<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------
FORM 10-Q
--------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-83665
SAGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0389091
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2460 NORTH FIRST STREET, #100, SAN JOSE, CA 95131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(408) 383-5300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of February 7, 2000, there were 10,465,916 shares of the Registrant's
common stock, $0.01 par value per share, outstanding.
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<PAGE> 2
SAGE INC
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1999 and December 31, 1999
(unaudited)
Consolidated Statement of Operations for the nine and three months
ended December 31, 1998 and 1999 (unaudited)
Consolidated Statement of Cash Flows for the nine months ended
December 31, 1998 and 1999 (unaudited)
Consolidated Statement of Stockholders' Equity for the nine months
ended December 31, 1999 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risks
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
2
<PAGE> 3
PART 1
ITEM 1. FINANCIAL STATEMENTS
SAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
<S> <C> <C>
Current assets:
Cash and cash equivalent $ 40,484 2,473
Accounts receivable, net 2,039 804
Inventory 918 412
Prepaids & other assets 527 172
-------- --------
Total current assets 43,968 3,861
Property & equipment, net 1,144 432
-------- --------
Total assets $ 45,112 $ 4,293
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,749 $ 638
Accrued expenses and other liabilities 2,119 1,752
-------- --------
Total current liabilities 3,868 2,390
Commitments -- --
Stockholders' equity (deficit):
Convertible preferred stock, $0.01 par value; -- 26
10,000,000 shares authorized; 0 and 2,564,000
shares issued and outstanding
Common stock, $0.01 par value; 50,000,000 and 105 32
23,000,000 shares authorized; 10,454,000 and
3,176,000 shares issued and outstanding
Additional paid-in capital 54,873 11,646
Notes receivable from stockholders (113) (1,013)
Deferred compensation related to stock
options and restricted stock (499) (113)
Accumulated deficit (13,122) (8,675)
-------- --------
Total stockholders' equity 41,244 1,903
-------- --------
Total liabilities & stockholders' equity 45,112 $ 4,293
======== ========
</TABLE>
The accompanying notes are an integral part of these
condenses consolidated financial statements.
3
<PAGE> 4
SAGE, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 4,827 $ 2,283 $ 12,287 $ 3,629
Cost of revenues 2,612 1,335 7,149 2,212
-------- -------- -------- --------
Gross profit 2,215 948 5,138 1,417
Operating expenses:
Research and development 1,039 524 2,844 1,563
Charge for in-process technology -- -- 2,500 --
Selling, general and administration 1,721 868 4,076 1,962
Stock compensation 147 333 514 1,338
-------- -------- -------- --------
Total operating expenses 2,907 1,725 9,934 4,863
Loss from operations (692) (777) (4,796) (3,446)
Interest and other income (expense), net 266 30 349 83
-------- -------- -------- --------
Net loss $ (426) $ (747) $ (4,447) $ (3,363)
======== ======== ======== ========
Number of primary shares 6,642 2,637 6,547 2,502
Primary earnings per share $ (0.06) $ (0.28) $ (0.68) $ (1.34)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE> 5
SAGE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,447) $ (3,363)
Adjustments to reconcile net loss to net
cash used in operating activities:
Charge for in-process technology 2,500 --
Depreciation and amortization 319 180
Stock compensation 514 1,338
Warrant expense 4 4
Changes in assets and liabilities:
Accounts receivable (1,235) (398)
Inventories (506) (829)
Prepaid expenses and other assets (355) 21
Accounts payable 1,111 924
Accrued expenses and other liabilities 367 203
-------- --------
Net cash used in operating activities (1,728) (1,920)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (1,031) (183)
-------- --------
Cash flow from financing activities:
Repayment of Notes payable -- (190)
Proceeds from issuance of common stock upon 85 --
exercise of stock options
Net proceeds from issuance of common stock 500 133
in connection with license agreement
Net proceeds from issuance of common stock
in connection of Initial Public Offering 37,248 --
Net proceeds from issuance of preferred stock 2,937 5,458
-------- --------
Net cash provided by financing activities 40,770 5,401
-------- --------
Net increase in cash and cash equivalents 38,011 3,298
Cash and cash equivalents at beginning of period 2,473 380
-------- --------
Cash and cash equivalents at end of period $ 40,484 $ 3,678
======== ========
Non-cash investing and financing activities:
Issuance of convertible preferred stock in lieu
of debt repayments $ -- $ 318
======== ========
Issuance of common and preferred stock
for notes receivable $ -- $ 113
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE> 6
SAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1999 2,564 $ 26 3,176 $ 32 11,646
Exercise of preferred stock
warrants 6 35
Issuance cost of Series E preferred stock, net of
issuance expense of $52 493 5 2,897
Issuance expense of Series E preferred stock
warrants 4
Issuance of common stock upon exercise of
stock options 147 1 84
Issuance of common stock in connection with
license agreement 375 4 2,996
Issuance of common stock in connection with
Initial Public Offering, net of issuance
cost of $4,152 -- -- 3,450 35 37,213
Conversion of Preferred stock to common stock
in connection with Initial Public Offering (3,063) (31) 3,183 32 (1)
Conversion of warrants to common stock in
connection with Initial Public Offering -- -- 123 1 (1)
Amortization of deferred compensation related
to stock options and restricted stock -- -- -- -- --
Net loss -- -- -- -- --
-------- -------- -------- -------- --------
Balance at December 31, 1999 -- $ -- 10,454 $ 105 $ 54,873
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
NOTES DEFERRED
RECEIVABLE COMPENSATION
FROM RELATED TO ACCUMULATED
SHAREHOLDERS STOCK OPTIONS DEFICIT TOTAL
------------ ------------- ----------- --------
<S> <C> <C> <C> <C>
Balance at March 31, 1999 $ (113) $ (1,013) $ (8,675) $ 1,903
Exercise of preferred stock
warrants 35
Issuance cost of Series E preferred stock, net of
issuance expense of $52 2,902
Issuance expense of Series E preferred stock
warrants 4
Issuance of common stock upon exercise of
stock options 85
Issuance of common stock in connection with
license agreement 3,000
Issuance of common stock in connection with
Initial Public Offering, net of issuance
cost of $4,152 -- -- -- 37,248
Conversion of Preferred stock to common stock
in connection with Initial Public Offering -- -- -- --
Conversion of warrants to common stock in
connection with Initial Public Offering -- -- -- --
Amortization of deferred compensation related
to stock options and restricted stock -- 514 -- 514
Net loss -- -- (4,447) $ (4,447)
-------- -------- -------- --------
Balance at December 31, 1999 $ (113) $ (499) $(13,122) $ 41,244
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
<PAGE> 7
SAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED, IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and note disclosures normally
included in the annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted for
interim financial reporting. These condensed consolidated financial statements
should be read in conjunction with our financial statements and notes thereto
for the three years ended March 31, 1999 that are included in our S-1
Registration Statement filing with the Securities and Exchange Commission. We
believe that the accompanying financial statements reflect all adjustments,
consisting solely of normal, recurring adjustments, that are necessary for fair
presentation of the results of the interim periods presented. The results of
operations presented for the periods ended December 31, 1999 are not necessarily
indicative of the results to be expected for the full fiscal year. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
2. EARNINGS PER SHARE
Primary earnings per share are computed by dividing the net loss for the
period by the weighted average number of common shares outstanding during that
period. Diluted earnings per share has not been calculated for all periods since
the result would be anti-dilutive. All share and per share amounts have been
adjusted in all periods presented to reflect a three-for-one reverse split
effective October 1, 1999.
3. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 March 31, 1999
----------------- --------------
<S> <C> <C>
Raw materials $ 316 $ 208
Finished goods 602 204
-------- --------
$ 918 $ 412
======== ========
</TABLE>
4. SEGMENT INFORMATION
Sage operates in one reportable segment which is the development and sale of
display processor integrated circuits ("ICs") and circuit boards and
accompanying software to support the display industry.
Sage has operations in the United States and India. The India operation was
established in January 1996. The results of the India operation for the nine
months ended December 31, 1998 and 1999 and its total assets as of the
respective dates were not material to Sage's consolidated financial statements.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion in conjunction with our consolidated
financial statements and the notes thereto included the prospectus issued in
conjunction with our Initial Public Offering in November 1999. The results
described below are not necessarily indicative of the results to be expected in
any future period. Certain statements in this discussion and analysis are
forward-looking statements within the meaning of the federal securities laws.
These forward-looking statements are subject to certain risk and uncertainties
that could cause actual results to differ materially from historical results or
our predictions.
OVERVIEW
Sage was founded in 1994 and began operations in 1995. We design, develop and
market high performance digital display processors used in digital displays.
Flat panel displays and other emerging digital display devices have substantial
advantages over their traditional analog counterparts, and markets for these
products are beginning to grow rapidly. Display signals are characterized by
several important attributes: resolution, frame refresh rate, scanning format
and color depth. Combinations of these characteristics are called modes, and
there are over 100 different modes used today to display images on PCs and
televisions. These modes must be recognized and processed to produce a high
quality image on a display. Display manufacturers seek display processing
solutions that can function effectively with the large number of existing and
emerging signal modes, ensure the compatibility of new displays with the large
installed base of PCs and provide consumers with plug and play capability.
We offer state-of-the-art digital display processors that provide, highly
integrated analog-to-digital conversion, signal reformatting and color
processing capabilities. Our solutions are compatible with all commercially
available display signal modes and display types and are designed with a common
architecture, configurable software and modular components that can be easily
and rapidly incorporated into digital display devices. We sell our processing
solutions to leading display manufacturers, including Fujitsu, NEC and Sanyo.
Since our inception, we have focused primarily on the design and sale of high
performance display processor ICs. In our early operations we developed circuit
boards assembled with off-the-shelf display processors and other components. We
secured limited sales of these circuit board products through independent
distributors to manufacturers of low volume, embedded display products, such as
medical or measuring equipment, and to systems integrators developing their own
flat panel display monitors.
In November 1996, we introduced our first display processor, Cheetah, as a
prototype based on 0.6 micron technology. In November 1997, we introduced
Cheetah1, based on the prototype Cheetah architecture, but manufactured using
0.35 micron technology. During the fiscal year ended March 31, 1998, we secured
limited orders to incorporate the Cheetah1 into display processing boards
designed by us. Throughout this period, we developed and perfected our core
display processing technology, built our firmware library and identified
qualified semiconductor manufacturing vendors.
In April 1998, we introduced our Cheetah2 display processor, with an improved
scaling engine, an AutoSet feature that automatically adjusts the image position
and quality, and a modular design that allows external memory to be added as an
option to support increased functionality. Cheetah2's features led to
significant design wins with large OEM flat panel display manufacturers. In July
1998, we achieved our first significant revenues from sales of Cheetah2, and in
April 1999, we released our Cheetah3 and Cheetah4 semiconductor products. These
display processors are designed around the same core technologies as our
Cheetah2 semiconductor and provide advanced functionality for higher performance
and more specialized applications. We have achieved significant design wins for
Cheetah3 and Cheetah4. We commenced shipping Cheetah4 in commercial quantities
in the September 1999 quarter.
Since July 1998, we have derived our revenues principally through sales of
our semiconductors to large OEM display manufacturers. We recognize revenues
when our products are shipped to our customers or, in cases of sales to
distributors made under agreements permitting the return of unsold products,
when our distributors ship the products to their customers. Generally, we ship
our products within a few weeks after order and therefore we carry no
significant backlog. Because our semiconductors are purchased for installation
in our OEM customers' products, our ability to recognize revenues depends upon
our customers' product development cycles. Also, our customers may limit our
ability to announce significant design wins if they see competitive advantages
in not disclosing the technology built into their newest display devices.
8
<PAGE> 9
Currently, we produce packaged, assembled and tested semiconductor products.
However, we expect that we will assume greater responsibility over this process
for our next generations of display processors by separately subcontracting for
the production of wafers, the assembly of the completed semiconductor and their
testing. While this transition to a new manufacturing model will expose us to
greater responsibilities for semiconductor yields and the coordination of the
assembly and testing process, we believe that our gross margins will improve and
that the transition will result in our having greater control over the
manufacturing process.
Historically, sales of display processing circuit boards have represented a
substantial portion of our revenues. In the future, we expect sales of circuit
boards to decline as a percentage of total revenues and sales of semiconductors
to increase as a percentage of total revenues. From time to time, however, we
may be asked to design and supply our circuit boards to low volume manufacturers
and other OEM manufacturers who are not equipped or prefer not to design and
develop their own display processing boards. Because we generate significantly
lower operating margins on circuit boards as compared to semiconductors,
fluctuations in our product mix will impact our overall operating margins.
In July 1999, we entered into a joint development agreement with Faroudja
Labs Inc. under which we issued 375,000 shares of common stock to Faroudja in
exchange for an aggregate amount of $500,000 in cash and a limited exclusive
license to certain of Faroudja's decoding, deinterlacing and image enhancement
technologies that can only be used in products currently under development.
Under the terms of the agreement, we intend to produce a family of video display
processors incorporating Faroudja technology that are intended to expand our
semiconductor technology into emerging television and monitor markets. We intend
to incorporate Faroudja's technologies into our proprietary display processing
solutions to create a video solution for the mass television market by combining
Faroudja's decoding, deinterlacing and image algorithms with our technology. As
a result of that transaction, we recorded an expense of $2.5 million relating to
in-process research and development during the three months ended September 30,
1999 and have since completed approximately twenty percent of the overall
development work and the project is proceeding according to our expectations.
Faroudja has delivered the licensed technology, executed several design
transfers and conducted meetings with us as required by the agreement. In
addition, we have also met with Faroudja to discuss the architecture and
specifications for our video display processor, and we hope to complete the
architecture and specifications before March 31, 2000. We have not to date
encountered any deviations from our cost projections. We hope to introduce the
new semiconductor towards the end of calendar 2000. In the event we are unable
to achieve our project goal, our business prospects will be limited with respect
to the project's target market.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, certain condensed
consolidated statement of operations data reflected as a percentage of revenues.
Our results of operations are reported as a single business segment.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenues 54.1% 58.5% 58.2% 61.0%
Gross profit (loss) 45.9% 41.5% 41.8% 39.0%
===================== =====================
Operating expenses:
Research and development 21.5% 23.0% 23.1% 43.1%
Charge for in-process technology 0.0% 0.0% 20.3% 0.0%
Selling, general and administration 35.7% 38.0% 33.2% 54.0%
Stock compensation 3.0% 14.5% 4.2% 36.9%
Total operating expenses 60.2% 75.5% 80.8% 134.0%
===================== =====================
Loss from operations -14.3% -34.0% -39.0% -95.0%
Interest income (expense), net 5.5% 1.3% 2.8% 2.3%
===================== =====================
Net loss -8.8% -32.7% -36.2% -92.7%
===================== =====================
</TABLE>
9
<PAGE> 10
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
Revenues. Our revenues were $4.8 million and $2.3 million in the three months
ended December 31, 1999 and 1998, respectively, representing an increase of
111.4%. Revenues from our digital display processor IC product line increased by
109.1% between the December 1998 and 1999 quarters as a result of additional
customer design wins and the addition of the Cheetah 4 to our IC product range.
In both periods digital display processing ICs represented approximately 65% of
total revenues. Revenues from sales of our circuit board and other products
increased by 115.8% to $1.7 million in the three months ended December 31, 1999,
compared to $0.8 million in the three months ended December 31, 1998 principally
due to shipments to new circuit board customers. Our circuit board products
represented approximately 35% of total revenues in both periods. We expect sales
of digital display processor IC products to grow faster than circuit board and
other products in future periods. Revenues from two customers, NEC and Fujitsu
accounted for 40.1% and 10.3%, respectively, of total revenues for the three
months ended December 31, 1999.
Gross margin. Our gross margin was 45.9% and 41.5% for the three months ended
December 31, 1999 and 1998, respectively. The increase in gross margin for the
three months ended December 31, 1999 compared to the three months ended December
31, 1998 was due to an increasing proportion of circuit board products being
sold to direct OEM accounts rather than through lower margin distribution
channels and the benefit of fixed period costs being spread over a larger sales
volume.
Research and development. Our research and development expenses were
$1,039,000 and $524,000 for the three months ended December 31, 1999 and 1998,
respectively. Research and development expenses represented 21.5% and 23.0% of
revenues for the three months ended December 31, 1999 and 1998, respectively.
Our research and development expenses consist primarily of compensation and
personnel related expenses and costs for purchased materials, designs and
tooling which can fluctuate significantly from period to period as a result of
our product development cycles. The compensation and personnel related expenses
increased $197,000 from $158,000 for the three months ended December 31, 1998 to
$355,000 for the three months ended December 31, 19999. During the three months
ended December 31, 1999, we were developing our next generation of
semiconductors, and we increased our spending on purchased materials, designs
and tooling. We expect similar increases in future quarterly research and
development expenses as we increase product development efforts in connection
with our next generation of semiconductors.
Selling, general and administration. Selling, general and administration
expenses were $1.7 million and $868,000 for the three months ended December 31,
1999 and 1998, respectively. Our selling, general and administration expenses
consist primarily of compensation and personnel related expenses and commissions
paid to independent sales representatives. The compensation and personnel
related expenses increased $361,000 from $330,000 for the three months ended
December 31, 1998 to $691,000 for the three months ended December 31, 1999.
Commissions paid to independent sales representatives were 8.3% and 6.4% of
selling, general and administration expenses for the three months ended December
31, 1999 and December 31, 1998, respectively. As a percentage of revenues, our
selling, general and administration expenses decreased to 34.7% of revenues for
the three months ended December 31, 1999 as compared to 38.0% of revenues for
the three months ended December 31, 1998. This decrease in selling, general and
administration expenses in proportion to revenues was largely the result of a
significant increase in sales volume partially offset by increased payroll.
Stock compensation. Stock compensation expenses amounted to $147,000 and
$333,000 for the three months ended December 31, 1999 and 1998, respectively.
Deferred compensation, representing the difference between the deemed fair
market value of our common stock on the date of grant and the exercise price of
stock options on the date of grant, is amortized on an accelerated basis as the
options vest. We expect deferred compensation expenses of $499,000 as of
December 31, 1999 to be amortized on an accelerated basis as the options vest
over the next four years.
Interest and other income and (expense), net Net interest and other income
increased from $30,000 in the three months ended December 31, 1998 to $266,000
in the three months ended December 31, 1999. This increase results from the
deposit of the IPO proceeds in November and December 1999 into interest bearing
accounts.
Provision for income taxes. We incurred operating losses for the three months
ended December 31, 1999 and 1998 and therefore had no provision for income tax
in either period. As of March 31, 1999, we had $5.1 million in net operating
losses which are available to offset future taxable income. If not used, the net
operating losses expire between 2010 and 2019.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998
10
<PAGE> 11
Revenues. Total revenues for the nine months ended December 31, 1999 and 1998
were $12.3 million and $3.6 million, respectively. Revenues from sale of digital
display processor ICs increased by 235.8% to $6.6 million in the nine months
ended December 31, 1999 as a result of the introduction of the new Cheetah4 IC
and start of commercial shipments to new customers in 1999. Revenues from the
sale of circuit board and other products increased by 241.8% to $5.7 million in
the nine months ended December 31, 1999 as a result of increased shipments to
large new OEM customers in the nine months ended December 31, 1999.
Revenues from sales of our digital display processor ICs represented
approximately 53.5% and 53.9% of total revenues for the nine months ended
December 31, 1999 and 1998, respectively while circuit board and other sales
were 46.5% and 46.1%, respectively. Although we have shifted the focus of our
business from circuit boards to semiconductors, resulting in a greater emphasis
on semiconductor product development as opposed to sales of circuit board
products, we have seen continued growth in sales of circuit board and other
products from major OEM customers..
Gross margin. Gross margin for the nine months ended December 31, 1999 and
1998 was 41.8%, and 39.0%, respectively. During fiscal year 1999, the increase
in our gross margin was the result of increased revenues from higher margin
semiconductor products.
Research and development. Research and development expenses increased to $2.8
million, for the nine months ended December 31, 1999, from $1.6 million for the
nine months ended December 31, 1998. As a percentage of revenues, research and
development expenses represented 23.1% and 43.1% of revenues during the nine
months ended December 31, 1999 and 1998, respectively. Our research and
development expenses for the nine months ended December 31, 1999 increased
compared to the corresponding prior period primarily because of the engineering
research and prototype development of Cheetah4, and subsequent new products
being developed within the Jaguar family. As a result of an increase in the
number of engineers employed in our research and development efforts, the
compensation and personnel related expenses increased $321,000 from $626,000 for
the nine months ended December 31, 1998 to $947,000 for the nine months ended
December 31, 1998. The costs for purchased materials, designs and tooling
increased from $146,000 for the nine months ended December 31, 1998 to $626,000
in the nine months ended December 31, 1999. However, as revenues increased from
1998 to 1999, research and development expenses, as a percentage of revenues,
declined. Although we expect absolute expenses to increase, we expect research
and development expenses as a percentage of revenues to decrease.
Selling, general and administration. For the nine months ended December 31,
1999 and 1998, selling, general and administration expenses were $4.0 million,
and $2.0 million, respectively. Selling, general and administration expenses
represented 33.2% and 54.1% of revenues in the nine months ended December 31,
1999 and 1998, respectively. The overall increase in our selling, general and
administration expenses was principally related to the introduction of the
Cheetah3 and Cheetah 4 display processor ICs in 1999 and the related increase in
salaries, commissions to independent sales representatives, travel and
promotional expenses. In the future, we anticipate that our expenditures will
decline as a percentage of revenues increase from our semiconductor products.
Stock compensation. We incurred stock compensation expenses of $0.5 million
and $1.3 million respectively for nine months ended December 31 1999 and 1998.
Stock compensation expenses relates to options granted below the perceived fair
market value prior the Initial Public Offering.
Interest income (expense), net. For the nine months ended December 31, 1999
and 1998, net interest and other income were $349,000 and $83,000, respectively.
The increase in interest income in the nine months ended December 31, 1999
included the investment of the IPO proceeds for approximately seven weeks.
Provision for income taxes. We incurred operating losses for the nine months
ended December 31, 1999 and 1998, and therefore made no provision for income tax
in these fiscal years. As of March 31, 1999, we had $5.1 million in net
operating losses which are available to offset future taxable income earned
until between 2010 and 2019.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have satisfied our liquidity requirements principally
through the issuance and sale of private equity securities, totaling
approximately $17.7 million, and an initial public offering in November 1999,
which raised approximately $37.3 million, net of fees and expenses.
During the nine months ended December 31, 1999, we used $1.7 million, for
operating activities, primarily due to operating losses and increased working
capital requirements as sales increased. Net cash used in investing activities
was $1.0 million for the nine months ended December 31, 1999. . Net cash
provided from financing activities was $37.3 million from the issuance and sale
of
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common stock in the Initial Public Offering in November 1999.
As of December 31, 1999, we had $40.5 million in cash and cash equivalents.
In addition, we had a $2.0 million credit facility under which no borrowings had
been made. As of December 31, 1999, we did not have any significant capital
expenditure commitments We believe that our existing cash resources and credit
facility will be sufficient to meet our capital requirements through the next
twelve months. However, we could be required or could choose to raise additional
capital during the next twelve months. Our future capital requirements will
depend on many factors, including the rate of revenue growth, profitability,
timing and extent of spending to support research and development programs,
expansion of selling and marketing and administrative activities, timing or
introductions of new products and product enhancements and market acceptance of
our products. We expect that we may need to raise additional equity or debt
financing in the future, although we are not currently negotiating for
additional financing nor do we have any plans to obtain additional financing
following our initial public offering. We cannot assure you that additional
equity or debt financing, if required, will be available on acceptable terms, or
at all. If we are unable to obtain additional capital, we may be required to
reduce the scope of our planned product development, selling and marketing
activities, which could harm our business, financial condition and results of
operations. In the event that we do raise additional equity financing, investors
in this offering will be further diluted.
From time to time, we may evaluate acquisitions of businesses, products or
technologies that complement our business. Although we have no current plans in
this regard, any transactions, if consummated, may consume a portion of our
working capital or require the issuance of equity securities that may result in
further dilution to existing stockholders.
QUANTITATIVE AND QUALITATIVE DISCUSSION OF MARKET RISKS
INVESTMENT RISK
Our cash equivalents and short-term investments are exposed to financial
market risk due to fluctuation in interest rates, which may affect our interest
income and, in the future, the fair market value of our investments. We manage
the exposure to financial market risk by performing ongoing evaluations of our
investment portfolio and presently invest entirely in certificates of deposit
issued by banks, the value of which does not change based on changes in interest
rates. As our cash balances increase, we anticipate investing in short-term
investment-grade government and corporate securities. These securities will be
highly liquid and generally mature within 12 months from our purchase date. Due
to the short maturities of our investments, the carrying value should
approximate the fair value. In addition, we do not use our investments for
trading or other speculative purposes. We have performed an analysis to assess
the potential effect of reasonably possible near-term changes in interest and
foreign currency exchange rates. The effect of any change in foreign currency
exchange rates is not expected to be material to our results of operations, cash
flows or financial condition. Due to the short duration of our investment
portfolio, an immediate 10% change in interest rates would not have a material
effect on the fair market value of our portfolio. Therefore, we would not expect
our operating results or cash flows to be affected to any significant degree by
the effect of a sudden change in market interest rates on our securities
portfolio.
FOREIGN CURRENCY EXCHANGE RISK
We are an international company, selling our products globally and, in
particular, in Japan, Taiwan and Korea. Although we transact our business in
U.S. dollars, we cannot assure you that future fluctuations in the value of the
U.S. dollar would not affect the competitiveness of our products, gross profits
realized, and results of operations. Further, we incur expenses in India, Japan,
Taiwan and other countries that are denominated in currencies other than U.S.
dollars. We cannot estimate the effect that an immediate 10% change in foreign
currency exchange rates would have on our future operating results or cash flows
as a direct result of changes in exchange rates. However, we do not believe that
we currently have any significant direct foreign currency exchange rate risk and
have not hedged exposures denominated in foreign currencies or any other
derivative financial instruments.
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BUSINESS RISKS
This Quarterly Report on Form 10-Q contains numerous statements of a
forward-looking nature relating to potential future events or to our future
financial performance. Our actual results may differ significantly from those
forward-looking statements.
You should carefully consider the risk factors described below, and all other
information contained in this report, before making an investment decision
regarding our common stock. The risks and uncertainties described below are not
the only ones we face. If any of the events or circumstances described below
arise, our business, financial condition or results of operations could be
seriously harmed, the value of our common stock could decline and you could lose
all or part of your investment. Additional risks and uncertainties not presently
known to us, or that may be currently considered by us to be immaterial, may
also impair our business operations.
RISKS RELATED TO OUR OPERATIONS
A SIGNIFICANT AMOUNT OF OUR REVENUES COMES FROM A FEW CUSTOMERS AND ANY DECREASE
IN REVENUES FROM THESE FEW CUSTOMERS COULD SIGNIFICANTLY IMPACT OUR TOTAL
REVENUES.
We are and will continue for the foreseeable future to be dependent on a
limited number of large customers for a substantial portion of our revenues. For
the three months ended December 31, 1999, sales of semiconductor products to NEC
and Fujitsu accounted for 40.1% and 10.3%, respectively, of our total revenues.
As a result of customer concentration any one of the following factors could
significantly impact our total revenues:
- a significant reduction, delay or cancellation of orders from one or
more of our key customers; or
- a decision by one or more significant customers to select products
manufactured by a competitor, or its own internally developed solution,
for inclusion in future product generations.
The digital display manufacturing market is highly concentrated among
relatively few large manufacturers. We expect our operating results to continue
to depend on revenues from a relatively small number of display manufacturers
and their suppliers.
OUR RELIANCE ON A LIMITED NUMBER OF LARGE CUSTOMERS REDUCES OUR ABILITY TO
NEGOTIATE FAVORABLE PRICING TERMS WITH OUR CUSTOMERS.
The digital display manufacturing market is highly concentrated among
relatively few large manufacturers. These manufacturers have significantly
greater financial and other resources than we do, therefore we may be unable to
negotiate favorable pricing terms with them. Any inability to negotiate
favorable pricing terms with our customers could impact our ability to generate
positive earnings.
WE HAVE INCURRED NET LOSSES SINCE OUR INCEPTION, AND WE MAY NOT ACHIEVE OR
SUSTAIN ANNUAL PROFITABILITY.
We incurred net losses of $427,000 and $4.4 million, respectively for the
three months and nine months ended December 31, 1999, and had an accumulated
deficit of $13.1 million as of December 31, 1999. In the future we expect our
research and development and our selling, general and administration expenses to
increase. Accordingly, we expect to continue to incur additional operating
losses for at least the next 6 months. Although we have experienced revenue
growth in recent periods, this growth is not necessarily indicative of future
operating results, and we cannot assure you that we will be able to sustain the
growth in our revenues. If we do achieve profitability, we cannot be certain
that we can sustain or increase profitability on a quarterly or annual basis in
the future or at all. This may in turn cause our stock price to decline. In
addition, if we do not achieve or sustain profitability in the future, we may be
unable to continue our operations.
WE HAVE A LIMITED OPERATING HISTORY, MAKING IT DIFFICULT FOR YOU TO EVALUATE OUR
BUSINESS AND YOUR INVESTMENT.
We commenced operations in January 1995, but we did not generate material
revenues from the sale of our semiconductor products until July 1998. Thus, we
have a limited operating history upon which to evaluate our current business and
prospects. Due to our limited history, it is difficult or impossible for us to
predict our future results of operations with any degree of accuracy. For
example, we cannot accurately forecast expenses based on our projections of
future revenues. Most of our expenses are relatively fixed in the short term,
and we may not be able to quickly reduce spending if our revenues are lower than
our projections. In addition, because substantially all of our present customers
order on a purchase order basis rather than long-term purchase commitments, we
have only a limited ability to project future revenues. Therefore, net losses in
a given quarter may be greater than expected. Moreover,
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due to our limited operating history, any evaluation of our business and
prospects must be made in light of the risks and uncertainties often encountered
by early stage companies in technology markets.
FLUCTUATIONS IN OUR OPERATING RESULTS MAKE IT DIFFICULT TO PREDICT OUR FUTURE
PERFORMANCE AND MAY RESULT IN VOLATILITY IN THE MARKET PRICE OF OUR COMMON
STOCK.
Our quarterly operating results have fluctuated significantly in the past and
we expect our results to fluctuate significantly in the future based on a number
of factors. Some of these factors arise from decisions we have made with respect
to the timing and magnitude of expenditures and our ability to control our
revenues. Our operating expenses, which include research and development
expenses and selling, general and administration expenses, are relatively fixed
over the short-term. If our revenues are lower than we expect because we sell
fewer display processors, because we delay the release or the announcement of
new products or for other reasons, we may not be able to quickly reduce our
spending in response. In addition, our revenues could fall short of our
expectations if we experience delays or cancellations of even a small number of
orders.
Certain other factors have, in the past, caused fluctuations in our quarterly
operating. These factors are industry risks over which we have no control,
including:
- changes in the available supply of flat panel displays at reasonable
prices;
- changes in our customers' demand for our products;
- the deferral of customer orders in anticipation of new products or
enhancements by us or our competitors; and
- changes in the available production capacity at the semiconductor
fabrication foundries that manufacture our products and changes in the
costs of manufacturing.
- our ability to develop, introduce and market new products in time to
meet the product design cycles of our customers;
There are additional factors that could, but which have not, affected our
operating results including:
- the growth rate of the overall digital display market;
- incorrect forecasting of future revenues;
- changes in product mix, product costs or pricing; and
- general economic conditions and economic conditions specific to the
personal computer, display and semiconductor markets.
Any one or more of these factors are difficult to forecast and could result
in fluctuations in our future operating results. Any shortfall in our revenues
would have a direct impact on our business. In addition, fluctuations in our
quarterly results could adversely affect the market price of our common stock in
a manner unrelated to our long-term operating performance. Because our operating
results are volatile and difficult to predict, you should not rely on the
results of one quarter as an indication of our future performance. It is likely
that in some future quarter our operating results will fall below the
expectations of securities analysts and investors. In this event, the trading
price of our common stock may decline significantly.
ANY DELAY IN INTRODUCING NEW PRODUCTS OR ENHANCEMENTS TO EXISTING PRODUCTS COULD
REDUCE CUSTOMER ACCEPTANCE OF OUR PRODUCTS AND COULD DECREASE OUR MARKET SHARE
OR REVENUES.
Our display manufacturing customers have regular design cycles for their next
display models. Our future success will depend to a substantial degree upon our
ability to develop and introduce new products and enhancements to our existing
products, and to do so on a schedule that makes our products and enhancements
available at the time our customers are making purchasing decisions. Our
products and product enhancements must incorporate technological changes and
innovations to meet evolving customer and industry standards. Although we expect
to continue to make significant investments in research and development to
enhance our current products and to develop products incorporating new and
existing technologies, we cannot assure you that new products or product
enhancements will be successfully developed. If developed, we cannot assure you
that any new products or product enhancements will be developed in time to
capture market opportunities or achieve a significant or sustainable level of
acceptance in new and existing markets.
FAILURE TO MANAGE OUR EXPANSION EFFECTIVELY COULD ADVERSELY AFFECT OUR ABILITY
TO INCREASE OUR REVENUES AND IMPROVE OUR EARNINGS.
Our ability to successfully offer our products in a rapidly evolving market
requires effective planning and management processes. We continue to increase
the scope of our operations domestically and internationally and have increased
our headcount substantially. Between December 31, 1998 and December 31, 1999, we
expanded our headcount by over 35%. In addition, we plan to continue to
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hire a significant number of employees this year. Our past growth, and our
expected future growth, places a significant strain on our management systems
and resources including our financial and managerial controls, reporting systems
and procedures. In addition, we will need to continue to expand, train and
manage our workforce worldwide.
WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY, AND IF WE ARE
UNABLE TO RETAIN OR HIRE ADDITIONAL PERSONNEL, OUR REVENUES AND PRODUCT
DEVELOPMENT EFFORTS COULD BE HARMED.
Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing and support personnel, many
of whom would be difficult to replace. We do not have key person life insurance
policies covering any of our employees other than Arun Johary, our Vice
President of Engineering. We intend to hire a significant number of engineering,
sales, marketing and support personnel in the future, and we believe our success
depends, in large part, upon our ability to attract and retain our key
employees. Competition for these persons is intense, especially in the San
Francisco Bay Area, and we may not be able to retain our key personnel or
identify, attract or retain other highly qualified personnel in the future. 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, our revenues
and product development efforts could be harmed.
OUR FOREIGN CUSTOMERS ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES, AND IF
WE DO NOT SUCCESSFULLY ADDRESS THE RISKS ASSOCIATED WITH THESE INTERNATIONAL
OPERATIONS, OUR REVENUES COULD DECLINE.
Sales outside of the U.S. accounted for 64.6% of our revenues in the three
months ended December 31, 1999. A substantial portion of our OEM customers are
located in Japan, Taiwan and Korea. We anticipate that sales outside of the U.S.
could increase in future periods and may account for an increasing portion of
our revenue. In addition, manufacturers who incorporate our processors into
their displays sell them outside of the U.S., thereby exposing us indirectly to
foreign risks. We are, therefore, subject to many international risks,
including:
- the increased complexity and costs of conducting international
operations;
- difficulties in managing sales representatives located outside the U.S.;
- difficulties in staffing and managing foreign operations;
- economic and political instability;
- changes in regulatory requirements, tariffs, current and future import
and export restrictions and other barriers;
- timing and availability of export licenses;
- potentially adverse tax consequences;
- the burden of complying with complex foreign laws and treaties;
- difficulties in collecting accounts receivable;
- difficulties in protecting intellectual property rights in foreign
countries; and
- foreign currency exchange fluctuations.
To date, sales of our products have been denominated exclusively in U.S.
dollars. An increase in the value of the U.S. dollar will increase the price of
our products so that they become relatively more expensive to customers in the
local currency of a particular country, potentially leading to a reduction in
our revenues and profitability.
WE CURRENTLY DEPEND ON A LIMITED NUMBER OF CONTRACT MANUFACTURERS FOR OUR
SEMICONDUCTOR AND CIRCUIT BOARD PRODUCTS, AND WE MUST ORDER PRODUCTS FROM THEM
BASED ON FORECASTS FROM OUR CUSTOMERS FROM WHICH WE DO NOT HAVE FIRM PURCHASE
ORDERS.
We do not own or operate a semiconductor fabrication facility and we do not
have the resources to manufacture our products internally. Currently, our
Cheetah2 and Cheetah4 chips are being manufactured, assembled and tested by
Kawasaki LSI U.S.A., Inc., and our Cheetah3 chips are being manufactured,
assembled and tested by Fujitsu Microelectronics Inc. Our circuit board products
are manufactured and tested by Topline Electronics, Inc. We do not have a
long-term supply contract with any of our contract manufacturers, and they are
not obligated to supply us with products for any specific period, in any
specific quantity or at any specific price, except as may be provided in a
particular purchase order. We try not to maintain substantial inventories of
products, but we must often place orders for products two to three months before
they are needed and before we have firm purchase orders for those products. None
of our products is currently manufactured by more than one supplier, and all of
our products are expected to be single-source manufactured for the foreseeable
future. There are many risks associated with our dependence on third-party
manufacturing, assembling and product testing relationships, including:
- delays in delivering products in response to purchase orders due to
increased demand, disruptions in operations or other factors;
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- lack of control over pricing;
- reduced quality assurance;
- reduced manufacturing yields and costs;
- unavailability or interruption of access to process technologies
necessary to manufacture our products; and
- potential misappropriation of our intellectual property.
If we are unable to obtain our products from manufacturers on schedule,
revenues from the sale of those products may be delayed. If orders for our
products are cancelled, revenues will be lost.
IF WE HAVE TO QUALIFY A NEW CONTRACT MANUFACTURER FOR ANY OF OUR PRODUCTS, WE
MAY LOSE REVENUES AND DAMAGE OUR CUSTOMER RELATIONSHIPS.
Our display processors require manufacturing with state-of-the-art
fabrication equipment and techniques. Because the lead time needed to establish
a strategic relationship with a new contract manufacturer is at least three
months, and the estimated time for us to adapt a product's design to a
particular contract manufacturer's processes is an additional three to four
months, there is no readily available alternative source of supply for any
specific product. A manufacturing disruption at any of our contract
manufacturers would impact the production of our display processors for a
substantial period of time, thereby reducing our revenues, and would harm our
customer relationships.
SHORTAGES OF MATERIALS INCLUDED IN OUR SEMICONDUCTOR AND CIRCUIT BOARD PRODUCTS
MAY INCREASE OUR COSTS OR LIMIT OUR REVENUES AND DELAY OUR ABILITY TO SHIP OUR
PRODUCTS ON TIME.
From time to time, shortages of certain materials that are used in our
semiconductor and circuit board products may occur. In particular, we may
experience shortages of semiconductor wafers, video random access memory and
analog-to-digital converters. If materials shortages occur, we may incur
additional costs to procure the scarce components or be unable to ship our
products to our customers in a timely fashion, all of which could negatively
impact our earnings.
BY SUBCONTRACTING SEPARATELY FOR THE PRODUCTION OF WAFERS FOR OUR NEXT
GENERATION PROCESSORS, WE ARE ASSUMING RISKS THAT WE DO NOT CURRENTLY FACE.
Currently, we purchase packaged, assembled and tested semiconductor products
from contract manufacturers. We expect that we will assume greater
responsibility for this process for our next generation of products by
subcontracting separately for the production of wafers and for their assembly
and testing. If we do so, we will become more responsible for losses arising
from wafer manufacturing yields and for coordination of the manufacturing,
assembly and testing process. Poor yields, or our failure to implement this
approach to manufacturing properly, would reduce our revenues and harm our gross
margin and results of operations.
FAILURE TO MAINTAIN OUR LICENSE WITH FAROUDJA COULD MATERIALLY HARM OUR BUSINESS
BY DELAYING OR PREVENTING NEW PRODUCT INTRODUCTIONS.
We hold a license to develop semiconductors based on technology owned by
Faroudja under a joint license and development agreement with Faroudja. Under
the terms of the agreement, we may produce a family of video display processors
incorporating Faroudja technologies that are intended to expand our
semiconductor technology into emerging television and monitor markets. Under the
terms of license agreement, we are required to provide Faroudja with certain
favorable pricing terms in connection with Faroudja's purchase of products
developed by us incorporating their technology. Faroudja is restricted for a
limited time to license to others the technology it has licensed to us. During
the term of the agreement, we are prohibited from developing, for use in
products licensed, sold or distributed by us to third parties or for use in
products licensed, sold or distributed through a private label, any circuit
board video display processor that incorporates a licensed chip and is intended
to be used as a standalone video display processor similar to certain Faroudja
products. We are also required to pay royalties to Faroudja on sales of our
semiconductors incorporating their technology. Faroudja may terminate the
agreement if we fail to perform or violate the terms of the agreement and fail
to cure such violation within 30 days of Faroudja's written notice thereof.
Failure to maintain our license with Faroudja could delay or prevent the
introduction of new products which could limit our ability to compete for new
business and negatively impact our revenues. Even if we could identify and
license or develop non-infringing equivalent technology, which is far from
certain, the cost and delays from such a changeover in our base technology would
likely cause material harm to our business.
PORTIONS OF OUR RESEARCH AND DEVELOPMENT EFFORTS ARE PERFORMED IN INDIA, AND
RISKS RELATED TO THOSE OPERATIONS COULD HARM OUR RESEARCH AND DEVELOPMENT
CAPABILITIES AND NEGATIVELY IMPACT OUR PRODUCT SALES.
Any risks related to the political or economic conditions in India and the
surrounding region, including risks relating to India's national security
situation or labor market conditions, may adversely impact our ability to take
advantage of our operations in India. In
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addition, circumstances beyond our control at our facilities, related to
operating in a developing country, such as unreliable power supplies, may have a
material adverse effect on our research and development capabilities. We cannot
assure you that restrictive laws or policies on either the part of India or the
United States will not constrain our ability to effectively operate in both
countries. If we are required to relocate our India facilities, we cannot assure
you that a relocation will not disrupt our business.
BECAUSE OUR DISPLAY PROCESSORS ARE COMPLEX, THEY MAY HAVE ERRORS OR DEFECTS THAT
ARE FOUND ONLY AFTER THE PROCESSORS HAVE BEEN INCORPORATED INTO OUR CUSTOMERS'
PRODUCTS, WHICH COULD RESULT IN WARRANTY CLAIMS AND A REDUCTION IN REVENUES.
Our display processors are complex products and are designed to be
incorporated into digital display devices, which are themselves complex.
Although we thoroughly test our products, design and manufacturing defects may
not be discovered during the manufacturing and testing process and only be
discovered when the finished display products are connected to a signal source.
Consequently, our customers may discover errors or defects in our hardware or
software after large quantities of our products have been fully incorporated
into their digital display devices. To date, however, our customers have not, to
our knowledge, discovered errors or defects in our products, although a small
number of customers have returned products because the product design did not
meet those customers' needs. If our customers were to discover errors or defects
that may be identified after a display device is connected to a signal source,
we could experience:
- loss of or delay in revenues and loss of market share;
- loss of customers;
- failure to achieve market acceptance;
- diversion of development resources;
- increased warranty costs;
- legal actions by our customers; and
- increased insurance costs.
In addition, in the event of a significant number of product returns due to a
defect or recall of our products, our revenues, gross margin and name brand
could be significantly harmed.
IF MONITORS INCORPORATING OUR SOLUTIONS ARE NOT COMPATIBLE WITH PCS AND OTHER
DEVICES FOR WHICH THEY ARE MARKETED, THE MARKET FOR OUR PRODUCTS WILL BE REDUCED
AND OUR BUSINESS PROSPECTS COULD BE SIGNIFICANTLY LIMITED.
Our products are incorporated into our customers' display monitors which have
different parts and specifications and utilize multiple protocols that allow
them to be compatible with specific PCs and other devices. If our customers'
products are not compatible with the PCs and other devices for which they have
been marketed and sold, consumers will return those monitors, or consumers will
not purchase those monitors, and the market for our customers' products could be
significantly reduced. As a result, a portion of our market would be eliminated,
and our business would be harmed.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
COULD HARM OUR COMPETITIVE POSITION.
Our ability to compete effectively with other companies will depend, in part,
on our ability to maintain the proprietary nature of our technology. We have
four pending patent applications filed with the U.S. Patent and Trademark Office
for protection of certain of our significant technologies, but we cannot assure
you that the degree of protection offered by these patents will be sufficient or
that any of our pending patents will be issued. In addition, competitors in both
the U.S. and foreign countries, many of which have substantially greater
resources, may apply for and obtain patents that will prevent, limit or
interfere with our ability to make and sell our products.
We may from time to time receive notifications of claims that we may be
infringing patents or intellectual property rights owned by third parties. While
there is currently no intellectual property rights litigation pending against
us, litigation could result in significant expenses to us and could reduce sales
of our products. Any litigation could also divert the efforts of our technical
and management personnel, whether or not the litigation is determined in our
favor. In addition, we may not be able to develop, license or acquire
non-infringing technology under reasonable terms. These developments could
result in an inability to compete for customers or could adversely affect our
ability to increase our earnings.
RISKS RELATED TO THE DISPLAY PROCESSING INDUSTRY
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FAILURE OF CONSUMER DEMAND FOR FLAT PANEL DISPLAYS AND OTHER DISPLAY
TECHNOLOGIES TO INCREASE AS WE EXPECT COULD IMPEDE OUR GROWTH PROSPECTS.
Our product development strategies anticipate that consumer demand for flat
panel displays and other emerging display products will increase in the future.
The success of our products is dependent on increased demand for these products,
which are at early stages of development. The potential size of the flat panel
display market and the timing of its development are uncertain and will depend
upon a number of factors, all of which are beyond our control.
THERE IS CURRENTLY AN UNDER-SUPPLY OF FLAT PANELS, AND IF THE MANUFACTURING
CAPACITY OF FLAT PANELS DOES NOT INCREASE, OUR MARKET GROWTH WILL BE LIMITED.
Currently, there is a limited supply of flat panels, and increasing the
supply of flat panels is a costly and lengthy process requiring significant
capital investment. Accordingly, we do not expect the current shortage of flat
panels or their high prices to change in the near term. In the past, the supply
of flat panels has been cyclical. We expect this pattern to continue.
Undercapacity in the flat panel market may limit our ability to increase our
revenues because our customers may limit their purchases of our products if they
cannot obtain sufficient supplies of flat panels. In addition, flat panel
monitor prices may remain high because of limited supply, and consumer demand
may not grow if the supply of flat panels does not increase.
INTENSE COMPETITION MAY REDUCE THE DEMAND OR PRICES FOR OUR PRODUCTS, DECREASING
OUR GROSS MARGIN.
The display signal processing industry is intensely competitive. Rapid
technological change, evolving industry standards and declining average selling
prices in these markets could have a material adverse effect on our business,
financial condition and results of operations. As the overall price of flat
panel display screens continues to fall, we may be required to offer solutions
to manufacturers at discounted prices due to increased price competition. At the
same time, new, alternative display processing technologies and industry
standards may emerge that directly compete with technologies that we offer. We
may be required to increase our investment in research and development at the
same time that product prices are falling. In addition, even after making this
investment, we cannot assure you that our technologies will be superior to those
of our competitors or that our products will achieve market acceptance, whether
for performance or price reasons. Failure to effectively respond to these trends
could reduce the demand for our products.
We compete with a range of diversified electronic and semiconductor companies
that offer display processors, some of which have substantially greater
resources than we do. In particular, we compete against Arithmos, Inc., Genesis
Microchip, Inc., Pixelworks, Inc. and Silicon Image, Inc. We also compete in
some instances against in-house processing solutions designed by large original
equipment manufacturers, or OEMs. In the future, our current or potential
customers may also develop their own proprietary display processors and become
our competitors. In addition, start-up companies that are seeking to capitalize
on business opportunities as a result of the shift from analog to digital
technology may seek to compete in our markets. Our competitors may develop
advanced technologies enabling them to offer more cost-effective and higher
quality solutions to our OEM customers than those offered by us. Increased
competition could harm our business, financial condition and results of
operations by, for example, increasing pressure on our profit margin or causing
us to lose sales opportunities.
BECAUSE OF OUR LONG PRODUCT DEVELOPMENT PROCESS AND SALES CYCLE, WE MAY INCUR
SUBSTANTIAL EXPENSES BEFORE WE EARN ASSOCIATED REVENUES AND MAY NOT ULTIMATELY
SELL AS MANY UNITS OF OUR PRODUCTS AS WE FORECASTED.
We develop products based on forecasts of demand and incur substantial
product development expenditures prior to generating associated revenues. Our
customers typically perform numerous tests and extensively evaluate our products
before incorporating them into their systems. The time required for testing,
evaluation and design of our products into a customer's equipment can take up to
six months or more. Because of our relatively limited history in selling our
products, we cannot assure you that the time required for the testing,
evaluation and design of our products by our customers will not exceed six
months. Because of this lengthy development cycle, we may experience a delay
between the time we accrue expenses for research and development and sales and
marketing efforts and the time when we generate revenues, if any, from such
expenditures.
Furthermore, achieving a design win with a customer does not necessarily mean
that this customer will order large volumes of our products. A design win is not
a binding commitment by a customer to purchase our products. Rather, it is a
decision by a customer to use our products in the design process of that
customer's products. In addition, our customers can choose at any time to
discontinue using our products in that customer's designs or product development
efforts. If our products are chosen to be incorporated into a customer's
products, we may still not realize significant revenues from that customer if
that customer's products are not commercially successful.
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WE MAY NOT BE ABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE IN THE MARKETS
IN WHICH WE COMPETE OR TO COMPLY WITH INDUSTRY STANDARDS IN THE FUTURE.
The markets in which we compete or seek to compete are subject to rapid
technological change, frequent new product introductions, changing customer
requirements for new products and features, and evolving industry standards. The
introduction of new technologies and the emergence of new industry standards
could render our display processors less desirable or obsolete. If we fail to
produce technologically competitive products in a cost-effective manner and on a
timely basis, and if we are unable to comply with industry standards in the
future, our business and results of operations could be harmed.
IF WE DO NOT ACHIEVE DESIGN WINS WITH LEADING DISPLAY MANUFACTURERS, WE MAY BE
UNABLE TO SECURE ADDITIONAL DESIGN WINS IN THE FUTURE AND OUR ABILITY TO GROW
WOULD BE SERIOUSLY LIMITED.
The development of new, technologically advanced products and product
enhancements is a complex and uncertain process requiring accurate anticipation
of technological and market trends, as well as skill in obtaining design wins.
Any failure on our part to obtain additional design wins with leading OEMs and
to successfully design, develop and introduce new products and product
enhancements could harm our business, financial condition and results of
operations. In addition, development and manufacturing schedules for our
products are difficult to predict, and we cannot assure you that we will achieve
timely customer shipments of new products. The timely introduction of these
products and their acceptance by customers are important to our future success.
Any delays in product development, whether due to manufacturing, product design
and development, lack of market acceptance or otherwise, could reduce future
customer acceptance of our products and harm our business, financial condition
and results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards, or SFAS, No. 133, Accounting For Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS No. 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the statement
of operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. We do not
expect the adoption of SFAS No. 133 to have a material impact on our financial
position or results of operations.
19
<PAGE> 20
PART II
ITEM 1. LEGAL PROCEEDINGS
As of December 31, 1999, there were no pending legal proceedings to which we
are a party.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 11, 1999 we sold three million shares of Common Stock at $12.00 per
share in an Initial Public Offering. In December, 1999, we sold a further
450,000 shares of Common Stock under the terms of the over allotment agreement
relating to that Initial Public Offering. The net proceeds, amounting to
approximately $37.3 million are currently invested in various short term
accounts and will be used for expansion of working capital, acquisition of
complementary technology, and other general corporate purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In November 1999, stockholders approved the following:
1. A resolution regarding the public offering of shares of Common
Stock.
2. A resolution giving the Company's board of directors and officers
authority take all actions necessary to amend the Company's
Certificate of Incorporation.
3. A resolution that the holders of Series D preferred stock, the
holders of warrants to purchase the Series D preferred stock, the
holders of the Series E preferred stock and the holders of warrants
to purchase the Series E preferred stock hereby waive the right of
first offer and notice requirement.
4. A resolution that the holders of Series D preferred stock, the
holders of warrants to purchase the Series D preferred stock, the
holders of the Series E preferred stock and the holders of warrants
to purchase the Series E preferred stock waive the registration
rights granted to the.
5. A resolution that the Company's Certificate of Incorporation be
amended to effect a 3 to 1 reverse stock split of all the
outstanding shares of the Company's capital stock.
6. A resolution that the Company's Certificate of Incorporation be
amended as described in the consent approving the resolution.
7. A resolution that the Company's Bylaws be amended to provide for
the Company's Board of Directors, stockholder proposals and the
calling of special elections as described in the consent approving
the resolution.
8. A resolution approving the Company's 1999 Employee Stock Purchase
Plan.
The votes cast in favor of the above resolutions were:
20
<PAGE> 21
<TABLE>
<CAPTION>
------------------------------------------------------------------
Class of shares Total Votes % of Class
------------------------------------------------------------------
<S> <C> <C>
Common 2,636,110 82.8%
------------------------------------------------------------------
Preferred Series A 863,333 96.1%
------------------------------------------------------------------
Preferred Series B 83,333 100.0%
------------------------------------------------------------------
Preferred Series C 0 0%
------------------------------------------------------------------
Preferred Series D 1,282,705 83.5%
------------------------------------------------------------------
Preferred Series E 235,667 47.9%
------------------------------------------------------------------
Total 5,101,148 74.4%
------------------------------------------------------------------
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are attached:
Certificate of Amendment of Certificate of Incorporation
Amended and Restated Employee Stock Purchase Plan .
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAGE, INC.
Registrant
Date: February 11, 2000 By: /s/ Simon P. Westbrook
---------------------------------
Simon P. Westbrook
Chief Financial Officer
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1 Certificate of Amendment of Certificate of Incorporation
10.1 Amended and Restated Employee Stock Purchase Plan
</TABLE>
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
SAGE, INC.
SAGE, INC., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
1. The name of the corporation is Sage, Inc. (hereinafter the
"Corporation").
2. The Corporation was originally incorporated in the State of Delaware
on September 22 , 1998 under the name Sage-Delaware, Inc. The Corporation filed
a Restated Certificate of Incorporation with the Secretary of State of Delaware
on May 10, 1999 and filed a Certificate of Amendment on June 18, 1999 and on
September 15, 1999.
3. That Article III, Section (A) of the Corporation's Restated
Certificate of Incorporation is hereby amended to read in full as follows:
The Corporation is authorized to issue two classes of shares to be
designated respectively "Preferred Stock" and "Common Stock", and
each class shall have a par value of $0.01 per share. The total
number of shares which the corporation is authorized to issue is
sixty million (60,000,000) shares. The total number of shares of
Common Stock authorized is fifty million (50,000,000) shares. The
total number of shares of Preferred Stock authorized is ten million
(10,000,000) shares. Upon filing of this amendment of this article,
each outstanding share of Common Stock, of par value of $.01 each, is
hereby split up and converted into 0.333333 shares of Common Stock,
of par value of $.01 each. Each share of Preferred Stock, of par
value of $.01 each, outstanding as of October 22, 1999, is hereby
split up and converted into 0.333333 shares of Preferred Stock, of
par value of $.01 each. In lieu of the issuance of any fractional
shares that would otherwise result from the reverse stock split
effected by the preceding sentence, the Corporation shall pay any
shareholder that would otherwise receive a fractional share cash
equal to the fair value of such fraction.
4. That Article IV(C)(ii) of the Corporation's Restated Certificate of
Incorporation is hereby amended to read in full as follows:
<PAGE> 2
The closing of a firm commitment underwritten public offering of
shares of the Common Stock solely for cash pursuant to an effective
registration statement filed with the Securities and Exchange
Commission (other than in a registration effected solely to implement
any employee benefit plan) with aggregate gross proceeds to the
Corporation of at least $7,500,000 and with a per share public
offering price of at least $2.00 (subject to adjustment for stock
splits, etc.); or
5. That Article XII of the Corporation's Restated Certificate of
Incorporation is hereby amended to read in full as follows:
The Corporation shall indemnify, to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware, as amended
from time to time, all officers and directors of the Corporation whom
it may indemnify pursuant thereto. The personal liability of a
director of the Corporation to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director shall
be limited to the fullest extent permitted by the General Corporation
Law of the State of Delaware, as it now exists or may hereafter be
amended. The Corporation may indemnify, to the fullest extent
permitted by Section 145 of the General Corporation Law of Delaware,
as amended from time to time, any or all employees or agents of the
Corporation whom it may indemnify pursuant thereto. Any repeal or
modification of this Article by the stockholders of the Corporation
shall not adversely affect any right or protection of an officer or
director of the Corporation existing at the time of such repeal or
modification.
6. That the following is hereby inserted as Article XIII of the
Corporation's Restated Certificate of Incorporation:
The Corporation expressly elects to be governed by Section 203 of the
General Corporation Law of the State of Delaware. The affirmative
vote of 80% of the total number of the then outstanding shares of
capital stock of the Corporation is required to modify the
anti-takeover protective provisions pursuant to Section 203 of the
General Corporation Law of the State of Delaware.
7. That the following is hereby inserted as Article XIX of the
Corporation's Restated Certificate of Incorporation:
Notwithstanding anything in this Certificate of Incorporation to the
contrary, any action required or permitted to be taken by a vote of
the stockholders of the Corporation may not be taken by written
consent.
* * * * *
8. The amendment set forth above was duly adopted in accordance with the
2
<PAGE> 3
provisions of Sections 242 and 228 of the General Corporation Law of the State
of Delaware.
3
<PAGE> 4
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of Restated Certificate of Incorporation to be signed as of this __
day of _____2000.
/s/ Chandrashekar M. Reddy
------------------------------------
Chandrashekar M. Reddy, President
4
<PAGE> 1
EXHIBIT 10.1
SAGE, INC.
AMENDED AND RESTATED 1999 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1999 Employee
Stock Purchase Plan of Sage, Inc.
1. Purpose. The purpose of the Plan is to provide employees of
the Company with an opportunity to purchase Common Stock of the Company through
accumulated payroll deductions. It is the intention of the Company to have the
Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code.
The provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Applicable Laws" means the legal requirements relating to
the administration of employee stock purchase plans, if any, under applicable
provisions of federal securities laws, state corporate and securities laws, the
Code, the rules of any applicable stock exchange or national market system, and
the rules of any foreign jurisdiction applicable to participation in the Plan by
residents therein.
(b) "Board" means the Board of Directors of the Company.
(c) "Change in Control" means a change in ownership or control of
the Company effected through the direct or indirect acquisition by any person or
related group of persons (other than an acquisition from or by the Company or by
a Company-sponsored employee benefit plan or by a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of the
Exchange Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Common Stock" means the common stock of the Company.
(f) "Company" means Informatica Corporation.
(g) "Compensation" means an Employee's base salary, commissions,
overtime, bonuses, annual awards, and other incentive payments from the Company
or one or more Designated Parents or Subsidiaries, including such amounts as are
deferred by the Employee (i)
1
<PAGE> 2
under a qualified cash or deferred arrangement described in Section 401(k) of
the Code, or (ii) to a plan qualified under Section 125 of the Code.
Compensation does not include reimbursements or other expense allowances, fringe
benefits (cash or noncash), moving expenses, deferred compensation,
contributions (other than contributions described in the first sentence) made on
the Employee's behalf by the Company or one or more Designated Parents or
Subsidiaries under any employee benefit or welfare plan now or hereafter
established.
(h) "Corporate Transaction" means any of the following
transactions:
(1) a merger or consolidation in which the Company is not
the surviving entity, except for a transaction the principal
purpose of which is to change the state in which the Company is
incorporated;
(2) the sale, transfer or other disposition of all or
substantially all of the assets of the Company (including the
capital stock of the Company's subsidiary corporations) in
connection with complete liquidation or dissolution of the
Company;
(3) any reverse merger in which the Company is the
surviving entity but in which securities possessing more than
fifty percent (50%) of the total combined voting power of the
Company's outstanding securities are transferred to a person or
persons different from those who held such securities immediately
prior to such merger; or
(4) an acquisition by any person or related group of
persons (other than the Company or by a Company-sponsored
employee benefit plan) of beneficial ownership (within the
meaning of Rule 13d-3 of the Exchange Act) of securities
possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities (whether or
not in a transaction also constituting a Change in Control), but
excluding any such transaction that the Plan Administrator
determines shall not be a Corporate Transaction
(i) "Designated Parents or Subsidiaries" means the Parents or
Subsidiaries which have been designated by the Plan Administrator from time to
time as eligible to participate in the Plan.
(j) "Effective Date" means the later of the effective date of the
Registration Statement relating to the Company's initial public offering of its
Common Stock. or the date on which the Plan is first offered to Employees.
However, should any Designated Parent or Subsidiary become a participating
company in the Plan after such date, then such entity shall designate a separate
Effective Date with respect to its employee-participants.
2
<PAGE> 3
(k) "Employee" means any individual, including an officer or
director, who is an employee of the Company or a Designated Parent or Subsidiary
for purposes of Section 423 of the Code. For purposes of the Plan, the
employment relationship shall be treated as continuing intact while the
individual is on sick leave or other leave of absence approved by the
individual's employer. Where the period of leave exceeds ninety (90) days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship will be deemed to have terminated on the
ninety-first (91st) day of such leave, for purposes of determining eligibility
to participate in the Plan.
(l) "Enrollment Date" means the first day of each Offer Period.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(n) "Exercise Date" means the last day of each Purchase Period.
(o) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(1) Where there exists a public market for the Common
Stock, the Fair Market Value shall be (A) the closing price for a
share of Common Stock for the last market trading day prior to
the time of the determination (or, if no closing price was
reported on that date, on the last trading date on which a
closing price was reported) on the stock exchange determined by
the Plan Administrator to be the primary market for the Common
Stock or the Nasdaq National Market, whichever is applicable or
(B) if the Common Stock is not traded on any such exchange or
national market system, the average of the closing bid and asked
prices of a share of Common Stock on the Nasdaq Small Cap Market
for the day prior to the time of the determination (or, if no
such prices were reported on that date, on the last date on which
such prices were reported), in each case, as reported in The Wall
Street Journal or such other source as the Plan Administrator
deems reliable; or
(2) In the absence of an established market of the type
described in (1), above, for the Common Stock, the Fair Market
Value thereof shall be determined by the Plan Administrator in
good faith.
(p) "Offer Period" means an Offer Period established pursuant to
Section 4 hereof.
(q) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(r) "Participant" means an Employee of the Company or
3
<PAGE> 4
Designated Parent or Subsidiary who is actively participating in the Plan.
(s) "Plan" means this Employee Stock Purchase Plan.
(t) "Plan Administrator" means either the Board or a committee of
the Board that is responsible for the administration of the Plan as is
designated from time to time by resolution of the Board.
(u) "Purchase Period" means a period of approximately six months,
commencing on February 1 and August 1 of each year and terminating on the next
following July 31 or January 31, respectively; provided, however, that the first
Purchase Period shall commence on the Effective Date and shall end on July 31,
2000.
(v) "Purchase Price" shall mean an amount equal to 85% of the
Fair Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(w) "Reserves" means the sum of the number of shares of Common
Stock covered by each option under the Plan which have not yet been exercised
and the number of shares of Common Stock which have been authorized for issuance
under the Plan but not yet placed under option.
(x) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Eligibility.
(a) General. Any individual who is an Employee on a given
Enrollment Date shall be eligible to participate in the Plan for the Offer
Period commencing with such Enrollment Date.
(b) Limitations on Grant and Accrual. Any provisions of the Plan
to the contrary notwithstanding, no Employee shall be granted an option under
the Plan (i) if, immediately after the grant, such Employee (taking into account
stock owned by any other person whose stock would be attributed to such Employee
pursuant to Section 424(d) of the Code) would own stock and/or hold outstanding
options to purchase stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company or of any
Parent or Subsidiary, or (ii) which permits the Employee's rights to purchase
stock under all employee stock purchase plans of the Company and its Parents or
Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) worth of stock (determined at the Fair Market Value of the shares at
the time such option is granted) for each calendar year in which such option is
outstanding at any time. The determination of the accrual of the right to
purchase stock shall be made in accordance with Section 423(b)(8) of the Code
and the regulations thereunder.
(c) Other Limits on Eligibility. Notwithstanding Subsection (a),
above, the
4
<PAGE> 5
following Employees shall not be eligible to participate in the Plan for any
relevant Offer Period: (i) Employees whose customary employment is twenty (20)
hours or less per week; (ii) Employees whose customary employment is for not
more than five (5) months in any calendar year; and (iii) Employees who are
subject to rules or laws of a foreign jurisdiction that prohibit or make
impractical the participation of such Employees in the Plan.
4. Offer Periods.
(a) The Plan shall be implemented through overlapping or
consecutive Offer Periods until such time as (i) the maximum number of shares of
Common Stock available for issuance under the Plan shall have been purchased or
(ii) the Plan shall have been sooner terminated in accordance with Section 19
hereof. The maximum duration of an Offer Period shall be twenty-seven (27)
months. Initially, the Plan shall be implemented through overlapping Offer
Periods of twenty-four (24) months' duration commencing each February 1 and
August 1 following the Effective Date (except that the initial Offer Period
shall commence on the Effective Date and shall end on January 31, 2002).
(b) A Participant shall be granted a separate option for each
Offer Period in which he or she participates. The option shall be granted on the
Enrollment Date and shall be automatically exercised in successive installments
on the Exercise Dates ending within the Offer Period.
(c) An Employee may participate in only one Offer Period at a
time. Accordingly, except as provided in Section 4(d), an Employee who wishes to
join a new Offer Period must withdraw from the current Offer Period in which the
Employee is participating and must also enroll in the new Offer Period prior to
the Enrollment Date for that Offer Period.
(d) If on the first day of any Purchase Period in an Offer Period
in which a Participant is participating, the Fair Market Value of the Common
Stock is less than the Fair Market Value of the Common Stock on the Enrollment
Date of the Offer Period (after taking into account any adjustment during the
Offer Period pursuant to Section 18(a)), the Offer Period shall be terminated
automatically and the Participant shall be enrolled automatically in the new
Offer Period which has its first Purchase Period commencing on that date,
provided the Participant is eligible to participate in the Plan on that date and
has not elected to terminate participation in the Plan.
(e) Except as specifically provided herein, the acquisition of
Common Stock through participation in the Plan for any Offer Period shall
neither limit nor require the acquisition of Common Stock by a Participant in
any subsequent Offer Period.
5. Participation.
(a) An eligible Employee may become a Participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the designated payroll office of
the Company at least ten (10) business days prior to the Enrollment Date for the
Offer Period in which such participation will commence, unless a
5
<PAGE> 6
later time for filing the subscription agreement is set by the Plan
Administrator for all eligible Employees with respect to a given Offer Period.
(b) Payroll deductions for a Participant shall commence with the
first partial or full payroll period beginning on the Enrollment Date and shall
end on the last complete payroll period during the Offer Period, unless sooner
terminated by the Participant as provided in Section 10.
6. Payroll Deductions.
(a) At the time a Participant files a subscription agreement, the
Participant shall elect to have payroll deductions made during the Offer Period
in amounts between one percent (1%) and not exceeding ten percent (10%) of the
Compensation which the Participant receives during the Offer Period.
(b) All payroll deductions made for a Participant shall be
credited to the Participant's account under the Plan and will be withheld in
whole percentages only. A Participant may not make any additional payments into
such account.
(c) A Participant may discontinue participation in the Plan as
provided in Section 10, or may increase or decrease the rate of payroll
deductions during the Offer Period by completing and filing with the Company a
change of status notice in the form of Exhibit B to this Plan authorizing an
increase or decrease in the payroll deduction rate. Any decrease in the rate of
a Participant's payroll deductions shall be effective with the first full
payroll period commencing ten (10) business days after the Company's receipt of
the change of status notice unless the Company elects to process a given change
in participation more quickly. Any increase in the rate of a Participant's
payroll deductions shall be effective with the next Purchase Period following
the Purchase Period in which the Company receives the change of status notice if
such notice is filed within ten (10) business days before the commencement of
the next Purchase Period. A Participant's subscription agreement (as modified by
any change of status notice) shall remain in effect for successive Offer Periods
unless terminated as provided in Section 10. The Plan Administrator shall be
authorized to limit the number of payroll deduction rate changes during any
Offer Period.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) herein, a
Participant's payroll deductions may be decreased to 0% at such time during any
Purchase Period which is scheduled to end during the current calendar year (the
"Current Purchase Period") that the aggregate of all payroll deductions which
were previously used to purchase stock under the Plan in a prior Purchase Period
which ended during that calendar year plus all payroll deductions accumulated
with respect to the Current Purchase Period equal $21,250. Payroll deductions
shall recommence at the rate provided in such Participant's subscription
agreement, as amended, at the beginning of the first Purchase Period which is
scheduled to end in the following calendar year, unless terminated by the
Participant as provided in Section 10.
7. Grant of Option. On the Enrollment Date, each Participant
shall
6
<PAGE> 7
be granted an option to purchase (at the applicable Purchase Price) up to a
number of shares of the Common Stock determined by dividing ten percent (10%) of
such Participant's Compensation receivable during the Offer Period by the
applicable Purchase Price; provided (i) that such option shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof, and (ii) the maximum
number of shares of Common Stock a Participant shall be permitted to purchase in
any Purchase Period shall be 2,500 shares, subject to adjustment as provided in
Section 18 hereof. Exercise of the option shall occur as provided in Section 8,
unless the Participant has withdrawn pursuant to Section 10, and the option, to
the extent not exercised, shall expire on the last day of the Offer Period.
8. Exercise of Option. Unless a Participant withdraws from the
Plan as provided in Section 10, below, the Participant's option for the purchase
of shares will be exercised automatically on each Exercise Date, by applying the
accumulated payroll deductions in the Participant's account to purchase the
maximum number of full shares subject to the option by dividing such
Participant's payroll deductions accumulated prior to such Exercise Date and
retained in the Participant's account as of the Exercise Date by the applicable
Purchase Price. No fractional shares will be purchased; any payroll deductions
accumulated in a Participant's account which are not sufficient to purchase a
full share shall be carried over to the next Purchase Period or Offer Period,
whichever applies, or returned to the Participant, if the Participant withdraws
from the Plan. Notwithstanding the foregoing, any amount remaining in a
Participant's account following the purchase of shares on the Exercise Date due
to the application of Section 423(b)(8) of the Code or Section 7, above, shall
be returned to the Participant and shall not be carried over to the next Offer
Period. During a Participant's lifetime, a Participant's option to purchase
shares hereunder is exercisable only by the Participant.
9. Delivery. Upon receipt of a request from a Participant after
each Exercise Date on which a purchase of shares occurs, the Company shall
arrange the delivery to such Participant, as promptly as practicable, of a
certificate representing the shares purchased upon exercise of the Participant's
option.
10. Withdrawal; Termination of Employment.
(a) A Participant may either (i) withdraw all but not less than
all the payroll deductions credited to the Participant's account and not yet
used to exercise the Participant's option under the Plan or (ii) terminate
future payroll deductions, but allow accumulated payroll deductions to be used
to exercise the Participant's option under the Plan at any time by giving
written notice to the Company in the form of Exhibit B to this Plan. If the
Participant elects withdrawal alternative (i) described above, all of the
Participant's payroll deductions credited to the Participant's account will be
paid to such Participant as promptly as practicable after receipt of notice of
withdrawal, such Participant's option for the Offer Period will be automatically
terminated, and no further payroll deductions for the purchase of shares will be
made during the Offer Period. If the Participant elects withdrawal alternative
(ii) described above, no further payroll deductions for the purchase of shares
will be made during the Offer Period, all of the Participant's payroll
deductions credited to the Participant's account will be applied to the exercise
of the Participant's option on the next Exercise Date, and after such Exercise
Date, such
7
<PAGE> 8
Participant's option for the Offer Period will be automatically terminated. If a
Participant withdraws from an Offer Period, payroll deductions will not resume
at the beginning of the succeeding Offer Period unless the Participant delivers
to the Company a new subscription agreement.
(b) Upon termination of a Participant's employment relationship
(as described in Section 2(k)) at a time more than three (3) months from the
next scheduled Exercise Date, the payroll deductions credited to such
Participant's account during the Offer Period but not yet used to exercise the
option will be returned to such Participant or, in the case of his/her death, to
the person or persons entitled thereto under Section 14, and such Participant's
option will be automatically terminated. Upon termination of a Participant's
employment relationship (as described in Section 2(k)) within three (3) months
of the next scheduled Exercise Date, the payroll deductions credited to such
Participant's account during the Offer Period but not yet used to exercise the
option will be applied to the purchase of Common Stock on the next Exercise
Date, unless the Participant (or in the case of the Participant's death, the
person or persons entitled to the Participant's account balance under Section
14) withdraws from the Plan by submitting a change of status notice in
accordance with subsection (a) of this Section 10. In such a case, no further
payroll deductions will be credited to the Participant's account following the
Participant's termination of employment and the Participant's option under the
Plan will be automatically terminated after the purchase of Common Stock on the
next scheduled Exercise Date.
11. Interest. No interest shall accrue on the payroll deductions
credited to a Participant's account under the Plan.
12. Stock.
(a) The maximum number of shares of Common Stock which shall be
made available for sale under the Plan shall be 500,000 shares subject to
adjustment upon changes in the capitalization of the Company as provided in
Section 18.. If on a given Exercise Date the number of shares with respect to
which options are to be exercised exceeds the number of shares then available
under the Plan, the Plan Administrator shall make a pro rata allocation of the
shares remaining available for purchase in as uniform a manner as shall be
practicable and as it shall determine to be equitable.
(b) A Participant will have no interest or voting right in shares
covered by the Participant's option until such shares are actually purchased on
the Participant's behalf in accordance with the applicable provisions of the
Plan. No adjustment shall be made for dividends, distributions or other rights
for which the record date is prior to the date of such purchase.
(c) Shares to be delivered to a Participant under the Plan will
be registered in the name of the Participant or in the name of the Participant
and his or her spouse.
13. Administration. The Plan shall be administered by the Plan
Administrator which shall have full and exclusive discretionary authority to
construe, interpret and apply the
8
<PAGE> 9
terms of the Plan, to determine eligibility and to adjudicate all disputed
claims filed under the Plan. Every finding, decision and determination made by
the Plan Administrator shall, to the full extent permitted by Applicable Law, be
final and binding upon all persons.
14. Designation of Beneficiary.
(a) Each Participant will file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
Participant's account under the Plan in the event of such Participant's death.
If a Participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the
Participant (and the Participant's spouse, if any) at any time by written
notice. In the event of the death of a Participant and in the absence of a
beneficiary validly designated under the Plan who is living (or in existence) at
the time of such Participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the Participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Plan Administrator), the Plan Administrator shall deliver such shares and/or
cash to the spouse (or domestic partner, as determined by the Administrator) of
the Participant, or if no spouse (or domestic partner) is known to the Plan
Administrator, then to the issue of the Participant, such distribution to be
made per stirpes (by right of representation).
15. Transferability. Neither payroll deductions credited to a
Participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the Participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Plan Administrator may treat such act as an election to
withdraw funds from an Offer Period in accordance with Section 10.
16. Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
17. Reports. Individual accounts will be maintained for each
Participant in the Plan. Statements of account will be given to Participants at
least annually, which statements will set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
18. Adjustments Upon Changes in Capitalization; Corporate
Transactions.
(a) Adjustments Upon Changes in Capitalization. Subject to any
required action by the stockholders of the Company, the Reserves, the Purchase
Price, as well as any other terms that the Plan Administrator determines require
adjustment shall be proportionately adjusted for (i) any increase or decrease in
the number of issued shares of Common Stock resulting from a stock split,
reverse stock split, stock dividend, combination or reclassification of the
Common
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Stock, (ii) any other increase or decrease in the number of issued shares of
Common Stock effected without receipt of consideration by the Company, or (iii)
as the Plan Administrator may determine in its discretion, any other transaction
with respect to Common Stock to which Section 424(a) of the Code applies;
provided, however that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Plan Administrator and its determination
shall be final, binding and conclusive. Except as the Plan Administrator
determines, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason hereof shall be made with respect to, the Reserves and the
Purchase Price.
(b) Corporate Transactions. In the event of a proposed Corporate
Transaction, each option under the Plan shall be assumed by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Plan Administrator determines, in the exercise of its sole discretion and in
lieu of such assumption, to shorten the Offer Period then in progress by setting
a new Exercise Date (the "New Exercise Date"). If the Plan Administrator
shortens the Offer Period then in progress in lieu of assumption in the event of
a Corporate Transaction, the Plan Administrator shall notify each Participant in
writing, at least ten (10) days prior to the New Exercise Date, that the
Exercise Date for the Participant's option has been changed to the New Exercise
Date and that the Participant's option will be exercised automatically on the
New Exercise Date, unless prior to such date the Participant has withdrawn from
the Offer Period as provided in Section 10. For purposes of this Subsection, an
option granted under the Plan shall be deemed to be assumed if, in connection
with the Corporate Transaction, the option is replaced with a comparable option
with respect to shares of capital stock of the successor corporation or Parent
thereof. The determination of option comparability shall be made by the Plan
Administrator prior to the Corporate Transaction and its determination shall be
final, binding and conclusive on all persons.
19. Amendment or Termination.
(a) The Plan Administrator may at any time and for any reason
terminate or amend the Plan. Except as provided in Section 18, no such
termination can affect options previously granted, provided that an Offer Period
may be terminated by the Plan Administrator on any Exercise Date if the Plan
Administrator determines that the termination of the Offer Period is in the best
interests of the Company and its stockholders. Except as provided in Section 18,
no amendment may make any change in any option theretofore granted which
adversely affects the rights of any Participant without the consent of affected
Participants. To the extent necessary to comply with Section 423 of the Code (or
any successor rule or provision or any other Applicable Law), the Company shall
obtain stockholder approval in such a manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
Participant rights may be considered to have been "adversely affected," the Plan
Administrator shall be entitled to limit the frequency and/or number of changes
in the amount withheld during Offer Periods, change the length of Purchase
Periods within any Offer Period, determine whether
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subsequent Offer Periods shall be consecutive or overlapping, establish the
exchange ratio applicable to amounts withheld in a currency other than U.S.
dollars, establish additional terms, conditions, rules or procedures to
accommodate the rules or laws of applicable foreign jurisdictions, permit
payroll withholding in excess of the amount designated by a Participant in order
to adjust for delays or mistakes in the Company's processing of properly
completed withholding elections, establish reasonable waiting and adjustment
periods and/or accounting and crediting procedures to ensure that amounts
applied toward the purchase of Common Stock for each Participant properly
correspond with amounts withheld from the Participant's Compensation, and
establish such other limitations or procedures as the Plan Administrator
determines in its sole discretion advisable and which are consistent with the
Plan.
20. Notices. All notices or other communications by a Participant
to the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Plan Administrator at the
location, or by the person, designated by the Plan Administrator for the receipt
thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be
issued with respect to an option unless the exercise of such option and the
issuance and delivery of such shares pursuant thereto shall comply with all
Applicable Laws and shall be further subject to the approval of counsel for the
Company with respect to such compliance. As a condition to the exercise of an
option, the Company may require the Participant to represent and warrant at the
time of any such exercise that the shares are being purchased only for
investment and without any present intention to sell or distribute such shares
if, in the opinion of counsel for the Company, such a representation is required
by any of the aforementioned Applicable Laws. In addition, no options shall be
exercised or shares issued hereunder before the Plan shall have been approved by
stockholders of the Company as provided in Section 23.
22. Term of Plan. The Plan shall become effective upon the
earlier to occur of its adoption by the Board or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 19.
23. Stockholder Approval. Continuance of the Plan shall be
subject to approval by the stockholders of the Company within twelve (12) months
before or after the date the Plan is adopted. Such stockholder approval shall be
obtained in the degree and manner required under Applicable Laws.
24. No Employment Rights. The Plan does not, directly or
indirectly, create any right for the benefit of any employee or class of
employees to purchase any shares under the Plan, or create in any employee or
class of employees any right with respect to continuation of employment by the
Company or a Designated Parent or Subsidiary, and it shall not be deemed to
interfere in any way with such employer's right to terminate, or otherwise
modify, an employee's employment at any time.
25. No Effect on Retirement and Other Benefit Plans. Except as
specifically provided in a retirement or other benefit plan of the Company or a
Designated Parent or Subsidiary, participation in the Plan shall not be deemed
compensation for purposes of
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computing benefits or contributions under any retirement plan of the Company or
a Designated Parent or Subsidiary, and shall not affect any benefits under any
other benefit plan of any kind or any benefit plan subsequently instituted under
which the availability or amount of benefits is related to level of
compensation. The Plan is not a "Retirement Plan" or "Welfare Plan" under the
Employee Retirement Income Security Act of 1974, as amended.
26. Effect of Plan. The provisions of the Plan shall, in
accordance with its terms, be binding upon, and inure to the benefit of, all
successors of each Participant, including, without limitation, such
Participant's estate and the executors, administrators or trustees thereof,
heirs and legatees, and any receiver, trustee in bankruptcy or representative of
creditors of such Participant.
27. Governing Law. The Plan is to be construed in accordance with
and governed by the internal laws of the State of California (as permitted by
Section 1646.5 of the California Civil Code, or any similar successor provision)
without giving effect to any choice of law rule that would cause the application
of the laws of any jurisdiction other than the internal laws of the State of
California to the rights and duties of the parties, except to the extent the
internal laws of the State of California are superseded by the laws of the
United States. Should any provision of the Plan be determined by a court of law
to be illegal or unenforceable, the other provisions shall nevertheless remain
effective and shall remain enforceable.
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