<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 2000
REGISTRATION NO. 333-86901
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
QUANTUM EFFECT DEVICES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3674 77-0290544
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
</TABLE>
3255-3 SCOTT BOULEVARD, SUITE 200
SANTA CLARA, CALIFORNIA 95054
(408) 565-0300
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
THOMAS J. RIORDAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
QUANTUM EFFECT DEVICES, INC.
3255-3 SCOTT BOULEVARD, SUITE 200
SANTA CLARA, CALIFORNIA 95054
(408) 565-0300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
ALAN C. MENDELSON, ESQ. JEFFREY R. VETTER, ESQ.
MATTHEW W. SONSINI, ESQ. CRAIG A. MENDEN, ESQ.
Cooley Godward LLP Fenwick & West LLP
Five Palo Alto Square Two Palo Alto Square
3000 El Camino Real 3000 El Camino Real
Palo Alto, CA 94306-2155 Palo Alto, CA 94306-2155
(650) 843-5000 (650) 494-0600
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / / ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JANUARY 11, 2000
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
3,720,000 SHARES
[LOGO]
COMMON STOCK
-----------------
QUANTUM EFFECT DEVICES, INC. IS OFFERING 3,000,000 SHARES, AND THE SELLING
STOCKHOLDER IS OFFERING 720,000 SHARES. THIS IS OUR INITIAL PUBLIC OFFERING AND
NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL
PUBLIC OFFERING PRICE WILL BE BETWEEN $10 AND $12 PER SHARE.
-------------------
WE HAVE FILED AN APPLICATION FOR OUR COMMON STOCK TO BE QUOTED ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "QEDI."
-------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS PROCEEDS TO QED STOCKHOLDER
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
PER SHARE..................... $ $ $ $
TOTAL......................... $ $ $ $
</TABLE>
QED AND THE SELLING STOCKHOLDER HAVE GRANTED THE UNDERWRITERS THE RIGHT TO
PURCHASE UP TO AN ADDITIONAL 558,000 SHARES TO COVER OVER-ALLOTMENTS.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MORGAN STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE SHARES TO PURCHASERS ON
, 2000.
-------------------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
ROBERTSON STEPHENS
, 2000
<PAGE>
[DESCRIPTION OF INSIDE FRONT COVER GRAPHICS:
- - Photograph of a portion of QED's RM7000 embedded microprocessor
- - Overlaying the photograph of the RM7000 are stylized renditions of:
- a television set, set top box and satellite;
- a lap-top computer connected to an image of the world; and
- a laser printer.
- - at the top of the graphic are the names and logos of the following
significant representative customers of QED: Cisco Systems, Hewlett-Packard
Company, Lexmark International Group, Echostar Communications Corporation,
Extreme Networks, Inc., EFI Electronics Corporation, Pairgain Technologies,
Inc., Aeroflex Inc., Cosign Communications and ConvergeNet.
- - at the bottom of the page are the phrase "Powering the Communications
Revolution" and QED's name and logo.]
[DESCRIPTION OF GATEFOLD GRAPHICS:
- - in the background, photograph of a portion of a semiconductor wafer
containing numerous individual semiconductors;
- - graphics depicting the evolution of each of QED's target markets:
- networking/communication infrastructure equipment: pictures of an
elderly woman listening to a gramophone, an early version of the
telephone, a more modern image of a telephone, a satellite dish and a
lap-top computer connected to an image of the world (with the captions
"telegraph", "telephone", "modem" and "world wide web").
- business network equipment: pictures of letters carved in stone, an
early printing press, a letter from a typewriter and a laser printer
(with the captions "printing press", "typewriter" and "networked
printer").
- consumer network products: pictures of a woman in old-fashioned dress,
an early movie camera, a black and white television set, a hand-held
video camera, a modern television set, together with pictures of a set
top box and a satellite (with the captions "black and white movies",
"color video", "cable television" and "internet access"), all of which
overlay a schematic diagram of connections among consumer products.
- - on the left-hand side of the gatefold, the following captions, representing
QED's three target markets, and associated text:
- "Networking/Communication Infrastructure Equipment," with the following
text, "QED designs its newest embedded microprocessor products to meet
the high-performance needs of the most complex network infrastructure
equipment."
- "Business Network Equipment," with the following text, "QED's embedded
microprocessors are used in business network equipment to print complex
images, send documents and connect to enterprise networks."
- "Consumer Network Products," with the following text, "QED's embedded
microprocessors power a new class of network products that enable
access to the Internet through the television."
- - in the top right-hand corner of the gatefold, the caption, "Focus on High
Performance," with the following text: "Network users today seek immediate
access to more information and entertainment content from their intranets
and the Internet. Manufacturers of high performance products connected to
the network, from network infrastructure equipment, to business network
equipment, to consumer
<PAGE>
network equipment, use our embedded microprocessors to deliver, access and
present this network content."
- - in the lower right-hand corner of the gatefold, the caption "Quantum Effect
Devices," with the following text: "QED is a leading developer of 64-bit
embedded microprocessors for use in information-intensive products requiring
high performance. Our embedded microprocessors use the standard MIPS
architecture to achieve high system performance at a reasonable cost. QED's
embedded microprocessors also include proprietary features designed
specifically for our target markets."
- - in the lower left-hand corner and the center of the gatefold, QED's name and
logo.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Prospectus Summary............................. 4
Risk Factors................................... 6
Special Note Regarding Forward-Looking
Statements................................... 17
Use of Proceeds................................ 18
Dividend Policy................................ 18
Capitalization................................. 19
Dilution....................................... 20
Selected Financial Data........................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 22
<CAPTION>
PAGE
---------
<S> <C>
Business....................................... 31
Management..................................... 44
Certain Transactions........................... 55
Principal and Selling Stockholders............. 57
Description of Capital Stock................... 60
Shares Eligible for Future Sale................ 64
Underwriters................................... 66
Legal Matters.................................. 68
Experts........................................ 68
Where You Can Find More Information............ 68
Index to Financial Statements.................. F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We and the selling stockholder are offering to
sell, and seeking offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of the prospectus or of any sale of the common stock.
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
For investors outside the United States: neither we nor any of the
underwriters have done anything that would permit this offering or possession or
distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to inform
yourselves about and to observe any restrictions relating to this offering and
the distribution of this prospectus.
3
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE ENTIRE PROSPECTUS,
INCLUDING THE MORE DETAILED INFORMATION IN OUR FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD CAREFULLY
CONSIDER, AMONG OTHER THINGS, THE MATTERS SET FORTH IN "RISK FACTORS."
QED is a leading developer of high-performance embedded microprocessors that
perform information processing in networking/communications infrastructure
equipment, such as routers and switches; business network equipment, such as
laser printers, network computers and data storage systems; and consumer network
products, such as set-top boxes and cable modems. Each of our target markets has
experienced rapid growth as a result of the widespread deployment of networks
such as intranets and the Internet. These networks have increased in number and
complexity as has the volume of traffic they carry. The network infrastructure
and devices used to access network content must be able to cost-effectively
process increasing amounts of information, which requires larger numbers of
increasingly high-performance embedded microprocessors. Dataquest, Inc.
estimates that approximately 106 million high-performance embedded
microprocessors were shipped in 1998, and that this number will grow to
approximately 228 million in 2002.
The key advantages of our embedded microprocessors include their high levels
of information processing performance, reduced time to market and
price-competitiveness. We believe that our newest generation product, the
RM7000, is the highest-performance 64-bit embedded microprocessor in commercial
production. This product is designed for demanding networking applications, such
as high-speed routers and switches. As the cost of manufacturing our products
declines, we broaden our target markets to include customers that demand a
balance of price and performance. We consider our ability to migrate our
products into new markets to be a key advantage for us.
Embedded microprocessors are often based on a high-efficiency design
approach known as reduced instruction set computing, or RISC, which is
fundamentally different from the design approach used in most desktop computer
microprocessors. The leading RISC architecture is known as MIPS, and we
incorporate this architecture into our products. We believe that we have
assembled one of the foremost MIPS architecture design teams, with engineers
averaging approximately 13 years of microprocessor design experience. We use
third parties to fabricate our microprocessors, and by doing so seek to take
advantage of the semiconductor process expertise of leading manufacturers. This
also allows us to work with those manufacturers offering the most advanced
manufacturing processes and competitive prices.
Our objective is to maintain a leadership position in designing and
developing high-performance embedded microprocessors. In addition, we intend to
continue to introduce our products into the high-performance segments of the
embedded microprocessor market, eventually migrating these products into more
price-sensitive segments within our target markets. Further, we intend to
continue establishing relationships with customers that are market leaders in
order to be on the leading edge of new technologies and market trends.
We generate revenue primarily from direct sales of our products to systems
manufacturers and to a lesser extent from royalties associated with our license
of microprocessor designs to third parties. We have customer relationships with
market leaders in each of our target markets, including Cisco Systems, Inc.,
Hewlett-Packard Company and WebTV Networks, Inc.
We have incurred net losses in each quarter since we began developing and
marketing our own products. As of December 31, 1999, we had an accumulated
deficit of $26.6 million, and we may not achieve or sustain profitability.
We incorporated in California in August 1991 and reincorporated in Delaware
in December 1999. Our principal executive offices are located at 3255-3 Scott
Boulevard, Suite 200, Santa Clara, California 95054, and our telephone number is
(408) 565-0300. We maintain a worldwide web site at www.qedinc.com. The
information on our web site is not incorporated by reference into this
prospectus. All trademarks and trade names appearing in this prospectus are the
property of their respective holders.
Unless otherwise indicated, all information in this prospectus:
- gives effect to the conversion of each outstanding share of preferred
stock into one share of common stock effective upon the closing of the
offering; and
- assumes no exercise of the underwriters' over-allotment option.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock to be offered by us............ 3,000,000 shares
Common stock to be offered by the selling 720,000 shares
stockholder...............................
Common stock to be outstanding after this 25,912,501 shares
offering..................................
Use of proceeds to us....................... We intend to use the net proceeds from this
offering for general corporate purposes,
including capital expenditures and working
capital. See "Use of Proceeds."
Proposed Nasdaq National Market symbol...... QEDI
</TABLE>
The number of shares of our common stock to be outstanding immediately after
this offering is based on the number of shares outstanding at December 31, 1999.
This number does not take into account:
- 4,704,201 shares of common stock issuable upon exercise of outstanding
options at an average exercise price of $2.02 per share;
- 177,750 shares of common stock issuable upon exercise of outstanding
warrants at an average exercise price of $2.03 per share; and
- 1,839,635 shares of common stock reserved for issuance under our stock
plans, which are not subject to outstanding options.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The pro forma basic and diluted share calculation below reflects the
conversion upon the closing of this offering of all outstanding shares of
preferred stock into 13,618,837 shares of common stock as if the conversion
occurred at the date of original issuance.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED DECEMBER 31,
----------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product revenue........................ $ -- $ -- $ -- $ 1,428 $ 10,937 $ 2,810 $ 19,338
Total revenue.......................... 7,870 5,827 10,063 6,480 15,362 5,127 21,227
Gross profit........................... 7,870 5,827 10,063 2,766 6,849 2,007 9,138
Operating income (loss)................ 1,445 (2,041) (1,481) (9,915) (11,745) (6,885) (2,395)
Net income (loss)...................... 890 (1,041) (1,201) (9,883) (11,769) (6,865) (2,259)
Basic income (loss) per share.......... $ .19 $ (.20) $ (.21) $ (1.53) $ (1.45) $ (.87) $ (.25)
Diluted income (loss) per share........ $ .14 $ (.20) $ (.21) $ (1.53) $ (1.45) $ (.87) $ (.25)
Basic average common shares
outstanding.......................... 4,644 5,320 5,746 6,451 8,111 7,901 8,911
Diluted average common shares
outstanding.......................... 6,444 5,320 5,746 6,451 8,111 7,901 8,911
Pro forma basic and diluted net loss
per share............................ $ (.63) $ (.10)
Shares used in pro forma per share
calculation.......................... 18,717 22,530
</TABLE>
The "as adjusted" column below reflects the issuance and sale of 3,000,000
shares of our common stock by us, at an assumed initial public offering price of
$11.00 per share, and the application of the net proceeds to us from the
offering, after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, short-term investments and restricted cash........................ $ 11,595 $ 41,335
Working capital........................................................................... 15,343 45,083
Total assets.............................................................................. 28,869 58,609
Long-term liabilities, less current portion............................................... 1,542 1,542
Total stockholders' equity................................................................ 16,496 46,236
</TABLE>
5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL
OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE MAKING AN
INVESTMENT DECISION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR
BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY
AFFECTED. IN THIS CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND
YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
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 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 six months
ended December 31, 1999, 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.
6
<PAGE>
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.
THE INABILITY OF OUR RM7000 EMBEDDED MICROPROCESSOR TO ACHIEVE CONTINUED
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 continued 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
IMPAIR 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.
7
<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.
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
8
<PAGE>
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 six months ended December 31, 1999, 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
- 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
9
<PAGE>
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.
In the past, we have experienced delays in the delivery of products by our
manufacturers, and we may experience delays in the future. As a result of the
September 21, 1999 earthquake in Taiwan, many semiconductor manufacturers,
including TSMC, experienced disruptions in their operations resulting in the
temporary cessation of semiconductor fabrication, the loss of some work in
process, delays in semiconductor shipments and limitations on manufacturing
capacity. To date, the earthquake has not had a material impact on our
operations. At this time, it is difficult to predict whether the earthquake will
have a material impact on our operations in the future. The disruption in
semiconductor manufacturing may result in product shortages that exceed our
current inventory reserves. Furthermore, even if we do not experience product
shortages, suppliers of other components incorporated into our customers'
products may experience shortages, which could affect the demand for our
products.
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.
10
<PAGE>
WE RELY ON FOREIGN THIRD-PARTY MANUFACTURING OPERATIONS, WHICH EXPOSES US TO
RISKS INHERENT IN INTERNATIONAL OPERATIONS.
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;
11
<PAGE>
- discontinue the use of certain technology; or
- 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 six month period ended December 31, 1999, these same four
customers accounted for 34%, 16%, 14%, and 5% 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.
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<PAGE>
MANY OF OUR SALES REPRESENTATIVES ARE NEW TO THE COMPANY, 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
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 97 as of December 31, 1999, 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.
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<PAGE>
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.
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.
OUR FAILURE AND THE FAILURE OF OUR KEY MANUFACTURERS AND CUSTOMERS TO BE
YEAR 2000 COMPLIANT MAY HARM OUR BUSINESS AND RESULTS OF OPERATIONS.
The Year 2000 computer issue creates a significant risk for us in at least
three areas:
- systems we use to run our business;
- systems used by our manufacturers; and
- warranty or other claims arising from our products.
A failure in any of these areas to be Year 2000 compliant may seriously harm
our business and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Computer
System Compliance."
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL YOUR
SHARES AT OR ABOVE THE OFFERING PRICE.
The market for the securities of high technology companies in general, and
of companies in the semiconductor industries in particular, has been highly
volatile. It is likely that the price of our common stock will fluctuate widely
in the future. Factors that could affect the trading price of our common stock
include:
- quarterly variations in our operating results;
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<PAGE>
- changes in the general conditions of the embedded microprocessor or
semiconductor markets;
- changes in financial estimates or recommendations by stock market analysts
regarding us or our competitors;
- our sales of common stock or other securities in the future;
- the hiring or departure of our key personnel;
- announcements by us or our competitors of significant contracts, new
products or product enhancements, acquisitions, distribution
relationships, joint ventures or capital commitments; and
- changes in market valuations of other embedded microprocessor companies.
PURCHASERS OF COMMON STOCK IN THIS OFFERING WILL SUFFER IMMEDIATE AND
SUBSTANTIAL DILUTION.
The initial public offering price is substantially higher than the book
value per share of our common stock. As a result, you will experience immediate
and substantial dilution of $9.22 in the pro forma net tangible book value per
share, based on an assumed public offering price of $11.00 per share. This
dilution is in large part because our earlier investors paid substantially less
than the initial public offering price in this offering when they purchased
their shares of common stock. You will experience additional dilution upon
exercise of outstanding stock options and warrants.
MANAGEMENT HAS BROAD DISCRETION ON HOW TO USE THE PROCEEDS FROM THIS
OFFERING AND MAY NOT APPLY THE PROCEEDS IN A MANNER THAT INCREASES THE VALUE
OF YOUR INVESTMENT.
Management will have broad discretion with respect to the expenditure of the
net proceeds from this offering. The proceeds have not been allocated for
specific purposes. You will be entrusting your funds to our management, upon
whose judgment you must depend, with limited information concerning the specific
working capital requirements and general corporate purposes to which the funds
will ultimately be applied. We may not be able to yield a significant return on
any investment of the proceeds.
WE MAY ENGAGE IN ACQUISITIONS THAT MAY HARM OUR OPERATING RESULTS, DILUTE
OUR STOCKHOLDERS AND CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT
LIABILITIES.
As part of our business strategy, we may make investments in complementary
companies, products or technologies that we believe would be advantageous to the
development of our business. If we acquire a company, we could have difficulty
in assimilating that company's personnel and operations. In addition, the key
personnel of the acquired company may decide not to work for us. If we make
other types of acquisitions, we could have difficulty in assimilating the
acquired technology or products into our operations. These difficulties could
disrupt our ongoing business, distract our management and employees and increase
our expenses. Furthermore, we may issue equity securities to pay for any future
acquisitions, which could be dilutive to our existing stockholders. We may also
incur debt or assume contingent liabilities in connection with acquisitions,
which could harm our operating results.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS OR DELAWARE LAW
MAY DELAY OR PREVENT A CHANGE OF CONTROL TRANSACTION AND, THEREFORE, DEPRESS
THE MARKET PRICE OF OUR STOCK.
Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could delay, defer or prevent a change in control of our
company on terms which you may deem advantageous. These provisions could limit
the price that investors might be willing to pay in the future for shares of our
common stock. These provisions:
- authorize the issuance of "blank check" preferred stock, which is
preferred stock that our board of directors can create and issue without
prior stockholder approval, with rights senior to those of common stock;
15
<PAGE>
- provide for a board of directors with staggered terms;
- prohibit stockholder action by written consent; and
- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.
A LIMITED NUMBER OF STOCKHOLDERS WILL HAVE THE ABILITY TO INFLUENCE THE
OUTCOME OF DIRECTOR ELECTIONS AND OTHER MATTERS REQUIRING STOCKHOLDER
APPROVAL.
After completion of this offering, our officers and directors and parties
affiliated with or related to these persons or to us will own approximately
39.9% of the outstanding shares of our common stock. Accordingly, these
stockholders will likely determine the outcome of director elections and other
matters submitted to our stockholders for approval, including potential mergers
or acquisitions and amendments to our certificate of incorporation. Stockholders
other than these principal stockholders are therefore likely to have little or
no influence on decisions regarding these matters.
THE PRICE OF OUR STOCK COULD DECREASE AS A RESULT OF SHARES BEING SOLD IN
THE MARKET AFTER THE OFFERING.
Sales of a substantial number of shares of our common stock in the public
market following this offering could cause the market price of our common stock
to decline. The number of shares of common stock available for sale in the
public market is limited by restrictions under federal securities law and under
lockup agreements that our stockholders have entered into with the underwriters,
and with us. Those lockup agreements restrict our stockholders from selling,
pledging or otherwise disposing of their shares for a period of 180 days after
the date of this prospectus without the prior written consent of Morgan
Stanley & Co. Incorporated. However, Morgan Stanley & Co. Incorporated may, in
its sole discretion, release all or any portion of the common stock from the
restrictions of the lockup agreements. The following table indicates
approximately when the 22,192,501 shares of our common stock that are not being
sold in the offering, but which were outstanding as of December 31, 1999,
assuming the conversion of all outstanding preferred stock, will be eligible for
sale into the public market:
<TABLE>
<CAPTION>
ELIGIBILITY OF
RESTRICTED
SHARES FOR SALE IN
PUBLIC MARKET
---------------------
<S> <C>
On the date of this prospectus......................................... --
180 days after the date of this prospectus............................. 11,668,412
180 days after the date of this prospectus, subject to volume
limitations.......................................................... 10,341,726
More than 180 days after the date of this prospectus................... 182,363
</TABLE>
Additionally, of the 4,881,951 shares issuable upon exercise of outstanding
options and warrants to purchase our common stock outstanding as of
December 31, 1999, approximately 2,072,574 shares will be vested and eligible
for sale 180 days after the date of this prospectus. For a further description
of the eligibility of shares for sale into the public market following the
offering. See "Shares Eligible for Future Sale."
In addition, as soon as practicable after the date of this prospectus, we
intend to file a registration statement on Form S-8 with the Securities and
Exchange Commission covering the 11,000,000 shares of common stock reserved for
issuance under our 1999 Equity Incentive Plan, 1999 Non-Employee Directors'
Stock Option Plan and 1999 Employee Stock Purchase Plan and for options issued
under our previous plans.
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<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. In some cases, you can identify forward-looking
statements by terms such as "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential," or "continue," or
the negative of such terms or other comparable technology. The forward-looking
statements contained in this prospectus involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, level of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these statements. These factors include
those listed under "Risk Factors" and elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
prospectus.
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<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of 3,000,000 shares of
common stock we are offering will be approximately $29.7 million, at an assumed
initial public offering price of $11.00 per share, after deducting estimated
underwriting discounts and commissions and after deducting estimated offering
expenses payable by us. If the underwriters exercise their over-allotment option
in full, we estimate that our net proceeds will be approximately $34.3 million.
We will not receive any proceeds from the sale of shares of common stock by the
selling stockholder. The primary purposes of this offering are to obtain
additional equity capital, create a public market for our common stock and
facilitate future access to public markets.
We intend to use the net proceeds we receive from this offering for general
corporate purposes, including capital expenditures and working capital. The
amounts that we expend for these purposes will depend on a number of factors,
including future revenue growth, if any, and the amount of cash we generate from
operations. As a result, we will retain broad discretion in the allocation of
the net proceeds of this offering. A portion of the net proceeds may also be
used to acquire or invest in complementary businesses, technologies, product
lines or products. We have no current agreements or commitments with respect to
any acquisition or investment, and we are not currently engaged in negotiations
with respect to any acquisition or investment. Pending these uses, we intend to
invest the net proceeds of this offering in investment grade, interest-bearing
securities.
DIVIDEND POLICY
We have never declared nor paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of our board of directors and will depend on
our financial condition, results of operations, capital requirements, general
business condition and other factors as our board of directors may deem
relevant.
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<PAGE>
CAPITALIZATION
The following table sets forth QED's capitalization as of December 31, 1999
(1) on an actual basis, (2) on a pro forma basis to reflect the conversion of
all outstanding shares of preferred stock into an aggregate of 13,618,837 shares
of common stock upon consummation of this offering, and (3) on a pro forma as
adjusted basis to give effect to the sale of the 3,000,000 shares of common
stock by QED in this offering, at an assumed initial public offering price of
$11.00 per share, and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by QED.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term debt and leases, less current portion............................. $ 1,542 $ 1,542 $ 1,542
---------- --------- ---------
Stockholders' equity:
Preferred stock, $.001 par value, 13,897,750 shares authorized, 13,618,837
shares issued and outstanding, actual; 10,000,000 shares authorized, no
shares issued and outstanding pro forma and pro forma as adjusted....... 14 -- --
Common stock, $.001 par value, 29,000,000 shares authorized, 9,293,664
shares issued and outstanding, actual; 100,000,000 shares authorized,
22,912,501 shares issued and outstanding, pro forma; 100,000,000 shares
authorized, 25,912,501 shares issued and outstanding, pro forma as
adjusted................................................................ 9 23 26
Additional paid-in capital................................................ 43,846 43,846 73,583
Notes receivable from stockholder......................................... (42) (42) (42)
Deferred stock-based compensation......................................... (708) (708) (708)
Accumulated deficit....................................................... (26,623) (26,623) (26,623)
---------- --------- ---------
Total stockholders' equity.............................................. 16,496 16,496 46,236
---------- --------- ---------
Total capitalization.................................................. $ 18,038 $ 18,038 $ 47,778
========== ========= =========
</TABLE>
See Notes 4 and 9 of Notes to Financial Statements for a description of our
long-term debt and leases.
The share numbers in the table above exclude:
- 4,704,201 shares of common stock issuable upon exercise of options
outstanding at December 31, 1999 at a weighted average price of $2.02 per
share;
- outstanding warrants for the purchase of 177,750 shares of our common
stock at a weighted average exercise price of $2.03 per share; and
- an aggregate of 1,839,635 shares reserved for issuance under our 1999
Equity Incentive Plan, 1999 Non-Employee Directors' Stock Option Plan and
1999 Employee Stock Purchase Plan.
You should read this table in conjunction with "Management--Employee Benefit
Plans," "Description of Capital Stock" and Note 7 of Notes to Financial
Statements.
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DILUTION
Pro forma net tangible book value as of December 31, 1999 was
$16.5 million, or $.72 per share, after giving effect to the conversion of all
outstanding shares of preferred stock into an aggregate of 13,618,837 shares of
common stock which will occur upon the closing of this offering. Pro forma net
tangible book value per share before the offering has been determined by
dividing pro forma net tangible book value, total tangible assets less total
liabilities by the pro forma number of shares of common stock outstanding at
December 31, 1999. After giving effect to the sale of the common stock by QED in
this offering, at an assumed initial public offering price of $11.00 per share,
and after deducting estimated underwriting discounts and commissions and
estimated expenses of the offering payable by QED, the pro forma net tangible
book value as of December 31, 1999, would have been $46.2 million, or $1.78 per
share. This represents an increase in pro forma net tangible book value per
share of $1.06 to existing stockholders and dilution in pro forma net tangible
book value per share of $9.22 to new investors who purchase shares in the
offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $ 11.00
Pro forma net tangible book value per share as of September 30, 1999....... $ .72
Increase in pro forma net tangible book value per share attributable to new
investors................................................................ 1.06
---------
Pro forma net tangible book value per share after this offering.............. 1.78
---------
Dilution per share to new investors.......................................... $ 9.22
=========
</TABLE>
The following table sets forth, on the pro forma basis described above, as
of December 31, 1999 the difference between the number of shares of common stock
purchased from QED, the total consideration paid, and the average price per
share paid by the existing stockholders and by investors purchasing shares in
this offering, based upon an assumed initial public offering price of $11.00 per
share, before deducting estimated underwriting discounts and commissions and
estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................................. 22,912,501 88.4% $ 41,563,000 55.7% $ 1.81
New investors.......................................... 3,000,000 11.6 33,000,000 44.3 11.00
------------ --------- ------------- ---------
Totals............................................... 25,912,501 100.0% $ 74,563,000 100.0%
============ ========= ============= =========
</TABLE>
The following table indicates the effect of sales by the selling stockholder
on existing and new stockholders:
<TABLE>
<CAPTION>
SHARES HELD ASSUMING
SHARES HELD BEFORE THE SHARES HELD AFTER THE EXERCISE OF OVER-
OFFERING OFFERING ALLOTMENT OPTIONS
------------------------- ------------------------- -------------------------
NUMBERS PERCENT NUMBER PERCENT NUMBER PERCENT
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Existing stockholders...................... 22,912,501 88.4% 22,192,501 85.6% 22,084,501 83.8%
New investors.............................. 3,000,000 11.6 3,720,000 14.4 4,278,000 16.2
------------ --------- ------------ --------- ------------ ---------
Total................................ 25,912,501 100.0% 25,912,501 100.0% 26,362,501 100.0%
============ ========= ============ ========= ============ =========
</TABLE>
For a description of the stock owned by the selling stockholder, see
"Principal and Selling Stockholders."
The discussion and tables above exclude 4,704,201 shares of common stock
issuable upon exercise of outstanding stock options at a weighted average
exercise price of $2.02 per share and warrants to purchase 177,750 shares of
common stock at a weighted average exercise price of $2.03 per share. To the
extent that outstanding options are exercised in the future, investors in this
offering will experience further dilution.
20
<PAGE>
SELECTED FINANCIAL DATA
You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes included elsewhere in
this prospectus. The balance sheet data as of June 30, 1998 and 1999 and the
statement of operations data for the years ended June 30, 1997, 1998 and 1999
have been derived from the audited financial statements of QED included
elsewhere in this prospectus. The balance sheet data as of June 30, 1995, 1996
and 1997 and the statement of operations data for the years ended June 30, 1995
and 1996 have been derived from audited financial statements of QED not included
in this prospectus. The balance sheet data as of December 31, 1999 and the
statement of operations data for the six months ended December 31, 1999 and 1998
have been derived from the unaudited financial statements of QED included
elsewhere in this prospectus. The unaudited financial data is not indicative of
the results for our full fiscal year or any other period.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER
YEAR ENDED JUNE 30, 31,
----------------------------------------------------- -----------
1995 1996 1997 1998 1999 1998
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue................................... $ -- $ -- $ -- $ 1,428 $ 10,937 $ 2,810
Royalty revenue................................... 2,363 2,712 8,850 5,052 4,425 2,317
Contract development revenue...................... 5,507 3,115 1,213 -- -- --
--------- --------- --------- --------- --------- ---------
Total revenue................................... 7,870 5,827 10,063 6,480 15,362 5,127
--------- --------- --------- --------- --------- ---------
Cost of product revenue............................. -- -- -- 3,714 8,513 3,120
--------- --------- --------- --------- --------- ---------
Gross profit........................................ 7,870 5,827 10,063 2,766 6,849 2,007
--------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development.......................... 5,605 6,733 9,421 9,552 12,381 6,337
Selling, general and administrative............... 820 1,135 2,123 2,979 5,436 2,275
Stock-based compensation.......................... -- -- -- 150 777 280
--------- --------- --------- --------- --------- ---------
Total operating expenses........................ 6,425 7,868 11,544 12,681 18,594 8,892
--------- --------- --------- --------- --------- ---------
Income (loss) from operations....................... 1,445 (2,041) (1,481) (9,915) (11,745) (6,885)
Interest income (expense), net...................... 64 350 340 121 (24) 20
--------- --------- --------- --------- --------- ---------
Net income (loss) before taxes...................... 1,509 (1,691) (1,141) (9,794) (11,769) (6,865)
Provision (benefit) for income taxes................ 619 (650) 60 89 -- --
--------- --------- --------- --------- --------- ---------
Net income (loss)................................... $ 890 $ (1,041) $ (1,201) $ (9,883) $ (11,769) $ (6,865)
========= ========= ========= ========= ========= =========
Basic income (loss) per share....................... $ .19 $ (.20) $ (.21) $ (1.53) $ (1.45) $ (.87)
========= ========= ========= ========= ========= =========
Diluted income (loss) per share..................... $ .14 $ (.20) $ (.21) $ (1.53) $ (1.45) $ (.87)
========= ========= ========= ========= ========= =========
Basic average common shares outstanding............. 4,644 5,320 5,746 6,451 8,111 7,901
========= ========= ========= ========= ========= =========
Diluted average common shares outstanding........... 6,444 5,320 5,746 6,451 8,111 7,901
========= ========= ========= ========= ========= =========
Pro forma basic and diluted net loss per share...... $ (.63)
=========
Shares used in pro forma per share calculation...... 18,717
=========
<CAPTION>
1999
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue................................... $ 19,338
Royalty revenue................................... 1,889
Contract development revenue...................... --
---------
Total revenue................................... 21,227
---------
Cost of product revenue............................. 12,089
---------
Gross profit........................................ 9,138
---------
Operating expenses:
Research and development.......................... 6,561
Selling, general and administrative............... 4,300
Stock-based compensation.......................... 672
---------
Total operating expenses........................ 11,533
---------
Income (loss) from operations....................... (2,395)
Interest income (expense), net...................... 136
---------
Net income (loss) before taxes...................... (2,259)
Provision (benefit) for income taxes................ --
---------
Net income (loss)................................... $ (2,259)
=========
Basic income (loss) per share....................... $ (.25)
=========
Diluted income (loss) per share..................... $ (.25)
=========
Basic average common shares outstanding............. 8,911
=========
Diluted average common shares outstanding........... 8,911
=========
Pro forma basic and diluted net loss per share...... $ (.10)
=========
Shares used in pro forma per share calculation...... 22,530
=========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------------------------------------- -------------
1995 1996 1997 1998 1999 1999
--------- --------- --------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, short-term investments and
restricted cash.......................................... $ 2,005 $ 8,215 $ 6,973 $ 9,756 $ 19,465 $ 11,595
Working capital surplus (deficit).......................... (498) 5,036 4,027 8,221 18,174 15,343
Total assets............................................... 5,791 12,243 10,657 15,856 27,879 28,869
Long-term liabilities, less current portion................ -- -- -- 1,621 2,375 1,542
Total stockholders' equity................................. 2,061 7,156 5,995 8,509 17,606 16,496
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS WITH THE FINANCIAL STATEMENTS AND THE NOTES TO THE
FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION AND
ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES
AND ASSUMPTIONS. THE ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY FACTORS, INCLUDING THOSE
SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a leading developer 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 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 is dependent 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 changes in our business model, we have not entered into any
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.
We sell our products primarily to original equipment manufacturers and
recognize product revenue at the time of product shipment, net of accruals for
sales returns and allowances. We recognize royalty revenue when third parties
and related parties sell products we have designed.
We market and sell our products primarily through a direct sales force and
through sales representatives in the United States. Although we have sales
contracts with representatives in Europe and Asia, substantially all of our
product sales to date have been to U.S.-based original equipment manufacturers
and their manufacturing subcontractors. In both the year ended June 30, 1999 and
the six months ended December 31, 1999, product sales to U.S.-based customers
and their manufacturing subcontractors accounted for 96% of our product revenue.
Also, sales to our four largest customers, including sales to their respective
manufacturing subcontractors, accounted for 23%, 20%, 15% and 12% of total
revenue in the year ended June 30, 1999 and 34%, 16%, 14%, and 5% of total
revenue in the six months ended December 31, 1999.
Cost of revenue includes product costs, 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
22
<PAGE>
employee and consultant compensation arrangements. Employee-related stock-based
compensation expense is based on the deemed fair value of our common stock and
the exercise price of options to purchase that stock on the date of grant and is
being 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.
Our gross margin is affected by the mix of products sold, the position of a
product in its life cycle and expenses in connection with the manufacturing
process. For example, newly-introduced products generally have higher average
selling prices, which typically decline over product life cycles due to
competitive pressures and technological advances.
From July 1, 1997 through December 31, 1999, we have incurred losses in each
quarter. If our revenue does not increase, our operating results will be
adversely affected, and we may not be able to achieve profitability. At
December 31, 1999, we had an accumulated deficit of $26.6 million.
QUARTERLY RESULTS OF OPERATIONS
Because we have a limited operating history under our current business
model, we believe that year-to-year comparisons prior to 1999 are less
meaningful than an analysis of recent quarterly operating results. Accordingly,
we are providing a discussion and analysis of our results of operations for the
six quarters ended December 31, 1999.
The following tables present selected unaudited quarterly financial
information for each of the six quarters through December 31, 1999 and the
percentage of total revenue represented by each item in our statement of
operations. This information has been presented on the same basis as the audited
financial statements appearing elsewhere in this prospectus and, in the opinion
of management, reflects all adjustments necessary for a fair presentation of
this information under generally accepted accounting principles. These quarterly
results are not necessarily indicative of results for any future period.
23
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
SEPT.
SEPT. 30, DEC. 31, MAR. 31, JUN. 30, 30, DEC. 31,
1998 1998 1999 1999 1999 1999
--------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue.................. $ 1,383 $ 1,427 $ 2,512 $ 5,615 $ 9,808 $ 9,530
Royalty revenue.................. 507 255 246 380 50 730
Royalty revenue from related
parties........................ 732 823 837 645 609 500
------- ------- ------- ------- ------- -------
Total revenue.................. 2,622 2,505 3,595 6,640 10,467 10,760
Cost of product revenue............ 1,845 1,275 1,951 3,442 6,414 5,675
------- ------- ------- ------- ------- -------
Gross profit....................... 777 1,230 1,644 3,198 4,053 5,085
Operating expenses:
Research and development......... 2,933 3,404 2,917 3,127 3,141 3,420
Selling, general and
administrative................. 1,147 1,128 1,274 1,887 2,125 2,175
Stock-based compensation......... 132 148 238 259 654 18
------- ------- ------- ------- ------- -------
Total operating expenses....... 4,212 4,680 4,429 5,273 5,920 5,613
Loss from operations............... (3,435) (3,450) (2,785) (2,075) (1,867) (528)
Interest income (expense), net..... 41 (21) (155) 111 113 23
------- ------- ------- ------- ------- -------
Net loss before income taxes....... (3,394) (3,471) (2,940) (1,964) (1,754) (505)
Provision for income taxes......... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Net loss........................... $(3,394) $(3,471) $(2,940) $(1,964) $(1,754) $ (505)
======= ======= ======= ======= ======= =======
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
----------------------------------------------------------------
SEPT.
SEPT. 30, DEC. 31, MAR. 31, JUN. 30, 30, DEC. 31,
1998 1998 1999 1999 1999 1999
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue.................. 52.8 % 57.0 % 69.9 % 84.6 % 93.7 % 88.6 %
Royalty revenue.................. 19.3 10.2 6.8 5.7 .5 6.8
Royalty revenue from related
parties........................ 27.9 32.8 23.3 9.7 5.8 4.6
------- ------- ------- ------- ------- -------
Total revenue.................. 100.0 100.0 100.0 100.0 100.0 100.0
Cost of product revenue............ 70.4 50.9 54.3 51.8 61.3 52.7
------- ------- ------- ------- ------- -------
Gross profit....................... 29.6 49.1 45.7 48.2 38.7 47.3
Operating expenses:
Research and development......... 111.9 135.9 81.1 47.2 30.0 31.8
Selling, general and
administrative................. 43.7 45.0 35.5 28.4 20.3 20.2
Stock-based compensation......... 5.0 5.9 6.6 3.9 6.2 .2
------- ------- ------- ------- ------- -------
Total operating expenses....... 160.6 186.8 123.2 79.5 56.5 52.2
------- ------- ------- ------- ------- -------
Loss from operations............... (131.0) (137.7) (77.5) (31.3) (17.8) (4.9)
Interest income (expense), net..... 1.6 (.8) (4.3) 1.7 1.0 .2
------- ------- ------- ------- ------- -------
Net loss before income taxes....... (129.4) (138.5) (81.8) (29.6) (16.8) (4.7)
Provision for income taxes......... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Net loss........................... (129.4)% (138.5)% (81.8)% (29.6)% (16.8)% (4.7)%
======= ======= ======= ======= ======= =======
</TABLE>
PRODUCT REVENUE. Product revenue has increased each quarter since we began
commercial volume shipments of products in the quarter ended March 31, 1998,
except for the quarter ended December 31, 1999. This growth is attributable to
new product introductions and enhancements and an increasing number of design
wins for our products. In addition, the increase in product revenue reflects
growth in our overall number of customers, as well as in the number of customers
reaching volume production. The 2.8% decrease in product revenue in the December
1999 quarter was due to a decrease in sales to the consumer appliance market,
which was almost entirely offset by an increase in sales to other markets.
Consumer appliances such as set-top boxes have a seasonal sales cycle that
generally peaks in the September quarter.
ROYALTY REVENUE AND ROYALTY REVENUE FROM RELATED PARTIES. 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. We have no
24
<PAGE>
control over the volume or timing of these shipments, which vary from quarter to
quarter. Therefore, royalty revenue for a particular quarter could fluctuate
based on the volume or timing of shipments. Royalty revenue for the quarter
ended December 31, 1999 was positively impacted by a non-recurring receipt of
$500,000 arising from the sub-licensing of our technology by an unrelated
licensee.
GROSS PROFIT. During the quarter ended September 30, 1998, when we first
hired employees such as test engineers to support the manufacturing process, the
low volume of product sales negatively affected our gross profit. Our product
gross profit improved from the quarter ended December 31, 1998 as a result of
our products maturing and sales volumes increasing. The decrease in our gross
profit during the quarter ended September 30, 1999 was due to a decline in
royalty revenue, changes in product mix, and higher than normal yield losses.
There are no direct costs associated with our royalty revenue, which therefore
has a high gross profit margin. During the quarter ended September 30, 1999, a
relatively high percentage of our revenue derived from the sale of our
lowest-margin consumer appliance products in conjunction with Christmas
production increases. Additionally, we experienced low wafer yields on one of
our high-margin products that further reduced our gross profit. We have revised
the mask set for this product, which helped to increase wafer yields and gross
profits in the quarter ended December 31, 1999. The increase in gross profit
during the quarter ended December 31, 1999 was also attributable to a favorable
product mix and a higher level of royalty revenue.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses have fluctuated
on a quarterly basis due to the timing of product development activities. Prior
to releasing new products, we incur one-time charges for test wafers and mask
set revisions. We have also incurred additional expenses related to hiring
contractors to assist in the development effort. In addition, the number of our
full-time employees has increased over the six quarters ended December 31, 1999,
as have related overhead expenses. To maintain our competitiveness, we expect to
continue to increase our research and development expenses in absolute dollars
each fiscal year for the foreseeable future.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses have generally increased over the six quarters ended December 31, 1999
in response to the growth in product revenue and our overall growth. The number
of our employees has increased on a quarterly basis during this period, as have
our related overhead expenses. In addition, some of the fluctuations in
quarterly selling, general and administrative expenses in the table above are
related to the timing of third party certification expenses, such as Microsoft
Windows CE certification. We expect selling, general and administrative expenses
to increase in absolute dollars as we add personnel, increase our sales and
marketing activities and incur additional costs related to being a public
company.
STOCK-BASED COMPENSATION. In connection with the granting of stock options
to our employees and consultants, we have recorded deferred stock-based
compensation totaling approximately $2.3 million through December 31, 1999, of
which $708,000 remains to be amortized. This amount is included as a component
of stockholders' equity and is being amortized by charges to operations over the
vesting period of the related options, on an accelerated basis. The amortization
of the remaining deferred stock-based compensation at December 31, 1999 will
result in additional charges to operations through the year ended June 30, 2003.
Future compensation charges would be reduced if any employee or consultant
terminates employment or consultation prior to the expiration of the option
vesting periods. During the quarter ended December 31, 1999, we terminated
certain consulting agreements. As a result, approximately $177,000 of previously
recognized compensation expense associated with unvested options was reversed.
The amortization of stock-based compensation is classified as a separate
component of operating expenses in our statement of operations.
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
25
<PAGE>
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.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenue for the periods indicated:
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
DECEMBER
YEAR ENDED JUNE 30, 31,
------------------------------- ---------
1997 1998 1999 1998
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
Product revenue...................................................................... -- % 22.0 % 71.2 % 54.8 %
Royalty revenue...................................................................... 26.7 27.7 9.0 14.9
Royalty revenue from related parties................................................. 73.3 50.3 19.8 30.3
------ ------- ------ -------
Total revenue...................................................................... 100.0 100.0 100.0 100.0
Cost of product revenue................................................................ -- 57.3 55.4 60.9
------ ------- ------ -------
Gross profit....................................................................... 100.0 42.7 44.6 39.1
Operating expenses:
Research and development............................................................. 93.6 147.4 80.6 123.6
Selling, general and administrative.................................................. 21.1 46.0 35.4 44.4
Stock-based compensation............................................................. -- 2.3 5.1 5.5
------ ------- ------ -------
Total operating expenses........................................................... 114.7 195.7 121.1 173.5
------ ------- ------ -------
Loss from operations................................................................... (14.7) (153.0) (76.5) (134.4)
Interest income (expense), net......................................................... 3.4 1.9 (.2) .4
------ ------- ------ -------
Net loss before income taxes........................................................... (11.3) (151.1) (76.7) (134.0)
Provision for income taxes............................................................. .6 1.4 -- --
------ ------- ------ -------
Net loss............................................................................... (11.9)% (152.5)% (76.7)% (134.0)%
====== ======= ====== =======
<CAPTION>
1999
--------
<S> <C>
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
Product revenue...................................................................... 91.1 %
Royalty revenue...................................................................... 3.7
Royalty revenue from related parties................................................. 5.2
------
Total revenue...................................................................... 100.0
Cost of product revenue................................................................ 57.0
------
Gross profit....................................................................... 43.0
Operating expenses:
Research and development............................................................. 30.9
Selling, general and administrative.................................................. 20.3
Stock-based compensation............................................................. 3.2
------
Total operating expenses........................................................... 54.3
------
Loss from operations................................................................... (11.3)
Interest income (expense), net......................................................... .6
------
Net loss before income taxes........................................................... (10.7)
Provision for income taxes............................................................. --
------
Net loss............................................................................... (10.7)%
======
</TABLE>
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999
PRODUCT REVENUE. Product revenue increased from $2.8 million for the six
months ended December 31, 1998 to $19.3 million for the six months ended
December 31, 1999. The increase was due to a large increase in our number of
customers as well as an increase in the number of customers reaching volume
production. The increase was also due to the introduction of our communications
and networking products in the second half of the year ended June 30, 1999.
ROYALTY REVENUE AND ROYALTY REVENUE FROM RELATED PARTIES. Total royalty
revenue decreased from $2.3 million for the six months ended December 31, 1998
to $1.9 million for the six months ended December 31, 1999. We did not license
any new integrated circuit designs during the six months ended December 31, 1999
and do not intend to do so in the future.
GROSS PROFIT. Overall gross margin increased from 39.1% in the six months
ended December 31, 1998 to 43.0% in the six months ended December 31, 1999. This
increase largely reflects the absorption of fixed manufacturing costs over
higher revenues, offset by the negative impact on gross margin from decreased
royalty revenue. Our September quarter is generally the quarter with the lowest
product gross margin due
26
<PAGE>
to product mix. In anticipation of the holiday shopping season, our consumer
network products customers increase production, and we sell a larger volume of
lower-margin products than during other times of the year. As overall revenues
grow, we expect our gross margin to remain more consistent from quarter to
quarter.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$6.3 million for the six months ended December 31, 1998 to $6.6 million for the
six months ended December 31, 1999, primarily due to an increase in the number
of engineers and consultants from 56 at December 31, 1998 to 64 at December 31,
1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased from $2.3 million for the six months ended December 31, 1998
to $4.3 million for the six months ended December 31, 1999. This increase is due
to an increase in personnel and related expenses, as well as to increases in
commissions corresponding to the increases in our product revenue. Over this
period, headcount increased from 18 to 31 employees.
STOCK-BASED COMPENSATION. In connection with certain stock option grants,
we recorded total stock-based compensation expense in the six months ended
December 31, 1998 and 1999 of $280,000 and $672,000. The increase was the result
of an increase in the number of options granted to non-employee consultants.
COMPARISON OF THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999
PRODUCT REVENUE. We did not have any product revenue during the year ended
June 30, 1997. Product revenue increased from $1.4 million in the year ended
June 30, 1998 to $10.9 million in the year ended June 30, 1999. The increase in
product revenue in the year ended June 30, 1999 was due to the sale of products
based primarily upon design wins achieved during the year ended June 30, 1998.
ROYALTY REVENUE AND ROYALTY REVENUE FROM RELATED PARTIES. Combined royalty
revenue decreased from $10.1 million in the year ended June 30, 1997 to
$5.1 million in the year ended June 30, 1998 to $4.4 million in the year ended
June 30, 1999. In the year ended June 30, 1997, all of our total revenue was
derived from royalty agreements, including a one-time payment of $5.1 million
from a related party.
GROSS PROFIT. There were no product sales in the year ended June 30, 1997,
and, therefore, there were no direct product costs, resulting in an overall
gross margin of 100%. Overall gross margin increased from 42.7% in the year
ended June 30, 1998 to 44.6% in the year ended June 30, 1999. We incurred a
gross loss from product sales of $2.3 million in the year ended June 30, 1998
due to the low volumes of products initially introduced by us. Gross profit from
product sales improved to $2.4 million or 22.2% of product revenue in the year
ended June 30, 1999. This increase was due to the maturing of our products, an
increase in sales volume and the absorption of fixed costs, including overhead,
over a larger unit volume.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$9.4 million in the year ended June 30, 1997 to $9.6 million in the year ended
June 30, 1998 and to $12.4 million in the year ended June 30, 1999. The majority
of the increase in spending on research and development during these periods
reflects the increase in hiring of engineers and consultants to develop new
microprocessor products, as well as to enhance the design of existing products.
From the year ended June 30, 1997 to the year ended June 30, 1998, spending on
salaries and consultants increased by $1.2 million, or 84%, and from the year
ended June 30, 1998 to the year ended June 30, 1999, this spending increased by
$1.9 million, or 85%. The increase also reflects our increasing investment in
hardware and software design tools used to develop and test new products.
Additionally, the cost of materials and related services grew significantly over
these periods.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased from $2.1 million in the year ended June 30, 1997 to
$3.0 million in the year ended June 30, 1998 and to
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$5.4 million in the year ended June 30, 1999. From the year ended June 30, 1997
to the year ended June 30, 1998, $390,000, or 30%, of the increase was due to an
increase in personnel and related expenses. From the year ended June 30, 1998 to
the year ended June 30, 1999, $1.4 million, or 53%, of the increase was due to
an increase in personnel and related expenses. Additionally, over this period,
commissions increased corresponding to the increase in product revenue, and
marketing expenses, professional services fees and occupancy costs increased due
to our overall growth.
STOCK-BASED COMPENSATION. We recorded deferred stock-based compensation
costs in the years ended June 30, 1998 and 1999 of $1.0 million and
$1.4 million, in connection with certain stock option grants made during these
periods. This increase was primarily the result of increases in the number of
options granted due to the increased hiring of employees and an increase in the
utilization of the services of consultants. We recognized $150,000 and $777,000
of stock-based compensation expense in the years ended June 30, 1998 and 1999.
INTEREST INCOME (EXPENSE), NET. Interest income decreased from $340,000 in
the year ended June 30, 1997 to $325,000 in the year ended June 30, 1998, and
then increased to $472,000 in the year ended June 30, 1999. The fluctuations in
interest income resulted from changes in our average cash and investment
balances. In March 1999, we raised approximately $20.0 million from the sale of
our Series D preferred and common stock. We did not have any interest expense in
the year ended June 30, 1997. Interest expense increased from $204,000 in the
year ended June 30, 1998 to $496,000 in the year ended June 30, 1999. Interest
payments are related to our equipment lease lines and borrowings.
INCOME TAXES
Federal and state income taxes were minimal during the years ended June 30,
1997, 1998 and 1999 as a result of our net operating losses. As of June 30,
1999, we had available federal net operating loss carryforwards of approximately
$18.0 million and state net operating loss carryforwards of approximately
$10.0 million. We also had research and development tax credit carryforwards of
approximately $1.0 million. The net operating loss and credit carryforwards will
expire at various times through 2019. As of June 30, 1999, we had deferred tax
assets of approximately $9.5 million, for which no benefit has been recorded in
our financial statements, and which consist primarily of net operating loss and
research and development tax credit carryforwards. This deferred tax asset will
be recognized in future periods as any taxable income is realized and consistent
profits are reported.
BACKLOG
At December 31, 1999, our backlog was $10.1 million compared to
$3.9 million at December 31, 1998. Our backlog consists of product orders for
which a customer purchase order has been received and accepted and which is
scheduled for shipment within 12 months. Orders that are scheduled for shipment
beyond the 12-month window are not included in backlog until they fall within
the 12-month window. Orders are subject to rescheduling or cancellation by the
customer, usually without penalty. Because of possible changes in product
delivery schedules and cancellation of product orders and because our sales will
sometimes reflect orders shipped in the same quarter that they are received, our
backlog at any particular date is not necessarily indicative of actual sales for
any succeeding period.
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. As of December 31, 1999, we had $9.6 million in cash, cash
equivalents and short-term investments and $2.0 million of restricted cash. Net
cash used by operating activities during the years ended June 30, 1997, 1998 and
1999 and the six months ended December 31, 1999 was $96,000, $10.9 million,
$11.0 million and $6.1 million, respectively. During these periods, cash used by
operating activities consisted primarily of cash utilized to fund operating
losses
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and for working capital. During the year ended June 30, 1999 and the six months
ended December 31, 1999, the items that significantly impacted cash balances
were accounts receivable and inventories, both of which increased as the volume
of product sales increased.
Net cash provided by (used in) investing activities for the years ended
June 30, 1997, 1998 and 1999 and the six months ended December 31, 1999 was
$2.0 million, $(76,000), $(18.5) million and $8.4 million, respectively. Net
cash used in investing activities was related to the acquisition of property and
equipment and the purchase of short-term investments. Capital expenditures in
the years ended June 30, 1997, 1998 and 1999 and the six months ended
December 31, 1999 were $936,000, $76,000, $493,000 and $1.5 million,
respectively. Additionally, equipment acquired under capital lease arrangements
was $825,000 in the year ended June 30, 1998 and $367,000 in the year ended
June 30, 1999. No equipment was acquired under a capital lease during the six
months ended December 31, 1999. Overall capital spending during these periods
was the result of hiring additional employees and upgrading our design tools.
This transition required us to increase our investment in hardware
infrastructure, as well as in software tools, furniture and fixtures. As of
December 31, 1999, 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 (used in) financing activities in the years ended
June 30, 1997, 1998 and 1999 and the six months ended December 31, 1999 was
$(210,000), $13.8 million, $21.2 million and $(284,000). The net cash provided
by financing activities in the years ended June 30, 1998 and 1999 related to the
sale of shares of our preferred stock. Net cash provided by financing activities
also related to proceeds from the issuance of common stock and proceeds from
borrowings. Net 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 currently bear interest
at an annual rate of 8.5%. 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 December 31, 1999,
$1.7 million was outstanding under this line.
We believe that cash and cash equivalents, cash generated from operations,
if any, and the net proceeds from this offering will be sufficient to satisfy
our working capital requirements for the next 18 months. After that time, we may
require additional funds for working capital and operating expenses or for other
purposes. Our future operating expenses and capital requirements are difficult
to predict with accuracy. 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. Therefore, we may, from time to time, invest in
or acquire complementary businesses, products or technologies. We may effect
additional equity or debt financing to fund such activities or to satisfy our
future capital requirements. The sale of additional equity or convertible debt
could result in additional dilution to our stockholders.
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. We had an investment portfolio of
money market funds, commercial securities and U.S. Government bonds, including
those classified as short-term investments and restricted cash, of
$18.8 million and $11.6 million, as of June 30, 1999 and December 31, 1999.
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 June 30, 1999 and
December 31, 1999, 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.
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YEAR 2000 COMPUTER SYSTEM COMPLIANCE
BACKGROUND OF YEAR 2000 ISSUES. The Year 2000 Issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of our computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing the disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
We have established a task force with the responsibility of addressing
internal and external year 2000 issues. Although we believe that our products
and internal systems are currently Year 2000 compliant, and we have not
experienced any significant Year 2000 issues to date, we cannot guarantee that
our suppliers, vendors or other enterprises with which we interact are or will
be Year 2000 compliant. Failure of these enterprises to achieve Year 2000
compliance could have a material adverse effect on our business.
OUR EXTERNAL VENDORS. We have identified and contacted our significant
suppliers and service providers to determine the extent to which our business is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. All of our significant suppliers and service providers have indicated
that they were expecting to achieve Year 2000 compliance by December 31, 1999.
We are continuing to monitor the progress of third parties critical to our
business. We cannot be certain that the representations of these third parties
are accurate or that they have reached Year 2000 compliance.
OUR INTERNAL BUSINESS SOFTWARE. During the year ended June 30, 1999, we
installed an internal business software package. The developer of this system
has represented to us that the system is Year 2000 compliant. As a result, we
believe our internal financial systems are Year 2000 compliant.
OUR INTERNAL NON-FINANCIAL SOFTWARE AND EQUIPMENT. We have taken an
inventory of all our non-financial software and equipment that may be affected
by the Year 2000 and have identified the non-financial software and equipment
that is critical to our operations. We believe that our non-financial software
and equipment is Year 2000 compliant. If our major non-financial systems and
equipment are not Year 2000 compliant, the Year 2000 could have a material
impact on our operations.
COSTS OF ADDRESSING YEAR 2000 COMPLIANCE. We have incurred less than
$100,000 in costs in our Year 2000 compliance efforts, excluding costs
associated with our adoption of a Year 2000 compliant enterprise software
system. Based on our preliminary evaluations, we do not believe that in the
future we will incur significant expenses or be required to invest heavily in
additional computer system improvements to be Year 2000 compliant. However,
significant uncertainty exists concerning the potential costs and effects
associated with Year 2000 compliance. Any Year 2000 compliance problem
experienced by us or our customers could decrease demand for our products, which
could harm our business.
CONTINGENCY PLANNING. We have developed a contingency plan for critical
individual information technology systems and non-information technology systems
to address Year 2000 risks not fully resolved by our Year 2000 program. We
believe that the Year 2000 risk will not present significant operational
problems for us.
RECENT LEGISLATION. Legislation was recently passed by Congress that
purports to limit liability for failure to be Year 2000 compliant. We cannot
assure you that this legislation will limit our liability.
WORST CASE SCENARIO. We believe that the likely worst case scenario for our
business would be if IBM and TSMC, our semiconductor manufacturers, have
inadequate Year 2000 programs, and we are unable to obtain products from them on
a timely basis. This would cause us to miss shipments, and our revenue and
results of operations would be materially impacted.
If our Year 2000 program or any third-party Year 2000 programs are
inadequate, and our business operations are materially impacted, we could incur
additional costs to recover any lost information and replace affected systems.
We believe that our systems could be replaced without significant difficulty, as
replacement systems are generally available on commercially reasonable terms. We
also have regular data back-up procedures that would assist in our recovery of
lost business information.
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BUSINESS
OVERVIEW
QED is a leading developer of high-performance embedded microprocessors that
perform information processing in networking/communications infrastructure
equipment, business network equipment and consumer network products. We believe
that we have one of the industry's most experienced microprocessor development
teams. While we focus our development efforts on the high-performance segments
of the embedded microprocessor market, we also offer our mature products to the
more price sensitive segments of our target markets. We sell our products
directly to systems manufacturers, and we outsource the fabrication of our
microprocessors to third parties. We have customer relationships with market
leaders in each of our target markets, including Cisco Systems, Hewlett-Packard
and WebTV.
INDUSTRY BACKGROUND
EMBEDDED MICROPROCESSORS
Microprocessors are generally thought of as the integrated circuits that
perform sophisticated computations and control the flow of information within
desktop computers. The majority of microprocessors, however, are hidden, or
embedded, in products and systems where they perform specialized tasks. A
microprocessor is typically classified by the number of fundamental elements of
data, or bits, that it can process at one time. Low-performance 4- and 8-bit
embedded microprocessors perform simple tasks in products such as microwave
ovens and thermostats. Complex tasks, such as delivering e-mail messages over
the Internet or presenting web pages clearly on televisions and printers,
require a high level of computing power, which can only be delivered by
high-performance 32- and 64-bit embedded microprocessors.
High-performance embedded microprocessors are configured in a system much
like a small, general-purpose computer and must support advanced software
operating systems and high-level programming languages to enable complex
application software. Uses for high-performance embedded microprocessors include
networking/communications infrastructure equipment, such as routers and
switches; business network equipment, such as laser printers, network computers
and data storage systems; and consumer network products, such as
Internet-enabled televisions and cable modems.
While the desktop microprocessor market is dominated by Intel Corporation's
"x86" complex instruction set computing, or CISC, architecture, several
microprocessor architectures have emerged within the high-performance embedded
microprocessor market. A microprocessor's architecture refers to its fundamental
operations and organization, which enable it to perform computations and to
control the flow of information. Embedded microprocessors achieve high
performance and silicon-area efficiency because they are based on reduced
instruction set computing, or RISC, architectures. The leading RISC architecture
is known as MIPS. Microprocessors based on the MIPS architecture standard have
been developed for applications ranging from game consoles such as the Sony
Playstation, to routers and switches, to multiprocessor enterprise servers. The
MIPS architecture is widely supported by independent suppliers of software and
hardware.
MARKET OPPORTUNITY FOR HIGH-PERFORMANCE EMBEDDED MICROPROCESSORS
Dataquest, Inc. estimates that worldwide unit shipments of high-performance
32-bit and 64-bit embedded microprocessors will grow from approximately
106 million in 1998 to approximately 228 million in 2002. Demand from numerous
applications for the rapid transfer and processing of digital information and
the increasing need for more complex control functions is driving the growth in
shipments of high-performance 64-bit embedded microprocessors.
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One of the most powerful drivers of the need for increased embedded
microprocessor performance has been the rapid development of intranets and the
Internet, as businesses and consumers seek immediate access to more information
and entertainment in an increasingly networked society. International Data
Corporation, or IDC, estimates that between 1995 and 1998 the number of devices
worldwide with access to the Internet grew from approximately 14 million to
120 million and estimates that there will be approximately 515 million by the
end of 2002. Similarly, the amount of content available on the Internet is
increasing rapidly. IDC estimates that the number of web pages worldwide grew
from approximately 18 million in 1995 to approximately 829 million in 1998, and
will increase to approximately 7.7 billion by 2002.
In addition to this increased volume of network traffic, the emergence of
multimedia and streaming audio and video content and transaction-intensive
e-commerce web sites have strained the ability of networks to process and
transmit information quickly. These factors have created the need for increased
network capacity, or bandwidth. Advances in communication technology are helping
to alleviate bandwidth constraints by providing higher transmission capacity. To
accommodate this increased bandwidth, intelligent devices within a network's
infrastructure, such as routers and switches, as well as those used to access
information at a network's interface, such as network printers and cable modems,
are increasingly required to quickly process greater amounts of more complex
information. All of these devices therefore need high levels of performance from
the microprocessors embedded within them.
As the bandwidth and information transmission capabilities of networks have
increased, so have users' expectations for their performance. Network service
providers have responded by broadening their product offerings, allowing users
to select between varied levels of information transmission service. To provide
different levels of service, networking equipment vendors are seeking ways to
cost-effectively incorporate more processing capability within their systems. In
addition, new data communication standards and protocols are frequently being
introduced into network infrastructures to support their expanded capabilities.
Hence, networks are now required to support many standards and protocols
simultaneously. This increase in complexity requires higher performance as well
as increased flexibility from the embedded microprocessors within the devices
that manage networks.
As the popularity of the Internet has increased, more powerful and
sophisticated products have emerged to provide additional connections to
Internet users. These devices require new generations of high-performance
microprocessors that must also meet strict power consumption and heat
dissipation requirements as well as the cost constraints of systems
manufacturers.
With growing demands on network capabilities and increasing business and
consumer expectations for performance, new generations of high-performance
embedded microprocessors are required to enable cost-effective deployment of
advanced communications products, both within network infrastructures and at
network interfaces.
THE QED ADVANTAGE
QED is a leading developer of 64-bit embedded microprocessors for use in
information-intensive products requiring the highest level of performance. Our
embedded microprocessors use a RISC architecture designed to achieve high system
performance cost-effectively. Our products are based on the MIPS architecture
standard and include proprietary features designed specifically for our target
markets. We believe that our newest generation product, the RM7000, is the
highest-performance 64-bit embedded microprocessor in commercial production.
We believe that we have one of the foremost MIPS architecture design teams.
From 1988 to 1991, Thomas Riordan, our Chief Executive Officer and a co-founder
of QED, was the Director of Research and Development at MIPS Computer
Systems, Inc., now known as MIPS Technologies, Inc., where he helped develop the
original MIPS architecture. At MIPS Computer Systems, Mr. Riordan was the
principal logic designer of the first commercial RISC-based embedded
microprocessor. He also led the development of
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the product that established the current 64-bit MIPS architecture standard.
Raymond Kunita, our Chief Operating Officer, Vice President of Engineering and
co-founder, as well as seven of our engineers, were also employees of MIPS
Computer Systems and contributed to the development of the MIPS architecture
standard.
Each generation of our products is built around successively more advanced
microprocessor cores that are designed to remain compatible with previous
generations. This approach enables us to design a range of products including
our high-performance standard products, our market-specific derivative products
and our microprocessors with integrated components. We believe that our embedded
microprocessors offer several distinct advantages to our customers over
competing products:
HIGH PERFORMANCE. Our products are designed to deliver high levels of
processing performance to all of our target applications. This processing
performance is primarily attributable to a combination of four key features:
- 64-bit processing, which gives our embedded microprocessors up to twice
the peak data transfer rate of competing 32-bit architectures;
- superscalar technology, which enables microprocessors to issue and execute
two or more instructions simultaneously;
- two-level cache memory, which allows for substantially more memory to be
integrated with the microprocessor core, minimizing the delay associated
with moving data between the microprocessor and external memory without
slowing the microprocessor's speed; and
- multi-stage pipeline technology, which allows the microprocessor to
process several different stages of instructions simultaneously.
REDUCED TIME TO MARKET. Our microprocessors are compatible with the most
robust operating systems and powerful software programming languages. By using
the MIPS architecture standard for our products, we leverage industry support of
a wide range of operating systems, such as WindowsCE, pSOS, QNX, Linux and
support from third-party proprietary tool vendors. These attributes enable
original equipment manufacturers to incorporate our products into their systems
more quickly and easily. In addition, we design our products to maintain a high
level of hardware and software compatibility between product generations, which
we believe enables our customers to easily upgrade to our new products.
PRICE-COMPETITIVENESS. All of our products are fabricated by established
manufacturing facilities using industry-standard semiconductor fabrication
processes. Our proprietary design methodology allows our designs to be
efficiently moved from one manufacturer to another and from one fabrication
process to another. By using leading fabrication processes, we believe we can
take advantage of new processes that allow microprocessors to be made smaller
and, therefore, at lower cost. We believe this approach also enables us to move
our products quickly from prototype into production, which can reduce
development costs. Finally, implementation of higher-density fabrication
processes allows us to integrate additional features into our products, which
reduces total solution costs for our customers.
THE QED STRATEGY
Our objective is to be the leading developer and supplier of
high-performance embedded microprocessors for information-intensive products.
Key elements of our strategy to achieve this objective include:
MAINTAINING TECHNICAL LEADERSHIP IN HIGH-PERFORMANCE EMBEDDED MICROPROCESSOR
MARKETS. We believe that maintaining a technical leadership position in
developing high-performance microprocessors is critical to our success. Our
product development efforts are focused on the high-performance segments of
information-intensive markets for embedded microprocessors. We believe that our
three target markets,
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networking/communications infrastructure equipment, business network equipment
and consumer network products, will continue to experience significant growth
for the foreseeable future and to demand increased microprocessor performance
and functionality. We intend to maintain a technical leadership position by
continuing to invest substantially in research and development resources.
LEVERAGING PERFORMANCE LEADERSHIP TO OFFER A BROAD RANGE OF
PRICE/PERFORMANCE OPTIONS. We believe that technological advances gradually
reduce the cost of a given product over time. Therefore, we seek to take
advantage of this technological evolution by focusing our design efforts on the
segments of our target markets that demand the highest performance. As our
products mature and their manufacturing costs decline, we believe that we will
be able to migrate our products to more price-sensitive segments within our
target markets. In this way, we focus our resources on developing the
highest-performance embedded microprocessors while offering products with a
broad range of price/performance options targeted at a wide variety of
applications.
CAPITALIZING ON RELATIONSHIPS WITH MARKET LEADERS TO DEFINE STANDARD
PRODUCTS. We have customer relationships with technology and market leaders in
each of our target markets, including Cisco Systems, Hewlett-Packard and WebTV.
We work closely with market leaders to define standard products and features
that meet their current and anticipated product needs. We believe that these
collaborations will enable us to remain on the leading edge of new technologies
and market trends for high-performance embedded microprocessors.
CONTINUING TO ESTABLISH MIPS ARCHITECTURE SUPPORT RELATIONSHIPS. We have
relationships with key industry participants such as vendors of companion
integrated circuits, operating systems and third-party support tools. Through
these relationships we seek to offer more complete product solutions to our
customers by offering our products with those of complementary vendors. We
intend to continue to establish and maintain these relationships to help ensure
that our products achieve widespread industry adoption.
LEVERAGING FABLESS SEMICONDUCTOR MODEL. We use third parties to manufacture
our microprocessors. This "fabless" model allows us to focus resources on our
design competencies, while reducing capital and operating infrastructure
requirements. We believe this approach reduces our product development risks,
and the time to market of our new products, relative to semiconductor companies
with manufacturing facilities. By using third-party manufacturers, we can
leverage the research and development efforts of leading manufacturers and
maintain flexibility in choosing those suppliers that meet our technology or
cost requirements.
USING ADVANCED STANDARD TECHNOLOGIES. We seek to use the most advanced
standard semiconductor fabrication, testing and packaging technologies. By using
these technologies, we believe that we can reduce our time to market,
development risk and costs, help ensure product supply and improve the
reliability of our products. Our use of standard technologies also provides
flexibility, allowing us to transfer our manufacturing operations to other
suppliers or facilities more quickly and reliably.
MARKETS AND APPLICATIONS
Each of our three target markets is information-intensive and requires high
bandwidth and increasing computational performance.
NETWORKING/COMMUNICATIONS INFRASTRUCTURE EQUIPMENT
As greater numbers of devices access intranets and the Internet and the
speed of those devices increases, the capacity of network infrastructures must
grow to accommodate the increased traffic. In addition, network content is
increasingly data-intensive. Although primarily text and graphics-based today,
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information and services available on networks, particularly the Internet, are
increasingly incorporating video and audio. To meet this bandwidth demand:
- Internet backbone speeds are being upgraded to higher data rates;
- high speed Internet access is being deployed to the home through
technologies such as xDSL and ISDN;
- networks are being upgraded to higher-speed communications protocols; and
- data and voice communications are being unified in the same network
infrastructure.
Accordingly, we design our newest microprocessors to meet the high-performance
needs of the most complex network infrastructure equipment. Our products are
designed into the following network infrastructure applications:
- ROUTERS. Routers and switch routers direct data and information packets to
the correct destinations within a network. High-performance routers are
equipped with multiple embedded microprocessors to manage different
functions such as routing packets of information, translating between
communication protocols and adding higher levels of transmission services
to a network.
- LAN SWITCHES. Local area network, or LAN, switches are intranet network
devices that provide a direct connection from the sender of information to
the receiver within an intranet. Embedded microprocessors are used to
manage information flow through LAN switches. Multiple embedded
microprocessors may be used in each LAN switch to increase the data
movement capabilities of the switch.
- ACCESS SERVERS. The server nearest to a network user is the access server,
which uses embedded microprocessors to combine discrete data streams, such
as information from individual modem lines, into fewer streams of
high-speed data.
- NETWORK INTERFACE CARDS. Network interface cards provide the physical
connection between networking equipment and a user's access device.
Network interface cards are used at all levels in a network infrastructure
from the access server connecting modem, to xDSL or ISDN connections, to
high speed routers. Performance increases within network interface cards
have been driven by the requirement to make more physical connections in a
limited space. Consequently, network interface cards are incorporating
high-performance embedded microprocessors, with at least one
microprocessor embedded into each.
- STORAGE AREA NETWORKS. The growth in the amount of critical information
processed and stored by businesses has increased the need for more
sophisticated data storage systems. Storage area networks have been
developed to address this need by distributing data storage over a network
of storage devices. The complexity of managing information within storage
area networks requires high levels of embedded microprocessor performance.
BUSINESS NETWORK EQUIPMENT
Businesses are increasingly deploying LANs as their central communications
infrastructure to perform a range of important tasks such as sending documents,
accessing databases and other enterprise-wide information, connecting with
vendors and suppliers on-line and connecting to larger networks, including the
Internet. Highly sophisticated business network equipment has been developed to
manage these tasks at the network interface. Designers of business network
equipment generally require moderate to high processing performance, but must
balance this need against the power consumption and cost of the microprocessor
embedded into their products. Products within this market include:
- PRINTERS. We believe that printers will continue to require additional
embedded microprocessor performance to manage increases in print speed,
image complexity and the addition of color.
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Multifunction printers can combine the functions of copiers, scanners, fax
equipment and printers in one device. All of these devices incorporate
embedded microprocessors for processing the increasingly sophisticated
data comprising color images, web sites and other network content.
- NETWORK COMPUTERS. The primary purpose of a network computer is to serve
as an input/output device for accessing information stored on a network.
Network computers are designed to be less expensive than traditional
desktop computers. The processing capability of a network computer is
optimized by an embedded microprocessor's ability to move and format data
for presentation to the user.
- DISK ARRAYS. Disk arrays have been developed in response to the increasing
volume of data being stored by businesses. They consist of multiple hard
drives configured to operate like a single, large disk drive. Servers can
read data from drive arrays faster and achieve greater protection from
data loss relative to traditional hard drives. Microprocessors are used in
disk arrays to control the flow of data among their component hard drives
and the server.
CONSUMER NETWORK PRODUCTS
A new class of network products has been developed to provide consumers with
additional means of accessing the Internet beyond desktop computers. Because
these are retail products, most suppliers to this market are sensitive to the
price of the microprocessors that they incorporate into their products. They are
also concerned with the power consumption and heat dissipation of the
microprocessors because the devices into which they are installed are often
relatively small. There are two principal categories of products in this market:
- CONSUMER INTERNET APPLIANCES. Products such as set-top boxes provide an
alternative way to access the Internet through services such as WebTV and
are designed to be significantly easier to install and operate and less
expensive than a PC. These devices may offer a range of services such as
digital recording and customization for each user. The challenge in this
market is to offer full-speed multimedia performance at competitive
prices. We believe that as expectations for the performance of Internet
appliances rise and as multimedia information on the Internet becomes more
sophisticated, the need for increased performance provides a significant
opportunity for our products.
- DIGITAL NETWORK TRANSMISSION PRODUCTS. In order to access new digital data
services, two classes of products, the cable modem and the "x" digital
subscriber line, or xDSL, modem, have been developed. Cable modem and xDSL
modem technology offer significantly higher network speeds than analog
modems, therefore requiring higher microprocessor performance to manage
information flow. Some cable television operators are upgrading their
networks to enable two-way communications through the use of a cable
modem. High speed access services such as Excite@Home have also emerged to
provide network infrastructure and services to cable modem customers. In
addition, xDSL modem technology has been developed to provide high speed
digital communications through existing telephone lines to the home. This
service may be offered in areas where the local telephone switch network
has been upgraded to offer digital service.
36
<PAGE>
PRODUCTS
The following chart summarizes our line of microprocessor products:
<TABLE>
<CAPTION>
PRODUCT SYSTEM
PRODUCT INTRODUCTION PERFORMANCE MEMORY INTERFACE TARGET APPLICATION
<S> <C> <C> <C> <C> <C>
RM5230 Q3 1997 175MHz 16K/16K 32-bit Consumer
RM5260 Q3 1997 175MHz 16K/16K 64-bit Business
RM5270 Q4 1997 200MHz 16K/16K 64-bit Networking
RM5231 Q3 1998 250MHz 32K/32K 32-bit Business and Consumer
RM5261 Q3 1998 266MHz 32K/32K 64-bit Business
RM5271 Q3 1998 300MHz 32K/32K 64-bit Networking and Business
RM7000 Q4 1998 266MHz 16K/16K/256K 64-bit Networking and Business
</TABLE>
In the above table, Product Introduction refers to the calendar quarter in
which the product was first commercially shipped. Performance indicates maximum
available execution speed. Memory indicates the amount of memory contained in
the instruction cache and data cache, and for the RM7000, in the level-two
cache. System Interface indicates the width of the microprocessor's path to
external input/output and memory devices.
QED PRODUCTS
In 1997, we introduced the first microprocessors supplied directly by QED,
which we named RISCMark-TM-. As of December 31, 1999, we have introduced three
generations of our products, all of which are in production:
RM5230, RM5260 AND RM5270. Introduced in 1997, this series of products is
based on the same microprocessor core. The RM5230 is currently the largest
volume product we ship and is primarily used by manufacturers of consumer
Internet appliances. The RM5260 is a higher-performance, 64-bit version of the
RM5230. The 64-bit RM5270, the highest-performance product in the series,
supports an external secondary-cache memory interface for more demanding
computing applications.
RM5231, RM5261 AND RM5271. This series of products is an upgrade to the
RM52x0 series and provides higher execution speeds and additional performance
features. The RM52x1 is currently supplied in processing speeds up to 300MHz.
These devices are designed to be compatible with the prior generation RM52x0.
RM7000. The RM7000 is the highest-performance product in our product line,
and we believe it is the highest-performance 64-bit embedded microprocessor in
commercial production. We developed the RM7000 to be the microprocessor core for
our new generation of products. This product incorporates significant design and
performance enhancements while maintaining compatibility with prior product
generations. The RM7000 is incorporated primarily into networking infrastructure
products, such as routers and switches.
LICENSED PRODUCTS. Our initial business model was to develop and license
proprietary designs based on a microprocessor architecture developed by MIPS
Computer Systems. Under this business model, we developed five microprocessors
under contract with various manufacturers. Since beginning the transition to our
new business model in June 1996, we have not entered into any new third-party
licensing agreements and currently have no plans to do so.
37
<PAGE>
TECHNOLOGY
Our design efforts are focused on creating high-performance embedded
microprocessors based on the MIPS architecture.
PROPRIETARY MIPS ARCHITECTURE DESIGNS
Our microprocessor designs based on the MIPS architecture use proprietary
logic and circuit design techniques to achieve high performance:
LOGIC DESIGN. Our microprocessors use proprietary techniques similar to
those used in high-performance workstation and mainframe microprocessor designs,
including:
- superscalar, or parallel, instruction issue, which is a way to increase
processor performance by allowing multiple operations to occur
simultaneously;
- multistage pipelines, which are a way to allow operations to be broken
down into discrete steps that can then be overlapped;
- a two-level, integrated, cache memory hierarchy, which is a design that
allows instructions and data to be delivered to and processed by a
processor's operational units at an average rate substantially greater
than that achievable with single-level caches;
- flexible cache memory management that allows a processor's cache memory to
be optimized for a specific application; and
- dynamic power management that allows elements of the processor not used
for a particular operation to be shut down.
CIRCUIT DESIGN. Rather than using commercially available circuit libraries,
we have developed proprietary circuits that are designed for building
high-performance microprocessors. Commercially available circuits are generally
optimized for the development of specific purpose integrated circuits and are
usually a poor fit for high-performance designs. Our proprietary circuits that
increase speed and/or lower power consumption include:
- asynchronous circuits, which allow high-speed functional units of the
embedded microprocessor to be built in a small area on the integrated
circuit;
- charge/discharge circuits, which allow high-speed operation by minimizing
electrical inefficiencies;
- constant current source circuits, which high-speed performance for the
most critical operations; and
- reduced voltage swing circuits, which use low power for relatively
non-critical operations.
PROPRIETARY DESIGN AND VERIFICATION ENVIRONMENT
Our embedded microprocessor development environment uses a combination of
industry standard development tools augmented and integrated together by our
proprietary design tools. Some of our proprietary tools supplement the
capabilities of commercially available tools that are optimized for specific
purpose integrated circuit development. Examples of our proprietary tools
include:
- a MIPS architecture random-sequence generator/checker, which permits
billions of verification operations to be performed on our designs prior
to manufacture;
- an in-process design database consistency manager, which permits a full
design team to work on the same design simultaneously;
- a logic synthesizer, which offers more control to the designer than
commercially available synthesizers; and
38
<PAGE>
- semiconductor manufacturing process technology conversion programs, which
are designed to permit us to move our products efficiently from one
manufacturer or manufacturing process technology to another.
RESEARCH AND DEVELOPMENT
We have assembled a core team of experienced engineers averaging
approximately 13 years of microprocessor design experience. As of December 31,
1999, 30 of our 53 research and development employees had advanced degrees.
We have three design teams. One concentrates on new product development with
the objective of developing our next generation high performance microprocessor.
A second team works on integrating more functions with existing products. The
third team transfers products to new manufacturing technologies and modifies
existing products to adapt them to new applications. Because we rely upon third
parties to manufacture our products, we do not use research and development
resources on manufacturing process technology.
Our research and development expenses were $6.6 million for the six months
ended December 31, 1999, $12.4 million for the year ended June 30, 1999,
$9.6 million for the year ended June 30, 1998, and $9.4 million for the year
ended June 30, 1997. These expenses consisted primarily of salaries and related
costs of employees engaged in ongoing research.
We are designing two new microprocessors for end markets requiring a balance
between price and performance. The RM7061 will be marketed as a lower-cost
version of the RM7000 for consumer Internet appliances. The RM5720 will
integrate industry-standard connections and is intended to lower the cost of a
high performance system by eliminating the need for an external input/output and
memory controller. It will be marketed to networking infrastructure and business
network equipment manufacturers.
CUSTOMERS
We have several key customers in each of our three target markets. Because
we leverage our technology across these markets, our products may be
incorporated into equipment that is sold in several markets. For example, our
products are used in WebTV's set top boxes, Echostar's satellite set top boxes
and Cisco Systems' network switching equipment. Based on our product revenue
after June 30, 1998, our 20 largest customers are:
<TABLE>
<S> <C>
Aeroflex Inc.
Assured Access
Cisco Systems
Cobalt Group Inc.
Cosine Communications
Echostar Communications Corporation
EFI Electronics Corporation
Extreme Networks, Inc.
Genicom Corporation
Hewlett-Packard Company
Lexmark International Group
Lucent Technologies Inc.
Midway Games, Inc.
Netscreen Technologies, Inc.
Pairgain Technologies, Inc.
Primary Image Visions Systems Ltd.
Silicon Graphics, Inc.
Thompson Consumer Electronics (a division of
Thompson Multimedia)
Transmedia Communications, Inc.
WebTV Networks, Inc.
</TABLE>
Historically, a small number of customers have accounted for a substantial
portion of our total revenue. Sales to WebTV, Integrated Device
Technology, Inc. (consisting only of royalty revenue), Cisco Systems and
Echostar Communications, including sales to their manufacturing subcontractors,
accounted for approximately 23%, 20%, 15% and 12%, of our total revenue for the
year ended June 30, 1999 and accounted for 34%, 5%, 16% and 14% of our total
revenue for the six months ended December 31, 1999.
39
<PAGE>
From January 1, 1998 through June 30, 1999, we achieved approximately 100
design wins with more than 30 companies. Of these design wins, 38 are in
production, and we believe ten are considered unlikely to go into production. We
define a design win as a measurable commitment from a customer to use our
products. These measures include parts taken by the customer, a completed
printed circuit board design or a funded program that is targeted for
production. A particular design win may not result in significant product
revenue to us.
SALES AND MARKETING
In North America, we sell our products through a direct sales force of seven
people, with four based in our corporate headquarters in Santa Clara,
California, one based in a regional office in Research Triangle Park, North
Carolina, one based in a regional office in Massachusetts and one in Europe. We
also sell our products in North America through 12 sales representatives. We
sell our products in Europe through five sales representatives. We sell our
products in Korea through a sales representative, and we sell our products in
Japan through a distributor. Our sales effort is supported by a marketing staff
of five and five applications engineers who work directly with our customers on
technical issues.
MANUFACTURING
SEMICONDUCTOR FABRICATION. We use independent semiconductor manufacturers to
fabricate our microprocessors. By subcontracting our manufacturing, we focus our
resources on product design to eliminate the high cost of owning and operating a
semiconductor fabrication facility. This fabless business model also allows us
to take advantage of the research and development efforts of manufacturers,
permitting us to work with those manufacturers offering the most advanced
manufacturing processes and competitive prices.
Taiwan Semiconductor Manufacturing Corporation, or TSMC, at its
manufacturing plants in Taiwan and the United States, and IBM Corporation, at
its manufacturing plants in the states of Vermont and New York, have
manufactured all of our products to date. We currently use only these two
independent manufacturers, and few of our products have been manufactured at
both manufacturing companies at any given time. As a result, any inability of
TSMC or IBM to provide the necessary capacity or output could result in
significant production delays, which could seriously harm our business. In the
event either TSMC or IBM suffers any damage to their manufacturing facilities,
or in the event of any other disruption of manufacturing capacity, we may not be
able to qualify alternative manufacturing sources for our products in a timely
manner.
We have entered into a manufacturing agreement with IBM, which expires no
sooner than November 14, 2002. However, the contract does not guarantee any
level of production capacity or any particular price. We operate with TSMC on a
purchase order basis and do not have a long-term agreement with TSMC.
Our designs are compatible with industry-standard manufacturing processes.
We believe this compatibility permits the use of multiple manufacturers,
mitigating the risk of using a single source for a product. Our products are
currently fabricated using .25 micron and .35 micron process technologies. We
continuously evaluate the benefits, on a product by product basis, of migrating
to a smaller geometry process technology in order to reduce costs and increase
the performance of our embedded microprocessors. For example, we are preparing
to transition our high-end products to a .18 micron process as soon as it is
available at one of our manufacturer's facilities.
TESTING AND ASSEMBLY. Initial testing of the silicon wafers containing our
microprocessors is primarily performed by a subcontractor located in Taiwan.
Following completion of initial testing, the silicon wafers are cut into
individual semiconductors and assembled into packages. All testing is performed
on standard test equipment using proprietary test programs developed by our test
engineering group. The test facilities are periodically audited to ensure that
their procedures remain consistent with those required for the
40
<PAGE>
production of leading-edge devices. We use a subcontractor based in Korea to
package all of our products. We use standard, readily available packages for all
of our products. Following packaging, a subcontractor performs final testing. We
rely upon third parties to assemble and test substantially all of our products.
While we have not experienced significant problems in the past, this reliance
upon third parties could result in product shortages or delays in the future. If
these shortages or delays were significant, our customers might seek alternative
sources of supply, which could harm our operating results and reputation. Like
many companies in the semiconductor industry, we maintain excess levels of
inventory to mitigate the risk of product shortages or delays. Although our
inventory has been sufficient to cover periodic delays and shortages in the
past, our inventory may not be sufficient if a significant production shortage
or delay occurs in the future. We believe that our past experience with
production shortages and delays has been generally consistent with industry
norms.
QUALITY ASSURANCE AND RELIABILITY. We prequalify each manufacturing plant.
We also participate in quality and reliability monitoring through each stage of
the production cycle by reviewing data from our wafer manufacturing plant and
assembly subcontractors. We closely monitor wafer manufacturing plant production
to enhance product quality and reliability and yield levels. We purchase wafers
on a fixed-cost basis and, therefore, any improvement in manufacturing yields
reduces our cost per product. Like many semiconductor companies, we have
experienced our most significant yield problems with our newer products. The
manufacture of new products often requires the implementation of new circuit
designs or new manufacturing processes, which generally require time and
experience to refine so that acceptable yields are achieved. Other companies
have experienced poor yields with respect to mature products, and we may also
experience poor yields on mature products. In general, yield fluctuations on
mature products may impact the cost of manufacturing but will not result in
product shortages or delays. We believe that our experience with poor yields has
been generally consistent with industry norms.
COMPETITION
The embedded microprocessor market is intensely competitive and
characterized by continual technological change and price erosion. We expect
competition to increase as our target markets continue to grow and to present
increasingly attractive business opportunities. Many of our direct and indirect
competitors are large corporations with substantially greater technical,
financial and marketing resources and name recognition than QED. In addition,
many of these competitors have a much larger installed customer base than we do.
Competition within our industry is based on a variety of factors, including:
- microprocessor performance;
- product functionality;
- product price;
- product reliability;
- software compatibility;
- financial strength;
- name recognition;
- marketing and distribution capability; and
- customer support.
We believe that we compete favorably with respect to each of these factors.
41
<PAGE>
We face competition from the following sources:
OTHER MIPS LICENSEES. We license the MIPS instruction set architecture on a
non-exclusive basis. MIPS Technologies has licensed and, we believe, will
continue to license its technology to other companies that compete or may
compete with us. Other licensees of MIPS Technologies that currently compete
with us in our target markets include NEC Corporation, Toshiba Corporation and
Integrated Device Technology.
COMPANIES UTILIZING ALTERNATIVE RISC ARCHITECTURES. We face competition
from companies that use alternative RISC architectures. These architectures
include ARM/Strong Arm, developed by ARM Holdings plc and Intel; Hitachi SH,
developed by Hitachi; and PowerPC, developed by Motorola, Inc. and IBM. While
some of these companies have targeted the lower-end segments of the embedded
microprocessor market and, therefore, do not currently compete with us, these
companies may develop products for the high-end segments of the market.
COMPANIES UTILIZING NON-RISC TECHNOLOGIES. The embedded microprocessor
market is mostly comprised of companies utilizing RISC technology. Nonetheless,
CISC architectures, including the x86 architecture, have been introduced into
our target markets and represent a source of competition.
We believe that our high-end products generally exhibit higher performance,
as measured in terms of execution speed, than those of our competitors that
license the MIPS instruction set architecture. In addition, we believe that our
latest product, the RM7000, incorporate more memory, measured in terms of
kilobytes, than our competitors' current product offerings. Our competitors that
license the MIPS instruction set architecture offer products with a 64-bit
interface, as do all of our products other than the RM 5231. Our competitors
that do not license the MIPS instruction set architecture do not currently offer
products with a 64-bit interface.
MIPS LICENSE AND INTELLECTUAL PROPERTY
Our success and ability to compete is dependent in part upon our proprietary
technology. We rely upon a combination of patent, mask work, copyright,
trademark and trade secret laws and other means to protect our technology. We
have four issued patents that expire in 2014 through 2016. We also seek to
protect our trade secrets and proprietary technology through confidentiality
agreements with employees, consultants and other parties.
We currently derive and expect to continue to derive a substantial majority
of our revenue from the sale of products incorporating microprocessor technology
of MIPS Technologies. We have obtained the right to use this technology in our
products under a Technology License Agreement with MIPS Technologies. The
technology license granted under this agreement is perpetual and bears a royalty
based upon a percentage of our revenue derived from sales of products
incorporating the licensed technology. Our breach of this agreement could result
in our loss of these rights, which would harm our business. We also depend on
MIPS Technologies to enforce these patents against third-party infringement.
Because this license is non-exclusive, MIPS Technologies has licensed, and could
in the future license, its technologies to third parties, including our
competitors. If our competitors obtain a license from MIPS Technologies on more
favorable terms than ours, or if MIPS Technologies fails to enforce its patent
rights against infringers, we might not be able to compete successfully.
EMPLOYEES
As of December 31, 1999, we had a total of 97 employees, including 53 in
research and development, 19 in sales and marketing, 13 in manufacturing and 12
in general administration. As of December 31, 1999, we had 11 contractors in
research and development. None of our employees is represented by a collective
bargaining agreement or an employment agreement. We have never experienced any
work stoppage. We consider our relations with our employees to be good.
42
<PAGE>
FACILITIES
Our corporate headquarters, which serves as our principal sales, marketing,
research and development and administrative office, occupies 38,593 square feet
in two adjacent buildings in Santa Clara, California under a 15,218 square foot
lease and a 23,375 square foot lease. The 15,218 square foot lease expires on
June 30, 2001, and the 23,375 square foot lease expires on October 31, 2004.
We also have small sales offices in Raleigh, North Carolina, Burlington,
Massachusetts and Roswell, Georgia. The leases for these offices expire on
March 15, 2000, October 14, 2000 and October 1, 2000.
We believe that our existing facilities are adequate to meet our current
needs.
43
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our directors
and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- ----------- -----------------------------------------------------
<S> <C> <C>
Thomas J. Riordan.................................... 43 Chief Executive Officer, President and Director
Barry L. Cox......................................... 57 Chairman of the Board of Directors
Raymond Kunita....................................... 44 Chief Operating Officer and Vice President of
Engineering
Howard M. Bailey..................................... 53 Chief Financial Officer, Vice President of Finance
and Secretary
William S. Thomas.................................... 47 Vice President of Sales
Andrew J. Keane...................................... 37 Vice President of Marketing
Lester M. Crudele.................................... 50 Director
Bruce K. Graham...................................... 39 Director
Christopher J. Schaepe............................... 35 Director
</TABLE>
THOMAS J. RIORDAN, a co-founder of QED, has served as our Chief Executive
Officer, President and director since our inception in August 1991. From
February 1985 to June 1991, Mr. Riordan served in various design and managerial
roles most recently as director of research and development at MIPS Computer
Systems, Inc., a semiconductor design company. From March 1983 to January 1985,
Mr. Riordan served as a design engineer at Weitek Corporation, a semiconductor
company. From October 1979 to February 1983, Mr. Riordan was a design engineer
at Intel Corporation, a semiconductor company. Mr. Riordan holds B.S. and M.S.
degrees in Electrical Engineering as well as a B.A. degree in Government from
the University of Central Florida and has done post-graduate work in electrical
engineering at Stanford University.
BARRY L. COX joined QED in July 1998 and has served as our Chairman of the
Board of Directors since September 1999. From January 1996 to July 1998,
Mr. Cox served as a consultant for various companies. Currently, he is a member
of the board of directors of DynaChip Corporation, SUMMIT
Microelectronics, Inc. and Real 3D, each a privately-held company, and Photon
Dynamics, Inc., a publicly-held flat panel display equipment company. From
October 1993 to December 1995, Mr. Cox was President and Chief Executive Officer
of Weitek Corporation and from April 1992 to October 1993, Mr. Cox served as
President and Chief Operating Officer. In August 1984, Mr. Cox co-founded ATEQ
Corp., a semiconductor capital equipment manufacturing company, and from
October 1987 to December 1991, Mr. Cox served as its President, Chief Executive
Officer and director. From June 1980 to April 1983, he was President of Intel
Europe. Mr. Cox holds a B.S. degree in General Engineering from the U.S. Air
Force Academy and an M.B.A. degree from Boston University.
RAYMOND KUNITA, a co-founder of QED, has served as our Chief Operating
Officer and Vice President of Engineering, among other positions, since our
inception in August 1991. From February 1986 to July 1991, Mr. Kunita served in
various design and managerial roles at MIPS Computer Systems and most recently
as Director of Engineering. From August 1984 to January 1986, Mr. Kunita served
as a design engineer responsible for the development of a RISC microprocessor at
Weitek Corporation. From February 1983 to August 1984, Mr. Kunita served as a
design engineer responsible for the development of a graphics display processor
at Mindset Corporation, a computer systems company. From July 1977 to February
1983, Mr. Kunita served in various technology development roles at Intel
Corporation. Mr. Kunita holds a B.S. degree in Electrical Engineering from the
University of Illinois.
HOWARD M. BAILEY has served as our Chief Financial Officer, Vice President
of Finance and Secretary since June 1998. From August 1994 to June 1998,
Mr. Bailey served as Chief Financial Officer of Photon
44
<PAGE>
Dynamics. From August 1992 to August 1994, Mr. Bailey was a partner in the
Financial Services Division of David Powell, Inc., a financial services company,
where he provided financial consulting services. From 1989 to 1991, Mr. Bailey
was the Chief Financial Officer at Plus Logic Corporation, which was later
acquired by Xilinx, Inc. From 1978 to 1983, Mr. Bailey served as a controller at
Intel Corporation. Mr. Bailey holds a B.S. degree in Economics from the
University of Maryland and an M.B.A. degree in Finance from the University of
Utah.
WILLIAM S. THOMAS has served as QED's Vice President of Sales since
October 1996. From October 1995 to October 1996, Mr. Thomas served as Director
of Strategic Sales at Power Trends, Inc., an integrated switching regulator
company. From November 1994 to October 1995, Mr. Thomas served as Director of
Semiconductor Sales at Celeritek, Inc., a semiconductor company. From
August 1992 to November 1994, Mr. Thomas served as director of Communication
Product Marketing at Sierra Semiconductor Corp., and from October 1989 to
August 1992, as Western Area Sales Manager. Mr. Thomas holds a B.S. degree in
Electrical Engineering from the University of Florida.
ANDREW J. KEANE has served as QED's Vice President of Marketing since
February 1999. From August 1998 to February 1999, Mr. Keane worked as a
marketing consultant in various marketing positions. From March 1995 to
April 1996, Mr. Keane served as Director of Product Marketing at 3dfx
Interactive, Inc., a 3D graphics company, and from April 1996 to August 1998
served as Vice President, Marketing. From August 1994 to February 1995,
Mr. Keane served as the Product Line Manager at Xilinx, Inc. From June 1990 to
August 1994, Mr. Keane served as the Marketing Manager at MIPS Computer
Systems, Inc. From August 1986 to August 1988, Mr. Keane served as an engineer
at Intel Corporation. From June 1984 to August 1986, Mr. Keane was an engineer
at Signetics Corporation, a division of Philips Electronics. Mr. Keane holds a
B.S. degree in Physics from Rensselaer Polytechnic Institute and an M.B.A.
degree from the University of California, Berkeley.
LESTER M. CRUDELE has served as a director of QED since December 1999. From
April 1999 to August 1999, Mr. Crudele was Vice President of the Enterprise
Computing Group of Compaq Computer Corporation. From March 1997 to April 1999,
Mr. Crudele was Vice President and General Manager of the Workstation Division
of Compaq Computer Corporation. From August 1991 to March 1997, he was Vice
President and General Manager of the RISC Microprocessor Division of Motorola,
Inc. Prior to Motorola, Mr. Crudele served in various capacities at Stardent
Computer, Inc., Stellar Computer Systems, Inc. and MIPS Computer Systems, Inc.
Mr. Crudele holds a B.S. degree in Electrical Engineering from Florida Atlantic
University.
BRUCE K. GRAHAM has served as a director of QED since May 1998. Mr. Graham
is a General Partner of Bessemer Venture Partners, a venture capital firm, which
he joined in December 1996. From September 1995 to November 1996, Mr. Graham was
a Vice President at Vertex Management, a venture capital firm. Mr. Graham is a
director of GenOA, HiQ Networks, LightLogic, Optical Micromachines and Summit
Microelectronics, Inc., each of which is a privately held company. Mr. Graham
holds a B.S. degree in Chemical Engineering from Princeton University and an
M.B.A. degree from Stanford Graduate School of Business.
CHRISTOPHER J. SCHAEPE has served as a director of QED since March 1997.
Mr. Schaepe is a General Partner of Weiss, Peck & Greer Venture Partners, a
technology-focused venture capital firm, which he joined in 1991. Previously,
Mr. Schaepe served in corporate finance and capital markets roles for three
years at Goldman, Sachs & Co. after his employment as a software engineer at IBM
Corporation. Mr. Schaepe is a director of Galileo Technology Ltd. and Terayon
Communication Systems, as well as several privately held companies. Mr. Schaepe
holds B.S. and M.S. degrees in Computer Science from the Massachusetts Institute
of Technology and an M.B.A. degree from Stanford Graduate School of Business.
45
<PAGE>
Under a voting agreement dated April 16, 1998 that we entered into with a
number of our stockholders, the following stockholders or their affiliated
entities have appointed a member to our board of directors:
- Weiss, Peck & Greer Venture Partners, L.P., whose representative is
Mr. Schaepe;
- Bessemer Venture Partners, whose representative is Mr. Graham; and
- the common stockholders, whose representative is Mr. Riordan.
This voting agreement will terminate upon the closing of this offering.
BOARD OF DIRECTORS
Upon completion of the offering, the terms of the board of directors will be
divided into three classes each with a term of three years: Class I, whose term
will expire at the annual meeting of stockholders to be held in 2000; Class II,
whose term will expire at the annual meeting of stockholders to be held in 2001;
and Class III, whose term will expire at the annual meeting of stockholders to
be held in 2002. The Class I directors are Messrs. Cox and Riordan, the
Class II directors are Messrs. Schaepe and Graham, and the Class III director is
Mr. Crudele. At each annual meeting of stockholders after the initial
classification, the successors to directors whose terms expire will be elected
to serve a term of three years. This classification of directors may have the
effect of delaying or preventing changes in our control.
BOARD COMMITTEES
AUDIT COMMITTEE. The board of directors has established an audit committee
consisting of Messrs. Graham and Schaepe. The audit committee reviews with our
independent accountants the scope and timing of their audit services and any
other services that they are asked to perform, the independent accountants'
report on our financial statements following completion of their audit, and our
policies and procedures with respect to internal accounting and financial
controls. In addition, the audit committee makes annual recommendations to our
board of directors for the appointment of independent accountants for the
upcoming year.
COMPENSATION COMMITTEE. The board of directors has established a
compensation committee consisting of Messrs. Graham and Schaepe. The
compensation committee makes recommendations to the board concerning salaries
and compensation for our officers and employees and administers our employee
benefit plans.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation for services on
the board of directors or any committee of our board, but directors may be
reimbursed for certain expenses in connection with attendance at board of
directors and committee meetings. All directors are eligible to participate in
our 1999 Equity Incentive Plan. Non-employee directors are eligible to
participate in our 1999 Non-Employee Directors' Stock Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers currently serves, or in the past has served,
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers who serve as a member of our board or
compensation committee.
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<PAGE>
EXECUTIVE COMPENSATION
The following table presents information regarding the compensation paid to
our chief executive officer and our four other most highly compensated executive
officers whose salary and bonus exceeded $100,000 for the fiscal year ended
June 30, 1999:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------------
--------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- -------------------------------------------------- ---------- --------- --------------------- -----------------
<S> <C> <C> <C> <C>
Thomas J. Riordan
President and Chief Executive Officer........... $ 152,442 $ 60,105 150,000 $ 432(1)
Barry L. Cox
Chairman of the Board of Directors.............. 238,414 61,706 650,000 694(1)
Raymond Kunita
Chief Operating Officer and
Vice President of Engineering................... 152,442 60,105 150,000 432(1)
Howard M. Bailey
Chief Financial Officer,
Vice President of Finance
and Secretary................................... 152,385 26,545 35,000 622(1)
William S. Thomas
Vice President of Sales......................... 124,961 51,891 60,000 6,644(2)
</TABLE>
- ------------------------
(1) Represents term life insurance premiums paid on the officers' behalfs.
(2) Represents a $6,000 car allowance and $644 in term life insurance premiums
paid on Mr. Thomas' behalf.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding each grant of stock
options during the fiscal year ended June 30, 1999 to our chief executive
officer and our four other most highly compensated executive officers whose
salary and bonus exceeded $100,000 for the fiscal year ended June 30, 1999:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------ VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE PER EXPIRATION ----------------------
NAME GRANTED 1999 SHARE DATE 5% 10%
- ----------------------------------------- ---------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Riordan........................ 50,000 1.9% $ 1.00 10/20/08 $ 31,445 $ 79,687
100,000 3.9 3.00 3/29/09 188,668 478,123
Barry L. Cox............................. 600,000 23.2 1.00 6/30/08 377,337 956,245
50,000 1.9 3.00 3/29/09 94,334 239,061
Raymond Kunita........................... 50,000 1.9 1.00 10/20/08 31,445 79,687
100,000 3.9 3.00 3/29/09 188,668 478,123
Howard M. Bailey......................... 35,000 1.4 3.00 3/29/09 66,034 167,343
William S. Thomas........................ 60,000 2.3 3.00 3/29/09 113,201 286,874
</TABLE>
In fiscal year 1999, we granted to our employees options to purchase an
aggregate of 2,589,300 shares. Options were granted at an exercise price equal
to the fair market value of our common stock, as
47
<PAGE>
determined by the board of directors on the date of grant. In making this
determination, the board considered a number of factors, including:
- our historical and prospective revenue and profitability;
- our cash balance and rate of cash consumption;
- the development and size of the market for our products;
- the status of our financing activities;
- the stability and tenure of our management team; and
- the breadth of our product offerings.
Potential realizable values are computed by (a) multiplying the number of
shares of common stock subject to a given option by the exercise price per
share, (b) assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rates shown in the table for the entire ten
year term of the option and (c) subtracting from that result the aggregate
option exercise price. The 5% and 10% assumed annual rates of compounded stock
price appreciation are mandated by rules of the Securities and Exchange
Commission, or SEC. We can provide no assurance to any executive officer or any
other holder of our securities that any stock price appreciation over the option
term will be at the assumed 5% and 10% levels or at any other defined level.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth the number and value of securities underlying
unexercised options held by our chief executive officer and our four other most
highly compensated executive officers whose salary and bonus exceeded $100,000
for the fiscal year ended June 30, 1999:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT JUNE 30, 1999 AT JUNE 30, 1999
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Riordan............... -- $ -- 145,833 304,167 $ 670,832 $ 1,399,168
Barry L. Cox.................... 20,000 75,000 -- 650,000 -- 2,990,000
Raymond Kunita.................. -- -- 145,833 304,167 670,832 1,399,168
Howard M. Bailey................ 25,000 100,000 25,000 185,000 100,000 740,000
William S. Thomas............... 48,334 153,336 3,750 127,916 15,750 391,914
</TABLE>
- ------------------------
In the table above, the value of unexercised in-the-money options is based
on the fair market value of QED's common stock, determined by our board of
directors as discussed above to be $4.75 per share on or about June 30, 1999,
minus the per share exercise price multiplied by the number of shares.
EMPLOYEE STOCK PLANS
1999 EQUITY INCENTIVE PLAN
Our board of directors adopted and our stockholders approved the 1997 Stock
Option Plan in April 1997. We reserved an aggregate of 4,500,000 shares of our
common stock for issuance under the 1997 plan. Our board and stockholders
approved the 1992 Stock Option Plan in July 1992. We reserved an aggregate of
4,600,000 shares of our common stock for issuance under the 1992 plan. Our board
amended and restated both plans as the 1999 Equity Incentive Plan in
September 1999 and increased the combined common stock reserves of 9,100,000
shares by 1,400,000, to a total of 10,500,000 shares of common stock. The 1999
Equity Incentive Plan was approved by the stockholders in November 1999.
48
<PAGE>
SHARE RESERVE. We have reserved a total of 10,500,000 shares of our common
stock under the 1999 Equity Incentive Plan. On the last day of each fiscal year
for 10 years, starting with the fiscal year ending June 30, 2000, the share
reserve will automatically be increased by a number of shares equal to the
greater of:
- 5% of our outstanding shares on a fully-diluted basis, or
- that number of shares subject to awards granted under the incentive plan
during the prior 12-month period.
The automatic increase in the number of shares available for grants under
incentive stock options may not exceed 14,000,000 shares over the 10-year
period. If the recipient of a stock award does not purchase the shares subject
to a stock award before the stock award expires or otherwise terminates, the
shares that are not purchased again become available for issuance under the
incentive plan.
ADMINISTRATION. Our board administers the incentive plan unless it
delegates administration to a committee. Our board has the authority to
construe, interpret and amend the incentive plan as well as to determine:
- the grant recipients;
- the grant dates;
- the number of shares subject to the award;
- the exercisability of the award and vesting;
- the exercise price;
- the type of consideration; and
- the other terms of the award.
ELIGIBILITY. Our board may grant incentive stock options that qualify under
Section 422 of the Internal Revenue Code to our employees and to the employees
of our affiliates. Our board also may grant nonstatutory stock options, stock
bonuses and restricted stock purchase awards to our employees, directors and
consultants as well as to the employees, directors and consultants of our
affiliates.
- A stock option is a contractual right to purchase a specified number of
our shares at a specified price, or exercise price, for a specified period
of time.
- An incentive stock option is a stock option that has met the
requirements of Section 422 of the Internal Revenue Code. This type of
option is free from regular tax at both the date of grant and the date
of exercise. If two holding period tests are met--two years between
grant date and sale date and one year between exercise date and sale
date--the profit on the option is long-term capital gain income. If the
holding periods are not met, there has been a disqualifying
disposition, and generally the difference between the exercise price
and the fair market value of the shares on the exercise date will be
taxed at ordinary income rates. The difference between the fair market
value on date of exercise and the exercise price is an item of
alternative minimum tax unless there is a disqualifying disposition in
the year of exercise.
- A nonstatutory stock option is a stock option not meeting the Internal
Revenue Code criteria for qualifying incentive stock options and,
therefore, triggering a tax upon exercise. This type of option requires
payment of state and federal income tax and, if applicable, FICA/FUTA
on the difference between the exercise price and the fair market value
on the exercise date.
- A restricted stock purchase award is an offer to purchase shares at a
price either at or near the fair market value of the shares. A stock
bonus, on the other hand, is a grant of our shares at no cost to the
recipient in consideration for past services rendered. However, we may
reacquire the shares
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<PAGE>
under either type of award at the original purchase price, which is zero
in the case of a stock bonus, if the recipient's service to us and to our
affiliates terminates before the shares vest.
Our board may not grant an incentive stock option to any person who, at the
time of the grant, owns or is deemed to own stock possessing more than 10% of
our total combined voting power or the total combined voting power of an
affiliate of ours, unless the exercise price is at least 110% of the fair market
value of the stock on the grant date and the option term is five years or less.
LIMITS ON OPTION GRANTS. There are limits on the number of shares that our
board may grant under an option.
- Section 162(m) of the Internal Revenue Code, among other things, denies a
deduction to publicly held corporations for compensation paid to the chief
executive officer and the four other highest compensated officers in a
taxable year to the extent that the compensation for each such officer
exceeds $1.0 million. When we become subject to Section 162(m), in order
to prevent options granted under the incentive plan from being included in
such compensation, our board may not grant options under the incentive
plan to an employee covering an aggregate of more than 700,000 shares in
any calendar year; and
- An employee may not receive incentive stock options that exceed the
$100,000 per year limitation set forth in Section 422(d) of the Internal
Revenue Code. In calculating the $100,000 per year limitation, we
determine the aggregate number of shares under all incentive stock options
granted to that employee that will become exercisable for the first time
during a calendar year. For this purpose, we include incentive stock
options granted under the incentive plan as well as under any other stock
plans that we or our affiliates maintain. We then determine the aggregate
fair market value of such stock as of the grant date of the option. Taking
the options into account in the order in which they were granted, we treat
only the options covering the first $100,000 worth of stock as incentive
stock options. We treat any options covering stock in excess of $100,000
as nonstatutory stock options.
OPTION TERMS. The board may grant incentive stock options with an exercise
price of 100% or more of the fair market value of a share of our common stock on
the grant date. It may grant nonstatutory stock options with an exercise price
as low as 85% of the fair market value of a share on the grant date. If the
value of our shares declines after the grant date, the board may offer
optionholders the opportunity to replace such outstanding higher-priced options
with new lower-priced options. To the extent required by Section 162(m) of the
Internal Revenue Code, the old repriced option is deemed to be canceled and a
new option granted, but both options will be counted against the Section 162(m)
limit discussed above.
The maximum option term is 10 years. The board may provide for exercise
periods of any length in individual option grants. However, generally an option
terminates three months after the optionholder's service to us and to our
affiliate terminates. If this termination is due to the optionholder's
disability, the exercise period generally is extended to 12 months. If this
termination is due to the optionholder's death or if the optionholder dies
within three months after his or her service terminates, the exercise period
generally is extended to 18 months following death.
The board may provide for the transferability of nonstatutory stock options
but not incentive stock options. However, the optionholder may designate a
beneficiary to exercise either type of option following the optionholder's
death. If the optionholder does not designate a beneficiary, the optionholder's
option rights will pass by his or her will or by the laws of descent and
distribution.
TERMS OF OTHER STOCK AWARDS. The board determines the purchase price of
other stock awards, which may not be less than 85% of the fair market value of
our common stock on the grant date. However, the board may award stock bonuses
in consideration of past services without a purchase payment. Shares that we
sell or award under the incentive plan may, but need not be, restricted and
subject to a repurchase
50
<PAGE>
option in our favor in accordance with a vesting schedule that the board
determines. The board, however, may accelerate the vesting of such restricted
stock.
OTHER PROVISIONS. Transactions not involving our receipt of consideration,
such as a merger, consolidation, reorganization, stock dividend, or stock split,
may change the class and number of shares subject to the incentive plan and to
outstanding awards. In that event, the board will appropriately adjust the
incentive plan as to the class and the maximum number of shares subject to the
incentive plan, to the cap on the number of shares available for incentive stock
options, and to the Section 162(m) limit. It also will adjust outstanding awards
as to the class, number of shares and price per share subject to these awards.
If we dissolve or liquidate, then outstanding stock awards will terminate
immediately before this event. However, we treat outstanding stock awards
differently in the following situations:
- a sale, lease or other disposition of all or substantially all of our
assets;
- a sale of 50% or more of the combined voting power of our stock to another
corporation;
- a merger or consolidation in which we are not the surviving corporation;
or
- a merger in which we are the surviving corporation but the shares of our
common stock outstanding immediately before the merger are converted by
virtue of the merger into other property, such as securities or cash.
In these situations, the surviving entity will either assume or replace all
outstanding awards under the incentive plan. If it declines to do so, then
generally the vesting and exercisability of the awards will accelerate.
STOCK AWARDS GRANTED. As of December 31, 1999, we have issued 4,468,029
shares upon the exercise of options under the 1999 plan, 11,865 of which have
been repurchased, 266,630 shares of which are subject to repurchase at the
original exercise price, and none of which are subject to repurchase at fair
market value; options to purchase 4,704,201 shares at a weighted average
exercise price of $2.02 were outstanding; and 1,539,635 shares remained
available for future grant. As of December 31, 1999, the board had not granted
any stock bonuses or restricted stock under the incentive plan.
PLAN TERMINATION. The incentive plan will terminate in 2009 unless the
board terminates it sooner.
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In September 1999, our board adopted the 1999 Non-Employee Directors' Stock
Option Plan. The plan was approved by the stockholders in November 1999. The
directors' plan provides for the automatic grant to our non-employee directors
of options to purchase shares of our common stock.
SHARE RESERVE. We have reserved a total of 200,000 shares of our common
stock for issuance under the directors' plan. On the last day of each fiscal
year for 10 years, starting with the fiscal year ending June 30, 2000, the share
reserve will automatically be increased by a number of shares equal to the
greater of:
- .5% of our outstanding shares on a fully-diluted basis; or
- that number of shares subject to options granted under the directors' plan
during the prior 12-month period.
If the optionholder does not purchase the shares subject to the option
before the option expires or otherwise terminates, the shares that are not
purchased again become available for issuance under the directors' plan.
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<PAGE>
ADMINISTRATION. The board administers the directors' plan unless it
delegates administration to a committee. The board has the authority to
construe, interpret and amend the directors' plan but the directors' plan
specifies the essential terms of the options, including:
- the option recipients;
- the grant dates;
- the number of shares subject to the option;
- the exercisability and vesting of the option;
- the exercise price; and
- the type of consideration.
ELIGIBILITY. We automatically will grant an option covering 30,000 shares
to each non-employee director on the day after each annual meeting of our
stockholders, starting in 2000, at which the director is elected or re-elected
to a full three-year term of office. For non-employee directors who are elected
or appointed mid-term, the number of shares subject to the option will be pro
rated for each remaining month of the term of office, rounded to the nearest
whole month. The options will vest monthly over the number of months remaining
in the non-employee director's term of office.
As long as a non-employee director who is an optionholder continues to serve
with us or with an affiliate of ours, whether in the capacity of a director, an
employee or a consultant, the optionholder may exercise the option.
OPTION TERMS. Options have an exercise price equal to 100% of fair market
value of our common stock on the grant date. The option term is 10 years but it
terminates three months after the optionholder's service terminates. If this
termination is due to the optionholder's disability, the exercise period is
extended to 12 months. If this termination is due to the optionholder's death or
if the optionholder dies within three months after his or her service
terminates, the exercise period is extended to 18 months following death.
The optionholder may transfer the option by gift to immediate family or for
estate-planning purposes. The optionholder also may designate a beneficiary to
exercise the option following the optionholder's death. Otherwise, the option
exercise rights will pass by the optionholder's will or by the laws of descent
and distribution.
OTHER PROVISIONS. Transactions not involving our receipt of consideration,
such as a merger, consolidation, reorganization, stock dividend, or stock split,
may change the class and number of shares subject to the directors' plan and to
outstanding options. In that event, the board will appropriately adjust the
directors' plan as to the class and the maximum number of shares subject to the
directors' plan. It also will adjust outstanding options as to the class, number
of shares and price per share subject to these options.
If we dissolve or liquidate, then the outstanding options will terminate
immediately before this event. However, we treat outstanding options differently
in the following situations:
- a sale, lease or other disposition of all or substantially all of our
assets;
- a sale of 50% or more of the combined voting power of our stock to another
corporation;
- a merger or consolidation in which we are not the surviving corporation;
or
- a merger in which we are the surviving corporation but the shares of our
common stock outstanding immediately before the merger are converted by
virtue of the merger into other property, such as securities or cash.
In these situations, the surviving entity will either assume or replace all
outstanding options under the directors' plan. If it declines to do so, then
generally the vesting and exercisability of the options will accelerate.
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<PAGE>
OPTIONS ISSUED. We have not issued any options under the directors' plan.
PLAN TERMINATION. The directors' plan will terminate in 2009 unless the
board terminates it sooner.
1999 EMPLOYEE STOCK PURCHASE PLAN
In September 1999, our board adopted the 1999 Employee Stock Purchase Plan.
The stockholders approved the plan in November 1999.
SHARE RESERVE. We have authorized the issuance of 300,000 shares of our
common stock pursuant to purchase rights granted to eligible employees under the
purchase plan. On November 1 of each year for 10 years, starting with the year
2000, the number of shares in the reserve will be increased by the greater of 1%
of our outstanding shares on a fully-diluted basis or that number of shares that
have been issued under the purchase plan during the prior 12-month period. The
automatic share reserve increase in the aggregate may not exceed 3,000,000
shares over the 10-year period.
ELIGIBILITY. The purchase plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code.
The purchase plan provides a means by which eligible employees may purchase our
common stock through payroll deductions. We implement the purchase plan by
offerings of purchase rights to eligible employees. Generally, all of our
full-time employees and full-time employees of our affiliates incorporated in
the United States who have been employed for at least five days may participate
in offerings under the purchase plan. However, no employee may participate in
the purchase plan if, immediately after we grant the employee a purchase right,
the employee has voting power over 5% or more of our outstanding capital stock.
Currently, no shares of common stock had been purchased under the purchase plan.
ADMINISTRATION. Under the purchase plan, the board may specify offerings of
up to 27 months. Unless the board otherwise determines, common stock is
purchased for accounts of participating employees at a price per share equal to
the lower of:
- 85% of the fair market value of a share on the first day of the offering;
or
- 85% of the fair market value of a share on the purchase date.
For the first offering period, which will begin on the effective date of
this initial public offering, we will offer shares registered on a Form S-8
registration statement. The fair market value of the shares on the first date of
this offering will be the price per share at which our shares are first sold to
the public as specified in the final prospectus with respect to our initial
public offering. Otherwise, fair market value generally means the closing sales
price, rounded up where necessary to the nearest whole cent for the shares, or
the closing bid, if no sales were reported as quoted on the Nasdaq National
Market on the trading day prior to the relevant determination date, as reported
in THE WALL STREET JOURNAL.
The board may provide that employees who become eligible to participate
after the offering period begins nevertheless may enroll in the offering. These
employees will purchase our stock at the lower of:
- 85% of the fair market value of a share on the day they began
participating in the purchase plan; or
- 85% of the fair market value of a share on the purchase date.
Generally, participating employees may authorize payroll deductions of up to
10% of their compensation for the purchase of stock under the purchase plan.
Generally, employees may end their participation in the offering at any time up
to 10 days before a offering period begins. Their participation ends
automatically on termination of their employment.
OTHER PROVISIONS. The board may grant eligible employees purchase rights
under the purchase plan only if the purchase rights together with any other
purchase rights granted under other employee stock purchase plans established by
us or by our affiliates, if any, do not permit the employee's rights to purchase
our stock to accrue at a rate which exceeds $25,000 of fair market value of our
stock for each calendar year in which the purchase rights are outstanding.
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<PAGE>
Upon a change in control, the board may provide that the successor
corporation will assume or substitute for outstanding purchase rights.
Alternatively, the board may shorten the offering period and provide that our
stock will be purchased for the participants immediately before the change in
control.
DESCRIPTION OF 401(K) PLAN
We maintain a 401(k) retirement savings plan for our U.S. employees. This
plan is intended to qualify as a tax-qualified plan under Section 401 of the
Internal Revenue Code and provides that each participant may contribute a
percentage of his or her pre-tax compensation. A participant's pre-tax savings
contributions may not be more than 20% of the participant's pay for the plan
year, up to a statutory limit, which is $10,000 in calendar year 1999. Under
this plan, each employee is fully vested in his or her deferred salary
contributions. Employee contributions are held and invested by the plan trustee.
This plan also permits us to make discretionary contributions, subject to
established limits. To date, we have not made any matching contributions to this
plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, we have adopted
provisions in our certificate of incorporation and bylaws that limit or
eliminate the personal liability of our directors for a breach of their
fiduciary duty of care as a director. The duty of care generally requires that,
when acting on behalf of the corporation, directors exercise an informed
business judgment based on all material information reasonably available to
them. Consequently, a director will not be personally liable to us or our
stockholders for monetary damages or breach of fiduciary duty as a director,
except for liability for:
- any breach of the director's duty of loyalty to us or our stockholders;
- acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases, redemptions
or other distributions; or
- any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation allows us to indemnify our officers,
directors and other agents to the fullest extent permitted by Delaware law. We
intend to enter into indemnification agreements with each of our directors and
officers that are, in some cases, broader than the specific indemnification
provisions permitted by Delaware law, and that may provide additional procedural
protection. The indemnification agreements require us, among other things, to:
- indemnify officers and directors against certain liabilities that may
arise because of their status as officers or directors; and
- advance expenses, as incurred, to officers and directors in connection
with a legal proceeding, subject to limited exceptions.
Additionally, we anticipate obtaining directors' and officers' liability
insurance.
Our bylaws also permit us to purchase insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity, regardless of whether Delaware law would permit
indemnification, and to provide indemnification in circumstances in which
indemnification is otherwise discretionary under Delaware law.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.
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<PAGE>
CERTAIN TRANSACTIONS
Other than compensation agreements and other arrangements, which are
described as required in "Management," and the transactions described below,
since July 1, 1996, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party:
- in which the amount involved exceeded or will exceed $60,000; and
- in which any director, executive officer, holder of more than 5% of our
common stock on an as-converted basis or any member of their immediate
family had or will have a direct or indirect material interest.
FINANCING TRANSACTIONS
Purchasers of our preferred and common stock include, among others, the
following of our executive officers, directors and holders of more than 5% of
our outstanding stock:
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK
COMMON ------------------------------------------------------
PURCHASER STOCK SERIES A SERIES B SERIES C SERIES D
- ---------------------------------------------------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Thomas J. Riordan................................... 1,000,000 -- -- -- --
Barry L. Cox........................................ 20,000 -- -- -- --
Raymond Kunita...................................... 1,000,000 -- -- -- --
Howard M. Bailey.................................... 35,000 -- -- -- --
William S. Thomas................................... 75,000 -- -- -- --
Christopher J. Schaepe.............................. -- -- -- 28,000 --
ENTITIES AFFILIATED WITH DIRECTORS
Entities Affiliated with Bessemer Venture
Partners.......................................... -- -- -- 1,400,000 591,609
Entities Affiliated with Weiss, Peck & Greer Venture
Partners.......................................... -- -- 2,500,000 1,840,000 1,141,283
5% HOLDERS
Integrated Device Technology, Inc................... 2,200,000 1,440,000 -- -- --
Norwest Venture Partners VI, L.P.................... -- -- -- 1,200,000 507,094
Cisco Systems, Inc.................................. 237,500 -- -- -- 1,047,454
Price Per Share..................................... $ 0.001- $ 1.40 $ 2.40 $ 2.50 $ 4.32
$2.00
Date(s) of Purchase................................. 11/15/91- 1/24/92 3/5/97 4/16/98 3/1/99
8/31/99 and and
5/15/98 3/16/99
</TABLE>
The shares shown as held by Weiss, Peck & Greer in the above table include
shares held by Christopher J. Schaepe. Mr. Schaepe, one of our directors, is a
general partner of Weiss, Peck and Greer Venture Partners.
We have entered into an investors' rights agreement with each of the
purchasers of preferred stock set forth above and with Messrs. Riordan and
Kunita, as purchasers of the common stock set forth above. Under this agreement,
these and other stockholders are entitled to registration rights with respect to
their shares of common stock or common stock issuable upon conversion of their
preferred stock upon the closing of this offering.
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<PAGE>
AGREEMENTS WITH IDT
In January 1992, we entered into a development and license agreement with
Integrated Device Technology, or IDT, a 5% stockholder. Under this agreement, we
developed and delivered embedded microprocessor products in exchange for
milestone payments and continuing royalty payments by IDT to us. In June 1996,
we entered into a development agreement with IDT under which we agreed to modify
an embedded microprocessor for IDT and IDT agreed to make royalty payments to us
based on the product's net sales. We recognized aggregate royalty revenue from
IDT under the two agreements of $2.3 million in the year ended June 30, 1997,
$3.3 million in the year ended June 30, 1998 and $3.0 million in the year ended
June 30, 1999. We recognized aggregate royalty revenue from IDT of $1.1 million
in the six months ended December 31, 1999.
AGREEMENTS WITH CISCO
In connection with a purchase of QED capital stock on March 1, 1999, Cisco
Systems, a 5% stockholder, and QED entered into an agreement granting Cisco
Systems a right of first negotiation in the event of a proposed change in
control of QED. This agreement will terminate upon the closing of this offering.
In the fiscal year ended June 30, 1998, Cisco Systems purchased $5,685 worth of
our products. In the fiscal year ended June 30, 1999, Cisco Systems purchased
approximately $255,000 worth of our products. In the six months ended
December 31, 1999, Cisco Systems purchased approximately $100,000 worth of our
products. These amounts exclude product sales to Cisco Systems' manufacturing
subcontractors, which amounts are substantially larger than direct sales to
Cisco Systems and totalled approximately $2 million in fiscal year 1999 and
$3.3 million in the six months ended December 31, 1999.
OTHER TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
In November 1997, we entered into a consulting agreement with Barry L. Cox
under which we paid Mr. Cox an aggregate of $106,800 and granted him options to
purchase 20,000 shares of common stock. This agreement terminated in July 1998
when Mr. Cox became an employee of QED.
In June 1998, we granted Barry L. Cox an option to purchase 600,000 shares
of our common stock at an exercise price of $1.00 per share. The option vests
over five years, with 20% of the shares subject to the option vesting and
becoming exercisable upon the closing of this offering.
In May 1998, we granted Howard M. Bailey an option to purchase 200,000
shares of our common stock at an exercise price of $.75 per share. The option
vests over four years, with 50% of the shares subject to the option vesting and
becoming exercisable in the event of a change of control of QED.
In February 1999, we granted Andrew J. Keane an option to purchase 250,000
shares of our common stock at an exercise price of $2.00 per share. The option
vests over four years.
In December 1999, we granted Lester M. Crudele an option to purchase 45,000
shares of our common stock at an exercise price of $10.00 per share. The option
vests over three years.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with our directors and our
executive officers for the indemnification of and advancement of expenses to
these persons to the fullest extent permitted by law. We also intend to enter
into indemnification agreements with our future directors and officers.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested directors, and will be on terms no less favorable to us than could
be obtained from unaffiliated third parties.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
our common stock as of December 31, 1999 and as adjusted to reflect our sale of
shares offered and conversion of all outstanding shares of preferred stock into
shares of common stock held by the following persons:
- each person who we know to own beneficially more than five percent of the
common stock;
- each of our directors;
- each executive officer listed in the summary compensation table; and
- all directors and executive officers as a group.
Unless indicated below, to our knowledge the persons named have sole voting
and investment power with respect to all shares shown as beneficially owned by
them, subject to community property laws where applicable. Percentage of
beneficial ownership is based on 22,912,501 shares of common stock outstanding
on an as-converted basis as of December 31, 1999. This assumes no exercise of
the underwriters' over-allotment option. If the underwriters' over-allotment
option is exercised in full, we will sell up to an aggregate of 3,450,000 shares
of common stock and up to 26,362,501 shares of common stock will be outstanding
after the completion of this offering.
The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the SEC, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under these rules,
beneficial ownership includes any shares as to which the individual or entity
has sole or shared voting power or investment power and any shares as to which
the individual or entity has the right to acquire beneficial ownership within
60 days after December 31, 1999 through the exercise of any stock option or
other right. The inclusion of these shares in the table, however, does not
constitute an admission that the named stockholder is a direct or indirect
beneficial owner of, or receives the economic benefit from, these shares.
Unless indicated below, each person or entity named below has an address in
care of QED's principal executive offices located at 3255-3 Scott Boulevard,
Suite 200, Santa Clara, California 95054.
<TABLE>
<CAPTION>
SHARES
ISSUABLE
SHARES UPON
SUBJECT TO A EXERCISE OF PERCENTAGE BENEFICIALLY
RIGHT OF OPTIONS THAT
NUMBER OF REPURCHASE AS VEST WITHIN OWNED
SHARES OF 60 DAYS OF SHARES ------------------------
BENEFICIALLY DECEMBER 31, DECEMBER 31, BEING PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) 1999 1999 OFFERED OFFERING OFFERING
- ------------------------------------------------ ------------ ------------- ------------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Christopher J. Schaepe(2)..................... 5,509,283 -- -- -- 24.0% 21.3%
Thomas J. Riordan............................. 1,229,167 -- 229,167 -- 5.3 4.7
Raymond Kunita................................ 1,229,167 -- 229,167 -- 5.3 4.7
Bruce K. Graham(3)............................ 1,991,609 -- -- -- 8.7 7.7
Barry L. Cox.................................. 210,000 190,000 -- * *
Howard M. Bailey.............................. 83,333 -- 48,333 -- * *
William S. Thomas............................. 87,500 7,916 12,500 -- * *
OTHER 5% STOCKHOLDERS
Entities Affiliated with Weiss, Peck & Greer
Venture Partners(2)........................... 5,481,283 -- -- -- 23.9 21.2
555 California Street, Suite 3130
San Francisco, CA 94104
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
SHARES
ISSUABLE
SHARES UPON
SUBJECT TO A EXERCISE OF PERCENTAGE BENEFICIALLY
RIGHT OF OPTIONS THAT
NUMBER OF REPURCHASE AS VEST WITHIN OWNED
SHARES OF 60 DAYS OF SHARES ------------------------
BENEFICIALLY DECEMBER 31, DECEMBER 31, BEING PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) 1999 1999 OFFERED OFFERING OFFERING
- ------------------------------------------------ ------------ ------------- ------------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Integrated Device Technology, Inc............... 3,640,000 -- -- 720,000 15.9 11.3
2975 Stender Way
Santa Clara, CA 95054
Entities Affiliated with Bessemer Venture
Partners(3)................................... 1,991,609 -- -- -- 8.7 7.7
1400 Old Country Road, Suite 407
Westbury, NY 11590
Norwest Venture Partners VI, L.P................ 1,707,094 -- -- -- 7.5 6.6
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301
Cisco Systems, Inc.............................. 1,284,954 -- -- -- 5.6 5.0
255 West Tasman Drive, Bldg. J
San Jose, CA 95134
The Goldman Sachs Group, Inc.................... 1,157,408 -- -- -- 5.1 4.5
85 Broad Street
New York, NY 10004
All executive officers and directors as a group
(9 persons)................................... 10,341,726 7,916 710,834 720,000 45.1 39.9
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1%.
(1) These numbers may include shares subject to a right of repurchase by QED as
of December 31, 1999 and shares issuable upon the exercise of options that
vest within 60 days of December 31, 1999.
(2) Includes:
- 2,029,216 shares held by WPG Enterprise Fund II, L.L.C.;
- 1,687,297 shares held by Weiss Peck & Greer Venture Associates III,
L.L.C.;
- 865,267 shares held by Weiss Peck & Greer Venture Associates VI,
L.L.C.;
- 756,733 shares held by WPG Enterprise Fund III, L.L.C.;
- 109,239 shares held by Weiss Peck & Greer Venture Associates IV Cayman,
L.P.; and
- 33,531 shares held by WPG Information Sciences Entrepreneur Fund, L.P.
WPG Venture Partners III, L.P. is the fund investment advisory member of WPG
Enterprise Fund II, L.L.C. and Weiss Peck & Greer Venture Associates III,
L.L.C. Christopher J. Schaepe, one of our directors, is the general partner
of WPG Venture Partners III, L.P., and, as such, may be deemed to share
voting and investment power with respect to the shares held by these
entities. WPG VC Fund Advisor L.L.C. is the fund investment advisory member
of Weiss, Peck & Greer Venture Associates IV, L.L.C. and WPG Enterprise
Fund III, L.L.C., and is the general partner of WPG Information Sciences
Entrepreneur Fund, L.P. Mr. Schaepe is the managing member of WPG VC Fund
Advisor, L.L.C., and, as such, may be deemed to share voting and investment
power with respect to the shares held by these entities. WPG Fund Advisor
L.L.C. is the administrative general partner of Weiss, Peck & Greer Venture
Associates IV Cayman, L.P. Mr. Schaepe is a non-managing member of
58
<PAGE>
WPG Fund Advisor, L.L.C. and, as such, may be deemed to share voting and
investment power with respect to the shares held by Weiss, Peck & Greer
Venture Associates IV Cayman, L.P. Mr. Schaepe disclaims beneficial
ownership of all shares with respect to which he may be deemed to share
voting and investment power except to the extent of his pecuniary interests
therein. Mr. Schaepe's shares also include 24,000 shares held by
Mr. Schaepe's family living trust of which he is a trustee and 4,000 shares
held by his son's irrevocable trust. Mr. Schaepe disclaims beneficial
ownership of the shares held by his son's irrevocable trust.
(3) Includes (1) 1,050,328 shares held by Bessemer Venture Partners IV L.P.,
(2) 199,160 shares held by Bessemer Venture Investors L.P., and (3) 742,121
shares held by Bessec Ventures IV L.P. Deer IV & Co. LLC is the general
partner of Bessemer Venture Partners IV L.P., Bessemer Venture Investors
L.P. and Bessec Ventures IV L.P. Bruce K. Graham, one of our directors, is a
general partner of Deer IV & Co. LLC, and may be deemed to share voting and
investment power with respect to these shares. He disclaims beneficial
ownership of such shares except to the extent of his pecuniary interests
therein.
If the underwriters' over-allotment option is exercised, up to an additional
108,000 shares may be sold by the selling stockholder.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, $.001 par value, and 10,000,000 shares of
undesignated preferred stock, $.001 par value. As of December 31, 1999, there
were 22,912,501 shares of common stock outstanding held of record by
approximately 134 stockholders assuming the conversion of all outstanding
preferred stock into common stock. There will be 25,912,901 shares of common
stock outstanding after giving effect to the sale of the shares of common stock
offered under this prospectus.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding shares of preferred stock,
the holders of common stock are entitled to receive ratably such dividends as
may be declared by the board of directors out of funds legally available at
times and in amounts as the board may determine from time to time. See "Dividend
Policy." Upon completion of this offering, the board representation rights of
currently outstanding preferred stock will terminate and the holders of common
stock will be the only voting class for board elections. In the event of our
liquidation, dissolution or winding up, holders of the common stock are entitled
to share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of preferred stock. Holders of
common stock have no preemptive rights or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully-paid and nonassessable.
PREFERRED STOCK
Upon completion of this offering, all currently outstanding shares of
preferred stock will be converted into common stock. The preferred stock
liquidation, dividend and voting rights described in Notes to Financial
Statements will be extinguished upon the conversion of preferred stock into
common stock.
We will have authorized 10,000,000 shares of undesignated preferred stock.
The board of directors will have the authority to issue the undesignated
preferred stock in one or more series and to determine the powers, preferences
and rights and the qualifications, limitations or restrictions granted to or
imposed upon any wholly unissued series of undesignated preferred stock and to
fix the number of shares constituting any series and the designation of such
series, without any further vote or action by the stockholders. The issuance of
preferred stock may have the effect of delaying, deferring or preventing any
change in control without further action by the stockholders and may adversely
affect the voting and other rights of holders of common stock, and the
likelihood that such holders will receive dividend payments and payments upon
liquidation could have the effect of delaying, deferring or preventing a change
in control. Currently, we have no plans to issue any shares of preferred stock.
OPTIONS
As of December 31, 1999, options to purchase a total of 4,704,201 shares of
common stock were outstanding and up to 1,539,635 additional shares of common
stock may be issued upon exercise of options granted in the future under the
1999 Equity Incentive Plan and the 1999 Non-Employee Directors' Stock Option
Plan. Recommendations for option grants under our stock plans are made by our
compensation committee, subject to ratification by the full board of directors.
Our compensation committee may issue options with varying vesting schedules, but
all options granted under our stock plans must be exercised within 10 years from
the date of grant.
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<PAGE>
WARRANTS
In September 1997, in conjunction with the execution of a secured promissory
note and a lease agreement, we issued two six-year warrants to purchase an
aggregate of 93,750 shares of Series B preferred stock at an exercise price of
$1.60 per share.
In July 1998, in conjunction with the execution of an amendment to the
equipment financing agreement, we issued a warrant to purchase 4,000 shares of
Series C preferred stock at an exercise price of $2.50 per share. The number and
price of such shares are subject to adjustment, including a right to purchase
additional stock. If our total cost of equipment leased pursuant to the lease
exceeds $1.2 million, the warrantholder has the right to purchase an additional
number of shares as determined by multiplying the amount by which the
warrantholder's total equipment cost exceeds $1.2 million by 5%, and dividing
the product thereof by the exercise price per share. At December 31, 1999,
borrowings under the line had not exceeded $1.2 million.
In January 1999, in conjunction with the execution of a line of credit
agreement, we issued a six-year warrant to purchase 80,000 shares of common
stock at an exercise price of $2.50 per share plus additional shares calculated
as follows: (1) 10% of the aggregate loan amounts made to us under the loan
agreement in excess of $2.0 million after the date thereof divided by (2) the
price per share of our preferred stock issued in the most recent round of
venture capital equity financing prior to the funding of the loan. At
December 31, 1999, borrowings under the line had not exceeded $2.0 million.
All outstanding warrants are currently exercisable. Upon the closing of this
offering, all warrants described in this section will become exercisable for our
common stock at the rate of one share of common stock for each share of
preferred stock underlying the warrants.
REGISTRATION RIGHTS
After this offering, the holders of approximately 22,912,501 shares of
common stock and warrants to acquire 177,750 shares of common stock will be
entitled to rights with respect to the registration of those shares under the
Securities Act.
PIGGYBACK RIGHTS. Under the terms of the agreements between us and the
holders of these registrable securities, if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, these holders
are entitled to notice of registration and are entitled to include shares of
their common stock in the registration.
DEMAND RIGHTS. These holders are also entitled to certain demand
registration rights under which they may require us, on up to two occasions, to
file a registration statement under the Securities Act at our expense with
respect to our shares of common stock. We are required to use our best efforts
to effect a registration.
FORM S-3 RIGHTS. These holders may require us to file additional
registration statements on Form S-3 at our expense. All of these registration
rights are subject to conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in a
registration and our right not to effect a requested registration within six
months following an offering of our securities, including this offering.
Additionally, the holders of registration rights have agreed not to exercise
such rights for at least 180 days after the offering without the prior written
consent of Morgan Stanley & Co. Incorporated.
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<PAGE>
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation provides that, effective upon the closing
of this offering, all stockholder actions must be effected at a duly called
meeting and not by a consent in writing. The bylaws provide that at any time we
are subject to section 2115(b) of the California General Corporation Code, our
stockholders may call a special meeting of stockholders only upon a request of
stockholders owning at least 5% of our capital stock. These provisions of the
certificate of incorporation and bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control of QED. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of the board of directors and in the policies formulated by the
board of directors and to discourage transactions that may involve an actual or
threatened change of control of QED. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal. The provisions also are
intended to discourage tactics that may be used in proxy fights. However, these
provisions could have the effect of discouraging others from making tender
offers for our shares and, as a consequence, they also may inhibit fluctuations
in the market price of our shares that could result from actual or rumored
takeover attempts. These provisions also may have the effect of preventing
changes in our management. See "Risk Factors--Provisions of Our Certificate of
Incorporation and Bylaws or Delaware Law May Delay or Prevent a Change of
Control Transaction and, Therefore, Depress the Market Price of Our Stock."
DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law.
Unless our stockholders adopt an amendment to the contrary, our stock is no
longer listed on a national securities exchange or our stockholders consent,
this section prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder, unless:
- prior to becoming an interested stockholder, the board of directors of the
corporation approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (x) by persons who are
directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or subsequent to becoming an interested stockholder, the business
combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66 2/3% of the outstanding voting stock
that is not owned by the interested stockholder.
Section 203 defines a business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder
except upon the exercise, exchange or conversion of securities exercisable
for, exchangeable for or convertible into stock of such composition, upon
a
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merger of a parent and a subsidiary, or upon an exchange offer by the
corporation to purchase stock made on the same terms to all holders of
said stock;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
CALIFORNIA FOREIGN CORPORATION LAW
Section 2115 of the California Corporations Code provides that under some
circumstances several provisions of the California Corporations Code may be
applied to foreign corporations qualified to do business in California
notwithstanding the law of the jurisdiction where the corporation is
incorporated. These corporations are referred to in this prospectus as
"quasi-California" corporations. Section 2115 applies to foreign corporations
that have more than half of their voting stock held by stockholders residing in
California and more than half of their business deriving from California,
measured on or after the 135(th) day of the corporation's fiscal year. If we
were determined to be a quasi-California corporation, we would have to comply
with California law with respect to, among other things, elections of directors
and distributions to stockholders. Under the California Corporations Code, a
corporation is prohibited from paying dividends unless:
- the retained earnings of the corporation immediately prior to the
distribution equals or exceeds the amount of the proposed distribution; or
- (a) the assets of the corporation, exclusive of specific non-tangible
assets, equal or exceed 1 1/4 times its liabilities, exclusive of specific
liabilities; and
(b) the current assets of the corporation at least equal its current
liabilities. If the average pre-tax net earnings of the corporation before
interest expense for the two years preceding the distribution was less
than the average interest expense of the corporation for those year,
however, the current assets of the corporation must exceed 1 1/4 times its
current liabilities.
Following this offering, we will be exempt from the application of
Section 2115 until July 1, 2000, and after that if our voting stock is held by
more than 800 stockholders of record.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is Norwest Bank
Minnesota N.A., 161 North Concord Exchange, South St. Paul, MN 55075.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and sales of substantial amounts of common stock including shares issued
upon exercise of outstanding warrants or options, in the public market after
this offering could adversely affect market prices prevailing from time to time
and could impair our ability to raise capital through sale of equity securities.
Furthermore, as described below, 22,010,138 shares currently outstanding will be
available for sale after the expiration of contractual restrictions on resale
with us and/or the underwriters. Sales of substantial amounts of our common
stock in the public market after contractual restrictions lapse could adversely
affect the prevailing market price and our ability to raise equity capital in
the future.
SALES OF RESTRICTED SHARES
Of the 25,912,501 shares of common stock outstanding upon the completion of
this offering (assuming no exercise of the underwriters' over-allotment option),
22,912,501 shares are deemed restricted shares under Rule 144 of the Securities
Act. The number of shares of common stock available for sale in the public
market is limited by restrictions under the Securities Act and lock-up
agreements under which the holders of these shares have agreed, subject to
limited exceptions, not to sell or otherwise dispose of any of their shares for
a period of 180 days after the date of this prospectus without the prior written
consent of Morgan Stanley & Co. Incorporated.
The remaining shares will become eligible for public sale as follows:
- on the date of this prospectus, no shares other than 3,720,000 of the
shares offered under this prospectus will be eligible for sale;
- beginning 180 days after the date of this prospectus, or earlier with the
written consent of Morgan Stanley & Co. Incorporated, 22,010,138
restricted shares will become available for sale in the public market
subject to volume limitations of Rule 144 relating to manner of sale,
notice and the availability of current public information about us.
RULE 144. In general, under Rule 144 as currently in effect beginning
90 days after this offering, a person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least one year, including a
person who may be deemed an affiliate, is entitled to sell within any
three-month period a number of shares of common stock that exceed the greater of
1% of the then-outstanding shares of our common stock (approximately 258,895
shares after giving effect to this offering) and the average weekly trading
volume of our common stock on the Nasdaq National Market during the four
calendar weeks preceding that sale. Sales under Rule 144 are subject to
restrictions relating to manner of sale, notice and the availability of current
public information about us.
RULE 144(K). Under Rule 144(k), a person who is not our affiliate at any
time during the 90 days preceding a sale, and who has beneficially owned shares
for at least two years, would be entitled to sell their shares immediately
following this offering without regard to the volume limitations, manner of sale
provisions or notice or other requirements of Rule 144. However, the transfer
agent may require an opinion of counsel that a proposed sale of shares comes
within the terms of Rule 144 prior to effecting a transfer of the subject
shares.
OPTIONS
Any of our employees or consultants who purchased his or her shares under a
written compensatory benefit plan or contract is entitled to rely on the resale
provisions of Rule 701 of the Securities Act, which permits nonaffiliates to
sell their Rule 701 shares without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with the
Rule 144 holding period restrictions, in each case commencing 90 days after the
date of this prospectus. As of the date of this prospectus, the holders of
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<PAGE>
options to purchase approximately 2,072,574 shares of common stock will be
eligible to sell their shares on the expiration of the 180-day lock-up period.
We intend to file a registration statement on Form S-8 under the Securities
Act to register shares of common stock issued or reserved for issuance under our
stock plans within 180 days after the date of this prospectus. This would permit
the resale of such shares by nonaffiliates in the public market without
restriction under the Securities Act.
LOCK-UP AGREEMENTS
The officers, directors and stockholders of QED have agreed, subject to
limited exceptions, not to sell, transfer or otherwise dispose of, directly or
indirectly, any of their shares of common stock or any securities convertible or
exchangeable for shares of common stock for a period of 180 days after the date
of the offering without the prior written consent of Morgan Stanley & Co.
Incorporated. Morgan Stanley & Co. Incorporated, however, may in its sole
discretion, at any time without notice, release all or any portion of the shares
subject to lock-up agreements.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, FleetBoston Robertson Stephens Inc. and
Lehman Brothers Inc. are acting as representatives, have severally agreed to
purchase, and we and the selling stockholder have agreed to sell to them,
severally, the respective numbers of shares of common stock set forth opposite
the names of the underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Morgan Stanley & Co. Incorporated................................................
FleetBoston Robertson Stephens Inc...............................................
Lehman Brothers Inc..............................................................
----------
Total........................................................................ 3,720,000
==========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and the selling stockholder and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of common stock offered hereby are
subject to the approval of certain legal matters by their counsel and to other
conditions. The underwriters are obligated to take and pay for all of the shares
of common stock offered by this prospectus, other than those covered by the
over-allotment option described below, if any of the shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ a share to other underwriters or to other dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives of the
underwriters.
We and the selling stockholder have granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase from us
and the selling stockholder up to an aggregate of 558,000 additional shares of
common stock at the public offering price set forth on the cover page of this
prospectus, less underwriting discounts and commissions. The underwriters may
exercise such option solely for the purpose of covering over-allotments, if any,
made in connection with this offering of the shares of common stock. To the
extent this option is exercised, each underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of the
additional shares of common stock as the number set forth next to that
underwriter's name in the preceding table bears to the total number of shares of
common stock set forth next to the names of all underwriters in the preceding
table.
At our request, the underwriters have reserved up to 186,000 shares of
common stock to be sold in the offering for sale, at the public offering price,
to persons designated by us. We intend to offer and sell these shares to persons
with whom we have business relationships, but we have had no prior discussions
or arrangements with any person concerning the offer and sale of reserved
shares. The number of shares of common stock available for sale to the general
public will be reduced to the extent these persons purchase the reserved shares.
Any reserved shares that are not so purchased will be offered by the
underwriters to the general public on the same basis as the other shares offered
in this prospectus.
We, the selling stockholder, our directors, officers and all of our
stockholders, optionholders and warrantholders have each agreed that, without
the prior written consent of Morgan Stanley & Co.
66
<PAGE>
Incorporated on behalf of the underwriters, or otherwise during the period
ending 180 days after the date of this prospectus, we will not:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend or otherwise transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock, whether the shares
or any of those securities are then owned by that person or are later
acquired directly from us; or
- enter into any swap or similar arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock.
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
- the sale of any shares to the underwriters;
- the issuance by QED of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing;
- transactions by any person other than QED relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares; or
- the issuance of shares of common stock or options by QED to purchase
shares of common stock under our employee benefit plans as in existence on
the date of this prospectus provided the shares and options are subject to
a lock-up period of at least 180 days after the date of this prospectus.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have submitted an application to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "QEDI."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering if the syndicate repurchases previously distributed
shares of common stock in transactions to cover syndicate short positions or in
stabilization transactions. Any of these activities may stabilize or maintain
the market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities and may end any of
these activities at any time.
We, the selling stockholder and the underwriters have agreed to indemnify
each other against liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the public offering price for the shares of common
stock will be determined by negotiations between us
67
<PAGE>
and the representatives of the underwriters. Among the factors to be considered
in determining the public offering price will be:
- our record of operations, current financial position and future prospects;
- the future prospects of our industry in general;
- the experience of our management;
- our sales, earnings and other financial operating information in recent
periods; and
- the price-earnings ratios, price-sales ratios, market prices of securities
and financial and operating information of companies engaged in activities
similar to ours.
The estimated initial public offering price range indicated on the cover
page of this prospectus is subject to change as a result of market conditions
and other factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Cooley Godward LLP, Palo Alto, California. Legal matters in connection with
this offering will be passed upon for the underwriters by Fenwick & West LLP,
Palo Alto, California.
EXPERTS
Our financial statements as of June 30, 1997, 1998 and 1999 and for each of
the three years in the period ended June 30, 1999, included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered by this
prospectus. This prospectus does not contain all the information set forth in
the registration statement and related exhibits and schedules. For further
information with respect to QED and the common stock offered hereby, reference
is made to the registration statement and to the related exhibits and schedules.
Statements contained in this prospectus as to the contents of any contract
or other document referred to are not necessarily complete, and each of these
statements is qualified in all respects by reference to the full text of the
contract or other document filed as an exhibit to the registration statement. A
copy of the registration statement and the related exhibits and schedules may be
inspected without charge at the public reference facilities maintained by the
SEC in Room 1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and at the
SEC's regional offices located at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048, and copies of all or any part of
the registration statement may be obtained from these offices upon payment of
the fees prescribed by the SEC. The SEC maintains a worldwide web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the
site is HTTP://WWW.SEC.GOV.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and will file
periodic reports, proxy statements and other information with the SEC. These
periodic reports, proxy statements and other information will be available for
inspection and copying at the regional offices, public reference facilities and
web site of the SEC referred to above.
68
<PAGE>
QUANTUM EFFECT DEVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statements of Stockholders' Equity......................................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Quantum Effect Devices, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Quantum Effect Devices, Inc. as of
June 30, 1998, and 1999 and the results of its operations and its cash flows for
the three years in the period ended June 30, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers, LLP
San Jose, California
August 11, 1999 except Note 10,
which is as of December 28, 1999.
F-2
<PAGE>
QUANTUM EFFECT DEVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
JUNE 30, DECEMBER 31, EQUITY AT
---------------------- ------------ DECEMBER 31,
1998 1999 1999 1999
---------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 9,756 $ 1,442 $ 3,479
Short-term investments..................................... -- 16,023 6,116
Restricted cash............................................ -- 2,000 2,000
Accounts receivable, net................................... 1,387 3,065 5,507
Receivables from related parties........................... 870 652 532
Inventories................................................ 852 2,122 7,069
Prepaid expenses and other current assets.................. 1,082 768 1,471
---------- ---------- ----------
Total current assets..................................... 13,947 26,072 26,174
Property and equipment, net.................................. 1,909 1,807 2,695
---------- ---------- ----------
Total assets........................................... $ 15,856 $ 27,879 $ 28,869
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings, current portion................................ $ 489 $ 1,140 $ 1,196
Accounts payable........................................... 2,090 3,066 5,222
Accrued expenses and other current liabilities............. 2,217 3,102 3,884
Deferred revenue........................................... 710 248 171
Capital lease obligations, current portion................. 220 342 358
---------- ---------- ----------
Total current liabilities................................ 5,726 7,898 10,831
Borrowings, non-current portion.............................. 1,143 1,949 1,298
Capital lease obligations, non-current portion............... 478 426 244
---------- ---------- ----------
Total liabilities...................................... 7,347 10,273 12,373
---------- ---------- ----------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.001 par value, 13,897,750 shares
authorized, 9,100,000, 13,618,837 and 13,618,837
(unaudited) shares issued and outstanding actual;
10,000,000 shares authorized and none issued and
outstanding pro forma (unaudited)........................ 9 14 14 $ --
Common stock, $.001 par value, 29,000,000 shares
authorized, 7,789,966, 8,532,959 and
9,293,664 (unaudited) shares issued and outstanding
actual; 100,000,000 shares authorized, 22,912,501 shares
issued and outstanding pro forma (unaudited)............. 8 9 9 23
Additional paid-in capital................................. 21,955 43,409 43,846 43,846
Note receivable from stockholder........................... -- -- (42) (42)
Deferred stock-based compensation.......................... (868) (1,462) (708) (708)
Accumulated deficit........................................ (12,595) (24,364) (26,623) (26,623)
---------- ---------- ---------- ----------
Total stockholders' equity............................... 8,509 17,606 16,496 $ 16,496
---------- ---------- ---------- ==========
Total liabilities and stockholders' equity............. $ 15,856 $ 27,879 $ 28,869
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
QUANTUM EFFECT DEVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED DECEMBER 31,
-------------------------------- ------------------------
1997 1998 1999 1998 1999
--------- --------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue....................................... $ -- $ 1,428 $ 10,937 $ 2,810 $ 19,338
Royalty revenue....................................... 2,687 1,798 1,388 762 780
Royalty revenue from related parties.................. 7,376 3,254 3,037 1,555 1,109
--------- --------- ---------- --------- ---------
Total revenue....................................... 10,063 6,480 15,362 5,127 21,227
--------- --------- ---------- --------- ---------
Cost of revenue:
Product revenue....................................... -- 3,714 8,513 3,120 12,089
--------- --------- ---------- --------- ---------
Gross profit........................................ 10,063 2,766 6,849 2,007 9,138
--------- --------- ---------- --------- ---------
Operating expenses:
Research and development.............................. 9,421 9,552 12,381 6,337 6,561
Selling, general and administrative................... 2,123 2,979 5,436 2,275 4,300
Stock-based compensation.............................. -- 150 777 280 672
--------- --------- ---------- --------- ---------
Total operating expenses............................ 11,544 12,681 18,594 8,892 11,533
--------- --------- ---------- --------- ---------
Loss from operations.................................... (1,481) (9,915) (11,745) (6,885) (2,395)
Interest income......................................... 340 325 472 141 345
Interest expense........................................ -- (204) (496) (121) (209)
--------- --------- ---------- --------- ---------
Net loss before income taxes............................ (1,141) (9,794) (11,769) (6,865) (2,259)
Provision for income taxes.............................. 60 89 -- -- --
--------- --------- ---------- --------- ---------
Net loss................................................ $ (1,201) $ (9,883) $ (11,769) $ (6,865) $ (2,259)
========= ========= ========== ========= =========
Net loss per share:
Basic and diluted..................................... $ (.21) $ (1.53) $ (1.45) $ (.87) $ (.25)
========= ========= ========== ========= =========
Weighted average shares............................... 5,746 6,451 8,111 7,901 8,911
========= ========= ========== ========= =========
Pro forma net loss per share:
Basic and diluted (unaudited)......................... $ (.63) $ (.10)
========== =========
Weighted average shares (unaudited)................... 18,717 22,530
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
QUANTUM EFFECT DEVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTE
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED
--------------- ----------------- PAID-IN FROM STOCK-BASED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER COMPENSATION DEFICIT
------- ------ ------ -------- ---------- ------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996........... 4,300 $ 4 5,548 $ 6 $ 8,657 -- $ -- $ (1,511)
Exercise of stock options.......... -- -- 266 -- 40 -- -- --
Net loss........................... -- -- -- -- -- -- (1,201)
------- ---- ----- ---- ------- ----- ------- --------
BALANCE AT JUNE 30, 1997........... 4,300 4 5,814 6 8,697 -- -- (2,712)
Issuance of Series C preferred
stock............................ 4,800 5 -- -- 11,946 -- -- --
Exercise of stock options.......... -- -- 1,976 2 294 -- -- --
Deferred stock-based
compensation..................... -- -- -- -- 1,018 -- (1,018) --
Amortization of deferred
stock-based compensation......... -- -- -- -- -- -- 150 --
Net loss........................... -- -- -- -- -- -- -- (9,883)
------- ---- ----- ---- ------- ----- ------- --------
BALANCE AT JUNE 30, 1998........... 9,100 9 7,790 8 21,955 -- (868) (12,595)
Issuance of Series D preferred
stock............................ 4,519 5 -- -- 19,473 -- -- --
Issuance of common stock for
cash............................. -- -- 238 -- 475 -- -- --
Exercise of stock options.......... -- -- 505 1 135 -- -- --
Deferred stock-based
compensation..................... -- -- -- -- 1,371 -- (1,371) --
Amortization of deferred
stock-based compensation......... -- -- -- -- -- -- 777 --
Net loss........................... -- -- -- -- -- -- -- (11,769)
------- ---- ----- ---- ------- ----- ------- --------
BALANCE AT JUNE 30, 1999........... 13,619 14 8,533 9 43,409 -- (1,462) (24,364)
Exercise of stock options
(unaudited)...................... -- -- 761 -- 519 (42) -- --
Deferred stock-based compensation
(unaudited)...................... -- -- -- -- (82) -- 82 --
Amortization of deferred
stock-based compensation
(unaudited)...................... -- -- -- -- -- -- 672 --
Net loss (unaudited)............... -- -- -- -- -- -- -- (2,259)
------- ---- ----- ---- ------- ----- ------- --------
BALANCE AT DECEMBER 31, 1999
(UNAUDITED)...................... 13,619 $ 14 9,294 $ 9 $43,846 $ (42) $ (708) $(26,623)
======= ==== ===== ==== ======= ===== ======= ========
<CAPTION>
TOTAL
--------
<S> <C>
BALANCE AT JUNE 30, 1996........... $ 7,156
Exercise of stock options.......... 40
Net loss........................... (1,201)
--------
BALANCE AT JUNE 30, 1997........... 5,995
Issuance of Series C preferred
stock............................ 11,951
Exercise of stock options.......... 296
Deferred stock-based
compensation..................... --
Amortization of deferred
stock-based compensation......... 150
Net loss........................... (9,883)
--------
BALANCE AT JUNE 30, 1998........... 8,509
Issuance of Series D preferred
stock............................ 19,478
Issuance of common stock for
cash............................. 475
Exercise of stock options.......... 136
Deferred stock-based
compensation..................... --
Amortization of deferred
stock-based compensation......... 777
Net loss........................... (11,769)
--------
BALANCE AT JUNE 30, 1999........... 17,606
Exercise of stock options
(unaudited)...................... 477
Deferred stock-based compensation
(unaudited)...................... --
Amortization of deferred
stock-based compensation
(unaudited)...................... 672
Net loss (unaudited)............... (2,259)
--------
BALANCE AT DECEMBER 31, 1999
(UNAUDITED)...................... $ 16,496
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
QUANTUM EFFECT DEVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------- --------------------
1997 1998 1999 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................... $ (1,201) $ (9,883) $ (11,769) $ (6,865) $ (2,259)
Adjustments to reconcile net loss to net cash used in operating
activities:
Allowance for doubtful accounts.............................. -- -- 300 -- --
Depreciation and amortization................................ 959 909 962 470 594
Amortization of deferred stock-based compensation............ -- 150 777 280 672
Deferred income taxes........................................ 580 89 -- -- --
Changes in assets and liabilities:
Accounts receivable........................................ 217 (1,271) (1,760) 47 (2,322)
Inventories................................................ -- (852) (1,270) (747) (4,947)
Prepaid expenses and other current assets.................. (476) (391) 314 337 (703)
Accounts payable........................................... 770 597 976 (146) 2,156
Accrued expenses and other current liabilities............. 1,148 210 885 657 782
Deferred revenue........................................... (2,093) (451) (462) (281) (77)
--------- --------- --------- --------- ---------
Net cash used in operating activities.................... (96) (10,893) (11,047) (6,248) (6,104)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment.......................... (936) (76) (493) (88) (1,482)
Purchase of short term investments............................. -- -- (16,023) -- (11,898)
Maturities and sales of short term investments................. 2,974 -- -- -- 21,805
Restricted cash................................................ -- -- (2,000) -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities...... 2,038 (76) (18,516) (88) 8,425
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases........................ -- (127) (297) (137) (166)
Proceeds from issuance of preferred stock...................... -- 11,951 19,478 -- --
Proceeds from issuance of common stock......................... 40 296 611 51 477
Proceeds from borrowings....................................... -- 2,000 2,000 -- --
Repayments of borrowings....................................... (250) (368) (543) (18) (595)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities...... (210) 13,752 21,249 (104) (284)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents............. 1,732 2,783 (8,314) (6,440) (2,037)
Cash and cash equivalents at beginning of period................. 5,241 6,973 9,756 9,756 1,442
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period....................... $ 6,973 $ 9,756 $ 1,442 $ 3,316 $ 3,479
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income tax paid (refunded), net................................ $ 470 $ (467) $ 55 $ -- $ (63)
========= ========= ========= ========= =========
Cash paid for interest......................................... $ -- $ 170 $ 405 $ 109 $ 141
========= ========= ========= ========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property and equipment through capital leases... $ -- $ 825 $ 367 $ 107 $ --
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES:
THE COMPANY
Quantum Effect Devices, Inc. (formerly Quantum Effect Design, Inc.) ("QED"
or the "Company") was incorporated in California in August 1991 and
reincorporated in Delaware on December 28, 1999 (see note 11). The Company
changed its name from Quantum Effect Design, Inc. to Quantum Effect
Devices, Inc. in August 1999. The Company is a developer and supplier of high
performance embedded microprocessors for use in information-intensive
applications such as networking/communications infrastructure equipment,
business network equipment and consumer network products.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported 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 could differ from those estimates, and such
differences could affect the results of operations reported in future periods.
REVENUE RECOGNITION
Revenue from product sales is generally recognized upon shipment, net of
sales returns and allowances. Revenue generated by sales to distributors under
agreements allowing certain rights of return are deferred for financial
reporting purposes until the products are sold by the distributors.
Royalty revenue is recognized when third parties and related third parties
sell products that the Company has developed and licensed for production.
Royalty revenue received in advance of the sale of the licensed products is
recorded as deferred revenue and recognized when the products are sold by the
third parties.
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed as incurred.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity of three
months or less from the date of purchase to be cash equivalents. At June 30,
1999, cash and cash equivalents were held by three major U.S. financial
institutions. Cash and cash equivalents consist of cash on deposit with banks,
money market funds and commercial deposits, the fair value of which approximates
cost.
The Company classifies all short-term investments as available-for-sale.
Accordingly, these investments are carried at fair value. The fair value of such
securities approximates cost, and there were no material unrealized gains or
losses as of June 30, 1999. Short-term investments generally have maturities of
F-7
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
less than one year from the date of purchase. The following table summarizes the
estimated fair value of the Company's cash, cash equivalents and short-term
investments (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Cash and cash equivalents:
Cash................................................................... $ 621 $ 654
Money market funds..................................................... 1,135 788
Commercial paper....................................................... 8,000 --
--------- ---------
$ 9,756 $ 1,442
========= =========
Short-term investments:
U.S. Government bonds and notes........................................ $ -- $ 10,943
Commercial bonds and notes............................................. -- 5,080
--------- ---------
$ -- $ 16,023
========= =========
</TABLE>
RESTRICTED CASH
At June 30, 1999, the Company had $2.0 million invested in a certificate of
deposit with a major U.S. financial institution as security for a letter of
credit with a major supplier for the same amount. This letter of credit expires
on May 30, 2000.
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents, short-term
investments and accounts receivable. Substantially all of the Company's cash and
cash equivalents are invested in highly-liquid money market fundsand commercial
securities with major financial institutions. Short-term investments consist of
U.S. government and commercial bonds and notes. The Company sells its products
principally to original equipment manufacturers and their subcontract
manufacturers. The Company performs ongoing credit evaluations of its customers
and maintains an allowance for potential credit losses. Credit losses to date
have been consistent with management's estimates.
The following table sets forth customers comprising 10% or more of the
Company's total revenue for each of the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
CUSTOMER 1997 1998 1999
- -------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
A................................................. 23% 50% 20%
B................................................. 25 23 4
C................................................. -- 19 18
D................................................. 51 -- --
E................................................. -- -- 13
F................................................. -- -- 12
</TABLE>
F-8
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
The Company's accounts receivable were concentrated with two customers at
June 30, 1998 (representing 39% and 53% of aggregate receivables) and four
customers at June 30, 1999 (representing 22%, 20%, 17% and 15% of aggregate
receivables).
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, restricted cash short-term investments,
accounts receivable, accounts payable, capital lease obligations and borrowings
approximate their fair value due to the relatively short maturities and based
upon comparable market information available at the respective balance sheet
dates. The carrying value of the Company's long-term financial instruments
approximates fair value because the interest rates approximate current market
rates of similar debt. The Company does not hold or issue financial instruments
for trading purposes.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out ("FIFO") method. Appropriate consideration is
given to obsolescence, excessive levels, deterioration and other factors in
evaluating net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at
historical cost, less accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over the estimated useful lives of these
assets, ranging from three to five years, or, in the case of leasehold
improvements, over the lease period, whichever is shorter.
Upon disposal, the assets and related accumulated depreciation and
amortization are removed from the Company's accounts, and the resulting gains or
losses are reflected in the statements of operations.
Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that their net book value
may not be recoverable. An impairment loss is recognized if the sum of the
expected future cash flows (undiscounted and before interest) from the use of
the asset is less than the net book value of the asset. The amount of the
impairment loss will generally be measured as the difference between net book
values of the assets and their estimated fair values. Based on its most recent
analysis, the Company believes that no long-lived assets were impaired at
June 30, 1998 and 1999.
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 was no difference
between the Company's net loss and its total comprehensive loss for the years
ended June 30, 1997, 1998 and 1999.
F-9
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method as prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the fair value of the Company's stock at the date of grant over the
stock option exercise price. Expense associated with stock-based compensation is
amortized on an accelerated basis over the vesting period of the individual
award consistent with the method described in Financial Accounting Standards
Board Interpretation No. 28 ("FIN 28"). Application of FIN 28 results in
amortization of approximately 53% of the compensation in the first 12 months of
vesting, 27% of the compensation in the second 12 months of vesting, 14% of the
compensation in the third 12 months of vesting and 6% of the compensation in the
fourth 12 months of vesting. The Company accounts for stock issued to
non-employees in accordance with the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123") and Emerging Issues Task Force Consensus No. 96-18, "Accounting for
Equity Instruments that are offered to other than employees for acquiring of in
conjunction with selling goods or services" ("EITF 96-18"). Under SFAS 123 and
EITF 96-18 stock option awards issued to non-employees are accounted for at
their fair value using the Black-Scholes method. The fair value of each
non-employee stock awarded is remeasured at each period end until a commitment
date is reached, which is generally the vesting date.
SEGMENT INFORMATION
The Company has adopted the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 131 "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), effective for fiscal years
beginning after December 31, 1997.
The Company has determined that it has one reportable business segment: the
design, license, manufacture and marketing of integrated circuits. To date, all
of the Company's products and services have originated within the United States.
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 convertible preferred stock
and common shares issuable upon the exercise of common and convertible preferred
stock warrants.
F-10
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
The following table sets forth the computation of basic and diluted net loss
per share for the periods presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
-------------------------------- ------------------------
1997 1998 1999 1998 1999
--------- --------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss............................ $ (1,201) $ (9,883) $ (11,769) $ (6,865) $ (2,259)
========= ========= ========== ========= =========
Denominator:
Weighted average common shares...... 5,746 6,451 8,111 7,901 8,911
========= ========= ========== ========= =========
Net loss per share:
Basic and diluted................... $ (.21) $ (1.53) $ (1.45) $ (.87) $ (.25)
========= ========= ========== ========= =========
</TABLE>
The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share calculation above because to do so
would be anti-dilutive for the periods presented (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------------- --------------------
1997 1998 1999 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Series A preferred stock........................... 1,800 1,800 1,800 1,800 1,800
Series B preferred stock........................... 2,500 2,500 2,500 2,500 2,500
Series C preferred stock........................... -- 4,800 4,800 4,800 4,800
Series D preferred stock........................... -- -- 4,519 -- 4,519
Series B and C preferred stock warrants............ -- 94 98 98 98
Common stock options............................... 3,880 3,208 5,200 3,806 4,704
Common stock warrants.............................. -- -- 80 -- 80
</TABLE>
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended June 30, 1999 and the six
months ended December 31, 1999 is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A, Series B, Series C and Series D preferred
stock into shares of the Company's common stock effective upon the closing of
the Company's initial public offering ("IPO") as if such conversion occurred on
July 1, 1998 and July 1, 1999 respectively or at the date of original issuance,
if later.
F-11
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
The resulting pro forma net loss per share can be shown as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
1999 1999
---------- ----------
<S> <C> <C>
Numerator:
Pro forma net loss.............................. $ (11,769) $ (2,259)
========= =========
Denominator:
Weighted average shares......................... 8,111 8,911
Assumed conversion of Series A preferred
stock......................................... 1,800 1,800
Assumed conversion of Series B preferred
stock......................................... 2,500 2,500
Assumed conversion of Series C preferred
stock......................................... 4,800 4,800
Assumed conversion of Series D preferred
stock......................................... 1,506 4,519
--------- ---------
Denominator for pro forma basic and diluted
loss per share calculation.................. 18,717 22,530
========= =========
Pro forma net loss per share:
Basic and diluted............................... $ (.63) $ (.10)
========= =========
</TABLE>
The calculation of pro forma diluted net loss per share excludes potential
common shares as the effect would be anti-dilutive. Pro forma potential common
shares are composed of incremental common shares issuable upon the exercise of
stock options and common and preferred stock warrants.
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
Effective upon the closing of the IPO, the outstanding shares of Series A,
Series B, Series C and Series D preferred stock will automatically convert into
an aggregate of 13,618,837 shares of common stock. The pro forma effects of
these transactions are unaudited and have been reflected in the accompanying pro
forma statement of stockholders' equity at December 31, 1999.
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
F-12
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
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.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying balance sheet as of December 31, 1999, the statements of
operations and of cash flows for the six months ended December 31, 1998 and 1999
and the statement of stockholders equity for the six months ended December 31,
1999 are unaudited. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting of only normal recurring adjustments, necessary for the
fair presentation of the results for the interim periods. The data disclosed in
the financial statements as of such dates and for such periods are unaudited.
Results of the six months ended December 31, 1999 are not necessarily indicative
of results of the entire year.
NOTE 2--RELATED PARTY TRANSACTIONS:
DEVELOPMENT AND LICENSE AGREEMENT WITH MOTOROLA
In August 1995, the Company issued to Motorola, Inc. ("Motorola") 2,500,000
shares of Series B convertible preferred stock under the Series B Preferred
Stock Purchase Agreement, at a price of $2.40 per share. In February 1997,
Motorola sold all of the 2,500,000 shares of Series B convertible preferred
stock to a third party.
In August 1995, the Company entered into a Development and License Agreement
with Motorola ("the Motorola Agreement"). Under the Motorola Agreement, the
Company obtained a license from Motorola to design certain microprocessors on
behalf of Motorola in exchange for up to $1.1 million in milestone payments. In
March 1997, Motorola indicated its final acceptance of all milestones set forth
in the Motorola Agreement. As a result, the Company granted Motorola an
exclusive, royalty-bearing license to manufacture and sell the licensed product.
The full amount of milestone payments and a one-time royalty payment of
$4.0 million, totaling $5.1 million, received from Motorola was recognized upon
final acceptance of the milestones in the year ended June 30, 1997. This amount
is recorded in the statement of operations under "Royalty revenue from related
parties." The Company is not entitled to any other royalties under this
contract.
DEVELOPMENT AND LICENSE AGREEMENT WITH IDT
In January 1992, the Company entered into a Development and License
Agreement (the "IDT Agreement") with Integrated Device Technology, Inc. ("IDT").
At June 30, 1999, IDT owned approximately 16.4% of the Company's outstanding
common and preferred stock. Under the terms of the IDT Agreement, IDT agreed to
fund the development of three products, based on the achievement of
F-13
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--RELATED PARTY TRANSACTIONS: (CONTINUED)
certain milestones. The IDT agreement stipulated that products developed under
it become the sole and exclusive property of IDT. IDT is required to pay to the
Company royalties on QED-developed products sold by IDT for a period of ten
years from the initial royalty payment. The Company recognized IDT royalty
income of $2,276,000, $3,254,000 and $3,037,000 in the years ended June 30,
1997, 1998 and 1999, respectively. These amounts are recorded in the statement
of operations under "Royalty revenue from related parties."
SALE OF CAPITAL STOCK TO CISCO
In April 1999, in conjunction with the sale of Series D preferred stock to
other investors, the Company sold 1,047,454 shares of Series D preferred stock
and 237,500 shares of common stock to Cisco Systems, Inc. ("Cisco"). The Company
believes that these shares were sold on an arms-length basis.
Product revenue for the year ended June 30, 1999 includes sales of
approximately $255,000 made directly to Cisco. This excludes amounts sold to
Cisco's manufacturing subcontractors, which total approximately $2 million.
NOTE 3--BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
JUNE 30,
-------------------- DECEMBER 31,
1998 1999 1999
--------- --------- ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE, NET:
Accounts receivable..................................... $ 1,387 $ 3,365 $ 5,807
Less: allowance for doubtful accounts................... -- (300) (300)
--------- --------- ----------
$ 1,387 $ 3,065 $ 5,507
========= ========= ==========
INVENTORIES:
Work-in-progress........................................ $ 815 $ 1,384 $ 6,244
Finished goods.......................................... 37 738 825
--------- --------- ----------
$ 852 $ 2,122 $ 7,069
========= ========= ==========
PROPERTY AND EQUIPMENT, NET:
Furniture and fixtures.................................. $ 181 $ 257 $ 350
Computer hardware....................................... 3,252 3,918 3,616
Computer software....................................... 2,977 3,095 3,997
Leasehold improvements.................................. 23 23 13
--------- --------- ----------
6,433 7,293 7,976
Less: Accumulated depreciation and amortization......... (4,524) (5,486) (5,281)
--------- --------- ----------
$ 1,909 $ 1,807 $ 2,695
========= ========= ==========
</TABLE>
F-14
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BALANCE SHEET COMPONENTS (CONTINUED)
Assets acquired under capital lease obligations are included in property and
equipment and totaled $825,000 and $1,192,000, with related accumulated
depreciation of $167,000, $530,000 and $624,000 at June 30, 1998 and 1999, and
December 31, 1999 (unaudited), respectively.
<TABLE>
<CAPTION>
JUNE 30,
-------------------- DECEMBER 31,
1998 1999 1999
--------- --------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued employee compensation............................. $ 1,126 $ 1,439 $ 1,769
Accrued warranty.......................................... 531 929 864
Other..................................................... 560 734 1,251
--------- --------- ---------
$ 2,217 $ 3,102 $ 3,884
========= ========= =========
</TABLE>
NOTE 4--BORROWINGS:
SECURED PROMISSORY NOTE
In September 1997, the Company borrowed $2,000,000 under a secured
promissory note (the "Note"). The Note is secured by certain fixed assets of the
Company and bears interest at 8.25% per annum. The Note balance is payable over
42 months commencing November 1, 1997, with a final balloon payment of $300,000.
LINE OF CREDIT
In January 1999, the Company entered into a loan and security agreement
("line of credit") with a lender, under which it may borrow up to $6,000,000.
The line of credit is collaterized by substantially all of the Company's
tangible assets and expires on December 31, 2000. Under the line of credit, the
Company borrowed $2,000,000 through June 30, 1999. Borrowings under the line of
credit are payable over 42 months commencing in July 1999, and bear interest at
12% for the first six months and 8.5% thereafter, with a final balloon payment
of $200,000.
Under the line of credit, no financial covenants are required to be met for
borrowings up to $2,000,000. For incremental borrowings up to $6,000,000, QED
must maintain certain financial ratios. The line of credit prohibits the Company
from paying dividends. At June 30, 1999, the Company was in compliance with
these covenants.
Aggregate principal payments remaining under the Note and the line of credit
at June 30, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
YEAR ENDING JUNE 30,
2000............................................................. $ 1,140
2001............................................................. 1,289
2002............................................................. 660
---------
3,089
Less: current portion............................................ (1,140)
---------
Non-current portion.............................................. $ 1,949
=========
</TABLE>
F-15
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--PREFERRED STOCK:
Preferred stock at June 30, 1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
SHARES PROCEEDS NET
------------------------ OF ISSUANCE
AUTHORIZED OUTSTANDING COSTS
----------- ----------- ------------
<S> <C> <C> <C>
Series A.............................................. 1,800 1,800 $ 2,520
Series B.............................................. 2,594 2,500 6,000
Series C.............................................. 4,804 4,800 11,951
Series D.............................................. 4,700 4,519 19,478
--------- --------- ----------
13,898 13,619 $ 39,949
========= ========= ==========
</TABLE>
The holders of preferred stock have various rights and preferences as
follows:
CONVERSION
Each share of Series A, B, C and D preferred stock outstanding is
convertible into common stock at any time at the option of the holder based on a
formula which currently results in a one-for-one exchange ratio of common for
preferred. This formula is subject to adjustments for stock splits, stock
dividends, recapitalizations, and other similar transactions. The shares of
preferred stock automatically convert into shares of common stock upon the
effectiveness of a registration statement under the Securities Act of 1933, as
amended, (the "Securities Act") if the offering results in gross proceeds of at
least $10,000,000, and the per share offering price is at least $6.48.
DIVIDENDS
Noncumulative dividends at the annual rate of $.11, $.19, $.20 and $.35 per
share for Series A, B, C and D preferred stock, respectively, as declared by the
Board of Directors, are payable to the holders of preferred stock in preference
to any dividends for common stock declared by the Board of Directors. Dividends
on shares of preferred stock may exceed the annual per share rate of $.11, $.19
and $.20 and $.35 for Series A, B, C and D preferred stock, respectively, in the
event that a higher dividend rate is paid on any other class of the Company's
stock. In such an event, the dividends on the shares of preferred stock will be
paid at the same rate, determined on an if-converted basis. No dividends have
been declared to date.
LIQUIDATION
In the event of liquidation, holders of preferred stock are entitled to a
per share distribution in preference to holders of common stock equal to $1.40,
$2.40, $2.50 and $4.32 for Series A, B, C and D preferred stock, respectively
(adjusted for stock splits, combinations or similar events), plus any declared
but unpaid dividends. In the event funds are sufficient to make a complete
distribution to the holders of preferred stock as described above, the remaining
assets will be distributed to the holders of common stock and Series A, B and C
preferred stock based upon the number of shares of common stock held by each,
assuming conversion of all shares of preferred stock into common stock; provided
that the holders of Series C preferred shall not be entitled to distributions in
excess of $10.00 per share.
F-16
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--PREFERRED STOCK: (CONTINUED)
VOTING
The holders of common stock are entitled to elect one of the Company's five
directors. The holders of Series A preferred stock are entitled to elect two of
the Company's five directors. The holders of Series B preferred stock are
entitled to elect one of the company's five directors. The holders of Series C
preferred stock are entitled to elect one of the company's five directors. The
holders of Series D preferred stock are not entitled to elect members of the
Company's Board of Directors. Each share of preferred stock is entitled to one
vote for each share of common stock into which the preferred stock is
convertible.
SERIES B PREFERRED STOCK WARRANTS
In connection with a secured promissory note (see note 4) and a secured
lease agreement signed in September 1997, the Company issued warrants to
purchase 93,750 shares of Series B preferred stock at an exercise price of $1.60
per share. The warrants expire in September 30, 2003 or three years from the
effective date of the Company's IPO, whichever is later. The warrants include
certain registration rights. They also include anti-dilution provisions similar
to those granted to holders of preferred stock and provide for exercise on a
"net exercise" basis. The Company has determined the value of the warrants to be
$158,000, based on the Black-Scholes option pricing model, and this amount is
being recognized as interest expense over the term of the related borrowing
agreements. Notwithstanding the above expiration dates, upon conversion of the
convertible preferred stock in connection with an IPO, the convertible preferred
stock warrants shall automatically become exercisable.
SERIES C PREFERRED STOCK WARRANTS
In July 1998, the Company issued warrants to purchase 4,000 shares of
Series C preferred stock at an exercise price of $2.50 per share in connection
with an increase of $200,000 to its existing lease line from $1,000,000 to
$1,200,000. The warrants expire in July 2004 or three years from the effective
date of the Company's initial public offering, whichever is later. The warrants
include registration rights and anti-dilution provisions similar to those
granted to holders of Series C preferred stock and provide for exercise on a
"net exercise" basis. The Company has determined the value of the warrants to be
$6,000, based on the Black-Scholes option pricing model, and this amount is
being recognized as interest expense over the term of the related borrowing
agreement. Notwithstanding the above expiration dates, upon conversion of the
convertible preferred stock in connection with an IPO, the preferred stock
warrants shall automatically become exercisable.
If the total amount of equipment purchased under the lease line exceeds
$1,200,000, the leasing company has the right to purchase an additional number
shares of Series C preferred stock determined by dividing (i) 5% of the dollar
amount of equipment leased exceeding the $1,200,000 by (ii) the adjusted
exercise price per share. At June 30, 1999, borrowings under the line did not
exceed $1,200,000.
F-17
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--COMMON STOCK:
The Company's Amended and Restated Articles of Incorporation authorize the
Company to issue 29,000,000 shares of $.001 par value common stock. At June 30,
1999, there were 8,532,959 shares of common stock issued and outstanding.
As of June 30, 1999, the Company has reserved the following number of shares
of common stock for future issuance (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------
<S> <C>
Conversion of Series A preferred stock......................................... 1,800
Conversion of Series B preferred stock and warrants............................ 2,594
Conversion of Series C preferred stock and warrants............................ 4,804
Conversion of Series D preferred stock......................................... 4,700
Common stock warrant........................................................... 173
Options under stock option plans............................................... 5,405
---------
Total........................................................................ 19,476
=========
</TABLE>
COMMON STOCK WARRANT
In connection with the loan and security agreement signed in January 1999
(see note 4), the Company issued warrants to purchase 80,000 shares of common
stock at an exercise price of $2.50 per share. The warrants will become
exercisable for up to an additional 93,000 shares of common stock for 10% of the
aggregate borrowings made by the Company in excess of $2,000,000, up to a total
of $6,000,000 in borrowings. The warrants expire in December 2005 or upon a
reorganization, reclassification, consolidation, merger or sale of the Company,
as defined. The warrants include registration rights and anti-dilution
provisions similar to those granted to holders of Series C preferred stock and
provide for exercise on a "net exercise" basis. The Company determined the value
of the warrants relating to the 80,000 immediately vested shares to be $134,000,
based on the Black-Scholes option pricing model, and this amount is being
recognized as interest expense over the term of the related borrowing agreement.
At June 30, 1999, the borrowings under the line of credit had not exceeded
$2,000,000.
NOTE 7--EMPLOYEE BENEFIT PLANS:
1992 STOCK OPTION PLAN
In September 1992, the Company adopted a stock option plan (the "1992
Plan"), which authorizes the Board of Directors to grant incentive stock options
and nonstatutory stock options to employees, directors, and consultants for up
to 4,600,000 shares of common stock.
Under the 1992 Plan, incentive stock options are granted at a price that is
not to be less than 100% of the fair market value of the common stock on the
date of grant, as determined by the Board of Directors. Nonstatutory stock
options are granted at a price that is not less than 85% of the fair market
value of the common stock on the date of grant, as determined by the Board of
Directors. Options vest at 25% on the first anniversary of the date of grant and
vest in equal monthly installments over the remaining 36 months. Options granted
to stockholders who own more than 10% of the outstanding stock of the Company at
the time of grant must be issued at prices not less than 110% of the estimated
fair value of the stock on the date of grant.
F-18
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFIT PLANS: (CONTINUED)
1997 STOCK OPTION PLAN
In May 1997, the Company adopted a stock option plan (the "1997 Plan"),
which authorizes the Board of Directors to grant incentive stock options and
nonstatutory stock options to employees, directors and consultants for up to
2,000,000 shares of common stock. In March 1998, September 1998 and March 1999,
the 1997 Plan was amended to increase the number of authorized shares by a total
of 2,500,000 shares of common stock.
Under the 1997 Plan, all stock options are granted at a price that is not
less than 100% of the fair market value of the stock on the date of grant, as
determined by the Board of Directors. Options vest at 25% on the first
anniversary of the date of grant and vest in equal monthly installments over the
remaining 36 months. Options are exercisable for a term of ten years after the
date of grant. No options will be granted to any individual who owns more than
10% of total combined voting power of all classes of stock.
The following table summarizes stock option activity under the 1992, 1997,
and 1999 Plan (in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
OPTIONS WEIGHTED AVERAGE
AVAILABLE EXERCISE PRICE
FOR GRANT SHARES PER SHARE
----------- --------- -----------------
<S> <C> <C> <C>
Balance at June 30, 1996............................... 680 2,972 $ .15
Additional shares reserved........................... 2,000 -- --
Granted.............................................. (1,420) 1,420 .15
Canceled............................................. 246 (246) .15
Exercised............................................ -- (266) .15
--------- ---------
Balance at June 30, 1997............................... 1,506 3,880 .15
Additional shares reserved........................... 500 --
Granted.............................................. (1,332) 1,332 .59
Canceled............................................. 28 (28) .15
Exercised............................................ -- (1,976) .15
--------- ---------
Balance at June 30, 1998............................... 702 3,208 .33
Additional shares reserved........................... 2,000 -- --
Granted.............................................. (2,589) 2,589 2.31
Canceled............................................. 92 (92) .80
Exercised............................................ -- (505) .27
--------- ---------
Balance at June 30, 1999............................... 205 5,200 1.32
Additional shares reserved (unaudited)............... 1,400 -- --
Granted (unaudited).................................. (365) 365 9.11
Canceled (unaudited)................................. 130 (130) 3.38
Exercised (unaudited)................................ -- (761) .63
--------- ---------
Balance at December 31, 1999 (unaudited)............... 1,340 4,704 2.02
========= =========
</TABLE>
F-19
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFIT PLANS: (CONTINUED)
Significant option groups outstanding at June 30, 1999, and related weighted
average exercise prices and contractual life information are as follows (shares
in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
------------------------------------------------------- AND EXERCISABLE
WEIGHTED AVERAGE --------------------------------
RANGE OF REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE PRICE NUMBER EXERCISE PRICE
PRICES OUTSTANDING LIFE (YEARS) PER SHARE OUTSTANDING PER SHARE
- -------------------------------- ------------- --------------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
$.15............................ 1,763 7.1 $ .15 914 $ .15
.25 - 1.00..................... 1,704 8.9 .85 208 .74
1.50 - 3.00.................... 1,510 9.7 2.75 -- --
3.50 - 4.75.................... 223 9.9 4.44 -- --
--------- ---------
5,200 1,122
========= =========
</TABLE>
DEFERRED STOCK-BASED COMPENSATION
In connection with certain employee stock option grants made since January
1998, the Company recognized deferred compensation, which is being amortized
over the vesting periods of the related options, usually four years, using an
appropriate accelerated basis. The fair value per share used to calculate
deferred compensation was derived by reference to the convertible preferred
stock values, reduced by an appropriate discount factor. Future compensation
charges are subject to reduction for any employee who terminates employment
prior to expiration of such employee's option vesting period.
The following table sets forth deferred compensation and the amortization of
deferred compensation (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Deferred stock-based compensation..................................... $ -- $ 773 $ 851
Amortization of deferred stock-based compensation..................... -- 111 598
</TABLE>
CONSULTANT OPTIONS
During the period from October 31, 1997 through June 30, 1999, the Company
granted options to purchase 163,100 shares of common stock to consultants in
exchange for services at exercise prices ranging from $.15 to $4.75 per share.
The Company determined the value of the options granted to consultants based
on the Black-Scholes option pricing model. The fair value of options granted to
consultants was determined using the following assumptions: expected lives of
10 years, risk free interest rates ranging from 4.45% to 5.93%, dividend yield
F-20
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFIT PLANS: (CONTINUED)
of .0% and volatility of 60%. The following table summarizes the fair values and
the related amortization recorded (in thousands, except per option data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Weighted average fair per share value of options granted to
consultants during the period...................................... $ -- $ 4.39 $ 4.84
Deferred stock-based compensation.................................... $ -- $ 245 $ 520
Amortization of deferred stock-based compensation.................... -- 39 179
</TABLE>
FAIR VALUE DISCLOSURES
Pro forma information regarding net loss and net loss per share is required
by SFAS No. 123, which also requires that the information be determined as if
the Company had accounted for its employee stock options granted under the fair
value method. The fair value for these options was estimated using the
Black-Scholes option pricing model.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
options of publicly traded companies and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
measure of the fair value of options.
The fair value of options at the date of grant was estimated on the date of
grant based on the minimum value method as prescribed by SFAS No. 123. The
following table summarizes the estimated fair value of options and assumptions
used in the SFAS No. 123 calculations:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Estimated fair value............................................... $ .15 $ 1.25 $ 3.17
Expected life (years).............................................. 4 4 4
Risk-free interest rate............................................ 6.66% 5.98% 5.16%
Dividend yield..................................................... -- -- --
Volatility......................................................... -- -- --
</TABLE>
F-21
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFIT PLANS: (CONTINUED)
Had compensation cost for the Company's stock options been determined based
on the fair value of the options at the date of grant using the minimum value
method as required by SFAS No. 123, the Company's pro forma net loss would have
been as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
Net loss (in thousands):
As reported................................................ $ (1,201) $ (9,883) $ (11,769)
Pro forma.................................................. $ (1,217) $ (9,916) $ (12,392)
Basic and diluted net loss per share:
As reported................................................ $ (.21) $ (1.53) $ (1.45)
Pro forma.................................................. $ (.21) $ (1.54) $ (1.53)
</TABLE>
401(k) SAVINGS PLAN
Effective January 1, 1992, the Company adopted a salary savings plan (the
"Savings Plan") which conforms to Section 401(k) of the Internal Revenue Code of
1986, as amended (the "Code"), whereby eligible employees may contribute up to
20% of their earnings, not to exceed amounts allowed under the Code. Under the
terms of the Savings Plan, the Company may make contributions at the discretion
of the Board of Directors. As of June 30, 1999 the Company has not made any
contributions to the Savings Plan.
NOTE 8--INCOME TAXES:
The provision for income taxes is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
CURRENT:
Federal............................................................. $ (503) $ -- $ --
State............................................................... (17) -- --
--------- --------- ---------
(520) -- --
--------- --------- ---------
DEFERRED:
Federal............................................................. 580 89 --
--------- --------- ---------
580 89 --
--------- --------- ---------
Provision for income taxes............................................ $ 60 $ 89 $ --
========= ========= =========
</TABLE>
F-22
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES: (CONTINUED)
Deferred tax assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Net operating loss carryforwards........................................... $ 3,045 $ 6,705
Research and development tax credits....................................... 375 957
Nondeductible reserves..................................................... 746 968
Depreciation and amortization.............................................. 503 456
Contract revenue........................................................... 283 128
Other...................................................................... 106 330
--------- ---------
Gross deferred tax assets.................................................. 5,058 9,544
Valuation allowance........................................................ (5,058) (9,544)
--------- ---------
Net deferred tax assets.................................................... $ -- $ --
========= =========
</TABLE>
The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
These factors include the Company's history of losses, recent increases in
expense levels, the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology, the lack
of carryback capacity to realize deferred tax assets and the uncertainty
regarding market acceptance of the Company's products. The Company will continue
to assess the realizability of the deferred tax assets based on actual and
forecasted operating results.
At June 30, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $18,000,000 and
$10,000,000, respectively, which expire at various dates through 2019. In
addition, the Company has research and development credit carryforwards of
approximately $1,000,000 for federal and for state purposes. These carryforwards
expire in varying amounts through 2019. Under the Tax Reform Act of 1986, the
amounts of and benefits from net operating loss and tax carryforwards may be
impaired or limited in certain circumstances. Events which could cause
limitations in the amount of net operating losses that the Company may utilize
in any one year include, but are not limited to, a cumulative ownership change
of more than 50%, as defined, over a three year period. As a result of the IPO,
such a change in ownership is expected to occur.
NOTE 9--COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space and equipment under non-cancelable operating
and capital leases with various expiration dates through 2002. Rent expense for
operating leases was as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Rent expense.......................................................... $ 147 $ 173 $ 480
</TABLE>
F-23
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments under non-cancelable operating and capital
leases are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
----------- -----------
<S> <C> <C>
YEAR ENDING JUNE 30,
2000................................................................... $ 517 $ 393
2001................................................................... 535 349
2002................................................................... -- 102
--------- ---------
Total minimum lease payments........................................... $ 1,052 844
=========
Less: amount representing interest..................................... (76)
---------
Present value of capital lease obligations............................. 768
Less: current portion.................................................. (342)
---------
Capital lease obligations, non-current portion......................... $ 426
=========
</TABLE>
CONTINGENCIES
From time to time, in the normal course of business, various claims are made
against the Company. In the opinion of the Company's management, there are no
pending claims, the outcome of which is expected to result in a material adverse
effect on the financial position or results of operations of the Company.
NOTE 10--SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
On September 1, 1999, the Company's Board of Directors authorized management
of the Company to file a Registration Statement with the Securities and Exchange
Commission permitting the Company to sell its common stock to the public.
REINCORPORATION
On December 28, 1999, the Company was reincorporated in the State of
Delaware. All share information included in these financial statements has been
adjusted to reflect this reincorporation.
EMPLOYEE BENEFIT PLANS
On September 1, 1999, the Board of Directors authorized establishment of the
1999 Equity Incentive Plan with 1,400,000 shares authorized, the 1999
Non-Employee Directors' Stock Option Plan with 200,000 shares authorized, and
the 1999 Employee Stock Purchase Plan with 300,000 shares reserved for issuance.
The 1999 Non-Employee Directors' Stock Option Plan and 1999 Employee Stock
Purchase Plan will become effective upon the closing of the IPO. Each of the
plans was approved by the stockholders in November 1999.
FACILITIES LEASE
On August 16, 1999, the Company entered into an additional five-year
facilities lease to commence on November 1, 1999. The annual lease payments will
amount to approximately $687,000.
F-24
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the distribution of the common stock being registered. All amounts are
estimated, except the SEC Registration Fee, the NASD Filing Fee and the Nasdaq
National Market Filing Fee:
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 13,553
NASD Filing Fee................................................... 6,683
Nasdaq National Market Initial Filing Fee......................... 90,000
Blue Sky Fees and Expenses........................................ 15,000
Accounting Fees................................................... 200,000
Legal Fees and Expenses........................................... 350,000
Transfer Agent and Registrar Fees................................. 10,000
Printing and Engraving............................................ 250,000
Miscellaneous..................................................... 14,764
---------
Total......................................................... $ 950,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Act").
Article VI of the Registrant's Amended and Restated Certificate of Incorporation
provides for indemnification of its directors to the maximum extent permitted by
the Delaware General Corporation Law and Section 43 of Article XI of the
Registrant's Bylaws provides for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. In addition, the Registrant intends to enter into
Indemnification Agreements with each director and certain officers containing
provisions which are in some respects broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements may require the Company, among other things, to
indemnify its directors against certain liabilities that may arise by reason of
their status or service as directors (other than liabilities arising from
willful misconduct of culpable nature), to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified, and
to obtain directors' insurance if available on reasonable terms. Reference is
also made to Sections 7 and 8 of the Underwriting Agreement contained in
Exhibit 1.1 hereto, indemnifying officers and directors of the Company against
certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since inception, we have sold and issued the following unregistered
securities:
(1) From May 1, 1992 to September 1999, we granted stock options to purchase
an aggregate of 9,090,855 shares of common stock at exercise prices ranging from
$0.15 to $10.00 per share to employees, consultants, directors and other service
providers pursuant to our 1992 and 1997 Stock Option Plans.
(2) On November 15, 1991, we sold 800,000 shares of common stock to each of
our founders, Earl Killian, Raymond Kunita and Thomas J. Riordan. The price per
share of $0.001 for an aggregate purchase price of $2,400.
II-1
<PAGE>
(3) On November 15, 1991, we sold 2,200,000 shares of our common stock to
Integrated Device Technology, Inc. under a stock purchase agreement at a price
per share of $0.001 for an aggregate purchase price of $2,200.
(4) On March 1, 1999, we sold 237,500 shares of our common stock and
1,047,454 shares of our Series D preferred stock to Cisco Systems, Inc. for an
aggregate purchase price of $5,000,001.
(5) On January 24, 1992, we sold an aggregate of 1,800,000 shares of
Series A preferred stock to two purchasers at a price per share of $1.40 for an
aggregate purchase price of $2,520,000.
(6) On August 18, 1995, we sold an aggregate of 2,500,000 shares of
Series B preferred stock to two purchasers at a price per share of $2.40 for an
aggregate purchase price of $6,000,000.
(7) On April 16, 1998 and May 15, 1998, we sold an aggregate of 4,800,000
shares of Series C preferred stock to 37 purchasers at a price per share of
$2.50 for an aggregate purchase price of $12,000,000.
(8) On March 1, 1999 and March 16, 1999, we sold an aggregate of 4,518,837
shares of Series D preferred stock to 28 purchasers at a price per share of
$4.32 for an aggregate purchase price of $19,521,376.
The sales and issuances of securities described in paragraphs (1) and (2)
above were deemed to be exempt from registration under the Securities Act by
virtue of Rule 701 of the Securities Act in that they were offered and sold
either pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation, as provided by Rule 701.
The sales and issuances of securities described in paragraphs (3) through
(8) above were deemed to be exempt from registration under the Securities Act by
virtue of Rule 4(2) or Rule 506 under Regulation D promulgated thereunder.
Appropriate legends are affixed to the stock certificates issued in the
aforemention transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. All recipients either received adequate
information about us or had access, through employment or other relationships,
to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of the Registrant
3.2 Form of Second Amended and Restated Certificate of Incorporation of the Registrant
to be filed upon the closing of the offering made pursuant to this registration
statement
3.3+ Bylaws of the Registrant
4.1+ Specimen Common Stock Certificate
4.2+ Warrant to purchase Series B Preferred Stock, issued by Quantum Effect
Design, Inc. to Comdisco, Inc., dated September 30, 1997
4.3+ Warrant to purchase Series B Preferred Stock, issued by Quantum Effect
Design, Inc. to Comdisco, Inc., dated September 30, 1997
4.4+ Warrant to purchase Series C Preferred Stock, issued by Quantum Effect
Design, Inc. to Comdisco, Inc., dated July 24, 1998
4.5+ Warrant to purchase Common Stock, issued by Quantum Effect Design, Inc. to Venture
Lending & Leasing II, Inc., dated January 11, 1999
4.6+ Amended and Restated Investors' Rights Agreement dated March 16, 1999
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
5.1* Opinion of Cooley Godward LLP
10.1+ Form of Indemnity Agreement between the Registrant and its directors and officers.
10.2 1999 Equity Incentive Plan, Form of 1999 Equity Incentive Plan Stock Option
Agreement, Form of Stock Option Grant Notice and Form of 1999 Equity Incentive
Plan Notice of Exercise
10.3 1999 Employee Stock Purchase Plan and Form of Offering Document
10.4 1999 Non-Employee Directors' Stock Option Plan and Form of Nonstatutory Stock
Option Agreement and Notice of Exercise
10.5+ Commercial Lease Agreement, by and between Peachtree Associates and Quantum Effect
Design, Inc., dated March 22, 1999
10.6+ Lease Agreement, by and among John Arrillaga, Richard Peery and Quantum Effect
Design, Inc., dated December 3, 1998; Amendment No. 1 to Lease Agreement dated
December 3, 1998, by and among John Arrillaga, Richard Perry and Quantum Effect
Design, Inc., dated August 16, 1999
10.7+ Lease Agreement, by and among John Arrillaga, Richard Peery and Quantum Effect
Design, Inc., dated September 14, 1994; Amendment No. 1 to Lease Agreement dated
September 14, 1994, by and among John Arrillaga, Richard Peery and Quantum
Effect Design, Inc., dated February 11, 1998; Amendment No. 2 to Lease Agreement
dated September 14, 1994, by and among John Arrillaga, Richard Peery and Quantum
Effect Design, Inc., dated December 3, 1998; Amendment No. 3 to Lease Agreement
dated September 14, 1994, by and among John Arrillaga, Richard Perry and Quantum
Effect Design, Inc., dated August 16, 1999
10.8+ Lease Agreement, by and among John Arrillaga, Richard Perry and Quantum Effect
Design, Inc., dated August 16, 1999
10.9**+ Technology License Agreement, by and between Weitek Corporation and MIPS Computer
Systems, Inc., dated June 29, 1990; Assignment Agreement, by and between Weitek
Corporation and Quantum Effect Design, Inc., dated June 19, 1996; Amendment
No. 1 to the Technology License Agreement, by and between MIPS Technology, Inc.
and Quantum Effect Design, Inc., dated March 31, 1997
10.10** Agreement for Purchase and Sale of Custom Semiconductor Products, by and between
IBM Corporation and Quantum Effect Design, Inc., dated September 4, 1997;
Amendment 1 to the Agreement for Purchase and Sale of Custom Semiconductor
Products with Agreement No. X0468, by and between IBM Corporation and Quantum
Effect Devices, Inc., effective November 15, 1999
10.11**+ Development and License Agreement, by and between Integrated Device
Technology, Inc. and Quantum Effect Design, Inc., dated January 13, 1992
10.12**+ Development Agreement, by and between Integrated Device Technology, Inc. and
Quantum Effect Design, Inc., dated June 12, 1996
10.13+ 1997 Stock Option Agreement, by and between Barry L. Cox and Quantum Effect
Design, Inc.
10.14+ 1997 Stock Option Agreement, by and between Howard M. Bailey and Quantum Effect
Design, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
23.2* Consent of Cooley Godward LLP (included in Exhibit 5.1)
24.1+ Power of Attorney (See signature pages)
27.1+ Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
** Confidential treatment has been requested with respect to portions of this
exhibit.
II-3
<PAGE>
+ Previously filed.
(b) Financial Statement Schedules
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be a part of this Registration Statement as of the time it was
declared effective.
(2) For purposes of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant has
duly caused this Amendment to the Registration Statement to be signed on its
behalf, by the undersigned, thereunto duly authorized, in the City of Santa
Clara, County of Santa Clara, State of California, on January 11, 2000.
QUANTUM EFFECT DEVICES, INC.
By: *
-----------------------------------------
Thomas J. Riordan
CHIEF EXECUTIVE OFFICER, PRESIDENT AND
DIRECTOR
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chief Executive Officer,
* President and Director
- ------------------------------ (Principal Executive January 11, 2000
Thomas J. Riordan Officer)
/s/ HOWARD M. BAILEY Chief Financial Officer
- ------------------------------ (Principal Financial and January 11, 2000
Howard M. Bailey Accounting Officer)
*
- ------------------------------ Chairman of the Board of January 11, 2000
Barry L. Cox Directors
*
- ------------------------------ Director January 11, 2000
Bruce K. Graham
*
- ------------------------------ Director January 11, 2000
Christopher J. Schaepe
/s/ LESTER M. CRUDELE
- ------------------------------ Director January 11, 2000
Lester M. Crudele
<TABLE>
<S> <C> <C> <C>
*By: /s/ HOWARD M. BAILEY January 11, 2000
-------------------------
Howard M. Bailey
ATTORNEY-IN-FACT
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Thomas J. Riordan and Howard M. Bailey, and each
of them, his attorneys-in-fact, each with the power of substitution, for him in
any and all capacities, in any and all capacities, to sign any and all
amendments to this Registration Statement) including post-effective amendments),
and to sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with exhibits thereto and other
II-5
<PAGE>
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that such attorneys-in-fact, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof. This Power of Attorney may be
signed in several counterparts.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ LESTER M. CRUDELE
- ------------------------------ Director January 11, 2000
Lester M. Crudele
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of the Registrant
3.2 Form of Second Amended and Restated Certificate of Incorporation of the Registrant to be filed upon
the closing of the offering made pursuant to this registration statement
3.3+ Bylaws of the Registrant
4.1+ Specimen Common Stock Certificate
4.2+ Warrant to purchase Series B Preferred Stock, issued by Quantum Effect Design, Inc. to
Comdisco, Inc., dated September 30, 1997
4.3+ Warrant to purchase Series B Preferred Stock, issued by Quantum Effect Design, Inc. to
Comdisco, Inc., dated September 30, 1997
4.4+ Warrant to purchase Series C Preferred Stock, issued by Quantum Effect Design, Inc. to
Comdisco, Inc., dated July 24, 1998
4.5+ Warrant to purchase Common Stock, issued by Quantum Effect Design, Inc. to Venture Lending & Leasing
II, Inc., dated January 11, 1999
4.6+ Amended and Restated Investors' Rights Agreement dated March 16, 1999
5.1* Opinion of Cooley Godward LLP
10.1+ Form of Indemnity Agreement between the Registrant and its directors and officers.
10.2 1999 Equity Incentive Plan, Form of 1999 Equity Incentive Plan Stock Option Agreement, Form of Stock
Option Grant Notice and Form of 1999 Equity Incentive Plan Notice of Exercise
10.3 1999 Employee Stock Purchase Plan and Form of Offering Document
10.4 1999 Non-Employee Directors' Stock Option Plan and Form of Nonstatutory Stock Option Agreement and
Notice of Exercise
10.5+ Commercial Lease Agreement, by and between Peachtree Associates and Quantum Effect Design, Inc.,
dated March 22, 1999
10.6+ Lease Agreement, by and among John Arrillaga, Richard Peery and Quantum Effect Design, Inc., dated
December 3, 1998; Amendment No. 1 to Lease Agreement dated December 3, 1998, by and among John
Arrillaga, Richard Perry and Quantum Effect Design, Inc., dated August 16, 1999
10.7+ Lease Agreement, by and among John Arrillaga, Richard Peery and Quantum Effect Design, Inc., dated
September 14, 1994; Amendment No. 1 to Lease Agreement dated September 14, 1994, by and among John
Arrillaga, Richard Peery and Quantum Effect Design, Inc., dated February 11, 1998; Amendment No. 2
to Lease Agreement dated September 14, 1994, by and among John Arrillaga, Richard Peery and Quantum
Effect Design, Inc., dated December 3, 1998; Amendment No. 3 to Lease Agreement dated
September 14, 1994, by and among John Arrillaga, Richard Perry and Quantum Effect Design, Inc.,
dated August 16, 1999
10.8+ Lease Agreement, by and among John Arrillaga, Richard Perry and Quantum Effect Design, Inc., dated
August 16, 1999
10.9**+ Technology License Agreement, by and between Weitek Corporation and MIPS Computer Systems, Inc.,
dated June 29, 1990; Assignment Agreement, by and between Weitek Corporation and Quantum Effect
Design, Inc., dated June 19, 1996; Amendment No. 1 to the Technology License Agreement, by and
between MIPS Technology, Inc. and Quantum Effect Design, Inc., dated March 31, 1997
10.10** Agreement for Purchase and Sale of Custom Semiconductor Products, by and between IBM Corporation and
Quantum Effect Design, Inc., dated September 4, 1997; Amendment 1 to the Agreement for Purchase and
Sale of Custom Semiconductor Products with Agreement No. X0468, by and between IBM Corporation and
Quantum Effect Devices, Inc., effective November 15, 1999
10.11**+ Development and License Agreement, by and between Integrated Device Technology, Inc. and Quantum
Effect Design, Inc., dated January 13, 1992
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------- -----------------------------------------------------------------------------------------------------
<S> <C>
10.12**+ Development Agreement, by and between Integrated Device Technology, Inc. and Quantum Effect
Design, Inc., dated June 12, 1996
10.13+ 1997 Stock Option Agreement, by and between Barry L. Cox and Quantum Effect Design, Inc.
10.14+ 1997 Stock Option Agreement, by and between Howard M. Bailey and Quantum Effect Design, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
23.2* Consent of Cooley Godward LLP (included in Exhibit 5.1)
24.1+ Power of Attorney (See signature pages)
27.1+ Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
** Confidential treatment has been requested with respect to portions of this
exhibit.
+ Previously filed.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
QUANTUM EFFECT DEVICES, INC.
QUANTUM EFFECT DEVICES, INC., a corporation organized and existing
under the laws of the state of Delaware (the "Corporation") hereby certifies
that:
1. The name of the Corporation is Quantum Effect Devices, Inc.
2. The date of filing of the Corporation's original Certificate of
Incorporation was September 9, 1999.
3. The Amended and Restated Certificate of Incorporation of the
Corporation as set forth in Exhibit A hereto was duly adopted in accordance with
the provisions of Section 242 and Section 245 of the General Corporation Law of
the State of Delaware by the Board of Directors of the Corporation.
4. Pursuant to Section 245 of the Delaware General Corporation Law,
approval of the sole stockholder of the Corporation has been obtained.
5. The Amended and Restated Certificate of Incorporation so adopted
reads in full as set forth in Exhibit A attached hereto and is hereby
incorporated by reference.
IN WITNESS WHEREOF, the undersigned has signed this Amended and
Restated Certificate of Incorporation this 28th day of December 1999, and hereby
affirms and acknowledges under penalty of perjury that the filing of this
Amended and Restated of Incorporation is the act and deed of Quantum Effect
Devices, Inc.
QUANTUM EFFECT DEVICES, INC.
By /s/ THOMAS J. RIORDAN
---------------------------------------------
Thomas J. Riordan
President and Chief Executive Officer
1.
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AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
QUANTUM EFFECT DEVICES, INC.,
A DELAWARE CORPORATION
I.
The name of the Corporation is Quantum Effect Devices, Inc. (the
"Corporation").
II.
The address of the registered office of the Corporation in the State of Delaware
is 1013 Centre Road, City of Wilmington, County of New Castle, DE 19805, and the
name of the registered agent of the Corporation in the State of Delaware at such
address is Corporation Service Company.
III.
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
IV.
The Corporation is authorized to issue two classes of stock to be
designated, respectively, as "Preferred Stock" and "Common Stock." The total
number of shares of Preferred Stock which the Corporation is authorized to issue
is Thirteen Million Eight Hundred Ninety-Seven Thousand Seven Hundred Fifty
(13,897,750), each having a par value of one-tenth of one cent ($.001). The
total number of shares of Common Stock which the Corporation is authorized to
issue is One Hundred Million (100,000,000), each having a par value of one-tenth
of one cent ($.001).
The holders of Common Stock shall be entitled to one vote per share of
Common Stock in the election of directors and upon each other matter coming
before any vote of stockholders.
The rights, preferences, privileges and restrictions granted to and
imposed upon the Preferred Stock are as follows:
1. SERIES A PREFERRED, SERIES B PREFERRED, SERIES C PREFERRED AND SERIES D
PREFERRED STOCK. The Preferred Stock shall be issued in four series. The first
series of Preferred Stock shall be designated "Series A Preferred Stock" or
"Series A Preferred" and shall consist of 1,800,000 shares. The second series of
Preferred Stock shall be designated "Series B Preferred Stock" or "Series B
Preferred" and shall consist of 2,593,750 shares. The third series of Preferred
Stock shall be designated "Series C Preferred Stock" or "Series C Preferred" and
shall consist of 4,804,000 shares. The fourth series of Preferred Stock shall be
designated "Series D Preferred Stock" or "Series D Preferred" and shall consist
of 4,700,000 shares. Collectively, the
2.
<PAGE>
Series A Preferred, the Series B Preferred, the Series C Preferred and the
Series D Preferred are occasionally referred to herein as "Preferred."
2. GENERAL DEFINITIONS. For purposes of this Article III, the following
definitions shall apply:
(a) "JUNIOR SHARES" shall mean all Common and any other shares of
the Corporation other than the Preferred.
(b) "SUBSIDIARY" shall mean any corporation at least fifty
percent (50%) of whose outstanding voting securities or securities convertible
into such voting securities shall at the time be owned by this Corporation or by
one or more of such subsidiaries.
(c) "BOARD OF DIRECTORS" shall mean the Board of Directors of the
Corporation.
(d) "CONVERTIBLE SECURITIES" shall mean any evidences of
indebtedness, shares (other than Common Stock, Series A Preferred, Series B
Preferred, Series C Preferred and Series D Preferred) or other securities
convertible into or exchangeable for Common Stock.
(e) "OPTIONS" shall mean rights, options or warrants to subscribe
for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
(f) "ORIGINAL ISSUE DATE" shall mean, with respect to the Series
A Preferred, Series B Preferred, Series C Preferred and Series D Preferred,
respectively, the date on which shares of Series A Preferred, Series B
Preferred, Series C Preferred or Series D Preferred were first issued,
respectively.
(g) "ADDITIONAL SHARES OF COMMON" shall mean all shares of Common
issued (or, pursuant to Section 6(d)(ii) below, deemed to be issued) by the
Corporation after the Original Issue Date, other than shares of Common issued or
issuable:
(i) upon conversion of shares of Preferred;
(ii) to officers or employees of, or consultants to, the
Corporation pursuant to any stock grant, option plan or purchase plan or other
employee stock incentive program (collectively the "Plans") approved by the
Board of Directors; PROVIDED, HOWEVER, that, with respect to the Series A
Preferred only, all such shares of Common issued or issuable to said officers,
employees or consultants do not exceed Seven Million One Hundred Thousand
(7,100,000) such shares in the aggregate, net of Company repurchases, and with
respect to the Series B Preferred, Series C Preferred and Series D Preferred,
all such shares of Common issued or issuable to said officers, employees or
consultants do not exceed Nine Million One Hundred Thousand (9,100,000) such
shares in the aggregate, net of Company repurchases;
(iii) as a dividend or distribution on Series A Preferred,
Series B Preferred, Series C Preferred or Series D Preferred;
3.
<PAGE>
(iv) by way of dividend or other distribution on shares of
Common excluded from the definition of Additional Shares of Common by the
foregoing clauses (i), (ii) and (iii); and
(v) with respect to adjustments to the Series B Preferred
Conversion Price, the Series C Preferred Conversion Price and the Series D
Preferred Conversion Price only, up to 237,500 shares of Common Stock (as
adjusted for stock splits, recapitalizations, stock dividends and the like) to
Cisco Systems, Inc.
(h) "COMMON" shall mean the Common Stock of this Corporation.
(i) "PREFERRED" shall mean the Series A Preferred, Series B
Preferred, Series C Preferred and Series D Preferred Stock of the Corporation.
(j) "PURCHASE PRICE" shall mean $1.40 per share of Series A
Preferred, $2.40 per share of Series B Preferred, $2.50 per share of Series C
Preferred and $4.32 for the Series D Preferred.
(k) "HE," "SHE," "IT" shall mean any of such gender references as
required by the context and all of them if the context so requires.
3. DIVIDENDS.
(a) SERIES A PREFERRED STOCK. The holders of the then outstanding
Series A Preferred shall be entitled to receive, if, when, and as declared by
the Board of Directors, out of any funds legally available therefor, dividends
at an annual rate not to exceed eleven cents ($0.11) for each share of Series A
Preferred, prior and in preference to any declaration and payment of any
dividend (payable other than in stock of the Corporation) on the Junior Shares.
Dividends on each share of Series A Preferred, if any, shall be non-cumulative.
Dividends, if paid or if declared and set aside for payment, must be paid on, or
declared and set aside for payment on, all outstanding Series A Preferred,
Series B Preferred, Series C Preferred and Series D Preferred contemporaneously.
(b) SERIES B PREFERRED STOCK. The holders of the then outstanding
Series B Preferred shall be entitled to receive, if, when, and as declared by
the Board of Directors, out of any funds legally available therefor, dividends
at an annual rate not to exceed nineteen cents ($0.19) for each share of Series
B Preferred, prior and in preference to any declaration and payment of any
dividend (payable other than in stock of the Corporation) on the Junior Shares.
Dividends on each share of Series B Preferred, if any, shall be non-cumulative.
Dividends, if paid or if declared and set aside for payment, must be paid on, or
declared and set aside for payment on, all outstanding Series A Preferred,
Series B Preferred, Series C Preferred and Series D Preferred contemporaneously.
(c) SERIES C PREFERRED STOCK. The holders of the then outstanding
Series C Preferred shall be entitled to receive, if, when, and as declared by
the Board of Directors, out of any funds legally available therefor, dividends
at an annual rate not to exceed twenty cents ($0.20) for each share of Series C
Preferred, prior and in preference to any declaration and payment of any
dividend (payable other than in stock of the Corporation) on the Junior Shares.
4.
<PAGE>
Dividends on each share of Series C Preferred, if any, shall be non-cumulative.
Dividends, if paid or if declared and set aside for payment, must be paid on, or
declared and set aside for payment on, all outstanding Series A Preferred,
Series B Preferred, Series C Preferred and Series D Preferred contemporaneously.
(d) SERIES D PREFERRED STOCK. The holders of the then outstanding
Series D Preferred shall be entitled to receive, if, when, and as declared by
the Board of Directors, out of any funds legally available therefor, dividends
at an annual rate not to exceed thirty-five cents ($0.35) for each share of
Series D Preferred, prior and in preference to any declaration and payment of
any dividend (payable other than in stock of the Corporation) on the Junior
Shares. Dividends on each share of Series D Preferred, if any, shall be
non-cumulative. Dividends, if paid or if declared and set aside for payment,
must be paid on, or declared and set aside for payment on, all outstanding
Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred contemporaneously.
(e) COMMON STOCK. No shares of Common Stock shall receive any dividend
at a rate which is greater than the rate at which dividends are simultaneously
paid in respect of the Preferred Stock (based on the number of shares of Common
Stock into which the Preferred Stock is convertible on the date of the
declaration of the dividend).
(f) METHOD OF PAYMENT. Dividends shall be paid by forwarding a check,
postage prepaid, to the address of each holder (or in the case of joint holders,
to the address of any such holder), of Preferred Stock as shown on the books of
the Corporation, or to such other address as such holder specifies for such
purpose by written notice to the Corporation. The forwarding of such check shall
satisfy all obligations of the Corporation with respect to such dividends,
unless such check is not paid upon timely presentation.
(g) PROHIBITION AND RESTRICTIONS ON PREFERRED STOCK DIVIDEND PAYMENT.
If the Board of Directors shall declare a dividend on the outstanding shares of
Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred, and the amount available for payment thereof is insufficient to
permit the payment of the full preferential amounts required to be paid to the
holders of the outstanding shares of Series A Preferred, Series B Preferred,
Series C Preferred and Series D Preferred, then the amount available for such
dividend payments shall be distributed ratably among the holders of the
outstanding shares of Series A Preferred, the holders of the outstanding shares
of Series B Preferred, the holders of the outstanding shares of Series C
Preferred and the holders of the outstanding shares of Series D Preferred
according to (i) the respective dividend preference amounts to which all such
holders of outstanding Series A Preferred, Series B Preferred, Series C
Preferred and Series D Preferred would otherwise be entitled, and (ii) the
number of outstanding shares of each such series until each holder of
outstanding shares of Series A Preferred has received its Series A Preferred
preferential amount, each holder of outstanding shares of Series B Preferred has
received its Series B Preferred preferential amount, each holder of outstanding
shares of Series C Preferred has received its Series C Preferred preferential
amount and each holder of outstanding shares of Series D Preferred has received
its Series D Preferred preferential amount, each as applicable, in full.
5.
<PAGE>
4. LIQUIDATION PREFERENCE.
(a) PREFERRED STOCK. In the event of any liquidation, dissolution or
winding up of the Corporation and until all preferential amounts owed to them
under this Section 4(a) have been paid, the holders of the Series A Preferred,
Series B Preferred, Series C Preferred and Series D Preferred, respectively, on
a PARI PASSU basis, shall be entitled to receive, prior and in preference to any
distribution of any assets or property of the Corporation to the holders of
Junior Shares by reason of their ownership thereof, the amount of $1.40 per
share for each share of Series A Preferred then held by them, the amount of
$2.40 per share for each share of Series B Preferred then held by them, the
amount of $2.50 per share for each share of Series C Preferred then held by them
and the amount of $4.32 per share for each share of Series D Preferred then held
by them, plus an amount equal to all declared but unpaid dividends on the Series
A Preferred, Series B Preferred, Series C Preferred and/or Series D Preferred as
of the date of liquidation (the "Liquidation Date"). If, on the Liquidation
Date, the assets and property thus distributed among the holders of the
Preferred Stock shall be insufficient to permit the payment to such holders of
the full preferential amounts due them, then the entire assets and property of
the Corporation legally available for distribution shall be distributed on a pro
rata basis among the holders of the Series A Preferred, Series B Preferred,
Series C Preferred and Series D Preferred based upon their respective
liquidation preference prices, as set forth in the preceding sentence,
multiplied by the number of outstanding shares in each Series.
(b) MERGER OR CONSOLIDATION. The Corporation's sale of all or
substantially all of its assets to, or the acquisition of the Corporation by
another entity or by another corporation by means of merger or consolidation
resulting in the exchange of the outstanding shares of the Corporation for
securities or other consideration issued, or caused to be issued, by the
acquiring corporation or its subsidiary, in which merger or consolidation the
control of this Corporation is transferred (i.e., a transfer of more than fifty
percent (50%) of the voting securities of the Corporation to persons who did not
previously own voting securities of the Corporation), shall be deemed to be a
liquidation, dissolution and winding up of the Corporation as those terms are
used in this Section 4.
(c) COMMON STOCK LIQUIDATION PREFERENCE. After the Series A Preferred,
Series B Preferred, Series C Preferred and Series D Preferred have received the
liquidation preference described in Section 4(a) above, the remaining assets of
the Corporation available for distribution to stockholders shall be distributed
among the holders of the Series A Preferred, Series B Preferred, Series C
Preferred and holders of Junior Shares pro rata, on a fully diluted,
as-converted basis, based on the number of Junior Shares held by each (assuming
conversion of all such Preferred Stock); provided that at such time as the
holders of Series C Preferred shall have received an aggregate amount of ten
dollars ($10.00) per share (as adjusted for stock splits, recapitalizations and
the like) of Series C Preferred they own, (including all distributions with
respect to Series C Preferred pursuant to Section 4(a) and this Section 4(c)),
the holders thereof shall be entitled to no further distributions with respect
to such shares of Series C Preferred.
(d) FAIR MARKET VALUE. If not readily subject to determination, the
fair value of the assets or property to be distributed pursuant to Section 4(a),
4(b) and 4(c) above shall be determined in good faith by the Board of Directors.
6.
<PAGE>
5. REDEMPTION. The shares of Preferred are not redeemable.
6. CONVERSION. The holders of the Series A Preferred, Series B Preferred,
Series C Preferred and Series D Preferred shall have conversion rights as
follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series A Preferred, Series B
Preferred, Series C Preferred and Series D Preferred shall be convertible at the
option of the holder thereof, at any time after such Series' respective Original
Issue Date at the office of the Corporation or any transfer agent for the Series
A Preferred, Series B Preferred, Series C Preferred or Series D Preferred, into
that number of fully paid and non-assessable shares of Common of the Corporation
as is determined by dividing the Purchase Price for each share of Series A
Preferred, Series B Preferred, Series C Preferred or Series D Preferred,
respectively, by the applicable Conversion Price, determined as hereinafter
provided, in effect at the time of such conversion. The initial Conversion Price
for the Series A Preferred shall be $1.40 per share. The initial Conversion
Price for the Series B Preferred shall be $2.40 per share. The initial
Conversion Price for the Series C Preferred shall be $2.50 per share. The
initial Conversion Price for the Series D Preferred shall be $4.32 per share. No
adjustment shall be made with respect to dividends that may be declared and
unpaid at the date of such conversion. The respective Conversion Price for the
Series A Preferred, Series B Preferred, Series C Preferred and/or Series D
Preferred shall be subject to adjustment as hereinafter provided.
(b) AUTOMATIC CONVERSION. Each share of Series A Preferred, Series B
Preferred, Series C Preferred or Series D Preferred shall automatically be
converted into share(s) of Common at the then effective Conversion Price for
such share immediately upon the closing of a firm commitment underwritten offer
and sale of Common Stock for the account of the Corporation pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
at a public offering price of at least Six Dollars and Forty-Eight Cents ($6.48)
per share (appropriately adjusted in the case of any stock split, stock dividend
or recapitalization, with aggregate cash proceeds at the public offering price
equal to or exceeding Ten Million Dollars ($10,000,000) (net of underwriting
discounts and commissions).
(c) MECHANICS OF CONVERSION. Before any holder of Series A Preferred,
Series B Preferred, Series C Preferred or Series D Preferred shall be entitled
to convert the same into shares of Common, such holder shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for the Series A Preferred, Series B
Preferred, Series C Preferred or Series D Preferred, and shall give written
notice to the Corporation at such office that he elects to convert the same, and
shall state therein the name or names which he wishes the certificate or
certificates for shares of Common to be issued. The Corporation shall, as soon
as practicable thereafter, issue and deliver at such office to each holder of
Series A Preferred, Series B Preferred, Series C Preferred or Series D
Preferred, as applicable, or to his nominee or nominees, any certificate or
certificates for the number of shares of Common to which he shall be entitled.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of the Series A
Preferred, Series B Preferred, Series C Preferred or Series D Preferred to be
converted, and the person or persons entitled to receive the shares of Common
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of
7.
<PAGE>
Common on such date. No fractional shares of Common Stock shall be issued upon
conversion of Series A Preferred, Series B Preferred, Series C Preferred or
Series D Preferred. In lieu of any fractional shares to which the holder would
otherwise be entitled, the Corporation shall pay cash equal to such fraction
multiplied by the then effective Conversion Price.
(d) ADJUSTMENTS TO CONVERSION PRICE FOR DILUTING ISSUES.
(i) NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in the
Conversion Price of a Series A Preferred, Series B Preferred, Series C Preferred
or Series D Preferred shares shall be made in respect of the issuance of
Additional Shares of Common unless the consideration per share for an Additional
Share of Common issued or deemed to be issued by the Corporation is less than
the Conversion Price in effect on the date of, and immediately prior to such
issue, for such share of Series A Preferred, Series B Preferred, Series C
Preferred or Series D Preferred.
(ii) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON.
(1) OPTIONS AND CONVERTIBLE SECURITIES. In the event the
Corporation at any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number) of Common issuable
upon the exercise of such Options or, in the case of Convertible Securities and
Options therefor the conversion or exchange of such Convertible Securities,
shall be deemed to be Additional Shares of Common issued as of the time of such
issue or, in case such a record date shall have been fixed, as of the close of
business on such record date, provided that, Additional Shares of Common shall
not be deemed to have been issued unless the consideration per share (determined
pursuant to Section 6(d)(iv) hereof) of such Additional Shares of Common would
be less than the Conversion Price in effect on the date of and immediately prior
to such issue, or such record date, as the case may be, and provided further,
that in any such case in which Additional Shares of Common are deemed to be
issued:
(A) no further adjustment in the Conversion Price shall
be made upon the subsequent issue of Convertible Securities or shares of Common
upon the exercise of such Options or conversion or exchange of such Convertible
Securities;
(B) notwithstanding the immediately preceding clause
(A), if such Options or Convertible Securities by their terms provide, with the
passage of time or otherwise, for any increase in the consideration payable to
the Corporation, or decrease in the number of shares of Common issuable, upon
the exercise, conversion or exchange thereof, the Conversion Price computed upon
the original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such increase
or decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities; and
8.
<PAGE>
(C) no readjustment pursuant to clause (B) above shall
have the effect of increasing the Conversion Price to an amount which exceeds
the lower of (i) the Conversion Price on the original adjustment date or (ii)
the Conversion Price that would have resulted from any issuance of Additional
Shares of Common between the original adjustment date and such readjustment
date.
(2) STOCK DIVIDENDS AND SUBDIVISION. In the event the
Corporation at any time or from time to time after the Original Issue Date shall
declare or pay any dividend on the Common payable in Common without declaring or
paying an equivalent dividend upon the Preferred, or effect a subdivision of the
outstanding shares of Common into a greater number of shares of Common (by
reclassification or otherwise than by payment of a dividend in Common) without
making a corresponding adjustment in the Preferred, then and in any such event
Additional Shares of Common shall be deemed to have been issued:
(A) in the case of any such dividend, immediately after
the close of business on the record date for the determination of holders of any
class of securities entitled to receive such dividend, or
(B) in the case of any such subdivision, at the close
of business on the date immediately prior to the date upon which such corporate
action becomes effective.
(iii) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL
SHARES OF COMMON. In the event the Corporation shall issue Additional Shares of
Common (including Additional Shares of Common deemed to be issued pursuant to
Section 6(d)(ii)) without consideration or for a consideration per share less
than the respective Conversion Price for Series A Preferred, Series B Preferred,
Series C Preferred or Series D Preferred in effect on the date of and
immediately prior to such issue, then and in such event, such respective
Conversion Price shall be reduced, concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying such respective
Conversion Price by a fraction, (A) the numerator of which shall be the number
of shares of Common outstanding immediately prior to such issue plus the number
of shares of Common which the aggregate consideration received by the
Corporation for the total number of Additional Shares of Common so issued would
purchase at such respective Conversion Price and (B) the denominator of which
shall be the number of shares of Common outstanding immediately prior to such
issue plus the number of such Additional Shares of Common so issued; and
provided further that, for the purposes of this Section 6(d)(iii), all shares of
Common issuable upon conversion of outstanding Convertible Securities shall be
deemed to be outstanding, and immediately after any Additional Shares of Common
are deemed issued pursuant to Section 6(d)(ii), such Additional Shares of Common
shall be deemed to be outstanding.
(iv) DETERMINATION OF CONSIDERATION. For purposes of this Section
6(d), the consideration received by the Corporation for the issue of any
Additional Shares of Common shall be computed as follows:
(1) CASH AND PROPERTY. Such consideration shall:
9.
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(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation after deduction of (i) any
expenses payable, directly or indirectly, by the Corporation, and (ii) any
underwriting or similar commissions, compensation, discounts or concessions paid
or allowed by the Corporation;
(B) insofar as it consists of property other than cash,
be computed at the fair value thereof at the time of such issue, as determined
in good faith by the Board of Directors; and
(C) in the event Additional Shares of Common are issued
together with other shares or securities or other assets of the Corporation for
consideration which covers both, be the proportion of such consideration so
received, computed as provided in clauses (A) and (B) above, as determined in
good faith by the Board of Directors.
(2) OPTIONS AND CONVERTIBLE SECURITIES. The consideration
per share received by the Corporation for Additional Shares of Common deemed to
have been issued pursuant to Section 6(d)(ii)(l), relating to Options and
Convertible Securities, shall be determined by dividing:
(x) the total amount, if any, received or receivable by
the Corporation as consideration for the issue of such Option or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Corporation upon the exercise of such Options or the conversion or exchange
of such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by
(y) the maximum number of shares of Common (as set
forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of Options or the conversion or exchange of such Convertible
Securities.
(v) ADJUSTMENT FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the
event the Corporation at any time or from time to time makes, or fixes a record
date for the determination of holders of Common entitled to receive, a dividend
or other distribution payable in securities of the Corporation other than shares
of Common, then and in such event provision shall be made so that the holders of
Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred shall receive upon conversion thereof, in addition to the number of
shares of Common receivable thereupon, the amount of securities of the
Corporation which they would have received had their Series A Preferred, Series
B Preferred, Series C Preferred or Series D Preferred been converted into Common
on the date of such event and had they thereafter, during the period from the
date of such event to and including the date of conversion, retained such
securities receivable by them as aforesaid during such period, subject to all
other adjustments called for during such period under this Section 6 with
respect to the rights of the holders of the Series A Preferred, Series B
Preferred, Series C Preferred and Series D Preferred.
10.
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(vi) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS.
If at any time or from time to time there is (1) a capital reorganization of the
Common (other than a recapitalization, subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this Section 6
or other than a transaction deemed to be a liquidation, dissolution or winding
up of the Corporation pursuant to Section 4(b) hereof) or (2) a merger or
consolidation of the Corporation with or into another corporation, or the sale
of all or substantially all of the Corporation's properties and assets to any
other person, as a part of such reorganization, merger, consolidation or sale,
the terms of which have been approved by a majority of the Series A Preferred,
Series B Preferred, Series C Preferred and Series D Preferred, then provision
shall be made so that the holders of the Series A Preferred, Series B Preferred,
Series C Preferred and Series D Preferred shall thereafter be entitled to
receive, upon conversion of the Series A Preferred, Series B Preferred, Series C
Preferred and Series D Preferred, the number of shares of stock or other
securities or property of the Corporation, or of the successor corporation
resulting from such merger or consolidation or sale, to which a holder of Common
deliverable upon conversion of the Series A Preferred, Series B Preferred,
Series C Preferred and Series D Preferred would have been entitled on such
capital reorganization, merger, consolidation, or sale. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 6 with respect to the rights of the holders of the Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred after
the reorganization, merger, consolidation or sale to the end that the provisions
of this Section 6 (including adjustment of the Conversion Price then in effect
and number of shares purchasable upon conversion of the Series A Preferred,
Series B Preferred, Series C Preferred and Series D Preferred) shall be
applicable after that event and be as nearly equivalent to the provisions hereof
as may be practicable.
(vii) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE, SUBSTITUTION AND
STOCK SPLIT. If the Common issuable upon conversion of the Series A Preferred,
Series B Preferred, Series C Preferred and/or Series D Preferred shall be
changed into the same or different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than with respect to any such change provided for above) the
Conversion Price then in effect shall, concurrently with the effectiveness of
such reorganization or reclassification, be proportionately adjusted such that
the Series A Preferred, Series B Preferred, Series C Preferred and/or Series D
Preferred shall be convertible into, in lieu of the number of shares of Common
which the holders would otherwise have been entitled to receive, a number of
shares of such other class or classes of stock equivalent to the number of
shares of Common that would have been subject to receipt by the holders upon
conversion of the Series A Preferred, Series B Preferred, Series C Preferred
and/or Series D Preferred immediately before that change. If the Corporation
effects a stock split or similar transaction with respect to the Common issuable
upon conversion of the Series A Preferred, Series B Preferred, Series C
Preferred and/or Series D Preferred, the Conversion Price then in effect shall,
concurrently with the effectiveness of such reverse stock split or stock
combination, be proportionately adjusted to reflect such stock split or similar
transaction.
(e) NO IMPAIRMENT. Without the consent of a majority of each of the
Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred Shares, voting as separate classes, the Corporation will not, by
amendment of its Articles of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of
11.
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any of the terms to be observed or performed hereunder by the Corporation, but
it will at all times in good faith assist in the carrying out of all of the
provisions of this Section 6 and in the taking of all such action as may be
necessary or appropriate in order to protect the respective Conversion Rights of
the holders of the Series A Preferred, Series B Preferred, Series C Preferred
and Series D Preferred against impairment.
(f) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section 6,
upon the request of any holder of Series A Preferred, Series B Preferred, Series
C Preferred or Series D Preferred, the Corporation, at its expense, shall
promptly compute such adjustment or readjustment and furnish to each respective
holder of Series A Preferred, Series B Preferred, Series C Preferred and Series
D Preferred a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Series A Preferred, Series B Preferred, Series C Preferred or Series D
Preferred, furnish or cause to be furnished to each holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the Conversion Price
in effect at the time, and (iii) the number of shares of Common and the amount,
if any, of other property which at the time would be received upon the
conversion of the Series A Preferred, Series B Preferred, Series C Preferred or
Series D Preferred.
(g) NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of the record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, the Corporation
shall mail to each respective holder of Series A Preferred, Series B Preferred,
Series C Preferred and/or Series D Preferred, at least twenty (20) days prior to
the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend or distribution.
(h) RESERVATION OF STOCK. The Corporation shall at all times reserve
and keep available out of its authorized but unissued shares of Common solely
for the purpose of effecting the respective conversion of the shares of the
Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred, such number of its shares of Common as shall from time to time be
sufficient to effect the respective conversion of all outstanding shares of
Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred; and if at any time the number of authorized but unissued shares of
Common shall not be sufficient to effect the conversion of all the then
outstanding shares of the Series A Preferred, Series B Preferred, Series C
Preferred and Series D Preferred, the Corporation will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common to such number of shares as shall be
sufficient for such purpose.
(i) NOTICES. Any notice required by the provisions of this Section 6
to be given to the holders of shares of Series A Preferred, Series B Preferred,
Series C Preferred and/or Series D Preferred shall be deemed given upon receipt.
Notice may be deposited in the United States certified or registered mail, first
class postage prepaid, or by personal (courier) delivery and addressed to each
holder of record of his address appearing on the books of the Corporation.
12.
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7. VOTING RIGHTS.
For the management of the business and for the conduct of the affairs
of the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
(a) The management of the business and the conduct of the affairs of
the corporation shall be vested in its Board of Directors. Prior to the closing
of the initial public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended (the "1933 Act"), covering the
offer and sale of Common Stock to the public (the "Initial Public Offering"),
the authorized number of directors which shall constitute the whole Board of
Directors shall be fixed at five (5) unless changed by the consent of the
holders of a majority of each of the Common, the Series A Preferred, the Series
B Preferred and the Series C Preferred, each voting as a separate class. With
respect to any election of directors to the Corporation's Board of Directors:
(1) the Series A Preferred shall have the right to elect two and only two
members of the Board, voting separately as a class, (2) the Series B Preferred
shall have the right to elect one and only one member of the Board, voting
separately as a class, (3) the Series C Preferred shall have the right to elect
one and only one member of the Board, voting separately as a class, and (4) the
Common shall have the right to elect one and only one member of the Board,
voting separately as a class.
(b) Any vacancy created on this Corporation's Board of Directors shall
be filled by a successor Director who shall be elected in the manner by which
his or her predecessor was elected, as provided above. Any Director who has been
elected to this Corporation's Board of Directors as provided above may be
removed during his/her term of office in accordance with Delaware General
Corporation Law, and any vacancy thereby created shall be filled as provided in
the immediately preceding sentence.
(c) Following the closing of the Initial Public Offering, the number
of directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.
(d) On all other matters to come before the stockholders, the Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred shall
have that number of votes per share (rounded up or down to the nearest whole
share) equivalent to the number of shares of Common into which a share of Series
A Preferred, Series B Preferred, Series C Preferred and Series D Preferred,
respectively, is convertible determined by reference to the Conversion Price
then in effect for such Series of Preferred at the record date of determination
of the holders of the shares entitled to vote or, if no such record date is
established, at the date such vote is taken or any written consent of the
stockholders is first solicited, which vote may be cast as provided by the laws
of the State of Delaware, the Corporation's Articles of Incorporation, and the
Corporation's Bylaws, and except those matters required by law to be submitted
to a class vote, shall vote with the holders of the Common Stock, and shall be
entitled to notice of any stockholders' meeting in accordance with the Bylaws of
the Corporation.
13.
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(e) Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, following the
Initial Public Offering, the directors shall be divided into three classes
designated as Class I, Class II and Class III, respectively. Directors shall be
assigned to each class in accordance with a resolution or resolutions adopted by
the Board of Directors. At the first annual meeting of stockholders following
the closing of the Initial Public Offering, the term of office of the Class I
directors shall expire and Class I directors shall be elected for a full term of
three years. At the second annual meeting of stockholders following the Closing
of the Initial Public Offering, the term of office of the Class II directors
shall expire and Class II directors shall be elected for a full term of three
years. At the third annual meeting of stockholders following the Closing of the
Initial Public Offering, the term of office of the Class III directors shall
expire and Class III directors shall be elected for a full term of three years.
At each succeeding annual meeting of stockholders, directors shall be elected
for a full term of three years to succeed the directors of the class whose terms
expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
(f) Subject to the rights of the holders of any series of Preferred
Stock, the Board of Directors or any individual director may be removed from
office at any time with cause by the affirmative vote of the holders of a
majority of the voting power of all of the then outstanding stock of the
Corporation entitled to vote at an election of directors (the "Voting Stock").
(g) Subject to the rights of the holders of any series of Preferred
Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.
(h) In the event that Section 2115(a) of the California Corporations
Code is applicable to this corporation, then the following shall apply:
(i) Every stockholder entitled to vote in any election of
directors of this corporation may cumulate such stockholder's votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the stockholder's shares are
otherwise entitled, or distribute the stockholder's votes on the same principle
among as many candidates as such stockholder thinks fit;
14.
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(ii) No stockholder, however, may cumulate such stockholder's
votes for one or more candidates unless (i) the names of such candidates have
been properly placed in nomination, in accordance with the Bylaws of the
corporation, prior to the voting, (ii) the stockholder has given advance notice
to the corporation of the intention to cumulative votes pursuant to the Bylaws,
and (iii) the stockholder has given proper notice to the other stockholders at
the meeting, prior to voting, of such stockholder's intention to cumulate such
stockholder's votes; and
(iii) If any stockholder has given proper notice, all
stockholders may cumulate their votes for any candidates who have been properly
placed in nomination. The candidates receiving the highest number of votes of
the shares entitled to be voted for them up to the number of directors to be
elected by such shares shall be declared elected.
(i) Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws
may be altered or amended or new Bylaws adopted by the affirmative vote of at
least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of
the then-outstanding shares of the Voting Stock. The Board of Directors shall
also have the power to adopt, amend or repeal Bylaws.
(i) The directors of the corporation need not be elected by
written ballot unless the Bylaws so provide.
(ii) No action shall be taken by the stockholders of the
corporation except at an annual or special meeting of stockholders called in
accordance with the Bylaws or by written consent of the stockholders in
accordance with the Bylaws prior to the closing of the Initial Public Offering
and following the closing of the Initial Public Offering no action shall be
taken by the stockholders by written consent.
(iii) Advance notice of stockholder nominations for the election
of directors and of business to be brought by stockholders before any meeting of
the stockholders of the corporation shall be given in the manner provided in the
Bylaws of the corporation.
8. COVENANTS.
(a) So long as any Series A, Series B, Series C or Series D Preferred
shall be outstanding, this Corporation shall not, without first obtaining the
respective affirmative vote or written consent of not less than a majority of
the outstanding shares of the holders of each of the Series A, Series B and
Series C and Series D Preferred, voting as separate classes:
(i) amend or repeal any provision of, or add any provision to,
this Corporation's Articles of Incorporation or Bylaws if such action would
alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, any Series A, Series B, Series C or
Series D Preferred;
(ii) authorize or issue shares of any class or series of stock
having any preference or priority as to dividends or assets superior to any such
preference or priority of the Series A, Series B or Series C Preferred, or
authorize or issue shares of stock of any class or any bonds, debentures, notes
or other obligations convertible into or exchangeable for, or having option
rights to purchase, any shares of stock of this Corporation having any
preference or
15.
<PAGE>
priority as to dividends or assets superior to any such preference or
priority of the Series A, Series B, Series C or Series D Preferred;
(iii) reclassify any Junior Shares into shares having any
preference or priority as to dividends or assets superior to any such preference
or priority of the Series A, Series B, Series C or Series D Preferred;
(iv) effect a merger, reorganization, or sale of the Corporation
or substantially all the Corporation's assets; or
(v) effect a reclassification or recapitalization of the
outstanding capital stock of the Corporation.
9. RESIDUAL RIGHTS. All rights accruing to the outstanding shares of the
Corporation not expressly provided for to the contrary herein shall be vested in
the Common.
V.
1. A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
2. Any repeal or modification of this Article V shall be prospective
and shall not affect the rights under this Article V in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VI.
The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute and all
rights conferred upon the stockholders herein are granted subject to this
reservation.
16.
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EXHIBIT 3.2
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
QUANTUM EFFECT DEVICES, INC.
QUANTUM EFFECT DEVICES, INC., a corporation organized and existing
under the laws of the state of Delaware (the "Corporation") hereby certifies
that:
1. The name of the Corporation is Quantum Effect Devices, Inc.
2. The date of filing of the Corporation's original Certificate of
Incorporation was September 9, 1999.
3. The date of filing of the Corporation's Amended and Restated
Certificate of Incorporation was December 28, 1999.
4. The Second Amended and Restated Certificate of Incorporation of the
Corporation as provided in Exhibit A hereto was duly adopted in accordance with
the provisions of Section 242 and Section 245 of the General Corporation Law of
the State of Delaware by the Board of Directors of the Corporation.
5. Pursuant to Section 245 of the Delaware General Corporation Law,
approval of the stockholders of the Corporation has been obtained.
6. The Second Amended and Restated Certificate of Incorporation so
adopted reads in full as set forth in Exhibit A attached hereto and is hereby
incorporated by reference.
IN WITNESS WHEREOF, the undersigned has signed this Amended and
Restated Certificate of Incorporation this ___ day of __________, 2000, and
hereby affirms and acknowledges under penalty of perjury that the filing of
this Amended and Restated of Incorporation is the act and deed of Quantum
Effect Devices, Inc.
QUANTUM EFFECT DEVICES, INC.
By
--------------------------------------
Thomas J. Riordan
President and Chief Executive Officer
1.
<PAGE>
EXHIBIT A
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
QUANTUM EFFECT DEVICES, INC.
I.
The name of this corporation is QUANTUM EFFECT DEVICES, INC.
II.
The address of the registered office of the corporation in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, and the
name of the registered agent of the corporation in the State of Delaware at such
address is the Corporation Research Company.
III.
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
IV.
A. This corporation is authorized to issue two classes of stock to
be designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the corporation is authorized to issue is One Hundred
Ten Million (110,000,000) shares. One Hundred Million (100,000,000) shares
shall be Common Stock, each having a par value of one-tenth of one cent
($.001). Ten Million (10,000,000) shares shall be Preferred Stock, each
having a par value of one-tenth of one cent ($.001).
B. The Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is hereby authorized, by filing a
certificate (a "Preferred Stock Designation") pursuant to the Delaware
General Corporation Law ("DGCL"), to fix or alter from time to time the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions of any wholly unissued
series of Preferred Stock, and to establish from time to time the number of
shares constituting any such series or any of them; and to increase or
decrease the number of shares of any series subsequent to the issuance of
shares of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be decreased in
accordance with the foregoing sentence, the shares constituting such decrease
shall resume the status that they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
2.
<PAGE>
V.
A. For the management of the business and for the conduct of the
affairs of the corporation, and in further definition, limitation and
regulation of the powers of the corporation, of its directors and of its
stockholders or any class thereof, as the case may be, it is further provided
that:
1. The management of the business and the conduct of the
affairs of the corporation shall be vested in its Board of Directors. The
number of directors which shall constitute the whole Board of Directors shall
be fixed exclusively by one or more resolutions adopted by the Board of
Directors.
2. BOARD OF DIRECTORS
a. Subject to the rights of the holders of any
series of Preferred Stock to elect additional directors under specified
circumstances, following the closing of the initial public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended (the "1993 Act"), covering the offer and sale of Common Stock to the
public (the "Initial Public Offering"), the directors shall be divided into
three classes designated as Class I, Class II and Class III, respectively.
Directors shall be assigned to each class in accordance with a resolution or
resolutions adopted by the Board of Directors. At the first annual meeting of
stockholders following the closing of the Initial Public Offering, the term
of office of the Class I directors shall expire and Class I directors shall
be elected for a full term of three years. At the second annual meeting of
stockholders following the Initial Public Offering, the term of office of the
Class II directors shall expire and Class II directors shall be elected for a
full term of three years. At the third annual meeting of stockholders
following the Initial Public Offering, the term of office of the Class III
directors shall expire and Class III directors shall be elected for a full
term of three years. At each succeeding annual meeting of stockholders,
directors shall be elected for a full term of three years to succeed the
directors of the class whose terms expire at such annual meeting. During such
time or times that the corporation is subject to Section 2115(b) of the
California General Corporation Law ("CGCL"), this Section A.2.a of this
Article V shall become effective and be applicable only when the corporation
is a "listed" corporation within the meaning of Section 301.5 of the CGCL.
b. In the event that the corporation (i) is
subject to Section 2115(b) of the CGCL AND (ii) is not a "listed" corporation
or ceases to be a "listed" corporation under Section 301.5 of the CGCL,
Section A. 2. a. of this Article V shall not apply and all directors shall be
shall be elected at each annual meeting of stockholders to hold office until
the next annual meeting.
c. No person entitled to vote at an election for
directors may cumulate votes to which such person is entitled, unless, at the
time of such election, the corporation (i) is subject to Section 2115(b) of
the CGCL AND (ii) is not a "listed" corporation or ceases to be a "listed"
corporation under Section 301.5 of the CGCL. During this time, every
stockholder
3.
<PAGE>
entitled to vote at an election for directors may cumulate such stockholder's
votes and give one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which such
stockholder's shares are otherwise entitled, or distribute the stockholder's
votes on the same principle among as many candidates as such stockholder
thinks fit. No stockholder, however, shall be entitled to so cumulate such
stockholder's votes unless (i) the names of such candidate or candidates have
been placed in nomination prior to the voting and (ii) the stockholder has
given notice at the meeting, prior to the voting, of such stockholder's
intention to cumulate such stockholder's votes. If any stockholder has given
proper notice to cumulate votes, all stockholders may cumulate their votes
for any candidates who have been properly placed in nomination. Under
cumulative voting, the candidates receiving the highest number of votes, up
to the number of directors to be elected, are elected.
Notwithstanding the foregoing provisions of this section, each director shall
serve until his successor is duly elected and qualified or until his death,
resignation or removal. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
3. REMOVAL OF DIRECTORS
a. During such time or times that the corporation is
subject to Section 2115(b) of the CGCL, the Board of Directors or any
individual director may be removed from office at any time without cause by
the affirmative vote of the holders of at least a majority of the outstanding
shares entitled to vote on such removal; provided, however, that unless the
entire Board is removed, no individual director may be removed when the votes
cast against such director's removal, or not consenting in writing to such
removal, would be sufficient to elect that director if voted cumulatively at
an election which the same total number of votes were cast (or, if such
action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the time of such director's
most recent election were then being elected.
b. At any time or times that the corporation is not
subject to Section 2115(b) of the CGCL and subject to any limitations imposed
by law, Section A. 3. a. above shall no longer apply. Subject to the rights of
the holders of any series of Preferred Stock, the Board of Directors or any
individual director may be removed from office at any time with cause by the
affirmative vote of the holders of a majority of the voting power of all of
the then outstanding stock of the Corporation entitled to vote at an
election of directors (the "Voting Stock").
4. VACANCIES
a. Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from
death, resignation, disqualification, removal or other causes and any newly
created directorships resulting from any increase in the number of directors,
shall, unless the Board of Directors determines by resolution that any such
vacancies or newly created directorships shall be filled by the stockholders,
except as otherwise provided by law, be filled only by the affirmative vote
of a majority of the directors then in
4.
<PAGE>
office, even though less than a quorum of the Board of Directors, and not by
the stockholders. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of the director
for which the vacancy was created or occurred and until such director's
successor shall have been elected and qualified.
b. If at the time of filling any vacancy or any newly
created directorship, the directors then in office shall constitute less than
a majority of the whole board (as constituted immediately prior to any such
increase), the Delaware Court of Chancery may, upon application of any
stockholder or stockholders holding at least ten percent (10%) of the total
number of the shares at the time outstanding having the right to vote for
such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen
by the directors then in offices as aforesaid, which election shall be
governed by Section 211 of the DGCL.
c. At any time or times that the corporation is subject to
Section 2115(b) of the CGCL, if, after the filling of any vacancy by the
directors then in office who have been elected by stockholders shall
constitute less than a majority of the directors then in office, then
(i) Any holder or holders of an aggregate of five
percent (5%) or more of the total number of shares at the time outstanding
having the right to vote for those directors may call a special meeting of
stockholders; or
(ii) The Superior Court of the proper county
shall, upon application of such stockholder or stockholders, summarily order
a special meeting of stockholders, to be held to elect the entire board, all
in accordance with Section 305(c) of the CGCL. The term of office of any
director shall terminate upon that election of a successor.
B.
1. BYLAW AMENDMENTS
Subject to paragraph (h) of Section 43 of the
Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the
affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of
the voting power of all of the then-outstanding shares of the voting stock of
the corporation entitled to vote. The Board of Directors shall also have the
power to adopt, amend, or repeal Bylaws.
2. The directors of the corporation need not be elected by
written ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the
corporation except at an annual or special meeting of stockholders called in
accordance with the Bylaws or by written consent of stockholders in
accordance with the Bylaws prior to the closing of the Initial Public
Offering and following the closing of the Initial Public Offering no action
shall be taken by the stockholders by written consent.
5.
<PAGE>
4. Advance notice of stockholder nominations for the
election of directors and of business to be brought by stockholders before
any meeting of the stockholders of the corporation shall be given in the
manner provided in the Bylaws of the corporation.
VI.
A. The liability of the directors for monetary damages shall be
eliminated to the fullest extent under applicable law.
B. A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which the director
derived an improper personal benefit. If the Delaware General Corporation Law
is amended after approval by the stockholders of this Article to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director shall be eliminated or limited to
the fullest extent permitted by the Delaware General Corporation Law, as so
amended.
C. Any repeal or modification of this Article VI shall be
prospective and shall not affect the rights under this Article VI in effect
at the time of the alleged occurrence of any act or omission to act giving
rise to liability or indemnification.
VII.
A. The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, except
as provided in paragraph B. of this Article VII, and all rights conferred
upon the stockholders herein are granted subject to this reservation.
B. Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation or any provision of law which might otherwise
permit a lesser vote or no vote, but in addition to any affirmative vote of
the holders of any particular class or series of the Voting Stock required by
law, this Amended and Restated Certificate of Incorporation or any Preferred
Stock Designation, the affirmative vote of the holders of at least sixty-six
and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of the voting stock, voting together as a single
class, shall be required to alter, amend or repeal Articles V, VI, and VII.
6.
<PAGE>
EXHIBIT 10.2
QUANTUM EFFECT DEVICES, INC.
1999 EQUITY INCENTIVE PLAN
1992 STOCK OPTION PLAN ADOPTED JULY 6, 1992
APPROVED BY STOCKHOLDERS JULY 6, 1992
1997 STOCK OPTION PLAN ADOPTED APRIL 1, 1997
APPROVED BY STOCKHOLDERS APRIL 1, 1997
1992 AND 1997 STOCK OPTION PLANS WERE AMENDED AND
RESTATED ON SEPTEMBER 1, 1999 AS 1999 EQUITY
INCENTIVE PLAN
APPROVED BY STOCKHOLDERS NOVEMBER 23, 1999
AMENDED JANUARY 11, 2000 (STOCKHOLDER APPROVAL NOT REQUIRED)
TERMINATION DATE: AUGUST 31, 2009
1. PURPOSES.
(a) AMENDMENT AND RESTATEMENT. The Plan is an amendment and restatement of
the 1992 Stock Option Plan and the 1997 Stock Option Plan (the "Initial Plans").
The Initial Plans hereby are amended and restated in their entirety and renamed
the 1999 Equity Incentive Plan effective as of September 1, 1999. The terms of
the Initial Plans (other than the aggregate number of shares issuable
thereunder) shall remain in effect and apply to all Stock Awards granted
pursuant to the Initial Plans.
(b) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive Stock
Awards are the Employees, Directors and Consultants of the Company and its
Affiliates.
(c) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a means
by which eligible recipients of Stock Awards may be given an opportunity to
benefit from increases in value of the Common Stock through the granting of the
following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) stock bonuses and (iv) rights to acquire restricted stock.
(d) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the
services of the group of persons eligible to receive Stock Awards, to secure and
retain the services of new members of this group and to provide incentives for
such persons to exert maximum efforts for the success of the Company and its
Affiliates.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation of
the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
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(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a committee of one or more members of the Board
appointed by the Board in accordance with subsection 3(c).
(e) "COMMON STOCK" means the common stock of the Company.
(f) "COMPANY" means Quantum Effect Devices, Inc., a California corporation,
which will be reincorporated in the State of Delaware.
(g) "CONSULTANT" means any person, including an advisor, (i) engaged by the
Company or an Affiliate to render consulting or advisory services and who is
compensated for such services or (ii) who is a member of the Board of Directors
of an Affiliate. However, the term "Consultant" shall not include either
Directors who are not compensated by the Company for their services as Directors
or Directors who are merely paid a director's fee by the Company for their
services as Directors.
(h) "CONTINUOUS SERVICE" means that the Participant's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Participant's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Participant renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Participant
renders such service, provided that there is no interruption or termination of
the Participant's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or a Director will not
constitute an interruption of Continuous Service. The Board or the chief
executive officer of the Company, in that party's sole discretion, may determine
whether Continuous Service shall be considered interrupted in the case of any
leave of absence approved by that party, including sick leave, military leave or
any other personal leave.
(i) "COVERED EMPLOYEE" means the chief executive officer and the four (4)
other highest compensated officers of the Company for whom total compensation is
required to be reported to stockholders under the Exchange Act, as determined
for purposes of Section 162(m) of the Code.
(j) "DIRECTOR" means a member of the Board of Directors of the Company.
(k) "DISABILITY" means (i) before the Listing Date, the inability of a
person, in the opinion of a qualified physician acceptable to the Company, to
perform the major duties of that person's position with the Company or an
Affiliate of the Company because of the sickness or injury of the person and
(ii) after the Listing Date, the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.
(l) "EMPLOYEE" means any person employed by the Company or an Affiliate.
Mere service as a Director or payment of a director's fee by the Company or an
Affiliate shall not be sufficient to constitute "employment" by the Company or
an Affiliate.
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(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or
traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair
Market Value of a share of Common Stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or market (or the exchange or market with the greatest volume of
trading in the Common Stock) on the last market trading day prior to the day of
determination, as reported in THE WALL STREET JOURNAL or such other source as
the Board deems reliable.
(ii) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined in good faith by the Board.
(iii) Prior to the Listing Date, the value of the Common Stock shall
be determined in a manner consistent with Section 260.140.50 of Title 10 of the
California Code of Regulations.
(o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(p) "LISTING DATE" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system if
such securities exchange or interdealer quotation system has been certified in
accordance with the provisions of Section 25100(o) of the California Corporate
Securities Law of 1968.
(q) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or a subsidiary, does
not receive compensation (directly or indirectly) from the Company or its parent
or a subsidiary for services rendered as a consultant or in any capacity other
than as a Director (except for an amount as to which disclosure would not be
required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act ("Regulation S-K")), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(r) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as
an Incentive Stock Option.
(s) "OFFICER" means (i) before the Listing Date, any person designated by
the Company as an officer and (ii) on and after the Listing Date, a person who
is an officer of the
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Company within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(t) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock Option
granted pursuant to the Plan.
(u) "OPTION AGREEMENT" means a written agreement between the Company and an
Optionholder evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(v) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to
the Plan or, if applicable, such other person who holds an outstanding Option.
(w) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury Regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(x) "PARTICIPANT" means a person to whom a Stock Award is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding Stock
Award.
(y) "PLAN" means this Quantum Effect Devices, Inc. 1999 Equity Incentive
Plan.
(z) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any
successor to Rule 16b-3, as in effect from time to time.
(aa) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(bb) "STOCK AWARD" means any right granted under the Plan, including an
Option, a stock bonus and a right to acquire restricted stock.
(cc) "STOCK AWARD AGREEMENT" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
(dd) "TEN PERCENT STOCKHOLDER" means a person who owns (or is deemed to own
pursuant to Section 424(d) of the Code) stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or of any of its Affiliates.
3. ADMINISTRATION.
(a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless and
until the Board delegates administration to a Committee, as provided in
subsection 3(c).
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(b) POWERS OF BOARD. The Board shall have the power, subject to, and within
the limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible under
the Plan shall be granted Stock Awards; when and how each Stock Award shall be
granted; what type or combination of types of Stock Award shall be granted; the
provisions of each Stock Award granted (which need not be identical), including
the time or times when a person shall be permitted to receive Common Stock
pursuant to a Stock Award; and the number of shares of Common Stock with respect
to which a Stock Award shall be granted to each such person.
(ii) To construe and interpret the Plan and Stock Awards granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in Section 12.
(iv) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) DELEGATION TO COMMITTEE.
(i) GENERAL. The Board may delegate administration of the Plan to a
Committee or Committees of one (1) or more members of the Board, and the term
"Committee" shall apply to any person or persons to whom such authority has been
delegated. If administration is delegated to a Committee, the Committee shall
have, in connection with the administration of the Plan, the powers theretofore
possessed by the Board, including the power to delegate to a subcommittee any of
the administrative powers the Committee is authorized to exercise (and
references in this Plan to the Board shall thereafter be to the Committee or
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
(ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED. At
such time as the Common Stock is publicly traded, in the discretion of the
Board, a Committee may consist solely of two or more Outside Directors, in
accordance with Section 162(m) of the Code, and/or solely of two or more
Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of such
authority, the Board or the Committee may (1) delegate to a committee of one or
more members of the Board who are not Outside Directors the authority to grant
Stock Awards to eligible persons who are either (a) not then Covered Employees
and are not expected to be Covered Employees at the time of recognition of
income resulting from such Stock Award or (b) not persons with respect to whom
the Company wishes to comply with Section 162(m) of the Code and/or) (2)
delegate to a committee of one or more members of the Board who are not
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Non-Employee Directors the authority to grant Stock Awards to eligible persons
who are not then subject to Section 16 of the Exchange Act.
(d) EFFECT OF BOARD'S DECISION. All determinations, interpretations and
constructions made by the Board in good faith shall not be subject to review by
any person and shall be final, binding and conclusive on all persons.
4. SHARES SUBJECT TO THE PLAN.
(a) SHARE RESERVE. Subject to the provisions of Section 11 relating to
adjustments upon changes in Common Stock, the Common Stock that may be issued
pursuant to Stock Awards shall not exceed in the aggregate ten million five
hundred thousand (10,500,000) shares of Common Stock (4.6 million shares
reserved under the 1992 Stock Option Plan plus 4.5 million shares reserved under
the 1997 Stock Option Plan plus 1.4 million share increase).
(b) ADDITIONAL SHARES. The aggregate number of shares of Common Stock that
may be issued pursuant to Awards granted under the Plan as specified in
subsection 4(a) shall automatically be increased as follows:
(i) For a period of ten (10) years, commencing on June 30, 2000 and
ending on June 30, 2009, the aggregate number of shares of Common Stock
specified in paragraph 4(a) hereof automatically shall be increased each June
(the "Calculation Date") by the greater of (1) five percent (5%) of the Diluted
Shares Outstanding on the Calculation Date, or (2) that number of shares subject
to Awards granted under the Plan during the prior 12-month period.
(ii) "Diluted Shares Outstanding" means the number of outstanding
shares of Common Stock on the Calculation Date, plus the number of shares of
Common Stock issuable upon the Calculation Date assuming the conversion of all
outstanding Preferred Stock and convertible notes, plus the additional number of
dilutive Common Stock equivalent shares outstanding as the result of any options
or warrants outstanding during the prior 12-month period, calculated using the
treasury stock method.
(iii) The maximum aggregate number of shares of Common Stock that are
available for issuance as Incentive Stock Options under the Plan shall not
exceed twenty three million one hundred thousand (23,100,000) shares of Common
Stock.
(c) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall for
any reason expire or otherwise terminate, in whole or in part, without having
been exercised in full, the shares of Common Stock not acquired under such Stock
Award shall revert to and again become available for issuance under the Plan.
If the Company repurchases any unvested shares issued of Common Stock under a
Stock Award, such repurchased shares of Common Stock shall revert to and
again become available for issuance under the Plan for all Stock Awards other
than Incentive Stock Options.
(d) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may be
unissued shares or reacquired shares, bought on the market or otherwise.
(e) SHARE RESERVE LIMITATION. Prior to the Listing Date and to the extent
then required by Section 260.140.45 of Title 10 of the California Code of
Regulations, the total
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number of shares of Common Stock issuable upon exercise of all outstanding
Options and the total number of shares of Common Stock provided for under any
stock bonus or similar plan of the Company shall not exceed the applicable
percentage as calculated in accordance with the conditions and exclusions of
Section 260.140.45 of Title 10 of the California Code of Regulations, based on
the shares of Common Stock of the Company that are outstanding at the time the
calculation is made.
5. ELIGIBILITY.
(a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may be
granted only to Employees. Stock Awards other than Incentive Stock Options may
be granted to Employees, Directors and Consultants.
(b) TEN PERCENT STOCKHOLDERS.
(i) A Ten Percent Stockholder shall not be granted an Incentive Stock
Option unless the exercise price of such Option is at least one hundred ten
percent (110%) of the Fair Market Value of the Common Stock at the date of grant
and the Option is not exercisable after the expiration of five (5) years from
the date of grant.
(ii) Prior to the Listing Date, a Ten Percent Stockholder shall not be
granted a Nonstatutory Stock Option unless the exercise price of such Option is
at least (i) one hundred ten percent (110%) of the Fair Market Value of the
Common Stock at the date of grant or (ii) such lower percentage of the Fair
Market Value of the Common Stock at the date of grant as is permitted by Section
260.140.41 of Title 10 of the California Code of Regulations at the time of the
grant of the Option.
(iii) Prior to the Listing Date, a Ten Percent Stockholder shall not
be granted a restricted stock award unless the purchase price of the restricted
stock is at least (i) one hundred percent (100%) of the Fair Market Value of the
Common Stock at the date of grant or (ii) such lower percentage of the Fair
Market Value of the Common Stock at the date of grant as is permitted by Section
260.140.41 of Title 10 of the California Code of Regulations at the time of the
grant of the Option.
(c) SECTION 162(m) LIMITATION. Subject to the provisions of Section 11
relating to adjustments upon changes in the shares of Common Stock, no Employee
shall be eligible to be granted Options covering more than seven hundred
thousand (700,000) shares of Common Stock during any calendar year. This
subsection 5(c) shall not apply prior to the Listing Date and, following the
Listing Date, this subsection 5(c) shall not apply until (i) the earliest of:
(1) the first material modification of the Plan (including any increase in the
number of shares of Common Stock reserved for issuance under the Plan in
accordance with Section 4); (2) the issuance of all of the shares of Common
Stock reserved for issuance under the Plan; (3) the expiration of the Plan; or
(4) the first meeting of stockholders at which Directors are to be elected that
occurs after the close of the third calendar year following the calendar year in
which occurred the first registration of an equity security under Section 12 of
the Exchange Act; or (ii)
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such other date required by Section 162(m) of the Code and the rules and
regulations promulgated thereunder.
(d) CONSULTANTS.
(i) Prior to the Listing Date, a Consultant shall not be eligible for
the grant of a Stock Award if, at the time of grant, either the offer or the
sale of the Company's securities to such Consultant is not exempt under Rule 701
of the Securities Act ("Rule 701") because of the nature of the services that
the Consultant is providing to the Company, or because the Consultant is not a
natural person, or as otherwise provided by Rule 701, unless the Company
determines that such grant need not comply with the requirements of Rule 701 and
will satisfy another exemption under the Securities Act as well as comply with
the securities laws of all other relevant jurisdictions.
(ii) From and after the Listing Date, a Consultant shall not be
eligible for the grant of a Stock Award if, at the time of grant, a Form S-8
Registration Statement under the Securities Act ("Form S-8") is not available to
register either the offer or the sale of the Company's securities to such
Consultant because of the nature of the services that the Consultant is
providing to the Company, or because the Consultant is not a natural person, or
as otherwise provided by the rules governing the use of Form S-8, unless the
Company determines both (i) that such grant (A) shall be registered in another
manner under the Securities Act (E.G., on a Form S-3 Registration Statement) or
(B) does not require registration under the Securities Act in order to comply
with the requirements of the Securities Act, if applicable, and (ii) that such
grant complies with the securities laws of all other relevant jurisdictions.
(iii) Rule 701 and Form S-8 generally are available to consultants and
advisors only if (1) they are natural persons; (2) they provide bona fide
services to the issuer, its parents, its majority-owned subsidiaries or (for
Rule 701 purposes only) majority-owned subsidiaries of the issuer's parent; and
(3) the services are not in connection with the offer or sale of securities in a
capital-raising transaction, and do not directly or indirectly promote or
maintain a market for the issuer's securities.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock Options or Nonstatutory Stock Options at the time of
grant, and, if certificates are issued, a separate certificate or certificates
will be issued for shares of Common Stock purchased on exercise of each type of
Option. The provisions of separate Options need not be identical, but each
Option shall include (through incorporation of provisions hereof by reference in
the Option or otherwise) the substance of each of the following provisions:
(a) TERM. Subject to the provisions of subsection 5(b) regarding Ten
Percent Stockholders, no Option granted prior to the Listing Date shall be
exercisable after the expiration of ten (10) years from the date it was granted,
and no Incentive Stock Option granted on or after
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the Listing Date shall be exercisable after the expiration of ten (10) years
from the date it was granted.
(b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise
price of each Incentive Stock Option shall be not less than one hundred percent
(100%) of the Fair Market Value of the Common Stock subject to the Option on the
date the Option is granted. Notwithstanding the foregoing, an Incentive Stock
Option may be granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.
(c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise
price of each Nonstatutory Stock Option granted prior to the Listing Date shall
be not less than eighty-five percent (85%) of the Fair Market Value of the
Common Stock subject to the Option on the date the Option is granted. The
exercise price of each Nonstatutory Stock Option granted on or after the Listing
Date shall be not less than eighty-five percent (85%) of the Fair Market Value
of the Common Stock subject to the Option on the date the Option is granted.
Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with
an exercise price lower than that set forth in the preceding sentence if such
Option is granted pursuant to an assumption or substitution for another option
in a manner satisfying the provisions of Section 424(a) of the Code.
(d) CONSIDERATION. The purchase price of Common Stock acquired
pursuant to an Option shall be paid, to the extent permitted by applicable
statutes and regulations, either (i) in cash at the time the Option is exercised
or (ii) at the discretion of the Board at the time of the grant of the Option
(or subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to
the Company of other Common Stock, (2) according to a deferred payment or other
similar arrangement with the Optionholder or (3) in any other form of legal
consideration that may be acceptable to the Board. Unless otherwise specifically
provided in the Option, the purchase price of Common Stock acquired pursuant to
an Option that is paid by delivery to the Company of other Common Stock
acquired, directly or indirectly from the Company, shall be paid only by shares
of the Common Stock of the Company that have been held for more than six (6)
months (or such longer or shorter period of time required to avoid a charge to
earnings for financial accounting purposes). At any time that the Company is
incorporated in Delaware, payment of the Common Stock's "par value," as defined
in the Delaware General Corporation Law, shall not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock
Option shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder. Notwithstanding
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the foregoing, the Optionholder may, by delivering written notice to the
Company, in a form satisfactory to the Company, designate a third party who, in
the event of the death of the Optionholder, shall thereafter be entitled to
exercise the Option.
(f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory
Stock Option granted prior to the Listing Date shall not be transferable except
by will or by the laws of descent and distribution and, to the extent provided
in the Option Agreement, to such further extent as permitted by Section
260.140.41(d) of Title 10 of the California Code of Regulations at the time of
the grant of the Option, and shall be exercisable during the lifetime of the
Optionholder only by the Optionholder. A Nonstatutory Stock Option granted on or
after the Listing Date shall be transferable to the extent provided in the
Option Agreement. If the Nonstatutory Stock Option does not provide for
transferability, then the Nonstatutory Stock Option shall not be transferable
except by will or by the laws of descent and distribution and shall be
exercisable during the lifetime of the Optionholder only by the Optionholder.
Notwithstanding the foregoing, the Optionholder may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionholder, shall thereafter be
entitled to exercise the Option.
(g) VESTING GENERALLY. The total number of shares of Common Stock
subject to an Option may, but need not, vest and therefore become exercisable in
periodic installments that may, but need not, be equal. The Option may be
subject to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board may
deem appropriate. The vesting provisions of individual Options may vary. The
provisions of this subsection 6(g) are subject to any Option provisions
governing the minimum number of shares of Common Stock as to which an Option may
be exercised.
(h) MINIMUM VESTING PRIOR TO THE LISTING DATE. Notwithstanding the
foregoing subsection 6(g), to the extent that the following restrictions on
vesting are required by Section 260.140.41(f) of Title 10 of the California Code
of Regulations at the time of the grant of the Option, then:
(i) Options granted prior to the Listing Date to an Employee who
is not an Officer, Director or Consultant shall provide for vesting of the total
number of shares of Common Stock at a rate of at least twenty percent (20%) per
year over five (5) years from the date the Option was granted, subject to
reasonable conditions such as continued employment; and
(ii) Options granted prior to the Listing Date to Officers,
Directors or Consultants may be made fully exercisable, subject to reasonable
conditions such as continued employment, at any time or during any period
established by the Company.
(i) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise such Option as of the date of
termination) but only within such period of time ending on the earlier of (i)
the date three (3) months following the termination of the Optionholder's
Continuous Service
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(or such longer or shorter period specified in the Option Agreement, which
period shall not be less than thirty (30) days for Options granted prior to the
Listing Date unless such termination is for cause), or (ii) the expiration of
the term of the Option as set forth in the Option Agreement. If, after
termination, the Optionholder does not exercise his or her Option within the
time specified in the Option Agreement, the Option shall terminate.
(j) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement
may also provide that if the exercise of the Option following the termination of
the Optionholder's Continuous Service (other than upon the Optionholder's death
or Disability) would be prohibited at any time solely because the issuance of
shares of Common Stock would violate the registration requirements under the
Securities Act, then the Option shall terminate on the earlier of (i) the
expiration of the term of the Option set forth in subsection 6(a) or (ii) the
expiration of a period of three (3) months after the termination of the
Optionholder's Continuous Service during which the exercise of the Option would
not be in violation of such registration requirements.
(k) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise such Option as of the date of termination), but only
within such period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period specified in
the Option Agreement, which period shall not be less than six (6) months for
Options granted prior to the Listing Date) or (ii) the expiration of the term of
the Option as set forth in the Option Agreement. If, after termination, the
Optionholder does not exercise his or her Option within the time specified
herein, the Option shall terminate.
(l) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's
Continuous Service terminates as a result of the Optionholder's death or (ii)
the Optionholder dies within the period (if any) specified in the Option
Agreement after the termination of the Optionholder's Continuous Service for a
reason other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise such Option as of the date of death) by
the Optionholder's estate, by a person who acquired the right to exercise the
Option by bequest or inheritance or by a person designated to exercise the
option upon the Optionholder's death pursuant to subsection 6(e) or 6(f), but
only within the period ending on the earlier of (1) the date eighteen (18)
months following the date of death (or such longer or shorter period specified
in the Option Agreement, which period shall not be less than six (6) months for
Options granted prior to the Listing Date) or (2) the expiration of the term of
such Option as set forth in the Option Agreement. If, after death, the Option is
not exercised within the time specified herein, the Option shall terminate.
(m) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares of Common Stock subject to the Option prior to the full vesting of
the Option. Subject to the "Repurchase Limitation" in subsection 10(h), any
unvested shares of Common Stock so purchased may be subject to a repurchase
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option in favor of the Company or to any other restriction the Board determines
to be appropriate. Provided that the "Repurchase Limitation" in subsection 10(h)
is not violated, the Company will not exercise its repurchase option until at
least six (6) months (or such longer or shorter period of time required to avoid
a charge to earnings for financial accounting purposes) have elapsed following
exercise of the Option unless the Board otherwise specifically provides in the
Option.
(n) RIGHT OF REPURCHASE. Subject to the "Repurchase Limitation" in
subsection 10(h), the Option may, but need not, include a provision whereby the
Company may elect, prior to the Listing Date, to repurchase all or any part of
the vested shares of Common Stock acquired by the Optionholder pursuant to the
exercise of the Option. Provided that the "Repurchase Limitation" in subsection
10(h) is not violated, the Company will not exercise its repurchase option until
at least six (6) months (or such longer or shorter period of time required to
avoid a charge to earnings for financial accounting purposes) have elapsed
following exercise of the Option unless the Board otherwise specifically
provides in the Option.
(o) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to exercise
a right of first refusal following receipt of notice from the Optionholder of
the intent to transfer all or any part of the shares of Common Stock received
upon the exercise of the Option. Except as expressly provided in this subsection
6(o), such right of first refusal shall otherwise comply with any applicable
provisions of the Bylaws of the Company.
(p) RE-LOAD OPTIONS.
(i) Without in any way limiting the authority of the Board to
make or not to make grants of Options hereunder, the Board shall have the
authority (but not an obligation) to include as part of any Option Agreement a
provision entitling the Optionholder to a further Option (a "Re-Load Option") in
the event the Optionholder exercises the Option evidenced by the Option
Agreement, in whole or in part, by surrendering other shares of Common Stock in
accordance with this Plan and the terms and conditions of the Option Agreement.
Unless otherwise specifically provided in the Option, the Optionholder shall not
surrender shares of Common Stock acquired, directly or indirectly from the
Company, unless such shares have been held for more than six (6) months (or such
longer or shorter period of time required to avoid a charge to earnings for
financial accounting purposes).
(ii) Any such Re-Load Option shall (1) provide for a number of
shares of Common Stock equal to the number of shares of Common Stock surrendered
as part or all of the exercise price of such Option; (2) have an expiration date
which is the same as the expiration date of the Option the exercise of which
gave rise to such Re-Load Option; and (3) have an exercise price which is equal
to one hundred percent (100%) of the Fair Market Value of the Common Stock
subject to the Re-Load Option on the date of exercise of the original Option.
Notwithstanding the foregoing, a Re-Load Option shall be subject to the same
exercise price and term provisions heretofore described for Options under the
Plan.
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(iii) Any such Re-Load Option may be an Incentive Stock Option or
a Nonstatutory Stock Option, as the Board may designate at the time of the grant
of the original Option; provided, however, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollar ($100,000) annual limitation on the exercisability of Incentive Stock
Options described in subsection 10(d) and in Section 422(d) of the Code. There
shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall
be subject to the availability of sufficient shares of Common Stock under
subsection 4(a) and the "Section 162(m) Limitation" on the grants of Options
under subsection 5(c) and shall be subject to such other terms and conditions as
the Board may determine which are not inconsistent with the express provisions
of the Plan regarding the terms of Options.
7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.
(a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such
form and shall contain such terms and conditions as the Board shall deem
appropriate. The terms and conditions of stock bonus agreements may change from
time to time, and the terms and conditions of separate stock bonus agreements
need not be identical, but each stock bonus agreement shall include (through
incorporation of provisions hereof by reference in the agreement or otherwise)
the substance of each of the following provisions:
(i) CONSIDERATION. A stock bonus may be awarded in consideration
for past services actually rendered to the Company or an Affiliate for its
benefit.
(ii) VESTING. Subject to the "Repurchase Limitation" in
subsection 10(h), shares of Common Stock awarded under the stock bonus agreement
may, but need not, be subject to a share repurchase option in favor of the
Company in accordance with a vesting schedule to be determined by the Board.
(iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject to
the "Repurchase Limitation" in subsection 10(h), in the event a Participant's
Continuous Service terminates, the Company may reacquire any or all of the
shares of Common Stock held by the Participant which have not vested as of the
date of termination under the terms of the stock bonus agreement.
(iv) TRANSFERABILITY. For a stock bonus award made before the
Listing Date, rights to acquire shares of Common Stock under the stock bonus
agreement shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Participant
only by the Participant. For a stock bonus award made on or after the Listing
Date, rights to acquire shares of Common Stock under the stock bonus agreement
shall be transferable by the Participant only upon such terms and conditions as
are set forth in the stock bonus agreement, as the Board shall determine in its
discretion, so long as Common Stock awarded under the stock bonus agreement
remains subject to the terms of the stock bonus agreement.
(b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement
shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate. The
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terms and conditions of the restricted stock purchase agreements may change from
time to time, and the terms and conditions of separate restricted stock purchase
agreements need not be identical, but each restricted stock purchase agreement
shall include (through incorporation of provisions hereof by reference in the
agreement or otherwise) the substance of each of the following provisions:
(i) PURCHASE PRICE. Subject to the provisions of subsection 5(b)
regarding Ten Percent Stockholders, the purchase price under each restricted
stock purchase agreement shall be such amount as the Board shall determine and
designate in such restricted stock purchase agreement. For restricted stock
awards made prior to the Listing Date, the purchase price shall not be less than
eighty-five percent (85%) of the Common Stock's Fair Market Value on the date
such award is made or at the time the purchase is consummated. For restricted
stock awards made on or after the Listing Date, the purchase price shall not be
less than eighty-five percent (85%) of the Common Stock's Fair Market Value on
the date such award is made or at the time the purchase is consummated.
(ii) CONSIDERATION. The purchase price of Common Stock acquired
pursuant to the restricted stock purchase agreement shall be paid either: (i) in
cash at the time of purchase; (ii) at the discretion of the Board, according to
a deferred payment or other similar arrangement with the Participant; or (iii)
in any other form of legal consideration that may be acceptable to the Board in
its discretion; provided, however, that at any time that the Company is
incorporated in Delaware, then payment of the Common Stock's "par value," as
defined in the Delaware General Corporation Law, shall not be made by deferred
payment.
(iii) VESTING. Subject to the "Repurchase Limitation" in subsection
10(h), shares of Common Stock acquired under the restricted stock purchase
agreement may, but need not, be subject to a share repurchase option in favor of
the Company in accordance with a vesting schedule to be determined by the Board.
(iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject to the
"Repurchase Limitation" in subsection 10(h), in the event a Participant's
Continuous Service terminates, the Company may repurchase or otherwise reacquire
any or all of the shares of Common Stock held by the Participant which have not
vested as of the date of termination under the terms of the restricted stock
purchase agreement.
(v) TRANSFERABILITY. For a restricted stock award made before the
Listing Date, rights to acquire shares of Common Stock under the restricted
stock purchase agreement shall not be transferable except by will or by the laws
of descent and distribution and shall be exercisable during the lifetime of the
Participant only by the Participant. For a restricted stock award made on or
after the Listing Date, rights to acquire shares of Common Stock under the
restricted stock purchase agreement shall be transferable by the Participant
only upon such terms and conditions as are set forth in the restricted stock
purchase agreement, as the Board shall determine in its discretion, so long as
Common Stock awarded under the restricted stock purchase agreement remains
subject to the terms of the restricted stock purchase agreement.
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8. COVENANTS OF THE COMPANY.
(a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.
(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from
each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Stock Awards and to issue and sell shares
of Common Stock upon exercise of the Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any
such Stock Award. If, after reasonable efforts, the Company is unable to obtain
from any such regulatory commission or agency the authority which counsel for
the Company deems necessary for the lawful issuance and sale of Common Stock
under the Plan, the Company shall be relieved from any liability for failure to
issue and sell Common Stock upon exercise of such Stock Awards unless and until
such authority is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of Common Stock pursuant to Stock Awards shall
constitute general funds of the Company.
10. MISCELLANEOUS.
(a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have
the power to accelerate the time at which a Stock Award may first be exercised
or the time during which a Stock Award or any part thereof will vest in
accordance with the Plan, notwithstanding the provisions in the Stock Award
stating the time at which it may first be exercised or the time during which it
will vest.
(b) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the
holder of, or to have any of the rights of a holder with respect to, any shares
of Common Stock subject to such Stock Award unless and until such Participant
has satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
(c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant any right to continue to serve the Company or an Affiliate in
the capacity in effect at the time the Stock Award was granted or shall affect
the right of the Company or an Affiliate to terminate (i) the employment of an
Employee with or without notice and with or without cause, (ii) the service of a
Consultant pursuant to the terms of such Consultant's agreement with the Company
or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the
Company or an Affiliate, and any applicable provisions of the corporate law of
the state in which the Company or the Affiliate is incorporated, as the case may
be.
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(d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the
aggregate Fair Market Value (determined at the time of grant) of Common Stock
with respect to which Incentive Stock Options are exercisable for the first time
by any Optionholder during any calendar year (under all plans of the Company and
its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or
portions thereof which exceed such limit (according to the order in which they
were granted) shall be treated as Nonstatutory Stock Options.
(e) INVESTMENT ASSURANCES. The Company may require a Participant, as a
condition of exercising or acquiring Common Stock under any Stock Award, (i) to
give written assurances satisfactory to the Company as to the Participant's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (ii) to
give written assurances satisfactory to the Company stating that the Participant
is acquiring Common Stock subject to the Stock Award for the Participant's own
account and not with any present intention of selling or otherwise distributing
the Common Stock. The foregoing requirements, and any assurances given pursuant
to such requirements, shall be inoperative if (iii) the issuance of the shares
of Common Stock upon the exercise or acquisition of Common Stock under the Stock
Award has been registered under a then currently effective registration
statement under the Securities Act or (iv) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the Common Stock.
(f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a
Stock Award Agreement, the Participant may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of Common
Stock under a Stock Award by any of the following means (in addition to the
Company's right to withhold from any compensation paid to the Participant by the
Company) or by a combination of such means: (i) tendering a cash payment; (ii)
authorizing the Company to withhold shares of Common Stock from the shares of
Common Stock otherwise issuable to the Participant as a result of the exercise
or acquisition of Common Stock under the Stock Award, provided, however, that no
shares of Common Stock are withheld with a value exceeding the minimum amount of
tax required to be withheld by law; or (iii) delivering to the Company owned and
unencumbered shares of Common Stock.
(g) INFORMATION OBLIGATION. Prior to the Listing Date, to the extent
required by Section 260.140.46 of Title 10 of the California Code of
Regulations, the Company shall deliver financial statements to Participants at
least annually. This subsection 10(g) shall not apply to key Employees whose
duties in connection with the Company assure them access to equivalent
information.
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(h) REPURCHASE LIMITATION. The terms of any repurchase option shall be
specified in the Stock Award and may be either at Fair Market Value at the time
of repurchase or at not less than the original purchase price. To the extent
required by Section 260.140.41 and Section 260.140.42 of Title 10 of the
California Code of Regulations at the time a Stock Award is made, any repurchase
option contained in a Stock Award granted prior to the Listing Date to a person
who is not an Officer, Director or Consultant shall be upon the terms described
below:
(i) FAIR MARKET VALUE. If the repurchase option gives the Company
the right to repurchase the shares of Common Stock upon termination of
employment at not less than the Fair Market Value of the shares of Common Stock
to be purchased on the date of termination of Continuous Service, then (i) the
right to repurchase shall be exercised for cash or cancellation of purchase
money indebtedness for the shares of Common Stock within ninety (90) days of
termination of Continuous Service (or in the case of shares of Common Stock
issued upon exercise of Stock Awards after such date of termination, within
ninety (90) days after the date of the exercise) or such longer period as may be
agreed to by the Company and the Participant (for example, for purposes of
satisfying the requirements of Section 1202(c)(3) of the Code regarding
"qualified small business stock") and (ii) the right terminates when the shares
of Common Stock become publicly traded.
(ii) ORIGINAL PURCHASE PRICE. If the repurchase option gives the
Company the right to repurchase the shares of Common Stock upon termination of
Continuous Service at the original purchase price, then (i) the right to
repurchase at the original purchase price shall lapse at the rate of at least
twenty percent (20%) of the shares of Common Stock per year over five (5) years
from the date the Stock Award is granted (without respect to the date the Stock
Award was exercised or became exercisable) and (ii) the right to repurchase
shall be exercised for cash or cancellation of purchase money indebtedness for
the shares of Common Stock within ninety (90) days of termination of Continuous
Service (or in the case of shares of Common Stock issued upon exercise of
Options after such date of termination, within ninety (90) days after the date
of the exercise) or such longer period as may be agreed to by the Company and
the Participant (for example, for purposes of satisfying the requirements of
Section 1202(c)(3) of the Code regarding "qualified small business stock").
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common
Stock subject to the Plan, or subject to any Stock Award, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject to the Plan
and available for Incentive Stock Options pursuant to subsections 4(a) and 4(b)
and the maximum number of securities subject to award to any employee pursuant
to subsection 5(c), and the outstanding Stock Awards will be appropriately
adjusted in the class(es) and number of securities and price per share of Common
Stock subject to such outstanding Stock Awards. The Board shall make such
adjustments, and
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its determination shall be final, binding and conclusive. (The conversion of any
convertible securities of the Company shall not be treated as a transaction
"without receipt of consideration" by the Company.)
(b) CHANGE IN CONTROL--DISSOLUTION OR LIQUIDATION. In the event of a
dissolution or liquidation of the Company, then all outstanding Stock Awards
shall terminate immediately prior to such event.
(c) CHANGE IN CONTROL--ASSET SALE, STOCK SALE, MERGER, CONSOLIDATION
OR REVERSE MERGER. In the event of (i) a sale, lease or other disposition of all
or substantially all of the assets of the Company, (ii) a sale by the
stockholders of the Company of the voting stock of the Company to another
corporation and/or its subsidiaries that results in the ownership by such
corporation and/or its subsidiaries of fifty percent (50%) or more of the
combined voting power of all classes of the voting stock of the Company entitled
to vote; (iii) a merger or consolidation in which the Company is not the
surviving corporation or (iv) a reverse merger in which the Company is the
surviving corporation but the shares of Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise, then any surviving
corporation or acquiring corporation shall assume any Stock Awards outstanding
under the Plan or shall substitute similar stock awards (including an award to
acquire the same consideration paid to the stockholders in the transaction
described in this subsection 11(c)) for those outstanding under the Plan. In the
event any surviving corporation or acquiring corporation refuses to assume such
Stock Awards or to substitute similar stock awards for those outstanding under
the Plan, then with respect to Stock Awards held by Participants whose
Continuous Service has not terminated, the vesting of such Stock Awards (and, if
applicable, the time during which such Stock Awards may be exercised) shall be
accelerated in full, and the Stock Awards shall terminate if not exercised (if
applicable) at or prior to such event. With respect to any other Stock Awards
outstanding under the Plan, such Stock Awards shall terminate if not exercised
(if applicable) prior to such event.
12. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) AMENDMENT OF PLAN. The Board at any time, and from time to time,
may amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in Common Stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3
or any Nasdaq or securities exchange listing requirements.
(b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion,
submit any other amendment to the Plan for stockholder approval, including, but
not limited to, amendments to the Plan intended to satisfy the requirements of
Section 162(m) of the Code and the regulations thereunder regarding the
exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to certain executive officers.
(c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the
Board may amend the Plan in any respect the Board deems necessary or advisable
to provide eligible Employees with the maximum benefits provided or to be
provided under the provisions of the
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Code and the regulations promulgated thereunder relating to Incentive Stock
Options and/or to bring the Plan and/or Incentive Stock Options granted under it
into compliance therewith.
(d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted
before amendment of the Plan shall not be impaired by any amendment of the Plan
unless (i) the Company requests the consent of the Participant and (ii) the
Participant consents in writing.
(e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to
time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) PLAN TERM. The Board may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan shall terminate on the day before the
tenth (10th) anniversary of the date the Plan is adopted by the Board or
approved by the stockholders of the Company, whichever is earlier. No Stock
Awards may be granted under the Plan while the Plan is suspended or after it is
terminated.
(b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan
shall not impair rights and obligations under any Stock Award granted while the
Plan is in effect except with the written consent of the Participant.
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective on the date the Board adopts the Plan,
but no Stock Award shall be exercised (or, in the case of a stock bonus, shall
be granted) unless and until the Plan has been approved by the stockholders of
the Company, which approval shall be within twelve (12) months before or after
the date the Plan is adopted by the Board.
15. CHOICE OF LAW.
The law of the State of Delaware shall govern all questions concerning
the construction, validity and interpretation of this Plan, without regard to
such state's conflict of laws rules.
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QUANTUM EFFECT DEVICES, INC.
1999 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
(INCENTIVE AND NONSTATUTORY STOCK OPTIONS)
Pursuant to your Stock Option Grant Notice ("Grant Notice") and this Stock
Option Agreement, Quantum Effect Devices, Inc. (the "Company") has granted you
an option under its 1999 Equity Incentive Plan (the "Plan") to purchase the
number of shares of the Company's Common Stock indicated in your Grant Notice at
the exercise price indicated in your Grant Notice. Defined terms not explicitly
defined in this Stock Option Agreement but defined in the Plan shall have the
same definitions as in the Plan.
The details of your option are as follows:
1. VESTING. Subject to the limitations contained herein, your option will
vest as provided in your Grant Notice, provided that vesting will cease upon the
termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common
Stock subject to your option and your exercise price per share referenced in
your Grant Notice may be adjusted from time to time for capitalization
adjustments, as provided in the Plan.
3. EXERCISE PRIOR TO VESTING ("EARLY EXERCISE"). If permitted in your Grant
Notice (i.e., the "Exercise Schedule" indicates that "Early Exercise" of your
option is permitted) and subject to the provisions of your option, you may elect
at any time that is both (i) during the period of your Continuous Service and
(ii) during the term of your option, to exercise all or part of your option,
including the nonvested portion of your option; provided, however, that:
(a) a partial exercise of your option shall be deemed to cover first
vested shares of Common Stock and then the earliest vesting installment of
unvested shares of Common Stock;
(b) any shares of Common Stock so purchased from installments that
have not vested as of the date of exercise shall be subject to the purchase
option in favor of the Company as described in the Company's form of Early
Exercise Stock Purchase Agreement;
(c) you shall enter into the Company's form of Early Exercise Stock
Purchase Agreement with a vesting schedule that will result in the same vesting
as if no early exercise had occurred; and
(d) if your option is an incentive stock option, then, as provided in
the Plan, to the extent that the aggregate Fair Market Value (determined at the
time of grant) of the shares of Common Stock with respect to which your option
plus all other incentive stock options you hold are exercisable for the first
time by you during any calendar year (under all plans of the
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Company and its Affiliates) exceeds one hundred thousand dollars ($100,000),
your option(s) or portions thereof that exceed such limit (according to the
order in which they were granted) shall be treated as nonstatutory stock
options.
4. METHOD OF PAYMENT. Payment of the exercise price is due in full upon
exercise of all or any part of your option. You may elect to make payment of the
exercise price in cash or by check or in any other manner PERMITTED BY YOUR
GRANT NOTICE, which may include one or more of the following:
(a) In the Company's sole discretion at the time your option is
exercised and provided that at the time of exercise the Common Stock is publicly
traded and quoted regularly in THE WALL STREET JOURNAL, pursuant to a program
developed under Regulation T as promulgated by the Federal Reserve Board that,
prior to the issuance of Common Stock, results in either the receipt of cash (or
check) by the Company or the receipt of irrevocable instructions to pay the
aggregate exercise price to the Company from the sales proceeds.
(b) Provided that at the time of exercise the Common Stock is publicly
traded and quoted regularly in THE WALL STREET JOURNAL, by delivery of
already-owned shares of Common Stock either that you have held for the period
required to avoid a charge to the Company's reported earnings (generally six
months) or that you did not acquire, directly or indirectly from the Company,
that are owned free and clear of any liens, claims, encumbrances or security
interests, and that are valued at Fair Market Value on the date of exercise.
"Delivery" for these purposes, in the sole discretion of the Company at the time
you exercise your option, shall include delivery to the Company of your
attestation of ownership of such shares of Common Stock in a form approved by
the Company. Notwithstanding the foregoing, you may not exercise your option by
tender to the Company of Common Stock to the extent such tender would violate
the provisions of any law, regulation or agreement restricting the redemption of
the Company's stock.
5. WHOLE SHARES. You may exercise your option only for whole shares of
Common Stock.
6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, you may not exercise your option unless the shares of Common
Stock issuable upon such exercise are then registered under the Securities Act
or, if such shares of Common Stock are not then so registered, the Company has
determined that such exercise and issuance would be exempt from the registration
requirements of the Securities Act. The exercise of your option must also comply
with other applicable laws and regulations governing your option, and you may
not exercise your option if the Company determines that such exercise would not
be in material compliance with such laws and regulations.
7. TERM. The term of your option commences on the Date of Grant and expires
upon the EARLIEST of the following:
(a) three (3) months after the termination of your Continuous Service
for any reason other than your Disability or death, provided that if during any
part of such three (3)-
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month period your option is not exercisable solely because of the condition set
forth in the preceding paragraph relating to "Securities Law Compliance," your
option shall not expire until the earlier of the Expiration Date or until it
shall have been exercisable for an aggregate period of three (3) months after
the termination of your Continuous Service;
(b) twelve (12) months after the termination of your Continuous
Service due to your Disability;
(c) eighteen (18) months after your death if you die either during
your Continuous Service or within three (3) months after your Continuous Service
terminates;
(d) the Expiration Date indicated in your Grant Notice; or
(e) the day before the tenth (10th) anniversary of the Date of Grant.
If your option is an incentive stock option, note that, to obtain the
federal income tax advantages associated with an "incentive stock option," the
Code requires that at all times beginning on the date of grant of your option
and ending on the day three (3) months before the date of your option's
exercise, you must be an employee of the Company or an Affiliate, except in the
event of your death or Disability. The Company has provided for extended
exercisability of your option under certain circumstances for your benefit but
cannot guarantee that your option will necessarily be treated as an "incentive
stock option" if you continue to provide services to the Company or an Affiliate
as a Consultant or Director after your employment terminates or if you otherwise
exercise your option more than three (3) months after the date your employment
terminates.
8. EXERCISE.
(a) You may exercise the vested portion of your option (and the
unvested portion of your option if your Grant Notice so permits) during its term
by delivering a Notice of Exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.
(b) By exercising your option you agree that, as a condition to any
exercise of your option, the Company may require you to enter into an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise of
your option, (2) the lapse of any substantial risk of forfeiture to which the
shares of Common Stock are subject at the time of exercise, or (3) the
disposition of shares of Common Stock acquired upon such exercise.
(c) If your option is an incentive stock option, by exercising your
option you agree that you will notify the Company in writing within fifteen (15)
days after the date of any disposition of any of the shares of the Common Stock
issued upon exercise of your option that occurs within two (2) years after the
date of your option grant or within one (1) year after such shares of Common
Stock are transferred upon exercise of your option.
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(d) By exercising your option you agree that the Company (or a
representative of the underwriter(s)) may, in connection with the first
underwritten registration of the offering of any securities of the Company under
the Securities Act, require that you not sell, dispose of, transfer, make any
short sale of, grant any option for the purchase of, or enter into any hedging
or similar transaction with the same economic effect as a sale, any shares of
Common Stock or other securities of the Company held by you, for a period of
time specified by the underwriter(s) (not to exceed one hundred eighty (180)
days) following the effective date of the registration statement of the Company
filed under the Securities Act. You further agree to execute and deliver such
other agreements as may be reasonably requested by the Company and/or the
underwriter(s) that are consistent with the foregoing or that are necessary to
give further effect thereto. In order to enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to your shares of
Common Stock until the end of such period.
9. TRANSFERABILITY. Your option is not transferable, except by will or by
the laws of descent and distribution, and is exercisable during your life only
by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company, you may designate a third party
who, in the event of your death, shall thereafter be entitled to exercise your
option.
10. RIGHT OF FIRST REFUSAL. Shares of Common Stock that you acquire upon
exercise of your option are subject to any right of first refusal that may be
described in the Company's bylaws in effect at such time the Company elects to
exercise its right. The Company's right of first refusal shall expire on the
Listing Date.
11. RIGHT OF REPURCHASE. To the extent provided in the Company's bylaws as
amended from time to time, the Company shall have the right to repurchase all or
any part of the shares of Common Stock you acquire pursuant to the exercise of
your option.
12. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or
service contract, and nothing in your option shall be deemed to create in any
way whatsoever any obligation on your part to continue in the employ of the
Company or an Affiliate, or of the Company or an Affiliate to continue your
employment. In addition, nothing in your option shall obligate the Company or an
Affiliate, their respective shareholders, Boards of Directors, Officers or
Employees to continue any relationship that you might have as a Director or
Consultant for the Company or an Affiliate.
13. WITHHOLDING OBLIGATIONS.
(a) At the time you exercise your option, in whole or in part, or at
any time thereafter as requested by the Company, you hereby authorize
withholding from payroll and any other amounts payable to you, and otherwise
agree to make adequate provision for (including by means of a "cashless
exercise" pursuant to a program developed under Regulation T as promulgated by
the Federal Reserve Board to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Company or an Affiliate, if any, which arise in connection
with your option.
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<PAGE>
(b) Upon your request and subject to approval by the Company, in its
sole discretion, and compliance with any applicable conditions or restrictions
of law, the Company may withhold from fully vested shares of Common Stock
otherwise issuable to you upon the exercise of your option a number of whole
shares of Common Stock having a Fair Market Value, determined by the Company as
of the date of exercise, not in excess of the minimum amount of tax required to
be withheld by law. If the date of determination of any tax withholding
obligation is deferred to a date later than the date of exercise of your option,
share withholding pursuant to the preceding sentence shall not be permitted
unless you make a proper and timely election under Section 83(b) of the Code,
covering the aggregate number of shares of Common Stock acquired upon such
exercise with respect to which such determination is otherwise deferred, to
accelerate the determination of such tax withholding obligation to the date of
exercise of your option. Notwithstanding the filing of such election, shares of
Common Stock shall be withheld solely from fully vested shares of Common Stock
determined as of the date of exercise of your option that are otherwise issuable
to you upon such exercise. Any adverse consequences to you arising in connection
with such share withholding procedure shall be your sole responsibility.
(c) You may not exercise your option unless the tax withholding
obligations of the Company and/or any Affiliate are satisfied. Accordingly, you
may not be able to exercise your option when desired even though your option is
vested, and the Company shall have no obligation to issue a certificate for such
shares of Common Stock or release such shares of Common Stock from any escrow
provided for herein.
14. NOTICES. Any notices provided for in your option or the Plan shall be
given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by mail by the Company to you, five (5) days after
deposit in the United States mail, postage prepaid, addressed to you at the last
address you provided to the Company.
15. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions
of the Plan, the provisions of which are hereby made a part of your option, and
is further subject to all interpretations, amendments, rules and regulations
which may from time to time be promulgated and adopted pursuant to the Plan. In
the event of any conflict between the provisions of your option and those of the
Plan, the provisions of the Plan shall control.
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QUANTUM EFFECT DEVICES, INC.
STOCK OPTION GRANT NOTICE
(1999 EQUITY INCENTIVE PLAN)
Quantum Effect Devices, Inc. (the "Company"), pursuant to its 1999 Equity
Incentive Plan (the "Plan"), hereby grants to Optionholder an option to purchase
the number of shares of the Company's Common Stock set forth below. This option
is subject to all of the terms and conditions as set forth herein and in the
Stock Option Agreement, the Plan and the Notice of Exercise, all of which are
attached hereto and incorporated herein in their entirety.
Optionholder: _______________________________
Date of Grant: _______________________________
Vesting Commencement Date: _______________________________
Number of Shares Subject to Option: _______________________________
Exercise Price (Per Share): _______________________________
Total Exercise Price: _______________________________
Expiration Date: _______________________________
TYPE OF GRANT: |_| Incentive Stock Option(1) |_| Nonstatutory Stock Option
EXERCISE SCHEDULE: Early Exercise is permitted
VESTING SCHEDULE: 1/4th of the shares vest one year after the Vesting
Commencement Date.
1/48th of the shares vest monthly thereafter over the next
three years.
PAYMENT: By one or a combination of the following items (described
in the Stock Option Agreement):
By cash or check
Pursuant to a Regulation T Program if the Shares
are publicly traded
By delivery of already-owned shares if the Shares
are publicly traded
ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionholder acknowledges
receipt of, and understands and agrees to, this Grant Notice, the Stock Option
Agreement and the Plan. Optionholder further acknowledges that as of the Date of
Grant, this Grant Notice, the Stock Option Agreement and the Plan set forth the
entire understanding between Optionholder and the Company regarding the
acquisition of stock in the Company and supersede all prior oral and written
agreements on that subject with the exception of (i) options previously granted
and delivered to Optionholder under the Plan, and (ii) the following agreements
only:
OTHER AGREEMENTS: _________________________________________________
_________________________________________________
QUANTUM EFFECT DEVICES, INC. OPTIONHOLDER:
By: _______________________________ _______________________________________
Signature Signature
Title: ____________________________ Date: _________________________________
Date: _____________________________
ATTACHMENTS: Stock Option Agreement, 1999 Equity Incentive Plan, and Notice
of Exercise
- ----------------------
(1) If this is an incentive stock option, it (plus your other outstanding
incentive stock options) cannot be first EXERCISABLE for more than $100,000 in
any calendar year. Any excess over $100,000 is a nonstatutory stock option.
<PAGE>
ATTACHMENT I
STOCK OPTION AGREEMENT
<PAGE>
ATTACHMENT II
1999 EQUITY INCENTIVE PLAN
<PAGE>
ATTACHMENT III
NOTICE OF EXERCISE
<PAGE>
QUANTUM EFFECT DEVICES, INC.
1999 EQUITY INCENTIVE PLAN
NOTICE OF EXERCISE (POST-IPO)
Quantum Effect Devices, Inc.
3255-3 Scott Blvd., Suite 200
Santa Clara CA 95054 Date of Exercise: _______________
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase
the number of shares for the price set forth below.
Type of option (check one): Incentive |_| Nonstatutory |_|
Stock option dated: ______________________________
Number of shares being acquired: ______________________________
Certificates to be issued in name of: ______________________________
Total exercise price: $______________
Cash payment delivered herewith: $______________
Value of ________ shares of common stock(1): $______________
By this exercise, I agree (i) to provide such additional documents as
you may require pursuant to the terms of the 1999 Equity Incentive Plan, (ii) to
provide for the payment by me to you (in the manner designated by you) of your
withholding obligation, if any, relating to the exercise of this option, and
(iii) if this exercise relates to an incentive stock option, to notify you in
writing within fifteen (15) days after the date of any disposition of any of the
shares of Common Stock issued upon exercise of this option that occurs within
two (2) years after the date of grant of this option or within one (1) year
after such shares of Common Stock are issued upon exercise of this option.
Very truly yours,
------------------------------------
- --------
1 Shares must meet the public trading requirements set forth in the option.
Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the option,
and must be owned free and clear of any liens, claims, encumbrances or security
interests. Certificates must be endorsed or accompanied by an executed
assignment separate from certificate unless shares are tendered by attestation.
<PAGE>
EXHIBIT 10.3
QUANTUM EFFECT DEVICES, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
ADOPTED BY BOARD OF DIRECTORS: SEPTEMBER 1, 1999
APPROVED BY STOCKHOLDERS: NOVEMBER 23, 1999
EFFECTIVE DATE: DATE OF INITIAL PUBLIC OFFERING
TERMINATION DATE: NONE
1. PURPOSE.
(a) The purpose of the Plan is to provide a means by which Employees
of the Company and certain designated Affiliates may be given an opportunity to
purchase Shares of the Company.
(b) The Company, by means of the Plan, seeks to retain the services of
such Employees, to secure and retain the services of new Employees and to
provide incentives for such persons to exert maximum efforts for the success of
the Company and its Affiliates.
(c) The Company intends that the Rights to purchase Shares granted
under the Plan be considered options issued under an "employee stock purchase
plan," as that term is defined in Section 423(b) of the Code.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary
corporation, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the United States Internal Revenue Code of 1986, as
amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subparagraph 3(c) of the Plan.
(e) "COMPANY" means Quantum Effect Devices, Inc., a Delaware
corporation.
(f) "DIRECTOR" means a member of the Board.
(g) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements
set forth in the Offering for eligibility to participate in the Offering.
(h) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or an Affiliate of the Company. Neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
"employment" by the Company or the Affiliate.
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(i) "EMPLOYEE STOCK PURCHASE PLAN" means a plan that grants rights
intended to be options issued under an "employee stock purchase plan," as that
term is defined in Section 423(b) of the Code.
(j) "EXCHANGE ACT" means the United States Securities Exchange Act of
1934, as amended.
(k) "FAIR MARKET VALUE" means the value of a security, as determined
in good faith by the Board. If the security is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
then, except as otherwise provided in the Offering, the Fair Market Value of the
security shall be the closing sales price (rounded up where necessary to the
nearest whole cent) for such security (or the closing bid, if no sales were
reported) as quoted on such exchange or market (or the exchange or market with
the greatest volume of trading in the relevant security of the Company) on the
trading day prior to the relevant determination date, as reported in THE WALL
STREET JOURNAL or such other source as the Board deems reliable.
(l) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
("Regulation S-K")), does not possess an interest in any other transaction as to
which disclosure would be required under Item 404(a) of Regulation S-K, and is
not engaged in a business relationship as to which disclosure would be required
under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a
"non-employee director" for purposes of Rule 16b-3.
(m) "OFFERING" means the grant of Rights to purchase Shares under the
Plan to Eligible Employees.
(n) "OFFERING DATE" means a date selected by the Board for an Offering
to commence.
(o) "OUTSIDE DIRECTOR" means a Director who either (i) is not a
current employee of the Company or an "affiliated corporation" (within the
meaning of the Treasury regulations promulgated under Section 162(m) of the
Code), is not a former employee of the Company or an "affiliated corporation"
receiving compensation for prior services (other than benefits under a tax
qualified pension plan), was not an officer of the Company or an "affiliated
corporation" at any time, and is not currently receiving direct or indirect
remuneration from the Company or an "affiliated corporation" for services in any
capacity other than as a Director, or (ii) is otherwise considered an "outside
director" for purposes of Section 162(m) of the Code.
(p) "PARTICIPANT" means an Eligible Employee who holds an outstanding
Right granted pursuant to the Plan or, if applicable, such other person who
holds an outstanding Right granted under the Plan.
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<PAGE>
(q) "PLAN" means this 1999 Employee Stock Purchase Plan.
(r) "PURCHASE DATE" means one or more dates established by the Board
during an Offering on which Rights granted under the Plan shall be exercised and
purchases of Shares carried out in accordance with such Offering.
(s) "RIGHT" means an option to purchase Shares granted pursuant to the
Plan.
(t) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3 as in effect with respect to the Company at the time discretion is
being exercised regarding the Plan.
(u) "SECURITIES ACT" means the United States Securities Act of 1933,
as amended.
(v) "SHARE" means a share of the common stock of the Company.
3. ADMINISTRATION.
(a) The Board shall administer the Plan unless and until the Board
delegates administration to a Committee, as provided in subparagraph 3(c).
Whether or not the Board has delegated administration, the Board shall have the
final power to determine all questions of policy and expediency that may arise
in the administration of the Plan.
(b) The Board (or the Committee) shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine when and how Rights to purchase Shares shall be
granted and the provisions of each Offering of such Rights (which need not be
identical).
(ii) To designate from time to time which Affiliates of the
Company shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and Rights granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully effective.
(iv) To amend the Plan as provided in paragraph 14.
(v) Generally, to exercise such powers and to perform such acts
as it deems necessary or expedient to promote the best interests of the Company
and its Affiliates and to carry out the intent that the Plan be treated as an
Employee Stock Purchase Plan.
(c) The Board may delegate administration of the Plan to a Committee
of the Board composed of two (2) or more members, all of the members of which
Committee may be, in the discretion of the Board, Non-Employee Directors and/or
Outside Directors. If administration is delegated to a Committee, the Committee
shall have, in connection with the administration of the
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<PAGE>
Plan, the powers theretofore possessed by the Board, including the power to
delegate to a subcommittee of two (2) or more Outside Directors any of the
administrative powers the Committee is authorized to exercise (and references in
this Plan to the Board shall thereafter be to the Committee or such a
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 13 relating to adjustments
upon changes in securities, the Shares that may be sold pursuant to Rights
granted under the Plan shall not exceed in the aggregate three hundred thousand
(300,000) Shares. If any Right granted under the Plan shall for any reason
terminate without having been exercised, the Shares not purchased under such
Right shall again become available for the Plan.
(b) The aggregate number of Shares that may be sold pursuant to Rights
granted under the Plan as specified in paragraph 4(a) hereof automatically shall
be increased as follows:
(i) For a period of ten (10) years, on each November 1 (the
"Calculation Date"), commencing on November 1, 2000, the aggregate number of
Shares specified in paragraph 4(a) hereof shall be increased by the greater of
(1) that number of Shares equal to one percent (1%) of the Diluted Shares
Outstanding or (2) that number of Shares that have been sold pursuant to Rights
granted under the Plan in the prior 12-month period; provided, however, that the
maximum aggregate number of Shares that may be sold pursuant to Rights granted
under the Plan shall not increase by more than Three Million (3,000,000) Shares
during said 10-year period.
(ii) For purposes of paragraph 4(b)(i) hereof, "Diluted Shares
Outstanding" shall mean, as of any date, (1) the number of outstanding Shares on
such Calculation Date, plus (2) the number of Shares issuable upon such
Calculation Date assuming the conversion of all outstanding Preferred Stock and
convertible notes, plus (3) the additional number of dilutive Common Stock
equivalent shares outstanding as the result of any options or warrants
outstanding during the fiscal year, calculated using the treasury stock method.
(c) The Shares subject to the Plan may be unissued Shares or Shares
that have been bought on the open market at prevailing market prices or
otherwise.
5. GRANT OF RIGHTS; OFFERING.
(a) The Board may from time to time grant or provide for the grant of
Rights to purchase Shares of the Company under the Plan to Eligible Employees in
an Offering on an Offering Date or Dates selected by the Board. Each Offering
shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate, which shall comply with the requirements of Section
423(b)(5) of the Code that all Employees granted Rights to purchase Shares under
the Plan shall have the same rights and privileges. The terms and conditions of
an
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<PAGE>
Offering shall be incorporated by reference into the Plan and treated as part of
the Plan. The provisions of separate Offerings need not be identical, but each
Offering shall include (through incorporation of the provisions of this Plan by
reference in the document comprising the Offering or otherwise) the period
during which the Offering shall be effective, which period shall not exceed
twenty-seven (27) months beginning with the Offering Date, and the substance of
the provisions contained in paragraphs 6 through 9, inclusive.
(b) If a Participant has more than one Right outstanding under the
Plan, unless he or she otherwise indicates in agreements or notices delivered
hereunder: (i) each agreement or notice delivered by that Participant will be
deemed to apply to all of his or her Rights under the Plan, and (ii) an
earlier-granted Right (or a Right with a lower exercise price, if two Rights
have identical grant dates) will be exercised to the fullest possible extent
before a later-granted Right (or a Right with a higher exercise price if two
Rights have identical grant dates) will be exercised.
6. ELIGIBILITY.
(a) Rights may be granted only to Employees of the Company or, as the
Board may designated as provided in subparagraph 3(b), to Employees of an
Affiliate. Except as provided in subparagraph 6(b), an Employee shall not be
eligible to be granted Rights under the Plan unless, on the Offering Date, such
Employee has been in the employ of the Company or the Affiliate, as the case may
be, for such continuous period preceding such grant as the Board may require,
but in no event shall the required period of continuous employment be equal to
or greater than two (2) years.
(b) The Board may provide that each person who, during the course of
an Offering, first becomes an Eligible Employee will, on a date or dates
specified in the Offering which coincides with the day on which such person
becomes an Eligible Employee or which occurs thereafter, receive a Right under
that Offering, which Right shall thereafter be deemed to be a part of that
Offering. Such Right shall have the same characteristics as any Rights
originally granted under that Offering, as described herein, except that:
(i) the date on which such Right is granted shall be the
"Offering Date" of such Right for all purposes, including determination of the
exercise price of such Right;
(ii) the period of the Offering with respect to such Right shall
begin on its Offering Date and end coincident with the end of such Offering; and
(iii) the Board may provide that if such person first becomes an
Eligible Employee within a specified period of time before the end of the
Offering, he or she will not receive any Right under that Offering.
(c) No Employee shall be eligible for the grant of any Rights under
the Plan if, immediately after any such Rights are granted, such Employee owns
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 Affiliate. For purposes
of this subparagraph 6(c), the rules of Section 424(d)
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<PAGE>
of the Code shall apply in determining the stock ownership of any Employee, and
stock which such Employee may purchase under all outstanding rights and options
shall be treated as stock owned by such Employee.
(d) An Eligible Employee may be granted Rights under the Plan only if
such Rights, together with any other Rights granted under all Employee Stock
Purchase Plans of the Company and any Affiliates, as specified by Section
423(b)(8) of the Code, do not permit such Eligible Employee's rights to purchase
Shares of the Company or any Affiliate to accrue at a rate which exceeds twenty
five thousand dollars ($25,000) of the fair market value of such Shares
(determined at the time such Rights are granted) for each calendar year in which
such Rights are outstanding at any time.
(e) The Board may provide in an Offering that Employees who are highly
compensated Employees within the meaning of Section 423(b)(4)(D) of the Code
shall not be eligible to participate.
7. RIGHTS; PURCHASE PRICE.
(a) On each Offering Date, each Eligible Employee, pursuant to an
Offering made under the Plan, shall be granted the Right to purchase up to the
number of Shares purchasable either:
(i) with a percentage designated by the Board not exceeding ten
percent (10%) of such Employee's Earnings (as defined by the Board in each
Offering) during the period which begins on the Offering Date (or such later
date as the Board determines for a particular Offering) and ends on the date
stated in the Offering, which date shall be no later than the end of the
Offering; or
(ii) with a maximum dollar amount designated by the Board that,
as the Board determines for a particular Offering, (1) shall be withheld, in
whole or in part, from such Employee's Earnings (as defined by the Board in each
Offering) during the period which begins on the Offering Date (or such later
date as the Board determines for a particular Offering) and ends on the date
stated in the Offering, which date shall be no later than the end of the
Offering and/or (2) shall be contributed, in whole or in part, by such Employee
during such period.
(b) The Board shall establish one or more Purchase Dates during an
Offering on which Rights granted under the Plan shall be exercised and purchases
of Shares carried out in accordance with such Offering.
(c) In connection with each Offering made under the Plan, the Board
may specify a maximum amount of Shares that may be purchased by any Participant
as well as a maximum aggregate amount of Shares that may be purchased by all
Participants pursuant to such Offering. In addition, in connection with each
Offering that contains more than one Purchase Date, the Board may specify a
maximum aggregate amount of Shares which may be purchased by all Participants on
any given Purchase Date under the Offering. If the aggregate purchase of Shares
upon exercise of Rights granted under the Offering would exceed any such maximum
aggregate
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amount, the Board shall make a pro rata allocation of the Shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.
(d) The purchase price of Shares acquired pursuant to Rights granted
under the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair
market value of the Shares on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair
market value of the Shares on the Purchase Date.
8. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a) An Eligible Employee may become a Participant in the Plan pursuant
to an Offering by delivering a participation agreement to the Company within the
time specified in the Offering, in such form as the Company provides. Each such
agreement shall authorize payroll deductions of up to the maximum percentage
specified by the Board of such Employee's Earnings during the Offering (as
defined in each Offering). The payroll deductions made for each Participant
shall be credited to a bookkeeping account for such Participant under the Plan
and either may be deposited with the general funds of the Company or may be
deposited in a separate account in the name of, and for the benefit of, such
Participant with a financial institution designated by the Company. To the
extent provided in the Offering, a Participant may reduce (including to zero) or
increase such payroll deductions. To the extent provided in the Offering, a
Participant may begin such payroll deductions after the beginning of the
Offering. A Participant may make additional payments into his or her account
only if specifically provided for in the Offering and only if the Participant
has not already had the maximum permitted amount withheld during the Offering.
(b) At any time during an Offering, a Participant may terminate his or
her payroll deductions under the Plan and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company
provides. Such withdrawal may be elected at any time prior to the end of the
Offering except as provided by the Board in the Offering. Upon such withdrawal
from the Offering by a Participant, the Company shall distribute to such
Participant all of his or her accumulated payroll deductions (reduced to the
extent, if any, such deductions have been used to acquire Shares for the
Participant) under the Offering, without interest unless otherwise specified in
the Offering, and such Participant's interest in that Offering shall be
automatically terminated. A Participant's withdrawal from an Offering will have
no effect upon such Participant's eligibility to participate in any other
Offerings under the Plan but such Participant will be required to deliver a new
participation agreement in order to participate in subsequent Offerings under
the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon cessation of any participating Employee's employment
with the Company or a designated Affiliate for any reason (subject to any
post-employment participation period required by law) or other lack of
eligibility. The Company shall distribute to such terminated Employee
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<PAGE>
all of his or her accumulated payroll deductions (reduced to the extent, if any,
such deductions have been used to acquire Shares for the terminated Employee)
under the Offering, without interest unless otherwise specified in the Offering.
If the accumulated payroll deductions have been deposited with the Company's
general funds, then the distribution shall be made from the general funds of the
Company, without interest. If the accumulated payroll deductions have been
deposited in a separate account with a financial institution as provided in
subparagraph 8(a), then the distribution shall be made from the separate
account, without interest unless otherwise specified in the Offering.
(d) Rights granted under the Plan shall not be transferable by a
Participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in paragraph 15 and, otherwise during
his or her lifetime, shall be exercisable only by the person to whom such Rights
are granted.
9. EXERCISE.
(a) On each Purchase Date specified therefor in the relevant Offering,
each Participant's accumulated payroll deductions and other additional payments
specifically provided for in the Offering (without any increase for interest)
will be applied to the purchase of Shares up to the maximum amount of Shares
permitted pursuant to the terms of the Plan and the applicable Offering, at the
purchase price specified in the Offering. No fractional Shares shall be issued
upon the exercise of Rights granted under the Plan unless specifically provided
for in the Offering.
(b) Unless otherwise specifically provided in the Offering, the
amount, if any, of accumulated payroll deductions remaining in any Participant's
account after the purchase of Shares that is equal to the amount required to
purchase one or more whole Shares on the final Purchase Date of the Offering
shall be distributed in full to the Participant at the end of the Offering,
without interest. If the accumulated payroll deductions have been deposited with
the Company's general funds, then the distribution shall be made from the
general funds of the Company, without interest. If the accumulated payroll
deductions have been deposited in a separate account with a financial
institution as provided in subparagraph 8(a), then the distribution shall be
made from the separate account, without interest unless otherwise specified in
the Offering.
(c) No Rights granted under the Plan may be exercised to any extent
unless the Shares to be issued upon such exercise under the Plan (including
Rights granted thereunder) are covered by an effective registration statement
pursuant to the Securities Act and the Plan is in material compliance with all
applicable state, foreign and other securities and other laws applicable to the
Plan. If on a Purchase Date in any Offering hereunder the Plan is not so
registered or in such compliance, no Rights granted under the Plan or any
Offering shall be exercised on such Purchase Date, and the Purchase Date shall
be delayed until the Plan is subject to such an effective registration statement
and such compliance, except that the Purchase Date shall not be delayed more
than twelve (12) months and the Purchase Date shall in no event be more than
twenty-seven (27) months from the Offering Date. If, on the Purchase Date of any
Offering hereunder, as delayed to the maximum extent permissible, the Plan is
not registered and
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in such compliance, no Rights granted under the Plan or any Offering shall be
exercised and all payroll deductions accumulated during the Offering (reduced to
the extent, if any, such deductions have been used to acquire Shares) shall be
distributed to the Participants, without interest unless otherwise specified in
the Offering. If the accumulated payroll deductions have been deposited with the
Company's general funds, then the distribution shall be made from the general
funds of the Company, without interest. If the accumulated payroll deductions
have been deposited in a separate account with a financial institution as
provided in subparagraph 8(a), then the distribution shall be made from the
separate account, without interest unless otherwise specified in the Offering.
10. COVENANTS OF THE COMPANY.
(a) During the terms of the Rights granted under the Plan, the Company
shall ensure that the amount of Shares required to satisfy such Rights are
available.
(b) The Company shall seek to obtain from each federal, state, foreign
or other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell Shares upon exercise of the
Rights granted under the Plan. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of Shares under the Plan, the Company shall be relieved from any liability for
failure to issue and sell Shares upon exercise of such Rights unless and until
such authority is obtained.
11. USE OF PROCEEDS FROM SHARES.
Proceeds from the sale of Shares pursuant to Rights granted under the
Plan shall constitute general funds of the Company.
12. RIGHTS AS A STOCKHOLDER.
A Participant shall not be deemed to be the holder of, or to have any
of the rights of a holder with respect to, Shares subject to Rights granted
under the Plan unless and until the Participant's Shares acquired upon exercise
of Rights under the Plan are recorded in the books of the Company.
13. ADJUSTMENTS UPON CHANGES IN SECURITIES.
(a) If any change is made in the Shares subject to the Plan, or
subject to any Right, without the receipt of consideration by the Company
(through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan will be appropriately adjusted in the
class(es) and maximum number of Shares subject to the Plan pursuant to
subparagraph 4(a), and the outstanding Rights will be appropriately adjusted in
the class(es), number of Shares and purchase limits of such outstanding Rights.
The Board shall make such adjustments, and its determination shall be final,
binding and
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conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a transaction that does not involve the receipt of
consideration by the Company.)
(b) In the event of: (i) a dissolution, liquidation, or sale of all or
substantially all of the assets of the Company; (ii) a merger or consolidation
in which the Company is not the surviving corporation; or (iii) a reverse merger
in which the Company is the surviving corporation but the Shares outstanding
immediately preceding the merger are converted by virtue of the merger into
other property, whether in the form of securities, cash or otherwise, then: (1)
any surviving or acquiring corporation shall assume Rights outstanding under the
Plan or shall substitute similar rights (including a right to acquire the same
consideration paid to Stockholders in the transaction described in this
subparagraph 13(b)) for those outstanding under the Plan, or (2) in the event
any surviving or acquiring corporation refuses to assume such Rights or to
substitute similar rights for those outstanding under the Plan, then, as
determined by the Board in its sole discretion such Rights may continue in full
force and effect or the Participants' accumulated payroll deductions (exclusive
of any accumulated interest which cannot be applied toward the purchase of
Shares under the terms of the Offering) may be used to purchase Shares
immediately prior to the transaction described above under the ongoing Offering
and the Participants' Rights under the ongoing Offering thereafter terminated.
14. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 13 relating to adjustments upon changes
in securities and except as to minor amendments to benefit the administration of
the Plan, to take account of a change in legislation or to obtain or maintain
favorable tax, exchange control or regulatory treatment for Participants or the
Company or any Affiliate, no amendment shall be effective unless approved by the
stockholders of the Company to the extent stockholder approval is necessary for
the Plan to satisfy the requirements of Section 423 of the Code, Rule 16b-3
under the Exchange Act and any Nasdaq or other securities exchange listing
requirements. Currently under the Code, stockholder approval within twelve (12)
months before or after the adoption of the amendment is required where the
amendment will:
(i) Increase the amount of Shares reserved for Rights under the
Plan;
(ii) Modify the provisions as to eligibility for participation in
the Plan to the extent such modification requires stockholder approval in order
for the Plan to obtain employee stock purchase plan treatment under Section 423
of the Code or to comply with the requirements of Rule 16b-3; or
(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to obtain employee stock
purchase plan treatment under Section 423 of the Code or to comply with the
requirements of Rule 16b-3.
(b) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide Employees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder
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relating to Employee Stock Purchase Plans and/or to bring the Plan and/or Rights
granted under it into compliance therewith.
(c) Rights and obligations under any Rights granted before amendment
of the Plan shall not be impaired by any amendment of the Plan, except with the
consent of the person to whom such Rights were granted, or except as necessary
to comply with any laws or governmental regulations, or except as necessary to
ensure that the Plan and/or Rights granted under the Plan comply with the
requirements of Section 423 of the Code.
15. DESIGNATION OF BENEFICIARY.
(a) A Participant may file a written designation of a beneficiary who
is to receive any Shares and/or cash, if any, from the Participant's account
under the Plan in the event of such Participant's death subsequent to the end of
an Offering but prior to delivery to the Participant of such Shares and cash. In
addition, a Participant may file a written designation of a beneficiary who is
to receive any cash from the Participant's account under the Plan in the event
of such Participant's death during an Offering.
(b) The Participant may change such designation of beneficiary 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 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
Company), the Company, in its sole discretion, may deliver such Shares and/or
cash to the spouse or to any one or more dependents or relatives of the
Participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board in its discretion may suspend or terminate the Plan at
any time. Unless sooner terminated, the Plan shall terminate at the time that
all of the Shares subject to the Plan's reserve, as increased and/or adjusted
from time to time, have been issued under the terms of the Plan. No Rights may
be granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any Rights granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
as expressly provided in the Plan or with the consent of the person to whom such
Rights were granted, or except as necessary to comply with any laws or
governmental regulation, or except as necessary to ensure that the Plan and/or
Rights granted under the Plan comply with the requirements of Section 423 of the
Code.
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17. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no
Rights granted under the Plan shall be exercised unless and until the Plan has
been approved by the stockholders of the Company within twelve (12) months
before or after the date the Plan is adopted by the Board, which date may be
prior to the effective date set by the Board.
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QUANTUM EFFECT DEVICES, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
OFFERING
ADOPTED SEPTEMBER 1, 1999
AMENDED JANUARY 11, 2000
1. GRANT OF RIGHTS.
(a) The Board of Directors ("Board") of Quantum Effect Devices, Inc.,
a Delaware corporation (the "Company"), pursuant to the Company's 1999 Employee
Stock Purchase Plan (the "Plan"), hereby authorizes the grant of Rights to
purchase Shares of the Company to all Eligible Employees (an "Offering").
Defined terms not explicitly defined in this Offering but defined in the Plan
shall have the same definitions as in the Plan. In the event of any conflict
between the provisions of an Offering and those of the Plan (including
interpretations, amendments, rules and regulations that may from time to time be
promulgated and adopted pursuant to the Plan), the provisions of the Plan shall
control.
(b) An "Offering Date" is the first day of an Offering. An Offering
may consist of one purchase period or may be divided into shorter purchase
periods ("Purchase Periods"). A "Purchase Date" is the last day of a Purchase
Period or the Offering, as the case may be.
(c) The first Offering shall begin on the effective date of the
initial public offering of the Shares and end on February 14, 2002 (the "Initial
Offering"). The Initial Offering will be divided into four (4) shorter Purchase
Periods of approximately six (6) months in duration, with the initial Purchase
Period ending on July 14, 2000, the second Purchase Period ending on February
14, 2001, the third Purchase Period ending on July 14, 2001 and the fourth
Purchase Period ending on February 14, 2002.
(d) Except as otherwise provided, each Offering hereunder shall be
twenty-four (24) months long and shall be divided into four (4) shorter Purchase
Period approximately six (6) months in length. Offerings shall be concurrent. A
new Offering shall start every six (6) months.
(e) Commencing on July 15, 2000, a new 24-month Offering shall begin
every July 15 and February 15. Each such Offering shall end on the day prior to
the second anniversary of its Offering Date unless sooner terminated as provided
above.
(f) An Eligible Employee may enroll in only one Offering at a time.
(g) If on the first day of any Purchase Period during an Offering
(I.E., July 15 or February 15) the fair market value of the Shares is less than
it was on the Offering Date for that Offering, then the Offering shall
immediately terminate, and the employees who were enrolled in the terminated
Offering shall automatically be enrolled in the new Offering that starts that
day.
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(h) Prior to the commencement of any Offering, the Board may change
any or all terms of such Offering and any subsequent Offerings. The granting of
Rights pursuant to each Offering hereunder shall occur on each respective
Offering Date unless, prior to such date (i) the Board (or such Committee)
determines that such Offering shall not occur, or (ii) no Shares remain
available for issuance under the Plan in connection with the Offering.
(i) Notwithstanding any other provisions of an Offering, if the terms
of an Offering as previously established by the Board would, as a result of a
change to applicable accounting standards, generate a charge to earnings, such
Offering shall terminate effective as of the day prior to the date such change
to accounting standards would otherwise first apply to the Offering (the
"Offering Termination Date"), and such Offering Termination Date shall be the
final Purchase Date of such Offering. A subsequent Offering shall commence on
such date and on such terms as shall be provided by the Board.
2. ELIGIBLE EMPLOYEES.
(a) All employees of the Company and each of its Affiliates
incorporated in the United States shall be granted Rights to purchase Shares
under each Offering on the Offering Date of such Offering, provided that each
such employee otherwise meets the employment requirements of subparagraph 6(a)
of the Plan and has been continuously employed for at least five (5) days on the
Offering Date of such Offering (an "Eligible Employee"); however, the five-day
eligibility requirement shall be waived with respect to the Initial Offering
only.
(b) Notwithstanding the foregoing, the following employees shall NOT
be Eligible Employees or be granted Rights under an Offering: (i) part-time or
seasonal employees whose customary employment is less than twenty (20) hours per
week or five (5) months per calendar year or (ii) 5% stockholders (including
ownership through unexercised options) described in subparagraph 6(c) of the
Plan.
3. RIGHTS.
(a) Subject to the limitations contained herein and in the Plan, on
each Offering Date each Eligible Employee shall be granted the Right to purchase
the number of Shares purchasable with up to ten percent (10%) of such Eligible
Employee's Earnings paid during such Offering after the Eligible Employee first
commences participation; provided, however, that no employee may purchase Shares
on a particular Purchase Date that would result in more than ten percent (10%)
of such employee's Earnings in the period from the Offering Date to such
Purchase Date having been applied to purchase Shares under all ongoing Offerings
under the Plan and all other Company plans intended to qualify as "employee
stock purchase plans" under Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code").
(b) For this Offering, "Earnings" means the total compensation paid to
an employee, including all salary, wages (including amounts elected to be
deferred by the employee, that would otherwise have been paid, under any cash or
deferred arrangement established by the Company), overtime pay, commissions,
bonuses, and other remuneration paid directly to the employee, but excluding
profit sharing, the cost of employee benefits paid for by the Company,
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education or tuition reimbursements, imputed income arising under any Company
group insurance or benefit program, traveling expenses, business and moving
expense reimbursements, income received in connection with stock options,
contributions made by the Company under any employee benefit plan, and similar
items of compensation.
(c) Notwithstanding the foregoing, the maximum number of Shares an
Eligible Employee may purchase on any Purchase Date in an Offering shall be such
number of Shares as has a fair market value (determined as of the Offering Date
for such Offering) equal to (x) $25,000 multiplied by the number of calendar
years in which the Right under such Offering has been outstanding at any time,
minus (y) the fair market value of any other Shares (determined as of the
relevant Offering Date with respect to such Shares) which, for purposes of the
limitation of Section 423(b)(8) of the Code, are attributed to any of such
calendar years in which the Right is outstanding. The amount in clause (y) of
the previous sentence shall be determined in accordance with regulations
applicable under Section 423(b)(8) of the Code based on (i) the number of Shares
previously purchased with respect to such calendar years pursuant to such
Offering or any other Offering under the Plan, or pursuant to any other Company
plans intended to qualify as "employee stock purchase plans" under Section 423
of the Code, and (ii) the number of Shares subject to other Rights outstanding
on the Offering Date for such Offering pursuant to the Plan or any other such
Company plan.
(d) The maximum aggregate number of Shares available to be purchased
by all Eligible Employees under an Offering shall be the number of Shares
remaining available under the Plan on the Offering Date. If the aggregate
purchase of Shares upon exercise of Rights granted under the Offering would
exceed the maximum aggregate number of Shares available, the Board shall make a
pro rata allocation of the Shares available in a uniform and equitable manner.
4. PURCHASE PRICE.
(a) The purchase price of the Shares under the Offering shall be the
lesser of eighty-five percent (85%) of the fair market value of the Shares on
the Offering Date or eighty-five percent (85%) of the fair market value of the
Shares on the Purchase Date, in each case rounded up to the nearest whole cent
per Share.
(b) For the Initial Offering, the fair market value of the Shares at
the time when the Offering commences shall be the price per Share at which
Shares are first sold to the public in the Company's initial public offering as
specified in the final prospectus with respect to that offering.
5. PARTICIPATION.
(a) An Employee who is an Eligible Employee at the beginning of an
Offering may elect to participate in such Offering at the beginning of the
Offering or at the start of any new Purchase Period during the Offering.
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(b) A Participant who is enrolled in an Offering automatically will be
enrolled in the next Offering that commences after the current Offering ends.
(c) An Eligible Employee shall become a Participant in an Offering by
delivering an agreement authorizing payroll deductions. Such deductions must be
in whole percentages, with a minimum percentage of one percent (1%) and a
maximum percentage of ten percent (10%) of Earnings. A Participant may not make
additional payments into his or her account. The agreement shall be made on such
enrollment form as the Company provides, and must be delivered to the Company at
least ten (10) days before the Offering Date, or before such later date
specified in subparagraph 5(a), in advance of the date of participation to be
effective, unless a later time for filing the enrollment form is set by the
Board for all Eligible Employees with respect to a given Offering Date. For the
Initial Offering, the time for filing an enrollment form and commencing
participation for individuals who are Eligible Employees on the Offering Date
for the Initial Offering may be after the Offering Date, as determined by the
Company and communicated to such Eligible Employees.
(d) If the agreement authorizing payroll deductions is required to be
delivered to the Company or designated Affiliate a specified number of days
before the Offering Date to be effective, then an employee who becomes eligible
during the required delivery period shall not be considered to be an Eligible
Employee at the beginning of the Offering.
6. CHANGING PARTICIPATION LEVEL DURING OFFERING; WITHDRAWAL FROM OFFERING.
(a) A Participant may not increase his or her deductions during the
course of a Purchase Period. A Participant may increase or decrease his or her
deductions prior to the beginning of a new Purchase Period or a new Offering, to
be effective at the beginning of such new Purchase Period or new Offering. A
Participant shall make a change in his or her participation level by delivering
a notice to the Company in such form and at such time as the Company provides.
(b) A Participant may reduce (including to zero) his or her deductions
once (and only once) during a Purchase Period, effective as soon as
administratively practicable. A Participant shall make a change in his or her
participation level by delivering a notice to the Company in such form and at
such time as the Company provides.
(c) Except as otherwise specifically provided herein, a Participant
may not increase or decrease his or her participation level during the course of
an Offering.
(d) Notwithstanding the foregoing, a Participant may withdraw from an
Offering and receive his or her accumulated payroll deductions from the Offering
(reduced to the extent, if any, such deductions have been used to acquire Shares
for the Participant on any prior Purchase Dates), without interest, or reduce
his or her participation percentage to zero (0), at any time prior to the end of
the Offering, excluding only each five (5) day period immediately preceding a
Purchase Date (or such shorter period of time determined by the Company and
communicated to
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Participants) by delivering a withdrawal notice to the Company in such form as
the Company provides.
7. PURCHASES.
Subject to the limitations contained herein, on each Purchase Date,
each Participant's accumulated payroll deductions (without any increase for
interest) shall be applied to the purchase of whole Shares, up to the maximum
number of Shares permitted under the Plan and the Offering.
8. NOTICES AND AGREEMENTS.
Any notices or agreements provided for in an Offering or the Plan shall
be given in writing, in a form provided by the Company, and unless specifically
provided for in the Plan or this Offering shall be deemed effectively given upon
receipt or, in the case of notices and agreements delivered by the Company, five
(5) days after deposit in the United States mail, postage prepaid.
9. EXERCISE CONTINGENT ON STOCKHOLDER APPROVAL.
The Rights granted under an Offering are subject to the approval of the
Plan by the Shareholders as required for the Plan to obtain treatment as a
tax-qualified employee stock purchase plan under Section 423 of the Code.
10. OFFERING SUBJECT TO PLAN.
Each Offering is subject to all the provisions of the Plan, and its
provisions are hereby made a part of the Offering, and is further subject to all
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan.
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EXHIBIT 10.4
QUANTUM EFFECT DEVICES, INC.
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
ADOPTED SEPTEMBER 1, 1999
APPROVED BY STOCKHOLDERS NOVEMBER 23, 1999
EFFECTIVE DATE: DATE OF INITIAL PUBLIC OFFERING
TERMINATION DATE: NONE
1. PURPOSE.
(a) ELIGIBLE OPTION RECIPIENTS. The persons eligible to receive
Options are the Non-Employee Directors of the Company.
(b) AVAILABLE OPTIONS. The purpose of the Plan is to provide a means
by which Non-Employee Directors may be given an opportunity to benefit from
increases in value of the Common Stock through the granting of Nonstatutory
Stock Options.
(c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to
retain the services of its Non-Employee Directors, to secure and retain the
services of new Non-Employee Directors and to provide incentives for such
persons to exert maximum efforts for the success of the Company and its
Affiliates.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation
of the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "ANNUAL MEETING" means the annual meeting of the stockholders of
the Company.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMON STOCK" means the common stock of the Company.
(f) "COMPANY" means Quantum Effect Devices, Inc., a Delaware
corporation.
(g) "CONSULTANT" means any person, including an advisor, (i) engaged
by the Company or an Affiliate to render consulting or advisory services and who
is compensated for such services or (ii) who is a member of the Board of
Directors of an Affiliate. However, the term "Consultant" shall not include
either Directors of the Company who are not compensated by the Company for their
services as Directors or Directors of the Company who are merely paid a
director's fee by the Company for their services as Directors.
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(h) "CONTINUOUS SERVICE" means that the Optionholder's service with
the Company or an Affiliate, whether as an Employee, Director or Consultant, is
not interrupted or terminated. The Optionholder's Continuous Service shall not
be deemed to have terminated merely because of a change in the capacity in which
the Optionholder renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Optionholder
renders such service, provided that there is no interruption or termination of
the Optionholder's Continuous Service. For example, a change in status from a
Non-Employee Director of the Company to a Consultant of an Affiliate or an
Employee of the Company will not constitute an interruption of Continuous
Service. The Board or the chief executive officer of the Company, in that
party's sole discretion, may determine whether Continuous Service shall be
considered interrupted in the case of any leave of absence approved by that
party, including sick leave, military leave or any other personal leave.
(i) "DIRECTOR" means a member of the Board of Directors of the
Company.
(j) "DISABILITY" means the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any person employed by the Company or an
Affiliate. Mere service as a Director or payment of a director's fee by the
Company or an Affiliate shall not be sufficient to constitute "employment" by
the Company or an Affiliate.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Common Stock) on the last market trading day prior to the day
of determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable.
(ii) In the absence of such markets for the Common Stock, the
Fair Market Value shall be determined in good faith by the Board.
(n) "IPO DATE" means the effective date of the initial public offering
of the Common Stock.
(o) "NON-EMPLOYEE DIRECTOR" means a Director who is not an Employee.
(p) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code and the regulations promulgated thereunder.
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(q) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "OPTION" means a Nonstatutory Stock Option granted pursuant to the
Plan.
(s) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionholder evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(t) "OPTIONHOLDER" means a person to whom an Option is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Option.
(u) "PLAN" means this Quantum Effect Devices, Inc. 1999 Non-Employee
Directors' Stock Option Plan.
(v) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act
or any successor to Rule 16b-3, as in effect from time to time.
(w) "SECURITIES ACT" means the Securities Act of 1933, as amended.
3. ADMINISTRATION.
(a) ADMINISTRATION BY BOARD. The Board shall administer the Plan.
(b) POWERS OF BOARD. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine the provisions of each Option to the extent not
specified in the Plan.
(ii) To construe and interpret the Plan and Options granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Option Agreement, in a
manner and to the extent it shall deem necessary or expedient to make the Plan
fully effective.
(iii) To amend the Plan or an Option as provided in Section 12.
(iv) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company that are not in conflict with the provisions of the Plan.
(c) EFFECT OF BOARD'S DECISION. All determinations, interpretations
and constructions made by the Board in good faith shall not be subject to review
by any person and shall be final, binding and conclusive on all persons.
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4. SHARES SUBJECT TO THE PLAN.
(a) SHARE RESERVE. Subject to the provisions of Section 11 relating to
adjustments upon changes in the Common Stock, the Common Stock that may be
issued pursuant to Options shall not exceed in the aggregate Two Hundred
Thousand (200,000) shares of Common Stock.
(b) ADDITIONAL SHARES. The aggregate number of shares of Common Stock
that may be issued pursuant to Options granted under the Plan as specified in
subsection 4(a) shall automatically be increased as follows:
(i) For a period of ten (10) years, commencing on June 30, 2000
and ending on June 30, 2009, the aggregate number of shares of Common Stock
specified in paragraph 4(a) hereof automatically shall be increased each June
(the "Calculation Date") by the greater of (1) five-tenths of one percent (0.5%)
of the Diluted Shares Outstanding on the Calculation Date, or (2) that number of
shares subject to Options granted under the Plan during the prior 12-month
period.
(ii) For purposes of subsection 4(a)(i), "Diluted Shares
Outstanding" means the number of outstanding shares of Common Stock on the
Calculation Date, plus the number of shares of Common Stock issuable upon the
Calculation Date assuming the conversion of all outstanding Preferred Stock and
convertible notes, plus the additional number of dilutive Common Stock
equivalent shares outstanding as the result of any options or warrants
outstanding during the prior 12-month period, calculated using the treasury
stock method.
(c) REVERSION OF SHARES TO THE SHARE RESERVE. If any Option shall for
any reason expire or otherwise terminate, in whole or in part, without having
been exercised in full, the shares of Common Stock not acquired under such
Option shall revert to and again become available for issuance under the Plan.
(d) SOURCE OF SHARES. The shares of Common Stock subject to the Plan
may be unissued shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
The Options as set forth in section 6 automatically shall be granted
under the Plan to all Non-Employee Directors.
6. NON-DISCRETIONARY GRANTS.
Without any further action of the Board, each Non-Employee Director
shall be granted the following Options:
(a) ANNUAL MEETING GRANT. Each person who is elected or re-elected to
a three-year term of office as a Non-Employee Director at an Annual Meeting,
commencing with the Annual Meeting in 2000, automatically shall be granted, on
the day following such Annual Meeting, an Option to purchase Thirty Thousand
(30,000) shares of Common Stock.
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(b) INTERIM GRANT. Each person who is elected or appointed to fill a
vacancy for less than a full three-year term of office as a Non-Employee
Director automatically shall be granted, on the following day of such election
or appointment, an Option to purchase that number of shares of Common Stock
equal to Thirty Thousand (30,000) shares divided by the number of remaining
months of such person's term of office as a Director, rounded up to the nearest
whole share and rounded up or down to the nearest whole month.
(c) ADDITIONAL ANNUAL MEETING GRANT. Each person who is a Non-Employee
Director on the day following the Annual Meeting in 2000 but who is not eligible
for the Annual Meeting Grant specified in subsection 6(a) hereof automatically
shall be granted, on the day following such Annual Meeting, an Option to
purchase that number of shares of Common Stock equal to Thirty Thousand (30,000)
shares divided by the number of remaining months of such person's term of office
as a Director, rounded up to the nearest whole share and rounded up or down to
the nearest whole month.
(d) TERMS AND CONDITIONS. The Options shall be made on the terms and
conditions set forth herein.
7. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as required by the Plan. Each Option shall contain such additional
terms and conditions, not inconsistent with the Plan, as the Board shall deem
appropriate. Each Option shall include (through incorporation of provisions
hereof by reference in the Option or otherwise) the substance of each of the
following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) EXERCISE PRICE. The exercise price of each Option shall be one
hundred percent (100%) of the Fair Market Value of the stock subject to the
Option on the date the Option is granted. Notwithstanding the foregoing, an
Option may be granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option may be paid, to the extent permitted by applicable statutes and
regulations, in any combination of (i) cash or check, (ii) delivery to the
Company of other Common Stock, or (ii) by a "same day sale" program pursuant to
Regulation T of the Exchange Act. The purchase price of Common Stock acquired
pursuant to an Option that is paid by delivery to the Company of other Common
Stock acquired, directly or indirectly from the Company, shall be paid only by
shares of the Common Stock of the Company that have been held for more than six
(6) months (or such longer or shorter period of time required to avoid a charge
to earnings for financial accounting purposes). At any time that the Company is
incorporated in Delaware, payment of the Common Stock's
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"par value," as defined in the Delaware General Corporation Law, shall not be
made by deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(d) TRANSFERABILITY. An Option is not transferable, except (i) by will
or by the laws of descent and distribution, (ii) by instrument to an inter vivos
or testamentary trust, in a form accepted by the Company, in which the Option is
to be passed to beneficiaries upon the death of the trustor (settlor) and (iii)
by gift, in a form accepted by the Company, to a member of the "immediate
family" of the Optionholder as that term is defined in 17 C.F.R. 240.16a-1(e).
In addition, Optionholder may, by delivering written notice to the Company, in a
form satisfactory to the Company, designate a third party who, in the event of
the death of the Optionholder, shall thereafter be entitled to exercise the
Option.
(e) VESTING GENERALLY. Options shall vest and become exercisable in
equal monthly installments after the grant of the Option, the number of which
shall be determined by the number of months remaining of the Optionholder's term
of office as a Director at the time of the grant of the Option.
(f) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise it as of the date of termination) but
only within such period of time ending on the expiration of the term of the
Option. If, after termination, the Optionholder does not exercise his or her
Option within the time specified in the Option Agreement, the Option shall
terminate.
(g) EXTENSION OF TERMINATION DATE. If the exercise of the Option
following the termination of the Optionholder's Continuous Service (other than
upon the Optionholder's death or Disability) would be prohibited at any time
solely because the issuance of shares would violate the registration
requirements under the Securities Act, then the Option shall terminate on the
earlier of (i) the expiration of the term of the Option set forth in subsection
7(a) or (ii) the expiration of a period of three (3) months after the
termination of the Optionholder's Continuous Service during which the exercise
of the Option would not be in violation of such registration requirements.
(h) DISABILITY OF OPTIONHOLDER. In the event an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise it as of the date of termination), but only within such
period of time ending on the earlier of (i) the date twelve (12) months
following such termination or (ii) the expiration of the term of the Option. If,
after termination, the Optionholder does not exercise his or her Option within
the time specified herein, the Option shall terminate.
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(i) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's
Continuous Service terminates as a result of the Optionholder's death or (ii)
the Optionholder dies within the three-month period after the termination of the
Optionholder's Continuous Service for a reason other than death, then the Option
may be exercised (to the extent the Optionholder was entitled to exercise the
Option as of the date of death) by the Optionholder's estate, by a person who
acquired the right to exercise the Option by bequest or inheritance or by a
person designated to exercise the Option upon the Optionholder's death, but only
within the period ending on the earlier of (1) the date eighteen (18) months
following the date of death or (2) the expiration of the term of such Option.
If, after death, the Option is not exercised within the time specified herein,
the Option shall terminate.
8. COVENANTS OF THE COMPANY.
(a) AVAILABILITY OF SHARES. During the terms of the Options, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Options.
(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from
each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Options and to issue and sell shares of
Common Stock upon exercise of the Options; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Option or any stock issued or issuable pursuant to any such
Option. If, after reasonable efforts, the Company is unable to obtain from any
such regulatory commission or agency the authority which counsel for the Company
deems necessary for the lawful issuance and sale of stock under the Plan, the
Company shall be relieved from any liability for failure to issue and sell stock
upon exercise of such Options unless and until such authority is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.
10. MISCELLANEOUS.
(a) STOCKHOLDER RIGHTS. No Optionholder shall be deemed to be the
holder of, or to have any of the rights of a holder with respect to, any shares
subject to such Option unless and until such Optionholder has satisfied all
requirements for exercise of the Option pursuant to its terms.
(b) NO SERVICE RIGHTS. Nothing in the Plan or any instrument executed
or Option granted pursuant thereto shall confer upon any Optionholder any right
to continue to serve the Company as a Non-Employee Director or shall affect the
right of the Company or an Affiliate to terminate (i) the employment of an
Employee with or without notice and with or without cause, (ii) the service of a
Consultant pursuant to the terms of such Consultant's agreement with the Company
or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the
Company
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or an Affiliate, and any applicable provisions of the corporate law of the state
in which the Company or the Affiliate is incorporated, as the case may be.
(c) INVESTMENT ASSURANCES. The Company may require an Optionholder, as
a condition of exercising or acquiring stock under any Option, (i) to give
written assurances satisfactory to the Company as to the Optionholder's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Option; and (ii) to give
written assurances satisfactory to the Company stating that the Optionholder is
acquiring the stock subject to the Option for the Optionholder's own account and
not with any present intention of selling or otherwise distributing the stock.
The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (iii) the issuance of the shares upon the
exercise or acquisition of stock under the Option has been registered under a
then currently effective registration statement under the Securities Act or (iv)
as to any particular requirement, a determination is made by counsel for the
Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.
(d) WITHHOLDING OBLIGATIONS. The Optionholder may satisfy any federal,
state or local tax withholding obligation relating to the exercise or
acquisition of stock under an Option by any of the following means (in addition
to the Company's right to withhold from any compensation paid to the
Optionholder by the Company) or by a combination of such means: (i) tendering a
cash payment; (ii) authorizing the Company to withhold shares from the shares of
the Common Stock otherwise issuable to the Optionholder as a result of the
exercise or acquisition of stock under the Option, provided, however, that no
shares of Common Stock are withheld with a value exceeding the minimum amount of
tax required to be withheld by law; or (iii) delivering to the Company owned and
unencumbered shares of the Common Stock.
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the stock
subject to the Plan, or subject to any Option, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject both to the
Plan pursuant to subsection 4(a) and to the nondiscretionary Options specified
in Section 6, and the outstanding Options will be appropriately adjusted in the
class(es) and number of securities and price per share of stock subject to such
outstanding Options. The Board shall make such adjustments, and its
determination shall be final, binding and conclusive. (The conversion of any
convertible
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securities of the Company shall not be treated as a transaction "without receipt
of consideration" by the Company.)
(b) CHANGE IN CONTROL--DISSOLUTION OR LIQUIDATION. In the event of a
dissolution or liquidation of the Company, then all outstanding Options shall
terminate immediately prior to such event.
(c) CHANGE IN CONTROL--ASSET SALE, MERGER, CONSOLIDATION OR REVERSE
MERGER. In the event of (i) a sale, lease or other disposition of all or
substantially all of the assets of the Company, (ii) a merger or consolidation
in which the Company is not the surviving corporation or (iii) a reverse merger
in which the Company is the surviving corporation but the shares of Common Stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, then any surviving corporation or acquiring corporation shall assume
any Options outstanding under the Plan or shall substitute similar Options
(including an option to acquire the same consideration paid to the stockholders
in the transaction described in this subsection 11(c) for those outstanding
under the Plan). In the event any surviving corporation or acquiring corporation
refuses to assume such Options or to substitute similar Options for those
outstanding under the Plan, then with respect to Options held by Optionholders
whose Continuous Service has not terminated, the vesting of such Options (and
the time during which such Options may be exercised) shall be accelerated in
full, and the Options shall terminate if not exercised at or prior to such
event. With respect to any other Options outstanding under the Plan, such
Options shall terminate if not exercised prior to such event.
12. AMENDMENT OF THE PLAN AND OPTIONS.
(a) AMENDMENT OF PLAN. The Board at any time, and from time to time,
may amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary to satisfy the requirements of Rule 16b-3 or any Nasdaq or
securities exchange listing requirements.
(b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion,
submit any other amendment to the Plan for stockholder approval.
(c) NO IMPAIRMENT OF RIGHTS. Rights under any Option granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Optionholder and (ii) the
Optionholder consents in writing.
(d) AMENDMENT OF OPTIONS. The Board at any time, and from time to
time, may amend the terms of any one or more Options; provided, however, that
the rights under any Option shall not be impaired by any such amendment unless
(i) the Company requests the consent of the Optionholder and (ii) the
Optionholder consents in writing.
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<PAGE>
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) PLAN TERM. The Board may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan shall terminate on the day before the
tenth (10th) anniversary of the date the Plan is adopted by the Board or
approved by the stockholders of the Company, whichever is earlier. No Options
may be granted under the Plan while the Plan is suspended or after it is
terminated.
(b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan
shall not impair rights and obligations under any Option granted while the Plan
is in effect except with the written consent of the Optionholder.
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective on the IPO Date, but no Option shall be
exercised unless and until the Plan has been approved by the stockholders of the
Company, which approval shall be within twelve (12) months before or after the
date the Plan is adopted by the Board.
15. CHOICE OF LAW.
All questions concerning the construction, validity and interpretation
of this Plan shall be governed by the law of the State of Delaware, without
regard to such state's conflict of laws rules.
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QUANTUM EFFECT DEVICES, INC.
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
STOCK OPTION AGREEMENT
(NONSTATUTORY STOCK OPTION)
Pursuant to your Stock Option Grant Notice ("Grant Notice") and this
Stock Option Agreement, Quantum Effect Devices, Inc. (the "Company") has granted
you an option under its 1999 Non-Employee Directors' Stock Option Plan (the
"Plan") to purchase the number of shares of the Company's Common Stock indicated
in your Grant Notice at the exercise price indicated in your Grant Notice.
Defined terms not explicitly defined in this Stock Option Agreement but defined
in the Plan shall have the same definitions as in the Plan.
The details of your option are as follows:
1. VESTING. Subject to the limitations contained herein, your option
will vest as provided in your Grant Notice, provided that vesting will cease
upon the termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common
Stock subject to your option and your exercise price per share referenced in
your Grant Notice may be adjusted from time to time for capitalization
adjustments, as provided in the Plan.
3. METHOD OF PAYMENT. Payment of the exercise price is due in full
upon exercise of all or any part of your option. You may elect to make payment
of the exercise price in cash or by check or in one or more of the following:
(a) Provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in THE WALL STREET JOURNAL, pursuant to a
program developed under Regulation T as promulgated by the Federal Reserve Board
that, prior to the issuance of Common Stock, results in either the receipt of
cash (or check) by the Company or the receipt of irrevocable instructions to pay
the aggregate exercise price to the Company from the sales proceeds.
(b) Provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in THE WALL STREET JOURNAL, by delivery of
already-owned shares of Common Stock either that you have held for the period
required to avoid a charge to the Company's reported earnings (generally six
months) or that you did not acquire, directly or indirectly from the Company,
that are owned free and clear of any liens, claims, encumbrances or security
interests, and that are valued at Fair Market Value on the date of exercise.
"Delivery" for these purposes shall include delivery to the Company of your
attestation of ownership of such shares of Common Stock in a form approved by
the Company. Notwithstanding the foregoing, you may not exercise your option by
tender to the Company of Common Stock to the extent such tender would violate
the provisions of any law, regulation or agreement restricting the redemption of
the Company's stock.
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4. WHOLE SHARES. You may exercise your option only for whole shares of
Common Stock.
5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, you may not exercise your option unless the shares of Common
Stock issuable upon such exercise are then registered under the Securities Act
or, if such shares of Common Stock are not then so registered, the Company has
determined that such exercise and issuance would be exempt from the registration
requirements of the Securities Act. The exercise of your option must also comply
with other applicable laws and regulations governing your option, and you may
not exercise your option if the Company determines that such exercise would not
be in material compliance with such laws and regulations.
6. TERM. The term of your option commences on the Date of Grant and
expires upon the EARLIEST of the following:
(a) three (3) months after the termination of your Continuous
Service for any reason other than your Disability or death, provided that if
during any part of such three (3)-month period your option is not exercisable
solely because of the condition set forth in the preceding paragraph relating to
"Securities Law Compliance," your option shall not expire until the earlier of
the Expiration Date or until it shall have been exercisable for an aggregate
period of three (3) months after the termination of your Continuous Service;
(b) twelve (12) months after the termination of your Continuous
Service due to your Disability;
(c) eighteen (18) months after your death if you die either
during your Continuous Service or within three (3) months after your Continuous
Service terminates;
(d) the Expiration Date indicated in your Grant Notice; or
(e) the day before the tenth (10th) anniversary of the Date of
Grant.
7. EXERCISE.
(a) You may exercise the vested portion of your option during its
term by delivering a Notice of Exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.
(b) By exercising your option you agree that, as a condition to
any exercise of your option, the Company may require you to enter into an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise of
your option, (2) the lapse of any substantial risk of forfeiture to which the
shares of Common Stock are subject at the time of exercise, or (3) the
disposition of shares of Common Stock acquired upon such exercise.
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8. TRANSFERABILITY. Your option is not transferable, except (i) by
will or by the laws of descent and distribution, (ii) by instrument to an inter
vivos or testamentary trust, in a form accepted by the Company, in which the
option is to be passed to beneficiaries upon the death of the trustor (settlor)
and (iii) by gift, in a form accepted by the Company, to your "immediate family"
as that term is defined in 17 C.F.R. 240.16a-1(e). The term "immediate family"
is defined in 17 C.F.R. 240.16a-1(e) to mean any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and includes
adoptive relationships. Your option is exercisable during your life only by you
or a transferee satisfying the above-stated conditions. The right of a
transferee to exercise the transferred portion of your option after termination
of your Continuous Service shall terminate in accordance with your right to
exercise your option as specified in your option. In the event that your
Continuous Service terminates due to your death, your transferee will be treated
as a person who acquired the right to exercise your option by bequest or
inheritance. In addition to the foregoing, the Company may require, as a
condition of the transfer of your option to a trust or by gift, that your
transferee enter into an option transfer agreement provided by, or acceptable
to, the Company. The terms of your option shall be binding upon your
transferees, executors, administrators, heirs, successors, and assigns.
Notwithstanding the foregoing, by delivering written notice to the Company, in a
form satisfactory to the Company, you may designate a third party who, in the
event of your death, shall thereafter be entitled to exercise your option.
9. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or
service contract, and nothing in your option shall be deemed to create in any
way whatsoever any obligation on your part to continue in the employ of the
Company or an Affiliate, or of the Company or an Affiliate to continue your
employment. In addition, nothing in your option shall obligate the Company or an
Affiliate, their respective shareholders, Boards of Directors, Officers or
Employees to continue any relationship that you might have as a Director or
Consultant for the Company or an Affiliate.
10. WITHHOLDING OBLIGATIONS.
(a) At the time you exercise your option, in whole or in part, or
at any time thereafter as requested by the Company, you hereby authorize
withholding from payroll and any other amounts payable to you, and otherwise
agree to make adequate provision for (including by means of a "cashless
exercise" pursuant to a program developed under Regulation T as promulgated by
the Federal Reserve Board to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Company or an Affiliate, if any, which arise in connection
with your option.
(b) Upon your request and subject to approval by the Company, in
its sole discretion, and compliance with any applicable conditions or
restrictions of law, the Company may withhold from fully vested shares of Common
Stock otherwise issuable to you upon the exercise of your option a number of
whole shares of Common Stock having a Fair Market Value, determined by the
Company as of the date of exercise, not in excess of the minimum amount of tax
required to be withheld by law. If the date of determination of any tax
withholding
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obligation is deferred to a date later than the date of exercise of your option,
share withholding pursuant to the preceding sentence shall not be permitted
unless you make a proper and timely election under Section 83(b) of the Code,
covering the aggregate number of shares of Common Stock acquired upon such
exercise with respect to which such determination is otherwise deferred, to
accelerate the determination of such tax withholding obligation to the date of
exercise of your option. Notwithstanding the filing of such election, shares of
Common Stock shall be withheld solely from fully vested shares of Common Stock
determined as of the date of exercise of your option that are otherwise issuable
to you upon such exercise. Any adverse consequences to you arising in connection
with such share withholding procedure shall be your sole responsibility.
(c) You may not exercise your option unless the tax withholding
obligations of the Company and/or any Affiliate are satisfied. Accordingly, you
may not be able to exercise your option when desired even though your option is
vested, and the Company shall have no obligation to issue a certificate for such
shares of Common Stock or release such shares of Common Stock from any escrow
provided for herein.
11. NOTICES. Any notices provided for in your option or the Plan shall
be given in writing and shall be deemed effectively given upon receipt or, in
the case of notices delivered by mail by the Company to you, five (5) days after
deposit in the United States mail, postage prepaid, addressed to you at the last
address you provided to the Company.
12. GOVERNING PLAN DOCUMENT. Your option is subject to all the
provisions of the Plan, the provisions of which are hereby made a part of your
option, and is further subject to all interpretations, amendments, rules and
regulations which may from time to time be promulgated and adopted pursuant to
the Plan. In the event of any conflict between the provisions of your option and
those of the Plan, the provisions of the Plan shall control.
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QUANTUM EFFECT DEVICES, INC.
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
NOTICE OF EXERCISE (POST-IPO)
Quantum Effect Devices, Inc.
3255-3 Scott Blvd., Suite 200
Santa Clara CA 95054 Date of Exercise: _______________
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase
the number of shares for the price set forth below.
Stock option dated: ______________________________
Number of shares being acquired: ______________________________
Certificates to be issued in name of: ______________________________
Total exercise price: $______________
Cash payment delivered herewith: $______________
Value of ________ shares of common stock (1): $______________
By this exercise, I agree (i) to provide such additional documents as
you may require pursuant to the terms of the 1999 Non-Employee Directors' Stock
Option Plan, and (ii) to provide for the payment by me to you (in the manner
designated by you) of your withholding obligation, if any, relating to the
exercise of this option.
Very truly yours,
----------------------------------------
- ------------------
1 Shares must meet the public trading requirements set forth in the option.
Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the option,
and must be owned free and clear of any liens, claims, encumbrances or security
interests. Certificates must be endorsed or accompanied by an executed
assignment separate from certificate unless shares are tendered by attestation.
<PAGE>
EXHIBIT 10.10
AMENDMENT 1 TO THE AGREEMENT FOR PURCHASE AND SALE OF CUSTOM
SEMICONDUCTOR PRODUCTS WITH AGREEMENT NO. X0468
THIS AMENDMENT ("Amendment 1") to Agreement Number X0468 entered into
between INTERNATIONAL BUSINESS MACHINES CORPORATION ("IBM") and QUANTUM EFFECT
DESIGN, INC. ("Customer") on or about July 30, 1997 ("the Agreement") is made
and entered into by and between IBM and Customer. This Amendment 1 shall be
effective as of November 15, 1999.
WHEREAS IBM and Customer desire to amend the Agreement so as to modify
the existing terms and conditions of the Agreement and to add additional
products to be manufactured and sold under the terms and conditions of the
Agreement.
NOW THEREFORE, the parties hereby agree to amend the Agreement as
follows:
1. Delete Section 1 in its entirety and replace it with the following:
1.0 TERM OF AGREEMENT. This Agreement is effective on July 30, 1997
(the "Commencement Date"). This Agreement will expire on the later of November
14, 2002 (the "Expiration Date") or upon completion of the last Task Order
entered into prior to the Expiration Date, subject to Section 15 (Termination
Rights).
2. Delete Sections 2 and 3 in their entirety and replace them with the
following:
2.0 FORECASTS AND ORDERS.
2.1 Customer will maintain a rolling twelve (12) month forecast
subject to the following terms and conditions:
2.1.1 For purposes of this Section 2.0, the first month of a
forecast is the month in which the forecast is submitted, the second month of
the forecast is the following month, and so on through the twelfth month. For
example, if a forecast is submitted in January, then January is the first month
and December is the twelfth month. For the next forecast submitted in February,
February moves from the second month to the first month, December becomes the
eleventh month and January of the next year is now the new twelfth month.
Customer's forecast for a specific month indicates the number of Products
Customer forecasts for delivery during that month.
2.1.2 Customer's initial forecast accepted by IBM is set
forth in Section 5 PCL of this Attachment.
2.1.3 By the fifth (5th) day of every month during the term
of this Attachment, Customer will submit a proposed rolling twelve (12) month
forecast in substantially the same format as the initial forecast.
1.
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2.1.4 Within ten (10) days of receipt of Customer's proposed
rolling forecast:
(a) IBM will accept the proposed forecast for month
five (5) as submitted, provided that the forecasted amount for month five (5) is
the same as the prior accepted forecasted amount for such calendar month.
(b) IBM may accept or reject a forecast for month six
(6) for any reason. Forecasts for months seven (7) or greater are for
convenience purposes only and are non-binding on Customer and IBM.
(c) If for any month the proposed forecast is greater
than the accepted forecasted amount for the calendar month from the prior
forecast:
(i) IBM may reject such forecast for such month;
(ii) IBM may accept the forecast for such month as
submitted; or
(iii) IBM may negotiate with Customer on a volume
that IBM will accept.
2.1.5 IBM's failure to respond to Customer's proposed
forecast within ten (10) days of receipt of such forecast will result in the
automatic conversion of the proposed forecast into the new accepted forecast.
2.1.6 Customer's failure to submit a forecast by the fifth
(5th) day of any month during the term of this Attachment will result in the
prior month's accepted forecast being deemed as the new accepted forecast. In
this event, months one (1) through eleven (11) will be the same as the prior
accepted forecast amount for each such month and the forecast for month twelve
(12) shall be deemed to be zero (0).
2.1.7 Upon IBM's rejection of a forecast (or any month
thereof), the parties will attempt to negotiate a mutually agreeable forecast.
If the parties fail to mutually agree to a forecast by the last day of the month
in which the forecast was due, then the following forecast will automatically
become the new accepted forecast: months one (1) through five (5) will be the
same as the prior accepted forecasted amount for each such calendar month and
months six (6) through twelve (12) become zero (0).
2.2 Customer will request delivery of Products by issuing written
purchase orders to IBM by the fifth (5th) day of each calendar month. Customer
shall submit a purchase order with its initial forecast for a minimum of the
first four (4) months of the twelve month forecast. With each subsequent
forecast, Customer shall submit a purchase order for the fourth (4th) month of
the forecast (months one (1) through three (3) having already been committed
under purchase order(s) pursuant to the previous forecast).
2.3 Provided Customer is not in breach and meets all other terms
and conditions of this Agreement:
2.
<PAGE>
2.3.1 IBM will accept any order whose delivery date is equal
to or greater than four (4) months but less than six (6) months from the order
date provided that the purchase order quantity is between ninety percent (90%)
and one hundred and ten percent (110%) of the most recently accepted forecast
for the month at issue.
2.3.2 IBM may, but is not required to, accept any order
whose delivery date is equal to or greater than six (6) months from the order
date.
2.3.3 IBM may, but is not required to, accept any orders in
which Customer specifies a delivery date less than four months from the order
date, provided that the delivery date is equal to or greater than the Purchase
Order Lead Time and the amount ordered for the month at issue is equal to the
quantity in the most recently accepted forecast for that month.
2.3.4 IBM may, but is not required to, accept orders whose
delivery date is equal to or greater than four (4) months but less than six (6)
months from the order date if such order requests a quantity of Product greater
than one hundred and ten percent (110%) of the most recently accepted forecast
for the month at issue.
2.4 If by the fifth (5th) day of each month during the term of
this Attachment, Customer fails to order at least ninety (90%) of the accepted
forecasted quantity for the month five (5) of the previously accepted forecast
(which is month four (4) of the current forecast), then the cancellation charges
in Section 6.0 PCL of this Attachment will apply.
2.5 IBM may reject any purchase order that does not comply with
the terms and conditions of the Agreement and this Attachment or does not fall
within the most recent Customer credit limit granted by IBM.
2.6 Customer will request delivery of Products by issuing written
purchase orders to the IBM ordering location identified in Section 7.0 PCL of
this Attachment. Purchase orders will specify only the following information:
(a) Customer's purchase order number;
(b) Customer's tax status - exempt or non-exempt;
(c) ship to location - complete address;
(d) bill to location - complete address;
(e) order from location - complete address;
(f) shipping instructions, including preferred carrier and
carrier account number;
(g) the agreement number of this Agreement;
(h) name of Customer contact;
(i) Product part numbers, the quantity of wafers being
ordered, (in increments of the Minimum Order Quantity
("MOQ")), and whether Customer wants die packaged from
the wafers ordered;
3.
<PAGE>
(j) the Product's applicable unit price; and
(k) requested shipment dates.
3.0 INTENTIONALLY BLANK
3.0 Add the following Task Order #X0468-2 to the Agreement. Task Order
#X0468-2 shall be governed by the terms and conditions of Agreement Number
X0468:
TASK ORDER #X0468-2
1.0 TERM OF TASK ORDER: This Task Order will be effective as of November
15, 1999 and will expire on November 14, 2002, unless earlier terminated
pursuant to Section 15 of the Agreement.
2.0 PRODUCT INFORMATION FOR THE TAHOE PRODUCT:
2.1 PRODUCT DESCRIPTION OF TAHOE:
- Wafer Untested 200mm wafer in CMOS 6SF and
backside grind
- Levels of metal: 4
- number of Transistors: 1745
- die size: 6.2286mm x 6.9243mm
- Wire bond pad pitch: >90 microns
2.2 PRICING FOR TAHOE (Untested 200mm wafer in CMOS 6SF, with 4 levels
of metal, fuse blow and backside grind):
[CONFIDENTIAL TREATMENT]
* The prices for 2001 are for budgetary purposes only.
2.2.1 The pricing set forth above in this Section 2.2 applies to
all orders received by IBM, which are accepted by IBM, during a specific
calendar year. For example, the 1999 price applies to any order received and
accepted by IBM in 1999. Additionally, the pricing applies to all products,
whether Pre-Production or Production, other than Prototypes.
2.2.2 For any product with 5 levels of metal, the pricing shall
be determined by adding [CONFIDENTIAL TREATMENT] to the applicable price under
Section 2.2.
4.
<PAGE>
2.3 NRE (NON-RECURRING ENGINEERING CHARGES) FOR TAHOE:
2.3.1 Wafer Fab NRE [CONFIDENTIAL TREATMENT]
- Mask build
- Disclosure of CMOS 6SF design manual
- Disclosure of Spice Models
- Processing of GDS II tape in CMOS 6SF
- 2 prototype wafers
2.3.2 Additional prototype hardware
- Up to 4 wafers [CONFIDENTIAL TREATMENT]
2.3.3 Subsequent metal level revisions
- Per revision [CONFIDENTIAL TREATMENT]
- Per mask level [CONFIDENTIAL TREATMENT]
- Per prototype wafer (up to 6) [CONFIDENTIAL TREATMENT]
The prices in this Section 2.3.3 must be added together to determine
the correct price associated with a specific revision. For example, if Customer
requests that IBM complete one metal revision, which requires three mask level
changes and verification on 4 prototype wafers, then the applicable price would
be:
[CONFIDENTIAL TREATMENT]
2.3.4 IBM shall invoice Customer for NRE due pursuant to Section
2.3.1 as follows: [CONFIDENTIAL TREATMENT] of the NRE upon IBM's acceptance of
Customer's purchase order for the NRE and [CONFIDENTIAL TREATMENT] upon shipment
of Prototypes to Customer. IBM shall invoice Customer for any payment due
pursuant to Section 2.3.2 upon shipment of Prototypes to Customer. IBM shall
invoice Customer for any payment due pursuant to Section 2.3.3 upon IBM's
acceptance of Customer's purchase order for the NRE. ALL PURCHASE ORDERS FOR NRE
ARE NON-CANCELABLE BY CUSTOMER.
2.4 PURCHASE ORDER LEAD TIME FOR TAHOE:
PROTOTYPE* PRODUCTION
---------- ----------
RTAT** [CONFIDENTIAL [CONFIDENTIAL
TREATMENT] TREATMENT]
NTAT [CONFIDENTIAL [CONFIDENTIAL
TREATMENT] TREATMENT]
* The Purchase Order Lead Time for Prototypes runs from
IBM's receipt of Customer's purchase order and its DRC
clean GDS II, provided that IBM has received Customer's
final chip size fourteen (14) days prior to the time
IBM receives the DRC clean GDSII Tape.
** If available, IBM will provide a Turbo RTAT lot.
Otherwise, IBM will provide an NTAT lot.
5.
<PAGE>
2.5 DELIVERABLE ITEMS FOR TAHOE:
2.5.1 Customer shall provide IBM with the following:
- DRC clean GDS II Tape
2.5.2 IBM shall provide Customer with the following:
- CMOS 6SF Spice models
- CMOS 6SF Process Ground Rules
3.0 PRODUCT INFORMATION FOR THE OMEGA PRODUCT:
3.1 PRODUCT DESCRIPTION OF OMEGA
- Wafer Untested 200mm wafer in CMOS
6SF and backside grind
- Levels of metal: 4
- number of Transistors: 5635
- die size: 9.9417mm x 9.0138mm
- Wire bond pad pitch: >90 microns
3.2 PRICING FOR OMEGA (Untested 200mm wafer in CMOS 6SF, with
four levels of metal, fuse blow and backside grind):
[CONFIDENTIAL TREATMENT]
* The prices for 2001 are for budgetary purposes only.
3.2.1 The pricing set forth above in this Section 3.2
applies to all orders received by IBM, which are accepted by IBM, during a
specific calendar year. For example, the 1999 price applies to any order
received and accepted by IBM in 1999. Additionally, the pricing applies to all
products, whether Pre-Production or Production, other than Prototypes.
3.2.2 For any product with 5 levels of metal, the pricing
shall be determined by adding [CONFIDENTIAL TREATMENT] to the applicable price
under Section 2.2.
3.3 NRE (NON-RECURRING ENGINEERING CHARGES) FOR OMEGA:
3.3.1 Wafer Fab NRE [CONFIDENTIAL TREATMENT]
- Mask build
- Disclosure of CMOS 6SF design manual
- Disclosure of Spice Models
- Processing of GDS II tape in CMOS 6SF
- 2 prototype wafers
3.3.2 Additional prototype hardware
- Up to 4 wafers [CONFIDENTIAL TREATMENT]
3.3.3 Subsequent metal revisions
6.
<PAGE>
- Per revision [CONFIDENTIAL TREATMENT]
- Per mask level [CONFIDENTIAL TREATMENT]
- Per wafer (up to 6) [CONFIDENTIAL TREATMENT]
The prices in this Section 3.3.3 must be added together to determine
the correct price associated with a specific revision. For example, if Customer
requests that IBM complete one metal revision, which requires three mask level
changes and verification on 4 prototype wafers, then the applicable price would
be:
[CONFIDENTIAL TREATMENT]
3.3.4 IBM shall invoice Customer for NRE due pursuant to Section
3.3.1 as follows: [CONFIDENTIAL TREATMENT] of the NRE upon IBM's acceptance of
Customer's purchase order for the NRE and [CONFIDENTIAL TREATMENT] upon shipment
of Prototypes to Customer. IBM shall invoice Customer for any payment due
pursuant to Section 3.3.2 upon shipment of Prototypes to Customer. IBM shall
invoice Customer for any payment due pursuant to Section 3.3.3 upon IBM's
acceptance of Customer's purchase order for the NRE. ALL PURCHASE ORDERS FOR NRE
ARE NON-CANCELABLE.
3.4 PURCHASE ORDER LEAD TIME FOR OMEGA:
PROTOTYPE* PRODUCTION
------------- -------------
RTAT** [CONFIDENTIAL [CONFIDENTIAL
TREATMENT] TREATMENT]
NTAT [CONFIDENTIAL [CONFIDENTIAL
TREATMENT] TREATMENT]
* The Purchase Order Lead Time for Prototypes runs from
IBM's receipt of Customer's purchase order and its DRC
clean GDS II, provided that IBM has received Customer's
final chip size fourteen (14) days prior to time IBM's
receipt of Customer's DRC clean GDSII Tape.
** If available, IBM will provide a Turbo RTAT lot.
Otherwise, IBM will provide an NTAT lot.
3.5 DELIVERABLE ITEMS FOR OMEGA:
3.5.1 Customer shall provide IBM with the following:
- DRC clean GDS II Tape
3.5.2 IBM shall provide Customer with the following:
- CMOS 6SF Spice models
- CMOS 6SF Process Ground Rules
7.
<PAGE>
4.0 NRE FOR RECENTERING I-SUM FOR TAHOE AND OMEGA
4.1 The following provisions in this Section 4.0 describe terms
and conditions applicable to IBM's efforts, at Customer's request, to tailor the
poly line width of Tahoe and/or Omega Products.
4.2 Customer may request recentering I-sum NRE services in
purchase orders issued to IBM. In such case, Customer shall designate the I-sum
value in its purchase order. The payments for such NRE services will be
determined by reference to the table below and are based on the number of lots
of wafers (for which Customer is seeking recentering) purchased by Customer
under the purchase order at issue. There are 24 wafers in a lot.
<TABLE>
<CAPTION>
>1050 I-sum < 1050 I-sum
Lots per purchase order NRE Charge NRE Charge
- ----------------------- ------------------------ ------------------------
<S> <C> <C>
For lots 1-10 [CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT]
For lots 11-20 [CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT]
For lots 21-30 [CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT]
For lots 31-40 [CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT]
For lots 41 or more [CONFIDENTIAL TREATMENT] [CONFIDENTIAL TREATMENT]
</TABLE>
4.3 For example, the NRE recentering charge for a purchase order
requesting 25 lots with an I-sum of 1025 would be determined as follows:
[CONFIDENTIAL TREATMENT]
4.4 Purchase orders to recentering the I-sum values must be
accompanied by a change order, to assist IBM in having a specific part number
associated with the recentered product.
4.5 The I-sum recentering charges do not include charges for new
masks or other engineering services. Should additional masks or services be
required, IBM will provide a quotation based on the customer requirements.
4.6 ALL NRE SERVICES ASSOCIATED WITH RECENTERING I-SUM VALUES ARE
PROVIDED ON AN "AS IS" BASIS. IBM DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS OR USE FOR A
PARTICULAR PURPOSE.
4.7 ALL ORDERS FOR RECENTERED I-SUM PRODUCTS ARE NON-CANCELABLE.
CUSTOMER MUST PAY FOR ALL SUCH PRODUCTS, REGARDLESS OF YIELD RESULTS OR THE
CONDITION, RELIABILITY OR QUALITY OF THE PRODUCTS OR ANY VARIABILITY FROM WAFER
TO WAFER OR LOT TO LOT. ALL SUCH PRODUCTS ARE PROVIDED ON AN "AS IS" BASIS. IBM
DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES
OF MERCHANTABILITY AND FITNESS OR USE FOR A PARTICULAR PURPOSE.
8.
<PAGE>
5.0 PRODUCT DEMAND FORECASTS FOR BOTH TAHOE AND OMEGA:
5.1 Wafers
Tahoe [CONFIDENTIAL TREATMENT]
Omega
5.2 Minimum order quantity for both Tahoe and Omega is 1 lot of
24 wafers.
6.0 CANCELLATION CHARGES AND RESCHEDULING
The following sets forth Customer's rescheduling rights and the
cancellation charges that will be apply for failure to order against accepted
forecasts and to any change or canceled Customer order or portion thereof. The
"cancellation charge" referred to below is the percentage to be applied to the
prices stated in Sections 2.2 and 3.2 hereof. As noted in other sections of this
Task Order, purchase orders nor NRE services, including NRE Recentering I-Sum
services, are non-cancelable and nothing in this Section 5 modifies that fact.
6.1 RESCHEDULING
6.1.1 Customer may reschedule a shipment date provided:
(a) customer sends IBM written notice of the request
to reschedule;
(b) the notice is received by IBM more than
[CONFIDENTIAL TREATMENT] days prior to the
shipment date; and
(c) the rescheduled delivery date is written
[CONFIDENTIAL TREATMENT] days after the current
shipment date. If the foregoing requirements are
met, no cancellation charge will be imposed by
IBM in connection with rescheduling. Once a
shipment date is rescheduled, the new shipment
date is firm and cannot be rescheduled by
Customer.
6.1.2 If customer cancels an order or reduces an order or
exceeds the foregoing Product shipment rescheduling rights in this Section,
Customer agrees to pay the Product cancellation charges as described below.
The charges below also apply for any Product scrapped at Customer's request
or as a result of yield deficiencies caused in whole or in part by Customer's
design and for Product deemed cancelled due to Customer exceeding the
rescheduling rights set forth above. These charges apply with respect to both
Pre-production and Production products.
9.
<PAGE>
6.2 CANCELED OR CHANGED ORDERS
<TABLE>
<CAPTION>
Wafers
-------------------------------------------------- ------------------------------------------------
<S> <C>
Notice of purchase order cancellation or change Wafer Cancellation Charge
received by IBM: (Percentage to be applied to the prices set
forth in Section 2.2 or 3.2 above, as
applicable)
-------------------------------------------------- ------------------------------------------------
After Wafer Start [CONFIDENTIAL TREATMENT]
-------------------------------------------------- ------------------------------------------------
After purchase order acknowledgement and prior [CONFIDENTIAL TREATMENT]
to wafer start
-------------------------------------------------- ------------------------------------------------
</TABLE>
6.3 CANCELLED OR CHANGED FORECASTS
If customer fails to order forecasted quantities of
Product for month five (5) of any accepted forecast, as described in Section
2.2 and 2.4 of the Agreement, Customer will pay [CONFIDENTIAL TREATMENT] of
the wafer price and/or [CONFIDENTIAL TREATMENT] of the module packaging price
for all Product that was not ordered; however, there shall be no charge for a
given month if Customer orders at least [CONFIDENTIAL TREATMENT] of the
forecasted quantities listed in the most recently accepted forecast, for that
month.
7.0 TASK ORDER TECHNICAL COORDINATORS:
IBM Microelectronics Quantum Effect Design, Inc.
Director of Manufacturing
100 River Street 3255-3 Scott Boulevard, Suite 200
Essex Junction, VT 05452 Santa Clara, California 95054
Fax: 802-769-6744 Fax: 408-565-0335
Attn: John Dinklage Attn: Phil Hamister
8.0 SHIPPING/BILLING/ORDERING LOCATIONS:
Customer's Ship to Location: Customer's Bill to Location:
Per purchase orders Per purchase orders
IBM's Ordering Location:
International Business Machines Corporation
1055 Joaquin Rd.
Mountain View, CA 94043
Attention: Keith A. Frazier
Fax: 650-694-3157
10.
<PAGE>
NO OTHER AMENDMENT OR MODIFICATION. Except as expressly set forth in
this Amendment 1, the Agreement remains in full force and effect without
modification. The terms and conditions of this Amendment 1 and the Agreement
shall not be modified or amended except by a writing signed by authorized
representatives of both parties.
ENTIRE AGREEMENT. The Agreement, as amended herein sets forth the
entire agreement and understanding between the parties, and supersedes and
cancels all previous negotiations, agreements, commitments and writings, in
respect to the subject matter hereof, and neither party hereto shall be bound by
any term, clause, provision or condition except as expressly provided in the
Agreement as amended herein or as duly set forth on or subsequent to the date
hereof in writing, signed by duly authorized representatives of the parties.
AGREED TO AND ACCEPTED BY:
INTERNATIONAL BUSINESS MACHINES QUANTUM EFFECT DESIGN, INC.
CORPORATION
By: /s/ Peter D. Hansen By: /s/ Philip Hamister
------------------------------- ------------------------------
Authorized Signature Authorized Signature
Name: Peter D. Hansen Name: Philip Hamister
Title: VP NA Sales, IBM MD Title: Director of Manufacturing
Date: Date: 12/16/99
11.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated August 11, 1999, except
as to Note 10 which is as of December 28, 1999, relating to the financial
statements of Quantum Effect Devices, Inc., which appears in such Prospectus. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
PricewaterhouseCoopers, LLP
San Jose, California
January 11, 2000
