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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-29109
QUANTUM EFFECT DEVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0290544
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2500-5 AUGUSTINE BOULEVARD, SUITE 200, SANTA CLARA, CA 95054
(Address of principal executive offices) (Zip Code)
(408) 565-0300
(Registrant's telephone number, including area code)
3255-3 SCOTT BOULEVARD, SUITE 200, SANTA CLARA, CA 95054
(Address of principal executive offices) (Zip Code)
(Former name, former address, and former fiscal year,
if changed since last report.)
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 NO X
---- ----
As of May 9, 2000 26,670,940 shares of the Issuer's Common Stock, .001 par
value, were outstanding.
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TABLE OF CONTENTS
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PART I: FINANCIAL INFORMATION PAGE
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ITEM 1. Financial Statements (Unaudited)
Condensed Balance Sheets - March 31, 2000 and June 30, 1999....................... 2
Condensed Statements of Operations- Three and Nine Months Ended March 31, 2000
and 1999..................................................................... 3
Condensed Statements of Cash Flows - Nine Months Ended March 31, 2000 and 1999.... 4
Notes to Condensed Financial Statements........................................... 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 7
Factors that May Affect Our Business, Operating Results and Financial Condition... 10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk........................ 19
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................. 20
ITEM 2. Changes in Securities and Use of Proceeds......................................... 20
ITEM 3. Defaults Upon Senior Securities................................................... 20
ITEM 4. Submission of Matters to a Vote of Security Holders............................... 20
ITEM 5. Other Information................................................................. 20
ITEM 6. Exhibits and Reports on Form 8-K.................................................. 21
Signatures........................................................................ 22
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Quantum Effect Devices, Inc.
Condensed Balance Sheets
(IN THOUSANDS)
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<CAPTION>
MARCH 31, 2000 JUNE 30, 1999
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(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents $ 46,418 $ 1,442
Short-term investments 7,909 16,023
Restricted cash 2,000 2,000
Accounts receivable, net 8,251 3,717
Inventories 9,924 2,122
Prepaid expenses and other current assets 2,109 768
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Total current assets 76,611 26,072
Property and equipment, net 3,486 1,807
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Total assets $ 80,097 $ 27,879
================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings, current portion $ 1,222 $ 1,140
Accounts payable 6,629 3,066
Accrued expenses and other current liabilities 4,394 3,350
Capital lease obligations, current portion 360 342
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Total current liabilities 12,605 7,898
Borrowings, non-current portion 970 1,949
Capital lease obligations, non-current portion 155 426
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Total liabilities 13,730 10,273
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Commitments and contingencies
Stockholders' equity:
Preferred stock - 14
Common stock 26 9
Additional paid-in capital 94,384 43,409
Note receivable from stockholder (42) -
Deferred stock-based compensation (598) (1,462)
Accumulated deficit (27,403) (24,364)
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Total stockholders' equity 66,367 17,606
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Total liabilities and stockholders' equity $ 80,097 $ 27,879
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The accompanying notes are an integral part of these financial statements.
Note: The balance sheet at June 30, 1999 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
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Quantum Effect Devices, Inc.
Condensed Statements of Operations
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ -------------------------
2000 1999 2000 1999
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Revenue:
Product revenue $ 10,628 $ 2,512 $ 29,966 $ 5,322
Royalty revenue 358 246 1,138 1,008
Royalty revenue from related parties 400 837 1,509 2,392
---------- ---------- ---------- ----------
Total revenue 11,386 3,595 32,613 8,722
Cost of revenue:
Product revenue 5,621 1,951 17,710 5,071
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Gross profit 5,765 1,644 14,903 3,651
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Operating expenses:
Research and development 3,929 2,917 10,490 9,254
Selling, general, and administrative 2,641 1,274 6,941 3,549
Stock-based compensation 212 238 884 518
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Total operating expenses 6,782 4,429 18,315 13,321
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Loss from operations (1,017) (2,785) (3,412) (9,670)
Interest income 545 42 890 183
Interest expense and other (308) (197) (517) (317)
---------- ---------- ---------- -----------
Net loss $ (780) $ (2,940) $ (3,039) $ (9,804)
========== ========== ========== ===========
Basic and diluted net loss per share: $ (0.04) $ (0.36) $ (0.24) $ (1.23)
Shares used in computing basic and diluted
net loss per share 20,651 8,180 12,824 7,987
</TABLE>
See accompanying notes to condensed financial statements
3
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Quantum Effect Devices, Inc.
Condensed Statements of Cash Flows
(IN THOUSANDS)
(UNAUDITED)
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NINE MONTHS ENDED MARCH 31,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,039) $ (9,804)
Adjustments to reconcile net loss to net cash used
in operating activities:
Allowance for doubtful accounts 158 -
Depreciation and amortization 975 710
Amortization of stock-based compensation 884 518
Changes in operating assets and liabilities:
Accounts receivable (4,692) (79)
Inventories (7,802) (607)
Prepaid expenses and other current assets (1,341) (295)
Accounts payable 3,563 (976)
Accrued expenses and other liabilities 1,044 142
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Net cash used in operating activities (10,250) (10,391)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (2,655) 88
Purchases of short-term investments (13,691) -
Maturities and sales of short-term investments 21,805 -
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Net cash provided by investing activities 5,459 88
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases (253) (216)
Proceeds from issuance of preferred stock, net of
issuance costs 19,478
Proceeds from issuance of common stock, net of
issuance costs 50,917 549
Proceeds from borrowings 2,000
Repayments of borrowings (897) (402)
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Net cash provided by financing activities 49,767 21,409
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Net increase in cash and cash equivalents 44,976 11,106
Cash and cash equivalents at beginning of period 1,442 9,756
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Cash and cash equivalents at end of period $ 46,418 $ 20,862
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See accompanying notes to condensed financial statements
4
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Quantum Effect Devices, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1- SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended March 31, 2000 are not necessarily indicative
of the results that may be expected for the fiscal year ending June 30, 2000.
For further information, refer to the audited consolidated financial statements
and footnotes for the fiscal year ended June 30, 1999 included in the Company's
prospectus dated January 31, 2000.
COMPREHENSIVE INCOME
The Company adopted statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and displaying comprehensive income and
its components in a full set of general-purpose financial statements. There
were no differences between the Company's net losses and its total
comprehensive losses for the periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires all costs related to
the development stage to be expensed as incurred. Costs incurred during the
application development stage are required to be capitalized and amortized over
the estimated useful life of the software. The Company does not expect that the
adoption of SOP 98-1 will have a material effect on its financial statements.
SOP 98-1 is effective for the Company's fiscal year ending June 30, 2000.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), as amended by Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- an
amendment of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their
fair market value. Changes in the fair market value of derivatives are
recorded each period in current earnings or comprehensive income, depending
on whether a derivative is designed as part of a hedge transaction, and if
so, the type of hedge transaction. Substantially all of the Company's revenue
and costs are denominated in U.S. dollars, and to date the Company has not
entered into any material derivative contracts. The Company does not expect
that the adoption of SFAS No. 133 will have a material effect on its
financial statements. The effective date of SFAS No. 133 as amended by SFAS
No. 137 will be for fiscal years beginning after June 15, 2000.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles (GAAP) to revenue recognition in financial
statements. We are required to adopt SAB 101 in the first quarter of fiscal 2001
and are currently studying the impact of SAB 101 on our financial statements. We
do not believe that SAB 101 will have a material impact on our financial
statements.
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NOTE 2- INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined on a first-in, first-out basis. Appropriate consideration is given to
obsolescence, excessive levels, deterioration and other factors in evaluating
net realizable value.
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<CAPTION>
(In Thousands) MARCH 31, JUNE 30,
2000 1999
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Work-in-process $ 8,279 $ 1,384
Finished goods 1,645 738
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$ 9,924 $ 2,122
=============== ================
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NOTE 3- NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss
available to common stockholders for the period by the weighted average number
of common shares outstanding during the period. Diluted net loss per share is
computed based on the weighted average number of common shares and dilutive
potential common shares outstanding. The calculation of diluted net loss per
share excludes potential common shares if the effect is anti-dilutive. Potential
common shares consist of incremental common shares issuable upon the exercise of
stock options, shares issuable upon conversion of preferred stock and common
shares issuable upon the exercise of common and preferred stock warrants.
Approximately 4,472,000 stock options have been excluded from the calculations
below for the three months ended March 31, 2000 and approximately 4,089,000
options have been excluded from the calculations below for the nine months ended
March 31, 2000 as their effect would have been anti-dilutive.
The following table sets forth the computation of basic and diluted
net loss per share for the periods presented:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
----------------------------------- ----------------------------------
2000 1999 2000 1999
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Numerator:
Net loss.................................... $ (780) $ (2,940) $ (3,039) $ (9,804)
Denominator:
Weighted average common shares.............. 20,651 8,180 12,824 7,987
Net loss per share:
Basic and diluted.......................... $ (0.04) $ (0.36) $ (0.24) $ (1.23)
</TABLE>
6
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Quantum Effect Devices, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT PURELY HISTORICAL ARE
FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING
STATEMENTS REGARDING OUR EXPECTATIONS, HOPES, INTENTIONS OR STRATEGIES REGARDING
THE FUTURE. ALL FORWARD LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED
ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE ASSUME NO OBLIGATION
TO UPDATE ANY SUCH FORWARD LOOKING STATEMENTS. IT IS IMPORTANT TO NOTE THAT OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD LOOKING
STATEMENTS. YOU SHOULD CONSULT THE RISK FACTORS LISTED FROM TIME TO TIME IN THE
COMPANY'S REPORTS ON FORM 10-K, PROSPECTUS AND ANNUAL REPORTS TO STOCKHOLDERS.
AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE THOSE
DISCUSSED UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS
FORM 10-Q.
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes, and with the Company's
audited financial statements and notes thereto for the year ended June 30, 1999.
OVERVIEW
QED is a leading developer and supplier of high performance embedded
microprocessors for use in information-intensive products such as
networking/communications infrastructure equipment, business network equipment
and consumer network products. We began operations in 1991 as an intellectual
property company, developing and licensing RISC microprocessor designs for third
parties in exchange for royalty payments. During the year ended June 30, 1997,
we began transitioning to a semiconductor company that designs, develops,
markets and sells its own high-performance microprocessors using the MIPS
microprocessor architecture. Volume shipments of our products began during the
three months ended March 31, 1998.
Continuous growth in our product revenue depends upon an increasing
number of customers incorporating our microprocessors into their end product
designs. We have achieved numerous design wins with existing and new customers.
There is generally a time lag ranging from 12 to 24 months between a design win
and volume shipments of our products. Design wins are only an expression of
interest by potential customers and are not binding contracts of any nature. We
cannot assure you that design wins will result in future revenue or that such
revenue will be derived in a predictable manner.
As a result of the aforementioned transition and change in our business
model, we have not entered into any new revenue generating third party licensing
agreements since June 1996 and currently have no plans to do so. Consequently,
royalty revenue relates primarily to products sold by our licensees based on
designs that are maturing and will become obsolete. We believe that our royalty
revenue will continue to decline both in absolute dollars and as a percentage of
total revenue.
Cost of revenue includes product costs, MIPS license royalty expenses,
salaries and overhead costs associated with employees engaged in activities
related to the manufacturing of our products. Research and development expense
consists primarily of salaries and related overhead costs associated with
employees engaged in research, design and development activities as well as the
cost of mask sets, wafers and other materials and related services used in the
development process. Selling, general and administrative expense consists of
salaries, commissions paid to internal and external sales representatives, third
party certification and testing costs and legal and accounting services.
Stock-based compensation expense relates both to stock-based employee and
consultant compensation arrangements. Employee-related stock compensation
expense is based on the deemed fair market value of our common stock and the
exercise price of options to purchase that stock on the date of grant and is
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recognized on an accelerated basis over the vesting periods of the related
options, usually four years. Consultant stock-based compensation expense is
based on the Black-Scholes option pricing model.
We currently use independent suppliers to manufacture, test and
assemble all of our products. This business model allows us to focus our
resources on the design, development and marketing of our products, rather than
on building and maintaining manufacturing facilities. Because we must often
place orders for products with our vendors prior to entering into sales
contracts, we may be exposed to the risks associated with holding obsolete or
excess inventory.
As the production processes used to manufacture our microprocessor have
matured, we have experienced higher production yields, which have contributed to
the increase in our gross margins. We anticipate that gross margins will
continue to increase in the future as more of our products mature, production
efficiencies increase, and overall sales volumes increase. However, we believe
that the selling prices of our products generally decline over time, and each of
our products has a different cost structure. Additionally, the position of the
products in their respective life cycles, manufacturing cost efficiencies and
competitive pricing strategies may affect gross margins on a quarterly basis. As
a result, gross margins may vary on a quarterly basis as the mix of products
sold changes.
COMPARISON OF THE THREE MONTH AND NINE MONTH PERIODS ENDED MARCH 31,
1999 AND 2000
PRODUCT REVENUE. Product revenue increased from $2.5 million for the
three months ended March 31, 1999 to $10.6 million for the three months ended
March 31, 2000. The $8.1 million or 323% increase in product revenue was due to
an increase in the number of our design wins which have reached volume
production. Product revenue increased by $24.6 million or 463%, from $5.3
million for the nine months ended March 31, 1999 to $30.0 million for the nine
months ended March 31, 2000. Product revenue has increased almost every quarter
since we began shipping products in the first quarter of the year ended June 30,
1998. In addition to an increasing number of design wins, the increase in
product revenue is also attributable to new product introductions and
enhancements of existing products, including a shift to smaller manufacturing
geometries. It is also due to an increase in the number of customers in each of
our target markets.
ROYALTY REVENUE AND ROYALTY REVENUE FROM RELATED PARTIES. Total royalty
revenue decreased from $1.1 million for the three months ended March 31, 1999 to
$0.8 million for the three months ended March 31, 2000. Total royalty revenue
decreased from $3.4 million for the nine months ended March 31, 1999 to $2.6
million for the nine months ended March 31, 2000. Combined royalty revenue has
decreased as a percentage of total revenue as we continue to transition from a
license model to a product model. Royalty revenue is dependent upon shipments of
products by third parties and related third parties. QED has no control over the
volume or timing of these shipments, which vary quarter to quarter. As we are no
longer licensing new products to third parties, we expect royalty revenue to
decrease both in absolute dollars, as well as a percentage of total revenue, in
future periods.
GROSS PROFIT. Overall gross profit increased from $1.6 million, or
45.7% of revenue, in the three months ended March 31, 1999 to $5.8 million, or
50.6% of revenue, in the three months ended March 31, 2000. Overall gross profit
increased from $3.6 million, or 41.9% of revenue, during the nine months ended
March 31, 1999 to $14.9 million, or 45.7% of revenue, during the nine months
ended March 31, 2000. During the quarter and the nine months ended March 31,
1999, when we began investing in manufacturing infrastructure, including hiring
manufacturing employees, the low volume of product sales negatively influenced
gross profit and margin. Our product gross profit and margin improved during the
quarter and the nine months ended March 31, 2000 as the increase in production
volumes led to manufacturing and cost efficiencies, including volume discounts
on the cost of components, such as silicon wafers. Each of our products has a
different cost structure; therefore, gross margins vary on a quarterly basis as
our product mix changes. Additionally, the position of our products in their
respective life cycles, manufacturing cost efficiencies and competitive pricing
strategies may affect gross margins on a quarterly basis.
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OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses increased
by $1.0 million or 34.7%, from $2.9 million for the three months ended March 31,
1999 to $3.9 million for the three months ended March 31, 2000. Research and
development expenses increased by $1.2 million or 13.4%, from $9.3 million for
the nine months ended March 31, 1999 to $10.5 million for the nine months ended
March 31, 2000. The increase in spending on research and development during
these periods is attributable to an increase in the number of research and
development projects during both the quarter and the nine months ended March 31,
2000, and a corresponding increase in the number of engineers and consultants.
It is also due to increased depreciation charges on new and upgraded software
design tools. We expect that research and development expense will continue to
increase in absolute dollars for the foreseeable future.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased from $1.3 million for the three months ended
March 31, 1999 to $2.6 million for the three months ended March 31, 2000. This
increase of $1.3 million, or 107.3%, is due to an increase in personnel and
related expenses as well as to increases in commissions corresponding to the
increase in our product revenue. Selling, general and administrative expenses
increased from $3.5 million for the nine months ended March 31, 1999 to $6.9
million for the nine months ended March 31, 2000. In addition to the reasons
listed above, this increase of $3.4 million, or 95.6%, is also due to increased
occupancy costs and professional fees. We expect that selling, general and
administrative expenses will continue to increase in absolute dollars for the
foreseeable future to support the continued expansion of our operations.
STOCK-BASED COMPENSATION. In connection with certain stock option
grants, we recorded total stock compensation expense in the three months ended
March 31, 1999 and 2000 of $238,000 and $212,000, respectively. This slight
decrease was the result of a decline in the amount of the monthly charges
remaining to be amortized. Stock-based compensation expenses increased from
$500,000 for the nine months ended March 31, 1999 to $900,000 for the nine
months ended March 31, 2000. Stock-based compensation is being recognized on an
accelerated basis and relates primarily to certain option grants to employees at
prices below deemed fair market values as well as for options granted to
consultants. We expect stock-based compensation expense to decrease in general
on a quarterly and annual basis.
INTEREST INCOME AND EXPENSE, NET. Net interest income (expense) for the
three months ended March 31, 1999 and March 31, 2000 increased from ($155,000)
to $237,000. Net interest income (expense) for the nine months ended March 31,
1999 and 2000 increased from ($134,000) to $373,000. The overall increase in net
interest income resulted from changes in our average cash and investment
balances during these respective periods as a result of the cash generated by a
private placement of Preferred Stock in March 1999 and our initial public
offering in February 2000. It is also due to an overall decrease in interest
expense corresponding to the decrease in debt during these respective periods.
Our quarterly results of operations have fluctuated significantly in
the past and may continue to fluctuate in the future based on a number of
factors, not all of which are in our control. If revenue declines in a given
quarter, our operating results will be adversely affected because many of our
expenses are relatively fixed. As a result, we believe period to period
comparisons are not necessarily meaningful and should not be relied upon as
indicative of future results.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through a
combination of sales of equity securities, cash generated by operations
during our early years, and borrowings. At March 31, 2000, we had $46.4
million in cash and cash equivalents, $7.9 million in short-term investments
and $2.0 million of restricted cash. At June 30, 1999, we had $1.4 million in
cash and cash equivalents, $16.0 million in short-term investments and $2.0
million of
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restricted cash. Net cash used by operating activities during the nine months
ended March 31, 1999 and 2000 was $10.4 million and $10.3 million,
respectively. During these periods, cash used by operating activities
consisted primarily of cash utilized to fund operating losses and for working
capital. During the nine months ended March 31, 2000, the items that
significantly impacted cash balances were accounts receivable and
inventories, both of which increased during the year as the volume of product
sales increased.
Net cash provided by investing activities during the nine months ended
March 31, 1999 and 2000 was $88,000 and $5.5 million. Cash generated by
investing activities during the nine months ended March 31, 2000 was related to
interest earned on investments and the transfer of short-term investments into
cash equivalent investments. Cash used in investing activities was related to
the acquisition of property and equipment and the purchase of short-term
investments. Capital expenditures during the nine months ended March 2000 were
$2.7 million. Capital spending during fiscal 2000 reflects investments in
hardware infrastructure and new software tools. As of March 31, 2000, we had no
material outstanding commitments to purchase or lease capital equipment.
However, we expect to continue investing in software and hardware design tools
in future periods and do not expect capital spending to decline in absolute
dollars in any future period.
Net cash provided by financing activities during the nine months ended
March 31, 1999 and 2000 was $21.4 million and $49.8 million, respectively. Cash
provided by financing during the nine months ended March 31, 1999, relates to
the sale of shares of our preferred stock. Cash provided by financing during the
nine months ended March 31, 2000 relates to the sale of shares of our common
stock as part of our initial public offering in February 2000. Cash used in
financing activities related to principal payments under capital leases and
repayment of borrowings.
In January 1999, we obtained a $6.0 million line of credit expiring on
December 31, 2000. Borrowings under this line of credit bear interest at an
annual rate of 12% for the first sixth months and 8.5% after that time. This
line of credit is secured by substantially all of our tangible assets and
contains financial and other covenants that arise after more than $2.0 million
has been drawn down. As of March 31, 2000, $1.5 million was outstanding under
this line.
We believe that cash and cash equivalents and cash generated from
operations will be sufficient to satisfy our working capital requirements for
the next 12 months. We believe that success in our industry requires
substantial capital in order to maintain the flexibility to take advantage of
opportunities as they may arise. We may, from time to time, invest in or
acquire complementary businesses, products or technologies. We may seek
additional equity or debt financing to fund such activities. The sale of
additional equity or convertible debt could result in additional dilution to
our stockholders.
FACTORS THAT MAY AFFECT OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY UNDER OUR CURRENT BUSINESS MODEL,
WHICH MAKES IT DIFFICULT TO PREDICT OUR FUTURE OPERATING RESULTS.
We were incorporated in 1991 and began business as a provider of
proprietary microprocessor designs to semiconductor companies. In 1996, we
obtained a license to design, manufacture and sell embedded microprocessors
using intellectual property developed by MIPS Computer Systems, Inc., currently
known as MIPS Technologies, Inc. Since obtaining this license, we have
transitioned to a company that develops and markets its
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own products. Therefore, we have operated under our current business model
for a short period of time. This limited operating history makes it difficult
to predict our future revenue and expenses.
WE HAVE NOT BEEN PROFITABLE OPERATING UNDER OUR CURRENT BUSINESS MODEL,
AND WE MAY NOT ACHIEVE PROFITABILITY.
In 1997, we began transitioning from a provider of proprietary
microprocessor designs to a company that develops and markets its own products,
and since then we have lost money in each quarter. Although product revenue has
increased significantly in the year ended June 30, 1999 and in the nine months
ended March 31, 2000, we still have not achieved profitability. If our revenue
does not increase, we may not achieve or sustain profitability.
WE EXPERIENCE FLUCTUATIONS IN OUR OPERATING RESULTS DUE TO A NUMBER OF
FREQUENTLY CHANGING BUSINESS CONDITIONS, WHICH MAY CAUSE OUR STOCK
PRICE TO DECLINE.
We experience fluctuations in our operating results due to a variety of
factors, including:
- the timing and amount of orders from our customers, including
cancellations and reschedulings;
- the gain or loss of significant customers, including as a result
of industry consolidation;
- seasonality in some of our target markets;
- changes in the mix of products we sell;
- changes in demand by the end users of our customers' products;
- market acceptance of our current and future products;
- variability of our customers' product life cycles;
- changes in the average selling prices of embedded microprocessors
or the products that incorporate them due to our customers
reaching volume production, technological change, product
obsolescence or otherwise; and
- cancellations, changes or delays of deliveries to us by our
manufacturers, including as a result of the availability and terms
of manufacturing capacity.
Revenue from the sale of our embedded microprocessors is dependent upon
companies designing our microprocessors into their products, which we refer to
as "design wins". Our gross margin is impacted by the mix of revenue among our
products. As a result of these factors and those listed above, our lengthy sales
cycle and our dependence on relatively few customers whose order cycles vary
significantly, our revenue and gross margin could fluctuate significantly.
We cannot accurately forecast all of the above factors. As a result, we
believe that period-to-period comparisons do not indicate future operating
results. Our operating results in a future quarter or quarters may fall below
the expectations of public market analysts or investors. If this were to occur,
the price of our common stock could decline.
11
<PAGE>
THE INABILITY OF OUR RM7000 EMBEDDED MICROPROCESSOR TO ACHIEVE GREATER
MARKET ACCEPTANCE COULD HARM OUR NEAR-TERM GROWTH.
We believe that our RM7000 embedded microprocessor, which we began
shipping in the second half of 1998, will form the basis for our next-generation
family of embedded microprocessors. Although we have achieved design wins for
the RM7000, some of them may not result in revenue to us. If the RM7000 does not
achieve greater market acceptance:
- revenue from our existing products could be inadequate to
cover our expenses, including the cost of selling, marketing,
developing and manufacturing the RM7000 and other new
products;
- our brand and reputation could be damaged; and
- our competitors' products could achieve greater market share as
our market share declines.
OUR FAILURE TO DEVELOP AND INTRODUCE NEW PRODUCTS ON A TIMELY BASIS
COULD HARM OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS.
The semiconductor industry is characterized by rapidly changing
technology, frequent product introductions and ongoing demands for greater speed
and functionality. Therefore, we must continually design, develop and introduce
new products with improved features to be competitive. To introduce these
products on a timely basis we must:
- design innovative and performance-improving features that
differentiate our products from those of our competitors;
- transition our products to new manufacturing process technologies;
- identify emerging technological trends in our target markets,
including new standards for our products;
- accurately define and design new products to meet market needs;
- anticipate changes in end-user preferences with respect to our
customers' products;
- bring products to market on a timely basis at competitive prices;
and
- respond effectively to technological changes or product
announcements by others.
We cannot assure you that we will be able to meet the design and market
introduction schedules for our new products or enhancements to our existing
products or that these products will achieve market acceptance.
WE MUST ACHIEVE NEW DESIGN WINS, AND THESE DESIGN WINS MUST TRANSLATE
INTO CUSTOMER PURCHASES, FOR OUR PRODUCT REVENUE TO INCREASE.
Our success depends in large part upon achieving design wins for our
products with current and future customers. Design wins are indications by
existing and potential customers that they intend to incorporate our products
into new designs. To achieve design wins, we must continually increase the
performance levels of our embedded microprocessors, keep pace with evolving
industry standards and introduce new products in a timely manner. If we fail to
achieve design wins, we will lose potential sales opportunities.
12
<PAGE>
Design wins, however, do not necessarily result in purchase orders
for our products. Our design wins are solely an expression of interest by
customers and are not supported by binding contracts of any nature. Design
wins also may not result in future revenue for the following reasons:
- consolidation of our customer base or acquisitions of our
customers;
- failure of our customers' products to compete in their respective
markets; and
- cancellation of development of a customer's product that
incorporates our embedded microprocessors.
WE FACE INTENSE COMPETITION IN THE MARKET FOR EMBEDDED MICROPROCESSORS.
Competition in the market for embedded microprocessors is intense, and
we expect it to increase in the future. We face competition from:
- other licensees of technology from MIPS Technologies, including
NEC Corporation, Toshiba Corporation and Integrated Device
Technology, Inc.;
- companies utilizing alternative reduced instruction set computing,
or RISC, technologies, including ARM/Strong Arm, developed by ARM
Holdings plc and Intel; Hitachi SH, developed by Hitachi; and
PowerPC, developed by Motorola, Inc. and IBM Corporation; and
- companies utilizing technologies other than RISC.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater brand recognition, larger
customer bases and greater financial and marketing resources than we do. They
may therefore be able to respond more quickly than we can to new or emerging
technologies and changes in customer requirements. They may also be able to
devote greater resources than we can to the development and promotion of their
technologies and products. We also face competition from several private
companies in various stages of development. In addition, our competitors that
are licensees of MIPS Technologies may obtain more favorable terms under their
current or future licenses, which would place us at a competitive disadvantage.
Furthermore, many of our existing and potential customers have the
resources to internally develop microprocessors and other devices that perform
all or a portion of the functions performed by our products. If these customers
decided to develop embedded microprocessors internally rather than purchasing
our products, we would lose sales opportunities.
IF OUR TARGET MARKETS REJECT THE MIPS MICROPROCESSOR ARCHITECTURE,
SUPPORT AND DEMAND FOR OUR PRODUCTS WILL DECLINE.
We have derived and expect to continue to derive substantially all of
our product revenue from products based on the MIPS microprocessor architecture.
Therefore, our success is dependent on continued acceptance of this architecture
within our target markets. Moreover, a large number of companies currently
develop semiconductor design tools, components and products that are compatible
with and optimized for the MIPS microprocessor architecture. If these companies
ceased to provide these tools for any reason, it could become more difficult or
less desirable for manufacturers and others to continue to support the MIPS
microprocessor architecture. If the markets for embedded microprocessors adopt
an alternative technology, we could lose the support of these MIPS
architecture-based tools, components and products and the demand for our
products would decline.
13
<PAGE>
IF MIPS TECHNOLOGIES DEVELOPS FUTURE GENERATIONS OF ITS TECHNOLOGY, WE
MAY NOT BE ABLE TO OBTAIN A LICENSE ON REASONABLE TERMS.
MIPS Technologies has introduced, and will likely continue to
introduce, new generations of its microprocessor technology architecture
containing improvements that are not covered by the technology we are currently
licensing from MIPS Technologies. Our success could depend on our ability to
develop products that incorporate those improvements. We may not be able to
license the technology for any new improvements from MIPS Technologies on
commercially reasonable terms or at all. If we cannot obtain required licenses
from MIPS Technologies, we could encounter delays in product development while
we attempt to develop similar technology, or we may not be able to develop,
manufacture and sell products incorporating this technology.
WE DEPEND UPON OUR LICENSE OF MICROPROCESSOR TECHNOLOGY FROM MIPS
TECHNOLOGIES AS THE BASIS FOR OUR PRODUCTS, AND WE WILL BE UNABLE TO
MARKET OUR PRODUCTS IF THIS LICENSE IS TERMINATED.
All of our current products and planned future products are based upon
the microprocessor technology we license from MIPS Technologies. Our failure to
comply with any of the terms of our license agreement could result in the
termination of our rights, preventing us from marketing our current and planned
products.
THE LOSS OF ANY OF OUR KEY PERSONNEL OR THE FAILURE TO HIRE AND RETAIN
ADDITIONAL QUALIFIED PERSONNEL COULD IMPAIR OUR ABILITY TO DEVELOP AND
MARKET OUR PRODUCTS.
Our success depends to a significant degree upon the continued
contributions of our key management, engineering and sales and marketing
personnel, especially our design engineers, who we believe are difficult to
replace. We are particularly dependent upon the continued services of Thomas J.
Riordan, our Chief Executive Officer, President and a director, and Raymond
Kunita, our Chief Operating Officer and Vice President of Engineering.
Competition for highly skilled managerial, engineering and sales and marketing
personnel in the semiconductor industry is intense, and we may not succeed in
attracting and retaining these personnel. Our inability to attract and retain
qualified personnel in the future or delays in hiring required personnel could
impair our ability to meet customer and technological demands or our ability to
develop and market our products. We do not have either employment contracts
with, or key person life insurance on, any of our key personnel.
OUR DEPENDENCE ON THIRD PARTIES TO FABRICATE OUR EMBEDDED
MICROPROCESSORS REDUCES OUR CONTROL OVER THE PRODUCTION, SUPPLY AND
DELIVERY OF OUR PRODUCTS.
We currently rely on third parties to fabricate our products. In the
year ended June 30, 1999 and the nine months ended March 31, 2000, IBM and
Taiwan Semiconductor Manufacturing Company Ltd., or TSMC, performed all of our
product fabrication. We recently amended our contract with IBM, which expires no
sooner than November 14, 2002. IBM is not obligated under this contract to
provide us with any specified number of products, at any specified price. TSMC
fabricates our microprocessors on a purchase order basis, and we do not
currently have a long-term contract with TSMC.
There are significant risks associated with our reliance on third
parties to fabricate our products, including:
- manufacturing capacity may be unavailable to us, even though we
may have submitted a product order;
- we have limited control over product delivery schedules, and we
may not receive products within the time frames and in the volumes
required by us at a favorable cost or at all;
- we could face delays in obtaining, or we might not be able to
obtain access to, key fabrication process technologies; and
14
<PAGE>
- we have limited control over quality assurance, manufacturing
yields and production costs.
Currently, our semiconductor manufacturers require approximately 13 to
15 weeks to deliver new orders, which often requires us to place orders in
advance of expected purchase orders from our customers. As a result, we have
only a limited ability to react to fluctuations in demand for our products,
which could cause us to have an excess or a shortage of inventory of a
particular product.
If our manufacturers are unable or unwilling to continue to manufacture
our products in required volumes or at commercially acceptable costs, we may be
forced to seek other manufacturing sources for our products. Transferring to
another manufacturer would require a significant amount of time, and we cannot
assure you that we could make a smooth and timely transition.
OUR DEPENDENCE UPON THIRD PARTIES TO ASSEMBLE AND TEST SUBSTANTIALLY
ALL OF OUR PRODUCTS REDUCES OUR CONTROL OF PRODUCT DELIVERY SCHEDULES
AND QUALITY ASSURANCE.
Because third parties assemble and test substantially all of our
products, we do not directly control our product delivery schedules and quality
assurance. This lack of control could result in product shortages, particularly
in the case of new products. Product shortages could increase our fabrication,
assembly or testing costs or delay delivery of our products. We do not have
long-term contracts with the companies that test and assemble our products, and
we typically procure services from them on a per order basis. Therefore, we may
not be able to continue to obtain assembly and testing services for our products
on acceptable terms, or at all. If we are required to find and qualify
alternative assemblers or testers for our products, we could experience delays
in product shipments or a decline in product quality.
WE MAY NOT ACHIEVE ACCEPTABLE PRODUCT YIELDS FROM OUR THIRD-PARTY
MANUFACTURERS, WHICH COULD INCREASE THE COST AND REDUCE THE SUPPLY OF
OUR PRODUCTS.
In the process of manufacturing embedded microprocessors, contaminants,
manufacturing errors and other factors can result in a substantial percentage of
nonfunctional products, and many semiconductor companies frequently encounter
difficulties in achieving acceptable product yields. The proportion of
functional products derived from a particular manufacturing process is referred
to as product "yield". If we do not achieve planned yields, our product costs
would increase and product availability would decrease. Yield problems may not
be identified and resolved, if ever, until a product has been manufactured and
can be analyzed and tested. As a result, yield problems are often difficult,
time consuming and expensive to correct. The risk of low yields is compounded by
the offshore location of some of our third-party manufacturing facilities,
increasing the effort and time required to identify, communicate and resolve
manufacturing yield problems.
In the past, we have experienced lower yields and related problems more
often with newer products than with mature products. For example, shipments to
customers have been delayed by as much as three weeks because of low-yielding
manufacturing processes on new products. Other companies have experienced poor
yields with respect to mature products, and we may also experience poor yields
on mature products. While we believe that our manufacturing yields have
generally been consistent with industry norms, we may experience yield problems
in the future that have a significant impact on our operating results and our
ability to deliver our products to our customers in a timely manner. If we do
not deliver our products to our customers in a timely manner, they may choose
other suppliers.
WE RELY ON FOREIGN THIRD-PARTY MANUFACTURING OPERATIONS, WHICH EXPOSES
US TO RISKS INHERENT IN INTERNATIONAL OPERATIONS.
15
<PAGE>
We are subject to risks associated with conducting business outside of
the United States because a large portion of our semiconductor fabrication and
substantially all of our assembly and testing operations occur in foreign
countries. These risks include:
- unexpected changes in U.S. or foreign regulatory requirements;
- additional costs and delays associated with tariffs, quotas and
other trade barriers and restrictions; and
- uncertainties relating to political, social and economic
conditions.
In addition, all of our current arrangements with third-party
manufacturers provide for pricing and payment in U.S. dollars. Fluctuations in
currency exchange rates, therefore, could cause our third-party manufacturers to
increase their prices, which would reduce our gross margin.
OUR FAILURE TO PROTECT OUR PROPRIETARY RIGHTS, OR THE COSTS OF
PROTECTING THESE RIGHTS, MAY HARM OUR ABILITY TO COMPETE.
Third parties may be able to copy or reverse engineer aspects of our
products or obtain and use information that we regard as proprietary. Our
success and ability to compete is dependent in part upon continued protection of
our proprietary rights. Our failure to adequately protect our proprietary rights
could result in our competitors offering similar products, potentially resulting
in our loss of a competitive advantage and decreased revenue. In addition, as a
licensee of patent rights relating to the MIPS architecture, we rely upon MIPS
Technologies to enforce its patent rights against infringers. If MIPS
Technologies fails to enforce its patent rights, we might not be able to compete
successfully. We also seek to protect our trade secrets and proprietary
information through confidentiality agreements with our employees and
consultants and with other parties. However, we may not have an adequate remedy
in the event these agreements are breached or any remedy if our trade secrets
are independently developed by others. Despite our efforts to protect our
proprietary rights, existing intellectual property laws afford only limited
protection. In addition, the laws of some foreign countries provide only limited
proprietary rights protection.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. This litigation could result in
substantial costs and diversion of resources.
WE COULD BE SUBJECT TO CLAIMS OF INFRINGEMENT OF THIRD-PARTY
INTELLECTUAL PROPERTY, WHICH COULD RESULT IN SIGNIFICANT EXPENSE AND
LOSS OF INTELLECTUAL PROPERTY RIGHTS.
The semiconductor industry is characterized by uncertain and
conflicting intellectual property claims and frequent intellectual property
litigation, especially regarding patent rights. From time to time, third parties
may assert patent, copyright, trademark and other intellectual property rights
to technologies that are important to our business. We may receive notices of
claims that our products infringe or may infringe these rights. Any litigation
to determine the validity of these claims, including claims arising through our
contractual indemnification of our customers, regardless of their merit or
resolution, would likely be costly and divert the efforts and attention of our
management and technical personnel. We cannot assure you that we would prevail
in this litigation given the complex technical issues and inherent uncertainties
in intellectual property litigation. If this litigation resulted in an adverse
ruling, we could be required to:
- pay substantial damages;
- cease the manufacture, use or sale of infringing products;
- discontinue the use of certain technology; or
16
<PAGE>
- obtain a license under the intellectual property rights of the
third party claiming infringement, which license may not be
available on reasonable terms, or at all.
OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT FOR US TO PREDICT IF OR WHEN
A SALE WILL BE MADE, WHICH INCREASES OUR RISKS RELATED TO CUSTOMER
CANCELLATIONS.
The timing of our sales revenue is difficult to predict because of the
length and variability of the sales cycle for our products. Our sales cycle
typically includes a three- to six-month period prior to our achieving a design
win and an additional 12- to 24-month period before a customer commences volume
production of products incorporating our embedded microprocessors. While
potential customers are evaluating our products and before they place an order
with us, we may incur sales and marketing expenses and expend significant
management effort. Therefore, we take risks related to product cancellations or
changed product plans, which could result in the loss of anticipated sales or
missed sales opportunities.
OUR REVENUE AND PROFITS MAY DECREASE IF WE LOSE ANY OF OUR SIGNIFICANT
CUSTOMERS.
Historically, a relatively small number of customers have accounted for
a significant portion of our total revenue in any particular period. The loss of
any significant customer could cause our revenue to decline. In the year ended
June 30, 1999, our four largest customers, including sales to their respective
manufacturing subcontractors, accounted for 23%, 20%, 15% and 12% of our total
revenue. In the nine month period ended March 31, 2000, these same four
customers accounted for 30%, 15%, 7%, and 4% of our total revenue. We anticipate
that sales of our products to relatively few customers will continue to account
for a significant portion of our total revenue. We have no long-term purchase
commitments with any of our significant customers. Therefore, these customers
could cease purchasing our products with limited notice and with little or no
penalty.
Our dependence on a small number of customers increases the risks
associated with our potential loss of customers resulting from business
combinations or consolidations. If a customer or potential customer were
acquired or combined with another company, the resulting company could cancel
development efforts, design wins or purchase orders as part of the integration
process.
IF WE FAIL TO ESTABLISH AND MAINTAIN OUR RELATIONSHIPS WITH KEY
PARTICIPANTS IN OUR TARGET MARKETS, WE MAY HAVE DIFFICULTY MARKETING
OUR PRODUCTS.
It is important to our success to establish and maintain relationships
with customers who are technology or market-share leaders in our target markets.
We believe that we need to work closely with these customers to gain valuable
insight into market demands for new products and in order to help us design new
embedded microprocessors. If we fail to establish and maintain these
relationships, it would be more difficult for us to develop and market products
offering features that address emerging market trends.
In addition, to help sell our products, we rely upon our relationships
with vendors of collateral products and tools, such as companion integrated
circuits, operating systems and a variety of system design tools. If we fail to
maintain current relationships and to develop new relationships with these
vendors, our products may not remain compatible with other products and tools.
This lack of compatibility could affect our ability to acquire greater market
share.
MANY OF OUR SALES REPRESENTATIVES ARE NEW TO QED, AND IF THEY FAIL TO
SUCCESSFULLY MARKET OUR PRODUCTS OR IF WE FAIL TO EXPAND THE NUMBER OF
OUR SALES REPRESENTATIVES, WE MAY NOT BE ABLE TO INCREASE SALES AND
MARKET AWARENESS OF OUR PRODUCTS.
We depend on sales representatives to sell a substantial portion of our
products. We have established relationships with many of our sales
representatives within the last year, and we are unable to predict how
17
<PAGE>
successful these sales representatives will be in marketing and selling our
products. In addition, we must expand the number of sales representatives both
domestically and internationally. Without this increase, we may not be able to
increase sales and market awareness of our products. Competition for qualified
sales representatives is intense. We may not be able to retain our existing
sales representatives or engage the type and number of sales representatives
that we require on a timely basis or at all. In addition, all of our sales
representatives' agreements may be terminated upon 30-days notice by either
party.
OUR RAPID GROWTH HAS STRAINED OUR RESOURCES, AND WE MAY NOT BE ABLE TO
MANAGE FUTURE GROWTH.
We have experienced a period of rapid growth and expansion, which has
placed, and continues to place, a significant strain on our resources. This
growth has required us to increase the number of our employees from 48 as of
September 30, 1997 to 104 as of March 31, 2000, and otherwise expand our
operations, which has resulted in increased responsibilities for our management.
If we continue to expand our operations, we may significantly strain our
management, manufacturing, financial, information systems and other resources.
Moreover, we cannot be certain that our systems, procedures, controls and
existing space will be adequate to support our operations. We are currently
implementing a new enterprise resource planning system to accommodate the growth
in our operations, and we may not be able to implement this system effectively
or on a timely basis.
IF OUR PRODUCTS CONTAIN DEFECTS OR FAIL TO ACHIEVE INDUSTRY RELIABILITY
STANDARDS, OUR BUSINESS REPUTATION WILL BE HARMED, AND WE MAY INCUR
SIGNIFICANT UNEXPECTED EXPENSES AND LOSE SALES OPPORTUNITIES.
Our products have in the past contained, and may in the future contain,
undetected errors. Errors are more common when products are introduced or as new
versions are released. We may find errors, defects or failures in our products
after commencement of commercial shipments. If this happens, we may experience:
- delay in or loss of market acceptance and sales;
- product returns;
- diversion of development resources;
- injury to our reputation; or
- increased service and warranty costs.
Moreover, because we design many of our embedded microprocessors for
products that provide critical communications services, we may be subject to
significant liability claims. Our agreements with customers typically contain
provisions intended to limit our exposure to liability claims. These limitations
may not, however, preclude all potential claims from being made. We do not
currently have product liability insurance, and our general liability insurance
generally would not cover any claims sought against us. Furthermore, our
agreements with our manufacturers contain limitations on their obligations to
indemnify us if our embedded microprocessors contain manufacturing defects.
Liability claims could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any of these claims,
whether or not successful, could seriously damage our reputation and our
business.
RISKS RELATED TO OUR INDUSTRY
THE GROWTH OF OUR TARGET MARKETS DEPENDS UPON THE CONTINUED GROWTH OF
THE INTERNET, AND, THEREFORE, OUR OPERATING RESULTS COULD BE HARMED IF
THE INTERNET AND, HENCE, OUR TARGET MARKETS FAIL TO GROW OR GROW MORE
SLOWLY THAN EXPECTED.
18
<PAGE>
We derive our revenue from the sale of embedded microprocessors
targeted at the networking/communications infrastructure equipment, business
network equipment and consumer network products markets. In particular, we
depend on the continued growth of the Internet, which largely dictates the
demand for the products incorporating our embedded microprocessors. The
continued growth of the Internet depends on various factors, many of which are
outside our control. Risks related to continued growth of the Internet include
that:
- Internet infrastructure may not be able to support the demands
placed on it;
- performance and reliability of the Internet may decline as usage
grows; and
- privacy, security and authentication concerns with respect to
the transmission of confidential information over the Internet
may result in decreased usage.
Although our target markets have experienced significant growth in
recent years, they may not continue to grow as rapidly or at all. If they fail
to grow, or grow more slowly than expected, our operating results could be
harmed.
THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY MAY IMPACT OUR OPERATING
RESULTS.
The semiconductor industry is highly cyclical and subject to rapid
technological change. From time to time, the semiconductor industry has
experienced significant economic downturns, characterized by diminished product
demand, accelerated erosion of prices and excess production capacity. Our
industry also periodically experiences increased demand and production capacity
constraints. Accordingly, our operating results may vary significantly as a
result of general conditions in the semiconductor industry.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use derivative financial instruments in our investment
portfolio. We only invest in instruments that meet high credit and quality
standards, as specified in our investment policy guidelines. At March 31, 2000,
we had an investment portfolio of money market funds, commercial securities and
U.S. Government bonds including those classified as short-term investments of
$7.9 million. These instruments, like all fixed income instruments, are subject
to interest rate risk. The fixed income portfolio will fall in value if there
were an increase in interest rates. If market interest rates were to increase
immediately and uniformly by 10% from levels as of March 31, 2000, the decline
of the fair value of the fixed income portfolio would not be material. All of
our revenue is denominated in U.S. dollars, and therefore, we do not currently
engage in any currency hedging transactions.
19
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
SALES OF REGISTERED SECURITIES AND USE OF PROCEEDS
On February 1, 2000, the Company completed an initial public
offering (the "Offering") of its common stock, $.001 par value. The shares of
common stock sold in the Offering were registered under the Securities Act of
1933, on a Registration Statement on Form S-1 (File No. 333-86901) that was
declared effective by the SEC on January 31, 2000. Of the total shares sold,
3,450,000 were sold by the Company (including 450,000 shares sold pursuant to
the exercise of the underwriter's over-allotment option), and 828,000 shares
were sold by a selling stockholder (including 108,000 shares sold pursuant to
the exercise of the underwriter's over-allotment option). The purchase price for
the underwritten shares was $16.00 per share and the aggregate price of the
Offering amount registered was approximately $68.4 million. The managing
underwriters for the Offering were Morgan Stanley Dean Witter, Lehman Brothers
and Robertson Stephens.
From the effective date of the Registration Statement through
March 31, 2000, the Company invested all of the proceeds from the initial public
offering in short term investments and cash equivalent investments. The use of
proceeds from the offering does not represent a material change in the use of
proceeds described in the prospectus used in the offering.
SALES OF UNREGISTERED SECURITIES
From January 1, 2000 to March 7, 2000 the Company sold 229,652
shares of common stock to various employees/optionees pursuant to exercises of
fully vested options granted under the Company's 1999 Equity Incentive Plan at a
weighted average exercise price of $0.78 per share. The Company received an
aggregate of $178,000 in cash. All sales of stock pursuant to option exercises
were made in reliance on Rule 701 under the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 * Second Amended and Restated Certificate of Incorporation
3.2 * Bylaws.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
- ---------------
* Filed with the Company's Registration Statement on Form S-1 (Registration No.
333-86901) declared effective by the SEC on January 31, 2000, incorporated
herein by reference.
21
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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.
QUANTUM EFFECT DEVICES, INC.
(Registrant)
Date: May 14 , 2000 /s/ Thomas Riordan
--------------------------------------------
Thomas Riordan
Chief Executive Officer and Director
(PRINCIPAL EXECUTIVE OFFICER)
Date: May 14, 2000 /s/ Howard Bailey
--------------------------------------------
Howard Bailey
Chief Financial Officer and Secretary
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUANTUM
EFFECT DEVICES FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 48,418
<SECURITIES> 7,909
<RECEIVABLES> 8,709
<ALLOWANCES> (458)
<INVENTORY> 9,924
<CURRENT-ASSETS> 76,611
<PP&E> 9,148
<DEPRECIATION> (5,662)
<TOTAL-ASSETS> 80,097
<CURRENT-LIABILITIES> 12,605
<BONDS> 1,125
0
0
<COMMON> 26
<OTHER-SE> 66,341
<TOTAL-LIABILITY-AND-EQUITY> 80,097
<SALES> 29,966
<TOTAL-REVENUES> 32,613
<CGS> 17,710
<TOTAL-COSTS> 17,710
<OTHER-EXPENSES> 18,315
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 373
<INCOME-PRETAX> (3,039)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,039)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,039)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
