transferred quickly, such as digital imaging and digital sound recordings. Our
controller integrates various digital and advanced analog modules by using
proprietary tools. We believe our controller technology enables us to provide a
high-performance solution to our customers, while remaining cost-effective.
Our patented controller architecture also allows the controller's operating
software, which we refer to as firmware, to reside in the flash storage device.
The firmware is downloaded into the controller's internal random access memory
for execution and can easily be upgraded using simple utilities. This feature
allows us to reprogram the firmware for any digital camera or other digital
device. As a result, we provide digital film solutions with high-performance
and low power consumption without physically altering the digital storage
device.
Our USB-enabled CompactFlash digital film combined with our JumpShot cable
enables users to transfer their digital images or data to or from the computer
with ease at higher performance and lower cost than standard digital film
reader/writers. Our JumpShot cable does not require the user to connect the
camera to a computer, which avoids the drain on digital camera batteries caused
by using the serial port or USB port of the digital camera to transfer digital
images. Our digital film also uses less power per shot than most other flash
memory cards, which means consumers do not have to change their camera
batteries as often.
We also sell our controllers as a stand-alone product to other flash storage
manufacturers and may license this technology to other original equipment
manufacturers. These controllers and the underlying technology are applicable
to numerous applications such as digital cameras, Internet music players,
laptop computers, telecommunication and network devices, personal digital
assistants, digital video recorders and other portable consumer electronics
products.
Research and Development
We believe that in order to compete successfully, we must continually
design, develop and introduce new product innovations that take advantage of
market opportunities and address emerging standards. As of July 24, 2000, we
had a staff of 46 research and development personnel, 17 of which were involved
in system architecture development, seven of which were involved in proprietary
circuit and cell design and process development, 18 of which were involved in
digital video testing and four of which were involved in digital image
processing and printing at PrintRoom.com. In addition, we have, on occasion,
engaged outside consultants to assist in the development of technologies to our
specifications. We intend to continue this selective use of outside consultants
in the future. During 1997, 1998, 1999 and the six months ended June 30, 2000,
we spent approximately $3.9 million, $3.1 million, $4.1 million and $3.6
million, respectively, on research and development activities.
In addition, we endeavor to develop and maintain close relationships with
key suppliers of components and technologies in order to enable us to quickly
introduce new products that incorporate the latest technologies. We have worked
closely with our flash memory suppliers to develop customized flash memory. We
also consistently receive prototypes of digital camera models from
manufacturers prior to their market introduction to ensure compatibility with
our digital film. We have also worked with some digital camera manufacturers to
optimize the performance of their digital camera when used with our digital
film. We believe our relationships with digital camera manufacturers provide
valuable insights into their current and future digital film requirements.
Manufacturing and Operations
We contract with independent foundries and assembly and testing
organizations to manufacture all of our products. This allows us to focus on
our design efforts, minimize fixed costs and capital expenditures and
50
<PAGE>
gain access to advanced manufacturing capabilities. We maintain a comprehensive
quality testing program to help ensure that our products meet our quality
standards. We also require and certify that all subcontractors are ISO 9002
certified.
There are three major types of flash memory: NAND, AND and NOR. We use
industry standard NAND flash memory. Although we currently purchase almost all
of our NAND flash memory from Toshiba and Samsung, we have the ability to use
NAND flash memory produced by Advanced Micro Devices, Inc. and Fujitsu. Our
controllers can also be configured to work with AND flash memory produced by
Hitachi. Our controller technology can also be applied to other types of flash
memory including NOR and other proprietary types of flash memory.
UMC, based in Taiwan, currently manufactures our controller chips. Other
foundries that can produce our controller chip include Taiwan Semiconductor
Manufacturing and Chartered Semiconductor Manufacturing. Our flash memory cards
are assembled at Flash Electronics, in Fremont, California, and Samsung
Electro-Mechanical Corporation, in Seoul, Korea.
Legal Proceedings
We are a party to SanDisk Corporation v. Lexar Media, Inc., an action filed
in March 1998 in the United States District Court for the Northern District of
California, Case No. C98-01115 CRB. The suit involves allegations by SanDisk
that our CompactFlash cards and PC Cards infringe its U.S. Patent
No. 5,602,987. In its complaint, SanDisk alleges that it will seek preliminary
and permanent injunctions against infringement, damages for infringement,
increased damages for willful infringement up to treble damages, attorneys'
fees and costs. SanDisk has alleged that the operation of all of our
controllers infringe their patent. Approximately 80% of our revenues in 1999
and in the first six months of 2000 were from sales of our controllers and
products incorporating our controllers, and we expect this to be the case for
the next several years.
At our request, the district court conducted an expedited claim construction
proceeding. SanDisk identified Claims 1, 10, 17, 23 and 35 of U.S. Patent No.
5,602,987 as being at issue. On March 4, 1999, the District Court issued a
memorandum and order regarding the construction of these claims of U.S. Patent
No. 5,602,987. In that memorandum and order, the District Court adopted some of
the claim construction positions advanced by SanDisk and some of the claim
construction positions advanced by us, and did not rule on some of the issues
raised by the parties. On September 20, 1999, SanDisk updated its disclosures
to assert solely Claims 1 and 10 of U.S. Patent No. 5,602,987, with a
reservation of rights with respect to the other claims originally asserted.
On July 29, 1999, SanDisk filed a motion for partial summary judgment that
the identified products contribute to the infringement of Claim 10 of U.S.
Patent No. 5,602,987. We filed an opposition to this motion on December 30,
1999. We also filed our own motions that there is no infringement of this claim
and that it is invalid. These motions were heard by the District Court on March
17, 2000.
On March 30, 2000, the court found that certain of our products infringe one
of the claims of SanDisk's patent. The court has set a trial date for October
23, 2000 to determine whether we infringe any of the other claims of the patent
and whether the patent is valid. SanDisk could seek an injunction at any time
before the trial. We intend to continue to vigorously defend the SanDisk
litigation. We believe that U.S. Patent No. 5,602,987 is invalid and our
products do not infringe any of the valid claims of that patent. We intend to
vigorously contest SanDisk's claims and the validity of SanDisk's patent at
trial, but to succeed, we will have to overcome by clear and convincing
evidence the legal presumption that a patent is valid. This is a difficult
burden of proof and, as a result, patents are found to be valid in a
significant majority of cases.
In its complaint, SanDisk requests both a preliminary and a permanent
injunction. SanDisk could request a hearing on its request for a preliminary
injunction against us at any time prior to trial. In the event
51
<PAGE>
a preliminary or permanent injunction were granted, we would be unable to sell
products found to infringe SanDisk's patent. Such an injunction would result in
our not being able to ship a substantial portion of our products and might
require us to recall the infringing products from our customers, which would
cause a substantial reduction in our revenues, significant losses and loss of
customer goodwill for an extended period of time. As a result, we would face a
substantial depletion of our financial resources that could severely limit our
future business prospects or render us insolvent. Further, if at trial the
SanDisk patent is held to be valid, we could be required to pay significant
monetary damages to SanDisk, which, in the event of a finding of willful
infringement, would be subject to trebling and could also require us to pay
SanDisk's attorney's fees. We have also agreed to indemnify customers from
liability with respect to claimed infringement of the SanDisk patent, including
their costs and fees of defending themselves in such suits. The existence of
the SanDisk litigation has had and in the future could have an adverse effect
on our ability to attract and retain customers.
In the event of an injunction, we could seek a license from SanDisk to
enable us to continue selling our products, but SanDisk might not agree to
license its patents to us on reasonable terms, or at all. If available, such a
license may cause us to pay royalties on all our products, even those in the
future that may not infringe SanDisk's patent, and we might be required to
grant a license to SanDisk to utilize our technology for little or no royalty.
Accordingly, the terms of any license might adversely affect our margins and
our ability to compete with SanDisk and others. We are in the process of
redesigning our products in an effort to avoid infringement of SanDisk's
patent. However, we cannot assure you that these efforts would be successful.
Even if successful, these efforts may not result in a competitive product and
could require a substantial period of time to complete.
In connection with the SanDisk litigation, we have incurred and expect to
continue to incur substantial legal and other expenses. In addition, the
SanDisk litigation has diverted and is expected to continue to divert the
efforts and attention of our management and technical personnel. Patent
litigation is highly complex and can extend for a protracted period of time,
which can substantially increase the cost of litigation. Accordingly, the
expenses and diversion of resources associated with the SanDisk litigation
could seriously harm our business and financial condition and could affect our
ability to raise capital in the future. Further, if the SanDisk patent
litigation were to be resolved by a settlement, we might need to make
substantial upfront payments to SanDisk, either in cash or equity, as well as
on-going royalties or grant a license to SanDisk to utilize portions of our
technology, which could have a material adverse effect on our business and
financial condition.
In response to the District Court's finding that some of our products
infringe one of SanDisk's patents, we have commenced the redesign of those
products. In the opinion of our patent counsel, Haverstock & Owens LLP, our
redesigned products do not infringe the SanDisk patent that is the subject of
the current litigation. These products are being tested in our labs and have
met our requirements for functionality, reliability and compatibility. We are
currently completing the development of these redesigned products and will then
prepare them for mass production. We believe that we will be able to ship
redesigned products prior to the conclusion of the trial that is currently
scheduled to commence on October 23, 2000.
As we have not yet finished the development of, or commercially produced,
these products, we may find that our redesigned products will not be feasible
to manufacture, commercially competitive, as reliable as our current products
or accepted by our customers. Our redesigned products may be more costly than
our current products, and we may not be able to achieve our present
functionality and future planned functionality with our redesigned products.
SanDisk is seeking discovery with regard to our redesigned products. Despite
the opinion of Haverstock & Owens LLP, our redesigned products may be found to
infringe SanDisk's existing or future patents or the existing or future patents
of another party. If we are not able to produce our redesigned products by the
time the SanDisk trial is completed and we were enjoined from shipping our
current products, or if the redesigned products should be determined to
infringe SanDisk's patent then it could render us insolvent or severely impair
our future business prospects.
52
<PAGE>
Customers may delay orders or return merchandise to wait until our redesigned
products are available. We have diverted engineering resources from our
currently planned research and development projects to redesign our products
that could result in a delay in the introduction of planned products.
Facilities
Our corporate headquarters and principal operating facility are located in
Fremont, California. Our headquarters is comprised of approximately 34,400
square feet and is the location for all our engineering, operations,
administrative and worldwide sales and marketing functions. We occupy this
facility under a lease that expires on December 31, 2003 and have option to
renew this lease for an additional five-year period. Our current facility is
not adequate to meet our anticipated growth and we are currently seeking to
relocate our principal executive offices to a larger space. We also currently
lease a facility in Tokyo, Japan for our sales and marketing organization
there. The lease for our Tokyo facility expires on September 30, 2001.
Employees
At July 24, 2000, we had 168 employees, of which 34 were employed in
marketing and sales, 46 in engineering and research and development, 45 in
operations and 43 in corporate administration. These numbers include 18 part-
time employees and consultants. Of the full-time employees, six are based in
our Japanese marketing subsidiary, based in Tokyo, and 12 are based in our
European distribution facility, based in the United Kingdom. Our continued
success will depend, in part, on our ability to attract and retain skilled and
motivated personnel who are in great demand throughout the industry. None of
our employees is represented by labor unions. We believe that we have good
relations with our employees.
53
<PAGE>
MANAGEMENT
Executive Officers, Directors and Other Key Employees
The following table presents information concerning our executive officers,
directors and other key employees as of June 30, 2000.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Executive Officers and Directors:
Petro Estakhri................... 42 Chairman, Chief Technology Officer and
Executive Vice President, Engineering
John H. Reimer................... 42 President, Chief Executive Officer and
Director
Eric B. Stang.................... 40 Chief Operating Officer and Director
Ronald H. Bissinger.............. 49 Vice President, Finance and Chief
Financial Officer
Eric S. Whitaker................. 33 General Counsel and Secretary
William T. Dodds................. 52 Director
Brian D. Jacobs.................. 39 Director
John A. Rollwagen................ 59 Director
William J. Stewart............... 39 Director
Key Employees:
Mahmud (Mike) Assar.............. 56 Senior Vice President, Technology
Robert N. Leibowitz.............. 42 Vice President, Product Marketing
Paul D. McGuire.................. 36 Vice President, Original Equipment
Manufacturers and International Sales
Jack H. Peterson................. 36 Vice President, Consumer Products
Joseph A. Young.................. 43 Vice President, Operations
Carlton X. Osborne............... 31 Vice President and General Manager of
PrintRoom.com
Linda Frueh...................... 39 Vice President, Corporate Development
</TABLE>
Petro Estakhri has served as our Chief Technology Officer since April 1999
and as our Chairman and Executive Vice President, Engineering since August
1997. Mr. Estakhri also served as our Vice President, Systems from September
1996 to August 1997. From January 1993 to August 1996, Mr. Estakhri served as
the Senior Director of Mass Storage Controller Engineering at Cirrus Logic.
Mr. Estakhri is a co-author of many patents related to magnetic media, flash
storage controller and systems architecture. Mr. Estakhri holds a B.S. and an
M.S. in electrical and computer engineering from the University of California
at Davis.
John H. Reimer has served as our President and Chief Executive Officer since
joining us in August 1997 and as a director since May 1997. From May 1994 to
August 1997, Mr. Reimer served as the Senior Director of WorldWide Operations
for the Mobile Computing Products Division of Motorola. Prior to this time, Mr.
Reimer served as the Vice President of Marketing at SanDisk. Mr. Reimer was a
founder and four-time Chairman of Personal Computer Memory Card International
Association, the organization that sets the worldwide standard for PC Cards.
Mr. Reimer has also held management positions at Texas Instruments and Fujitsu
Microelectronics. Mr. Reimer holds a B.S. in electrical engineering from the
University of Illinois at Champaign.
Eric B. Stang has served as our Chief Operating Officer since joining us in
November 1999 and as a director since January 2000. From June 1998 to November
1999, Mr. Stang was Vice President and General Manager of the Radiation Therapy
Products Division of ADAC Laboratories, a medical equipment and software
company. From January 1995 to May 1998, he was Director of Operations at
Raychem Corporation, a material science company. Prior to joining Raychem, Mr.
Stang co-founded Monitor Company Europe Limited, an international strategic
consulting firm. Mr. Stang holds a B.A. in economics from Stanford University
and an M.B.A. from the Harvard Business School.
54
<PAGE>
Ronald H. Bissinger has served as our Vice President, Finance and Chief
Financial Officer since December 1999. From October 1999 to December 1999, Mr.
Bissinger was independently employed as a financial consultant. From March 1998
until October 1999, Mr. Bissinger was Vice President of Finance and Business
Development and Chief Financial Officer of Ultradata Corp., an enterprise
software company. From July 1997 to March 1998, he was independently employed
as a financial consultant. From March 1996 to July 1997, he was Chief Financial
Officer of The Alta Group, a wireless design software company, from May 1995 to
March 1996, he was Chief Financial Officer of Biosym/MSI, a simulation software
company. Mr. Bissinger holds a B.S. in chemical engineering from Clarkson
University, an M.S. in chemical engineering from the University of California
at Berkeley and an M.B.A. from the University of Denver.
Eric S. Whitaker has served as our General Counsel and Secretary since April
2000. Mr. Whitaker previously served as our Director of Legal Affairs from
December 1999 until April 2000. From October 1995 to December 1999, Mr.
Whitaker was in private law practice with Latham & Watkins. Mr. Whitaker holds
a B.A. in politics from Princeton University and a J.D. from Stanford Law
School.
William T. Dodds has served as a member of our board of directors since
February 1998. Since February 1980, Mr. Dodds has been Vice President and
Secretary of The Woodbridge Company Limited, a Toronto, Canada based holding
company. The Woodbridge Company Limited owns a majority interest in The Thomson
Corporation, an information publishing company. Mr. Dodds is also Vice
President and Secretary of Thomvest Holdings Inc., a venture capital firm. Mr.
Dodds serves on the board of directors of Certicom Corporation, a provider of
encryption technology for computing and communication applications, and OCI
Communications Inc., a telecommunications company. Mr. Dodds holds a B.A. in
economics from the University of Waterloo and has a Canadian Chartered
Accountant's Designation.
Brian D. Jacobs has served as a member of our board of directors since
February 1998. Mr. Jacobs has been a general partner and Executive Vice
President of St. Paul Venture Capital, Inc., a venture capital firm, since
1992. Mr. Jacobs serves on the board of directors of several private companies.
Mr. Jacobs hold a B.S. and an M.S. in mechanical engineering from the
Massachusetts Institute of Technology and an M.B.A. from Stanford University.
John A. Rollwagen has served as a member of our board of directors since
February 1998. From May 1993 to December 1999, Mr. Rollwagen was a venture
partner with St. Paul Venture Capital, Inc. From 1981 to January 1993, Mr.
Rollwagen served as the Chairman and Chief Executive Officer of Cray Research,
Inc., a worldwide supplier of supercomputers. Mr. Rollwagen was a founding
member of the Computer Systems Policy Project, an organization of chief
executive officers of 12 leading computer systems companies in the United
States that was created to identify and advocate industry positions on trade
and technology policy. Mr. Rollwagen also serves on the board of directors of
Computer Network Technology Corporation, a supplier of computer networking
hardware and software, and Diva Systems, a video-on-demand service provider.
Mr. Rollwagen holds a B.S. in electrical engineering from the Massachusetts
Institute of Technology and an M.B.A. from the Harvard Business School.
William J. Stewart has served as a member of our board of directors since
February 1998. Mr. Stewart has been the President of Asia Pacific Ventures, a
consulting and technology transfer firm that he founded, since October 1989.
Mr. Stewart is also a general partner of APV Technology Partners, a venture
capital firm. Mr. Stewart also serves on the board of directors of Certicom
Corporation, a provider of encryption technology for computing and
communication applications. Mr. Stewart holds a B.A. in economics from
St. Anselm College and an M.B.A. from Suffolk University.
Mahmud (Mike) Assar has served as our Senior Vice President, Technology
since our inception in September 1996. From November 1994 to September 1996,
Mr. Assar served as the Vice President of Engineering at Cirrus Logic. Mr.
Assar is a co-author of several patents related to Mass Storage Flash
controller architecture and circuits. Mr. Assar holds a B.S. in electrical
engineering from the University of Illinois at Champaign.
55
<PAGE>
Robert N. Leibowitz has served as our Vice President, Product Marketing
since December 1998. From December 1997 to December 1998, Mr. Leibowitz was
Business Director of WorldWide TDMA Digital Cellphones for the Cellular
Subscriber Group of Motorola. From January 1995 to December 1997, Mr. Leibowitz
was Director of Marketing for the Information Systems Group at Motorola. Mr.
Leibowitz holds a B.S. in physics from New York State University at Oneonta and
an M.S. in electrical engineering from California State University at
Northridge.
Paul D. McGuire has served as our Vice President, Original Equipment
Manufacturers and International Sales since November 1997. From June 1991 to
October 1997, Mr. McGuire served as a member of the sales management team at
SanDisk. Mr. McGuire holds a B.S. in electrical engineering from Dublin
University, Trinity College in Dublin, Ireland.
Jack H. Peterson has served as our Vice President, Consumer Products since
February 1998. From February 1995 to February 1998, Mr. Peterson was the
Director of Strategic Alliances for Macmillan Publishing USA, a software and
book publisher. Mr. Peterson holds a B.S. in electrical and computer
engineering from the University of Texas at Austin, Texas.
Joseph A. Young has served as our Vice President, Operations since December
1999. From June 1998 to December 1999, Mr. Young was Director of Operations for
the OEM Electronics Division of Raychem Corporation. From 1983 to June 1998,
Mr. Young held various management positions with Raychem, including World Wide
Director of Operations and Operations Manager of Raychem's Polyswitch Division.
Mr. Young holds a B.S. in industrial engineering from Rensselaer Polytechnic
Institute, an M.S. in operations research from the University of New Haven and
an M.B.A. from the Wharton School of the University of Pennsylvania.
Carlton X. Osborne has served as our Vice President and General Manager of
PrintRoom.com since April 2000. Mr. Osborne previously served as our General
Counsel, Director of Business Development and Strategic Alliances and Secretary
from August 1999 to April 2000. From January 1999 to August 1999, Mr. Osborne
was our Acting General Counsel. From December 1996 to August 1998, Mr. Osborne
was in private law practice with Fenwick & West LLP. From September 1995 to
December 1996, Mr. Osborne was in private law practice with Latham & Watkins.
Prior to joining Latham & Watkins, Mr. Osborne attended law school at Stanford
University from September 1992 to May 1995. Mr. Osborne holds a B.A. in
philosophy from the University of Pennsylvania and a J.D. from Stanford Law
School.
Linda Frueh has served as our Vice President, Corporate Development since
joining us in April 2000. From June 1999 to April 2000, Ms. Frueh was the
Senior Partner at 54th Street Partners, a business incubator and consulting
firm. From May 1996 to December 1997, Ms. Frueh served as Vice President,
Corporate Development and Strategy at Network General Corporation. From June
1990 to May 1996, Ms. Frueh held several senior finance and strategy positions
at Raychem Corporation, a materials science, electronics and process
engineering company. Ms. Frueh received a B.S. in physics from the
Massachusetts Institute of Technology and an M.B.A. from the Stanford Graduate
School of Business.
Composition of Board of Directors
Our bylaws currently provide for a board of directors consisting of eight
members. Our current directors were elected pursuant to a voting agreement
between us and some of our principal stockholders. The holders of the Series C
preferred stock were entitled to elect two directors. Messrs. Stewart and
Jacobs serve on our board pursuant to this right. The holders of the Series E
preferred stock were entitled to elect one director. The holders of our common
stock, voting as a separate class were entitled to elect one director. Mr.
Estakhri serves on our board pursuant to this right. Finally, the holders of
our preferred stock and common stock, voting together as a single class, were
entitled to elect four directors. Messrs. Reimer, Stang, Rollwagen and Dodds
serve on our board pursuant to this right. Upon the closing of the offering,
these board representation rights will terminate and no stockholders will have
any special rights with respect to board representation.
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Our certificate of incorporation and bylaws that will take effect upon
completion of this offering provide that our board will consist of seven
directors divided into three classes, Class I, Class II and Class III, that
serve staggered three-year terms. The Class I directors, initially Messrs.
Stewart and Rollwagen, will stand for reelection at the 2001 annual meeting of
stockholders. The Class II directors, initially Messrs. Jacobs, Dodds and
Stang, will stand for reelection at the 2002 annual meeting of stockholders.
The Class III directors, initially Messrs. Reimer and Estakhri, will stand for
reelection at the 2003 annual meeting of stockholders. As a result, only one
class of directors will be elected at each annual meeting of our stockholders,
with the other classes continuing for the remainder of their respective terms.
This classification of our board could make it more difficult for a third party
to acquire, or could discourage a third party from acquiring, control of Lexar
Media.
Committees of Board of Directors
Our board of directors has a compensation committee and an audit committee.
Compensation Committee. The current members of our compensation committee
are Messrs. Jacobs and Stewart. The compensation committee reviews and makes
recommendations to our board of directors concerning salaries and incentive
compensation for our officers and employees. The compensation committee also
administers the issuance of stock options and other awards under our 1996 Stock
Option/ Stock Issuance Plan and will administer our 2000 Equity Incentive Plan
and our 2000 Employee Stock Purchase Plan.
Audit Committee. The current members of our audit committee are Messrs.
Dodds and Rollwagen. The audit committee reviews and monitors our financial
statements and accounting practices, makes recommendations to our board
regarding the selection of independent auditors and reviews the results and
scope of the audit and other services provided by our independent auditors.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee has at any time since our
formation been an officer or employee of ours. None of our executive officers
currently serves or in the past has served as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving on our board or compensation committee. Prior to the
creation of our compensation committee, all compensation decisions were made by
our full board. None of Messrs. Estakhri, Reimer or Stang participated in
discussions by our board with respect to his own compensation. You should refer
to "Related Party Transactions" for a description of transactions between us
and entities affiliated with the members of the compensation committee.
Director Compensation
Our directors do not receive cash compensation for their services as
directors, but are reimbursed for their reasonable and necessary expenses in
attending board and committee meetings. All board members are eligible to
receive stock options pursuant to the discretionary option grant program in
effect under our 1996 Stock Option/Stock Issuance Plan. In March 1998, we
granted Mr. Rollwagen an option to purchase a total of 150,000 shares of our
common stock at an exercise price of $0.08 per share, which he exercised in
full on May 23, 1999. The option was immediately exercisable and subject to
vesting over a four-year period. We have the right to repurchase the unvested
shares of this option if Mr. Rollwagen ceases to provide services to us as one
of our directors. In the event of a change of control of 50% or more of our
outstanding stock, any unvested shares will vest immediately.
Each member of the board who is not our employee, or an employee of a
parent, subsidiary or affiliate of ours, will be eligible to participate in our
2000 Equity Incentive Plan. Under this plan, the option grants to directors are
automatic and nondiscretionary. Each non-employee director who became a member
of our
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board of directors before the date of this offering will receive an option to
purchase 25,000 shares of our common stock. 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 50,000 shares of our common
stock. Immediately after each annual meeting of our stockholders, each non-
employee director will automatically be granted an additional option to
purchase 25,000 shares if the director has served continuously as a member of
our board since the date of the director's initial grant and for a period of at
least one year before the annual meeting. The board may also make discretionary
supplemental grants to a non-employee director who has served for less than one
year from the date of the director's initial grant, provided that no director
may receive options to purchase more than 75,000 shares of our common stock in
any calendar year.
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 following the date the director ceases to be a
director or 12 months if the termination is due to death or disability. Each of
these options will vest and become exercisable as to 25% of the shares on the
one year anniversary of the date of grant and as to 2.083% of the shares per
month after this anniversary so long as the director continues to be a member
of the board. In the event of our liquidation or dissolution or a change of
control of 50% or more of our outstanding stock, the options granted to each
non-employee director under this plan will become fully vested and exercisable.
Executive Compensation
The following table presents the compensation earned, awarded or paid for
services rendered to us in all capacities during 1999 by our Chief Executive
Officer and by each person who was an executive officer in 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual
Compensation Awards
---------------- ------------
Shares of
Common Stock
Underlying All Other
Name and Principal Position Salary Bonus Options Compensation(1)
--------------------------- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C>
John H. Reimer.................. $252,000 $45,000 -- $ 5,496
President and Chief Executive
Officer
Petro Estakhri.................. $180,105 $45,000 -- $ 4,513
Chief Technology Officer and
Executive Vice President,
Engineering
Robert J. Netter, Jr. (2)....... $141,750 $15,000 -- $96,033
Former Vice President, Finance
and Chief Financial Officer
Eric B. Stang (3)............... $200,000 $ -- 800,000 $ 2,151
Chief Operating Officer
Ronald H. Bissinger (4)......... $165,000 $ -- 400,000 $ 1,546
Vice President, Finance and
Chief Financial Officer
</TABLE>
---------------------
(1) These amounts consist of (a) supplemental payments made by us to the named
individuals to subsidize medical expenses not reimbursed by insurance, (b)
the fair market value of a digital camera given by us to each of the named
individuals and (c) in the case of Mr. Netter, a performance bonus payment
and loan forgiveness in the aggregate amount of $93,663 as a result of his
successful efforts to obtain and close a private placement financing for
us.
(2) Mr. Netter resigned as our Vice President, Finance and Chief Financial
Officer in November 1999.
(3) Mr. Stang joined us on November 8, 1999. As of December 31, 1999, we paid
Mr. Stang an actual salary of $30,769.
(4) Mr. Bissinger joined us on December 20, 1999. As of December 31, 1999, we
paid Mr. Bissinger an actual salary of $3,273.
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<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth grants of stock options made during 1999 to
the executive officers listed in the Summary Compensation Table.
Potential realizable values are calculated by:
. Multiplying the number of shares of common stock subject to a given
option by the deemed fair market value of our common stock at December
31, 1999;
. Assuming that the aggregate option exercise price 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 aggregate 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 projections of future stock price growth.
The percentage of total options granted to employees in the last fiscal year
is based on options to purchase an aggregate of 3,290,906 shares of common
stock granted to employees during 1999. All options were granted at fair market
value on the date of grant as determined by our board of directors. Our board
of directors determined the fair market value at a given date by considering
our operating performance, significant milestones in the development of our
business and, where applicable, the price paid by third parties in preferred
stock financings.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
-------------------------------------------- ---------------------
Shares of % of Total
Common Options
Stock Granted to
Underlying Employees Exercise or
Options in Fiscal Base Price Expiration
Name Granted Year Per Share Date 5% 10%
---- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John H. Reimer.......... -- -- -- -- -- --
Petro Estakhri.......... -- -- -- -- -- --
Robert J. Netter, Jr. .. -- -- -- -- -- --
Eric B. Stang........... 800,000 24.31% $0.50 11/28/09 $2,206,232 $3,749,988
Ronald H. Bissinger..... 400,000 12.16% $2.00 12/20/09 $ 503,116 $1,274,994
</TABLE>
The options granted in 1999 and 2000 to Messrs. Stang and Bissinger are
under our 1996 Stock Option/Stock Issuance Plan, are immediately exercisable
and are either incentive stock options or nonqualified stock options.
Messrs. Stang and Bissinger exercised these options on November 30, 1999 and
December 27, 1999, respectively. We have a right to repurchase these shares
upon termination of their employment with us. This right lapses as to 25% of
the shares subject to the option one year from the date of grant and as to
2.083% of the shares each succeeding month. In January 2000, Messrs. Stang and
Bissinger were granted additional options to purchase 100,000 and 50,000 shares
of our common stock, respectively, at an exercise price of $3.00 per share. For
information regarding restricted stock purchases by Messrs. Reimer and
Estakhri, please refer to "--Employment Contracts and Change of Control
Arrangements."
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Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth the number of shares of common stock acquired
and the value realized upon exercise of stock options during 1999 by each of
the executive officers named in the Summary Compensation Table. As of December
31, 1999, none of these individuals held any unexercised stock options. Value
at fiscal year-end is the difference between the exercise price and the deemed
fair market value of the underlying common stock at December 31, 1999.
<TABLE>
<CAPTION>
Common Stock
Acquired on Value
Name Exercise(#)(1) Realized($)
---- -------------- -----------
<S> <C> <C>
John H. Reimer....................................... -- --
Petro Estakhri....................................... 602,324 $1,108,276
Robert J. Netter, Jr. ............................... -- --
Eric B. Stang........................................ 800,000 $1,200,000
Ronald H. Bissinger.................................. 400,000 --
</TABLE>
---------------------
(1) The options granted to the named individuals vest over a four-year period.
As of December 31, 1999, we had a right to repurchase 112,936 of Mr.
Estakhri's shares of common stock acquired upon exercise of options and all
of Mr. Stang's and Mr. Bissinger's shares of common stock acquired upon
exercise of options.
Employment Contracts and Change of Control Arrangements
All of our employees are at-will employees, which means that either we or
our employees may terminate the employment relationship at any time for any
reason.
We entered into an employment offer letter on September 4, 1997 with John H.
Reimer, our President and Chief Executive Officer. This letter established Mr.
Reimer's initial annual base salary at $240,000 and his eligibility for a bonus
of up to $120,000 per year based upon his achievement of certain performance
goals. The offer letter also provided for Mr. Reimer's election to the board of
directors and for reimbursement of his relocation expenses. On June 5, 1998,
Mr. Reimer purchased 2,400,000 shares of our common stock at a purchase price
of $0.08 per share. The shares purchased by Mr. Reimer are subject to our right
to repurchase the shares upon termination of his employment. Our repurchase
right lapsed with respect to 600,000 shares on June 5, 1998 and 600,000 shares
on July 15, 1998. The repurchase right expires ratably as to the remaining
shares over a 24-month period. Our repurchase right also expires as to all of
the shares if Mr. Reimer is terminated after a change of control of Lexar
Media. On June 5, 1998, we loaned Mr. Reimer $192,000, all of which remains
outstanding. This loan is secured by a stock pledge and security agreement in
connection with this purchase of our common stock. This loan accrues interest
at a rate of 6.23% and is due on or before the earlier of July 15, 2002 or the
termination of Mr. Reimer's employment. On January 17, 2000, Mr. Reimer
purchased an additional 400,000 shares of common stock at a purchase price of
$2.00 per share which is subject to the same repurchase rights described above.
In connection with this purchase of our common stock, on January 17, 2000, we
loaned Mr. Reimer $800,000 secured by a stock pledge and security agreement.
This loan accrues interest at a rate of 6.21% and is due on or before the
earlier of (1) January 17, 2004, (2) the termination of Mr. Reimer's employment
or (3) a change of control of Lexar Media. If we terminate Mr. Reimer's
employment without cause, we must continue to pay his base salary for twelve
months or until he finds other employment, whichever occurs first, and Mr.
Reimer will be granted an additional 18 months of vesting with respect to his
outstanding stock.
We executed an employment agreement on September 19, 1996 with Petro
Estakhri, our Chief Technology Officer and Executive Vice President,
Engineering. This agreement established Mr. Estakhri's initial annual base
salary at $125,000. On November 19, 1996, we granted Mr. Estakhri an option to
purchase 602,324 shares of our common stock at an exercise price of $0.16 per
share. Of these shares, 150,581 vested on November 19, 1997 and the remainder
vests ratably over a 36-month period. In the event
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that Mr. Estakhri is terminated following a change of control of Lexar, 100% of
the shares issued upon exercise of the options will vest immediately. On
December 2, 1999, we loaned Mr. Estakhri $96,372, all of which remains
outstanding. This loan is secured by a stock pledge and security agreement in
connection with the exercise of these options. The loan accrues interest at a
rate of 6.20% and is due on or before the earlier of (1) December 2, 2003,
(2) the termination of Mr. Estakhri's employment or (3) a change of control of
Lexar Media.
On June 5, 1998, Mr. Estakhri purchased 1,076,284 shares of our common stock
at a purchase price of $0.08 per share. The shares purchased by Mr. Estakhri
are subject to our right to repurchase the shares upon termination of his
employment. Our repurchase right lapsed with respect to 269,071 shares on July
15, 1998 and expires ratably as to the remaining shares over a 36-month period.
Our repurchase right also expires as to all of the shares if Mr. Estakhri is
terminated after a change of control of Lexar. On June 5, 1998, we loaned Mr.
Estakhri $86,103, all of which remains outstanding. This loan is secured by a
stock pledge and security agreement in connection with this purchase of our
common stock. This loan accrues interest at a rate of 6.23% and is due on or
before the earlier of July 15, 2002 or the termination of Mr. Estakhri's
employment. On January 17, 2000, Mr. Estakhri purchased an additional 400,000
shares of common stock at a purchase price of $2.00 per share which is subject
to the same repurchase rights described above. In connection with this purchase
of our common stock, on January 17, 2000, we loaned Mr. Estakhri $800,000
secured by a stock pledge and security agreement. This loan accrues interest at
a rate of 6.21% and is due on or before the earlier of (1) January 17, 2004,
(2) the termination of Mr. Estakhri's employment or (3) a change of control of
Lexar Media. If we terminate Mr. Estakhri's employment without cause, we must
continue to pay his base salary for 12 months or until he finds other
employment, whichever comes first, and Mr. Estakhri will be granted an
additional 18 months of vesting with respect to his outstanding stock and
options.
We entered into an employment offer letter on December 15, 1999 with Ronald
Bissinger, our Chief Financial Officer and Executive Vice President, Finance.
This letter established Mr. Bissinger's initial annual base salary at $165,000
and his eligibility for a bonus based upon his achievement of certain
performance goals. Under this offer letter, on December 20, 1999, Mr. Bissinger
was granted an option to purchase 400,000 shares of our common stock at an
exercise price of $2.00 per share. Of these shares, 100,000 will vest on
December 20, 2000 and the remainder will vest ratably over a 36-month period.
In addition, we entered into an employment agreement with Mr. Bissinger
pursuant to which we have agreed to repurchase all of his unvested shares in
the event of his termination, and, if Mr. Bissinger is terminated following a
change of control of Lexar Media, 100% of the shares issued upon exercise of
the option will vest immediately. On December 27, 1999 we loaned Mr. Bissinger
$800,000, all of which remains outstanding. This loan is secured by a stock
pledge and security agreement in connection with the exercise of these options.
This loan accrues interest at a rate of 6.20% and is due on or before the
earlier of (1) December 27, 2003, (2) 45 days after the termination of Mr.
Bissinger's employment or (3) a change of control of Lexar Media. On January
21, 2000, Mr. Bissinger was granted an additional option to purchase 50,000
shares of our common stock at an exercise price of $3.00 per share. Of these
shares, 12,500 will vest on January 21, 2001 and the remainder will vest
ratably over a 36-month period. In the event that Mr. Bissinger is terminated
following a change of control of Lexar Media, 100% of the shares issued upon
exercise of the option will vest immediately. If we terminate Mr. Bissinger's
employment without cause, we must continue to pay his base salary for six
months or until he finds other employment, whichever occurs first and Mr.
Bissinger will be granted an additional 12 months of vesting with respect to
his outstanding stock and options.
We entered into an employment offer letter on November 8, 1999 with Eric
Stang, our Chief Operating Officer. This letter established Mr. Stang's initial
annual base salary at $200,000 and his eligibility for a bonus based upon his
achievement of certain performance goals. The offer letter also provided for
Mr. Stang's election to the board of directors. Under this offer letter, on
November 29, 1999, Mr. Stang was granted an option to purchase 800,000 shares
of our common stock at an exercise price of $0.50 per share. Of these shares,
200,000 will vest on November 8, 2000 and the remainder will vest ratably over
a 36-month period.
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In addition, we entered into an employment agreement with Mr. Stang pursuant to
which we have agreed to repurchase all of his unvested shares in the event of
his termination, and, if Mr. Stang is terminated following a change of control
of Lexar Media, 100% of the shares issued upon exercise of the option will vest
immediately. On November 30, 1999, we loaned Mr. Stang $400,000, all of which
remains outstanding. This loan is secured by a stock pledge and security
agreement in connection with the exercise of this option. This loan accrues
interest at a rate of 6.08% and is due on or before the earlier of (1) November
30, 2003, (2) 45 days after the termination of Mr. Stang's employment or (3) a
change of control of Lexar Media. On January 21, 2000, Mr. Stang was granted an
additional option to purchase 100,000 shares of common stock at an exercise
price of $3.00 per share. Of these shares, 25,000 will vest on January 21, 2001
and the remainder will vest ratably over a 36-month period. In the event that
Mr. Stang is terminated following a change of control of Lexar Media, 100% of
the shares issued upon exercise of the option will vest immediately. If we
terminate Mr. Stang's employment without cause, we must continue to pay his
base salary for six months or until he finds other employment, whichever occurs
first and Mr. Stang will be granted an additional 12 months of vesting with
respect to his outstanding stock and options.
We entered into an employment offer letter on December 17, 1999 with Eric S.
Whitaker, for him to become our Assistant General Counsel and Director of Legal
Affairs. Since April 2000, Mr. Whitaker has served as our General Counsel and
Secretary. This offer letter established Mr. Whitaker's initial annual base
salary at $125,000 and his eligibility for a bonus based upon his achievement
of certain performance goals. Under this offer letter, on December 21, 1999,
Mr. Whitaker was granted an option to purchase 85,000 shares of our common
stock at an exercise price of $2.00 per share. Of these shares, 21,250 will
vest on December 21, 2000 and the rest will vest ratably over a 36-month
period. In the event that Mr. Whitaker is terminated following a change of
control of Lexar Media, 100% of the shares issued upon exercise of the option
will vest immediately. On December 27, 1999, we loaned Mr. Whitaker $170,000,
all of which remains outstanding. This loan is secured by a stock pledge and
security agreement in connection with the exercise of this option. This loan
accrues interest at a rate of 6.20% and is due on or before the earlier of (1)
December 27, 2003, (2) 30 days after the termination of Mr. Whitaker's
employment or (3) a change of control of Lexar Media. On March 17, 2000, Mr.
Whitaker was granted an additional option to purchase 15,000 shares of common
stock at an exercise price of $8.00 per share. Of these shares, 3,750 will vest
on March 17, 2001 and the remainder will vest ratably over a 36-month period.
In the event that Mr. Whitaker is terminated following a change of control of
Lexar Media, 100% of the shares issued upon exercise of the option will vest
immediately. On April 7, 2000, Mr. Whitaker was granted an additional option to
purchase 80,000 shares of common stock at an exercise price of $6.00 per share.
Of these shares, 20,000 will vest on April 7, 2001 and the remainder will vest
ratably over a 36-month period. In the event that Mr. Whitaker is terminated
following a change of control of Lexar Media, 100% of the shares issued upon
exercise of the option will vest immediately. If we terminate Mr. Whitaker's
employment without cause, we must continue to pay his base salary for six
months or until he finds other employment, whichever occurs first, and Mr.
Whitaker will be granted an additional six months of vesting with respect to
his outstanding stock and options.
In connection with the termination of Robert J. Netter Jr.'s employment as
our Vice President, Finance and Chief Financial Officer, we entered into a
Separation Agreement with Mr. Netter dated October 7, 1999. Pursuant to our
agreement, we paid Mr. Netter his full salary for consulting services that he
provided to us through the end of February 2000, and we will continue to pay
Mr. Netter his full salary as severance payments through the end of September
2000, subject to reduction for payments Mr. Netter may receive from another
employer. In connection with his successful efforts to obtain and close a
private placement financing for us, Mr. Netter also received a performance
bonus of $70,875, six months of accelerated vesting of shares of our common
stock owned by Mr. Netter, constituting 37,500 shares, and forgiveness of
$22,788 he owed to us under a promissory note for the purchase of shares of our
common stock. We also accelerated 12 months of the vesting of shares of our
common stock owned by Mr. Netter, constituting 75,000 shares.
Each sale of securities described in this section was granted at fair market
value on the date of grant as determined by our board of directors.
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Employee Benefit Plans
1996 Stock Option/Stock Issuance Plan. We have historically granted options
to purchase our common stock pursuant to our 1996 Stock Option/Stock Issuance
Plan. Our board of directors adopted our 1996 Stock Option/Stock Issuance Plan
on December 19, 1996. Subject to adjustments for stock splits and similar
events, the total number of shares of our common stock that may be issued under
the plan is 13,038,082. As of December 31, 1999, there were 2,964,046 shares
available for issuance under this plan and options to purchase 1,471,992 shares
of our common stock currently outstanding under this plan. The board of
directors has resolved, however, that this plan will terminate immediately
prior to the completion of this offering and no further options will be
granted. The termination of this plan will not affect any outstanding options.
Those options will remain outstanding until they are exercised, terminate or
expire.
2000 Equity Incentive Plan. On January 21, 2000, our board of directors
adopted the 2000 Equity Incentive Plan subject to stockholder approval. The
2000 Equity Incentive Plan will become effective on the date of this prospectus
and will serve as the successor to our 1996 Stock Option/Stock Issuance Plan.
The 2000 Equity Incentive Plan authorizes the award of options, restricted
stock awards and stock bonuses.
The 2000 Equity Incentive Plan will be administered by the compensation
committee of our board of directors, which currently consists of Mr. Jacobs and
Mr. Stewart, each of whom 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 will provide 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 other awards other than incentive stock options, may be
granted to employees, officers, directors, consultants, independent contractors
and advisors of ours or 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 exercise price of
nonqualified stock options must be at least equal to 85% 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 with respect to
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 12 months
if the termination is due to death or disability. In the event of a
liquidation, dissolution or "change in control" in which the successor does not
assume the options, the options granted under the plan will vest and become
exercisable as to 25% of the unvested shares with the remaining shares vesting
over the original vesting term.
We have reserved 8,000,000 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 to include:
. any shares of our common stock reserved under our 1996 Stock
Option/Stock Issuance Plan that are not issued or subject to outstanding
grants on the date of this prospectus;
. any shares of our common stock issued under our 1996 Stock Option/Stock
Issuance Plan that are repurchased by us at the original purchase price;
and
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. any shares of our common stock issuable upon exercise of options granted
under our 1996 Stock Option/Stock Issuance Plan that expire or become
unexercisable without having been exercised in full at any time after
this offering.
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 by an amount equal to 5% of
our total outstanding shares of common stock as of the immediately preceding
December 31. Our board of directors or our Compensation Committee may reduce
the amount of the increase in any particular year.
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 the plan that is terminated or cancelled before the option is
exercised;
. shares of our common stock issued upon exercise of an option granted
under this plan that are subsequently repurchased by us at the original
purchase price;
. shares of our common stock subject to awards granted under this plan
that are subsequently forfeited or repurchased by us 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
2,000,000 shares, or 3,000,000 shares in the case of a new employee, under the
2000 Equity Incentive Plan. The 2000 Equity Incentive Plan will terminate on
January 20, 2010, unless it is terminated earlier by our board of directors.
2000 Employee Stock Purchase Plan. On January 21, 2000, our board of
directors adopted the 2000 Employee Stock Purchase Plan subject to stockholder
approval. 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 shall be automatically granted an option based on 15% of their cash
compensation during such 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, in any calendar year in which the employee participates in the 2000
Employee Stock Purchase Plan. 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 business day on which price quotations for our
common stock are available on the Nasdaq National Market. The first purchase
period may be more or less than six months long. The offering periods
thereafter 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
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<PAGE>
committee will have the power to change the starting date of any subsequent
offering period, the 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 initially reserved 1,000,000 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
by an amount equal to 1% of our total outstanding shares as of the immediately
preceding December 31. Our board of directors or compensation committee may
reduce the amount of the increase in any particular year. The 2000 Employee
Stock Purchase Plan will terminate on January 20, 2010, unless it is terminated
earlier by our board of directors.
401(k) Plan. We sponsor a defined contribution plan intended to qualify
under Section 401(k) of the Internal Revenue Code. All employees who are at
least 21 years old are generally eligible to participate and may enter the
401(k) on January 1, April 1, July 1, and October 1 of each year. Participants
may make pre-tax contributions to the plan of up to 20% of their eligible
compensation, subject to a statutorily prescribed annual limit. Participants
are fully vested in their contributions and the investment earnings. The plan
does not provide for any matching contributions by us. Participant
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 Executive Officers and Limitation on Liability
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that a
director of a corporation will not be personally liable to us or our
stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under Delaware law regarding unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
As permitted by Delaware law, our bylaws will provide that:
. we must indemnify our directors and officers to the fullest extent
permitted by Delaware law, provided that each indemnified officer and
director acted in good faith and in a manner that the officer or
director reasonably believed to be in or not opposed to our best
interests;
. we may indemnify our other employees and agents; and
. we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law, subject to very limited exceptions.
In addition to the indemnification provisions in our certificate of
incorporation and bylaws, we intend to enter into indemnification agreements
with each of our current directors and executive officers prior to the
completion of this offering. These agreements will provide for the
indemnification of our executive 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 our agents. We have
also obtained directors' and officers' insurance to cover our directors,
executive officers and some of our employees for specific liabilities,
including public securities matters. 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>
The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against our 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, your investment may be negatively affected to the
extent we pay the costs of settlement and damage awards against directors and
officers as required by these indemnification provisions.
There is presently 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
Other than the transactions described in "Management" and the transactions
described below, since we were incorporated in September 1996, there has not
been nor is there currently proposed any transaction or series of similar
transactions to which we were or will be a party in which the amount involved
exceeded or will exceed $60,000 and in which any director, executive officer,
holder of more than 5% of our common stock or any member of his or her
immediate family had or will have a direct or indirect material interest.
Financing Transactions
In May 1997, we sold an aggregate of 6,000,000 shares of our Series A
preferred stock at a purchase price of $1.00 per share, 3,000,000 shares of
which we subsequently repurchased. In August 1997, we sold (1) convertible
secured promissory notes that were convertible into shares of our Series B
preferred stock, at a conversion price of $0.41667 per share, in the aggregate
principal amount of $1,250,000 and (2) secured promissory notes in the
aggregate principal amount of $4,750,000 which we intend to repay with a
portion of the net proceeds from this offering. In February 1998, the note
holders converted their secured convertible promissory notes into 3,000,048
shares of our Series B preferred stock simultaneously with the sale of an
aggregate of 11,443,750 shares of our Series C preferred stock at a purchase
price of $0.80 per share. In November 1998 and January 1999, we sold an
aggregate of 6,943,618 shares of our Series D preferred stock at a purchase
price of $1.685 per share. In September 1999, we sold an aggregate of
11,648,493 shares of our Series E preferred stock at a purchase price of $2.59
per share.
The following table summarizes, as of June 30, 2000, private placement
transactions of our preferred stock to, among others, the following executive
officers, directors and holders of more than 5% of our outstanding stock. You
should refer to "Principal Stockholders" for more detail on shares of our
common stock held by these purchasers and their affiliations with our directors
and officers.
<TABLE>
<CAPTION>
Preferred Stock(1)
------------------------------------------------
Stockholder Series A Series B Series C Series D Series E
----------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Directors and Executive
Officers
John A. Rollwagen............ 150,000 13,998
5% Stockholders
Toshiba America Electronic
Components, Inc............. 3,000,000
APV Technology Partners II,
L.P. ....................... 3,750,000 1,186,943 1,148,803
Entities affiliated with St.
Paul Venture Capital, Inc. . 3,750,000 1,186,943 2,127,413
Thomvest Holdings Inc........ 3,750,000 1,186,943 1,404,092
1267104 Ontario, Limited..... 3,264,094
GE Capital Equity
Investments, Inc. .......... 3,191,119
</TABLE>
---------------------
(1) Shown on an as-if-converted to common stock basis.
In January 1998, in connection with a bridge financing, we issued warrants
to purchase shares of our common stock at an exercise price of $0.80 per share
to some of our stockholders who hold more than 5% of our outstanding stock.
These warrants have not been exercised. These holders, who are identified
below, are affiliated with certain of our directors. You should refer to
"Principal Stockholders" for more detail on their affiliations with our
directors.
<TABLE>
<CAPTION>
Common Stock
Warrant Holder Subject to Warrant Expiration Date
-------------- ------------------ -----------------
<S> <C> <C>
APV Technology Partners II, L.P........ 62,500 December 31, 2002
Entities affiliated with St. Paul
Venture Capital, Inc. ................ 62,500 December 31, 2002
</TABLE>
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<PAGE>
In August 1999, in connection with a bridge financing, we issued warrants to
purchase shares of our Series E preferred stock at an exercise price of $2.59
per share to some of our stockholders who hold more than 5% of our outstanding
stock. These warrants have not been exercised. These holders, who are
identified below, are affiliated with certain of our directors. You should
refer to "Principal Stockholders" for more detail on their affiliations with
our directors.
<TABLE>
<CAPTION>
Common Stock
Warrant Holder Subject to Warrant Expiration Date
-------------- ------------------ ---------------
<S> <C> <C>
John A. Rollwagen........................ 1,399 August 6, 2003
Entities affiliated with St. Paul Venture
Capital, Inc............................ 23,399 August 6, 2003
Thomvest Holdings Inc.................... 27,644 August 6, 2003
APV Technology Partners II, L.P.......... 27,995 August 9, 2003
</TABLE>
In May, June and July 2000, we borrowed approximately $13.3 million from six
of our stockholders in the form of promissory notes, with interest on the notes
accruing at a rate of 6% per year. In connection with this transaction, we
issued to these stockholders warrants to purchase an aggregate of 644,395
shares of our common stock at an exercise price of $3.09 per share. These
warrants have not been exercised. Three of these holders, which are identified
below, are affiliated with certain of our directors and each of the four
stockholders listed below is a holder of 5% or more of our common stock.
<TABLE>
<CAPTION>
Common Stock
Warrant Holder Subject to Warrant Expiration Date
-------------- ------------------ ---------------
<S> <C> <C>
APV Technology Partners II, L.P.(1) ...... 14,563 May 31, 2005
St. Paul Venture Capital V, LLC(2)........ 149,271 May 31, 2005
Thomvest Holdings, Inc.(3) ............... 67,939 May 31, 2005
GE Capital Equity Investments, Inc........ 24,271 May 31, 2005
</TABLE>
---------------------
(1) Affiliated with William J. Stewart
(2) Affiliated with Brian D. Jacobs
(3) Affiliated with William T. Dodds
In addition, under the terms of the warrants, these four stockholders have
the right to purchase additional shares of our common stock, in monthly
installments, at an exercise price of $8.00 per share for up to 12 months from
the issue date of the respective promissory notes so long as the principal on
the promissory notes remain outstanding. Because we intend to repay the
promissory notes in full by September 15, 2000, these stockholders will have
the right to purchase an aggregate of up to 143,994 additional shares of our
common stock subject to these warrants.
Loans to Executive Officers
In addition to the loans described in "Management--Employment Contracts and
Change of Control Arrangements," we loaned to Petro Estakhri, our Chairman of
the Board, Chief Technology Officer and Executive Vice President, Engineering,
a total of $40,000, all of which remains outstanding as of March 31, 2000. This
loan is secured by a stock pledge agreement and bears interest at a rate of
5.7% per year. The principal is due on or before the earlier of (1) April 2002
or (2) a change of control of Lexar Media.
Transactions with Stockholders
Toshiba America Electronic Components, Inc. In June and July 1997, we
received a cash advance for working capital in the amount of $400,000 from
Toshiba America Electronic Components, Inc., a holder of more than 5% of our
common stock and, from May 1997 until September 1999, a shareholder with rights
under our articles of incorporation to elect a representative to serve on our
board of directors. The advance bears interest at a rate of 5.5% per year and
is payable in July 2000. As of June 30, 2000, the total amount
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<PAGE>
outstanding, including accrued interest, was approximately $404,000. We have
repaid this advance with the funds from our term loan with Access Technology
Partners. Toshiba is also the guarantor of a promissory note that we sold to
MetLife Capital Corporation in the aggregate principal amount of $348,423 which
is more fully described below. On April 15, 1998, we entered into a Consignment
Agreement with Toshiba for the supply of flash memory. In 1998, we purchased
approximately $5.3 million of materials from Toshiba pursuant to this agreement
and, as of December 31, 1998, had payables to Toshiba of approximately
$1.8 million. The agreement had a one-year term renewable at our option, and we
renewed the agreement with Toshiba in April 1999. In 1999, we purchased
approximately $18.5 million of materials from Toshiba, and as of June 30, 2000,
we had payables to Toshiba of approximately $1.7 million.
Our agreement with Toshiba was negotiated at arm's length and contains terms
no less favorable to us than we could have obtained from unaffiliated third
parties.
GE Capital Equity Investments, Inc. In March 1997, we issued and sold a
promissory note in the aggregate principal amount of $348,423 to MetLife
Capital Corporation, which was purchased by General Electric Capital Business
Asset Funding Corporation, an affiliate of GE Capital Equity Investments, Inc.,
a holder of more than 5% of our common stock. This note is secured by software
that we own and is guaranteed by Toshiba, a holder of more than 5% of our
common stock. The note accrues interest at a rate of 9.68% per year and is due
and payable on March 8, 2002. As of June 30, 2000, the total amount outstanding
was approximately $140,000.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of June 30, 2000, and as adjusted to reflect
the sale of the shares in this offering for:
. each person known by us to own beneficially more than 5% of our common
stock;
. each director and each executive officer listed on the Summary
Compensation Table; and
. all directors and executive officers as a group.
The percentage of beneficial ownership for the following table is based on
52,531,830 shares of common stock outstanding on June 30, 2000, assuming the
exercise of outstanding warrants to purchase 420,559 shares of our common stock
prior to the completion of this offering and the conversion of all outstanding
shares of our preferred stock into our common stock, and 59,031,830 shares of
our common stock outstanding after the completion of this offering, assuming no
exercise of the underwriters' over-allotment option.
Unless otherwise indicated below, to our knowledge, all persons listed below
have sole voting and investment power with respect to their shares of our
common stock, except to the extent authority is shared by spouses under
applicable law. Unless otherwise indicated, each entity or person listed below
maintains a mailing address of c/o Lexar Media, Inc., 47421 Bayside Parkway,
Fremont, California 94538.
The number of shares beneficially owned by each stockholder is determined in
accordance with the rules of the Securities and Exchange Commission and is not
necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes any shares of common stock over
which the stockholder has sole or shared voting or investment power and any
shares of common stock that the stockholder has a right to acquire within 60
days after June 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>
Percent of Shares
Number of Beneficially Owned
Shares ----------------------
Beneficially Before After
Name and Address of Beneficial Owner Owned Offering Offering
------------------------------------ ------------ --------- ---------
<S> <C> <C> <C>
Executive Officers and Directors:
Petro Estakhri (1).................... 2,800,000 5.3% 4.7%
John H. Reimer........................ 2,800,000 5.3 4.7
Eric B. Stang (2)..................... 900,000 1.7 1.5
Robert J. Netter, Jr. ................ 268,750 * *
Ronald H. Bissinger (3)............... 450,000 * *
William T. Dodds (4).................. 6,480,353 12.3 10.9
Thomvest Holdings, Inc.
Brian D. Jacobs (5)................... 7,364,369 13.9 12.4
Entities affiliated with St. Paul
Venture Capital, Inc.
John A. Rollwagen (6)................. 315,397 * *
William J. Stewart (7)................ 6,200,179 11.8 10.5
APV Technology Partners II, L.P.
Executive Officers and Directors as a
group (9 persons) (8)................ 27,490,298 51.5 45.9
5% Stockholders:
1267104 Ontario, Limited.............. 3,264,094 6.2 5.5
GE Capital Equity Investments, Inc.
(9).................................. 3,220,598 6.1 5.5
Toshiba America Electronic Components,
Inc.................................. 3,000,000 5.7 5.1
</TABLE>
---------------------
* Less than 1%
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<PAGE>
(1) Includes 1,723,716 shares of our common stock held directly by Mr. Estakhri
and 1,076,284 shares of our common stock held jointly between Mr. Estakhri
and his wife.
(2) Includes an option to purchase 100,000 shares of our common stock which is
immediately exercisable.
(3) Includes an option to purchase 50,000 shares of our common stock which is
immediately exercisable.
(4) Represents 6,341,035 shares of our common stock and includes warrants to
purchase 95,583 shares of our common stock, which are immediately
exercisable, owned by Thomvest Holdings, Inc., with which Mr. Dodds is
affiliated by virtue of his being a Vice President thereof. Also includes
warrants to purchase an additional 43,735 shares of our common stock that
will become exercisable in August 2000, assuming that we do not pay off the
promissory note we issued to Thomvest Holdings Inc. prior to August 29,
2000. Mr. Dodds disclaims any beneficial interest of such shares except to
the extent of any individual interest in such shares. The address of
Thomvest Holdings Inc. is 65 Queen Street West, Suite 2400, Toronto,
Ontario, Canada M5H 2M8.
(5) Represents 194,269 shares of our common stock owned by St. Paul Venture
Capital Affiliates Fund I, LLC, 4,801,177 shares of our common stock owned
by St. Paul Venture Capital IV, LLC and 2,068,910 shares of our common
stock owned by St. Paul Venture Capital V, LLC. Also includes warrants to
purchase 2,361 shares of our common stock held by St. Paul Venture Capital
Affiliates Fund I, LLC, a warrant to purchase 60,781 shares of our common
stock held by St. Paul Venture Capital IV, LLC and warrants to purchase
172,028 shares of our common stock held by St. Paul Venture Capital V, LLC,
each of which is immediately exercisable. Also includes warrants to
purchase an additional 64,843 shares of our common stock that will become
exercisable in August 2000, assuming that we do not pay off the promissory
note we issued to St. Paul Venture Capital V, LLC prior to August 29, 2000.
St. Paul Venture Capital, Inc. has sole voting and investment power over
these shares by virtue of it being a manager of each of the funds.
Decisions are made by a committee of executive officers of St. Paul Venture
Capital, Inc. consisting of at least three of the following individuals:
Brian Jacobs, Patrick A. Hopf, Fredric Boswell, Everett Cox, Michael
Gorman, James Simons, Nancy Olson and Zenas Hutcheson. Mr. Jacobs and the
other executive officers of St. Paul Venture Capital, Inc. disclaim any
beneficial interest of such shares except to the extent of any individual
interest in such shares. The address of each of the entities affiliated
with St. Paul Venture Capital, Inc. is 10400 Viking Drive, Suite 550, Eden
Prairie, MN 55344.
(6) Includes 163,998 shares of our common stock owned by the John A. Rollwagen
Revocable Trust, 75,000 shares of our common stock owned by an individual
retirement account for the benefit of Mr. Rollwagen, 75,000 shares of our
common stock owned by the Rollwagen Family Limited Partnership and a
warrant owned by the John A. Rollwagen Revocable Trust to purchase 1,399
shares of our common stock, which is immediately exercisable.
(7) Represents shares of our common stock owned by APV Technology Partners II,
L.P., with which Mr. Stewart is affiliated by virtue of his being a general
partner, manager or principal, or a general partner, manager or principal
of the general partner or managing member, of such fund. Peter G. Bodine
and Spencer C. Tall are each Managing Members of APV Technology Partners
II, L.P. and share voting control of such fund with Mr. Stewart. Messrs.
Stewart, Bodine and Tall disclaim any beneficial interest of such shares
except to the extent of any individual interest in such shares. Also
includes warrants to purchase 105,058 shares of our common stock which are
immediately exercisable. Also includes warrants to purchase an additional
9,375 shares of our common stock that will become exercisable in August
2000, assuming that we do not pay off the promissory note we issued to APV
Technology Partners II, L.P. prior to August 29, 2000. The address of APV
Technology Partners II, L.P. is 535 Middlefield Road, Suite 150, Menlo
Park, CA 94025.
(8) Includes warrants to purchase 555,163 shares of our common stock, each of
which are immediately exercisable and options to purchase an aggregate of
245,000 shares of our common stock which are immediately exercisable.
(9) Includes a warrant to purchase 24,271 shares of our common stock, which is
immediately exercisable. Also includes a warrant to purchase an additional
5,208 shares of our common stock that will become exercisable in August
2000, assuming that we do not pay off the promissory note we issued to GE
Capital Equity Investments, Inc. prior to August 29, 2000. The address of
GE Capital Equity Investments, Inc. is 120 Long Ridge Road, Stamford,
Connecticut 06927.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of 200,000,000 shares of common stock, par value $0.0001 per
share, and 10,000,000 shares of preferred stock, par value $0.0001 per share.
As of June 30, 2000, assuming the conversion of all of our outstanding
preferred stock into 37,224,049 shares of common stock and the exercise of
outstanding warrants to purchase 420,559 shares of our common stock prior to
the completion of this offering, there were outstanding 52,531,830 shares of
our common stock held of record by approximately 125 stockholders, options to
purchase 3,239,684 shares of our common stock and warrants to purchase
1,601,579 shares of our common stock. The following description of our capital
stock does not purport to be complete and is subject to and qualified by our
certificate of incorporation and bylaws, which are included as exhibits to the
Registration Statement of which this prospectus forms a part, and by the
provisions of applicable Delaware law.
Common Stock
Voting Rights. Each holder of our common stock is entitled to one vote for
each share held of record on all matters submitted to a vote of the
stockholders, including the election of directors. We do not provide in our
certificate of incorporation for cumulative voting in the election of
directors. Therefore, in accordance with Section 2115 of the California
Corporations Code, commencing at the first annual meeting of stockholders
following the date on which we first shall have had at least 800 holders of our
common stock, the holders of a majority of the shares of our common stock can
elect all of the directors then standing for election.
Dividend Rights. Subject to preferences that may be applicable to any
outstanding series of our preferred stock, the holders of outstanding shares of
our common stock are entitled to receive dividends out of assets that are
legally available for distribution at the times and in the amounts that our
board of directors may determine.
Liquidation Rights. In case of our liquidation, dissolution or winding up,
the holders of our common stock will be entitled to share ratably in the assets
legally available for distribution to stockholders, in each case after payment
of all of our liabilities and subject to preferences that may be applicable to
any series of our preferred stock then outstanding.
Other Rights. The holders of our common stock have no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to our common stock. The rights, preferences
and privileges of holders of our common stock are subject to the rights of the
holders of shares of any series of preferred stock that we may designate and
issue in the future.
Preferred Stock
Upon the completion of this offering, our outstanding preferred stock will
convert into 37,224,049 shares of our common stock, assuming that each
outstanding share of our Series A preferred stock, Series B preferred stock,
Series C preferred stock and Series D preferred stock will be converted into
one share of our common stock and each outstanding share of our Series E
preferred stock will be converted into 1.102 shares of our common stock.
Our board of directors has the authority, without further action by our
stockholders, to issue, from time to time, shares of our preferred stock in one
or more series. Our board of directors may fix the number of shares,
designations, preferences, powers and other special rights of the preferred
stock. The preferences, powers, rights and restrictions of different series of
preferred stock may differ. The issuance of preferred stock could decrease the
amount of earnings and assets available for distribution to holders of our
common stock or impair the rights and powers, including voting rights, of the
holders of common stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, may also have the effect of discouraging, delaying or preventing a
change in control of Lexar,
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<PAGE>
regardless of whether the transaction may be beneficial to stockholders. After
the completion of this offering, there will be no shares of preferred stock
outstanding, and we have no current plans to issue any shares of preferred
stock.
Warrants
As of June 30, 2000, we had the following outstanding warrants to purchase
our stock:
<TABLE>
<CAPTION>
Total Number
of Shares
Subject to Exercise Price
Type of Stock Warrants(1) Per Share Expiration Date
------------- ------------ -------------- ----------------------------------
<S> <C> <C> <C>
Common Stock............ 10,583 $0.30 Upon consummation of this offering
Common Stock............ 125,000 $0.80 December 31, 2002
Common Stock............ 30,000 $1.00 January 31, 2005
Series C Preferred
Stock.................. 100,000 $0.80 Upon consummation of this offering
Series E Preferred
Stock.................. 309,976 $2.35 Upon consummation of this offering
Common Stock............ 875,000 $8.00(2) June 30, 2005(2)
</TABLE>
---------------------
(1) Shown on an as-if-converted to common stock basis.
(2) These warrants were amended in August 2000 such that upon the completion of
this offering, warrants to purchase 386,500 shares of our common stock will
have an exercise price equal to the initial public offering price and
expire, if not earlier exercised, on June 30, 2005, while the remaining
488,500 shares subject to the warrants will continue to have an exercise
price of $8.00 per share and will expire on June 30, 2007.
In May, June and July 2000, we issued warrants to purchase 644,395 shares of
our common stock having an exercise price of $3.09 per share to six of our
stockholders in connection with promissory notes that we issued to these
stockholders. In addition, under the terms of the promissory notes, these
stockholders received additional warrants to purchase additional shares of our
common stock, in monthly installments, at an exercise price of $8.00 per share
for 12 months from the issue date of the respective promissory notes so long as
the principal on the notes remain outstanding. Because we intend to repay the
promissory notes in full by September 15, 2000, these stockholders will have
the right to purchase an aggregate of up to an additional 310,660 shares of our
common stock subject to these warrants.
Registration Rights
Immediately after the completion of this offering, in accordance with an
Investors' Rights Agreement dated September 28, 1999, as amended, certain of
our stockholders and warrantholders beneficially owning 37,538,007 shares of
our common stock will be entitled to rights with respect to the registration of
their shares under the Securities Act, as described below.
Demand Registration Rights. At any time after six months following the
completion of this offering, both the holders of at least a majority of the
shares having registration rights and the holders of at least one-fifth of the
shares of the Series E preferred stock can request that we register all or a
portion of their shares so long as the total offering price of the shares to
the public is at least $5,000,000. We will only be required to file two
registration statements in response to a demand for registration by the holders
of a majority of the shares having registration rights and one registration
statement in response to a demand for registration by the holders of at least
one-fifth of the shares of the Series E preferred stock. We are not required to
file more than one registration statement in any six-month period. We may
postpone the filing of any registration statement for up to 90 days if we
determine that the filing would be seriously detrimental to us and our
stockholders, although we may only exercise this right once in any 12-month
period.
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. This right, however, does not apply to a
registration statement relating to any of our employee benefit plans or to a
corporate
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<PAGE>
reorganization. If marketing reasons dictate, the managing underwriter of any
underwritten offering will have the right to limit the number of shares
registered by these holders to be included in the registration statement to 10%
of the total shares covered by the registration statement.
Form S-3 Registration Statements. The holders of the shares having
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 two Form S-3 Registration Statements in any
12-month period. We are not required to file any registration statement
pursuant to these rights within the six months following this offering. We may
postpone the filing of any registration statement for up to 90 days if we
determine that the filing would be seriously detrimental to us and our
stockholders, although we may only exercise this right once in any 12-month
period.
We will pay all expenses incurred in connection with the filings described
above, except for underwriters' and brokers' discounts and commissions, which
will be paid by each of the selling stockholders. The registration rights
described above will expire with respect to any particular stockholder if it
can sell all of its shares in a three-month period under Rule 144 of the
Securities Act. In any event, the registration rights described above will
expire five years after the completion of this offering.
Anti-takeover Effects of Delaware Law and our Certificate of Incorporation and
Bylaws
There are certain provisions of Delaware law and our certificate of
incorporation and bylaws that may be deemed to have an anti-takeover effect and
may discourage, delay or prevent a tender offer or takeover attempt that you
might consider to be in your best interest, including any attempt that might
result in a premium over the market price for your shares. These provisions are
summarized in the following paragraphs.
Classified Board of Directors. In accordance with Section 2115 of the
California Corporations Code, commencing at the first annual meeting of
stockholders following the date on which we first shall have had at least 800
holders of our common stock, our board of directors will be divided into three
classes of directors, as nearly equal in size as possible, serving staggered
three-year terms. Upon expiration of the term of a class of directors, the
directors in that class will be elected for three-year terms at the annual
meeting of stockholders in the year in which the term for that class of
directors expires. Our certificate of incorporation and bylaws provide that
directors may be removed only by the affirmative vote of the holders of two-
thirds of the shares of capital stock entitled to vote in the election of
directors. In addition, any vacancy on the board of directors, however
occurring, including a vacancy resulting from an enlargement of the board of
directors, may only be filled by vote of a majority of the directors then in
office. The classification of the board of directors and the limitations on the
removal of directors and filling of vacancies could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third
party from acquiring, control of Lexar.
Stockholder Action; Special Meeting of Stockholders. Our certificate of
incorporation eliminates the ability of stockholders to act by written consent.
Our bylaws further provide that our stockholders may not call special meetings
without advance notice and approval of stockholders owning at least a majority
of our outstanding voting stock. These provisions could have the effect of
delaying actions that are favored by some stockholders. These provisions may
also discourage another person from making a tender offer for our common stock,
because that person, even if it acquired a majority of our outstanding voting
securities, would be able to take action as a stockholder, such as electing new
directors or approving a merger, only at a duly called meeting of stockholders
and not by written consent.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Our bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice thereof in writing. To be timely, a stockholder's notice must be
received at our principal executive offices not less
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<PAGE>
than 60 days nor more than 90 days before the one-year anniversary of the
prior annual meeting of stockholders. If the annual meeting is called for a
date that is not within 30 days before or 60 days after the anniversary date,
in order to be timely, notice from the stockholder must be received within ten
days after the date on which notice of the annual meeting was mailed to
stockholders or made public, whichever occurred first. Our bylaws also specify
certain requirements as to the form and content of a stockholder's notice.
These provisions may preclude stockholders from bringing matters before an
annual meeting of stockholders or from making nominations for directors at an
annual meeting of stockholders.
Authorized but Unissued Shares. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of common stock and preferred stock could
render more difficult or discourage an attempt to obtain control of us by
means of a proxy contest, tender offer, merger or otherwise.
Amendments; Supermajority Vote Requirements. Delaware law provides
generally that the affirmative vote of stockholders owning a majority of the
outstanding shares of stock entitled to vote on a matter is required to amend
a corporation's certificate of incorporation or bylaws, unless a corporation's
certificate of incorporation or bylaws, as the case may be, requires a greater
percentage. Our certificate of incorporation requires the approval of holders
of at least two-thirds of the outstanding shares of stock entitled to vote in
order to adopt, amend or repeal the provisions of our certificate of
incorporation relating to the election and removal of directors and the
ability of our stockholders to take action by written consent.
Section 203 Business Combinations. After this offering, we will be subject
to the provisions of 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, meaning 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 of directors before the date
the interested stockholder attained the status;
. upon consummation of the transaction that resulted in the stockholder's
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
. on or subsequent to that date the business combination is approved by
the board of directors and authorized at an annual or special 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 section with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
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.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services L.L.C.
Listing
Our common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol LEXR.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there was no public market for our common stock. A
significant public market for our common stock may not develop or be sustained
after this offering. The sale of a substantial amount of our common stock,
including shares issued upon exercise of outstanding options and warrants, in
the public market after this offering, or the possibility of these sales
occurring, could cause the prevailing market price of our common stock to
decline or impair our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
59,031,830 shares of our common stock, based on shares of common stock
outstanding as of June 30, 2000, assuming the conversion of all of our
outstanding preferred stock into 37,224,049 shares of our common stock and the
exercise of outstanding warrants to purchase 420,559 shares of our common stock
prior to the completion of this offering. Of these shares, all of the 6,500,000
shares of our common stock sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
the shares are purchased by affiliates as that term is defined in Rule 144
under the Securities Act. Any shares purchased by an affiliate may not be
resold except pursuant to an effective registration statement or an applicable
exemption from registration, including an exemption under Rule 144 of the
Securities Act. The remaining 52,031,830 shares of our common stock held by
existing stockholders are restricted securities as that term is defined in
Rule 144 under the Securities Act. 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 Rule 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, additional shares
will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Number
of Shares Date
--------- ----
<C> <S>
6,500,000 On the date of this prospectus, these shares sold in the offering
will be immediately available for sale in the public market.
49,022,203 180 days after the date of this prospectus, the 180-day lock-up
terminates and these shares are saleable under Rule 144 (subject in
some cases to volume limitations) or Rule 144(k) or Rule 701.
3,509,627 At various times commencing more than 180 days after the date of
this prospectus, these shares will be eligible for sale under Rule
144 or Rule 145 upon the expiration of various one-year holding
periods or the lapse of various repurchase rights.
</TABLE>
Lock-Up Agreements
All of our officers and directors and substantially all of our stockholders
have signed lock-up agreements that prohibit them from offering, selling or
otherwise disposing of any shares of our common stock, options or warrants to
acquire shares of our common stock or securities exchangeable for or
convertible into shares of our common stock owned by them without the prior
written consent of Chase Securities Inc. during the 180-day period following
the date of this prospectus. Chase Securities Inc. may choose to release some
of these shares from these restrictions prior to the expiration of this 180-day
period, although it has no current intention to do so.
Rule 144
In general, under Rule 144 as currently in effect, beginning 180 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 does not
exceed the greater of:
(1) 1% of the number of shares of common stock then outstanding, which
will equal approximately 590,318 shares immediately after this offering; or
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<PAGE>
(2) the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale of any shares of common stock.
The sales of any shares of common stock under Rule 144 are also subject to
manner of sale provisions and notice requirements and to the availability of
current public information about us. Affiliates may sell shares not
constituting restricted securities in accordance with the foregoing volume
limitations and other restrictions, but without regard to the one-year holding
period.
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 those 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 or otherwise, those shares may be sold immediately upon the
completion of this offering.
Rule 701
Any employee, officer or director of, or consultant to, us who purchased his
or her shares under a written compensatory plan or contract may be entitled to
sell his or her shares in reliance on Rule 701. Rule 701 permits affiliates to
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirements of Rule 144. Rule 701 further provides that non-affiliates
may sell those shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are required to wait until 90 days
after the date of this prospectus before selling those shares. However, all
shares issued under Rule 701 are subject to lock-up agreements and will only
become eligible for sale when the 180-day lock-up agreements expire.
Stock Options
At June 30, 2000, there were options to purchase 3,239,684 shares of our
common stock outstanding under our stock option plans and otherwise.
Immediately after the effective date of this offering, we expect to file a
registration statement under the Securities Act covering the shares of common
stock reserved for issuance under our stock option plans. Upon the filing of
this registration statement and upon expiration of 180-day lock-up agreements,
approximately 6,581,279 shares of common stock issuable upon exercise of stock
options will be immediately eligible for sale in the public market, subject to
Rule 144 volume limitations applicable to our affiliates.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Chase Securities Inc.,
J.P. Morgan Securities Inc., SG Cowen Securities Corporation and Wit SoundView
Corporation have severally agreed to purchase from us the following respective
numbers of shares of our common stock:
<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Chase Securities Inc............................................... 2,240,000
J.P. Morgan Securities Inc......................................... 1,120,000
SG Cowen Securities Corporation.................................... 1,120,000
Wit SoundView Corporation ......................................... 1,120,000
FleetBoston Robertson Stephens Inc................................. 100,000
CIBC World Markets Corp............................................ 100,000
Lehman Brothers Inc................................................ 100,000
Thomas Weisel Partners LLC......................................... 100,000
U.S Bancorp Piper Jaffray Inc...................................... 100,000
UBS Warburg LLC.................................................... 100,000
Kaufman Bros., L.P................................................. 50,000
Morgan Keegan & Company, Inc....................................... 50,000
Needham & Co. Inc.................................................. 50,000
Raymond James & Associates, Inc.................................... 50,000
Sutro & Co. Incorporated........................................... 50,000
Tucker Anthony Cleary Gull......................................... 50,000
---------
Total............................................................ 6,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to conditions, including the absence of any material adverse change
in our business and the receipt of certificates, opinions and letters from us
and our counsel. The nature of the underwriters' obligations requires that they
purchase all shares of our common stock offered in this offering if they
purchase any of the shares in this offering.
The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and to dealers at that price less a concession not in excess of
$0.33 per share. The underwriters may allow and the dealers may reallow a
concession not in excess of $0.10 per share to other dealers. After the public
offering of the shares, the underwriters may change the offering price and
other selling terms. The representatives have advised us that the underwriters
do not intend to confirm discretionary sales in excess of 5% of the shares of
common stock offered by this prospectus.
We have granted to the underwriters an option, exercisable no later than 30
days after the effective date of this offering, to purchase up to 975,000
additional shares of our common stock at the initial public offering price,
less the underwriting discounts and commissions, set forth on the cover page of
this prospectus. To the extent that the underwriters exercise this option, each
underwriter will have a firm commitment to purchase approximately the same
percentage that the number of shares of our common stock to be purchased by it
shown in the above table bears to the total number of shares of our common
stock offered in this offering. We will be obligated to sell shares to the
underwriters to the extent the option is exercised. The underwriters may
exercise the option only to cover over-allotments made in connection with the
sale of our common stock offered in this offering.
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<PAGE>
The following table shows the per share and total public offering price, the
underwriting discounts and commissions and the proceeds before expenses to us.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1,600,000.
<TABLE>
<CAPTION>
Without With
Over-Allotment Over-Allotment
Exercise Exercise
-------------- --------------
<S> <C> <C>
Public offering price.......................... $52,000,000 $59,800,000
Underwriting discounts and commissions......... $ 3,640,000 $ 4,186,000
Proceeds, before expenses, to us............... $48,360,000 $55,614,000
</TABLE>
At our request, the underwriters have reserved up to 450,000 shares of our
common stock to be sold in the offering and offered for sale, at the initial
public offering price, to friends and relatives of employees, employees,
consultants, directors and other persons with business relationships to us. The
number of shares of our common stock available for sale to the general public
will be reduced to the extent these individuals 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.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against liabilities connected
to this offering, including liabilities under the Securities Act of 1933, and
to contribute to payments the underwriters may be required to make in respect
of those liabilities.
Substantially all of our stockholders, including all of our executive
officers and directors, who will own in the aggregate 51,985,565 shares of our
common stock after the offering, have agreed that they will not, without the
prior written consent of Chase Securities Inc., offer, sell or otherwise
dispose of any shares of our common stock, options or warrants to acquire
shares of our common stock or securities exchangeable for or convertible into
shares of common stock owned by them during the 180-day period following the
date of this prospectus. We have agreed that we will not, without the prior
written consent of Chase Securities Inc., offer, sell or otherwise dispose of
any shares of our common stock, options or warrants to acquire shares of our
common stock or securities exchangeable for or convertible into shares of our
common stock during the 180-day period following the date of this prospectus,
except that we may issue shares upon the exercise of options granted before the
date of this prospectus and may grant additional options under our stock option
plans, provided, however, that, without the prior written consent of Chase
Securities Inc., the additional options will not be exercisable during such
period.
Prior to this offering, there has been no public market for our shares. The
initial public offering price has been determined by negotiations among the
underwriters and us. Among the factors considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, were our historical performance, estimates of our business
potential and earnings prospects, an assessment of management and the
consideration of the above factors in relation to market valuations of
companies in related businesses.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover short positions created
by short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from the issuer in the offering. The
underwriters may close out any covered short position by either exercising
their option to purchase shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. "Naked" short sales are any
sales in excess of such option. The underwriters must close out any naked short
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<PAGE>
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.
Stabilizing transactions consist of various bids for or purchases of common
stock made by the underwriters in the open market prior to the completion of
the offering.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discounts and commissions received by it because the representatives have
repurchased shares sold by or for the account of such underwriter in
stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of our common stock. As a result, the price of our
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over- the-counter market or otherwise.
A prospectus in electronic format is being made available on an Internet
website maintained by Wit SoundView's affiliate, Wit SoundView Corporation. In
addition, other dealers purchasing shares from Wit SoundView in this offering
have agreed to make a prospectus in electronic format available on websites
maintained by each of these dealers.
On September 28, 1999, in consideration for services that SG Cowen
Securities Corporation provided to us in connection with the issuance and sale
of our Series E preferred stock, we issued to SG Cowen a warrant to purchase
193,050 shares of our Series E preferred stock at an exercise price of
$2.59 per share convertible into 212,741 shares of common stock. This warrant
expires, if not earlier exercised, upon the consummation of this offering.
On June 30, 2000, in connection with our revolving credit facility with The
Chase Manhattan Bank, we issued a warrant to purchase 250,000 shares of our
common stock to Chase Securities, Inc. In June 2000, in connection with our
term loan, we issued to Access Technology Partners, L.P. a warrant to purchase
625,000 shares of our common stock. Certain limited partners of Access are
affiliates of Chase Securities, Inc. Upon the completion of this offering, the
warrant held by Chase Securities, Inc. and the warrant held by Access with
respect to 136,500 shares subject to such warrant will have an exercise price
equal to the initial public offering price and will expire, if not earlier
exercised, on June 30, 2005. With respect to the remaining 488,500 shares
subject to the Access warrant, the exercise price will be equal to $8.00 per
share and the warrant will expire, if not earlier exercised, on June 30, 2007.
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will pass upon the validity of
the issuance of the shares of common stock offered by this prospectus for us.
Gibson, Dunn & Crutcher LLP, San Francisco, California, will pass upon certain
legal matters in connection with this offering for the underwriters. An
investment partnership comprised of partners from Fenwick & West LLP holds
43,750 shares of our common stock and Fenwick & West LLP holds a warrant to
purchase 30,000 shares of our common stock at an exercise price of $1.00 per
share.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for each of
the three years in the period ended December 31, 1999 have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The opinion of Haverstock & Owens LLP included elsewhere in this prospectus
has been so included upon the authority of said firm in legal matters.
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ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1, including exhibits and schedules, 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 set forth in the Registration Statement or the
exhibits and schedules that are part of the Registration Statement. Any
statements made in this prospectus as to the contents of any contract,
agreement or other document are not necessarily complete. With respect to each
of these contracts, agreements or other documents filed as an exhibit to the
Registration Statement, we refer you to the exhibit for a more complete
description of the matter involved, and each statement in this prospectus is
qualified in its entirety by this reference. 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
Securities and Exchange 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>
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 Internet web site maintained by the Commission at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors, and make available to
our stockholders quarterly reports for the first three quarters of each year
containing unaudited interim financial statements.
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LEXAR MEDIA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Mandatorily Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit)................................. F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Lexar Media, Inc.
"In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of mandatorily redeemable
convertible preferred stock and stockholders' equity (deficit) and of cash
flows present fairly, in all material respects, the financial position of Lexar
Media, Inc. at December 31, 1998 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above."
PricewaterhouseCoopers LLP
San Jose, California
July 25, 2000, except for Note 13 for which the date is August 9, 2000
F-2
<PAGE>
LEXAR MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity
------------------ June 30, June 30,
1998 1999 2000 2000
-------- -------- ----------- -------------
(unaudited) (unaudited)
(Note 12)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents
(includes restricted cash of
$2,200 in 2000).............. $ 9,824 $ 6,495 $13,792
Short-term investments
(includes restricted
securities of $2,500 in
1999)........................ -- 3,896 --
Accounts receivable, net of
allowances for sales returns
and doubtful accounts of $239
in 1998, $730 in 1999 and
$1,834 in 2000............... 2,603 8,822 10,351
Inventory, net................ 2,856 16,287 19,592
Prepaid expenses and other
current assets............... 345 545 5,686
-------- -------- -------
Total current assets......... 15,628 36,045 49,421
Property and equipment, net..... 807 1,834 3,097
Intangible assets, net.......... 299 188 4,061
Other assets.................... 80 207 317
-------- -------- -------
Total assets................. $ 16,814 $ 38,274 $56,896
======== ======== =======
LIABILITIES, MANDATORILY
REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............. $ 4,133 $ 9,029 $12,605
Accrued liabilities........... 950 2,106 5,245
Deferred revenue.............. 97 112 1,014
Notes payable to stockholders. 67 5,224 14,514
Notes payable................. -- -- 2,016
-------- -------- -------
Total current liabilities.... 5,247 16,471 35,394
Notes payable to stockholders,
net of current portion......... 5,326 96 196
Notes payable, net of current
portion........................ -- -- 14
-------- -------- -------
Total liabilities............ 10,573 16,567 35,604
Mandatorily redeemable
convertible preferred stock
(redemption value $55,258)..... 24,653 53,136 53,414
Commitments and contingencies
(Notes 9 and 10)
Stockholders' equity (deficit):
Common stock, $0.0001 par
value:
Authorized: 75,000,000 shares
Issued and outstanding:
7,971,217 shares in 1998,
12,664,322 shares in 1999,
14,887,222 shares in 2000
and 52,111,271 shares pro
forma....................... -- 1 1 $ 5
Additional paid-in capital.... 845 24,566 45,621 99,031
Unearned stock-based
compensation................. -- (19,158) (18,571) (18,571)
Notes receivable from
stockholders................. (456) (2,756) (5,992) (5,992)
Accumulated deficit........... (18,801) (34,082) (53,181) (53,181)
-------- -------- ------- --------
Total stockholders' equity
(deficit)................... (18,412) (31,429) (32,122) $ 21,292
-------- -------- ------- ========
Total liabilities,
mandatorily redeemable
convertible preferred stock
and stockholders' equity
(deficit)................... $ 16,814 $ 38,274 $56,896
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
LEXAR MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended
-------------------------- ------------------
June 30, June 30,
1997 1998 1999 1999 2000
------- ------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales................. $ 1,938 $ 7,609 $ 29,219 $ 9,237 $ 40,816
Development fees.............. 1,005 -- -- -- --
------- ------- -------- ------- --------
Total revenues.............. 2,943 7,609 29,219 9,237 40,816
Cost of revenues (excludes
stock-based compensation of $0,
$0, $129, $10 and $766)........ 1,133 6,033 24,596 7,935 34,052
------- ------- -------- ------- --------
Gross margin.................... 1,810 1,576 4,623 1,302 6,764
Operating expenses:
Research and development
(excludes stock-based
compensation of $0, $0, $274,
$85 and $2,705).............. 3,931 3,101 4,141 1,963 3,551
Sales and marketing (excludes
stock-based compensation of
$0, $0, $285, $32 and
$1,185)...................... 1,098 4,413 8,599 3,515 8,126
General and administrative
(excludes stock-based
compensation of $0, $0,
$1,118, $171 and $3,512)..... 1,650 2,733 5,241 2,370 5,860
Stock-based compensation...... -- -- 1,806 298 8,168
------- ------- -------- ------- --------
Total operating expenses.... 6,679 10,247 19,787 8,146 25,705
------- ------- -------- ------- --------
Loss from operations............ (4,869) (8,671) (15,164) (6,844) (18,941)
Interest expense and other...... 288 419 117 113 158
------- ------- -------- ------- --------
Net loss.................... $(5,157) $(9,090) $(15,281) $(6,957) $(19,099)
======= ======= ======== ======= ========
Net loss per common share--basic
and diluted.................... $ (0.50) $ (2.57) $ (2.65) $ (1.33) $ (2.29)
======= ======= ======== ======= ========
Shares used in net loss per
common share calculation--basic
and diluted.................... 10,387 3,543 5,820 5,253 8,471
======= ======= ======== ======= ========
Pro forma net loss per common
share--basic and diluted
(unaudited) (Note 12).......... $ (0.47) $ (0.42)
======== ========
Shares used in pro forma net
loss per common share
calculation--basic and diluted
(unaudited) (Note 12).......... 32,663 45,695
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
LEXAR MEDIA, INC.
CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Mandatorily
Redeemable
Convertible
Preferred Notes
Stock Common Stock Additional Unearned Receivable
--------------- --------------- Paid-in Stock-based from Accumulated
Shares Amount Shares Amount Capital Compensation Stockholders Deficit Total
------ ------- ------- ------ ---------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1997................... 16,854 $ 2 $ 107 $ -- $ -- $ (4,554) $ (4,445)
Conversion of note
payable into Series A
mandatorily
redeemable convertible
preferred stock........ 3,000 $ 3,000
Issuance of Series A
mandatorily redeemable
convertible preferred
stock.................. 3,000 2,919 15 -- 2 -- -- -- 2
Issuance of common stock
to employees for
services............... -- -- 1,631 -- 257 -- -- -- 257
Issuance of common stock
for services........... -- -- 100 -- 16 -- -- -- 16
Exercise of stock
options................ -- -- 9 -- 1 -- -- -- 1
Repurchase of stock..... (3,000) (2,997) (16,279) (2) (1) -- -- -- (3)
Net loss................ -- -- -- -- -- -- -- (5,157) (5,157)
------ ------- ------- --- ------- -------- ------- -------- --------
Balances, December 31,
1997................... 3,000 2,922 2,330 -- 382 -- -- (9,711) (9,329)
Conversion of
convertible promissory
notes into Series B
mandatorily redeemable
convertible preferred
stock.................. 3,000 1,240
Issuance of Series C
mandatorily redeemable
convertible preferred
stock.................. 10,444 8,267
Conversion of
convertible promissory
notes into Series C
mandatorily
redeemable convertible
preferred stock........ 1,000 800
Issuance of Series D
mandatorily redeemable
convertible preferred
stock.................. 6,825 11,424
Issuance of restricted
stock to employees in
exchange for notes
receivable............. -- -- 4,553 -- 364 -- (364) -- --
Exercise of stock
options and grant of
restricted stock....... -- -- 1,201 -- 108 -- (104) -- 4
Repurchase of stock..... -- -- (113) -- (9) -- 9 -- --
Reduction of notes
receivable from
stockholders........... -- -- -- -- -- -- 3 -- 3
Net loss................ -- -- -- -- -- -- -- (9,090) (9,090)
------ ------- ------- --- ------- -------- ------- -------- --------
Balances, December 31,
1998................... 24,269 24,653 7,971 -- 845 -- (456) (18,801) (18,412)
Issuance of Series D
mandatorily redeemable
convertible preferred
stock.................. 119 200
Conversion of
convertible promissory
notes into Series E
mandatorily
redeemable convertible
preferred stock........ 882 2,285
Conversion of note
payable into Series E
mandatorily
redeemable convertible
preferred stock........ 65 153
Issuance of Series E
mandatorily redeemable
convertible preferred
stock.................. 10,701 25,679
Unearned stock-based
compensation........... -- -- -- -- 20,964 (20,964) -- -- --
Amortization of unearned
stock-based
compensation........... -- -- -- -- -- 1,806 -- -- 1,806
Accretion of mandatorily
redeemable convertible
preferred stock........ -- 166 -- -- (166) -- -- -- (166)
Issuance of warrants for
bridge financing....... -- -- -- -- 5 -- -- -- 5
Issuance of warrants for
services............... -- -- -- -- 446 -- -- -- 446
Exercise of stock
options................ -- -- 4,849 1 2,484 -- (2,349) -- 136
Repurchase of stock..... -- -- (156) -- (12) -- 12 -- --
Reduction of notes
receivable from
stockholders........... -- -- -- -- -- -- 37 -- 37
Net loss................ -- -- -- -- -- -- -- (15,281) (15,281)
------ ------- ------- --- ------- -------- ------- -------- --------
Balances, December 31,
1999................... 36,036 53,136 12,664 1 24,566 (19,158) (2,756) (34,082) (31,429)
Issuance of common stock
for acquisition........ -- -- 505 -- 4,040 -- -- -- 4,040
Issuance of warrants for
promissory notes....... -- -- -- -- 5,986 -- -- -- 5,986
Issuance of common stock
for browser
development............ -- -- 25 -- 200 -- -- -- 200
Unearned stock-based
compensation........... -- -- -- -- 7,581 (7,581) -- -- --
Amortization of unearned
stock-based
compensation........... -- -- -- -- -- 8,168 -- -- 8,168
Accretion of mandatorily
redeemable convertible
preferred stock........ -- 278 -- -- (278) -- -- -- (278)
Exercise of stock
options................ -- -- 1,735 -- 3,537 -- (3,236) -- 301
Repurchase of stock..... -- -- (42) -- (11) -- -- -- (11)
Net loss................ -- -- -- -- -- -- -- (19,099) (19,099)
------ ------- ------- --- ------- -------- ------- -------- --------
Balance at June 30, 2000
(unaudited)............ 36,036 $53,414 14,887 $ 1 $45,621 $(18,571) $(5,992) $(53,181) $(32,122)
====== ======= ======= === ======= ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
LEXAR MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
--------------------------- -----------------
1997 1998 1999 1999 2000
------- -------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating ac-
tivities:
Net loss...................... $(5,157) $ (9,090) $(15,281) $(6,957) $(19,099)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Stock issued for services
rendered..................... 273 -- -- -- --
Depreciation and
amortization................. 286 433 740 325 853
Gain on sale of fixed assets.. (6) -- -- -- --
Allowances for sales returns
and doubtful accounts........ 39 201 491 286 1,104
Allowance to reduce inventory
to net realizable value...... 102 125 296 104 398
Note issued in connection
with legal settlement........ -- -- 154 150 --
Amortization of stock-based
compensation................. -- -- 1,806 298 8,168
Amortization of debt
discount..................... -- -- -- -- 89
Issuance of warrants.......... -- -- 192 -- --
Change in operating assets
and liabilities:
Accounts receivable.......... 48 (2,541) (6,709) (1,174) (1,076)
Inventory.................... (562) (2,520) (13,728) (1,735) (2,899)
Prepaid expenses and other
assets...................... 23 (294) (326) 222 (1,220)
Accounts payable............. 96 3,030 3,920 1,334 1,164
Accrued liabilities.......... 566 247 2,132 434 2,456
Deferred revenue............. (350) 97 15 214 902
------- -------- -------- ------- --------
Net cash used in operating
activities................. (4,642) (10,312) (26,298) (6,499) (9,160)
------- -------- -------- ------- --------
Cash flows from investing ac-
tivities:
Cash used in acquisition of
Impact Peripherals Ltd. ..... -- -- -- -- (64)
Purchase of intangible assets. -- (17) -- -- --
Purchase of property and
equipment.................... (753) (534) (1,655) (1,091) (1,488)
Proceeds from sale of fixed
assets....................... 15 -- -- -- --
Cash acquired upon acquisition
of PrintRoom, Inc. .......... -- -- -- -- 49
Purchase of short-term
investments (including $2,500
of restricted securities in
1999)........................ -- -- (3,896) -- --
Proceeds from short term
investments.................. -- -- -- -- 3,896
Stockholders' loans........... -- (80) -- -- --
------- -------- -------- ------- --------
Net cash provided by (used
in) investing activities... (738) (631) (5,551) (1,091) 2,393
------- -------- -------- ------- --------
Cash flows from financing ac-
tivities:
Issuance of mandatorily
redeemable convertible
preferred stock.............. 2,922 19,680 26,137 200 --
Reduction of notes receivable
from stockholders............ -- 3 35 -- --
Exercise of stock options..... 1 5 136 17 301
Proceeds from convertible
promissory notes............. 349 800 2,285 -- --
Repayment of loan............. (45) (61) (73) -- --
Repayment of notes payable.... (1,000) -- -- (32) (38)
Proceeds from notes payable... -- -- -- -- 2,037
Repurchase of stock........... (3,000) -- -- -- (11)
Proceeds from notes payable to
stockholders................. 6,400 -- -- -- 11,775
------- -------- -------- ------- --------
Net cash provided by
financing activities....... 5,627 20,427 28,520 185 14,064
------- -------- -------- ------- --------
Net increase (decrease) in
cash.......................... 247 9,484 (3,329) (7,405) 7,297
Cash at beginning of the year.. 93 340 9,824 9,824 6,495
------- -------- -------- ------- --------
Cash at end of year............ $ 340 $ 9,824 $ 6,495 $ 2,419 $ 13,792
======= ======== ======== ======= ========
Supplemental disclosure of cash
flow information:
Cash paid during the year for
interest..................... $ 76 $ 667 $ 575 $ 290 $ 301
Taxes paid.................... $ 1 $ 1 $ 1 $ -- $ --
Supplemental disclosure of non-
cash financing and investing
activities:
Conversion of note payable
into mandatorily redeemable
convertible
preferred stock.............. $ 3,000 $ 1,250 $ 153 $ -- $ --
Conversion of convertible
promissory notes into
mandatorily redeemable
convertible preferred stock.. $ -- $ 800 $ 2,285 $ -- $ --
Exercise of stock options and
restricted stock grants in
exchange for full recourse
notes........................ $ -- $ 468 $ 2,349 $ 16 $ 3,236
Repurchase of shares through
cancellation of notes
receivable................... $ -- $ 9 $ 13 $ -- $ --
Issuance of common stock in
connection with acquisition
of PrintRoom.com, Inc. and
Impact Peripherals........... $ -- $ -- $ -- $ -- $ 4,040
Issuance of common stock for
browser development.......... $ -- $ -- $ -- $ -- $ 200
Issuance of warrants and
accrual of expenses in
relation to Chase credit
facility..................... $ -- $ -- $ -- $ -- $ 3,940
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF BUSINESS:
Lexar Media, Inc. (the "Company") was incorporated under the laws of the
State of California on September 16, 1996 when the Company acquired the solid-
state storage business unit of Cirrus Logic, Inc. ("Cirrus Logic"). The Company
designs, develops and markets a complete line of removable digital film and
digital photography connectivity products. Operations and revenues, to date,
have been generated primarily from sales in the United States, the United
Kingdom ("UK") and Japan. The Company changed its name from Lexar Microsystems,
Inc. to Lexar Media, Inc. in February 1998.
In September 1996, immediately following its formation, the Company acquired
all of the intangible assets of the Solid State Business Unit of Cirrus Logic
for $3,500,000 plus legal costs of $73,000. The acquisition was accounted for
as a purchase transaction. The Company financed the acquisition by borrowing
$1,000,000 from Cirrus Logic and the issuance of a note of $2,500,000 for the
remainder of the purchase price to a new third party. The $1,000,000 note was
repaid in May 1997 and the $2,500,000 note was converted into Series A
Preferred Stock in September 1997. The Company also obtained the option to
purchase certain assets of Cirrus Logic related to the business unit. The
option was exercised and certain of the option assets were acquired for
additional consideration of $227,000 in 1997. The entire original purchase
price of $3,500,000 was allocated to intangibles. Of this amount, $3,047,000
was determined to be in-process research and development costs and has been
charged to operations at the date of acquisition. The remaining goodwill is
being amortized to operations on a straight-line basis over five years.
On January 21, 2000, the Company acquired all the common stock of
PrintRoom.com, Inc. for a total purchase price of $3.8 million which consisted
of 475,000 shares of the Company's common stock. PrintRoom.com was incorporated
on April 12, 1999 under the laws of the state of California and has developed
an online photofinishing site that provides consumers with high quality prints
of digital images and photo sharing services. The acquisition was accounted for
as a purchase and the results of operations of PrintRoom.com have been included
in the consolidated financial statements from the date of acquisition.
The allocation of the purchase price was based on the estimated fair value
of the following items:
<TABLE>
<CAPTION>
$'000
------
<S> <C>
Assets less liabilities at the date of the acquisition............... $ 78
Goodwill............................................................. 3,722
------
3,800
======
</TABLE>
Goodwill arising from this acquisition will be amortized over its estimated
useful life of 3 years.
In April 2000, the Company acquired Impact Peripherals, which now operates
as Lexar Media Europe,, for consideration valued at $1,130,000, representing
30,000 shares of the Company's common stock, $892,000 of cash discounted as
appropriate and $39,000 of acquisition-related costs. Of the cash
consideration, $450,000 was paid upon completion of the acquisition, $288,000
is payable on the first anniversary of the acquisition and $150,000 is payable
on the second anniversary of the acquisition. The acquisition is to be
accounted for as a purchase and, pending finalization of the closing balance
sheet of Lexar Media Europe, it is anticipated that the purchase price of
$1,130,000 will be allocated between net tangible assets and purchased
goodwill.
Reincorporation
On January 21, 2000, the board of directors authorized the reincorporation
of the Company in the State of Delaware.
F-7
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Following the reincorporation, the Company will be authorized to issue
200,000,000 shares of $0.0001 par value common stock and 10,000,000 shares of
$0.0001 par value preferred stock. The board of directors has the authority to
issue the undesignated preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof.
Initial Public Offering
On January 21, 2000, the board of directors approved the filing of a
registration statement for an underwritten public offering of the Company's
common stock.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation and foreign currency translation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The functional currencies of the
subsidiaries are deemed to be the local currencies and accordingly all
unrealized gains or losses arising on translation are recorded as a component
of stockholders' equity (deficit). To date, such unrealized gains and losses
have not been significant.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original or remaining maturity of three months or less to be cash equivalents.
Concentration of cash and credit risk
The Company's cash and cash equivalents are maintained at major U.S. and
Japanese financial institutions. Deposits in these institutions may exceed the
amount of insurance provided on these deposits.
The Company's accounts receivable are derived from revenues earned from
customers located primarily in the U.S., U.K. and Japan. The Company performs
ongoing credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers. The Company maintains an
allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable.
Four customers accounted for 39%, 11%, 11% and 10% of accounts receivable as
of December 31, 1998. Three customers accounted for 16%, 15% and 13% of
accounts receivable as of December 31, 1999. Three customers accounted for 21%,
12% and 10% of accounts receivable as of June 30, 2000. Revenues from three
customers represented 48%, 20% and 15% of total revenues for the year ended
December 31, 1997. Revenues from four customers represented 25%, 18%, 13% and
11% of total revenues for the year ended December 31, 1998. Revenues from three
customers represented 13%, 11% and 10% of total revenues for the year ended
December 31, 1999.
F-8
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenues from one customer represented 20% of total revenues for the six
months ended June 30, 1999. Revenues from three customers represented 18%, 14%
and 12% of total revenues for the six months ended June 30, 2000.
Certain components necessary for the manufacture of the Company's products
are obtained from a sole supplier or a limited group of suppliers.
Restricted cash and securities
At December 31, 1999, $2,500,000 of the Company's short-term investments
were restricted under letters of credit. These letters of credit expired on
March 31, 2000; however in April and May 2000 new letters of credit for
$2,000,000 were executed. At June 30, 2000, $2,200,000 of the Company's cash
and cash equivalents were restricted under letters of credit.
Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments including
cash equivalents, short term investment, accounts receivable, notes receivable,
accounts payable, notes payable and accrued liabilities approximate fair value
due to their short maturities.
Investments in marketable securities
The Company accounts for investments in marketable securities in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Debt and equity securities are classified as available for sale
securities and are reported at fair market value with any unrealized holding
gains and losses excluded from current earnings and reported as a separate
component of stockholders' equity and as a separate component of comprehensive
income. As of December 31, 1999, the investments in marketable securities were
corporate debt securities, all of which mature within one year. The unrealized
gain on these securities at December 31, 1999 was approximately $58,000. There
were no investments in marketable securities at June 30, 2000.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out method. Appropriate allowances are made to reduce the
value of inventories to net realizable value, where this is below cost. This
may occur where the Company determines that inventories may be slow-moving or
obsolete.
Property and equipment
Property and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line basis over the estimated useful lives of the
assets, generally 3 to 5 years as follows:
<TABLE>
<CAPTION>
Useful Life
-----------
<S> <C>
Computer equipment............................................... 3 years
Software......................................................... 3 years
Engineering and office equipment................................. 5 years
Furniture, fixtures and improvements............................. 5 years
</TABLE>
Leasehold improvements are amortized over the shorter of the lease term or
the estimated useful lives of the related assets.
F-9
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible assets
Intangible assets consist principally of goodwill.
Goodwill is amortized on a straight-line basis to operations over three to
five years.
Long Lived Assets
The Company assesses the recoverability of long lived assets, in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," which requires the Company to review the carrying value of an
asset for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset might not be recoverable. When such an event
occurs, the Company estimates the future undiscounted cash flows expected to
result from the use of the asset and its eventual disposition. If the
undiscounted expected future cash flows are less than the carrying amount of
the asset, an impairment loss is recognized.
Software development costs
Costs incurred in the research, design and development of products are
expensed as incurred until technological feasibility has been established. To
date, the establishment of technological feasibility of the Company's products
and general release substantially coincided. As a result, the Company has not
capitalized any software development costs since such costs have not been
significant.
Web site development costs
Costs incurred in the design, creation and maintenance of content, graphics
and user interface of the Company's web sites are expensed as incurred in
accordance with SOP 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Costs incurred in the development of
application and infrastructure of the web sites are capitalized and amortized
over the useful life of the web sites. To date, such costs have not been
significant.
Segments
The Company follows Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company operates in one segment, using one measurement of profitability to
manage its business. All long-lived assets are maintained in the United States.
The revenues generated from customers located in countries other than the
United States were as follows (in thousands):
<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended June 30,
------------------------ --------------
1997 1998 1999 1999 2000
--------------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
Japan................................ $ 257 $ 1,468 $ 4,275 708 9,562
United Kingdom....................... -- 386 3,398 1,303 5,111
Other................................ 1 83 383 105 416
------ -------- -------- ------ -------
$ 258 $ 1,937 $ 8,056 $2,116 $15,089
====== ======== ======== ====== =======
</TABLE>
F-10
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue recognition
The Company's customers include distributors, retailers, original equipment
manufacturers and end users. Certain customers have return and price protection
rights. The Company recognizes revenue where there is a contract or purchase
order, upon shipment or delivery depending on the terms of sale and
collectibility of the resulting receivable is probable. The Company provides
for estimated future returns and price protection based on historical
experience at the time revenue is recognized. At the time of sale, the Company
also provides for the estimated costs of meeting product warranty obligations.
For certain customers where the Company is unable to reasonably estimate the
level of returns or where the customers do not take title to the product on
delivery, revenues and the costs of revenues are deferred until the customers
have sold the product to their customers.
Research and development
Research and development costs are charged to operations as incurred.
Accounting for stock-based compensation
The Company follows the disclosure provisions of Financial Accounting
Standards Board ("FASB") SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company has elected to continue accounting for stock-based
compensation issued to employees using Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
pro forma disclosures required under SFAS No. 123 have been presented (see Note
7). Under APB No. 25, compensation expense is based on the difference, if any,
on the date of the grant, between the fair value of the Company's stock and the
exercise price of the option. Stock, stock options and warrants for stock
issued to non-employees have been accounted for in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."
Advertising costs
Advertising costs are charged to operations as incurred. Advertising costs
for the years ended December 31, 1997, 1998 and 1999 and for six months ended
June 30, 1999 and 2000 were $9,000, $710,000 and $2,456,000, and $765,000 and
$2,818,000, respectively.
Income taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
Comprehensive income
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Through December 31, 1999, the Company had not had any
transactions that were required to be reported in other comprehensive income.
At June 30, 2000, the Company had a cumulative translation adjustment balance
of $2,000.
F-11
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent accounting pronouncements
In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position 98-1, or SOP 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 does
not have a material impact on the financial statements.
In April 1998, the AcSEC issued Statement of Position 98-5, or SOP 98-5,
"Reporting on the Costs of Start-Up Activities." The standard requires
companies to expense the costs of start-up activities and organization costs as
incurred. In general, SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. The adoption of SOP 98-5 does not have a material impact on
the financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities.
SFAS 133 requires that all derivatives be recognized at fair value in the
balance sheet, and that the corresponding gains or losses be reported either in
the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133 will be
effective for fiscal years beginning after June 15, 2000. The Company does not
currently hold derivative instruments or engage in hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial
Statements" which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. The Company
has adopted SAB 101 and the adoption did not have a material impact on the
financial statements.
In March, 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation," FIN 44 is an interpretation on APB Opinion No. 25 and
clarifies guidance for certain issues that arose in the application of APB
Opinion No. 25. Management believes that the adoption of FIN 44 does not have a
material impact on the financial statements.
F-12
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net loss per common share
Basic net loss per common share is computed by dividing net loss available
to common stockholders by the weighted average number of vested common shares
outstanding for the period. Diluted net loss per share is computed giving
effect to all dilutive potential common shares, including options, warrants and
preferred stock. A reconciliation of the numerator and denominator used in the
calculation of historical basic and diluted net loss per share follows (in
thousands, except per common share amounts):
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
-------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss................... $(5,157) $(9,090) $(15,281) $(6,957) $(19,099)
Accretion of mandatorily
redeemable convertible
preferred stock ......... -- -- (166) (23) (278)
------- ------- -------- ------- --------
Net loss after accretion of
mandatorily redeemable
convertible preferred
stock...................... $(5,157) $(9,090) $(15,447) $(6,980) $(19,377)
======= ======= ======== ======= ========
Denominator:
Weighted average common
shares outstanding........ 10,387 5,812 8,622 8,165 14,575
Weighted average unvested
common shares subject
to repurchase............. -- (2,269) (2,802) (2,912) (6,105)
------- ------- -------- ------- --------
Denominator for basic and
diluted calculations....... 10,387 3,543 5,820 5,253 8,471
======= ======= ======== ======= ========
Net loss per common share--
basic and diluted.......... $ (0.50) $ (2.57) $ (2.65) $ (1.33) $ (2.29)
======= ======= ======== ======= ========
</TABLE>
Antidilutive securities
Securities listed below have not been included in the computations of
diluted net loss per share for the years ended December 31, 1997, 1998 and 1999
and the six months ended June 30, 1999 and 2000 indicated (in thousands):
<TABLE>
<CAPTION>
Six Months
Years Ended December Ended June
31, 30,
-------------------- -------------
1997 1998 1999 1999 2000
------ ------ ------ ------ ------
Shares Shares Shares Shares Shares
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Shares under warrants for Series C
mandatorily redeemable convertible
preferred stock......................... 100 100 100 100 100
Shares under warrants for Series E
mandatorily redeemable convertible
preferred stock......................... -- -- 310 -- 1,757
Shares under warrants for common stock... -- 125 166 125 166
Shares under options for common stock.... 2,406 3,370 1,472 3,268 3,240
Restricted stock ........................ -- -- 1,200 -- --
Mandatorily redeemable convertible
preferred stock......................... 3,000 24,269 36,036 24,269 36,036
</TABLE>
F-13
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign currency transactions
Foreign currency denominated monetary assets and liabilities are translated
into U.S. dollars at the end-of-period exchange rates; nonmonetary assets and
liabilities are recorded at their historical exchange rates. Gains and losses
from foreign currency transactions are included in interest expense and other.
NOTE 3--BALANCE SHEET DISCLOSURES (in thousands):
Inventory consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------- June 30,
1998 1999 2000
------ ------- --------
<S> <C> <C> <C>
Raw materials..................................... $ 265 $ 5,332 $ 3,048
Controllers....................................... 29 1,877 926
Flash memory products............................. 2,403 8,760 15,648
Ancillary products................................ 386 841 891
------ ------- -------
3,083 16,810 20,513
Less: inventory reserve........................... (227) (523) (921)
------ ------- -------
$2,856 $16,287 $19,592
====== ======= =======
Property and equipment consisted of the following:
<CAPTION>
December 31,
--------------- June 30,
1998 1999 2000
------ ------- --------
<S> <C> <C> <C>
Equipment......................................... $ 852 $ 1,858 $ 3,278
Software.......................................... 390 785 1,036
Furniture, fixtures and improvements.............. 70 325 375
------ ------- -------
1,312 2,968 4,689
Less: accumulated depreciation and amortization... (505) (1,134) (1,592)
------ ------- -------
Property and equipment, net....................... $ 807 $ 1,834 $ 3,097
====== ======= =======
Intangible assets consisted of the following:
<CAPTION>
December 31,
--------------- June 30,
1998 1999 2000
------ ------- --------
<S> <C> <C> <C>
Goodwill.......................................... $ 543 $ 543 $ 4,811
Less: accumulated amortization.................... (244) (355) (750)
------ ------- -------
$ 299 $ 188 $ 4,061
====== ======= =======
Accrued liabilities consisted of the following:
<CAPTION>
December 31,
--------------- June 30,
1998 1999 2000
------ ------- --------
<S> <C> <C> <C>
Payroll and related amounts....................... $ 526 $ 1,390 $ 2,455
Interest.......................................... 136 87 187
Other............................................. 288 629 2,603
------ ------- -------
$ 950 $ 2,106 $ 5,245
====== ======= =======
</TABLE>
F-14
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--NOTES PAYABLE:
In April 1997, the Company purchased engineering equipment financed through
an equipment financing company. The loan is collateralized by the equipment. At
December 31, 1999, the holder of this note was a stockholder of the Company;
accordingly the loan balance has been classified under notes payable to
stockholders. The note, which bears interest at 9.68% per year, requires
monthly principal and interest payments of $7,000 through March 2002. Principal
payments are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
2000................................................................ $ 74
2001................................................................ 82
2002................................................................ 14
----
$170
====
</TABLE>
In June and July 1997, a stockholder made a cash advance to the Company in
the amount of $400,000 to provide working capital to the Company. The note
bears interest at 5.5% and the maturity date is July 2000.
Under a Note Purchase Agreement signed in August 1997 with two noteholders,
the Company issued two convertible promissory notes and ten other promissory
notes for a total amount of $6,000,000. In February 1998, $1,250,000 of these
convertible promissory notes were converted to shares of Series B mandatorily
redeemable convertible preferred stock. In February 1998, the interest rate on
the remaining $4,750,000 was changed from 8.5% to 10% and the maturity date was
extended from July 31, 1999 to July 31, 2000. All these notes are
collateralized by all assets of the Company.
In March 2000, the Company issued a $2.0 million convertible promissory note
to Sony. The note is automatically convertible into shares of common stock at
the closing of the Company's IPO or upon a change in control prior to an IPO,
unless Sony elects for repayment of the note in cash, such election to be made
within 5 business days of the change in control. The conversion price is the
lower of $15.00 per share or 93% of the public offering price of the common
stock in the IPO. In the event that the IPO is not closed before September 1,
2000, the note is no longer convertible. In addition, a warrant was issued to
Sony in conjunction with the convertible note financing. The warrant is for
400,000 shares of common stock at a price equal to the lower of $5.00 per share
or 93% of the public offering price of the common stock in the IPO. The warrant
expires upon closing of the Company's IPO or upon a change in control prior to
an IPO. In any case, the warrant cannot be exercised prior to September 1,
2000.
F-15
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May, June and July 2000, the Company entered into agreements to issue
promissory notes to six existing stockholders for $13.3 million. The Company
received $11.8 million from five of the investors by June 30, 2000. In relation
to these promissory notes, the Company issued warrants to purchase 644,395
shares of common stock at an exercise price of $3.09 per share. Under the terms
of the promissory notes, these stockholders received additional warrants to
purchase additional shares of common stock, in monthly installments, at an
exercise price of $8.00 per share for up to 12 months from the issue date of
the respective promissory notes so long as the principal on the notes remain
outstanding. The proceeds from the promissory notes have been allocated to both
the debt instruments and the warrants for common stock based on their relative
fair values. The value assigned to the warrants for the $11.8 million received
at June 30, 2000 was $2.8 million, representing a discount to the face value of
the promissory notes and will be expensed to the statement of operations as
interest expense over the term of the promissory notes.
<TABLE>
<CAPTION>
June 30, 2000
--------------
(in thousands)
<S> <C>
Promissory notes.............................................. $11,775
Discount on promissory notes.................................. (2,759)
-------
$ 9,016
=======
</TABLE>
The Company issued notes payable to former shareholders of Lexar Media
Europe in the amount of $438,000. Of this balance $288,000 is payable on April
27, 2001 and $150,000 is payable on April 27, 2002. The notes payable have been
discounted to their fair value and the related discount will be amortized to
the statements of operations over the term of the notes payable.
NOTE 5--INCOME TAXES:
The federal and state tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities are presented
below (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Deferred tax assets and liabilities:
Net operating loss carryforwards......................... $ 5,236 $ 11,027
Depreciation and amortization............................ 1,275 1,344
Research credit carryforwards............................ 387 1,157
Other.................................................... 868 1,107
------- --------
7,766 14,635
Less: valuation allowance................................. (7,766) (14,635)
------- --------
$ -- $ --
======= ========
</TABLE>
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $25,741,000, and federal and state research
credits of approximately $580,000 and $577,000, respectively, to offset future
taxes. The operating loss carryforwards and credits will expire between 2003
and 2019 if not utilized. The Company has established a 100% valuation
allowance since it is more likely than not that no benefit will be realized for
its deferred tax assets.
The future utilization of the Company's net operating loss carryforwards
will be subject to certain limitations based on an ownership change as defined
by Internal Revenue Code section 382.
F-16
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT):
In January 1998, the Company completed a bridge loan financing with three
venture capital parties for an aggregate amount of $800,000 plus interest of
10% per annum. The bridge loan was converted into 1,000,000 shares of Series C
mandatorily redeemable convertible preferred stock in February 1998 when the
Company entered into a Series C mandatorily redeemable preferred stock purchase
agreement with venture capital firms and other investors. Under this agreement,
the Company issued 11,443,750 shares (including the 1,000,000 shares) of Series
C mandatorily redeemable convertible preferred stock at $0.80 per share for a
total consideration of $9,155,000.
In November 1998, the Company issued 6,824,923 shares of Series D
mandatorily redeemable convertible preferred stock at $1.685 per share for
$11,500,000. In January 1999, the Company issued 118,695 additional shares of
Series D mandatorily redeemable convertible preferred stock at $1.685 per share
for $200,000.
In August 1999, the Company issued convertible promissory notes for an
aggregate amount of $2,285,000 plus interest at 6% per annum. The convertible
promissory notes automatically converted into 882,409 shares of Series E
mandatorily redeemable convertible preferred stock at $2.59 per share.
Additionally, a $153,000 convertible note payable including interest was
converted into 65,482 shares of Series E mandatory redeemable convertible
preferred stock in September 1999. The Company also issued 10,700,602 shares of
Series E mandatorily redeemable convertible preferred stock at $2.59 per share,
for a total of $27,715,000.
Mandatorily redeemable convertible preferred stock
At December 31, 1998 and 1999, the amounts of the mandatorily redeemable
convertible preferred stock by series were as follows (in thousands):
<TABLE>
<CAPTION>
Shares Issued
and Outstanding Net Amount Liquidation Value
December 31, December 31, Including
Shares --------------- --------------- Liquidation Undeclared,
Series Authorized 1998 1999 1998 1999 Value Unpaid Dividends
------ ---------- ------- ------- ------- ------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
A 3,000 3,000 3,000 $ 2,922 $ 2,955 $ 3,000 $ 3,620
B 3,000 3,000 3,000 1,240 1,243 1,250 1,433
C 11,544 11,444 11,444 9,067 9,096 9,155 10,498
D 6,943 6,825 6,944 11,424 11,640 11,700 12,769
E 12,171 -- 11,648 -- 28,202 30,153 30,757
------ ------- ------- ------- ------- ------- -------
36,658 24,269 36,036 $24,653 $53,136 $55,258 $59,077
====== ======= ======= ======= ======= ======= =======
</TABLE>
Amendment of Articles of Incorporation
On February 23, 2000, the shareholders approved the Company's amended
articles of incorporation to increase the conversion price for Series E
mandatorily redeemable convertible preferred stock to $3.09. In the event that
the Company does not close an underwritten public offering of the Company's
common stock on or before May 31, 2000, the conversion price of Series E
mandatorily redeemable convertible preferred stock will be $2.35. Accordingly,
the conversion price of the Series E mandatorily redeemable convertible
preferred stock is now $2.35.
Dividends
The holders of each share of Series A, Series B, Series C, Series D and
Series E mandatorily redeemable convertible preferred stock are entitled to
receive cumulative dividends, out of any funds and
F-17
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assets of the Company legally available, prior and in preference to any
declaration or payment of any dividend on common stock of the Company at the
annual dividend rate (which means respectively $0.08, $0.033, $0.064, $0.1348
and $0.2072 per share per annum for the Series A, Series B, Series C, Series D
and Series E mandatorily redeemable convertible preferred stock, respectively,
adjusted for any stock split, combination, dividend or other recapitalization)
when, as and if declared by the Board of Directors of the Company. Such
cumulative dividends will accrue on each share of Series A, Series B, Series C,
Series D and Series E mandatorily redeemable convertible preferred stock, when,
as and if declared by the Board of Directors, from the date such share is
issued and will accrue from day to day whether or not earned. Payments of any
dividends to the holders of the Series A, Series B, Series C, Series D and
Series E mandatorily redeemable convertible preferred stock shall be made pro
rata, on an equal priority, pari passu basis, according to their respective
dividend preferences. If the Company will have accrued but unpaid dividends on
redeemable convertible preferred stock, upon conversion at an initial public
offering, then all such accrued but unpaid dividends shall be cancelled.
Liquidation rights
The holders of each share of Series A, Series B, Series C, Series D and
Series E mandatorily redeemable convertible preferred stock will be entitled to
be paid, out of the available funds and assets, and prior and in preference to
any payment or distribution of any available funds and assets on any shares of
common stock, an amount per share equal to the original issue price (which
means respectively $1.00, $0.417, $0.80, $1.685 and $2.59 per share of the
Series A, Series B, Series C, Series D and Series E mandatorily redeemable
convertible preferred stock adjusted for any stock split, combination, dividend
or other recapitalization) plus any accrued but unpaid dividends. Funds and
assets will be distributed among the holders of the outstanding Series A,
Series B, Series C, Series D and Series E mandatorily redeemable convertible
preferred stock pro rata, on an equal priority, pari passu basis, according to
their respective liquidation preferences. A consolidation, merger or sale of
the Company will be deemed to be a liquidation, dissolution or winding up of
the Company for purposes of liquidation rights.
Participation rights
If there are any funds and assets remaining after the payment or
distribution to the holders of the mandatorily redeemable preferred stock of
their full preferential amounts, then all remaining assets and funds will be
distributed among the holders of the outstanding common stock and the Series A,
the Series B, Series C, Series D and Series E mandatorily redeemable
convertible preferred stock pro rata according to the number of shares of
common stock held by such holders assuming conversion of the mandatorily
redeemable preferred stock into common stock.
Redemption
The Company, to the extent it is lawfully and contractually able to do so,
is obligated to offer to redeem, at the respective Original Issue Price plus
accrued but unpaid dividends (if declared) all of the Series A, Series B,
Series C, Series D and Series E mandatorily redeemable convertible preferred
stock in three annual installments, one-third of the mandatorily redeemable
convertible preferred stock issued by the Company within sixty days of each of
the fifth and sixth annual anniversary dates of the Original Issue Date and
100% of the remaining mandatorily redeemable convertible preferred stock issued
by the Company within sixty days of the seventh anniversary of the Original
Issue Date. The holders of each of the Series A, Series B, Series C, Series D
and Series E mandatorily redeemable convertible preferred stock will have the
option, each year, to either accept or reject the redemption offer.
F-18
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Voting rights
Each holder of shares of common stock is entitled to one vote for each share
held.
Each holder of shares of mandatorily redeemable convertible preferred stock
is entitled to the number of votes equal to the number of whole shares of
common stock into which such shares of mandatorily redeemable convertible
preferred stock are convertible.
Conversion rights
At the option of the holder, each share of mandatorily redeemable
convertible preferred stock is convertible, at any time or from time to time,
into fully paid and nonassessable shares of common stock.
Each share of mandatorily redeemable convertible preferred stock will
automatically be converted into fully paid and nonassessable shares of common
stock, immediately prior to the closing of an initial public offering with
minimum proceeds and a price per share as set forth in the agreements for each
series or upon the Company's receipt of the written consent of the holders of
not less than two-thirds of the then outstanding shares of mandatorily
redeemable convertible preferred stock to the conversion of all then
outstanding mandatorily redeemable convertible preferred stock. Series A,
Series B, Series C and Series D mandatorily redeemable convertible preferred
stock is convertible into shares of common stock on a one-for-one basis. The
conversion price of Series E mandatorily redeemable convertible preferred stock
is subject to adjustments based on certain performance criteria. The conversion
price will, however, not be lower than $2.09 per share or higher than $3.09 per
share.
Common stock
In February 1998, three employees were issued 2,400,000, 1,076,284 and
1,076,284 shares, respectively, of the Company's common stock at a price of
$0.08 per share. The share issuances were outside of the Company's 1996 Stock
Plan. The purchase price was paid through full-recourse promissory notes
payable in full to the Company in four years. The purchased shares are subject
to repurchase by the Company at the original purchase price paid per share,
upon the purchaser's cessation of service other than by involuntary termination
prior to vesting of such shares. The repurchase right lapses with respect to
the purchased shares upon vesting. At December 31, 1999, each of the three
employees had 600,000 unvested shares. These shares will vest fully at the end
of the four year vesting period or earlier if certain performance criteria are
met.
Warrants
During the years ended December 31, 1998 and 1999, the Company issued the
following warrants:
Shares subject to warrants to purchase mandatorily redeemable convertible
preferred stock (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Number of
Shares
Exercise (Common Stock Black-Scholes
Series Date Issued Price Equivalents) Value Reason
------ -------------- -------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
C February 1998 $0.80 100 0.414 Services
E August 1999 $2.35 97 1.339 Bridge financing
E September 1999 $2.35 213 1.339 Services
</TABLE>
F-19
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Shares subject to warrants to purchase common stock (in thousands):
<TABLE>
<CAPTION>
Black-
Exercise Number of Scholes
Date Issued Price Shares Value Reason
-------------- -------- --------- ------- ---------------------
<S> <C> <C> <C> <C> <C>
February 1998 $0.80 125 0.414 Equity financing cost
September 1999 $0.30 11 2.361 Legal settlement
December 1999 $1.00 30 6.247 Services
</TABLE>
Warrants issued during the years ended December 31, 1998 and 1999 were
valued using the Black-Scholes valuation model using the following assumptions;
dividend yield of 0%, volatility of 60%, risk-free interest rate of 6% and a
contractual term of four years.
NOTE 7--STOCK OPTION PLAN:
The 1996 Stock Option/Stock Issuance Plan
The Company has a 1996 Stock Option/Stock Issuance Plan. The Plan is divided
into three separate equity programs: the option grant program, the stock
issuance program and the stock bonus program. Under the Plan, the exercise
price per share of the stock options granted to employees, members of the Board
of Directors or consultants shall not be less than 85% (110% for a 10%
shareholder) of the fair market value on the option grant date. Incentive
options may only be granted to employees and exercise price per share shall not
be less than 100% of the fair market value per share of common stock on the
option grant date.
Each option is exercisable as determined by the Board of Directors for all
of the option shares and has a maximum term of ten years from the date of the
grant. The Company has the right to repurchase, at the time of cessation of
employment, at the exercise price paid per share any unvested shares, as
established by the Board of Directors. As of December 31, 1998, 1999 and June
30, 2000, the Company had reserved 7,938,082, 13,038,082 and 13,038,082 shares,
respectively, under the Plan.
The 2000 Equity Incentive Plan
On January 21, 2000, the board of directors approved the adoption of the
2000 Equity Incentive Plan, which will become effective upon the effective date
of an initial public offering. The Company reserved 8,000,000 shares under this
plan for grants to employees.
The 2000 Employee Stock Purchase
On January 21, 2000, the board of directors approved the adoption of the
2000 Employee Stock Purchase Plan, which will become effective on the first
business day on which price quotations for the Company's common stock are
available on the Nasdaq National Market. The Company has reserved 1,000,000
shares under this plan for grants to employees.
F-20
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock option activity under the Plan for the period from January 1, 1997 to
June 30, 2000 is summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------
Shares Weighted
Available Number of Exercise Average
for Grant Shares Price Exercise Price
--------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Balances, January 1, 1997.... 3,751 2,762 $ 0.16 $0.160
Additional shares reserved.. 1,208 -- --
Options granted............. (766) 766 0.08-0.16 0.147
Options exercised........... -- (9) 0.16 0.160
Options canceled............ 1,113 (1,113) 0.16 0.160
------ ------
Balances, December 31, 1997.. 5,306 2,406 0.08-0.16 0.158
Additional shares reserved.. 217 -- --
Options granted............. (1,207) 1,207 0.08-0.20 0.105
Options exercised........... -- (151) 0.16 0.160
Options canceled............ 92 (92) 0.08-0.16 0.099
------ ------
Balances, December 31, 1998.. 4,408 3,370 0.08-0.20 0.140
Additional shares reserved.. 5,100 --
Options granted............. (3,291) 3,291 0.20-2.00 0.770
Options exercised........... -- (4,849) 0.08-1.00 0.512
Options canceled............ 340 (340) 0.08-0.30 0.126
Repurchases................. 156 -- 0.08 0.080
------ ------
Balances, December 31, 1999.. 6,713/1/ 1,472 0.08-2.00 0.468
Additional shares reserved.. -- --
Options granted............. (2,397) 2,397 3.00-8.00 4.685
Options exercised........... -- (536) 0.16-4.00 2.123
Options canceled............ 93 (93) 0.20-3.00 1.926
Repurchases................. 43 -- 0.20-0.30 0.262
------ ------
Balances, June 30, 2000 (un-
audited).................... 4,452/1/ 3,240 $0.16-8.00 $3.646
====== ======
</TABLE>
---------------------
(1) The Company granted 2,699,331 and 1,050,000 shares of restricted stock to
employees during the years ended December 31, 1996 and 1998, respectively.
These grants were made under the Company's 1996 Stock Option/Issuance Plan,
therefore the shares available for grant at December 31, 1999 and June 30,
2000 were 2,964,046 and 703,453. At June 30, 2000 1,800,000 shares were
unvested and subject to repurchase.
In December 1999, three employees were granted 1,200,000 shares of
restricted stock with a purchase price of $2.00 per share. These equity grants
were made outside of the Company's 1996 Stock Plan and vest over a four-year
period. At June 30, 2000, 1,050,000 shares were unvested and subject to
repurchase.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock-
Based Compensation," which was effective for the Company's fiscal year 1997.
SFAS 123 allows companies to either account for stock-based compensation under
the new provisions of SFAS 123 or under the provisions of Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees,"
but requires pro forma disclosure in the footnotes to the financial statements
as if the measurement provisions of SFAS 123 had been adopted.
The Company has continued to account for its stock-based compensation under
the Plan in accordance with APB 25. Accordingly, no compensation expense has
been recognized for the Plan.
Had compensation expense for the Company's stock options and the restricted
stock issuances been determined based on the fair value of the grant date for
awards in fiscal years 1997, 1998, 1999 and the
F-21
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
six months ended June 30, 1999 and 2000 consistent with the provision of SFAS
123, the Company's net loss for these periods would have been increased to the
pro forma amounts indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
-------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
As reported:
Net loss................... $(5,157) $(9,090) $(15,281) $(6,957) $(19,099)
Accretion of mandatorily
redeemable convertible
preferred stock........... -- -- (166) (23) (278)
------- ------- -------- ------- --------
Net loss after accretion of
mandatorily redeemable
convertible preferred
stock..................... $(5,157) $(9,090) $(15,447) $(6,980) $(19,377)
======= ======= ======== ======= ========
Pro forma net loss after
accretion................... $(5,181) $(9,097) $(15,578) $(6,980) $(19,762)
======= ======= ======== ======= ========
Net loss per common share--
basic and diluted as report-
ed.......................... $ (0.50) $ (2.57) $ (2.65) $ (1.33) $ (2.29)
======= ======= ======== ======= ========
Net loss per common share--
basic and diluted pro forma. $ (0.50) $ (2.57) $ (2.67) $ (1.33) $ (2.33)
======= ======= ======== ======= ========
</TABLE>
In accordance with the provisions of SFAS 123, the fair value of each option
is estimated using the following assumptions for grants during the years ended
December 31, 1997, 1998, 1999 and the six months ended June 30, 1999 and 2000;
dividend yield of 0%, volatility of 60%, risk-free interest rates of between
4.25% to 8.66% at the date of grant and an expected term of five years.
During the year ended December 31, 1999 and the six months ended June 30,
2000, the Company recorded unearned stock-based compensation totaling $21.0
million and $7.6 million, which is being amortized to expense over the period
during which the options vest, generally four years, using the method set out
in Example 2 both FASB Interpretation No. 28 ("FIN 28"). Under the FIN 28
method, each vested tranche of options is accounted for as a separate option
grant awarded for past services. Accordingly, the compensation expense is
recognized over the period during which the services have been provided. This
method results in a front-loading of the compensation expense. For the year
ended December 31, 1999 and the six months ended June 30, 2000, the Company
recorded stock-based compensation of $1.8 million and $8.2 million respectively
in respect of options granted to employees and non-employees during the year.
The total unamortized unearned stock-based compensation recorded for all
option grants through June 30, 2000 is expected to be amortized as follows:
$7.2 million for the remainder of the year ending December 31, 2000; $7.1
million for the year ending December 31, 2001; $3.3 million for the year ending
December 31, 2002; and $1.0 million for the year ending December 31, 2003.
The weighted average per share fair value of common stock options granted
during 1997, 1998, 1999 and the six months ended June 30, 1999 and 2000 was
$0.147, $0.105, $5.890, $1.68 and $8.29 respectively.
F-22
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 1999 and June 30, 2000 (shares in thousands):
<TABLE>
<CAPTION>
December 31, 1999 Weighted Weighted Number Weighted
------------------------ Average Average Exercisable Average
Exercise Number Contractual Exercise Not Subject Exercise
Price Outstanding Life Price to Repurchase Price
-------- ----------- ----------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$0.16 90 6.84 $0.16 37 $0.16
0.08 311 7.94 0.08 71 0.08
0.08 30 8.62 0.08 10 0.08
0.20 400 9.04 0.20 58 0.20
0.30 56 9.59 0.30 -- 0.30
0.50 94 9.76 0.50 -- 0.50
1.00 286 9.94 1.00 5 1.00
2.00 205 9.97 2.00 23 2.00
----- ---
1,472 204
===== ===
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000 Weighted Weighted Number Weighted
------------------------ Average Average Exercisable Average
Exercise Number Contractual Exercise Not Subject Exercise
Price Outstanding Life Price to Repurchase Price
-------- ----------- ----------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$0.16 86 6.34 $0.16 63 $0.16
0.08 290 7.43 0.08 100 0.08
0.08 5 7.86 0.08 5 0.08
0.08 25 8.21 0.08 9 0.08
0.20 40 8.40 0.20 15 0.20
0.20 91 8.55 0.20 29 0.20
0.20 14 8.75 0.20 5 0.20
0.20 58 8.91 0.20 15 0.20
0.30 57 9.08 0.30 -- 0.30
0.50 89 9.26 0.50 5 0.50
1.00 218 9.43 1.00 24 1.00
2.00 205 9.47 2.00 -- 2.00
3.00 694 9.55 3.00 6 3.00
4.00 200 9.61 4.00 -- 4.00
6.00 2 9.70 6.00 -- 6.00
6.00 374 9.77 6.00 -- 6.00
6.00 215 9.99 6.00 2 6.00
8.00 577 9.71 8.00 8 8.00
----- ---
3,240 286
===== ===
</TABLE>
At December 31, 1999 and June 30, 2000, there were 2,997,680 and 3,026,465
shares issued under the plan which were unvested and subject to repurchase.
NOTE 8--401(k) PLAN:
The Company has a 401(k) plan. The Company does not make matching
contributions or discretionary contributions under the plan.
NOTE 9--COMMITMENTS:
The Company leases its U.S. facilities under an operating lease agreement
expiring on January 1, 2005. Rent expense was $260,000, $338,000 and $383,000
for the years ended December 31, 1997, 1998 and 1999, respectively.
F-23
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company leases its Japanese facilities under an agreement which provides
for the lease of executive office space and administrative services in Japan
and expires on September 30, 2001. The lease payment is approximately $5,000
per month.
Minimum lease payments under all non-cancelable operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
2000.............................................................. $ 612
2001.............................................................. 631
2002.............................................................. 655
2003.............................................................. 656
2004.............................................................. 670
------
$3,224
======
</TABLE>
NOTE 10--CONTINGENCIES:
On March 20, 1998, a competitor, SanDisk, sued the company for patent
infringement. Motions by both parties were heard on March 17, 2000. On March
31, 2000, the Federal District Court for the Northern District of California
found that certain of the Company's products infringe one of the claims of
SanDisk's patent. Trial is set to begin on October 23, 2000 to determine
whether the Company has infringed any of the other claims of the patent and
whether SanDisk's patent is valid. The Company believes, based in part on
discussions with patent counsel, that it has meritorious defenses to the
plaintiff's claims and intends to defend the litigation vigorously. The Company
believes that the ultimate resolution of the matter will not have a material
adverse effect on its results of operations for the year ended December 31,
1999 or its financial condition and cash flow as of that date as reported in
these financial statements. This litigation, whether or not determined in the
Company's favor or settled by the Company, may be costly and may divert the
efforts and attention of the Company's management from normal business
operations and could affect the ability of the Company to raise capital in the
future.
NOTE 11--RELATED PARTY TRANSACTIONS:
In 1997, the Company sold $1,397,000 of products to Simple Technology, Inc.
The owners of this Company were stockholders of Lexar Media, Inc. until August
1997. As of December 31, 1997, the Company had receivables due from Simple
Technology, Inc. of $37,000. There were no such transactions in 1998 or 1999.
In 1998, the Company sold $294,000 of products to and made purchases of
$557,000 from Kingston Technology, Inc., an investor in the Company. At
December 31, 1998, the Company had payables to Kingston Technology, Inc. of
$22,000. There were no such transactions in 1997 or 1999.
The Company purchased materials of $5,273,000 and $18,509,000 from Toshiba,
an investor in the Company during the years ended December 31, 1998 and 1999,
respectively. The Company had payables of $1,803,000 and $3,392,000 to Toshiba
at December 31, 1998 and 1999, respectively.
During 1998, the Company advanced $80,000 to two officers (who are also
stockholders of the Company) in relation to taxes owed on bonus payments. The
term of these loans is four years and they bear interest at 5.7% per annum.
The Company had a $170,000 note payable to GE Capital, a stockholder of the
Company, this note is also guaranteed by Toshiba.
F-24
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12--UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE AND STOCKHOLDERS'
EQUITY:
Upon the closing of the Company's initial public offering, all outstanding
Series A, Series B, Series C, Series D and Series E mandatorily redeemable
convertible preferred stock will automatically convert into 37,224,049 shares
of common stock assuming a conversion price for the Series E mandatorily
redeemable convertible preferred stock of $2.35 per share. The pro forma effect
of this conversion has been presented as a separate column in the Company's
balance sheet, assuming that this conversion had occurred as of June 30, 2000.
This pro forma presentation does not reflect the exercise of warrants which
will expire, if not exercised, upon the closing of the Company's initial public
offering, the issuance of 30,000 shares of common stock upon the acquisition of
Impact Peripherals in May 2000, or the debt financing secured by the Company
subsequent to June 30, 2000 as disclosed in Note 13 below.
Pro forma basic and diluted net loss per common share have been computed to
give effect to common equivalent shares from preferred stock that will
automatically convert upon the closing of the Company's initial public offering
(using the as-if-converted method) for the year ended December 31, 1999 and the
six months ended June 30, 2000.
A reconciliation of the numerator and denominator used in the calculation of
pro forma basic and diluted net loss per share follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
1999 2000
------------ ----------
(unaudited)
<S> <C> <C>
Numerator:
Net loss.............................................. $(15,281) $19,099
======== =======
Denominator:
Shares used in computing basic and diluted net loss
per share............................................ 5,820 8,471
Adjusted to reflect the effect of the assumed conver-
sion of
convertible preferred stock from the date of issu-
ance:
Series A mandatorily redeemable preferred stock..... 3,000 3,000
Series B mandatorily redeemable preferred stock..... 3,000 3,000
Series C mandatorily redeemable preferred stock..... 11,444 11,444
Series D mandatorily redeemable preferred stock..... 6,939 6,944
Series E mandatorily redeemable preferred stock..... 2,460 12,836
-------- -------
Weighted average shares used in computing pro forma ba-
sic and diluted net loss per share.................... 32,663 45,695
======== =======
Pro forma basic and diluted net loss per share......... $ (0.47) $ (0.42)
======== =======
</TABLE>
NOTE 13--SUBSEQUENT EVENTS:
In June 2000, the Company entered into a credit facility with The Chase
Manhattan Bank and a term loan with Access Technology Partners, an affiliate of
Chase. These facilities include a $20.0 million revolving credit line from
Chase, with interest payable on any borrowings at a rate per year based on a
market rate of interest, and a $10.0 million term loan from Access, with
interest payable on any borrowings at a rate of 12% per year. The term loan
from Access is subordinate in right of payment to the credit line from Chase.
The Company is permitted to draw down amounts from the Chase revolving credit
facility based upon eligible receivables and inventory. As of June 30, 2000,
the Company is able to draw down $4.0 million from
F-25
<PAGE>
LEXAR MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Access term loan. On June 30, 2000, the Company issued warrants to purchase
875,000 shares of the Company's common stock in connection with the revolving
credit facility entered into with The Chase Manhattan Bank and the term loan
entered into with an affiliate of Chase in June 2000. These warrants have an
exercise price of $8.00 per share. The proceeds from these financings will be
allocated to both the debt instruments and the warrants for common stock based
on their relative fair values. The value assigned to the warrants at June 30,
2000 was approximately $3.1 million representing a discount of the face value
of the debt instruments and was included in prepaid expenses and other current
assets at June 30, 2000. This will be expensed to the statement of operations
as an interest expense over the period the facilities are in place.
The initial funding of the credit facility and term loan in the amount of
$10.1 million was completed on July 19, 2000 and the Company used $5.2 million
of these funds to repay notes payable to three stockholders. (unaudited)
In August 2000, the Company amended the warrants issued to Chase and Access
to modify the exercise price to be the initial public offering price with
respect to the 250,000 shares of common stock under the warrant originally
issued to Chase and 136,500 of the shares of common stock under the warrant
originally issued to Access. The exercise price with respect to the remaining
488,500 shares of common stock under the warrant originally issued to Access
remained at $8.00 per share.
F-26
<PAGE>
-------------------------------------------------------------------------------
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6,500,000 Shares
[LEXAR LOGO APPEARS HERE]
Common Stock
----------------
PROSPECTUS
----------------
Chase H&Q
J.P. Morgan & Co.
SG Cowen
Wit SoundView
----------------
August 14, 2000
----------------
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, common shares only in jurisdictions where offers and sales are permitted.
The information contained 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 our common shares.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common shares or possession or distribution of
this prospectus in that jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are required to inform
themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable to that jurisdiction.
Until September 8, 2000, all dealers that buy, sell or trade in our common
shares, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
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