<PAGE>
As filed with the Securities and Exchange Commission on November 9, 1999.
Registration No. 333-86591
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM S-1
AMENDMENT NO. 3
to
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
VIRATA CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware No. 3674 77-0521696
(State of Incorporation) (Primary Standard Industrial (IRS employer
Classification Code Number) identification number)
</TABLE>
---------------
2933 Bunker Hill Lane, Suite 201
Santa Clara, California 95054
(408) 566-1000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Andrew Vought
Chief Financial Officer
2933 Bunker Hill Lane, Suite 201
Santa Clara, California 95054
(408) 566-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Douglas D. Smith Nora L. Gibson
Gibson, Dunn & Crutcher LLP Brobeck, Phleger & Harrison LLP
One Montgomery Street, Telesis Tower One Market, Spear Street Tower
San Francisco, California 94104 San Francisco, California 94105
(415) 393-8200 (415) 442-0900
</TABLE>
---------------
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, 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, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement of 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
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 statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
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 state 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 Section 8(a), may
determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained 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 it is not soliciting +
+an offer to buy these securities in any state where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 9, 1999
5,000,000 Shares
[LOGO OF VIRATA]
VIRATA CORPORATION
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price is expected to be between $9.00 and $11.00
per share. We have applied to have our common stock approved for listing on The
Nasdaq Stock Market's National Market under the symbol "VRTA."
The underwriters have an option to purchase a maximum of 750,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 8.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Virata
------------- ------------- -------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Warburg Dillon Read LLC
Thomas Weisel Partners LLC
The date of this prospectus is , 1999.
<PAGE>
Inside Front Cover
On the left-hand side of the upper third of the page is a large stylized "V"
being the first letter of Virata, the Company's name.
To the right of this are the words "the elements of speed."
In the middle third of the page and with the first letter of each line aligned
with the left hand of the stylized V mentioned above is the Company's
positioning statement:
Virata delivers highly-integrated semiconductors
with a comprehensive suite of communications
software to broadband Internet access equipment
suppliers. Virata's systems expertise, products
and support services simplify development, maxi-
mize opportunity for differentiation and speed
time to market.
Below this positioning statement is the Company's logo "Virata" which is also
aligned such that the left hand edge of the initial V is on the same diagonal as
the text above.
<PAGE>
Fold out Two-Page Spread
The title of the two-page spread is "Virata Integrated Software on Silicon." The
words "on Silicon" are in italics. This is aligned left and stretches three-
quarters of the way across the two pages.
The graphic is divided into three zones which are elliptical in shape and in
which the two outer zones overlap the central one.
The central zone is identified on its front edge as "Telephone Company" and
depicts a telephone company central office and features a tall stylized office
building with a pond in front and two adjoining pieces of equipment which are
labeled Digital Loop Carrier and Digital Subscriber Line Access Multiplexer.
Next to each of these pieces of equipment is a semiconductor graphic on which is
shown the Company's logo "Virata." Dotted lines connect these pieces of
equipment to the office building. Additional dotted lines extend from the
building's left-hand side and go to two clouds, one of which contains the word
"Internet" and the other contains the words "Public Switched Telephone
Network."
The left-hand zone is identified on its front edge as "Residential" and shows
two groups of stylized houses and apartment blocks. A portable computer and an
ADSL Modem are depicted next to one group of residences and a PC, telephone and
Digital Subscriber Line Gateway are depicted next to the lower group. The Modem
and Gateway are linked by dotted lines to the Digital Loop Carrier and Digital
Subscriber Line Access Multiplexer respectively. Next to each of the Modem and
the Gateway is a semiconductor graphic on which is shown the Company's logo
"Virata."
The right hand zone is identified on its front edge as "Corporate Offices" and
shows a group of tall stylized offices with three computers. To the left of
these are drawings of a Branch Office Router and a Corporate Router, labeled
accordingly. The Branch Office Router and the Corporate Router are each linked
by a dotted line to the Digital Subscriber Line Access Multiplexer. On the
computer displays is the Company's stylized letter V and next to each of the
Branch Office Router and Corporate Router are a semiconductor graphic on which
is shown the Company's logo "Virata."
Above the right hand zone is a semiconductor graphic on which is shown the
Company's logo "Virata" and next to this the following text - "Shows where
Virata integrated software on silicon is applied."
At the bottom right hand side of the two-page spread is the Company's logo -
"Virata."
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 8
Special Note Regarding Forward Looking Statements........................ 21
Use Of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Consolidated Financial Data..................................... 24
Management's Discussion And Analysis Of Financial Condition And Results
Of Operations........................................................... 26
Business................................................................. 42
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management................................................................. 55
Certain Transactions....................................................... 64
Principal Stockholders..................................................... 69
Description Of Capital Stock............................................... 71
Certain Provisions In Our Certificate Of Incorporation And Bylaws.......... 73
Shares Eligible For Future Sale............................................ 75
Underwriting............................................................... 76
Notice To Canadian Residents............................................... 79
Legal Matters.............................................................. 80
Experts.................................................................... 80
Additional Information..................................................... 80
Index To Consolidated Financial Statements................................. F-1
</TABLE>
------------
You should rely only on the information contained in this document. We have
not authorized anyone to provide you with information that is different. This
document may only be used where it is legal to sell these securities. The
information in this document may only be accurate on the date of this
document.
Virata(R), ATMOS(R) and ATOM(R) are registered trademarks of Virata.
ISOS(TM), Proton(TM), Hydrogen(TM), Helium(TM), Lithium(TM) and Beryllium(TM)
are our trademarks and may be subject of pending trademark applications. This
prospectus also makes reference to trademarks of other companies.
Dealer Prospectus Delivery Obligation
Until , 1999 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
This following summary highlights basic information about us and this
offering contained more fully elsewhere in this prospectus. Because it is a
summary, it does not contain all of the information that you should consider
before investing. You should read this entire prospectus carefully, including
the section entitled "Risk Factors" and the financial statements and the
related notes to those statements included in this prospectus. This prospectus
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in the forward-
looking statements as a result of factors described under the heading "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" as well as discussions elsewhere in this
prospectus.
Virata Corporation
Virata provides communications processors combined with integrated software
modules to manufacturers of equipment utilizing digital subscriber line, or
DSL, technologies. These "integrated software on silicon" product solutions
enable our customers to develop a diverse range of DSL equipment, including
modems, gateways and routers targeted at the voice and high-speed data network
access, or broadband, market. We believe our systems expertise, products and
support services enable manufacturers of DSL equipment to simplify product
development, reduce the time it takes for products to reach the market and
focus resources on product differentiation and improvement.
Significant growth in demand for broadband access is being driven by
consumers and businesses who find current dial-up Internet access too slow and
services based on existing high-speed technologies too expensive. By contrast,
DSL technologies enable service providers to offer a wide range of affordable
broadband services using the existing copper wire telephone line
infrastructure.
To meet the demands of the rapidly growing DSL market, equipment
manufacturers encounter a number of challenges, including evolving technical
standards, an expanding range of feature expectations and shorter product life-
cycles. In response to these challenges, equipment manufacturers are
increasingly relying upon third party specialists to supply key technology
components, including semiconductors and software. However, combining these
individual elements can be a complex, costly and time-consuming task.
Our integrated products replace numerous software elements and
semiconductors that would otherwise have to be obtained from multiple vendors
and then integrated and tested. Our products meet applicable DSL standards and
are based on a flexible design that:
. simplifies the addition of features;
. can be used with a range of third party physical layer transceivers,
which are the other primary semiconductor components required for
communications equipment; and
. delivers the required functionality and performance at a compelling
price.
By adopting our solutions, our customers enjoy numerous benefits including:
. faster time-to-market;
. reduced product cost;
. opportunity to focus their engineering resources on product
differentiation and improvement;
. ability to design multiple products using different subsets of our
modular software; and
. re-use of software extensions they develop on future generations of
their products.
4
<PAGE>
Our objective is to be the leading supplier of communications processors and
integrated software to manufacturers of voice and high-speed data network
access equipment. We intend to achieve this objective by:
. initially focusing on DSL markets;
. leveraging our flexible semiconductor and software designs to introduce
an expanding range of communications processors and software modules;
. licensing our software to all our customers; and
. pursuing strategic acquisitions.
We outsource the manufacturing of our semiconductors, which allows us to
focus our resources on the design, development and marketing of our products.
As of October 26, 1999 we have licensed our software to 28 companies. These
customers have developed, or are developing, 73 designs of which 27 are
currently shipping. Our largest customers in terms of revenues include Orckit
Communications, Com21, Netopia and Westell Technologies. In July 1998, we
completed the acquisition of RSA Communications, our first strategic
acquisition.
Our commercial, financial and operations headquarters are in Santa Clara,
California. Research and development facilities and sales offices are located
in Raleigh, North Carolina, and Cambridge, England. The address of our
principal executive office is 2933 Bunker Hill Lane, Suite 201, Santa Clara,
California 95054 where the telephone number is (408) 566-1000. Our Internet
address on the worldwide web is http://www.virata.com. Information contained on
our website does not constitute part of this prospectus.
5
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by us............ 5,000,000 shares
Common stock to be outstanding after
the offering......................... 19,472,161 shares
Use of proceeds....................... We intend to use the net proceeds of
this offering primarily for working
capital and general corporate
purposes, including expenditures for
research and development of new
products and sales and marketing
efforts. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol............................... VRTA
</TABLE>
The common stock outstanding after this offering is based on the number of
shares outstanding on October 3, 1999.
The common stock outstanding after this offering excludes 3,672,475 shares
of our common stock which may be issued upon exercise of currently outstanding
stock options and warrants outstanding as of October 3, 1999, with a weighted
average exercise price of $4.92 per share, and approximately 3.6 million other
shares of common stock reserved for issuance under our stock plans. See
"Capitalization," "Management--Director Compensation," "--Employee Stock Option
Plan" and "--Employee Stock Purchase Plan" and "Description of Capital Stock."
----------------
This prospectus is subject to completion prior to this offering. Among other
things, this prospectus describes our company as we currently expect it to
exist at the time of this offering. Except as otherwise indicated, all
information in this prospectus assumes the underwriters' over-allotment option
will not be exercised and gives effect to:
. the issuance of series E preference shares by Virata Limited (see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Recent Developments--Private Placement Financing");
. a change in our fiscal year (see "selected Consolidated Financial
Data");
. the reorganization of Virata Limited (see "Certain Transactions--
Reorganization of Virata Limited"); and
. a 1 for 6.7 reverse stock split of our common stock (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments--Reverse Stock Split").
Offers and sales of the common stock are subject to restrictions in relation
to the United Kingdom, details of which are set out in "Underwriting," and in
other jurisdictions. The distribution of this prospectus may also be restricted
by law in some jurisdictions.
6
<PAGE>
Summary Consolidated Financial Information
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Six Months Six Months
Year Ended March 31, Ended Ended
--------------------------- September 30, October 3,
1997 1998 1999 1998 1999
------- -------- -------- ------------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
Semiconductors ........ $ -- $ 505 $ 2,784 $ 1,697 $ 3,493
Systems, license,
services and royalty.. 6,953 8,426 6,472 3,424 2,184
------- -------- -------- -------- -------
Total revenues........ 6,953 8,931 9,256 5,121 5,677
Total cost of
revenues............. 3,939 3,787 3,997 2,263 2,770
------- -------- -------- -------- -------
Gross profit............. 3,014 5,144 5,259 2,858 2,907
------- -------- -------- -------- -------
Operating expenses:
Research and
development........... 3,518 3,987 8,323 3,586 5,130
Sales and marketing.... 4,753 4,076 2,917 1,381 1,896
General and
administrative........ 3,410 4,917 5,567 3,099 2,303
Non-recurring charges,
amortization of
intangibles and stock
compensation.......... -- 2,270 7,203 6,080 875
------- -------- -------- -------- -------
Total operating
expenses................ 11,681 15,250 24,010 14,146 10,204
------- -------- -------- -------- -------
Loss from operations..... (8,667) (10,106) (18,751) (11,288) (7,297)
Interest and other income
(expense), net.......... 127 (172) 1,594 (407) (275)
------- -------- -------- -------- -------
Net loss................. $(8,540) $(10,278) $(17,157) $(11,695) $(7,572)
======= ======== ======== ======== =======
Net loss per share:
Basic and diluted...... $ (0.80) $ (0.90) $ (1.33) $ (0.91) $ (0.57)
======= ======== ======== ======== =======
Weighted average
shares................ 10,676 11,482 12,881 12,790 13,359
======= ======== ======== ======== =======
Pro forma net loss per
share:
Basic and diluted...... $ (1.42) $ (0.60)
======== =======
Weighted average
shares................ 12,075 12,642
======== =======
</TABLE>
<TABLE>
<CAPTION>
As of October 3, 1999
--------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------ -----------
(unaudited)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................ $ 4,137 12,037 57,287
Working capital...................................... 1,720 9,620 54,870
Total assets......................................... 12,562 20,462 65,712
Total long term liabilities.......................... 986 986 986
Total stockholders' equity .......................... 5,882 13,782 59,032
</TABLE>
See notes 1 and 13 of the notes to the consolidated financial statements
included in this prospectus for an explanation of the determination of the
number of shares used in computing per share data.
The pro forma numbers reflect the issuance of series E preference shares by
Virata Limited, the reorganization of Virata Limited and a 1 for 6.7 reverse
stock split of our common stock.
The pro forma as adjusted numbers give effect to our receipt of the net
proceeds from the sale of 5,000,000 shares of common stock offered in this
offering at an assumed initial public offering price of $10.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses. See "Use of Proceeds" and "Capitalization."
7
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be harmed. If that happens,
the trading price of our common stock could decline, and you may lose all or
part of your investment. These risk factors are not intended to represent a
complete list of the general or specific risk factors that may affect us.
Risks Relating to Our Business
Because we have a limited operating history selling products to the digital
subscriber line, or DSL, market, we cannot be sure that we can successfully
implement our business strategy
We have not had a long history of selling our products to the DSL market or
generating significant revenues and many of our products have only recently
been introduced. Furthermore, we have limited historical financial data that
can be used in evaluating our business and our prospects and in projecting
future operating results. For example, we cannot forecast operating expenses
based on our historical results because they are limited, and we are instead
required to forecast expenses based in part on future revenue projections.
Most of our expenses are fixed in the short term and we may not be able to
quickly reduce spending if our revenue is lower than we had projected.
Therefore net losses in a given quarter could be greater than expected. In
addition, our ability to forecast accurately our quarterly revenue is limited,
making it difficult to predict the quarter in which sales will occur.
You must consider our prospects in light of the risks, expenses and
difficulties we might encounter because we are at an early stage of
development in a new and rapidly evolving market. Many of these risks are
described under the sub-headings below. We may not successfully address any or
all of these risks and our business strategy may not be successful.
Because we expect to continue to incur net losses, the price of our stock may
decline and we may not be able to implement our business strategy
We have not reported an operating profit for any fiscal year since our
incorporation and experienced net losses of approximately $7.6 million, $17.2
million, $10.3 million, and $8.5 million for the six months ended October 3,
1999 and the fiscal years ended March 31, 1999, 1998, and 1997, respectively.
We expect to continue to incur net losses, and these losses may be
substantial. Further, we expect to incur substantial negative cash flow in the
future. Accordingly, our ability to continue to operate our business and
implement our business strategy may be hampered and the value of our stock may
decline.
Because we may not be able to achieve or sustain profitability or positive
cash flow, the price of our stock may decline and we may not be able to
implement our business strategy
Due to our continuing substantial capital expenditures and product
development, sales, marketing and administrative expenses, we will need to
generate significant revenues to achieve profitability and positive cash flow.
We cannot be sure that we will be able to generate such revenues or achieve
profitability or positive cash flow. Even if we do achieve profitability and
positive cash flow, we may not be able to sustain or increase profitability or
cash flow on a quarterly or annual basis. Our ability to generate future
revenues will depend on a number of factors, many of which are beyond our
control. These factors include:
. the rate of market acceptance of high speed network access;
. the rate of market acceptance of our products and the demand for
equipment that incorporates our products;
. changes in industry standards governing DSL technologies;
. the extent and timing of new customer transactions;
8
<PAGE>
. personnel changes, particularly those involving engineering and
technical personnel;
. regulatory developments; and
. general economic trends.
Due to these factors, we cannot forecast with any degree of accuracy what
our revenues will be in future periods and we may not be able to achieve or
sustain profitability or positive cash flow. Our ability to continue to operate
our business and implement our business strategy may thus be hampered and the
value of our stock may decline.
Because our operating results from quarter to quarter may fluctuate, the price
of our stock may decline
Our revenues, expenses and operating results have fluctuated in the past and
are likely to fluctuate significantly in the future on a quarterly and an
annual basis due to a number of factors, many of which are outside our control.
For example, our results of operations have been negatively affected by the
following:
. the loss of or decrease in sales to a major customer or failure to
complete significant transactions;
. the timing and size of semiconductor orders from, and shipments to, our
existing and new customers;
. unexpected delays in introducing new or enhanced products, including
manufacturing delays;
. the volume and average cost of products manufactured; and
. the timing and size of expenses, including expenses of developing new
products and product improvements.
Accordingly, our revenues, expenses and results of operations could vary
significantly in the future, and you should not rely upon period-to-period
comparisons as indications of future performance. Such fluctuations may make
our stock unattractive to investors and result in a decline in the price of our
stock.
Because our business is dependent upon the broad deployment of DSL services by
telecommunications service providers, we may not be able to generate
substantial sales of our products if such deployment does not occur
Our products are incorporated in equipment that is targeted at end-users of
DSL technologies. Consequently, the success of our products may depend upon the
decision by telecommunications service providers to broadly deploy DSL
technologies and the timing of such deployment. If telecommunications service
providers do not offer DSL services on a timely basis or if there are technical
difficulties with the deployment of DSL services, sales of our products may
decline, which would have a negative impact on our results of operations.
Factors that may impact this deployment include:
. a prolonged approval process, including laboratory tests, technical
trials, marketing trials, initial commercial deployment and full
commercial deployment;
. the development of a viable business model for DSL services, including
the capability to market, sell, install and maintain DSL services;
. cost constraints, such as installation costs and space and power
requirements at the telecommunications service provider's central
office;
. evolving industry standards for DSL technologies; and
. government regulation.
Because our products are components of other equipment, if equipment
manufacturers do not incorporate our products in their equipment, we may not
be able to generate sales of our products in volume quantities
Our products are not sold directly to the end-user, rather they are
components of other products. As a result, we rely upon equipment manufacturers
to design our products into their equipment. We further rely on
9
<PAGE>
this equipment to be successful. If equipment that incorporates our products
is not accepted in the marketplace, we may not achieve sales of our products
in volume quantities, which would have a negative impact on our results of
operations.
Because the requirements of our customers frequently change, we may not be
able to anticipate trends in the markets for our products, which could result
in a decline in sales of our products
We must anticipate the price, performance and functionality requirements of
equipment manufacturers who design DSL equipment. We must also successfully
develop products that meet these requirements and make these products
available on a timely basis and in sufficient quantities. If we do not
anticipate trends in the DSL market and meet the requirements of manufacturers
of DSL equipment, then we may be unable to generate substantial sales of our
products, which would have a negative impact on our results of operations.
While we have a strategy of licensing and partnering with as many key
participants in our markets as possible, some equipment manufacturers will be
more successful than others in developing and marketing their products that
incorporate our semiconductor products and it is difficult for us to predict
which of these customers will generate revenues for us. Our product sales are
almost completely dependent upon the relative success of our customers in the
marketplace for high-speed network access equipment.
Because we depend on third party foundries to manufacture, assemble and test
our products, we may experience delays in receiving semiconductor devices
We do not own or operate a semiconductor fabrication facility, rather our
semiconductor devices are generally sourced at different foundries. We intend
to continue to rely on third-party foundries and other specialist suppliers
for all of our manufacturing, assembly and testing requirements. However,
these foundries are not obligated to supply products to us for any specific
period, in any specific quantity or at any specific price, except as may be
provided in a particular purchase order that has been accepted by one of them.
As a result, we cannot directly control semiconductor delivery schedules,
which could lead to product shortages, quality assurance problems and
increases in the costs of our products. In addition, we have occasionally
experienced delays in receiving semiconductor devices from foundries due to
foundry scheduling and process problems. To date, such delays have not had a
material affect on our results of operations. However, we may experience
delays in the future and we cannot be sure that we will be able to obtain
semiconductors within the time frames and in the volumes required by us at an
affordable cost or at all. Any disruption in the availability of
semiconductors or any problems associated with the delivery, quality or cost
of the fabrication assembly and testing of our products could significantly
hinder our ability to deliver our products to our customers and may result in
a decrease in sales of products.
If the foundries we currently use are unable to provide us with
semiconductors, we may be required to seek a new manufacturer of our
semiconductors, and we cannot be certain that a new manufacturer of our
semiconductors will be available. Furthermore, switching to a new manufacturer
could require six months or more and would involve significant expense and
disruption to our business.
Because we depend on third party foundries, if there is a shortage in
worldwide foundry capacity, we may not be able to obtain sufficient
manufacturing capacity to meet our requirements
From time to time there may be shortages in worldwide foundry capacity due
to increases in semiconductor demand or other factors. In the event of such a
shortage, we may not be able to obtain a sufficient allocation of foundry
capacity to meet our product needs. In addition, such a shortage could
lengthen our products' manufacturing cycle and cause a delay in the shipments
of our products to our customers. This could ultimately lead to a loss of
sales of our products and have a negative impact on our results of operations.
10
<PAGE>
Because we may be required to enter into financial and other arrangements
with foundries in order to secure foundry capacity, our earnings or the
ownership of our stockholders may be diluted
Allocation of a foundry's manufacturing capacity may be influenced by a
customer's size or the existence of a long-term agreement with the foundry. To
address foundry capacity constraints, other semiconductor suppliers that rely
on third-party foundries have utilized various arrangements, including equity
investments in or loans to independent component manufacturers, in exchange
for guaranteed production capacity, joint ventures to own and operate
foundries, or "take or pay" contracts that commit a company to purchase
specified quantities of components over extended periods. While we are not
currently a party to any of these arrangements, we may decide to enter into
such arrangements in the future. We cannot be sure, however, that these
arrangements will be available to us on acceptable terms or at all. Any of
these arrangements could require us to commit substantial capital. The need to
commit substantial capital could require us to obtain additional debt or
equity financing, which could result in dilution to our earnings or the
ownership of our stockholders. We cannot be sure that this additional
financing, if required, would be available when needed or, if available, could
be obtained on terms acceptable to us.
Because the manufacture of our products is complex, the foundries on which we
depend may not achieve the necessary yields or product reliability that our
business requires
The manufacture of our products is a highly complex and precise process,
requiring production in a highly controlled environment. Changes in the
manufacturing processes or the inadvertent use of defective or contaminated
materials by a foundry could adversely affect such a foundry's ability to
achieve acceptable manufacturing yields and product reliability. If the
foundries we currently use do not achieve the necessary yields or product
reliability, our customer relationships could suffer. This could ultimately
lead to a loss of sales of our products and have a negative impact on our
results of operations.
Because we depend on a license from Advanced RISC Machines to manufacture
certain of our planned ATOM products, the loss or inability to maintain the
license could result in increased costs or delays in the manufacturing of our
products
Our ATOM products feature embedded ARM RISC microprocessors and,
accordingly, are required to be manufactured under a license from Advanced
RISC Machines, or ARM, the owner of the intellectual property to the ARM RISC
microprocessor. In the past, we were required to use foundries with an ARM
license for the manufacture of our ATOM products. In June 1999, we obtained a
per semiconductor design ARM license, which means that we are now able to
select foundry suppliers that best meet our quality, delivery and cost
objectives regardless of whether they have their own ARM license or not. With
this greater flexibility, we are able to assume more of the manufacturing and
quality control responsibilities, including contracting for wafer processing,
assembly and testing from separate suppliers. If we lose or are unable to
maintain the per semiconductor design license, we would be required to seek
alternative fabrication facilities in our manufacturing of our ATOM products.
Without the ARM license, the number of fabrication facilities we could use in
our manufacturing would be substantially reduced to those fabrication
facilities that themselves have been directly licensed by Advanced RISC
Machines. Accordingly, the loss of, or our inability to maintain the ARM
license may result in increased costs or delays in our ability to manufacture
our products and could harm our results of operations. In addition, ARM is
only required to indemnify us against intellectual property infringement
claims up to a specified dollar amount.
Because our customer base is concentrated, the loss of one or more of our
customers may result in a loss of a significant amount of our revenues
A relatively small number of customers account for a large percentage of
our total revenues. We expect this trend to continue. Our business will be
seriously harmed if we do not generate as much revenue as we expect from these
customers, experience a loss of any of our significant customers or suffer a
substantial reduction in orders
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from these customers. For the fiscal year ended March 31, 1999, Com21 and
Orckit Communications accounted for 22.6% and 15.7%, respectively, of our
total revenues. For the six months ended October 3, 1999, Orckit
Communications, Com21, Netopia and Westell Technologies accounted for 51.5%,
11.6%, 8.9% and 7.0%, respectively, of our total revenues. Our future success
depends in significant part upon the decision of our customers to continue to
purchase products from us. Furthermore, it is possible that equipment
manufacturers may design and develop internally, or acquire, their own
semiconductor technology, rather than continue to purchase semiconductors from
third parties like us. If we are not successful in maintaining relationships
with key customers and winning new customers, sales of our products may
decline. In addition, because a significant portion of our business has been
and is expected to continue to be derived from orders placed by a limited
number of large customers, variations in the timing of these orders can cause
significant fluctuations in our operating results.
Because manufacturers of DSL equipment may be reluctant to change their
sources of components, if we do not achieve design wins with manufacturers of
DSL equipment, we may be unable to secure sales from these customers in the
future
Once a manufacturer of DSL equipment has designed a supplier's
semiconductor into its products, the manufacturer may be reluctant to change
its source of semiconductors due to the significant costs associated with
qualifying a new supplier. Accordingly, our failure to achieve design wins
with manufacturers of DSL equipment which have chosen a competitor's
semiconductor could create barriers to future sales opportunities with these
manufacturers.
Because our customers are not subject to binding agreements, we cannot be
certain that we will sell any of our products
Achieving a design win with a customer does not create a binding commitment
from that customer to purchase our products. Rather, a design win is solely an
expression of interest by potential customers in purchasing our products and
is not supported by binding commitments of any nature. Accordingly, a customer
can choose at any time to discontinue using our products in their designs or
product development efforts. Even if our products are chosen to be
incorporated into a customer's products, we still may not realize significant
revenues from that customer if their products are not commercially successful.
Therefore, we cannot be sure that any design win will result in purchase
orders for our products, or that these purchase orders will not be later
canceled. Our inability to convert design wins into actual sales and any
cancellation of a purchase order could have a negative impact on our financial
condition and results of operations.
Because our customers may cancel orders, we may not be able to recoup
expenses incurred in anticipation of sales of our products
We work closely with our customers to determine their future product needs
and receive a rolling forecast for products. We have incurred and expect to
continue to incur expenses based upon these sales forecasts. However, our
customer purchase agreements generally contain no minimum purchase
requirements and customers typically purchase our products pursuant to short-
term purchase orders that may be canceled without charge if notice is given
within an agreed-upon period. Therefore, we cannot be sure that the actual
product revenues which we will receive will be commensurate with the level of
expenses that we will incur based on forecasts we receive from our customers
in any future period. As a result, cancellations, deferrals or reductions in
pending purchase orders could have a negative impact on our financial
condition and results of operations.
Because most of our revenues have been and will be derived from a limited
number of products, we may not be able to generate sufficient revenues to
sustain our business if any of these products fail to gain market acceptance
For the fiscal year ended March 31, 1999, approximately 21.6% and 10.7%,
respectively, of our total revenues were generated from sales of our Hydrogen
product and Proton family of products. For the six months ended October 3,
1999, approximately 59.3%, 33.1% and 7.6%, respectively, of our semiconductor
revenues
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were generated from sales of our Proton family and Hydrogen and Helium
products. We expect that our Proton family will represent a diminishing
proportion of our total revenues while a substantial portion of our total
revenues will be derived from our Hydrogen, Helium and Lithium products in the
foreseeable future. Therefore, broad market acceptance of the Hydrogen, Helium
and Lithium products is critical to our success. We cannot be sure that our
products will attain broad market acceptance. The failure of our products to
achieve broad market acceptance could result in a decrease in our revenues,
which would have a negative impact on our results of operations and financial
condition.
Because our products typically have lengthy sales cycles, we may experience
substantial delays between incurring expenses related to research and
development and the generation of sales revenue and may not ultimately sell a
large volume of our products
It usually takes more than one year, occasionally more than two years, for
us to realize volume shipments of our semiconductor products after we first
contact a customer. We first work with customers to achieve a design win,
which may take six months or longer, at which time we sell a source code
license. Our customers then complete the design, testing and evaluation of
their systems and begin the marketing process, a period which typically lasts
an additional three to six months or longer. As a result, a significant period
of time may elapse between our sales efforts and our realization of revenues,
if any, from volume purchasing of our products by our customers.
Because our products are complex, the detection of errors in our products may
be delayed, and if we deliver products with defects, our credibility will be
harmed, and the sales and market acceptance of our products may decrease
Our products are complex and may contain errors, defects and bugs when
introduced. If we deliver products with errors, defects or bugs, our
credibility and the market acceptance and sales of our products could be
significantly harmed. Furthermore, the nature of our products may also delay
the detection of any such error or defect. If our products contain errors,
defects and bugs, then we may be required to expend significant capital and
resources to alleviate these problems. This could result in the diversion of
technical and other resources from our other development efforts. Any actual
or perceived problems or delays may also adversely affect our ability to
attract or retain customers.
Because defects in our products may give rise to product liability claims
against us, we may be required to incur increased expenses and divert
management resources away from our operations
The occurrence of any defects, errors or failures in our products could
lead to product liability claims or lawsuits against us or against our
customers. In addition, we have agreed to indemnify certain of our customers
in certain limited circumstances against liability from defects in our
products. A successful product liability claim could result in substantial
cost and divert management's attention and resources, which would have a
negative impact on our financial condition and results of operations. Although
we have not experienced any product liability claims to date, the sale and
support of our products entail the risk of these claims.
Because we sell a significant portion of our products in countries other than
the US, we may be subject to political, economic and other conditions
affecting such countries that could result in increased operating expenses
and regulation of our products
One of our principal subsidiaries is incorporated under the laws of, and
its principal offices are located in, the United Kingdom. In addition, for the
fiscal year ended March 31, 1999, we generated approximately 40.3% of our
revenues from sources outside the United States, with 16.5% and 13.8% of our
total revenues derived from customers based in Israel and Europe,
respectively. In the six months ended October 3, 1999, 52.4% of our total
revenues was derived from customers based in Israel. We expect that sales to
these international customers will continue to account for a significant
portion of our total revenues for at least the next 12 months. Accordingly, we
are subject to the political, economic and other conditions affecting
countries or
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jurisdictions other than the United States, including Israel, Europe and Asia.
Any interruption or curtailment of trade between the countries in which we
operate and their present trading partners, change in exchange rates or a
significant downturn in the political, economic or financial condition of
these countries could cause demand for and revenue from our products to
decrease, cause our costs of doing business to increase or subject us to
increased regulation including future import and export restrictions.
Because we have expanded rapidly and future expansion may be required, we may
lack the ability to manage this growth in our operations
We have rapidly and significantly expanded our operations, including the
number of our employees, the geographic scope of our activities and our
product offerings. We expect that further significant expansion will be
required to address potential growth in our customer base and market
opportunities. If we are unable to manage growth effectively, we may not be
able to take advantage of market opportunities, develop or enhance our
products or our technical capabilities, execute our business plan or otherwise
respond to competitive pressures or unanticipated requirements. To
successfully manage the anticipated growth of our operations, we believe we
must effectively be able to:
. improve our existing and implement new operational, financial and
management information controls, reporting systems and procedures;
. hire, train and manage additional qualified personnel;
. expand and upgrade our core technologies; and
. effectively manage multiple relationships with our customers, suppliers
and other third parties.
Our products require significant training and support, and because of our
limited resources, we may not be able to support the development of and
demand for our products
The development of equipment using our products requires significant
training and support. If we are unable to provide this training and support
for our products, more time may be necessary to complete the implementation
process and customer satisfaction may be adversely affected. In addition, our
suppliers may not be able to meet increased demand for our products. We cannot
be sure that our systems, procedures or controls or those of our suppliers'
will be adequate to support the anticipated growth in our operations or the
demand for our products. This may result in a decline in the sales of our
products and have a negative impact on our results of operations.
Our executive officers and key personnel are critical to our business, and
because there is significant competition for personnel in our industry, we
may not be able to attract and retain such qualified personnel
Our success depends to a significant degree upon the continued
contributions of our executive management team, and our technical, marketing,
sales customer support and product development personnel. The loss of such
personnel could significantly harm our business, financial condition and
results of operations. We do not have any life insurance or other insurance
covering the loss of any of our key employees.
Because our products are specialized and complex, our success depends upon
our ability to attract, train and retain qualified personnel, including
qualified technical, marketing and sales personnel. However, the competition
for personnel is intense and we may have difficulty attracting and retaining
such personnel. In addition, companies in the communications, software and
semiconductor industries have frequently made unfair hiring practices claims
against competitors who have hired away such companies' personnel. We cannot
be sure that these claims will not be made against us in the future as we seek
to hire qualified personnel, or that any of these claims would be decided in
our favor. We may incur substantial costs in defending ourselves against any
such claims, regardless of their merits.
We have entered into employment agreements with our executive officers (see
"Management--Employment Agreements") and certain other key employees that
provide for set terms of employment. In
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addition, all of our employees in the United Kingdom have employment agreements
pursuant to the laws of the United Kingdom, subject generally to four weeks
notice of termination. Our employment agreements do not contain anti-
competition clauses.
Our software and hardware products and our internal systems may not be Year
2000 compliant, and the costs and problems associated with the Year 2000 issue
could have a negative impact on our customer relationships and results of
operations
The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and date-
sensitive calculations by computers and other machinery as the Year 2000 is
approached and reached. As a result of the Year 2000 issue, we may experience
serious unanticipated problems and costs caused by undetected errors or defects
in the technology used in our software and hardware products and internal
systems. In addition, we may be required to defend our products or services in
legal proceedings. We cannot guarantee that we will remain free of Year 2000
related disputes. If our software and hardware products or our internal systems
are not Year 2000 compliant, the costs and problems associated with correcting
errors caused by the Year 2000 issue could have a negative impact on our
customer relationships, financial condition and results of operations. Until
the Year 2000 occurs, we cannot be sure that we will not be affected by the
Year 2000 issue. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance Disclosure."
Risks Relating to our Industry
Because the markets in which we compete are highly competitive and many of our
competitors have greater resources than us, we cannot be certain that our
products will be accepted in the marketplace or capture market share
The market for software and communications semiconductor solutions is
intensely competitive and characterized by rapid technological change, evolving
standards, short product life cycles and price erosion. We expect competition
to intensify as current competitors expand their product offerings and new
competitors enter the market. Given the highly competitive environment in which
we operate, we cannot be sure that any competitive advantages enjoyed by our
products would be sufficient to establish and sustain our products in the
market. Any increase in price or other competition could result in erosion of
our market share, to the extent we have obtained market share, and would have a
negative impact on our financial condition and results of operations. We cannot
be sure that we will have the financial resources, technical expertise or
marketing and support capabilities to continue to compete successfully.
We face competition from a variety of vendors, including software and
semiconductor companies, which generally vary in size and in the scope and
breadth of products and services offered. We also face competition from
customers' or prospective customers' own internal development efforts. Many of
the companies that compete, or may compete in the future, against us have
longer operating histories, greater name recognition, larger installed customer
bases and significantly greater financial, technical and marketing resources.
These competitors may also have pre-existing relationships with our customers
or potential customers. As a result, they may be able to introduce new
technologies, respond more quickly to changing customer requirements or devote
greater resources to the development, promotion and sale of their products than
we can. Our competitors may successfully integrate the functionality of our
software and communication processors into their products and thereby render
our products obsolete. Further, in the event of a manufacturing capacity
shortage, these competitors may be able to manufacture products when we are
unable to do so.
We believe our principal competitors include or will include Alcatel
Microelectronics, Analog Devices, Centillium Technology, Conexant Systems,
GlobeSpan, Lucent Technologies, Motorola and Texas Instruments. In addition,
there have been a number of announcements by other semiconductor companies
including IBM and Intel and smaller emerging companies that they intend to
enter the market segments adjacent to or addressed by our products.
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Because the markets in which our customers compete are highly competitive,
our customers may not be successful and they may not continue to purchase our
products
Many of our customers face significant competition in their markets. If our
customers are unable to successfully market and sell their products which
incorporate our products, these customers may cease to purchase our products,
which may have a negative impact on our results of operations.
Because the markets in which we compete are subject to rapid changes, our
products may become obsolete or unmarketable
The markets for our products and services are characterized by rapidly
changing technology, short product life cycles, evolving industry standards,
changes in customer needs, growing competition and new product introductions.
If our product development and improvements take longer than planned, the
availability of our products would be delayed. Any such delay may render our
products obsolete or unmarketable, which would have a negative impact on our
ability to sell our products and our results of operations.
Because of changing customer requirements and emerging industry standards, we
may not be able to achieve broad market acceptance of our products
Our success is dependent, in part, on our ability, in a timely and cost-
effective manner, to:
. successfully develop, introduce and market new and enhanced products at
competitive prices in order to meet changing customer needs;
. respond effectively to new technological changes or new product
announcements by others;
. effectively use and offer leading technologies; and
. maintain close working relationships with our key customers.
We cannot be sure that we will be successful in these pursuits, that the
growth in demand will continue or that our products will achieve market
acceptance. Our failure to develop and introduce new products that are
compatible with industry standards and that satisfy customer requirements or
the failure of our products to achieve broad market acceptance could have a
negative impact on our ability to sell our products and our results of
operations.
Because the development of new products requires substantial time and
expense, we may not be able to recover our development costs
The pursuit of necessary technological advances and the development of new
products require substantial time and expense. Improvements to existing
products or the introduction of new products by us or our competitors have the
potential to replace or provide lower cost alternatives to our existing
products or render these products obsolete, unmarketable or inoperable. The
mere announcement of any improvement or new product could cause potential
customers to defer or cancel purchases of existing products and services.
Therefore, we cannot be sure that we will be able to recover the costs of the
development of our products or succeed in adapting our business to
advancements.
Because other high speed data transmission technologies may compete
effectively with digital subscriber line services, our products may not
capture marketshare
DSL services are competing with a variety of different broadband data
transmission technologies, including cable modems, satellite and other
wireless technologies. If any technology that is competing with DSL technology
is more reliable, faster, less expensive or has other advantages over DSL
technology, then the demand for our semiconductors may decrease, which would
have a negative impact on our operating results.
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Because price competition among our competitors and volume purchases by large
customers may result in a decrease in the average per unit selling price of
our products, our gross margins for our products may decline
We expect that price competition among our competitors and volume purchases
of our products at discounted prices will have a negative impact on our gross
margin for these products. We anticipate that average per unit selling prices
of DSL semiconductors will continue to decline as product technologies mature.
Since we do not manufacture our own products, we may be unable to reduce our
manufacturing costs in response to declining average per unit selling prices.
Many of our competitors are larger with greater resources and therefore may be
able to achieve greater economies of scale and would be less vulnerable to
price competition. Further, we expect that average per unit selling prices of
our products will decrease in the future due to volume discounts to our large
customers. These declines in average per unit selling prices will generally
lead to declines in our gross margins for these products.
Because the measures on which we rely to protect our intellectual property
rights afford only limited protections, we may lose any competitive advantage
we may have
The measures on which we rely to protect our intellectual property afford
only limited protection and we cannot be certain that these safeguards will
adequately protect our intellectual property and other valuable competitive
information. In addition, the laws of some countries in which we sell or plan
to sell our products, including the Peoples' Republic of China, Korea and
certain other Asian countries, may not protect our proprietary rights as fully
as do the laws of the United Kingdom or the United States. If we are unable to
adequately protect our proprietary rights, we may lose any competitive
advantage we may have over our competitors. This may have a negative impact on
sales of our products and our results of operations.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use trade secrets
or other information that we regard as proprietary. Our competitors may also
independently develop similar technologies. Moreover, through our
participation in various industry groups, we have entered into cross-licenses
for intellectual property necessary to the implementation of certain types of
standards-compliant products. Such cross-licenses may limit our ability to
enforce our intellectual property rights against competitors.
Because our industry is characterized by frequent litigation over
intellectual property rights, we may be required to incur substantial
expenses and divert management resources
The industries in which we compete are characterized by numerous
allegations of patent infringement among competitors. Such an infringement
claim could be asserted against us or by us in the future. The defense or
prosecution of any such claim could result in us incurring substantial
expenses and diverting significant management attention and other resources
away from our operations. In the event of an adverse result in any future
litigation or claim, we may be required:
. to pay substantial damages, including treble damages if we are held to
have willfully infringed on the intellectual property of another;
. to halt the manufacture, use and sale of infringing products or
technology;
. to forfeit a competitive advantage;
. to expend significant resources to develop non-infringing technology; or
. to obtain licenses to the infringing technology, which may not be
available on commercially reasonable terms, or at all.
Because our products may be required to meet certain industry standards, we
may be required to pay substantial royalties to the owners of the
intellectual property underlying the standards
In order for us to comply with the International Telecommunications Union
V.34, V.90 and ADSL standards, the software embedded in our current and
planned future products may use the proprietary technology
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of various parties advancing or promoting these standards. Where such owners
are members of such working group or union, they must provide a license upon
reasonable terms, which may include the payment of a reasonable royalty.
However, if such owners are not members of such working group or union, there
may be no limit on the terms or the amount of the royalty with respect to such
proprietary technology. As a result, the cumulative effect of the terms and
royalties with respect to the use of the proprietary technology necessary to
meet such industry standards could increase the cost of our products to the
point that they are no longer competitive and could limit our ability to meet
certain industry standards.
Because our products and those of our customers are subject to government
regulations, changes in current or future laws or regulations could cause
sales of our products to decline
The jurisdiction of the Federal Communications Commission, or the FCC,
extends to the entire U.S. communications industry, including our customers
and their products and services that incorporate our products. Future FCC
regulations affecting the U.S. communications services industry, our customers
or our products may have a negative impact on our business. For example, FCC
regulatory policies that affect the availability of data and Internet services
may impede our customers' penetration into certain markets or affect the
prices that they are able to charge. This may cause sales of our products to
decline. In addition, international regulatory bodies have introduced new
regulations for the communications industry. Delays caused by our compliance
with regulatory requirements may result in order cancellations or
postponements of product purchases by our customers, which would have a
negative impact on our results of operations and financial condition.
Risks Relating to this Offering
Because there has been no prior market for our common stock, we cannot be
sure that our stock price will not decline after this offering
Prior to this offering, you could not buy or sell our common stock on a
public market. The initial public offering price of our common stock will be
determined by negotiation among us and representatives of the underwriters and
may not be indicative of the price that will prevail in the open market after
this offering. In addition, the market price of our shares of common stock may
be highly volatile and could be subject to wide fluctuations. We cannot be
certain that an active trading market for our common stock will develop or be
sustained, or that the price of our stock will not decline after this
offering.
Because the Nasdaq stock market is likely to experience extreme price and
volume fluctuations, the price of our stock may decline even if our business
is doing well
The stock markets, and in particular the Nasdaq stock market, have
experienced extreme price and volume fluctuations that have affected and
continue to affect the market prices of equity securities of many technology
companies. These fluctuations often have been unrelated or disproportionate to
the operating performance of those companies. We also expect that the market
price of our common stock will fluctuate as a result of variations in our
quarterly operating results. These fluctuations may be exaggerated if the
trading volume of our common stock is low. In addition, due to the technology-
intensive and emerging nature of our business, the market price of our common
stock may rise and fall in response to:
. announcements of technological or competitive developments;
. acquisitions or strategic alliances by us or our competitors;
. the gain or loss of a significant customer or order; and
. changes in estimates of our financial performance or changes in
recommendations by securities analysts.
Accordingly, market fluctuations, as well as general economic, political and
market conditions such as recessions, interest rate changes or international
currency fluctuations, may negatively impact the market price of our common
stock.
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Because of likely fluctuations in the price of our stock we may be subject to
class action litigation, which could distract management and result in
substantial costs
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future.
Securities litigation could result in substantial costs and divert
management's attention and resources from our operations and sales of our
products, which would have a negative impact on our financial condition and
results of operations.
Because the book value per share of our stock is liklely to be less than the
initial offering price, you will experience immediate dilution
The initial public offering price is expected to be substantially higher
than the current book value per share of our outstanding common stock. As a
result, investors purchasing our common stock in this offering will incur
immediate dilution of approximately $7.12 per share in the book value of our
common stock from the price they pay for our common stock. In addition, we
have issued options to acquire common stock at prices significantly below the
initial public offering price. To the extent these outstanding options are
ultimately exercised, there will be further dilution to investors in this
offering. See "Dilution."
Because our principal stockholders and management may have the ability to
control stockholder votes, the premium over market price that an acquiror
might otherwise pay may be reduced and any merger or takeover may be delayed
Immediately following the offering, our officers and directors and their
affiliates will own or control approximately 47.1% of our common stock
(assuming no purchases of shares of common stock in this offering by our
officers and directors and their affiliates). Accordingly, our officers,
directors and their affiliates, as a group, may have the ability to control
the election of a majority of the members of our board of directors and the
outcome of corporate actions requiring stockholder approval. This
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of us, or may impede a merger, consolidation,
takeover or other business combination involving us. This concentration of
ownership could also adversely affect our stock's market price or lessen any
premium over market price that an acquiror might otherwise pay.
Provisions of our charter documents and Delaware law could prevent or delay a
change in our control and may reduce the market price of our common stock
Certain provisions of our certificate of incorporation and bylaws and the
provisions of Delaware law could have the effect of delaying, deferring or
preventing our acquisition. For example, we have authorized but unissued
shares of preferred stock which could be used to fend off a takeover attempt,
our stockholders may not take actions by written consent, our stockholders are
limited in their ability to make proposals at stockholder meetings and our
directors may be removed only for cause and upon the affirmative vote of at
least 80% of our outstanding voting shares. See "Description of Capital
Stock."
Because we have broad discretion to use the offering proceeds, how we invest
these proceeds may not increase our profits or market value
As of the date of this prospectus, we have no specific plans to use the net
proceeds from this offering other than for working capital and general
corporate purposes. Accordingly, our management will have considerable
discretion in the application of the net proceeds, and may apply the net
proceeds in ways which may not increase our profitability or our market value.
See "Use of Proceeds." You will not have the opportunity, as part of your
investment decision, to assess whether the proceeds are being used
appropriately.
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A substantial number of our shares of common stock are eligible for future
sale, and the sale of these shares may depress our stock price, even if our
business is doing well
Upon completion of the offering, we will have approximately 19,472,161
shares of common stock outstanding and 20,222,161 shares outstanding if we
issue shares upon exercise of the underwriters' over-allotment option. All of
these shares will be freely tradable without restriction or further
registration under the federal securities laws, except for shares purchased in
this offering by or held by our affiliates. See "Shares Eligible for Future
Sale." In addition, as of October 3, 1999 there were outstanding options and
warrants to purchase 3,672,475 shares of our common stock. Furthermore, as of
October 3, 1999, stockholders holding approximately 12,181,694 shares of
common stock had been granted registration rights with respect to their shares
of common stock. See "Description of Capital Stock--Registration Rights." In
the future, we may register for resale the shares underlying the outstanding
options, grant additional options or grant additional registration rights.
While our existing stockholders and option holders are generally subject to
lock-up agreements and the provisions of our bylaws restricting their ability
to sell shares of our common stock, when these restrictions expire, these
shares will be eligible for sale, in some cases without restriction. See
"Shares Eligible for Future Sale." A sale of a substantial number of shares,
particularly by our directors and officers, or the perception that this sale
could occur, could have an adverse effect on the price of our common stock.
We may need to raise additional capital in the future, and if we are unable
to secure adequate funds on terms acceptable to us, we may be unable to
execute our business plan
If the proceeds of this offering, together with our existing cash balances
and cash flow expected from future operations, are not sufficient to meet our
liquidity needs, we will need to raise additional funds. If adequate funds are
not available on acceptable terms or at all, we may not be able to take
advantage of market opportunities, develop or enhance new products, pursue
acquisitions that would complement our existing product offerings or enhance
our technical capabilities, execute our business plan or otherwise respond to
competitive pressures or unanticipated requirements.
20
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains forward-looking statements
within the meaning of the federal securities laws. These statements relate to
future events or our future financial performance, and involve known and
unknown risks, uncertainties, and other factors that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. These
risks and other factors include, among other things, those listed under "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "expects," "intends," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue," or the negative
of these terms or other comparable terminology. These statements are only
predictions and may be inaccurate. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the risks outlined under "Risk Factors." These
factors may cause our actual results to differ materially from any forward-
looking statement.
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. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results.
USE OF PROCEEDS
Our net proceeds from the sale of the 5,000,000 of common stock offered by
us are estimated to be approximately $45.3 million, based on an assumed initial
public offering price per share of $10.00, and after deducting estimated
underwriting discounts and commissions and offering expenses payable by us. If
the underwriters exercise the over-allotment option in full, our net proceeds
are estimated to be $52.2 million. See "Underwriting."
We intend to use the net proceeds of this offering primarily for working
capital and general corporate purposes, including expenditures for research and
development of new products and sales and marketing efforts. In addition, we
may use a portion of the net proceeds to acquire complementary products,
technologies or businesses; however, we currently have no commitments or
agreements and are not involved in any negotiations to do so. Pending use of
the net proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared nor paid any dividends on our capital stock. We
currently intend to retain any future earnings for use in the operation and
expansion of our business and we do not anticipate paying any dividends on our
capital stock in the foreseeable future. Additionally, our line of credit
currently prohibits the payment of dividends.
21
<PAGE>
CAPITALIZATION
The table below sets forth the following information:
. the actual capitalization of Virata Limited, our predecessor, as of
October 3, 1999;
. our capitalization as of October 3, 1999, after giving pro forma effect
to the issuance of series E preference shares by Virata limited, the
reorganization of Virata Limited and a 1 for 6.7 reverse stock split of
our common stock.
. our pro forma capitalization as of October 3, 1999, as adjusted to give
effect to the sale of 5,000,000 shares of common stock offered in this
offering at an assumed offering price of $10.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses.
The capitalization information in the table below is qualified by the more
detailed consolidated financial statements and related notes beginning on page
F-1 of this prospectus. The table should be read in conjunction with those
consolidated financial statements and related notes and the sections of this
prospectus titled "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
As of October 3, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
and
per share data)
(unaudited)
<S> <C> <C> <C>
Capital lease obligations, long-term........... $ 986 $ 986 $ 986
-------- -------- --------
Stockholders' equity:
Common stock, $0.01 par value per share,
95,000,000 shares authorized, 13,547,599
shares issued and outstanding, actual;
$0.001 par value per share, 40,000,000
shares authorized, 14,472,161 shares issued
and outstanding, pro forma; $0.001 par value
per share, 40,000,000 shares authorized,
19,472,161 shares issued and outstanding,
pro forma as adjusted....................... 215 14 19
Convertible preferred stock, $0.02 par value
per share, 86,100,000 shares authorized,
51,431,179 shares issued and outstanding,
actual; $0.001 par value per share,
5,000,000 shares authorized, zero shares
issued and outstanding, pro forma; $0.001
par value per share, 5,000,000 shares
authorized, zero shares issued and
outstanding, pro forma as adjusted.......... 801 -- --
Additional paid-in capital..................... 63,095 71,997 117,242
Accumulated other comprehensive income......... 1,064 1,064 1,064
Unearned stock compensation.................... (1,093) (1,093) (1,093)
Accumulated deficit............................ (58,200) (58,200) (58,200)
-------- -------- --------
Total stockholders' equity................. 5,882 13,782 59,032
-------- -------- --------
Total Capitalization..................... $ 6,868 $ 14,768 $ 60,018
======== ======== ========
</TABLE>
The common stock outstanding after this offering is based on the number of
shares outstanding on October 3, 1999.
The common stock outstanding after this offering excludes 3,672,475 shares
of our common stock which may be issued upon exercise of currently outstanding
stock options and warrants outstanding as of October 3, 1999, with a weighted
average exercise price of $4.92 per share; and approximately 3.6 million other
shares of common stock reserved for issuance under our stock plans. See
"Management--Director Compensation", "--Employee Stock Option Plan" and "--
Employee Stock Purchase Plan" and "Description of Capital Stock."
22
<PAGE>
DILUTION
As of October 3, 1999, our pro forma net tangible book value was
approximately $10.8 million, or $0.75 per share of our common stock. Pro forma
net tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the number of shares of our common
stock outstanding. Dilution in net tangible book value per share represents the
difference between the amount per share of common stock paid by purchasers of
common stock in this offering and the net tangible book value per share of
common stock immediately after this offering. Our pro forma net tangible book
value as of October 3, 1999 is calculated after giving effect to the issuance
of series E preference shares by Virata Limited, the reorganization of Virata
Limited and a 1 for 6.7 reverse stock split of our common stock.
Our pro forma as adjusted net tangible book value as of October 3, 1999 was
approximately $56.1 million, or $2.88 per share of our common stock, after
giving effect to the receipt of the net proceeds from the sale of the 5,000,000
shares of common stock offered by us, assuming an initial public offering price
of $10.00 per share and after deducting the estimated underwriting discounts
and commissions and estimated offering expenses.
This amount represents an immediate increase in pro forma net tangible book
value of $2.13 per share to the existing stockholders and an immediate dilution
of $7.12 per share to purchasers of common stock in the offering. The following
table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $10.00
Pro forma net tangible book value per share as of October 3,
1999........................................................... $0.75
Increase in net tangible book value per share attributable to
new investors.................................................. 2.13
-----
Pro forma as adjusted net tangible book value per share after the
offering......................................................... 2.88
------
Dilution in net tangible book value per share to new investors.... $ 7.12
======
</TABLE>
The following table summarizes, as of October 3, 1999, the difference
between the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid by existing
stockholders and to be paid by new investors purchasing shares of common stock
in this offering, before deducting the underwriting discounts and commissions
and estimated expenses payable by us, at an assumed initial public offering
price of $10.00 per share.
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration Average
-------------- ---------------- Price
Number Percent Amount Percent Per Share
------ ------- -------- ------- ---------
(in thousands, except percentages and per
share data)
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 14,472 74.3% $ 61,571 55.2% $ 4.25
New investors......................... 5,000 25.7 50,000 44.8 10.00
------ ---- -------- ----
Total............................... 19,472 100% $111,571 100%
====== ==== ======== ====
</TABLE>
The foregoing computations are based on the number of shares of common stock
outstanding on October 3, 1999.
The common stock outstanding after this offering excludes 3,672,475 shares
of our common stock which may be issued upon exercise of currently outstanding
stock options and warrants outstanding as of October 3, 1999, with a weighted
average exercise price of $4.92 per share, and approximately 3.6 million other
shares of common stock reserved for issuance under our stock plans. See
"Capitalization," "Management--Director Compensation", "--Employee Stock Option
Plan" and "--Employee Stock Purchase Plan" and "Description of Capital Stock."
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read with the
consolidated financial statements and related notes beginning on page F-1 of
this prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 26 of this prospectus.
The selected consolidated statement of operations data for each of the three
fiscal years ended March 31, 1997, 1998 and 1999 and selected consolidated
balance sheet data as of March 31, 1998 and 1999 are derived from, and
qualified by reference to, the audited consolidated financial statements
included elsewhere in this prospectus. The selected consolidated statement of
operations data for each of the two fiscal years ended March 31, 1995 and 1996
and selected consolidated balance sheet data as of March 31, 1995, 1996 and
1997 are derived from audited financial statements not included in this
prospectus. Information for the fiscal year ended March 31, 1999 includes the
results of operations for RSA Communications, Inc. only since July 17, 1998,
the closing date of the acquisition. For information showing our unaudited pro
forma results of operations including RSA Communications, Inc. for the fiscal
year ended March 31, 1999, see Virata Corporation Pro Forma Combined Financial
Information on page F-33.
Effective October 3, 1999, we changed our fiscal year such that each quarter
ends on the Sunday closest to the calendar quarter end.
The selected consolidated statement of operations data for the six months
ended September 30, 1998 and October 3, 1999 and the selected consolidated
balance sheet data as of October 3, 1999 are derived from unaudited
consolidated financial statements included elsewhere in this prospectus. The
unaudited consolidated financial statements have been prepared by us on a basis
consistent with our audited consolidated financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of our results of
operations and financial position as of and for those periods.
<TABLE>
<CAPTION>
Six Months Six Months
Year Ended March 31, Ended Ended
--------------------------------------------- September 30, October 3,
1995 1996 1997 1998 1999 1998 1999
------- ------- ------- -------- -------- ------------- ----------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
Semiconductors......... $ -- $ -- $ -- $ 505 $ 2,784 $ 1,697 $ 3,493
License................ -- 85 971 1,570 1,628 1,009 528
Services and royalty... 226 333 1,134 1,206 2,367 1,075 808
Systems................ -- 2,424 4,848 5,650 2,477 1,340 848
------- ------- ------- -------- -------- -------- -------
Total revenues....... 226 2,842 6,953 8,931 9,256 5,121 5,677
------- ------- ------- -------- -------- -------- -------
Cost of revenues:
Semiconductors......... -- -- -- 325 2,421 1,333 1,941
License................ -- -- -- -- -- -- --
Services and royalty
...................... 100 55 185 192 528 229 338
Systems................ -- 1,854 3,754 3,270 1,048 701 491
------- ------- ------- -------- -------- -------- -------
Total cost of
revenues............ 100 1,909 3,939 3,787 3,997 2,263 2,770
------- ------- ------- -------- -------- -------- -------
Gross profit............ 126 933 3,014 5,144 5,259 2,858 2,907
Operating expenses:
Research and
development........... 3,587 4,402 3,518 3,987 8,323 3,586 5,130
Sales and marketing.... 365 4,037 4,753 4,076 2,917 1,381 1,896
General and
administrative........ 1,278 2,096 3,410 4,917 5,567 3,099 2,303
Restructuring costs.... -- -- -- 1,871 -- -- --
Amortization of
intangible assets..... -- -- -- -- 549 137 370
Amortization of stock
compensation.......... -- -- -- 399 1,394 683 505
Acquired in-process
research and
development........... -- -- -- -- 5,260 5,260 --
------- ------- ------- -------- -------- -------- -------
Total operating
expenses............ 5,230 10,535 11,681 15,250 24,010 14,146 10,204
------- ------- ------- -------- -------- -------- -------
Loss from operations.... (5,104) (9,602) (8,667) (10,106) (18,751) (11,288) (7,297)
Interest and other
income (expense), net.. 4 264 127 (172) 1,594 (407) (275)
------- ------- ------- -------- -------- -------- -------
Net loss................ $(5,100) $(9,338) $(8,540) $(10,278) $(17,157) $(11,695) $(7,572)
======= ======= ======= ======== ======== ======== =======
Net loss per share:
Basic and diluted...... $ (0.56) $ (0.89) $ (0.80) $ (0.90) $ (1.33) $ (0.91) $ (0.57)
======= ======= ======= ======== ======== ======== =======
Weighted average
shares................ 9,150 10,481 10,676 11,482 12,881 12,790 13,359
======= ======= ======= ======== ======== ======== =======
Pro forma net loss per
share:
Basic and diluted...... $ (1.42) $ (0.60)
======== =======
Weighted average
shares................ 12,075 12,642
======== =======
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
March 31,
---------------------------------------- October 3,
1995 1996 1997 1998 1999 1999
------- ------ ------- ------- ------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............. $ 451 $1,315 $ 3,752 $ 767 $ 8,616 $ 4,137
Working capital.......... (3,206) 451 6,346 (3,653) 8,042 1,720
Total assets............. 2,086 4,422 12,066 5,950 19,187 12,562
Total long term
liabilities............. -- 48 875 738 1,130 986
Total stockholders'
equity (deficit)........ (2,129) 1,850 6,857 (3,085) 12,719 5,882
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of this prospectus includes a number of forward-looking
statements that reflect our current views with respect to future events and
financial performance. We use words such as "anticipates," "believes,"
"expects," "future," and "intends," and similar expressions to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this prospectus.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from historical results or our
predictions. These risks are described in "Risk Factors" and elsewhere in this
prospectus. See "Special Note Regarding Forward-Looking Statements."
Overview
We were incorporated in March 1993 in Cambridge, England, as a spin-out from
the Olivetti Research Laboratory (now AT&T Laboratories). Until 1995, we were a
development stage company focused primarily on product development. From first
production revenue shipment in April 1995 through March 1996, we focused on
developing and delivering ATM-based, board-level systems primarily for local
area network applications. In mid 1996, we began licensing our software suite
and selling our semiconductors to developers of broadband access products. In
September 1997, we ceased development of our systems products and focused
exclusively on expanding our software offering and developing additional
semiconductors for the broadband marketplace with a focus on the DSL market. We
recently moved our corporate headquarters from Cambridge, England to Santa
Clara, California.
We generate revenues from sales of semiconductors, systems-level products,
software licenses, maintenance, royalties and related design services.
Semiconductor revenues have come from two sources, our Proton family of ASIC
products and our ATOM family of ASSPs. An equipment manufacturer, or OEM,
licenses our software, which permits them to purchase our semiconductors for
use in their products. We support our licensee customers through the sale of
maintenance contracts and design services. Since September 1997, we have sold
our systems-level products primarily to one customer, and we expect sales of
these products to decline. We sell our products through a direct sales force,
which we believe most effectively allows us to serve our customers. We also
utilize a sales representative in Taiwan.
Revenues from the sale of both semiconductors and systems are recognized
upon shipment to customers. Allowances are provided for estimated returns at
the time of shipment. We recognize software license revenues under Statement of
Position, or SOP, 97-2, Software Revenue Recognition, and SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. When contracts contain multiple elements and vendor-specific
objective evidence exists for all undelivered elements, we account for the
delivered elements in accordance with the "Residual Method" prescribed by SOP
98-9. Software licenses are generally recognized as revenue upon shipment of
the software product. In the event that we grant our customers the right to
specified upgrades, license revenue is deferred until delivery of the specific
upgrade. If vendor-specific objective evidence of fair value does not exist,
then the entire license fee is deferred until the delivery of the specified
upgrade. We recognize revenues from maintenance and support services provided
to licensees ratably over the term of the agreement, generally one year, and
recognize revenues from design services provided to OEMs as the services are
performed.
It usually takes more than one year, occasionally more than two years, for
us to realize volume shipments of our semiconductor products after we first
contact a customer. We first work with customers to achieve a design win, which
may take six months or longer, at which time we sell a source code license. Our
customers then complete the design, testing and evaluation of their systems and
begin the marketing process, a period which typically lasts an additional three
to six months or longer. As a result, a significant period of time may elapse
between our sales efforts and our realization of revenues, if any, from volume
purchases of our products by our customers. We generally sell our products
based on individual purchase orders. Our customers are not obligated by long-
term contracts to purchase our semiconductors and can generally cancel or
reschedule orders upon short notice. As of October 3, 1999, our backlog was
approximately $7.5 million, including the backlog for semiconductors, which was
approximately $6.8 million.
26
<PAGE>
Achieving a design win with a customer does not create a binding commitment
from that customer to purchase our products. Rather, it is a decision by a
customer to use our products in the design process of their products. A
customer can choose at any time to discontinue using our products in their
designs or product development efforts. Even if our products are chosen to be
incorporated into a customer's products, we may still not realize significant
revenues from that customer if their products are not commercially successful.
We have a strategy of licensing and partnering with as many key participants in
our markets as possible, and we have achieved a significant number of design
wins. Nevertheless, some customers will be more successful than others in
developing and marketing their products that incorporate our semiconductor
products, and it is difficult for us to predict which of these customers will
generate revenues for us. Our semiconductor product sales are almost completely
dependent upon the relative success of our customers in the marketplace for
broadband access products.
We have spent considerable resources developing our Beryllium product for
the ADSL market, and we are just beginning to work with potential customers for
this product. Our future success will depend, in part, on the success of
Beryllium. However, we do not expect to know whether we will realize
significant commercial shipments of Beryllium until the second half of 2000.
Our revenues to date have been concentrated with a small number of
customers. We expect this concentration to continue. For the fiscal year ended
March 31, 1999, Com21 and Orckit Communications accounted for 22.6% and 15.7%,
respectively, of our total revenues. For the six months ended October 3, 1999,
Orckit Communications, Com21, Netopia and Westell Technologies accounted for
51.5%, 11.6% 8.9% and 7.0%, respectively, of our total revenues.
International revenues accounted for 44.2% of total revenues for the fiscal
year ended March 31, 1998 and 40.3% for the fiscal year ended March 31, 1999.
Sales to customers in Israel represented 10.8% and 16.5% of total revenues for
the fiscal year ended March 31, 1998 and March 31, 1999, respectively. For the
six months ended October 3, 1999, revenues from these Israeli customers were
52.4% of total revenues. International revenues are denominated solely in U.S.
dollars, which reduces our exposure to fluctuations in revenues attributable to
changes in foreign currency exchange rates. However, we experience risks
inherent in international business. These risks include extended collection
time for receivables, reduced ability to enforce contractual obligations and
reduced protection of our intellectual property. Our material costs are
denominated in U.S. dollars and our operating expenses are split between U.S.
dollars and British pounds sterling.
Our gross margin has fluctuated significantly due primarily to product mix.
For the fiscal year ended March 31, 1999, our semiconductor gross margin was
13.0%, our license gross margin was 100.0%, our services and royalty gross
margin was 77.7% and our systems gross margin was 57.7%. We believe our gross
margin may continue to fluctuate because we expect semiconductors to be a
greater percentage of total revenues and increased competition and more
consumer oriented markets may impact pricing.
Since inception, we have invested heavily in research and development and
have built a worldwide sales force and administration infrastructure, which has
contributed to net losses. Additionally, we have chosen to operate principally
in three locations: Cambridge, England; Raleigh, North Carolina; and Santa
Clara, California. We believe that our strategy of locating research and
development in Cambridge and Raleigh has provided access to high quality
engineers and contributed to low turnover. However, we incur higher general and
administrative expenses associated with multi-site operations. We plan to
continue to invest to exploit market opportunities and revenues may not
increase at a rate sufficient to achieve and maintain profitability.
In September 1997, we implemented a new business strategy and reduced the
resources allocated to the systems line of business. A restructuring plan was
implemented in the second half of fiscal 1998 which resulted in one-time
charges of $1.9 million for the year ended March 31, 1998. Approximately
$900,000 of the restructuring charge represents employee costs, $900,000
represents asset write-downs and $71,000 relates to other restructuring costs.
We continue to sell our systems products to one principal customer and systems
revenues for the six months ended October 3, 1999 were $848,000.
27
<PAGE>
To extend our analog and DSL technical capabilities, in July 1998 we
acquired RSA Communications, a privately-held company based in Raleigh, North
Carolina specializing in analog modem software development. Financial
information for the fiscal year ended March 31, 1999 includes the results of
operations for RSA Communications beginning July 17, 1998, the closing date of
the acquisition. The transaction was accounted for as a purchase business
combination, under the purchase method of accounting. The aggregate purchase
price is required to be allocated to the tangible and identifiable intangible
assets acquired and liabilities assumed on the basis of their fair values on
the acquisition date. Based on a valuation by an independent appraiser, $5.3
million of the $9.3 million purchase price was allocated to in-process research
and development. The core technologies acquired in the RSA Communications
acquisition were the ADSL PHY software and voiceband modem protocol software.
The significant in-process research and development projects include V.90 modem
software and two software algorithms, the modem modulation software algorithm
and the ADSL software algorithm.
The V.90 modem software is voiceband modem software for the Hitachi SH-3
processor on a Windows CE platform. This software project was completed
subsequent to the acquisition in 1998 and has been licensed to Hitachi. At the
time of the acquisition this project was approximately 90% complete, and the
fair value assigned to this project was $2.4 million.
The modem modulation software algorithm includes layer 1 software (PHY
software) that provides modulation/demodulation functions of a voiceband modem,
and layer 2 software for a voiceband modem that provides functions such as
control, error correction and data compression. It has a complete set of
flexible and portable voiceband modem and facsimile protocols required for our
customers' voiceband modem products. At the time of the acquisition, this
project was approximately 90% complete, and the fair value assigned to this
project was $2.4 million. This project was subsequently terminated.
The ADSL software algorithm is a complete software stack that is compliant
with the ITU ADSL standards. The fair value assigned to this project was
$425,000 at the time of the acquisition when this project was approximately 35%
complete. The project is currently 85% complete and has a remaining expected
development cost of $375,000. The remaining risks affecting the timely
completion and commercialization of this project are minimal. The remaining
uncertainties that might affect the outcome of this project are related to the
size of the developing ADSL market.
The in-process research and development valuation was determined using the
income-based approach for the V.90 modem software and replacement cost method
for the software algorithms. The acquired in-process technology was not
considered to have reached technological feasibility and had no alternative
future use. Accordingly, the amount was charged to operations upon acquisition.
For more information on the valuation of the acquired in-process research and
development, see Note 4 of notes to consolidated financial statements. For
information showing our unaudited pro forma results of operations including RSA
Communications for the fiscal year ended March 31, 1999, see Virata Corporation
Pro Forma Combined Financial Information on page F-33.
Our limited operating history in the DSL market makes it difficult to
forecast our future operating results accurately. To date, we have not achieved
profitability in any quarterly or annual period, and as of October 3, 1999, we
had an accumulated deficit of $58.2 million. Although our total revenues have
grown in recent quarters, we cannot be certain that our total revenues will
increase at a rate sufficient to achieve and maintain profitability.
Recent Developments
Financial Trends
Our revenues have increased during each of the past four quarters ended
October 3, 1999, however, we continue to operate at a loss, with operating
expenses exceeding revenues.
28
<PAGE>
Private Placement Financing
On October 12, 1999, in a private placement with Siemens Information and
Communication Networks, Inc., Olivetti Telemedia Investments B.V. and LSI Logic
Inc., Virata Limited issued 6,153,846 shares of its series E preference shares
at a purchase price of $1.30 per share, prior to giving effect to the 1 for 6.7
reverse stock split, for an aggregate purchase price of $8.0 million. The
series E preference shares will convert into 918,484 shares of our common stock
immediately prior to this offering. See "Certain Transactions." In connection
with the private placement, the investors in the private placement were granted
registration rights for the shares of common stock they purchased. See
"Description of Capital Stock--Registration Rights."
The series E investors include:
<TABLE>
<CAPTION>
Investment
Investor (millions) Description
-------- ---------- -----------
<S> <C> <C>
Olivetti Telemedia $3.0 Parent of Telecom Italia and Telecom Italia
Investments B.V. ...... Mobile, Italy's largest wireless and
Europe's largest wireless carriers,
respectively. Olivetti was an important
source of our initial technology.
Siemens Information and
Communication Networks, 3.0 Siemens is a leading worldwide
Inc. .................. telecommunications company and has been a
customer of ours since August 1999.
LSI Logic Inc. ......... 2.0 A leading global supplier of semiconductor
products. LSI is currently one of our
principal suppliers of semiconductors.
</TABLE>
In addition to the financial investment, we believe that our strategic
relationships with the series E investors will benefit our business by
providing access to additional technical, marketing and distribution expertise,
and potentially a large number of end users of DSL technologies.
Reorganization
Immediately prior to this offering, Virata Corporation became the holding
company of Virata Limited, pursuant to a share reconstruction under Section 425
of the United Kingdom Companies Act of 1985. See "Certain Transactions--
Reorganization of Virata Limited."
Reverse Stock Split
Immediately prior to this offering and immediately after the reorganization
of Virata Limited, we will effect a 1 for 6.7 reverse stock split of our common
stock. No fractional shares will be issued as a result of the reverse stock
split. In lieu of any fractional shares, shareholders will be paid an amount in
cash equal to such fractional interest multiplied by the initial price to the
public of our common stock in this offering.
29
<PAGE>
Results of Operations
The following table sets forth, for the periods presented, certain data from
our consolidated statement of operations expressed as a percentage of total
revenues.
<TABLE>
<CAPTION>
Six Months Six Months
Year Ended March 31, Ended Ended
------------------------ September 30, October 3,
1997 1998 1999 1998 1999
------ ------ ------ ------------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data as a
Percentage of Total
Revenues
Revenues:
Semiconductors........... -- % 5.7% 30.1% 33.1% 61.6%
License.................. 14.0 17.6 17.6 19.7 9.3
Services and royalty..... 16.3 13.4 25.5 21.0 14.2
Systems.................. 69.7 63.3 26.8 26.2 14.9
------ ------ ------ ------ ------
Total revenues......... 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------
Cost of revenues:
Semiconductors........... -- 3.6 26.2 26.0 34.2
License.................. -- -- -- -- --
Services and royalty..... 2.7 2.2 5.7 4.5 6.0
Systems.................. 54.0 36.6 11.3 13.7 8.6
------ ------ ------ ------ ------
Total cost of
revenues.............. 56.7 42.4 43.2 44.2 48.8
------ ------ ------ ------ ------
Gross profit.............. 43.3 57.6 56.8 55.8 51.2
Operating expenses:
Research and
development............. 50.6 44.6 89.9 70.0 90.4
Sales and marketing...... 68.4 45.6 31.5 27.0 33.4
General and
administrative.......... 49.0 55.1 60.2 60.5 40.6
Restructuring costs...... -- 20.9 -- -- --
Amortization of
intangible assets....... -- -- 5.9 2.7 6.5
Amortization of stock
compensation............ -- 4.5 15.1 13.3 8.9
Acquired in-process
research and
development............. -- -- 56.8 102.7 --
------ ------ ------ ------ ------
Total operating
expenses.............. 168.0 170.7 259.4 276.2 179.8
------ ------ ------ ------ ------
Loss from operations...... (124.7) (113.1) (202.6) (220.4) (128.6)
Interest and other income
(expense), net........... 1.9 (2.0) 17.2 (8.0) (4.8)
------ ------ ------ ------ ------
Net loss.................. (122.8)% (115.1)% (185.4)% (228.4)% (133.4)%
====== ====== ====== ====== ======
</TABLE>
Six Months Ended September 30, 1998 and October 3, 1999
Total Revenues
Total revenues increased 10.9% from $5.1 million for the six months ended
September 30, 1998 to $5.7 million for the six months ended October 3, 1999.
While total revenues were largely unchanged, semiconductor revenues increased
while license, services and royalty, and systems revenues decreased
significantly.
Semiconductor revenues increased 105.8% from $1.7 million for the six months
ended September 30, 1998 to $3.5 million for the six months ended October 3,
1999. The increase in semiconductor revenues, from 33.1% of total revenues for
the six months ended September 30, 1998 to 61.6% of total revenues for the six
months ended October 3, 1999, was due primarily to a substantial increase in
shipments of semiconductors to Orckit Communications. Sales to this customer
totaled $2.9 million in the six months ended October 3, 1999.
License revenues decreased 47.7% from $1.0 million for the six months ended
September 30, 1998 to $528,000 for the six months ended October 3, 1999. The
decrease in license revenues, from 19.7% of total revenues for the six months
ended September 30, 1998 to 9.3% of total revenues for the six months ended
October 3, 1999, was largely due to a decrease in the average selling price for
software licenses.
Services and royalty revenues decreased 24.8% from $1.1 million for the six
months ended September 30, 1998 to $808,000 for the six months ended October 3,
1999. The decrease in services and royalty revenues,
30
<PAGE>
from 21.0% of total revenues for the six months ended September 30, 1998 to
14.2% of total revenues for the six months ended October 3, 1999, was due
primarily to the introduction of our design and consulting services, offset by
a decrease in royalty revenues.
Systems revenues decreased 36.7% from $1.3 million for the six months ended
September 30, 1998 to $848,000 for the six months ended October 3, 1999. The
decrease in systems revenues, from 26.2% of total revenues for the six months
ended September 30, 1998 to 14.9% of total revenues for the six months ended
October 3, 1999, was the result of our decision in September 1997 to focus our
efforts on semiconductor sales.
Cost of Revenues and Gross Margin
Total cost of revenues consists primarily of semiconductor costs paid to
foundry vendors, costs attributable to design services and software maintenance
and operations expense including miscellaneous cost of revenues. Total cost of
revenues increased 22.4% from $2.3 million for the six months ended September
30, 1998 to $2.8 million for the six months ended October 3, 1999. The increase
in total cost of revenues, from 44.2% of total revenues for the six months
ended September 30, 1998 to 48.8% of total revenues for the six months ended
October 3, 1999, was primarily due to the increase in cost associated with
higher semiconductor unit sales.
Semiconductor cost of revenues increased 45.6% from $1.3 million for the six
months ended September 30, 1998 to $1.9 million for the six months ended
October 3, 1999. The increase in semiconductor gross margin, from 21.4% for the
six months ended September 30, 1998 to 44.4% for the six months ended October
3, 1999, was primarily due to product mix and an increase in sales volume
during the six months ended October 3, 1999.
There are no costs of revenues associated with our software license
revenues. As noted above, license revenues decreased 47.7% for the six months
ended October 3, 1999 as compared to the six months ended September 30, 1998.
The revenue decrease negatively impacted gross margins.
Services and royalty cost of revenues increased 47.6% from $229,000 for the
six months ended September 30, 1998 to $338,000 for the six months ended
October 3, 1999. The decrease in gross margin associated with services and
royalty revenues, from 78.7% for the six months ended September 30, 1998 to
58.2% for the six months ended October 3, 1999, was primarily the result of
costs incurred for design services and expenses associated with royalty
revenues.
Systems cost of revenues decreased 30.0% from $701,000 for the six months
ended September 30, 1998 to $491,000 for the six months ended October 3, 1999.
The decrease in systems gross margin, from 47.7% for the six months ended
September 30, 1998 to 42.1% for the six months ended October 3, 1999, was
primarily due to a change in customer mix.
Research and Development Expenses
Research and development expenses consist primarily of engineering staffing
costs and technology license fees. Research and development expenses increased
43.1% from $3.6 million, or 70.0% of total revenues, for the six months ended
September 30, 1998 to $5.1 million, or 90.4% of total revenues, for the six
months ended October 3, 1999. The increase was primarily due to the addition of
research and development personnel, which grew from 43 to 81 engineers as a
result of the acquisition of RSA Communications and accelerated new product
development. In comparison to the previous period, the number of new products
under development increased substantially. We expect research and development
expenses to increase in absolute dollar amounts in future periods as we further
expand our research and development organization and acquire additional
intellectual property for inclusion in semiconductor device designs.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee salaries, sales
commissions, travel and related costs for sales and marketing personnel,
promotional materials and trade show expenses. Sales and marketing
31
<PAGE>
expenses increased 37.3% from $1.4 million, or 27.0% of total revenues, for the
six months ended September 30, 1998 to $1.9 million, or 33.4% of total
revenues, for the six months ended October 3, 1999. The increase was primarily
due to the addition of sales and marketing personnel and increased marketing
activity. We expect sales and marketing expenses to increase in absolute dollar
amounts in future periods as sales and marketing activities increase.
General and Administrative
General and administrative expenses consist primarily of employee salaries
and related expenses for executive, accounting, legal and administrative
personnel, and costs associated with facilities, professional service fees and
other general corporate expenses. General and administrative expenses decreased
25.7% from $3.1 million, or 60.5% of total revenues, for the six months ended
September 30, 1998 to $2.3 million, or 40.6% of total revenues, for the six
months ended October 3, 1999. The decrease was primarily due to bad debt
expense which decreased from $1.3 million for the six months ended September
30, 1998 to $60,000 for the six months ended October 3, 1999. We expect general
and administrative expenses to increase in absolute dollar amounts as we
further invest in infrastructure and incur additional expenses related to the
anticipated growth of our business and operation as a publicly held company.
Amortization of Intangible Assets
Amortization of intangible assets expense is related to the acquisition of
RSA Communications, which occurred in July 1998. For the six months ended
October 3, 1999, amortization of intangible assets expense was $370,000. We are
amortizing the intangible assets on a straight-line basis over 60 months
beginning in the quarter ended September 30, 1998.
Amortization of Stock Compensation
Through October 3, 1999, we had recorded a total of $3.4 million of unearned
stock compensation. We recognized amortization of stock compensation of
$683,000 for the six months ended September 30, 1998 and $505,000 for the six
months ended October 3, 1999.
Interest Expense
Interest expense resulted primarily from interest expense related to
obligations under capital leases and our bank line of credit. Interest expense
decreased from $102,000 for the six months ended September 30, 1998 to $92,000
for the six months ended October 3, 1999.
Interest Income and Other Income (Expense), Net
Interest income and other income (expense), net consists primarily of
interest earned on cash and cash equivalents, short-term investments and
foreign currency translation adjustments. Interest income and other income
(expense), net decreased from an expense of $305,000 for the six months ended
September 30, 1998 to an expense of $183,000 for the six months ended October
3, 1999. The decrease in interest income and other income (expense), net was
primarily due to lower average cash balances in the six months ended October 3,
1999. In addition, we recorded a foreign currency transactions loss of $732,000
for the six months ended September 30, 1998 and a foreign currency transactions
loss of $333,000 for the six months ended October 3, 1999.
Income Taxes
Since inception, we have incurred net losses for federal and state tax
purposes and have not recognized any tax provision or benefit.
32
<PAGE>
Fiscal Years Ended March 31, 1997, 1998 and 1999
Total Revenues
Total revenues increased 28.4% from $7.0 million for the fiscal year ended
March 31, 1997 to $8.9 million for the fiscal year ended March 31, 1998. Total
revenues increased 3.6% to $9.3 million for the fiscal year ended March 31,
1999.
No semiconductor revenues were recorded in the fiscal year ended March 31,
1997. Semiconductor revenues increased 451.1% from $505,000 for the fiscal year
ended March 31, 1998 to $2.8 million for the fiscal year ended March 31, 1999.
Semiconductor revenues increased from 5.7% of total revenues for the fiscal
year ended March 31, 1998 to 30.1% of total revenues for the fiscal year ended
March 31, 1999 as a growing number of software licensees began initial trials
and deployments of broadband access devices.
License revenues increased 61.7% from $971,000 for the fiscal year ended
March 31, 1997 to $1.6 million for the fiscal year ended March 31, 1998. The
increase in license revenues, from 14.0% of total revenue for the fiscal year
ended March 31, 1997 to 17.6% for the fiscal year ended March 31, 1998, was the
result of increased success expanding our software licensee customer base.
License revenues of $1.6 million for the fiscal year ended March 31, 1999 were
substantially the same as the fiscal year ended March 31, 1998. License
revenues were 17.6% of total revenues for both the fiscal year ended March 31,
1998 and 1999.
Services and royalty revenues increased 6.3% from $1.1 million for the
fiscal year ended March 31, 1997 to $1.2 million for the fiscal year ended
March 31, 1998, but decreased from 16.3% to 13.5% of total revenues. Services
and royalty revenues increased 96.3% to $2.4 million for the fiscal year ended
March 31, 1999 and increased to 25.6% of total revenue. The increase is due
primarily to revenues contributed by Virata Raleigh Corporation under analog
modem consulting engineering agreements.
Systems revenues for the fiscal year ended March 31, 1997 totaled $4.8
million, or 69.7% of total revenues. Systems revenues increased 16.5% to $5.7
million for the fiscal year ended March 31, 1998. Systems revenues decreased
56.2% to $2.5 million for the fiscal year ended March 31, 1999. The decrease in
systems revenues, from 63.3% of total revenues for the fiscal year ended March
31, 1998 to 26.8% of total revenues for the fiscal year ended March 31, 1999,
was primarily due to our decision in September 1997 to focus our sales and
development efforts on semiconductor devices for the DSL market. During the
fiscal year ended March 31, 1999, sales to Com21 represented 72.4% of systems-
level product revenues.
Cost of Revenues and Gross Margin
Total cost of revenues consists primarily of semiconductor costs paid to
foundry vendors, costs attributable to design services and software maintenance
and operations expense including miscellaneous cost of revenues. Total cost of
revenues was $3.9 million, or 56.7% of total revenues, for the fiscal year
ended March 31, 1997. Cost of revenues increased from $3.8 million, or 42.4% of
total revenues, for the fiscal year ended March 31, 1998 to $4.0 million, or
43.2% of total revenues, for the fiscal year ended March 31, 1999.
No semiconductor revenues or costs were recorded for the fiscal year ended
March 31, 1997. Cost of revenues for semiconductors increased 644.6% from
$325,000 for the fiscal year ended March 31, 1998 to $2.4 million for the
fiscal year ended March 31, 1999. Semiconductor gross margin decreased from
35.6% for the fiscal year ended March 31, 1998 to 13.0% for the fiscal year
ended March 31, 1999 as a result of reduced selling prices for existing
products and product costs and inventory provisions associated with new product
introductions.
There are no costs of revenues associated with our software license
revenues.
Services and royalty cost of revenues increased 3.8% from $185,000 for the
fiscal year ended March 31, 1997 to $192,000 for the fiscal year ended March
31, 1998. Cost of revenues for services and royalty revenues
33
<PAGE>
increased 174.4% to $528,000 for the fiscal year ended March 31, 1999. Services
and royalty revenues gross margin increased from 83.7% for the fiscal year
ended March 31, 1997 to 84.1% for the fiscal year ended March 31, 1998.
Services and royalty revenues gross margin decreased to 77.7% for the fiscal
year ended March 31, 1999 as the result of costs associated with design
services revenues and royalty expenses associated with royalty income.
Systems cost of revenues decreased 12.9% from $3.8 million for the fiscal
year ended March 31, 1997 to $3.3 million for the fiscal year ended March 31,
1998. For the fiscal year ended March 31, 1999, systems cost of revenues
decreased 68.0% to $1.0 million. Gross margin for systems products improved
from 22.6% for the fiscal year ended March 31, 1997 to 42.1% for the fiscal
year ended March 31, 1998. Systems product gross margin improved further to
57.7% for the fiscal year ended March 31, 1999 as the result of decreased
operations support expenses and a narrower systems product range.
Research and Development Expenses
Research and development expenses increased 13.3% from $3.5 million for the
fiscal year ended March 31, 1997 to $4.0 million for the fiscal year ended
March 31, 1998. The increase was attributable primarily to the addition of
personnel in our research and development organization associated with
semiconductor product development. Research and development expenses increased
108.9% to $8.3 million for the fiscal year ended March 31, 1999. The increase
was primarily the result of increased staffing in Cambridge, England, as well
as the addition of personnel as a result of the acquisition of RSA
Communications and continued hiring at our Raleigh, North Carolina facility
following the acquisition.
Sales and Marketing Expenses
Sales and marketing expenses decreased 14.2% from $4.8 million for the
fiscal year ended March 31, 1997 to $4.1 million for the fiscal year ended
March 31, 1998. Sales and marketing expenses decreased a further 28.4% to $2.9
million for the fiscal year ended March 31, 1999. The decrease in sales and
marketing expenses in both periods resulted from our reduced emphasis on
systems-level products from September 1997 and increased focus on semiconductor
products. Sales efforts for semiconductors are targeted to fewer customers and
require lower sales and marketing staffing.
General and Administrative Expenses
General and administrative expenses increased 44.2% from $3.4 million for
the fiscal year ended March 31, 1997 to $4.9 million for the fiscal year ended
March 31, 1998. The increase was primarily due to a $1.1 million bad debt
provision for the fiscal year ended March 31, 1998. General and administrative
expenses increased 13.2% to $5.6 million for the fiscal year ended March 31,
1999. The increase was primarily due to increased staff performing general and
administrative tasks added as a result of the acquisition of RSA Communications
and increased bad debt provision.
Restructuring Cost
We recognized $1.9 million of restructuring cost for the fiscal year ended
March 31, 1998 associated with our reduced emphasis on systems-level products.
Amortization of Intangible Assets
Amortization of intangible assets expense is related to the acquisition of
RSA Communications, which occurred in July 1998. During the fiscal year ended
March 31, 1999, amortization of intangible assets expense was $549,000. We are
amortizing the intangible assets on a straight-line basis over 60 months
beginning in the quarter ended September 30, 1998.
34
<PAGE>
Amortization of Stock Compensation
During the fiscal years ended March 31, 1998 and 1999, we recorded a total
of $3.3 million of unearned stock compensation. We recognized amortization of
stock compensation of $399,000 for the fiscal year ended March 31, 1998 and
$1.4 million for the fiscal year ended March 31, 1999.
Interest Expense
Interest expense increased from $72,000 for the fiscal year ended March 31,
1997 to $214,000 for the fiscal year ended March 31, 1998. The increase in
interest expense was primarily due to interest expense associated with capital
equipment under our lease facility. Interest expense decreased from $214,000
for the fiscal year ended March 31, 1998 to $155,000 for the fiscal year ended
March 31, 1999. The decrease in interest expense was primarily due to interest
expense associated with capital equipment under our lease facility.
Interest Income and Other Income (Expense), Net
Interest and other income (expense), net consists primarily of income earned
on cash and cash equivalents and short-term investments, foreign exchange gains
and losses and income tax refunds. Interest income for the fiscal years ended
March 31, 1997, 1998 and 1999 were $396,000, $121,000, and $786,000,
respectively. Interest income for each fiscal year corresponded to the average
cash balance during the years. During the fiscal years ended March 31, 1997 and
1998 foreign exchange losses were $197,000 and $80,000, respectively. During
the fiscal year ended March 31, 1999 the foreign exchange gain was $427,000,
and an income tax refund was $531,000. Losses at RSA Communications, subsequent
to its acquisition, allowed for the income tax refund.
Income Taxes
Since inception, we have incurred net losses for federal and state tax
purposes and have not recognized any tax provision or benefit. At March 31,
1999, the Company had approximately $14.2 million, $11.7 million and $23.2
million in federal, state and foreign net operating loss carryforwards,
respectively, to reduce future taxable income. The net operating loss
carryforwards expires between 2002 and 2019 for both federal and state
purposes, if not utilized.
As of March 31, 1999, we had deferred tax assets of $14.5 million, which
were fully offset by a valuation allowance. Deferred tax assets consist
principally of the federal and state net operating loss carryforwards,
capitalized start-up expenditures, accruals and reserves not currently
deductible for tax purposes, research and development credits and foreign tax
credit carryforwards. We have provided a valuation allowance due to the
uncertainty of generating future profits that would allow for the realization
of these deferred tax assets. Accordingly, no tax benefit was recorded in the
accompanying consolidated statements of operations.
35
<PAGE>
Quarterly Results of Operations
The following table sets forth our consolidated operating results for each
of the six quarters ended October 3, 1999. This data has been derived from
unaudited consolidated financial statements that, in the opinion of our
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of this information when read in
conjunction with our annual audited consolidated financial statements and notes
thereto appearing elsewhere in this prospectus. These operating results are not
necessarily indicative of results of any future period.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
June 30, Sept 30, Dec 31, Mar 31, June 30, Oct 3,
1998 1998 1998 1999 1999 1999
-------- -------- ------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Semiconductors......... $ 675 $ 1,022 $ 425 $ 662 $ 1,419 $ 2,074
License................ 994 15 175 444 274 254
Services and royalty... 341 734 700 592 373 435
Systems................ 754 586 417 720 599 249
------ -------- ------- ------- ------- -------
Total revenues....... 2,764 2,357 1,717 2,418 2,665 3,012
------ -------- ------- ------- ------- -------
Cost of revenues:
Semiconductors......... 419 914 246 842 811 1,130
License................ -- -- -- -- -- --
Services and royalty... 55 174 138 161 138 200
Systems................ 444 257 374 (27) 324 167
------ -------- ------- ------- ------- -------
Total cost of
revenues............ 918 1,345 758 976 1,273 1,497
------ -------- ------- ------- ------- -------
Gross profit............ 1,846 1,012 959 1,442 1,392 1,515
Operating expenses:
Research and
development........... 1,202 2,384 2,553 2,184 2,549 2,581
Sales and marketing.... 532 849 710 826 923 973
General and
administrative........ 759 2,340 965 1,503 903 1,400
Amortization of
intangible assets..... -- 137 206 206 194 176
Amortization of stock
compensation.......... 306 377 363 348 266 239
Acquired in-process
research and
development........... -- 5,260 -- -- -- --
------ -------- ------- ------- ------- -------
Total operating
expenses............ 2,799 11,347 4,797 5,067 4,835 5,369
------ -------- ------- ------- ------- -------
Loss from operations.... (953) (10,335) (3,838) (3,625) (3,443) (3,854)
Interest and other
income (expense), net.. 10 (417) 648 1,353 428 (703)
------ -------- ------- ------- ------- -------
Net loss................ $ (943) $(10,752) $(3,190) $(2,272) $(3,015) $(4,557)
====== ======== ======= ======= ======= =======
As a Percentage of Total
Revenues
Revenues:
Semiconductors......... 24.4% 43.4% 24.7% 27.4% 53.2% 68.9%
License................ 36.0 0.6 10.2 18.3 10.3 8.3
Services and royalty... 12.3 31.1 40.8 24.5 14.0 14.4
Systems................ 27.3 24.9 24.3 29.8 22.5 8.4
------ -------- ------- ------- ------- -------
Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0
------ -------- ------- ------- ------- -------
Cost of revenues:
Semiconductors......... 15.1 38.8 14.3 34.8 30.4 37.5
License................ -- -- -- -- -- --
Services and royalty... 2.0 7.4 8.0 6.6 5.2 6.7
Systems................ 16.1 10.9 21.8 (1.1) 12.2 5.5
------ -------- ------- ------- ------- -------
Total cost of
revenues............ 33.2 57.1 44.1 40.3 47.8 49.7
------ -------- ------- ------- ------- -------
Gross profit............ 66.8 42.9 55.9 59.7 52.2 50.3
Operating expenses:
Research and
development........... 43.5 101.1 148.7 90.3 95.7 85.7
Sales and marketing.... 19.2 36.0 41.4 34.2 34.6 32.3
General and
administrative........ 27.5 99.3 56.2 62.2 33.9 46.5
Amortization of
intangible assets..... -- 5.8 12.0 8.5 7.2 5.9
Amortization of stock
compensation.......... 11.1 16.0 21.1 14.4 10.0 7.9
Acquired in-process
research and
development........... -- 223.2 -- -- -- --
------ -------- ------- ------- ------- -------
Total operating
expenses............ 101.3 481.4 279.4 209.6 181.4 178.3
------ -------- ------- ------- ------- -------
Loss from operations.... (34.5) (438.5) (223.5) (149.9) (129.2) (128.0)
Interest and other
income (expense), net.. 0.4 (17.7) 37.7 56.0 16.1 (23.3)
------ -------- ------- ------- ------- -------
Net loss................ (34.1)% (456.2)% (185.8)% (93.9)% (113.1)% (151.3)%
====== ======== ======= ======= ======= =======
</TABLE>
36
<PAGE>
Semiconductor revenues increased 51.4% to $1.0 million for the three months
ended September 30, 1998 as compared to $675,000 for the prior three-month
period. Semiconductor revenues decreased 58.4% to $425,000 for the three months
ended December 31, 1998 as compared to the prior three-month period. This
increase followed by a decrease was due to the timing of shipments to one
customer.
Our software license revenues have fluctuated during the last six quarters
ended October 3, 1999. Because of the limited number of licenses signed during
any three-month period, small changes in the number of licenses sold caused
significant changes in quarterly license revenues. During the three months
ended June 30, 1998, we adopted SOP 97-2, which affected the periods in which
license revenues were recognized. In addition, we substantially reduced the
average selling price for our licenses, which contributed to the increase in
the number of licenses sold and also contributed to the fluctuations in
quarterly license revenues.
Services and royalty revenues increased 115.4% from $341,000 for the three
months ended June 30, 1998 to $734,000 for the three months ended September 30,
1998. The increase was due primarily to the acquisition of RSA Communications
in July 1998. Services and royalty revenues have subsequently declined for
three quarters following the three months ended September 30, 1998 reflecting
our decision to offer consulting services only to companies that sign a
software license agreement.
Research and development expenditures increased 98.4% from $1.2 million for
the three months ended June 30, 1998 to $2.4 million for the three months ended
September 30, 1998. The increase was primarily due to our acquisition of RSA
Communications, which added 17 engineers to our staff, and accelerated product
development.
General and administrative expenses increased 208.3% to $2.3 million in the
three months ended September 30, 1998 as compared to $759,000 for the prior
three-month period. General and administrative expenses decreased 58.8% to
$965,000 in the three months ended December 31, 1998 as compared to the prior
three-month period. The increase followed by a decrease was principally due to
bad debt expense arising primarily from two customers. The first bad debt
expense related to a systems-level product customer, which purchased
substantially all of our remaining adapter card products. The customer
subsequently went out of business. The second bad debt expense related to Hayes
Microcomputer's decision to file for bankruptcy. We have adopted credit
policies that we believe will limit future customer non-payments. However, we
can not offer any assurances regarding the effectiveness of these policies or
of our ability in general to limit customer non-payments.
Our operating results have fluctuated significantly from quarter to quarter
in the past, and we expect these fluctuations to continue in the future. For a
list of factors that might affect fluctuations in our operating results, see
"Risk Factors--Our operating results in one or more future periods are likely
to fluctuate significantly and may fail to meet or exceed the expectations of
securities analysts or investors, which may cause our stock price to decline."
We believe period to period comparisons of our operating results are not
meaningful. You should not rely on our quarterly operating results to predict
our future performance.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through venture
capital and corporate investments in our convertible preferred stock, which
total approximately $57.1 million in aggregate net proceeds through October 3,
1999. We have also financed our operations through equipment lease financing,
which totaled $1.8 million in principal amount outstanding at October 3, 1999.
As of October 3, 1999, we had approximately $4.1 million of cash and cash
equivalents, working capital of approximately $1.7 million and approximately
$1.8 million under an equipment lease.
Net cash used in operating activities for the fiscal year ended March 31,
1997 of $7.0 million was primarily due to net operating losses of $8.5 million
and an increase in accounts receivable and other current
37
<PAGE>
assets of $797,000, and $615,000, respectively, partially offset by
depreciation and amortization of $1.1 million and increases in accounts payable
and accrued liabilities of $1.0 million and $818,000, respectively. Net cash
used in operating activities for the fiscal year ended March 31, 1998 of $9.2
million was primarily due to net operating losses of $10.3 million and an
increase in accounts receivable of $1.7 million, partially offset by
depreciation and amortization of $1.1 million and a provision for doubtful
accounts of $1.1 million. Net cash used in operating activities for the fiscal
year ended March 31, 1999 of $9.5 million was primarily due to net operating
losses of $17.2 million and a decrease in accrued liabilities of $2.1 million,
partially offset by depreciation and amortization of $1.7 million, a write off
of in-process research and development of $5.3 million, amortization of stock
compensation of $1.4 million and a provision for doubtful accounts of
$1.5 million.
Net cash used in operating activities for the six months ended September 30,
1998 of $4.0 million was primarily due to net operating losses of $11.7 million
and decreases in accrued liabilities of $1.6 million, partially offset by
depreciation and amortization of $673,000, a write-off of in-process research
and development of $5.3 million, a provision for doubtful accounts of $1.3
million, amortization of stock compensation of $683,000, decreases in accounts
receivable and other current assets of $327,000 and $478,000, respectively and
increases in accounts payable of $534,000. Net cash used in operating
activities for the six months ended October 3, 1999 of $5.1 million was
primarily due to net operating losses of $7.6 million and increases in
inventory of $430,000, partially offset by depreciation and amortization of
$1.2 million, amortization of stock compensation of $505,000, increases in
accrued liabilities of $376,000 and decreases in accounts receivable of
$914,000.
Net cash used in investing activities was $622,000 and $174,000 for the
fiscal years ended March 31, 1997 and 1998, respectively, which primarily
reflected purchases of property and equipment. Net cash used in investing
activities was $8.3 million for the fiscal year ended March 31, 1999, which
reflected purchases of property and equipment of $2.1 million, the net cash
paid in connection with the acquisition of RSA Communications of $5.1 million
and the purchase of short-term investments of $1.0 million. For the six months
ended September 30, 1998, net cash used in investing activities was
$5.8 million, due to the acquisition of RSA Communications and $618,000 of
capital equipment purchases. For the six months ended October 3, 1999, net cash
provided by investing activities was $702,000, primarily due to sales of short-
term investments of $1 million offset by capital equipment purchases of
$299,000.
Net cash provided by financing activities was $13.3 million, $2.8 million
and $25.6 million for the fiscal years ended March 31, 1997, 1998 and 1999,
respectively. Net cash provided by financing activities was $24.6 million for
the six months ended September 30, 1998. Net cash used by financing activities
was $377,000 for the six months ended October 3, 1999. Net cash provided by
financing activities in each of these periods was attributable primarily to
proceeds from the issuance of convertible preferred stock, proceeds from
equipment lease financing less repayments on capital lease obligations and, for
the fiscal year ended March 31, 1998, a revolving credit facility.
On August 29, 1999, we entered into a loan and security agreement with
Venture Banking Group, an entity of Greater Bay Bancorp, that provides for
borrowings up to $3.0 million. The agreement bears interest at prime rate plus
one-half percent, and all outstanding advances are due in August 2000.
Borrowings are secured by our property, equipment, intellectual property,
inventory and receivables and require that we comply with certain financial
covenants including the maintenance of specific minimum ratios. As of October
3, 1999, we were in compliance with or had obtained waivers for such financial
covenants, and we had $483,000 outstanding debt under this agreement, bearing
interest of 8.75%.
We believe that the net proceeds from this offering, together with our
current cash, cash equivalents, short-term investments and borrowings under our
current credit facility, will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures for the next 12 months. Therefore,
if cash generated from operations is insufficient to satisfy our long-term
liquidity requirements, we may seek to sell additional equity or debt
securities or to obtain an additional credit facility. If additional funds are
raised through the
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<PAGE>
issuance of debt securities, these securities could have rights, preferences
and privileges senior to holders of common stock, and the terms of any debt
could impose restrictions on our operations. The sale of additional equity or
debt securities could result in additional dilution to our stockholders, and
additional financing may not be available in amounts or on terms acceptable to
us, if at all. If we are unable to obtain this additional financing, we may be
required to reduce the scope of our planned product development and marketing
efforts, which could harm our business, financial condition and operating
results.
Year 2000 Compliance Disclosure
The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and date-
sensitive calculations by computers and other machinery as the Year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date. As a result, date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. These
problems may also arise from other sources as well, such as the use of special
codes and conventions in software that make use of the date field. If not
corrected, these electronic systems could fail or create erroneous results when
addressing dates on and after January 1, 2000.
State of Readiness
To address the Year 2000 issue, we have assembled a team that is responsible
for evaluating our state of readiness in connection with the Year 2000 issue.
Our information services and operations departments have evaluated the
Year 2000 issue, and one employee from each of these departments is designated
as a Year 2000 coordinator.
Our Year 2000 activities have focused primarily in five areas:
. products--analyzing software, semiconductor and circuit boards;
. systems--analyzing financial, materials planning, computer aided design
tools, PC desktops, applications and data;
. suppliers--ensuring a continuous supply of goods and services;
. customers--responding to customers requesting information; and
. policies and contingency plans--adopting policies in areas such as human
resources, finance, travel and security.
For each of these five areas, our strategy has been to:
. develop an awareness and understanding of particular issues;
. determine an appropriate solution for each issue, and plan and provide
resources for the solution;
. validate, test and document the solution;
. execute the solution; and
. ensure that an adequate contingency plan is in place.
Examples of our activities and conclusions in connection with the Year 2000
issue are as follows:
Products
None of our semiconductor products, embedded software or systems-level
products contain any date-related information or circuitry, nor do they have
any functionality specific to time of day, week, month or year. The only
exception to the preceding sentence is that we delivered ATM video storage
system devices to less than 50 customers in 1995 and 1996 for use in
experimental near-video-on-demand. We believe any Year 2000 problems arising in
such devices would in any event cause only negligible loss of functionality to
such devices. However, we cannot be certain of or control the use and
application of our products in conjunction with third party software
development or operating systems, and the failure of such third party products
due to Year 2000 problems could harm our development or sales activities
related to such third party products.
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<PAGE>
Systems
We have audited our internal systems and data, both information technology
and non-information technology, including those used for financial and
materials management and for computer aided design workstations and software.
In addition, we have tested our desktop and laptop PCs and applications and
have installed service pack software as required. Further, we have implemented
procedures to ensure that any new hardware or software purchased between now
and the end of 1999 will, when installed, undergo similar tests and audits.
Based on our preliminary assessment, we do not believe that our material
internal systems will be affected by the Year 2000 issue.
Suppliers
In early 1999, we issued Year 2000 questionnaires to over 100 of our
suppliers. We have received satisfactory responses to such questionnaires from
all but eight of these suppliers. We removed these eight suppliers from our
list of approved vendors and determined not to reinstate such suppliers until
they provide us with adequate assurances regarding Year 2000 readiness. The
goods and services previously provided by these eight suppliers are available
to us from other sources at comparable prices. In addition, we have taken
reasonable steps to audit our corporate services, including a review of
infrastructure items such as premises systems, telephones, air conditioners,
elevators and fire alarms. Nevertheless, we are not capable of independently
evaluating the state of Year 2000 readiness of our suppliers, and the failure
of suppliers and other third parties to identify and resolve Year 2000 issues
in a timely manner could harm our business, financial condition or results of
operation.
Customers
We have responded to each customer that has inquired about our Year 2000
readiness and have completed Year 2000 questionnaires upon request. However,
our products, once shipped to customers, are incorporated into other products
that we do not develop. The performance of our products could be affected if a
Year 2000 problem exists in a different component of a customer's product. We
have not, and will not, assess the existence of these potential problems in
customers' products or any other information regarding customers' state of Year
2000 readiness. In addition, our current or future customers may incur
significant expenses to achieve Year 2000 readiness, or customers may face
litigation costs. In either case, Year 2000 problems could reduce or eliminate
the budgets that current or potential customers may have for purchases of our
products and services. As a result, our business, results of operations or
financial conditions could be harmed.
Policies and Contingency Plans
We have developed, and will continue to develop, policies regarding matters
such as vacation time, travel, asset management and security during the roll-
over period. In addition, we intend to implement a complete back-up of all of
our business and technical computer data, with multiple copies of such data
being held in secure locations on December 30, 1999.
Costs to Address the Year 2000 Issue
Our Year 2000 activity has not required significant expense and we expect
that operating costs and margins will not be affected by Year 2000 issues. To
date, we estimate that we have spent approximately $50,000 on implementation of
our Year 2000 preparations, the majority of which relates to staffing costs in
coordinating and auditing ourselves. We believe that only a nominal amount of
work remains to be completed on Year 2000 preparation and we estimate the
remaining costs to completion will not exceed $25,000.
Legal Proceedings
We have not been party to any litigation or proceedings related to the Year
2000 issue, and we are not presently aware of any circumstances that could give
rise to such proceedings. However, we cannot be sure that
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<PAGE>
we will not in the future be required to defend our products or services in
legal proceedings, and we cannot guarantee that we will remain free of Year
2000 related disputes. Any liability of Year 2000 related damages, including
consequential damages, could harm our business, operating results and financial
condition.
Based on currently available information, we do not believe that Year 2000
issues will harm our business, financial condition, liquidity or overall
results of operations. However, until the Year 2000 occurs, it is uncertain to
what extent we may be affected by Year 2000 issues.
Risks
As a result of the Year 2000 issue, we may experience serious unanticipated
problems and costs caused by undetected errors or defects in the technology
used in our software and hardware products and internal systems. In addition,
we may be required to defend our products or services in legal proceedings, and
we cannot guarantee that we will remain free of Year 2000 related disputes. If
our software and hardware products or our internal systems are not Year 2000
compliant, the Year 2000 issue could harm our business, financial condition,
liquidity and results of operations. Until the Year 2000 occurs, we cannot be
sure that we will not be affected by the Year 2000 issue.
We do not believe that our company has any specific internal Year 2000
exposure, therefore, the worst case scenario takes the form of non-specific
disruption caused to the environment surrounding us and our operations such as
power failure, communications breakdown, inability of employees to attend the
workplace, transportation failure and/or similar failures occurring at our
customers or suppliers. This is essentially the same worst case scenario that
all businesses face at this time.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS
No. 133 until fiscal years beginning after June 15, 2000. We will adopt SFAS
No. 133 during the year ending March 31, 2002. To date, we have not engaged in
derivative or hedging activities. We cannot predict the impact of adopting SFAS
No. 133 if we were to engage in derivative and hedging activities in the
future.
Qualitative and Quantitative Disclosures About Market Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we may
invest in may be subject to market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate
at the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities and
certificates of deposit. In general, money market funds are not subject to
market risk because the interest paid on such funds fluctuates with the
prevailing interest rate. As of October 3, 1999, all of our investments were in
money market funds, certificates of deposits or high quality commercial paper.
See note 1 of the notes to the consolidated financial statements.
We develop products in both the United Kingdom and the United States and
sell in North America, Asia, Israel and Europe. As a result, our financial
results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions. A strengthening of the
dollar could make our products less competitive in foreign markets, since all
of our sales are currently made in U.S. dollars.
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BUSINESS
This prospectus contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. Our actual results
could differ significantly from the results discussed in the forward-looking
statements. Factors that could contribute to such differences include those
discussed in "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as those discussed
elsewhere in this prospectus.
Introduction
Virata provides communications processors combined with integrated software
modules to manufacturers of equipment utilizing digital subscriber line, or
DSL, technologies. These "integrated software on silicon" product solutions
enable our customers to develop a diverse range of DSL equipment, including
modems, gateways and routers targeted at the voice and high-speed data network
access, or broadband, market. We believe our systems expertise, products and
support services enable DSL equipment manufacturers to simplify product
development, reduce the time it takes for products to reach the market and
focus resources on product differentiation and enhancement. We outsource the
manufacturing of our semiconductors, which allows us to focus our resources on
the design, development and marketing of our products. As of October 26, 1999
we have licensed our software to 28 companies. These customers have developed,
or are developing, 73 designs of which 27 are currently shipping.
Industry Background
The amount of data being carried over the Internet and private
communications networks has grown dramatically in recent years. International
Data Corporation estimates that the number of Internet users worldwide was
approximately 142 million in 1998 and will reach approximately 502 million in
2003. This tremendous growth in data traffic is expected to continue as the
number of users accessing networks increases and as businesses and consumers
demand richer content and more complex applications for activities such as
telecommuting, electronic commerce and interactive media. These activities
require the transmission of large amounts of data which, in turn, requires
high-speed, broadband data access services for end users to obtain data
reliably and within practical time constraints.
To meet the demand for high-speed, broadband data transmission, network
service providers continue to install high-bandwidth fiber optic transmission
equipment, high-speed switches and core routers in the Internet backbone and in
interoffice networks. While this network backbone is capable of delivering data
at very high speeds, an access bottleneck exists between the telephone
companies' central offices and the end users' premises. The copper line
connections between the telecommunications service provider's central office
and the end user are commonly known as the local loop, or the last mile. The
last mile infrastructure was originally designed for low-speed analog voice
traffic rather than high-speed digital data transmission. As a result, access
to the Internet and private communications networks over the copper wire
infrastructure of the last mile has typically been limited to data transmission
rates of up to 56 Kbps using standard dial-up analog modems, or 128 Kbps using
integrated services digital network, or ISDN, modems. At these rates, several
minutes may be required to access a media rich website, and several hours may
be required to transfer or download large files.
In an effort to provide greater bandwidth in the local loop, network service
providers are deploying higher speed access services, such as frame relay or
T1/E1. However, the historical pricing structure has limited such services to
larger businesses. This competitive environment started to change with the
passage of the Federal Telecommunications Act of 1996 and was accelerated with
the recent merger of AT&T and TCI. The Federal Telecommunications Act
intensified the competitive environment by requiring incumbent local exchange
carriers to lease portions of their networks, including the local loop, to
other telecommunications service providers. These changes in competitive
structures coincided with the maturation of DSL technology, enabling high-
bandwidth data networking over the existing local loop copper infrastructure.
As a result, a number of companies, including Covad Communications, MCI
WorldCom, NorthPoint Communications, Rhythms
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NetConnections and Sprint, are now deploying high-speed services using DSL
technologies over the copper infrastructure owned by the incumbent local
exchange carriers. In addition, AT&T has announced plans to offer broadband and
interactive services, including telephony, on a broad scale over TCI's cable
systems over the next few years. In response to these competitive pressures,
and in an effort to increase revenues and maintain their existing customer
base, incumbent local exchange carriers are now aggressively committing their
resources to deploy DSL services.
DSL enables data transmission speeds of 128 Kbps to 52 Mbps using the
existing local loop copper wire infrastructure. DSL delivers "always on"
availability, eliminating the tedious dial-up process associated with
traditional analog modem technologies. DSL is a point-to-point technology that
connects the end user to a telecommunications service provider's central office
or to an intermediate hub. DSL equipment is deployed at each end of the copper
wire and the transmission speed depends on the length and condition of the
existing wire as well as the capabilities of the DSL equipment.
DSL implementations offer several attractive benefits over other broadband
technologies, including:
. Dedicated bandwidth. Some alternative high-speed data transmission
solutions, such as cable, are shared-media systems where many users are
attached to the same cable loop, and may suffer performance degradation
or security breaches as users are added to the network. Because each DSL
connection is dedicated to a single user, DSL does not suffer from such
service degradation and enables a higher level of security.
. Broad coverage. Dataquest estimates that the number of installed
telephone lines worldwide was approximately 831 million in 1998 and will
reach over 1.0 billion in 2002. Since virtually all businesses and homes
in developed countries have installed copper telephone wire connections,
DSL technologies can be made available to a large percentage of
potential end users.
. Low cost. Because DSL uses the existing local loop connection, it is
generally less expensive to deploy than other high-speed data
transmission technologies. In addition, recent advances in technology
development, industry standardization and competition are further
enabling widespread, low-cost deployment of DSL.
. Scalable to customer requirements. DSL technology enables service
providers to regulate the transmission speed for individual customers,
allowing tiered pricing at various service levels. Service providers can
then more efficiently segment their customer base.
. Natural upgrade from analog modems. DSL modems use the same phone port
as analog modems, providing the user with a simple upgrade path.
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Equipment manufacturers encounter a number of challenges to meet the demands
of the growing DSL market. These challenges include constantly evolving
technology and networking standards, an expanding range of feature expectations
and shorter product life-cycles. To meet these challenges and reduce the time
it takes for their products to reach the market, equipment manufacturers are
increasingly relying on multiple third-party vendors to deliver critical
component building blocks that can be incorporated into a complete DSL product.
A typical DSL customer premises system, such as a modem, gateway or router,
includes the primary building blocks which are illustrated below:
DSL Customer Premises Equipment
[Description of Graphic - a black and white graphic consisting of five
figures arranged in a horizontal row and connected by a single horizontal
line. From the left, the first figure is text reading "To Telephone Company
Central Office." The second figure is a box containing five small computer
chips enter-mixed with the words "Front End Circuitry." The third figure
consists of a picture of a large computer chip, with the word "PHY" in its
center. Above the computer chip is a cloud containing the word "Software."
The fourth figure is also a picture of a large computer chip, with the word
"Layer 2/3" in its center. Above the computer chip is a cloud containing
the word "Software," which is larger than the cloud in figure three. The
fifth figure is a box with the words "PCI," "USB" and "Ethernet" arranged
vertically. Above the box are the words "To PC and/or LAN."]
The front end circuitry which is comprised of semiconductors and other
components, receives and transmits the electronic signal and converts that
signal to either analog or digital streams. The physical layer semiconductor,
or PHY, together with its software, establishes, maintains and controls the
digital encoding and decoding of the signal and ensures reliable transmission
of information over the copper wire infrastructure. The layer 2 and 3
processor, combined with complex, multifunctional software modules, is
responsible for managing the addressing, routing, switching and protocol
conversions needed to encapsulate and route
information packets.
The integration of these individual components from multiple third-party
vendors can be a complex, time consuming and costly process. While today there
are a number of vendors which deliver a portion of either the hardware or
software building blocks, an opportunity exists for a supplier capable of
delivering higher levels of integration of both semiconductor and software
components.
The Virata Solution
We provide a solution that combines communications processors with
integrated software modules to manufacturers of equipment utilizing digital
subscriber line, or DSL, technologies. Our systems expertise, "integrated
software on silicon" product solutions and support services enable our
customers to simplify product development, reduce the time it takes for
products to reach the market and focus resources on product differentiation and
enhancement. Our communications processors perform system functions which
require real-time processing speed and are technically mature, thus unlikely to
change as standards evolve. Our proprietary software is used for protocol
processing, management and control of network and semiconductor interfaces,
allowing our communications processors to be fine tuned or fully customized for
specific applications. This approach delivers off-the-shelf functionality for
rapid development, scalability from single PCs to complex edge routers and
flexibility to add new features and quickly respond to evolving standards. Key
features of our solution include:
. Flexible design. Our products are based on a flexible design that
simplifies the addition of features. This design enables new services
such as voice, video and security to be added incrementally as broadband
solutions evolve.
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. PHY-independent. Our devices use generic, industry standard interfaces
to attach to any third party DSL physical layer semiconductor, which are
the other primary semiconductor components required for communications
equipment. By being PHY-independent, our products are able to meet the
demands of multiple OEMs for a wide array of applications within the
broadband local loop.
. Compelling price/performance. By designing software to run only on our
semiconductors we are able to achieve efficiency in silicon area and
code size. The combination of these features results in high
performance, low power consumption and compelling price/performance.
. Standards compliant. Our products are compliant with relevant ATM Forum,
IETF, ITU and other industry standards. Such standards evolve over time
and our products are designed to accommodate such changes.
Our customers recognize the following key benefits from using our solutions:
. Faster time-to-market. Fewer building blocks to integrate results in
shorter development and test cycles, lower engineering risks, faster
product introduction and reduced development costs.
. Reduced product cost. Eliminating costly external components and
reducing board space leads to lower product cost.
. Differentiation. Our customers' engineering resources can be focused on
product differentiation through value-added features and innovations,
rather than on elements contained in our solution.
. Platform for multiple products. Our modular software and hardware
architecture enables the design of multiple products using different
subsets of our modular software.
. Re-usability. As we add features and capabilities to our communications
processors and software modules, software extensions developed by our
customers can continue to be used on future generations of their
products.
The Virata Strategy
Our objective is to be the leading provider of communications processors
integrated with a comprehensive suite of related software to manufacturers of
voice and high-speed data network access equipment. Key elements of our
strategy include:
. Initial focus on DSL. We have built extensive expertise providing
solutions that integrate communications processors with software for the
content and connection enabling layers of the broadband communications
network. While our core technologies are capable of supporting a number
of broadband access alternatives, we have chosen to initially focus on
the DSL market.
. License our software to all customers. We typically license our software
to a customer at the time we achieve an initial design win. The customer
then designs products incorporating our communications processors, which
they purchase separately from us. By standardizing on our software,
customers build a foundation for integrating additional functionality
and designing next generation products. We believe that once a customer
employs our architecture and experiences the benefits of our systems
expertise, we become that customer's preferred partner for future
products.
. Leverage our flexible design. Our integrated solution provides us
substantial flexibility to extend our existing products, whether at the
software or semiconductor level, to meet evolving standards and features
required by the market. This approach allows our customers to achieve
faster time-to-market, lower development costs and focus engineering
resources on proprietary product feature development.
. Pursue strategic acquisitions. Our strategy is to enhance our growth
capability by pursuing selective acquisitions. This strategy allows us
to more rapidly obtain complementary technologies and engineering talent
and to access certain markets and key customer relationships. Consistent
with this strategy, we acquired RSA Communications in 1998. We believe
completing selective acquisitions will be important to remain
competitive as a complete solutions provider to manufacturers of
broadband access equipment.
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Products
We specialize in communications processors that are integrated with a
comprehensive suite of software for DSL equipment manufacturers. Our
communications processors perform the critical content encapsulation and
content routing functionality required in DSL equipment, which is commonly
referred to as layer 2 and layer 3 processing. Our system combines multiple
elements required for managing the addressing, routing, switching and protocol
conversions needed to encapsulate and route information packets. This
integration of communications processors and software provides our customers a
comprehensive, tested, self sufficient product that replaces semiconductors,
software and support previously sourced from multiple vendors.
Semiconductor Products
We offer two families of semiconductor products: the Proton family of
application specific integrated circuits, or ASICS, and the ATOM family of
application specific standard products, or ASSPs. The Proton ASICs are used in
various combinations to enable different applications including switching
fabrics for small to mid-sized DSLAMs. Proton products enabled customers to
quickly develop their products prior to the establishment of widely accepted
broadband access standards. The following is a list of our Proton family
products:
<TABLE>
<CAPTION>
Product Function Target Applications Introduction Date
<C> <S> <C> <C>
Boson ISA bus interface ATM adapter cards April 1995
- -----------------------------------------------------------------------------------
Quark ATM cell buffer and April 1995
processor for switch or
adapter network ports
- ------------------------------------------------------------
--------------------
Gluon ATM Forum CRC generator A combination of these April 1995
and ARM RISC products creates a switching
microprocessor support fabric for DSLAMs or cable
head-ends
- ------------------------------------------------------------
--------------------
Hadron ATM cell address hasher January 1996
for switching
applications
- ------------------------------------------------------------
--------------------
TBX ATM traffic shaping August 1997
controller and buffer
for switching
applications
</TABLE>
The establishment of broadband access standards and our experience with the
Proton ASIC family has enabled us to design the ATOM family of ASSPs for OEMs
focusing on the DSL market. These communications processors combine the
relevant elements of the Proton ASICs with at least one embedded ARM RISC
microprocessor. ATOM devices also provide Ethernet, PCI or USB network
interfaces as well as Utopia for connection to physical layer devices and other
semiconductors. While Hydrogen features a single embedded ARM RISC
microprocessor, Helium and Lithium contain two ARM RISC microprocessors to
separate protocol and network processing. The Hydrogen, Helium and Lithium
ASSPs support physical layer devices from a broad range of vendors. The
following is a list of our PHY-independent ATOM family products:
<TABLE>
<CAPTION>
Product Interfaces Target Applications Introduction Date
<C> <S> <C> <C>
Hydrogen PCI, Utopia 1 and ATM25 DSL internal and external August 1997
PHY modems and set-top boxes
- -------------------------------------------------------------------------------------
Helium USB, Utopia 1/2, ADSL DSL external modems, June 1999
T1.432, HDLC and 10BaseT gateways, routers, DSLAMs
Ethernet and DLC line cards
- -------------------------------------------------------------------------------------
Lithium PCI, Utopia 1/2 and ADSL DSL internal and external October 1999
T1.432 modems, gateways and set-top
boxes
</TABLE>
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We are developing a new generation of ATOM products to support the
transition from analog access equipment to next-generation DSL equipment. These
products leverage our extensible architecture to combine PHY layer processing
for both analog and digital technologies along with the layer 2 and layer 3
functionality of Helium and Lithium into a single highly integrated device. The
first PHY-integrated product we are developing for this market is Beryllium,
which is described below:
<TABLE>
<CAPTION>
Product Interfaces Target Applications Introduction Date
<C> <S> <C> <C>
Beryllium ADSL, V.90, PCI and USB ADSL/V.90 internal and March 2000
interfaces (for Ethernet external modems and gateways
and home phone-line
networking)
</TABLE>
By utilizing the Beryllium solution, equipment manufacturers will be able to
offer products that are functional with either dial-up 56K V.90 or ADSL
networks. Because of its dual V.90 and ADSL character, Beryllium will allow the
consumer to buy an "ADSL-ready" modem and subsequently upgrade from V.90 to
ADSL network access without any changes to their modem equipment once ADSL
services are available from the consumer's service provider. We cannot be sure
that if new products or product enhancements are developed, any such new
products or product enhancements will be developed in time to capture market
opportunities or achieve a significant or substantial level of acceptance in
new and existing markets.
Software
Our software is key to providing flexible, off-the-shelf processing
solutions. Multiple software modules deliver management and support for
functions at the link, protocol and physical layer. These modules operate on
top of ATMOS, our real-time operating system, which is optimized for
communications applications that run on ARM RISC microprocessors. The software
provides our customers a ready-to-deploy menu of over 50 modules to meet their
specific product requirements. Together, the modules complete a customized,
sophisticated system which supports multiple functions including quality of
service, system management, bridging, tunneling, address translation, signaling
and routing. We also offer customers a full set of software development tools
including compilers, linkers and other special-purpose tools.
Design and Support Services
We offer a number of design and support services which we believe add
substantial value to our product offerings. Our key services are detailed
below:
Custom Design Services
Our Customer Services and Solutions group specializes in product development
engagements for customers that require additional resources or particular
technical skills during the development stage. A typical project will take
three to six months to complete and comprises development and delivery of
system hardware, software and all supporting documentation enabling the
customer to rapidly commence production. We believe these services provide a
critical advantage in winning business.
Technical Support Services
Once customers have purchased a license for our software, they desire to
quickly and efficiently commence product development. We assist our customers
by providing five days of comprehensive training in the use of our
semiconductors and software development systems. Through our extranet site,
which is accessible to all of our customers, we deliver new software and
documentation and take action on bug reports. Our support engineers assist our
customers throughout the product development cycle which can include formal and
informal design reviews.
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Evaluation Systems
We help our customers accelerate their product development programs by
designing a board-level evaluation system for each ATOM product. Typically each
time a new ATOM ASSP is introduced, an evaluation system featuring the new
product is made available to our customers simultaneously with the first
release to customers of the new semiconductor. This approach provides an
effective way for our customers to evaluate the new semiconductor and its
software while enabling designers to add their own functionality.
Technology
A key element of our success is our technology expertise which spans
physical, networking and protocol layer processing and systems-level knowledge.
Our semiconductor and software architectures are designed to enable the rapid,
flexible development of new products to meet the evolving feature, performance
and standards compliance demands of the broadband access market. A single-chip,
multi-processor architecture was chosen as the most flexible and cost-efficient
approach to the complex challenge of satisfying the requirements of:
. layer 2 and 3 processing for broad application across the different DSL
technologies when used in conjunction with physical layer transceivers
from third party vendors;
. integration of analog processing with DSL processing on a single
communications processor;
. processing support for an evolving range of services and applications
such as high speed Internet access, corporate routing, voice services,
security and encryption for Virtual Private Networks, or VPNs, and video
distribution; and
. broad application of our solutions whether used in modems close-coupled
to PCs, Internet appliances, remote gateways and routers, DSLAMs or
DLCs.
We believe the core of our technology expertise is delivered to our
customers through our ASSP architecture, software architecture, communications
algorithms, digital signal processing, ATM, Frame and Internet protocol
processing and systems-level expertise.
ASSP Architecture
Our current ASSP architecture is specifically designed to meet the
performance and feature demands for broadband access equipment. This
architecture provides the flexibility for application in a wide range of
customer premises equipment without the need for additional processing support.
For example, when used inside or close coupled to a PC, our ASSPs and software
place minimal demands on the host PC processor freeing it to focus on its own
operating system and application software support. We believe this approach
results in improved user satisfaction through enhanced PC reliability and
better performance, and minimized support costs for PC suppliers and service
providers.
The architecture is based on a dual bus structure. One bus connects the
embedded ARM RISC processors used for protocol processing, network processing
and other control functions with a wide range of physical interfaces. These
physical interfaces support connection of our communications processors to
other semiconductors and memory systems as well as to external devices such as
PCs and Ethernet hubs. The second bus supports DSPs and other specialized
processors. Both buses access common resources such as an SDRAM controller, an
interprocessor gateway, processor registers and debugging facilities.
This architecture makes it possible for us to quickly develop new ASSPs to
meet evolving standards and the application demands of the market.
Software Architecture
By simultaneously developing the software and semiconductor architectures,
we have achieved tight software/semiconductor integration. This results in
better system performance, smaller chip size, fewer lines of
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code and lower memory requirements than is possible by the complex alternative
of assembling, integrating and
testing functionally equivalent software elements from multiple off-the-shelf
sources. Our software architecture partitions the processing requirements into
time critical and non-time critical tasks. All time critical code is optimized
to run on the network processor ensuring the high performance required for low
latency and control of external interfaces. A compact real-time operating
system controls processing on the protocol processor.
The modular construction of the software architecture makes it easier to add
further functionality without the need to re-test the integrity of the entire
software stack. This facilitates rapid development and release of new software
features.
Communications Algorithms and Digital Signal Processing
Communications algorithms are the processes and techniques used to transform
a digital data stream into a specially conditioned signal suitable for
transmission across copper telephone wires. We have extensive experience
developing software code for the voice modem market and are leveraging that
expertise to develop the solutions required for the ITU ADSL standards. PHY
layer code is executed in our Beryllium communications processor using a
compact, low power DSP supported by fixed function processors.
ATM, Frame and Internet Protocol Processing
The ATM processing software manages, channels, buffers and shapes ATM cells
and utilizes the custom hardware filters in the semiconductors to achieve the
optimum trade-off between software flexibility and hardware performance. To
support transmission of frame encapsulated data, our software supplies drivers
for Ethernet and HDLC as well as a variety of methods for encapsulating frames
over ATM. The software management capabilities for layer 3 processing include
TCP/IP, IP routing, network address translation, IP configuration and
tunneling.
Systems-Level Expertise
We have accumulated experience designing systems-level products that meet
the technical challenges of the local loop environment and of interoperability
with products from other suppliers. This know-how is embedded in our products.
Our customers additionally benefit from this experience during their product
architecture and design milestone reviews.
Partner Reference Design Programs
We develop and deliver board-level DSL products with providers of PHY level
communications processors. These products, or partner reference designs,
include our layer 2 and 3 communications processors and software modules and
our partner's PHY layer hardware. These programs allow us to benefit from the
expanded reach of the partner's sales organization. Our customers also benefit
from a more complete solution which allows faster time-to-market. One partner
reference design is currently offered through our joint development program
with ST Microelectronics. We are currently seeking to extend the partner
reference design program to expand our reach into additional DSL market
segments.
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Customers
We sell our products to established telecommunications equipment vendors,
modem manufacturers and broadband access equipment companies, including the
following 27 customers who have licensed our software:
<TABLE>
<CAPTION>
Customers Markets
<C> <S> <C>
Abocom Systems Next Level Communications DSL
Ambit Microsystems Opencon Systems
Asustek Computer Opnet Technology
Bosch Telecom Orckit Communications
Broadband Technologies Presence Technology
Coppercom Siemens A.G.
D-Link Sphere Communications
Diamond Multimedia Systems Tainet Communications System
E-Tech Teltrend
IPM Datacom Viagate Technologies
Mariner Networks Westell Technologies
Netopia Xavi Technology
- --------------------------------------------------------------------
Adaptive Broadband Wireless
- --------------------------------------------------------------------
Com21 Pace Micro Technology Cable
</TABLE>
These customers have developed or are developing 73 equipment designs based
on our semiconductors and software. Of these 73 designs, 27 are currently
shipping.
Our ASICs and ASSPs are employed by our customers in the following
representative product types:
. DSL modems which are installed inside PCs;
. DSL modems which are connected to a PC via a USB or Ethernet link;
. DSL gateways and routers;
. DSLAMs and DLCs; and
. Cable modem head-ends.
We depend on a relatively small number of customers for a large percentage
of our revenues. For the six months ended October 3, 1999, Orckit
Communications, Com21, Netopia and Westell Technologies accounted for 51.5%,
11.6%, 8.9% and 7.0%, respectively, of our total revenues. We do not have
purchase orders with any of our customers that obligate them to continue to
purchase our products and these customers could cease purchasing our products
at any time.
For the twelve months ended October 3, 1999, Orckit Communications, Com21,
Westell Technologies and Netopia accounted for 35.0%, 17.3%, 7.3% and 6.6%,
respectively, of our total revenues.
Sales and Marketing
Our sales and marketing strategy is to license our software and secure
design wins with industry leaders in emerging high growth segments of the
broadband access equipment market. We typically license our software to a
customer at the time we achieve an initial design win. The customer then
designs products incorporating our communications processors, which they
purchase separately from us. As a result, prior to completing the license
agreement, our development engineers often act as consultants to customers to
assist them with their architectural decisions. We generally employ a direct
sales model to build a close relationship with customers both prior to and
following the execution of a license. In Taiwan, we work with a dedicated
representative firm.
Generally, our sales team consists of qualified engineers who are located in
California, Massachusetts, North Carolina and the United Kingdom providing
coverage of the U.S. and Europe. The sales team is supported by development
engineers that work directly with customers on their new product developments.
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We manage a number of marketing programs designed to communicate our
capabilities and benefits to broadband access equipment manufacturers. Our
Internet site is an important marketing tool where a wide range of information
is available including product information, white papers, application notes,
press releases, contributed articles and presentations. In addition we
participate in industry trade shows, technical conferences and technology
seminars, conduct press tours and publish technical articles in industry
journals.
Research and Development
As of October 3, 1999 we had 81 engineers based in Raleigh, North Carolina
and Cambridge, England. Of these engineers, 27 have advanced degrees, including
nine with Ph.D.s. Several individuals were early developers in voice modem
software and ATM technologies.
Since mid-1998, we have been investing a significant portion of our research
and development expenditures in the development of Beryllium and its associated
software to address the ADSL market. We believe that we must continue to
innovate, extend the range and enhance our products and services to maintain
our leadership position. We cannot be sure that our research and development
efforts will result in the introduction of a new product or product
enhancements or that any new product will achieve market acceptance. We will
invest further to expand our research and development head-count and
capabilities. Our research and development expenditures were $4.0 million and
$8.3 million in the fiscal years ended March 31, 1998 and 1999, respectively.
Manufacturing
We outsource the manufacturing, assembly and testing of all our
semiconductors. This fabless semiconductor model allows us to focus our
resources on the design, development and marketing of our products. Our Proton
semiconductors and current ATOM communications processors have all been sourced
from suppliers that deliver fully assembled and tested products on a turnkey
basis.
The current ATOM products incorporate embedded ARM RISC microprocessors and
are supplied by companies that have an ARM license. In June 1999, we entered
into a per semiconductor design license agreement with ARM which allows us to
select foundry suppliers that best meet our quality, delivery and cost
objectives. Among other provisions, our ARM license requires ARM to indemnify
us, up to a specified dollar amount, in the event of third party claims of
intellectual property infringement. We have also expanded our operations team
so that we will be able to assume more of the manufacturing and quality control
responsibilities, including contracting for wafer processing, assembly and
testing from separate suppliers. Further benefits will include accelerating the
transition of our devices into progressively smaller die size, providing
important advantages, including lower cost, defect rates and power consumption
/ heat dissipation and higher speed, all of which are important to the
commercial success of our semiconductor products.
Because we rely on third party foundries for substantially all of our
manufacturing, assembly and testing requirements, we cannot be sure that we
will be able to obtain semiconductors within the time frames and in the volumes
required by us at an affordable cost or at all. These third party foundries are
not obligated to supply products to us for any specific period, in any specific
quantity or at any specific price, except as may be provided in a particular
purchase order that has been accepted by one of them. We have experienced
delays and may in the future experience delays in receiving semiconductors from
these foundries. If the foundries we currently use are unable to provide us
with their products on a turnkey basis or we are otherwise required to find
alternative subcontractors, product shipments could be delayed significantly.
Any problems associated with the delivery, quality or cost of the assembly and
testing of our products could seriously harm our business, financial condition
and results of operations.
Competition
The communications semiconductor market is intensely competitive and
characterized by rapid technological change, evolving standards, short product
life cycles and price erosion. Major competitive factors
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in the market we address include technical innovation, product features and
performance, level of integration, reliability, price, total system cost, time-
to-market, customer support and reputation. We believe that while, today, no
other single company offers a competing integrated solution, there is
competition with respect to individual elements of our solution. We also
believe that competition may increase substantially as the introduction of new
technologies and potential regulatory changes create new opportunities for
established and emerging companies.
We face competition from semiconductor device suppliers, software
development companies and vertically integrated telecommunications equipment
vendors. We believe our principal competitors for each of our products include:
. Proton, our family of ASICs: devices from Motorola, PMC-Sierra and
Transwitch;
. Hydrogen, Helium and Lithium, our PHY-neutral ASSPs: devices from BASIS
Communications, Motorola and IDT;
. Beryllium, our planned integrated PHY, ADSL/V.90 product: devices from
Alcatel Microelectronics, Analog Devices, Centillium Technology,
Conexant Systems, Globespan, Lucent Technologies and Texas Instruments;
and
. Software: operating systems and software stacks from Wind River Systems
and Integrated Systems; and networking and protocol layer software from
Harris & Jeffries, Inverness Systems, Microsoft and Trillium.
In addition, there have been a number of announcements by other
semiconductor companies including IBM and Intel and smaller emerging companies
that they intend to enter the market segments adjacent to or addressed by our
products.
Many of the companies that compete, or may compete against us in the future,
have longer operating histories, greater name recognition, larger installed
customer bases and significantly greater financial, technical and / or
marketing resources. As a result, they may be able to respond more quickly to
changing customer circumstances or to devote greater resources to the
development, promotion and sale of their products than we can. We cannot be
sure that our current or future competitors will not develop and introduce new
products that will be priced lower, provide superior performance or achieve
greater market acceptance than our products. Furthermore, current or potential
competitors have established, or may establish, cooperative relationships among
themselves or with third parties to increase the ability of their products to
address the needs of our prospective customers. Accordingly, it is possible
that new alliances among our competitors will emerge and rapidly acquire market
share, which would harm our business.
In addition, many of our customers and potential customers have substantial
technological capabilities and financial resources. Some customers have already
developed, or in the future may develop, technologies that will compete
directly with our products and services. Because these companies do not
purchase all of their semiconductors from suppliers such as us, if they
displace our customers in the equipment market, our customers would no longer
need our products, and our business, financial condition and results of
operations would be seriously harmed.
Given the highly competitive environment in which we operate, we cannot be
sure that any current competitive advantages enjoyed by our products will be
sufficient to establish or sustain our position in the market. Any increase in
price from our suppliers or other competition could result in erosion of our
market share and could harm our business, financial condition and results of
operations. We cannot be sure that we will have the financial resources,
technical expertise or marketing and support capabilities to continue to
compete successfully.
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Intellectual Property
We rely primarily on a combination of patents, copyrights, trademarks, trade
secret laws, contractual provisions, licenses and maskwork protection to
protect our intellectual property. We also enter into confidentiality
agreements with our employees, consultants and customers and seek to control
access to, and distribution of, our other proprietary information. However,
these measures afford only limited protection. There is no guarantee that such
safeguards will protect our intellectual property and other valuable
competitive information.
Our success depends significantly upon our ability to protect our
intellectual property. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or obtain and
use information that we regard as proprietary. Our competitors may also
independently develop similar technologies. In addition, in the past,
competitors have recruited our employees who have had access to our proprietary
technologies, processes and operations. Our competitors' recruiting efforts,
which we expect will continue, expose us to the risk that such employees will
misappropriate our intellectual property. Furthermore, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of the
United States. Many U.S. companies have encountered substantial infringement
problems in such countries, some of which are countries in which we have sold
and continue to sell products. There is a risk that our means of protecting our
proprietary rights may not be adequate. Our failure to adequately protect our
proprietary rights may seriously harm our business.
As of October 3, 1999, we have been granted two patents in the United
States, with three counterpart patents in other countries. Our patents have
expiration dates ranging from 2016 to 2017. In addition, we have nine patent
applications pending in the United Kingdom and four pending in the United
States. We also have 24 patent applications pending in various countries other
than the United Kingdom and the United States. These patents may never be
issued. Even if these patents are issued, taken together with our existing
patents, they may not provide sufficiently broad protection to protect our
proprietary rights, or they may prove to be unenforceable. We also utilize
unpatented proprietary know-how and trade secrets and employ various methods to
protect our trade secrets and know-how.
From time to time, we may desire or be required to renew or to obtain
licenses from others in order to further develop and market commercially viable
products effectively. We cannot be sure that any necessary licenses will be
available or will be available on reasonable terms.
We have registered the trademarks "Virata," "ATMOS" and "ATOM". "ISOS,"
"Proton," "Hydrogen," "Helium," "Lithium," and "Beryllium" are also our
trademarks.
Legal Proceedings
We are not currently a party to any legal proceedings, nor to our knowledge,
is any such proceeding threatened.
Employees
As of October 3, 1999, we had 113 full-time employees in our worldwide
operations. Of that total, 81 were primarily engaged in engineering, 12 were
engaged in sales and marketing and the remainder were engaged in operational,
financial and administrative functions. As of October 3, 1999, 15 of our
employees were located at our facilities in Santa Clara, California, 63 of our
employees were located at our facilities in Cambridge, England, and 35 were
located at our facilities in Raleigh, North Carolina. None of our employees are
covered by, nor are we a party to, any collective bargaining agreement. We
believe our employee relations are good.
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Facilities
Our headquarters are located in Santa Clara, California, where we lease
approximately 13,000 square feet of office space under a lease that expires in
September 2001. Approximately 4,500 square feet of our Santa Clara facility is
subleased to a third party under a lease that expires in September 2001.
Additionally, we lease approximately 9,600 square feet of office and laboratory
space in Cambridge, England, under two leases that expire in 2004 and 2005 and
approximately 13,200 square feet of office space in Raleigh, North Carolina,
under a lease that expires in September 2003. We believe that our current
facilities are adequate to conduct our business operations for the next 12
months, with the exception of our Santa Clara facility. We anticipate that we
may need to expand our office space at our Santa Clara facility within the next
12 months.
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MANAGEMENT
Directors, Executive Officers and Key Employees
Our current board of directors consists of Messrs. Charles Cotton, Hermann
Hauser, Bandel Carano and Peter Morris. Our current executive officers are
Charles Cotton, Michael Gulett and Andrew Vought. Following this offering, our
directors, executive officers and key employees are expected to be as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Charles Cotton.......... 52 Chief Executive Officer and Director
Michael Gulett.......... 46 President, Chief Operating Officer
Andrew Vought........... 44 Senior Vice President, Finance, Chief Financial Officer and Secretary
Martin Jackson.......... 40 Chief Technology Officer and Director
Daniel Karr............. 39 Vice President, Worldwide Sales
Thomas Cooper........... 50 Senior Vice President, Corporate Development
Duncan Greatwood........ 32 Vice President, Marketing
Bernard Glasauer........ 39 Vice President, Operations
Wayne Whitlock.......... 40 Vice President, Engineering
Dr. Paul Walsh.......... 39 Vice President, Software Engineering
Dr. Hermann Hauser...... 50 Chairman of the Board
Marco De Benedetti...... 37 Director
Gary Bloom.............. 39 Director
Bandel Carano........... 38 Director
Professor Andrew
Hopper................. 46 Director
Peter Morris............ 43 Director
Patrick Sayer........... 41 Director
Giuseppe Zocco.......... 33 Director
</TABLE>
Charles Cotton has been our Chief Executive Officer since September 1997.
Mr. Cotton joined us in January 1995, first as a consultant, and then in August
1995 as our General Manager, Europe, and was subsequently promoted to Chief
Operating Officer in July 1996. From January 1991 to December 1995, Mr. Cotton
was an independent consultant. In 1990, he served as Chief Executive Officer of
Shandwick Europe, a public relations consulting firm. From 1988 to 1989, Mr.
Cotton served as President of Thermal Scientific and as a Director of its
parent company, Thermal Scientific plc. From 1983 to 1986, he served in a
variety of international marketing and operations functions for Sinclair
Research. Mr. Cotton holds an honors degree in Physics from Oxford University.
Michael Gulett joined us in November 1998 as Chief Operating Officer and was
promoted to President and Chief Operating Officer in June 1999. Prior to
joining us, Mr. Gulett was President and Chief Executive Officer at Paradigm
Technology, a developer of fast, static memory solutions, in Milpitas,
California, from February 1993 to June 1998. Mr. Gulett has also held
management positions at VLSI Technology, California Devices, Intel Corporation
and NCR. Mr. Gulett holds a B.S.E.E. from the University of Dayton.
Andrew Vought joined us in May 1996 as Chief Financial Officer and Secretary
and was named Senior Vice President of Finance in September 1997. From January
1995 to May 1996, Mr. Vought founded and served as a General Partner of
Cheyenne Capital Corporation, a private venture capital firm. From May 1990 to
July 1994, Mr. Vought served as Chief Financial Officer of Micro Power Systems,
an analog semiconductor company. Mr. Vought has also held senior finance and
manufacturing management positions with Diasonics and the European
semiconductor operations of Texas Instruments. Mr. Vought serves on the board
of directors of SCM Microsystems, a supplier of digital access control and
connectivity solutions. Mr. Vought holds an M.B.A. from the Harvard Business
School and a B.S. in Finance and a B.A. in Environmental Studies from the
University of Pennsylvania.
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Martin Jackson is our Chief Technology Officer and has directed new product
development since joining us in April 1994. Prior to joining us, Mr. Jackson
was a co-founder and Vice President of Technology of EO--formerly Active Book
Company. Mr. Jackson also co-founded Tadpole Technology, a developer of high
performance computer boards. Mr. Jackson is acknowledged as a leader in the
application of asynchronous transfer mode technology for provisioning broadband
in the local loop and serves on the board of directors of the ADSL Forum. Mr.
Jackson holds an M.A. in Electrical Sciences and a M.A. Engineering from the
University of Cambridge.
Daniel Karr became our Vice President, Worldwide Sales in August 1999. Prior
to joining us, Mr. Karr was Vice President of Worldwide Sales at S3, a supplier
of multimedia hardware and software for the PC market, from April 1996 to
August 1999. From January 1988 to April 1996, Mr. Karr held various positions
at Cirrus Logic, a manufacturer of integrated circuits, where his last position
was Sales Director. Mr. Karr earned a B.A. in Physics and Mathematics from
Linfield College.
Thomas Cooper is our Senior Vice President, Corporate Development and has
been employed by us in various capacities since December 1994. Prior to joining
us, Mr. Cooper served as Vice President of Distribution for Network Equipment
Technologies Inc., an early entrant into in the asynchronous transfer mode
market, from 1992 to December 1994. He holds an M.B.A. from the University of
Toledo (Ohio) and a B.A. in English from Hamilton College.
Duncan Greatwood is our Vice President, Marketing, having previously been
our Vice President, European Sales. Mr. Greatwood joined us in November 1997.
Before being hired by us, Mr. Greatwood held a variety of management positions
in the software engineering and marketing functions of Madge Networks, a
network equipment company, from 1989 to November 1997. At Madge Networks, Mr.
Greatwood was responsible for activities in the areas of voice-over-IP
(Internet Protocol) and multiservice networking. Mr. Greatwood holds a degree
in Mathematics from Oxford University and an M.B.A. from London Business
School.
Bernard Glasauer is our Vice President, Operations and joined us in June
1999. Prior to joining us, Mr. Glasauer was Vice President of Engineering at
Cypress Semiconductor from 1996 to 1999. Prior to that Mr. Glasauer was the
Vice President of Quality from 1994 to 1996 and held other senior business and
engineering management positions at Cypress Semiconductor from 1988 to 1994.
Mr. Glasauer holds a B.S. degree in Electrical Engineering/Computer Science and
Materials Science Engineering and a B.A. in Economics from the University of
California.
Wayne Whitlock is our Vice President, Engineering and joined us in July
1998. Prior to joining us, Mr. Whitlock was Vice President, Engineering for RSA
Communications, the predecessor of Virata Raleigh Corporation, from October
1994 to July 1998. Prior to that, Mr. Whitlock was employed by International
Business Machines from July 1981 to October 1994. His most recent position with
IBM, which began in 1993, was Program Manager with the wireless Mobile Data
Division, developing PCMCIA wireless WAN devices for portable PCs. Mr. Whitlock
holds a B.S. in Electrical Engineering from Virginia Tech.
Dr. Paul Walsh is our Vice President, Software Engineering and joined us in
January 1999. Prior to joining us, Dr. Walsh was Senior Manager--Engineering,
at Ionica plc, from November 1995 to January 1999. Prior to Ionica, Dr. Walsh
held a Senior Manager role at Nortel/BNR Europe, from January 1992 to October
1995, where he was responsible for the design, build and delivery of systems to
provide Network Management of first SDH and later Passive Optical Networks.
Dr. Walsh holds a Ph.D. in Psychology from the City of London Polytechnic, an
M.Sc. (Distinction) in Social Psychology from London School of Economics and a
B.A. (1st Class Hons) in Psychology from the University College, Galway.
Dr. Hermann Hauser is one of our co-founders and serves as our Chairman. Dr.
Hauser's principal occupation is Director of Amadeus Capital Partners Ltd., a
venture capital fund management company. He has held this position since
December 1997. Dr. Hauser has also co-founded more than 20 other high
technology
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companies, including Acorn Computer Group plc, EO Ltd., Harlequin, IXI Ltd.,
Vocalis, Electronic Share Information, Advanced Displays Limited and SynGenix.
Dr. Hauser holds a Ph.D. in Physics from Cambridge University.
Marco De Benedetti is Chairman and Managing Director of Telecom Italia
Mobile S.p.A., Europe's largest cellular phone operator. He has held that
position since July 1999. Prior to joining Telecom Italia Mobile,
Mr. De Benedetti was chairman of Infostrada S.p.A., a company controlled by
Olivetti operating as an alternative fixed line carrier in Italy. Prior to
joining Olivetti in 1990, Mr. De Benedetti worked for the investment bank
Wasserstein, Perella & Co. in mergers and acquisitions from 1987 to 1989. Mr.
De Benedetti holds an M.B.A. from the Wharton School of the University of
Pennsylvania and a B.S. in Economics and History from Wesleyan University.
Gary Bloom is Executive Vice President of Oracle Corporation and has been
employed by Oracle since September 1986. Mr. Bloom received a B.S. in Computer
Science from California Polytechnic State University at San Luis Obispo.
Bandel Carano is a General Partner of Oak Investment Partners in Palo Alto,
California, a private venture capital firm, which he joined in 1985. Mr. Carano
currently serves as a member of the Investment Advisory Board of the Stanford
University Engineering Venture Fund. Mr. Carano also serves as a member of the
board of Advanced Radio Telecom and several private companies. Mr. Carano holds
both an M.S. and a B.S. in Electrical Engineering from Stanford University.
Professor Andrew Hopper is one of our co-founders. Since November 1997,
Professor Hopper has been the Professor of Communications Engineering within
the Department of Engineering at Cambridge University and prior to that he was
a Reader. Since 1986, Professor Hopper has also been the Managing Director of
the Olivetti Research Laboratory, now AT&T Laboratories-Cambridge. Professor
Hopper is considered one of the early developers of asynchronous transfer mode
technology and has over 20 years experience in networking, computer systems and
multimedia. Professor Hopper is also involved with the commercialization of
technology with a number of Cambridge-area firms. Professor Hopper is a Fellow
of the Royal Academy of Engineering and holds a Ph.D. from Cambridge
University.
Peter T. Morris is a General Partner of New Enterprise Associates in Menlo
Park, California, where he has been employed since 1992. Mr. Morris specializes
in information technologies, with a focus on communications and the Internet.
His current board memberships include Gadzoox Networks, Packeteer and several
private companies. Before joining New Enterprise Associates, Mr. Morris served
in various capacities with Telebit from 1987 to 1991. Prior to that he was with
Montgomery Securities, an investment bank, from 1985 to 1987, and Bain &
Company, a management consultancy, from 1980 to 1982. Mr. Morris holds an
M.B.A. and a B.S. in Electrical Engineering from Stanford University.
Patrick Sayer is a General Partner of Lazard Freres et Cie, a French
investment bank, where he oversees the technology, telecommunications and media
sectors. Mr. Sayer has worked within the Lazard Freres Group throughout his
career with assignment in its international advisory group, the corporate
finance department and the mergers and acquisitions department. In addition,
Mr. Sayer is the Chairman of the Investment Committee of Eurafrance and Gaz et
Eaux, two French publicly traded holding companies ultimately controlled by the
Lazard Freres Group. Mr. Sayer is a graduate of Ecole Polytechnique and Ecole
des Mines de Paris.
Giuseppe Zocco is a General Partner of Index Ventures, a private venture
capital firm based in Geneva, Switzerland, which he joined in 1996. Prior to
joining Index Ventures, Mr. Zocco was a management consultant with McKinsey &
Company from 1988 to 1996, working in several of its European offices and its
EuroCenter, a special consulting unit focused on Pan-European clients.
Mr. Zocco holds an M.B.A. from Stanford Business School, a B.A. in Finance from
Bocconi University in Milan, and an I.E.P. from the London Business School. He
is a director of Belle Systems A/S and Evolve Software.
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Board Committees
Our board of directors currently consists of four directors. Following this
offering, our board of directors is anticipated to consist of ten directors,
each holding office until the next annual meeting of stockholders. Following
this offering, our board of directors is also anticipated to have an Executive
Committee, Compensation Committee, Audit Committee and Director Compensation
Committee.
Executive Committee. The executive committee of our board of directors is
anticipated to consist of Messrs. Hauser, Carano, Cotton and Morris. The
executive committee will be authorized to act with respect to all matters
arising before the board, except where prohibited by Delaware law.
Compensation Committee. The compensation committee will review approve
and/or make recommendations to the board regarding all forms of compensation
provided to our executive officers, including stock compensation and loans. In
addition, the compensation committee will review approve and/or make
recommendations on stock compensation arrangements for all of our other
employees. As part of the foregoing, the compensation committee will administer
our stock incentive and other employee benefit plans. The members of the
compensation committee are anticipated to be Messrs. Hauser, Carano and Zocco.
Audit Committee. The audit committee will monitor our corporate financial
reporting and the internal and external audits, including our internal audit
and control functions, the results and scope of the annual audit and other
services provided by our independent auditors and our compliance with legal
matters that have a significant impact on our financial reports. The audit
committee will also consult with our management and our independent auditors
prior to the presentation of financial statements to stockholders and, as
appropriate, initiates inquiries into aspects of our financial affairs. In
addition, the audit committee will have the responsibility to consider and
recommend the appointment of, and to review fee arrangements with, our
independent auditors. The members of the audit committee are anticipated to be
Messrs. Morris, Sayer and Zocco.
Director Compensation Committee. The director compensation committee will
review and make recommendations to the board regarding all forms of
compensation provided to our non-employee directors. As part of the foregoing,
the director compensation committee will administer our non-employee director
compensation plan that we anticipate adopting prior to this offering. The
members of the director compensation committee are anticipated to be Messrs.
Cotton and Jackson.
Director Compensation
Directors who are our full-time employees receive no additional compensation
for serving on our board of directors or its committees; however, each director
will be reimbursed for his or her out-of-pocket expenses in attending board
meetings. Following this offering, it is anticipated that directors who are not
our employees will receive compensation for participation in meetings of our
board of directors and serving on and attending meetings of either the
compensation or the audit committees. See "Certain Transactions" for a
description of transactions involving directors or their affiliates and us, if
any.
Prior to this offering, we anticipate that we will adopt a compensation plan
for our non-employee directors, commensurate with plans offered by companies in
our industry or related industries.
Compensation Committee Interlocks and Insider Participation
Prior to this offering, our board of directors did not have a compensation
committee and all compensation decisions were made by our full board of
directors. In the fiscal year ended March 31, 1999, the full board of
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<PAGE>
directors determined the compensation of all executive officers, including
Mr. Cotton in his capacity of Chief Executive Officer. Upon completion of this
offering, it is anticipated that the compensation committee will make all
compensation decisions. We are not aware of any interlocking relationship
existing between our board of directors or proposed compensation committee and
the board of directors or compensation committee of any other company, nor are
we aware of any such interlocking relationship existing in the past.
Executive Compensation
The following table sets forth the approximate cash compensation (including
cash bonuses) paid or awarded by us for the fiscal year ended March 31, 1999 to
our Chief Executive Officer and the other four most highly compensated
executive officers who were serving as executive officers as of March 31, 1999
(the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------- ------------
Securities
Name and Principal Fiscal Underlying All Other
Position Year Salary($) Bonus($) Options(#) Compensation($)
- ------------------ ------ --------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Charles Cotton.......... 1999 224,940 60,000 108,208 24,000(1)
Chief Executive
Officer and Director
Michael Gulett(2)....... 1999 82,372 54,167 238,805 1,827(3)
President and Chief
Operating Officer
Andrew Vought........... 1999 184,875 40,000 55,970 1,230(4)
Senior Vice President,
Finance,
Chief Financial
Officer and Secretary
Martin Jackson.......... 1999 128,099 -- 44,776 8,392(5)
Chief Technology
Officer and Director
Thomas Cooper........... 1999 153,606 30,250 82,089 1,273(6)
Senior Vice President
Corporate Development
</TABLE>
- --------
(1) Represents an accrued pension contribution paid by us for the benefit of
Mr. Cotton under our pension arrangement.
(2) Mr. Gulett was hired in November 1998 and, therefore, such amounts are for
less than a full year.
(3) Represents a matching contribution paid by us for the benefit of Mr. Gulett
under our 401(k) plan.
(4) Represents a matching contribution paid by us for the benefit of Mr. Vought
under our 401(k) plan.
(5) Represents an accrued pension contribution paid by us for the benefit of
Mr. Jackson under our pension arrangement.
(6) Represents a matching contribution paid by us for the benefit of Mr. Cooper
under our 401(k) plan.
Option Grants in Fiscal Year Ended March 31, 1999
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------
Potential Realizable
Percent of Value at Assumed
Number of Total Options Annual Rates of Stock
Shares Granted to Price Appreciation For
Underlying Employees Exercise or Option Term ($)(3)
Options in Fiscal Base Price Expiration -----------------------
Name Granted (#) Year (%)(1) ($/sh)(2) Date 5% 10%
- ---- ---------- ------------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Charles Cotton.......... 108,208 7.0 4.69 4/28/05 206,603 481,474
Michael Gulett.......... 238,805 15.4 4.69 11/13/05 455,952 1,062,563
Andrew Vought........... 55,970 3.6 4.69 4/28/05 106,864 249,038
Martin Jackson.......... 44,776 2.9 4.69 4/28/05 85,491 199,231
Thomas Cooper........... 82,089 5.3 4.69 4/28/05 156,734 365,256
</TABLE>
59
<PAGE>
- --------
(1) Based on options to purchase a total of 1,549,282 shares of our common
stock granted during the fiscal year ended March 31, 1999.
(2) The exercise price was equal to the fair market value of our common stock
on the date of grant, as determined by our board of directors. The board
based its determination in part on the fact that, at the time, there was no
public market for the shares underlying the options granted, nor was there
anticipated to be such a market in the next 12 months, such shares were
subordinate to the outstanding preference shares with respect to payments
upon liquidation and dividends, such shares did not have registration
rights and the company was not yet profitable. Based on this information,
the board determined that the exercise price should be equal to
approximately 65% of the price per share of the series D preference shares
that had recently been sold in a private placement.
(3) The potential realizable value is calculated based on the seven year term
of the options at the time of grant. Stock price appreciation of 5% and 10%
is assumed pursuant to the rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of our stock price
performance. The potential realizable value at 5% and 10% appreciation is
calculated by assuming that the exercise price in the date of grant
appreciates at the indicated rate for the entire term of the option and
that the option is exercised at the exercise price and sold on the last day
of its term at the appreciated price.
Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year End Option
Values
The table below sets forth information with respect to the ownership and
value of options held by the Named Executive Officers identified in the summary
compensation table as of March 31, 1999. No options were exercised by these
individuals during the fiscal year ended March 31, 1999. We have no outstanding
stock appreciation rights.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Year End (#) at Fiscal year End ($)(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles Cotton.............. 94,869 203,638 696,696 1,119,805
Michael Gulett.............. -- 238,805 -- 960,000
Andrew Vought............... 72,014 114,552 529,867 648,633
Martin Jackson.............. 57,276 69,589 458,108 356,492
Thomas Cooper............... 45,771 103,482 355,467 481,933
</TABLE>
- --------
(1) Based on a fair market value of our common stock as of October 3, 1999
equal to $8.71 per share, less the exercise price payable for such shares.
Employment Agreements
Each of our Named Executive Officers is a party to an employment agreement
with Virata Limited. Following this offering, we anticipate that we will assume
each of these employment agreements.
Charles Cotton. Under the terms of his employment agreement dated September
17, 1997, as amended on May 1, 1999, Mr. Cotton receives an annual base salary
of (Pounds)155,875, with an additional bonus of $120,000 upon successful
achievement of specific objectives. Mr. Cotton is entitled to participate in
our stock incentive plans. As of October 3, 1999, Mr. Cotton had received
options to purchase an aggregate of 397,014 shares of our common stock at a
weighted average exercise price of $4.15 per share. In general, these options
vest equally over four years. Mr. Cotton is also entitled to a bonus of up to
$500,000 in the event we are sold during the term of his employment. We may
terminate Mr. Cotton's employment for cause at any time, or without cause upon
18 months written notice from the termination date. Mr. Cotton may voluntarily
resign upon six months written notice of his intention to leave. In the event
that Mr. Cotton is terminated without cause or following a change in our
control, Mr. Cotton will be entitled to salary continuation and vesting of his
share options for the 18 month period following termination.
60
<PAGE>
Michael Gulett. Under the terms of his employment agreement dated October
14, 1998, Mr. Gulett receives an annual base salary of $225,000, with an
additional bonus of $100,000 upon successful achievement of specific
objectives. Mr. Gulett is entitled to participate in our stock incentive plans.
As of October 3, 1999, Mr. Gulett had received options to purchase an aggregate
of 337,313 shares of our common stock at a weighted average exercise price of
$5.90 per share. These options vest equally over four years. The employment
agreement may be terminated by Mr. Gulett or us at any time, with or without
cause. In the event that Mr. Gulett is terminated without cause or following a
change in our control, Mr. Gulett will be entitled to salary continuation and
vesting of his share options for the 12 month period following termination.
Andrew Vought. Under the terms of his employment agreement dated May 10,
1996, as amended May 1, 1999, Mr. Vought receives an annual base salary of
$182,750 with an additional bonus of $75,000 upon successful achievement of
specific objectives. Mr. Vought is entitled to participate in our stock
incentive plans. As of October 3, 1999, Mr. Vought had received options to
purchase an aggregate of 246,268 shares of our common stock at a weighted
average exercise price of $3.95 per share. In general, these options vest
equally over four years. Mr. Vought is also entitled to a bonus of up to
$500,000 in the event we are sold during the term of his employment. We may
terminate Mr. Vought's employment for cause at any time, or without cause upon
18 months written notice from the termination date. Mr. Vought may voluntarily
resign upon six months written notice of his intention to leave. In the event
that Mr. Vought is terminated without cause or following a change in our
control, Mr. Vought will be entitled to salary continuation and vesting of his
share options for the 18 month period following termination.
Martin Jackson. Under the terms of his employment agreement dated May 5,
1997, Mr. Jackson receives an annual base salary of (Pounds)81,969. Mr. Jackson
is entitled to participate in our stock incentive plans. As of October 3, 1999,
Mr. Jackson had received options to purchase an aggregate of 152,985 shares of
our common stock at a weighted average exercise price of $3.42 per share. In
general, these options vest equally over four years. We may terminate Mr.
Jackson's employment for cause at any time, or without cause upon 12 months
written notice from the termination date. Mr. Jackson may voluntarily resign
upon three months written notice of his intention to leave.
Thomas Cooper. Under the terms of his employment agreement dated December
16, 1994, Mr. Cooper receives an annual base salary of $161,250, with an
additional bonus of $30,000 upon successful achievement of specific objectives.
Mr. Cooper is entitled to participate in our stock incentive plans. As of
October 3, 1999, Mr. Cooper had received options to purchase an aggregate of
179,104 shares of our common stock at a weighted average exercise price of
$4.02 per share. These options vest equally over four years. The employment
agreement may be terminated by Mr. Cooper or us at any time, with or without
cause. In the event that Mr. Cooper is terminated without cause or following a
change in our control, Mr. Cooper will be entitled to salary continuation and
vesting of his share options for the 12 month period following termination.
Employee Stock Option Plan
Effective with the consummation of this offering, we anticipate that we will
adopt the Virata Corporation 1999 Stock Incentive Plan. The purposes of the
stock incentive plan are to enable us to attract, retain and motivate our
employees, non-employee directors, independent contractors and consultants by
providing for or increasing the proprietary interests of such employees, non-
employee directors, independent contractors or consultants in our stock. The
stock incentive plan does not limit any award to any specified form or
structure and will be administered by the compensation committee of the board
of directors. The types and amount of awards will be determined at the
discretion of the compensation committee or the board of directors. The maximum
number of shares of our common stock that may be issued under the stock
incentive plan is 3,800,000 shares, subject to an automatic annual increase on
the first day of each of our fiscal years beginning in 2000 and 2001 equal to
the lesser of (i) 1,000,000 shares, (ii) 5% of the total number of shares of
common stock outstanding on the last day of the immediately preceding fiscal
year or (iii) an amount unanimously determined by the board of directors. If
incentive stock options are issued, these options must comply with Section 422
of the Internal Revenue Code.
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<PAGE>
Our board of directors may amend or terminate the stock incentive plan at
any time and in any matter, subject to the rights of recipients of awards under
the plan, and required stockholder approvals and the requirements of Sections
411 and 162(m) of the Internal Revenue Code. To the extent applicable under UK
law, the approval of the holders a majority of the our securities may be
required for the exercise of any option granted under the stock incentive plan
which may be deemed a "repurchase" under UK law. We will issue stock options to
eligible recipients under the stock incentive plan by way of individual option
agreements with each recipient. Unless terminated earlier by the board of
directors, the stock incentive plan will terminate in November 2019.
As of October 3, 1999 there were options outstanding to purchase
3,239,230 ordinary shares issued to our employees under the plans of or
agreements with Virata Limited. The outstanding options are exercisable at a
price per share ranging between $0.11 and $8.71 and generally vest over a four-
year period from the date of grant. These options are granted in three specific
categories: ordinary, top-up and bonus. Top-up options are granted to employees
whose ordinary options have fully vested on a purely discretionary basis. Top-
up options are subject to the same vesting schedule as ordinary options. Bonus
options vest on the date granted and are generally subject to completion of
individual performance targets by the option holder. All options are non-
transferable, but form part of the option holder's estate in the event of
death. An option may be exercised in whole or in part, but not more that three
times in the period commencing on the first anniversary of the date of grant of
the option and ending on the seventh anniversary of the date of its grant. An
option lapses on the seventh anniversary from the date of its grant. In the
event that a general offer is made to the holders of our common stock to
acquire all of the outstanding shares of our common stock, we are required to
use our best efforts to ensure that the offer is extended to the option
holders. If an option holder ceases to be our employee for any reason, any
options unexercised on such date and in respect of which a right of exercise
has accrued must be exercised within 90 days of such date. Upon the expiration
of this 90 day period, any options that remain unexercised will lapse. Prior to
the consummation of this offering these options will become convertible or
exercisable into shares of our common stock.
Employee Stock Purchase Plan
Effective with the consummation of this offering, we anticipate that we will
adopt the Virata Corporation 1999 Employee Stock Purchase Plan. The employee
stock purchase plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Internal Revenue Code and will be
administered by the compensation committee of the board of directors. A total
of 600,000 shares of common stock has been reserved under the employee stock
purchase plan, plus an automatic annual increase on the first day of each of
our fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the
lesser of (i) 500,000 shares, (ii) 1% of the total number of shares of common
stock outstanding on the last day of the immediately preceding fiscal year and
(iii) and amount unanimously determined by the board of directors. Unless
terminated earlier by the board of directors, the employee stock purchase plan
will terminate in October 2009.
The employee stock purchase plan will be implemented by a series of
overlapping offering periods with a duration of not more than 24 months and
will provide a means by which employees may purchase our common stock through
payroll deductions. The first offering period is expected to begin on the date
of execution of the underwriting agreement in connection with this offering,
and will terminate on the last business day in October 2001. Future offering
periods will be determined by the compensation committee. Each offering period
will generally consist of four consecutive purchase periods of six months'
duration, at the end of which an automatic purchase will be made for
participants. The initial purchase period is expected to begin on the date of
this offering and end on April 30, 2000, with subsequent purchase periods
ending on last business day of October 2000, April 2001 and October 2001.
Our employees, or those of any subsidiary designated by the board, are
eligible to participate in the employee stock purchase plan if they are
employed by us or a subsidiary of ours for at least 20 hours per week and more
than five months per year. The employee stock purchase plan permits eligible
employees to purchase
62
<PAGE>
common stock through payroll deductions, which in any event may not exceed 15%
of an employee's base salary. The purchase price is equal to the lower of 85%
of the fair market value of the common stock at the beginning of each offering
period or at the end of each purchase period. If the fair market value of the
common stock on a purchase date is less that the fair market value at the
beginning of the offering period, each participant in that offering period
shall automatically be withdrawn from the offering period as of the end of the
purchase date and re-enrolled in the new twenty-four month offering period
beginning on the first business day following the purchase date. Employees may
end their participation in the employee stock purchase plan at any time during
an offering period, and participation ends automatically on termination of
employment. An employee cannot be granted an option under the employee stock
purchase plan if immediately after the grant the employee would own stock
and/or hold outstanding options to purchase stock equaling 5% or more of the
total voting power or value of all classes of our stock or stock of our
subsidiaries, or if the option would permit an employee to purchase stock under
the employee stock purchase plan at a rate that exceeds $25,000 of fair market
value of stock for each calendar year in which the option is outstanding. In
addition, no employee may purchase more than 2,000 shares of common stock under
the employee stock purchase plan in any one purchase period.
The compensation committee has the power to amend or terminate the employee
stock purchase plan and to change or terminate offering periods as long as this
action does not adversely affect any outstanding rights to purchase stock
thereunder. However, the compensation committee may amend or terminate the
employee stock purchase plan or an offering period even if it would adversely
affect outstanding options in order to avoid our incurring adverse accounting
charges.
Employee Benefit Plans
We have two benefit plans, one in the United Kingdom, and a separate plan in
the United States. The United Kingdom plan includes private health care,
permanent health insurance, death in service coverage and a pension
arrangement. In addition, under the United Kingdom plan, we match pension
contributions of up to 5% of an employee's salary. Contributions for the years
ended March 31, 1997, 1998 and 1999 were $105,500, $109,400 and $112,600,
respectively.
The United States plan includes a medical plan, life insurance, accidental
death and dismemberment insurance, long-term disability, IRC Section 125
premium payment plan, COBRA and a 401(k) retirement plan. Under the United
States plan, effective with the acquisition of RSA Communications in July 1998,
we also provide a 50% matching contribution to the retirement plan of up to
$2,000 per calendar year per employee. Contributions for the year ended March
31, 1999 amounted to $58,000.
Limitation of Liability and Indemnification Matters
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Our bylaws provide that we shall
indemnify each of our directors and officers against expenses (including
attorney's fees), judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding, arising by reason of the
fact that such person is or was one of our directors or officers or serving as
director or officer of another corporation, partnership, joint venture, trust,
or other enterprise at our request. We have also entered into agreements to
indemnify directors and certain executive officers.
63
<PAGE>
CERTAIN TRANSACTIONS
The following is a description of transactions during our last three fiscal
years and the six months ended October 3, 1999 to which we have been a party,
in which the amount involved in the transaction exceeds $60,000 and in which
any director, executive officer or holder of more than 5% of our capital stock
had or will have a direct or indirect material interest other than compensation
arrangements that are otherwise required to be described under "Management."
Issuances of Ordinary Shares
During the past three fiscal years and the six months ended October 3, 1999,
we have issued ordinary shares of Virata Limited as follows (the following
information does not give effect to the 1 for 6.7 reverse stock split):
. In July 1997, we issued a warrant to purchase 75,000 ordinary shares in
a private placement to Dr. Robert W. Wilmott at an exercise price per
share of $0.08 in exchange for consulting services valued at $18,000 by
our board which were provided to us by Dr. Wilmott; this warrant was
exercised in full by Dr. Wilmott in September 1999; and
. In July 1998, we issued 1,540,000 ordinary shares in a private placement
at a purchase price of $0.92 per share and aggregate proceeds of
$1,416,800 to Munther Qubain in connection with the acquisition of RSA
Communications; and
. We have issued an aggregate of 1,332,599 ordinary shares in connection
with the exercise of options by our employees.
Issuances of Preference Shares
During the past three fiscal years and the six months ended October 3, 1999,
we have issued preference shares and warrants for preference shares of Virata
Limited as follows (the following information does not give effect to the 1 for
6.7 reverse stock split):
. in June 1996 and October 1996, we issued 2,713,670 series B preference
shares in a private placement at a purchase price of (Pounds)0.70 per
share and aggregate proceeds of (Pounds)1,899,569 to 3i Group plc, New
Enterprise Associates, Oak Investment Partners VI and Oak VI Affiliates
Fund;
. in June 1996, we issued 6,666,667 series C preference shares in a
private placement at a purchase price of $1.50 per share and aggregate
proceeds of $10,000,000 to Oracle Corporation;
. in October 1996, we issued a warrant to purchase 61,705 series C
preference shares in a private placement to Comdisco Ventures at an
exercise price per share of $1.50 in connection with an equipment
financing;
. in September 1997, we issued a warrant to purchase 8,000 series C
preference shares in a private placement to Comdisco Ventures at an
exercise price per share of $1.50 in connection with an equipment
financing;
. in December 1997, we issued a warrant to purchase 35,294 series C
preference shares in a private placement to Venture Banking Group, an
entity of Greater Bay Bancorp, at an exercise price per share of $1.70
in connection with a loan and security agreement; in June 1998, this
warrant automatically converted into a warrant to purchase 35,294 series
D preference shares at an exercise price per share of $1.70;
. in December 1997 and January 1998, we issued bridge notes in the
aggregate amount of $2,642,980 in a private placement to 3i Group plc,
New Enterprise Associates, Oak Investment Partners VI, Oak VI Affiliates
Fund, Oracle Corporation, Olivetti Telemedia Investments B.V., Professor
Hopper and Elserino Piol that were convertible into our series D
preference shares;
64
<PAGE>
. in March 1998, we issued a bridge note in the amount of $700,000 in a
private placement to The Index Special Situations Fund Ltd that was
convertible into our series D preference shares;
. in June 1998, we sold 24,780,934 series D preference shares in a private
placement at a purchase price of $1.10 per share and aggregate proceeds
of $27,259,027 to Oak Investment Partners VI, Financiere et Industrielle
Gaz et Eaux, New Enterprise Associates, Oracle Corporation, 3i Group
plc, The British Bank of the Middle East, Moore Global Investments Ltd,
Lombard Odier & Cie, Olivetti Telemedia Investments B.V., Elara Ltd, The
Index Special Situations Fund, Ltd., Bank Morgan Stanley AG ZH, Societe
Financiere Mirelis S.A., Pharos Genesis Fund Ltd., Pharos Fund Ltd.,
Pictet & Cie Banquiers, Remington Investment Strategies LP, Lighthouse
Partners USA, LP, Faisal Finance (Jersey) Ltd., Banque SCS Alliance
S.A., Crescent International Ltd., Denmore Investments Ltd., 4C Ventures
LP, Galba Anstalt, L.B. Finance S.A., Jordana-Gerhardt Family Trust
u/d/t 3/21/97, Oak VI Affiliates Fund, ppon Pictet & Cie, Societe
Financiere Mirelis S.A., Marcuard Cook & Cie S.A., Banca Del Gottardo,
Bank Julius Baes Zurich, Banque Privee ed. De Rothschild, Algonquin
Trust S.A., Manpower S.A., Bank Julius Bar & CO AG, Rex A. Sherry & Lori
Kargionis-Sherry, Trustees of the Sherry Family Trust, Lighthouse
Genesis Partners USA, LP, Credit Suisse Private Banking, Archery
Capital, Fondation de Prevoyance Manpower, Ayers-Plant Family Trust,
Messrs. D. Bertholet, T. Thornhill, M. Bertholet, R. Bishop, T. Saint-
Loup, J. Metzger, T Bungener, M. Sullivan, T. Keegen, D. Castagna, P.
Harvey, and G. Guthrie, in which Index Securities S.A. acted as
placement agent and received a fee of 7% of the aggregate proceeds and
warrants;
. in June 1998, in connection with the conversion of bridge notes in the
aggregate amount of $3,342,980, we issued 3,039,073 series D preference
shares in a private placement to 3i Group plc, New Enterprise
Associates, Oak Investment Partners VI, Oak VI Affiliates Fund, Oracle
Corporation, Olivetti Telemedia Investments B.V., The Index Special
Situations Fund Ltd., Professor Hopper and Mr. Piol;
. in June 1998, in connection with conversion of 12,460,150 series B
preference shares and 2,000,000 series C preference shares with an
aggregate value of $16,635,368, we issued 15,123,062 series D preference
shares in a private placement to 3i Group plc, 4C Ventures LP, New
Enterprise Associates, Oak Investment Partners VI, Oak VI Affiliates
Fund and Oracle Corporation;
. in June 1998, we issued a warrant to Messrs. G. Rimer, N. Rimer, D.
Rimer, G. Zocco, B. Dalle, H. Lebret, J. Peterschmitt and Genevest S.A.
to purchase, 1,595,054 series D preference shares in a private placement
at an exercise price of $1.10 in connection with Index Securities S.A.
acting as placement agent in our series D preference share financing;
. in June 1998, we issued a 21,818 series D preference shares in a private
placement to Professor Hopper for aggregate consideration of $24,000,
representing the amount of the fee Professor Hopper would have received
for serving on our technology advisory board;
. in July 1998, we issued 606,500 series D preference shares in a private
placement for aggregate consideration of $667,150 to Munther Qubain in
connection with the acquisition of RSA Communications;
. in September 1998, we issued a warrant to purchase 109,091 series D
preference shares in a private placement to Comdisco Ventures at an
exercise price per share of $1.10 in connection with an equipment
financing;
. in May 1999, we issued a warrant to purchase 54,545 series D preference
shares in a private placement to Comdisco Ventures at an exercise price
per share of $1.10 in connection with an equipment financing; and
. in October 1999, we issued 6,153,846 series E preference shares in a
private placement at a purchase price of $1.30 per share and aggregate
proceeds of $8,000,000 to Siemens Information and Communication
Networks, Inc., Olivetti Telemedia Investments B.V. and LSI Logic Inc.
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Our officers, directors and 5% stockholders participated in the foregoing
transactions as follows (the following information does not give effect to the
1 for 6.7 reverse stock split):
<TABLE>
<CAPTION>
Number of Number of Number of Number of Bridge Notes
Series B Series C Series D Series E and
Name of Purchaser Shares Shares Shares Shares Warrants(1)
- ----------------- --------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Gaz et Eaux............. -- -- 7,348,111 -- --
New Enterprise
Associates............. 766,883(2) -- 5,582,978(3) -- 343,275
Oak Investment Partners
Limited(4)............. 2,400,028(2) -- 7,945,331(5) -- 488,508
Olivetti Telemedia
Investments B.V. ...... -- -- 870,239(6) 2,307,692 627,814
Oracle Corporation...... -- 6,667,667(7) 4,194,421(8) -- 558,057
3i Group plc............ 517,257(2) -- 3,836,628(9) -- 245,356
Charles Cotton.......... -- -- -- -- --
Michael Gulett.......... -- -- -- -- --
Andrew Vought........... -- -- -- -- --
Martin Jackson.......... -- -- -- -- --
Thomas Cooper........... -- -- -- -- --
Dr. Hermann Hauser...... -- -- 75,152(10) -- 75,152
Marco De Benedetti...... -- -- -- -- --
Gary Bloom(11).......... -- 6,667,667 4,194,421 -- 558,057
Bandel Carano(12)....... 2,400,028 -- 7,945,331 -- 488,508
Professor Andrew
Hopper................. -- -- 40,000(13) -- 18,182
Peter Morris(14)........ 766,883 -- 5,582,978 -- 343,275
Patrick Sayer(15)....... -- -- 7,348,111 -- --
Giuseppe Zocco.......... -- -- 374,108 -- 374,108(16)
All of our directors and
executive officers as a
group (15 persons)..... 3,684,168 6,666,667 30,226,968 2,307,692 2,712,270
</TABLE>
- --------
(1) Except as noted, represents bridge notes denominated in the number of
series D preference shares into which they were convertible. All of the
bridge notes were subsequently converted into series D preference shares
in June 1998.
(2) Such shares were converted into series D preference shares in June 1998.
(3) Includes 343,275 series D preference shares issued upon conversion of
bridge notes in June 1998.
(4) Includes shares beneficially owned by Oak VI Affiliates Fund Limited.
(5) Includes 488,508 series D preference shares issued upon conversion of
bridge notes in June 1998.
(6) Includes 627,814 series D preference shares issued upon conversion of
bridge notes in June 1998.
(7) 2,000,000 of such shares were converted into series D preference shares in
June 1998 in June 1998.
(8) Includes 558,057 series D preference shares issued upon conversion of
bridge notes in June 1998.
(9) Includes 245,356 series D preference shares issued upon conversion of
bridge notes in June 1998.
(10) Represents series D preference shares issued upon conversion of bridge
notes in June 1998 held by Providence Investment Company Ltd, a Company
wholly owned by Providence Trust, of which Mr. Hauser may be a
beneficiary.
(11) Represents shares of our common stock beneficially owned by Oracle
Corporation, of which Mr. Bloom is an Executive Vice President. Mr. Bloom
disclaims all beneficial ownership of these shares.
(12) Represents shares of our common stock beneficially owned by Oak Investment
Partners, of which Mr. Carano is the General Partner. Mr. Carano disclaims
all beneficial ownership of these shares.
(13) Includes 18,182 series D preference shares issued upon conversion of
bridge notes in June 1998 and 21,818 series D preference shares issued in
exchange for Professor Hopper creating our technology advisory board.
(14) Represents shares of our common stock beneficially owned by New Enterprise
Associates, of which Mr. Morris is the General Partner. Mr. Morris
disclaims all beneficial ownership of these shares.
(15) Represents shares of our common stock beneficially owned by Gaz et Eaux,
of which Mr. Sayer is the General Partner. Mr. Sayer disclaims all
beneficial ownership of these shares.
(16) Represents a warrant for series D preference shares issued in connection
with Index Securities S.A. acting as placement agent in our series D
preference share financing.
66
<PAGE>
Reorganization of Virata Limited
In connection with a reorganization to create Virata Corporation as the
holding company of Virata Limited, all of the outstanding ordinary and
preference shares, and any other securities that are convertible into ordinary
and preference shares, of Virata Limited will be cancelled, new ordinary shares
of Virata Limited will be issued to Virata Corporation and shares of our common
stock will be issued to the former shareholders of Virata Limited. These
transactions will take place immediately prior to the consummation of this
offering and will be effected pursuant to a share reconstruction under Section
425 of the United Kingdom Companies Act of 1985. Any securities that are
convertible or exercisable into ordinary shares or preference shares of Virata
Limited will become convertible or exercisable into shares of our common stock
upon consummation of the share reconstruction.
The following table illustrates the conversion of the shares of Virata
Limited into shares of our common stock:
<TABLE>
<CAPTION>
Number of Shares Number of Shares of
Series of Virata Limited Outstanding as of Common Stock Received
Shares October 3, 1999 (1) Conversion Rate (2) In the the Reorganization
- ------------------------ ------------------- ------------------- -------------------------
<S> <C> <C> <C>
Ordinary Shares......... 13,547,599 1 for 6.7 2,021,999
Series A Preference
Shares................. 1,798,720 1 for 6.7 268,459
Series B Preference
Shares................. 1,394,406 1 for 6.7 208,116
Series C Preference
Shares................. 4,666,667 1 for 5.58(3) 835,820
Series D Preference
Shares................. 43,571,387 1 for 4.26(4) 10,219,283
Series E Preference
Shares................. 6,153,846 1 for 6.7 918,484
</TABLE>
- --------
(1) After giving effect to the issuance of series E preference shares by Virata
Limited.
(2) After giving effect to the 1 for 6.7 reverse stock split.
(3) As a consequence of the antidilution provisions of the series C preference
shares, the conversion rate of the series C preference shares was increased
from 1 for 6.7 to 1 for 5.58.
(4) Pursuant to their terms, the conversion rate of the series D preference
shares was increased from 1 for 6.7 to 1 for 4.26.
All of the shares of our common stock issued as a result of the
reorganization of Virata Limited and any shares of our common stock issued
after the effective date of the reorganization upon the exercise of options or
warrants of Virata Limited that were outstanding as of the effective date of
the reorganization, will be subject to certain transfer restrictions, pursuant
to Section 6.06 of our bylaws. See "Certain Provisions in our Certificate of
Incorporation and Bylaws--Transfer Restrictions in the Bylaws."
Acorn Computer
We entered into a technology license, manufacturing license and supply
agreement with Acorn Computer Group plc, or Acorn, in October 1998, pursuant to
which Acorn is able to manufacture certain ATM hardware with binary software
and software designs employing integrated circuits purchased from us. Acorn
subsequently transferred the license to Pace Micro Technology. For the three-
year period ended March 31, 1999 and the six months ended October 3, 1999, we
had aggregate sales to Acorn of approximately $674,000 and purchases from Acorn
of approximately $7,500. Dr. Hauser, Professor Hopper and Mr. De Benedetti were
directors of Acorn and have no affiliation with Pace Micro Technology.
Adaptive Broadband Limited
We entered into a technology license, manufacturing license and supply
agreement in March 1998, as amended in May 1999, with Adaptive Broadband
Limited, or ABL, a wholly owned subsidiary of Adaptive Broadband Corporation,
formerly California Microwave. Under the agreement, ABL has licensed our
software
67
<PAGE>
and is able to design, manufacture and sell products incorporating integrated
circuits purchased from us. Prof. Hopper is a director of ABL. To date, we have
received approximately $495,000 in license fees and product purchases from ABL
and, as of October 3, 1999, there was no outstanding balance owed to us.
Advanced RISC Machines
We entered into a consulting arrangement in November 1997 with Advanced RISC
Machines Ltd., or ARM, a United Kingdom corporation. Under the agreement
Advanced RISC Machines provided us with services relating to the development of
the Lithium integrated circuit. We entered into a per semiconductor design
license agreement in June 1999, under which we are able to design, have
manufactured and sell integrated circuits incorporating the ARM RISC
microprocessor core. Among other provisions, such license requires ARM to
indemnify us, up to a specific dollar amount, in the event of intellectual
property infringement claims by third parties. We also entered into a limited
use software agreement in June 1999, which provides us with a six month
evaluation license for certain software. Acorn Computer Group plc, of which
Dr. Hauser, Professor Hopper and Mr. De Benedetti were directors, owned
approximately 40% of Advanced RISC Machines Ltd. at the time the foregoing
agreements were entered into. We have paid approximately $1.2 million in fees
to ARM under these agreements as of October 3, 1999.
Olivetti Telemedia Investments B.V. and its Affiliates
We entered into a formation and license agreement in December 1993, as
supplemented in April 1994 and September 1994, with Olivetti Telemedia and its
parent, Ing. C. Olivetti & C. S.p.A. Pursuant to the license agreement, we were
granted an exclusive, world-wide license to exploit certain technology, subject
to certain conditions, and agreed to cooperate with respect to certain
technological matters, in exchange for an option, which has been fully
exercised. Additionally, we entered into an agreement with an affiliate of
Olivetti Telemedia in July 1995, under which we sold systems products to
Olivetti and its affiliates. For the three-year period ended March 31, 1999 and
the six months ended October 3, 1999, we had aggregate sales to Olivetti
Telemedia and its affiliates of approximately $209,000 and purchases from
Olivetti Telemedia and its affiliates of approximately $10,000. Olivetti
Telemedia holds approximately 11.5% of our common stock, after giving effect to
the issuance of series E preference shares by Virata Limited.
Telemedia Systems Limited
We occasionally buy products from and sell products to Telemedia Systems
Limited, or Telemedia, a United Kingdom corporation, on terms similar to terms
we negotiate with unaffiliated third parties. For the three year period ended
March 31, 1999 and the six months ended October 3, 1999, we had aggregate sales
to Telemedia of approximately $226,000 and purchases from Telemedia of
approximately $293,000. Dr. Hauser, Professor Hopper and Mr. De Benedetti serve
as directors of Telemedia.
68
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our outstanding shares of common stock as of October 3, 1999 held
by:
. each person or group known to us to be the beneficial owner of more than
5% of our outstanding common stock;
. each of our Named Executive Officers;
. each of our directors; and
. all of our directors and executive officers as a group.
Unless otherwise indicated, and subject to community property laws where
applicable, each of the persons named in the table have sole voting and
investment power with respect to all of the shares of common stock shown held
by them.
In calculating beneficial and percentage ownership, all shares of common
stock that a named stockholder or specified group will have the right to
acquire within 60 days of October 3, 1999 upon exercise of stock options are
deemed to be outstanding for the purpose of computing the ownership of such
stockholder, but are not deemed to be outstanding for the purpose of computing
the percentage of common stock owned by any other stockholder. As of October 3,
1999, an aggregate of 14,472,161 shares of common stock were outstanding. The
calculation of the number and percent of shares beneficially owned after this
offering assumes that no shares are purchased in this offering by the persons
or group listed below.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Owned After the
Offering Offering
--------------------- -----------------------
Name Number Percent Number Percent
- ---- ------------ -------- ------------ ----------
<S> <C> <C> <C> <C>
Oak Investment Partners Limited.... 1,863,510 12.9% 1,863,510 9.6%
525 University Avenue, Suite 1300
Palo Alto, CA 94301
Oracle Corporation................. 1,819,586 12.6 1,819,586 9.3
500 Oracle Parkway
Redwood Shores, CA 94065
Gaz et Eaux........................ 1,723,437 11.9 1,723,437 8.9
3 Rue Jacques Bingen
Paris, 75017, France
Olivetti Telemedia Investments 1,667,941 11.5 1,667,941 8.6
B.V...............................
Herengracht, 548
Amsterdam, The Netherlands
New Enterprise Associates.......... 1,309,440 9.0 1,309,440 6.7
1119 St. Paul Street
Baltimore, MD 21202
3i Group plc....................... 899,848 6.2 899,848 4.6
91 Waterloo Road
London SE1 8XP, United Kingdom
Charles Cotton(1).................. 167,428 1.1 167,428 *
Michael Gulett(1).................. 59,701 * 59,701 *
Andrew Vought(1)................... 114,692 * 114,692 *
Martin Jackson(1).................. 82,027 * 82,027 *
Daniel Karr........................ -- -- -- --
Thomas Cooper(1)................... 84,733 * 84,733 *
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Owned After the
Offering Offering
--------------------- -----------------------
Name Number Percent Number Percent
- ---- ------------ -------- ------------ ----------
<S> <C> <C> <C> <C>
Dr. Hermann Hauser(2)............ 243,596 1.7 243,569 1.3
Marco De Benedetti............... 1,667,941 11.5 1,667,941 8.6
Gary Bloom(3).................... 1,819,586 12.6 1,819,586 9.3
Bandel Carano(4)................. 1,863,510 12.9 1,863,510 9.6
Professor Andrew Hopper.......... 233,262 1.6 233,262 1.2
Peter Morris(5).................. 1,309,440 9.0 1,309,440 6.7
Patrick Sayer(6)................. 1,723,437 11.9 1,723,437 8.9
Giuseppe Zocco(7)................ 55,837 * 55,837 *
All of our directors and
executive officers as a group
(15 persons).................... 9,433,322 62.7 9,433,322 47.1
</TABLE>
- --------
* Less than 1%.
(1) Represents shares of our common stock underlying options that are vested or
will vest within 60 days of October 3, 1999.
(2) Represents shares of our common stock owned by Providence Investment
Company Limited, which is wholly owned by the Providence Trust, of which
Mr. Hauser may be a beneficiary.
(3) Represents shares held by Oracle Corporation. Mr. Bloom is an Executive
Vice President of Oracle. Mr. Bloom disclaims all beneficial ownership of
these shares.
(4) Represents shares of our common stock beneficially owned by Oak Investment
Partners, of which Mr. Carano is the General Partner. Mr. Carano disclaims
all beneficial ownership of these shares.
(5) Represents shares of our common stock beneficially owned by New Enterprise
Associates, of which Mr. Morris is the General Partner. Mr. Morris
disclaims all beneficial ownership of these shares.
(6) Represents shares of our common stock beneficially owned by Gaz et Eaux, of
which Mr. Sayer is the General Partner. Mr. Sayer disclaims all beneficial
ownership of these shares.
(7) Mr. Zocco owns a warrant to purchase 55,837 shares of our common stock.
70
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 40,000,000 shares of common stock, $.001 par value, and 5,000,000 shares of
preferred stock, $.001 par value. The description of our capital stock below
and certain provisions of our charter documents is not complete and is
qualified by our certificate of incorporation and bylaws, which are included as
exhibits to the registration statement that this prospectus is a part of, and
by applicable provisions of the Delaware General Corporate Law.
Common Stock
As of October 3, 1999, there were 14,472,161 shares of common stock
outstanding. Upon completion of this offering, there will be 19,472,161 shares
of our common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Holders of the
common stock are entitled to one vote per share on each matter submitted to a
vote of our stockholders. Beneficial owners of common stock are entitled to
receive ratably those dividends declared by our board of directors out of
legally available funds. Upon our liquidation, dissolution or winding up, our
common stockholders are entitled to share ratably in all of our assets which
are legally available for distribution, after payment of all debts and other
liabilities and the liquidation preference of any outstanding series of
preferred stock. Holders of common stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of common stock are,
when issued and delivered, validly issued, fully-paid and non-assessable under
the Delaware General Corporation Law.
Preferred Stock
Immediately after this offering, there will be no shares of our preferred
stock outstanding. However, our certificate of incorporation provides that our
preferred stock be divisible into and issuable in one or more series. The
rights and preferences of the different series may be established by our board
of directors without further action by our stockholders. Our board of directors
will be authorized with respect to each series to fix and determine, among
other things:
. its dividend rate;
. its liquidation preference;
. whether or not the shares will be convertible into, or exchangeable for,
any other securities; and
. whether or not the shares will have voting rights, and, if so, determine
the extent of the voting powers and the conditions under which the
shares will vote as a separate class.
We believe that our board of directors' ability to issue preferred stock on
such a wide variety of terms will enable the preferred stock to be used for
important corporate purposes, such as financing acquisitions or raising
additional capital. However, were it inclined to do so, our board of directors
could issue all or part of the preferred stock with (among other things)
substantial voting power or advantageous conversion rights. This stock could be
issued to persons deemed by our board of directors likely to support our
current management in a context for control of us, either as a precautionary
measure or in response to a specific takeover threat. We have no current plans
to issue preferred stock for any purpose.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company. Its phone number is (212) 936-5100.
Listing
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under symbol "VRTA."
71
<PAGE>
Registration Rights
Concurrent with this offering, we anticipate that we will enter into a
registration rights agreement with holders of our common stock who previously
held shares of the series B, series C, series D and series E preference shares
of Virata Limited or warrants to purchase shares of the series B, series C,
series D and series E preference shares of Virata Limited. As of October 3,
1999, these holders held approximately 12,181,694 of our outstanding shares.
The description of our registration rights agreement below is not complete
and is qualified by our registration rights agreement that is included as an
exhibit to the Registration Statement of which this prospectus is a part.
Requested Registration
Any time after six months after the closing date of this offering, holders
of at least 50% of the registrable securities may request that we file a
registration statement. Such request must be with respect to at least 30% of
the registrable securities held by such holders and such securities must have a
minimum aggregate fair market value of at least $5.0 million. Upon such a
request, we are required to use our reasonable efforts to cause such shares to
be registered, subject to certain conditions and limitations. The holders of
registrable securities are entitled to two such demand registrations.
In addition, if at any time we are entitled to file a registration statement
on Form S-3 (or any successor form), holders of at least 20% of the registrable
securities may request that we file a registration statement. Such request must
be with respect to registrable securities having a minimum aggregate fair
market value of $500,000. The holders of registrable securities are entitled to
two such S-3 registrations in any twelve-month period.
If the registration is an underwritten public offering and the underwriters
limit the number of securities that may be included in the registration, then
the number of registrable securities that may be included in the registration
and underwriting will be allocated among the holders of registrable securities
requesting registration in proportion, as nearly as practicable, to the
respective number registrable securities requested to be registered.
Company Registration
If we propose to register any of our or a holder's common stock under the
Securities Act, holders of registrable securities have the opportunity to
include their registrable securities in such registration. However, if the
registration is an underwritten public offering and the underwriters limit the
number of securities that may be included in the registration, then the number
of registrable securities that may be included in the registration and
underwriting may be cut back to zero. In such event, any registrable securities
that are included in the registration and underwriting will be allocated among
the holders of registrable securities based on the total number of our
securities held by such holder.
Termination of Registration Rights
The registration rights terminate as to registrable securities on the
earlier of (1) the date of the sale of such Registrable Securities pursuant to
a Registration Statement or Rule 144 under the Securities Act (or any similar
provision then in force); (2) the date such registrable securities become
capable of being distributed pursuant to Rule 144(k); or (3) the date such
registrable securities become distributable without being subject to Rule 144
or registration. Notwithstanding the above, the registration rights agreement
will terminate in 2006.
72
<PAGE>
CERTAIN PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS
Stockholder Meetings
Our bylaws provide that following this offering, any action required to be
taken or that may be taken at any meeting of our stockholders may only be taken
at a meeting of stockholders and may not be taken by the written consent of the
stockholders. Special meetings of stockholders may only be called by our board
of directors, the chairman of our board or the chief executive officer, and
only such business brought forth by or at the direction of our board of
directors or the stockholders may be conducted. If a stockholder wishes to
propose an item for consideration at any meeting, the stockholder must give
written notice to us not less than 90 days before the meeting or, if later, the
tenth day following the date of the first public announcement of the meeting,
or such other date as is necessary to comply with applicable federal proxy
solicitation rules and other regulations.
Board of Directors
Our bylaws provide that the number of directors may not be less than three
nor more than fourteen, until changed by an amendment duly adopted by our board
of directors or stockholders. Our bylaws further provide that the exact number
of directors shall be fixed from time to time, within such range, by our board
of directors. Currently, the number of directors is fixed at four. Our bylaws
provide that our board of directors will be divided into three classes of
directors, which serve for staggered three-year terms. Our bylaws do not
provide for cumulation of stockholder votes in the election of directors.
According to our bylaws, each director may be removed only for cause and only
by the affirmative vote of at least 80% of the total number of the then
outstanding shares of capital stock entitled to vote generally in the election
of directors. Our bylaws provide that nominations for election of directors may
be made by our board of directors or any stockholder entitled to vote in the
election of directors. If a stockholder wishes to nominate a director, the
stockholder must give written notice to us not less than 90 days before the
meeting or, if later, the tenth day following the date of the first public
announcement of the meeting.
Amendment of Our Charter Documents
Our certificate of incorporation may not be amended without the approval of
the holders of a majority of our outstanding voting shares or the approval of
at least a majority of our directors. Our bylaws contain provisions requiring
the affirmative vote of at least 80% of the total number of the then
outstanding shares of capital stock entitled to vote generally in the election
of directors to amend, alter or repeal the provisions of our bylaws relating to
the calling of special meetings of stockholders, advance notice of stockholder
business or nominees, removal of directors, stockholder action without a
meeting or amendments of our bylaws. These provisions of our charter documents
may delay, defer or prevent a change in control without further action by our
stockholders, may discourage bids for the common stock at a premium over the
market price of the common stock and may adversely affect the market price of
the common stock.
Transfer Restrictions in the Bylaws
In order to facilitate this offering, all of the shares of our common stock
issued as a result of the reorganization of Virata Limited and any shares of
our common stock issued after the effective date of the reorganization upon the
exercise of options or warrants of Virata Limited that were outstanding as of
the effective date of the reorganization, will be subject to a "lock up" period
during which the transfer of such shares will be restricted. See "Certain
Transactions--Reorganization of Virata Limited." Section 6.06 of our bylaws
provides that such shares may not be offered, sold, pledged or otherwise
disposed of, directly or indirectly nor may the holders of such shares publicly
disclose the intention to make any such offer, sale pledge or disposal for up
to 180 days after the Effective Date without the prior written consent of
Virata Corporation. A legend denoting such transfer restrictions will be
stamped or otherwise imprinted on the certificate representing such shares.
Neither we nor our transfer agent and registrar will make any transfer of
shares of our common stock if such transfer would constitute a violation or
breach of this provision of our bylaws.
73
<PAGE>
Effect of Delaware Anti-takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law which,
subject to certain exceptions, prohibits a Delaware corporation from engaging
in any "business combination" which includes a merger or sale of more than 10%
of the corporation's assets, with any interested stockholder for a period of
three years following the date that such stockholder became an interested
stockholder, unless:
. before such date, our board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
. upon completion of the transaction which 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 those shares owned by persons who
are directors and also officers; or
. on or after such date, the business combination is approved by our 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 two-thirds of the outstanding voting stock which is not owned by
the interested stockholder.
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 or any entity or person affiliated with or controlling or
controlled by such entity or person.
74
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. Upon
completion of this offering, there will be approximately 19,472,161 shares of
our common stock outstanding, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options. All of these shares
will be freely tradable without restriction or further registration under the
Securities Act, pursuant to an exemption provided by Section 3(a)(10) of the
Securities Act, except for any such shares held by our affiliates. Shares held
or purchased in this offering by one of our affiliates may not be sold in the
public market without registration under the Securities Act or in compliance
with an applicable exemption from registration as provided in Rule 144 or Rule
701 under the Securities Act, which rules are summarized below.
In general, under Rule 144 as currently in effect, a person who is one of
our affiliates is entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the shares of our common stock
then outstanding, equaling approximately 194,722 shares immediately after this
offering, or the average weekly trading volume of our common stock in the
public market during the four calendar weeks immediately before such sale.
Sales under Rule 144 are also subject to certain requirements as to the manner
of sale, notice and availability of current public information concerning us.
Under Rule 144(k), a person who has not been one of our "affiliates" at any
time during the 90 days before a sale, and who has beneficially owned shares
proposed to be sold for at least two years, is entitled to sell such shares
without regard to the volume limitations, manner of sale provisions or notice
requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 under the Securities Act, as
currently in effect, permits the resale of securities originally purchased from
us by our employees, directors, officers, consultants or advisers prior to the
closing of this offering in connection with a compensatory stock or option plan
or written agreement, by persons who are not our "affiliates" subject only to
the manner-of-sale provisions of Rule 144 and by our affiliates under Rule 144
without compliance with its minimum holding period requirement.
All of our officers, directors and stockholders have agreed that they will
not offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any of our shares or any securities convertible into or
exchangeable or exercisable for any of our shares, or publicly disclose the
intention to make any such offer, sale, pledge or disposal, for a period
beginning on the date of this prospectus and continuing to the date which is
180 days after the date of this prospectus, without the prior written consent
of Credit Suisse First Boston, which consent may be withheld in its sole
discretion. Credit Suisse First Boston may, in its sole discretion and any time
without notice, release all or any portion of the securities subject to these
lock-up agreements. In addition, we have agreed that, for a period of 180 days
after the date of this prospectus, we will not, without the consent of Credit
Suisse First Boston, issue, offer, sell or grant options to purchase or
otherwise dispose of any equity securities or securities convertible into or
exchangeable for equity securities except for (1) the issuance of shares of
common stock offered hereby and (2) shares of common stock issued upon the
exercise of outstanding options on or after the date of this prospectus. See
"Underwriting."
In addition, all of the shares of our common stock issued as a result of the
reorganization of Virata Limited and any shares of our common stock issued
after the effective date of the reorganization upon the exercise of options or
warrants of Virata Limited that were outstanding as of the effective date of
the reorganization, will be subject to certain transfer restrictions pursuant
to Section 6.06 of our bylaws. See "Certain Transactions--Reorganization of
Virata Limited" and "Certain Provisions in our Certificate of Incorporation and
Bylaws--Transfer Restrictions in the Bylaws."
There are no restrictions on resale with respect to any of our securities,
other than restrictions imposed by lock-up agreements, our bylaws and
applicable securities laws. All of the shares of our common stock outstanding
prior to this offering will be available for sale in the public market
immediately upon expiration of the 180 day lock-up period, subject to the
volume limitations and other conditions of Rule 144 with respect to shares held
by our affiliates.
75
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Warburg Dillon Read LLC
and Thomas Weisel Partners LLC are acting as representatives, the following
respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
Warburg Dillon Read LLC............................................
Thomas Weisel Partners LLC.........................................
---------
Total.......................................................... 5,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 750,000 additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay:
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us..................... $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We, our executive officers and directors, and existing holders of our
securities which holders own or have the right to acquire more than 1% of our
outstanding shares of common stock, have agreed that we will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration statement under
the Securities Act relating to, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any of our common stock, or
publicly disclose the intention to make an offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
in our case issuances pursuant to the exercise of employee stock options
outstanding on the date hereof.
The underwriters have reserved for sale, at the initial public offering
price, up to 250,000 shares of common stock for employees, directors and other
persons associated with us who have expressed an interest in
76
<PAGE>
purchasing common stock in the offering. The number of shares available for
sale to the general public in this offering will be reduced to the extent these
persons purchase the reserved shares. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same terms as the
other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We have applied to list our shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "VRTA."
Prior to the offering, there has been no public market for the common stock.
The initial public offering price for the common stock will be determined by
negotiation between us and the representatives, and may not reflect the market
price for the common stock following this offering. The principal factors
considered in determining the initial public offering price of our common stock
will be:
. the information in this prospectus and otherwise available to the
representatives;
. market conditions for initial public offerings;
. the history of and prospects for the industry in which we will compete;
. the ability of our management;
. our prospects for future earnings, the present state of our development
and our current financial condition;
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies; and
. the general condition of the securities markets at the time of this
offering.
We cannot be sure that the initial public offering price will correspond to
the price at which common stock will trade in the public market following this
offering or that an active trading market for the common stock will develop and
continue after this offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934, as amended.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase shares of the common
stock so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.
77
<PAGE>
Each underwriter has represented and agreed that:
. it and each of its affiliates have not offered or sold, and will not
offer or sell any common stock to persons in the United Kingdom, except
to those persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent)
for the purpose of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995;
. it and each of its affiliates have complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the common stock in, from or
otherwise involving the United Kingdom; and
. it and each of its affiliates have only issued or passed on and will
only issue or pass on in the United Kingdom any document received by it
in connection with the issue of the common stock to a person who is of a
kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to
whom the document may otherwise lawfully be issued or passed on.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has acted as a lead or co-manager on over
40 offerings of equity securities that have been completed. Thomas Weisel
Partners does not have any material relationship with us or any of our
officers, directors or other controlling persons, except with respect to its
contractual relationship with us pursuant to the underwriting agreement entered
into in connection with this offering.
78
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (1) the purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under the securities laws, (2) where required
by law, that the purchaser is purchasing as principal and not as agent, and (3)
the purchaser has reviewed the text above under "Resale Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U. S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
such issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
79
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
shares of common stock offered hereby will be passed upon for us by Gibson,
Dunn & Crutcher LLP, San Francisco, California. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Brobeck, Phleger & Harrison LLP, San Francisco, California.
EXPERTS
The consolidated financial statements of Virata Corporation as of March 31,
1998 and 1997 and for each of the three years in the period ended March 31,
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.
The financial statements of RSA Communications, Inc. as of March 31, 1998
and 1997 and for the period from June 6, 1997 through March 31, 1998, the
period from April 1, 1997 through June 5, 1997, and the year ended March 31,
1997 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.
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered in this offering. This prospectus does not contain all of
the information contained in the registration statement and the exhibits and
schedule filed with the registration statement. For further information with
respect to Virata and the common stock offered in this offering, we refer you
to the registration statement and the exhibits and schedules filed as a part of
the registration statement. Statements contained in this prospectus concerning
the contents of any contract or any other document referred to are not
necessarily complete. We refer you to the copy of such contract or document
filed as an exhibit to the registration statement.
Our registration statement, including exhibits and schedules attached
thereto, may be inspected without charge at the Securities and Exchange
Commission's public reference facilities in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Securities and Exchange Commission's
regional offices located at the Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048. You may also obtain copies of all or any part
of our registration statement from such offices after payment of fees
prescribed by the Securities and Exchange Commission. The Securities and
Exchange Commission maintains a worldwide website that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Securities and Exchange Commission at
http://www.sec.gov.
80
<PAGE>
VIRATA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Virata Corporation
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statement of Operations....................................... F-4
Consolidated Statement of Stockholders' Equity (Deficit)................... F-5
Consolidated Statement of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements................................. F-7
RSA Communications, Inc.
Report of Independent Accountants.......................................... F-22
Balance Sheet.............................................................. F-23
Statement of Operations.................................................... F-24
Statement of Stockholder's Equity (Deficit)................................ F-25
Statement of Cash Flows.................................................... F-26
Notes to Financial Statements.............................................. F-27
Pro Forma Combined Financial Information (unaudited)
Overview................................................................... F-33
Pro Forma Combined Statement of Operations (unaudited)..................... F-34
Notes to Pro Forma Combined Financial Information (unaudited).............. F-35
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Virata Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and
of cash flows present fairly, in all material respects, the financial position
of Virata Corporation and its subsidiaries (the "Company") at March 31, 1998
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended March 31, 1999, in conformity with
generally accepted accounting principles. 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 generally accepted auditing
standards, 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.
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 20, 1999, except as to Note 13
which is as of October 12, 1999
F-2
<PAGE>
VIRATA CORPORATION
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma,
Stockholders
March 31, Equity at
------------------ October 3, October 3,
1998 1999 1999 1999
-------- -------- ----------- ------------
(unaudited) (unaudited)
(Note 1)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....... $ 767 $ 8,616 $ 4,137
Short-term investments.......... -- 1,001 --
Accounts receivables, net of
allowance for doubtful accounts
and returns of $1,567, $2,742
and $630, respectively......... 2,091 2,267 1,180
Inventories..................... 434 264 705
Other current assets............ 1,352 1,232 1,392
-------- -------- --------
Total current assets........... 4,644 13,380 7,414
Property and equipment, net....... 1,306 2,479 2,198
Intangible assets................. -- 3,328 2,950
-------- -------- --------
Total assets................... $ 5,950 $ 19,187 $ 12,562
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities:
Accounts payable................ $ 1,727 $ 2,112 $ 2,100
Accrued liabilities............. 2,641 1,887 2,282
Deferred revenue................ 317 489 458
Convertible loan from related
parties........................ 2,712 -- --
Short-term borrowings........... 417 -- --
Capital lease obligations,
current........................ 483 850 854
-------- -------- --------
Total current liabilities...... 8,297 5,338 5,694
Capital lease obligations, long-
term............................. 738 1,130 986
-------- -------- --------
9,035 6,468 6,680
-------- -------- --------
Commitments (Note 8)
Stockholders' Equity (Deficit)
Convertible preferred stock,
$0.02 par value at March 31,
1998 and 1999 and October 3,
1999 and $0.001 par value at
pro forma; 36,100,000,
86,100,000, 86,100,000
(unaudited) and 5,000,000
(unaudited) shares authorized
at March 31, 1998 and 1999,
October 3, 1999, and pro forma,
respectively; 22,319,943,
51,431,179, 51,431,179
(unaudited) and zero
(unaudited) shares issued and
outstanding at March 31, 1998
and 1999, October 3, 1999 and
pro forma, respectively
(liquidation preference $57,929
(unaudited) at October 3,
1999).......................... 1,709 801 801 --
Common stock, $0.01 par value at
March 31, 1998 and 1999 and
October 3, 1999 and $0.001 par
value at pro forma; 45,000,000,
95,000,000, 95,000,000
(unaudited) and 40,000,000
(unaudited) shares authorized
at March 31, 1998 and 1999,
October 3, 1999, and pro forma,
respectively; 11,752,415,
13,340,644, 13,547,599,
(unaudited) and 14,472,161
(unaudited) shares issued and
outstanding at March 31, 1998
and 1999, October 3, 1999, and
pro forma, respectively........ 185 211 215 14
Additional paid-in capital...... 29,432 62,964 63,095 71,997
Accumulated other comprehensive
income......................... 619 871 1,064 1,064
Unearned stock compensation..... (1,559) (1,500) (1,093) (1,093)
Accumulated deficit............. (33,471) (50,628) (58,200) (58,200)
-------- -------- -------- --------
Total stockholders' equity
(deficit)..................... (3,085) 12,719 5,882 $ 13,782
-------- -------- -------- ========
Total liabilities and
stockholders' equity
(deficit)..................... $ 5,950 $ 19,187 $ 12,562
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
VIRATA CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31, Six Months Ended
--------------------------- ------------------------
September 30, October 3,
1997 1998 1999 1998 1999
------- -------- -------- ------------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Semiconductors........ $ -- $ 505 $ 2,784 $ 1,697 $ 3,493
License............... 971 1,570 1,628 1,009 528
Services and royalty.. 1,134 1,206 2,367 1,075 808
Systems............... 4,848 5,650 2,477 1,340 848
------- -------- -------- -------- -------
Total revenues...... 6,953 8,931 9,256 5,121 5,677
------- -------- -------- -------- -------
Cost of revenues:
Semiconductors........ -- 325 2,421 1,333 1,941
License............... -- -- -- -- --
Services and royalty.. 185 192 528 229 338
Systems............... 3,754 3,270 1,048 701 491
------- -------- -------- -------- -------
Total cost of
revenues........... 3,939 3,787 3,997 2,263 2,770
------- -------- -------- -------- -------
Gross profit............ 3,014 5,144 5,259 2,858 2,907
------- -------- -------- -------- -------
Operating expenses:
Research and
development.......... 3,518 3,987 8,323 3,586 5,130
Sales and marketing... 4,753 4,076 2,917 1,381 1,896
General and
administrative....... 3,410 4,917 5,567 3,099 2,303
Restructuring costs... -- 1,871 -- -- --
Amortization of
intangible assets.... -- -- 549 137 370
Amortization of stock
compensation......... -- 399 1,394 683 505
Acquired in-process
research and
development.......... -- -- 5,260 5,260 --
------- -------- -------- -------- -------
Total operating
expenses........... 11,681 15,250 24,010 14,146 10,204
------- -------- -------- -------- -------
Loss from operations.... (8,667) (10,106) (18,751) (11,288) (7,297)
Interest expense........ (72) (214) (155) (102) (92)
Interest income and
other income (expense),
net.................... 199 42 1,749 (305) (183)
------- -------- -------- -------- -------
Net loss................ $(8,540) $(10,278) $(17,157) $(11,695) $(7,572)
======= ======== ======== ======== =======
Basic and diluted net
loss per share......... $ (0.80) $ (0.90) $ (1.33) $ (0.91) $ (0.57)
======= ======== ======== ======== =======
Weighted average common
shares--basic
and diluted............ 10,676 11,482 12,881 12,790 13,359
======= ======== ======== ======== =======
Unaudited pro forma
basic and diluted net
loss per share (Note
1)..................... $ (1.42) $ (0.60)
======== =======
Pro forma weighted
average shares--basic
and diluted............ 12,075 12,642
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
VIRATA CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Convertible Accumulated Total
Preferred Stock Common Stock Additional Other Unearned Stockholders' Total
---------------- ------------- Paid-in Comprehensive Stock Accumulated Equity Comprehensive
Shares Amount Shares Amount Capital Income (Loss) Compensation Deficit (Deficit) Income
------ -------- ------ ------ ---------- ------------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March
31, 1996......... 12,940 $ 1,564 10,600 $ 165 $ 14,437 $ 338 $ -- $ (14,653) $ 1,851 $ --
Issuance of
Series B
convertible
preferred
stock........... 2,713 45 -- -- 3,080 -- -- -- 3,125 --
Issuance of
Series C
convertible
preferred
stock........... 6,667 100 -- -- 9,900 -- -- -- 10,000 --
Issuance of
common stock for
cash............ -- -- 337 6 19 -- -- -- 25 --
Net loss........ -- -- -- -- -- -- -- (8,540) (8,540) (8,540)
Currency
translation
adjustment...... -- -- -- -- -- 391 -- -- 391 391
------- -------- ------ ------ -------- ------ -------- --------- ------- --------
Balance, March
31, 1997......... 22,320 1,709 10,937 171 27,436 729 -- (23,193) 6,852 (8,149)
========
Issuance of
common stock for
cash............. -- -- 815 14 38 -- -- -- 52 --
Unearned stock
compensation..... -- -- -- -- 1,958 -- (1,958) -- -- --
Amortization of
unearned stock
compensation..... -- -- -- -- -- -- 399 -- 399 --
Net loss......... -- -- -- -- -- -- -- (10,278) (10,278) (10,278)
Currency
translation
adjustment....... -- -- -- -- -- (110) -- -- (110) (110)
------- -------- ------ ------ -------- ------ -------- --------- ------- --------
Balance, March
31, 1998......... 22,320 1,709 11,752 185 29,432 619 (1,559) (33,471) (3,085) (10,388)
========
Change in the
par value of
Series A
convertible
preferred
stock............ -- (1,366) -- -- 1,366 -- -- -- -- --
Issuance of
Series D
convertible
preferred stock
and warrants..... 24,781 410 -- -- 24,672 -- -- -- 25,082 --
Issuance of
Series D
convertible
preferred stock,
common stock and
options for
acquisition...... 606 10 1,540 25 3,553 -- -- -- 3,588 --
Issuance of
Series D
convertible
preferred stock
upon conversion
of debt.......... 3,039 38 -- -- 2,576 -- -- -- 2,614 --
Issuance of
Series D
convertible
preferred stock
for cash......... 22 -- -- -- 24 -- -- -- 24 --
Issuance of
common stock for
cash............. -- -- 49 1 6 -- -- -- 7 --
Exchange Series
B and Series C
convertible
preferred stock
to Series D
convertible
preferred
stock............ 663 -- -- -- -- -- -- -- -- --
Unearned stock
compensation..... -- -- -- -- 1,335 -- (1,335) -- -- --
Amortization of
unearned stock
compensation..... -- -- -- -- -- -- 1,394 -- 1,394 --
Net loss......... -- -- -- -- -- -- -- (17,157) (17,157) (17,157)
Unrealized gain
on investments... -- -- -- -- -- 1 -- -- 1 1
Currency
translation
adjustment....... -- -- -- -- -- 251 -- -- 251 251
------- -------- ------ ------ -------- ------ -------- --------- ------- --------
Balance, March
31, 1999......... 51,431 801 13,341 211 62,964 871 (1,500) (50,628) 12,719 (16,905)
========
Issuance of
common stock for
cash
(unaudited)...... -- -- 207 4 33 -- -- -- 37 --
Unearned stock
compensation
(unaudited)...... -- -- -- -- 98 -- (98) -- -- --
Amortization of
unearned stock
compensation
(unaudited)...... -- -- -- -- -- -- 505 -- 505 --
Net loss
(unaudited)...... -- -- -- -- -- -- -- (7,572) (7,572) (7,572)
Currency
translation
adjustment
(unaudited)...... -- -- -- -- -- 193 -- -- 193 193
------- -------- ------ ------ -------- ------ -------- --------- ------- --------
Balance, October
3, 1999
(unaudited)...... 51,431 $ 801 13,548 $ 215 $ 63,095 $1,064 $ (1,093) $ (58,200) $ 5,882 $ (7,379)
======= ======== ====== ====== ======== ====== ======== ========= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
VIRATA CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended March 31, Six Months Ended
------------------------------ ------------------------
September 30, October 3,
1997 1998 1999 1998 1999
-------- --------- --------- ------------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $ (8,540) $ (10,278) $ (17,157) $(11,695) $ (7,572)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Provision for doubtful
accounts and
returns.............. 111 1,075 1,458 1,334 157
Acquired in-process
research and
development.......... -- -- 5,260 5,260 --
Depreciation and
amortization......... 1,085 1,079 1,695 673 1,162
Amortization of stock
compensation......... -- 399 1,394 683 505
Changes in current
assets and
liabilities:
Accounts receivable.. (797) (1,651) (739) 327 914
Inventories.......... (129) 393 158 76 (430)
Other current
assets.............. (615) (445) 82 478 (174)
Accounts payable..... 1,027 (339) 248 534 9
Accrued liabilities.. 818 280 (2,083) (1,614) 376
Deferred revenue..... -- 306 184 (21) (22)
-------- --------- --------- -------- --------
Net cash used in
operating
activities......... (7,040) (9,181) (9,500) (3,965) (5,075)
-------- --------- --------- -------- --------
Cash flows from
investing activities:
Sale of short-term
investments........... -- -- -- -- 1,001
Purchase of short-term
investments........... -- -- (1,000) -- --
Purchase of property
and equipment, net.... (622) (174) (2,127) (618) (299)
Cash paid in connection
with acquisition, net
of cash acquired...... -- -- (5,149) (5,149) --
-------- --------- --------- -------- --------
Net cash (used in)
provided by
investing
activities......... (622) (174) (8,276) (5,767) 702
-------- --------- --------- -------- --------
Cash flows from
financing activities:
Proceeds from issuance
of convertible
preferred stock, net
of issuance costs..... 13,125 -- 25,106 25,106 --
Proceeds from issuance
of common stock....... 25 52 7 5 37
Proceeds from capital
leases................ 227 11 1,201 20 --
Repayments of capital
lease obligations..... (122) (277) (318) (104) (414)
Proceeds from
convertible loan...... -- 2,606 -- -- --
Proceeds from
(repayment of) bank
borrowings............ -- 417 (417) (417) --
-------- --------- --------- -------- --------
Net cash provided by
(used in) financing
activities......... 13,255 2,809 25,579 24,610 (377)
-------- --------- --------- -------- --------
Effect of exchange rate
changes on cash........ 380 24 46 756 271
-------- --------- --------- -------- --------
Net increase (decrease)
in cash and cash
equivalents............ 5,973 (6,522) 7,849 15,634 (4,479)
-------- --------- --------- -------- --------
Cash and cash
equivalents at
beginning of period.... 1,316 7,289 767 767 8,616
-------- --------- --------- -------- --------
Cash and cash
equivalents at end of
period................. $ 7,289 $ 767 $ 8,616 $ 16,401 $ 4,137
======== ========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
Virata Corporation (the "Company") was formed in 1993 as Advanced
Telecommunications Modules Limited, a corporation organized in the United
Kingdom, as a spin-off from Olivetti Research Laboratories. In February 1998,
the Company changed its name to Virata Limited. In July 1998, the Company
completed its acquisition of RSA Communications, Inc. ("RSA Communications"), a
corporation organized in North Carolina (see Note 4). RSA was subsequently
renamed to Virata Raleigh Corporation.
The historical financial statements presented are those of Virata Limited.
In August 1999, Virata Corporation was created and as of October 3, 1999 it had
no operations, assets or issued shares. Immediately prior to the initial public
offering ("IPO"), Virata Corporation will become the holding company of Virata
Limited (see Note 13). The reorganization will be accounted for on a historical
basis.
Effective October 3, 1999, the Company changed the fiscal year such that
each quarter ends on the Sunday closest to the calendar quarter end.
The Company is a provider of solutions that integrate communication
processors with a suite of software for the digital subscriber line equipment
market.
Principles of consolidation and basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Interim financial information (unaudited)
The accompanying interim consolidated financial statements as of October 3,
1999 and for the six months ended September 30, 1998 and October 3, 1999 are
unaudited but have been prepared on the same basis as the annual financial
statements and, in the opinion of management, reflect all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the Company's financial condition at October 3, 1999 and the results of
operations and cash flows for the six months ended September 30, 1998 and
October 3, 1999. The results of operations of any interim period are not
necessarily indicative of the results of operations for the full year.
Use of estimates
The preparation of consolidated 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 consolidated
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenues from the sale of both semiconductors and systems are recognized
upon shipment to customers. Allowances are provided for estimated returns at
the time of shipment. The Company recognizes software license revenue under
Statement of Position ("SOP") 97-2, Software Revenue Recognition, and SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. When contracts contain multiple elements and vendor-specific
objective evidence exists for all undelivered elements,
F-7
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Company accounts for the delivered elements in accordance with the
"Residual Method" prescribed by SOP 98-9. Software licenses are generally
recognized as revenue upon shipment of the software product. In the event the
Company grants customers the right to specified upgrades, license revenue is
deferred until delivery of the specific upgrade. If vendor-specific objective
evidence of fair value does not exist, then the entire license fee is deferred
until the delivery of the specified upgrade. The Company recognizes revenues
from maintenance and support services provided to licensees ratably over the
term of the agreement, generally one year, and recognizes revenues from design
services provided to customers as the services are performed.
Cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At March 31,
1998 and 1999, $767,000 and $7,142,000, respectively, of money market funds and
certificate of deposits, the fair value of which approximates costs, are
included in cash and cash equivalents. The Company deposits cash and cash
equivalents with high credit quality financial institutions.
Investments
Investments consist of high quality debt securities with original maturity
dates greater than ninety days. In accordance with Statement of Financial
Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company's investments are classified as
available-for-sale and, at the balance sheet date, are reported at fair value,
with the unrealized gains and losses, net of related taxes, reported as a
component of Other Comprehensive Income (Loss). The cost of these investments
at March 31, 1999 was $1,000,000. Gains and losses on the sale of available-
for-sale securities are determined using the specific-identification method.
Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable,
accrued expenses and other liabilities approximate fair value due to their
short maturities. Based upon borrowing rates currently available to the Company
for leases with similar terms, the carrying value of capital lease obligations
approximate fair value.
Segment information
Effective April 1, 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company identifies its operating segments based on business activities,
management responsibility and geographical location. During each of the three
years in the period ended March 31, 1999, the Company operated in one operating
segment, primarily in the United States and Europe.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents, and accounts
receivable. The Company's accounts receivable are derived from revenues earned
primarily from customers located in the U.S. and Europe. The Company performs
ongoing credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers. The Company maintains an
allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable.
F-8
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company currently has the following concentrations of revenues and trade
accounts receivables:
<TABLE>
<CAPTION>
Year Ended Six Months
March 31, Ended
---------------- October 3,
1997 1998 1999 1999
---- ---- ---- -----------
(unaudited)
<S> <C> <C> <C> <C>
Revenues
- --------
Customer A........................................... -- 10% 16% 52%
Customer B........................................... 21% 17% 22% 12%
Customer C........................................... -- 10% 3% --
</TABLE>
Revenues from customers located outside the United States were 47% in 1997,
44% in 1998 and 40% in 1999. The Company has $974,000 and $1,800,000 invested
in identifiable tangible assets in Europe as of March 31, 1998 and 1999,
respectively. The remaining identifiable tangible assets are located in the
United States.
<TABLE>
<CAPTION>
March 31,
---------- October 3,
1998 1999 1999
---- ---- -----------
(unaudited)
<S> <C> <C> <C>
Accounts Receivable
- -------------------
Customer A................................................ 23% 54% 72%
Customer B................................................ 11% 11% 2%
Customer C................................................ 28% -- --
Customer D................................................ 18% -- --
</TABLE>
Inventories
Inventories consist solely of finished goods and are stated at the lower of
cost or market, cost being determined using the first-in, first-out method.
Property and equipment
Property and equipment are recorded at cost. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
assets, as follows:
<TABLE>
<S> <C>
Computer and network equipment and software........................ 2-3 years
Furniture and office equipment..................................... 5 years
Research and development equipment................................. 2-3 years
</TABLE>
Leasehold improvements are amortized on a straight-line basis over the life
of the lease, or the useful life of the assets, whichever is shorter.
Impairment of long-lived assets
The Company evaluates the recoverability of long-lived assets in accordance
with Statement of Financial Accounting Standards No. 121. "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of "
("SFAS No. 121"). SFAS No. 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.
F-9
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible assets
Intangible assets consist of goodwill, which is being amortized on a
straight line basis over five years.
The Company investigates potential impairments of its goodwill on an
exception basis when evidence exists that events or changes in circumstances
may have made recovery of the carrying value unlikely. An impairment loss is
recognized when the expected undiscounted future net cash flows is less than
the carrying amount of the asset. No such losses have been identified to date.
Recent accounting pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS
No. 133 until fiscal years beginning after June 15, 2000. The Company will
adopt SFAS No. 133 during its year ending March 31, 2002. To date, the Company
has not engaged in derivative or hedging activities. The Company is unable to
predict the impact of adopting SFAS No. 133 if it were to engage in derivative
and hedging activities in the future.
Net loss per share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin ("SAB") No. 98. Under
the provisions of SFAS No. 128 and SAB No. 98, basic and diluted net loss per
share is computed by dividing the net loss available to holders of common stock
for the period by the weighted average number of shares of common stock
outstanding during the period. The calculation of diluted net loss per share
excludes potential shares of common stock if their effect is anti-dilutive.
Potential common stock consists of shares of common stock issuable upon the
exercise of stock options and warrants and shares issuable upon conversion of
the Series A, B, C, and D convertible preferred stock.
The following tables sets forth potential shares of common stock as
converted that are not included in the diluted net loss per share calculation
above because to do so would be anti-dilutive for the period indicated (in
thousands):
<TABLE>
<CAPTION>
March 31,
--------------------
September 30, October 3,
1997 1998 1999 1998 1999
------ ------ ------ ------------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Series A convertible preferred
stock.......................... 1,799 1,799 1,799 1,799 1,799
Series B convertible preferred
stock.......................... 13,855 13,855 1,394 1,394 1,394
Series C convertible preferred
stock.......................... 8,000 8,000 5,600 5,600 5,600
Series D convertible preferred
stock.......................... -- -- 68,469 68,469 68,469
Convertible preferred stock
warrants....................... 74 139 2,817 2,817 2,903
Common stock warrants........... -- 75 75 75 --
Common stock options............ 2,777 4,796 14,516 11,664 21,704
------ ------ ------ ------ -------
26,505 28,664 94,670 91,818 101,869
====== ====== ====== ====== =======
</TABLE>
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended March 31, 1999 is computed
using the weighted average number of shares of common stock outstanding,
including the pro forma effects of: (i) the cancellation of all
F-10
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
outstanding convertible preferred and common stock and all other securities
convertible into preferred or common stock of Virata Limited, (ii) the issuance
of new common shares of Virata Limited to Virata Corporation and the issuance
of shares of common stock of Virata Corporation to the former shareholders of
Virata Limited, and (iii) a 1 for 6.7 reverse common stock split, effective
upon the closing of the Company's IPO as if such transaction occurred on April
1, 1998, or at the date of original stock issuance, if later. The resulting pro
forma adjustment includes a decrease in the weighted average shares used to
compute basic net loss per share for the fiscal year ended March 31, 1999 and
the six months ended October 3, 1999. The calculation of diluted net loss per
share excludes potential shares of common stock as their effect would be anti-
dilutive.
Unaudited Pro Forma Stockholders' Equity
The Board of Directors have authorized the filing of a registration
statement with the Securities and Exchange Commission to register shares of its
common stock in connection with a proposed IPO. If the IPO is consummated under
the terms presently anticipated (i) all outstanding convertible preferred and
common stock and all other securities convertible into preferred or common
stock of Virata Limited will be cancelled (ii) new common shares of Virata
Limited will be issued to Virata Corporation and Virata Corporation will issue
shares of common stock to the former shareholders of Virata Limited, and (iii)
a 1 for 6.7 reverse stock split will be effected on all common shares. In
October 1999, the Company issued 6,153,846 shares of series E convertible
preferred stock for net proceeds of $7.9 million (see Note 13). These events
have been reflected in the unaudited pro forma stockholders' equity.
Stock compensation
The Company accounts for stock compensation arrangements in accordance with
provision of Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees" and complies with the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
unearned stock compensation is based on the difference, if any, on the date of
the grant, between the fair value of the Company's common stock and the
exercise price. Unearned stock compensation is amortized and expensed in
accordance with FASB Interpretation No. 28. The Company accounts for stock
issued to non-employees in accordance with the provisions of SFAS No.123 and
Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments
that are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."
Comprehensive income
Comprehensive income consists of foreign currency translation gains and
losses and other unrealized gains and losses arising from the valuation of
short-term investments and is presented in the Consolidated Statement of
Stockholders' Equity (Deficit). Balance sheet accounts of foreign operations
are translated using the period-end exchange rate, and income statement
accounts are translated on a monthly basis using the average exchange rate for
the period. Unrealized gains and losses on translation adjustments are recorded
in stockholders' equity as other comprehensive income. The currency translation
adjustments are not adjusted for income taxes as they relate to indefinite
investments in non-U.S. subsidiaries. Foreign currency transaction gains and
losses are included as a component of other income and expense and as of March
31, 1997, 1998 and 1999 the Company recognized (losses) gains of $(198,000),
$(80,000) and $432,000, respectively.
F-11
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Supplemental Cash Flow Information (in thousands):
<TABLE>
<CAPTION>
Year ended March Six Months
31, Ended
------------------- ------------------------
September 30, October 3,
1997 1998 1999 1998 1999
----- ------ ------ ------------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental cash flow
information:
Cash paid for income taxes...... $ 800 $ 800 $ 800
===== ====== ======
Cash paid for interest.......... $ 55 $ 197 $ 180
===== ====== ======
Supplemental noncash investing and
financing activity:
Issuance of preferred stock for
convertible loan............... $ -- $ -- $2,712 $ -- $ --
===== ====== ====== ===== =====
Issuance of stock and options in
connection
with acquisition............... $ -- $ -- $2,921 $ -- $ --
===== ====== ====== ===== =====
Unearned compensation in
connection with
issuance of stock options...... $ -- $1,958 $1,335 $ -- $ 98
===== ====== ====== ===== =====
Issuance of warrants in
connection with financing...... $ -- $ -- $ 949 $ -- $ --
===== ====== ====== ===== =====
Property and equipment purchased
with capital leases............ $ 754 $ 361 $ -- $ 257 $ 297
===== ====== ====== ===== =====
</TABLE>
Note 3--Balance Sheet Components (in thousands):
<TABLE>
<CAPTION>
March 31
----------------
1998 1999
------- -------
<S> <C> <C>
Other current assets:
Prepaid expenses......................................... $ 293 $ 564
Deposits................................................. 346 113
Other current assets..................................... 713 555
------- -------
$ 1,352 $ 1,232
======= =======
Property and equipment, net:
Office equipment......................................... $ 2,156 $ 2,856
Furniture and fixtures................................... 206 247
Leasehold improvements................................... 136 429
Research and development equipment....................... 1,881 3,039
------- -------
4,379 6,571
Less: Accumulated depreciation and amortization.......... (3,073) (4,092)
------- -------
$ 1,306 $ 2,479
======= =======
</TABLE>
Property and equipment includes $2,200,000 and $3,485,000 of computer
equipment and internal-use software under capital leases at March 31, 1998, and
1999, respectively. Accumulated amortization of assets under capital leases
totaled $1,319,000 and $2,015,000 at March 31, 1998 and 1999, respectively.
F-12
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
March 31
-------------
1998 1999
------ ------
<S> <C> <C>
Intangible assets:
Goodwill.................................................... $ -- $3,877
Less: Accumulated amortization.............................. -- (549)
------ ------
$ -- $3,328
====== ======
Accrued liabilities:
Compensation accrual........................................ $ 821 $ 869
Royalty obligation ......................................... 532 --
Contract accrual............................................ 422 --
Other....................................................... 866 1,018
------ ------
$2,641 $1,887
====== ======
</TABLE>
In fiscal year 1998, the Company recorded an accrual for $422,000 related to
an obligation of the Company to reimburse suppliers for cancelled purchase
orders related to systems products.
Note 4--Acquisition of RSA Communications:
The Company completed its acquisition of RSA Communications on July 17,
1998. RSA Communications was privately-held and based in Raleigh, North
Carolina, specializing in analog modem software development. The Company's
acquisition of RSA Communications was accounted for as a purchase business
combination.
The Company's allocation of RSA Communications' aggregate purchase price to
the tangible and identifiable intangible assets acquired in connection with
this acquisition were based on fair values as determined by independent
appraisers. The allocation is summarized below (in thousands):
<TABLE>
<S> <C>
In-process research and development.................................. $5,260
Goodwill............................................................. 3,877
Net assets........................................................... 138
------
Total purchase price................................................. $9,275
======
</TABLE>
The total purchase price of $9,275,000 million consisted of 1,540,000 shares
of the Company's common stock valued at $1,417,000 million, 606,500 series D
convertible preferred stock valued at $667,000, options to purchase 1,993,000
shares of common stock valued at $1,505,000 million, cash of $5,332,000 million
and acquisition related expenses of approximately $354,000 consisting primarily
of legal and other professional fees. The Company valued the options using the
Black-Scholes option pricing model, applying expected life of four years, a
weighted average risk-free rate of 5.47%, an expected dividend yield of zero
percent, a volatility of 70% and a deemed fair value of common stock of $0.92
per share.
The core technologies acquired in the RSA acquisition were the ADSL PHY
software and voiceband modem protocol software. The significant in-process
research and development projects include V.90 Modem Software and two software
algorithms, the Modem Modulation Software Algorithm and the ADSL Software
Algorithm.
The valuation of the acquired in-process research and development of
$5,260,000 was based on the result of an independent appraisal which was
determined using the income-based approach for V.90 Modem Software and the
replacement cost method for software algorithms. The acquired in-process
technology was not
F-13
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
considered to have reached technological feasibility at the time it was
acquired and had no alternative future use. Accordingly, the amount was
charged to operations upon acquisition.
The V.90 Modem Software project was completed subsequent to its acquisition
in 1998 and has been licensed to a customer. At the time of the acquisition
this project was approximately 90% complete, and the fair value assigned to
this project was $2.435 million.
The Modem Modulation Software Algorithm includes certain software that
provides modulation/demodulation functions of a voiceband modem, and certain
software for a voiceband modem that provides functions such as control, error
correction and data compression. At the time of the acquisition, this project
was approximately 90% complete, and the fair value assigned to this project
was $2.4 million. This project was subsequently terminated.
The ADSL software algorithm is a complete software stack that is compliant
with the ITU ADSL standards. The fair value assigned to this project was
$425,000 at the time of the acquisition when this project was approximately
35% complete. The project is currently 85% complete and has a remaining
expected development cost of $375,000. The remaining risks affecting the
timely completion and commercialization of this project are minimal. The
remaining uncertainties that might affect the outcome of this project are
related to the size of the developing ADSL market.
The income method of valuation for the V.90 Modem Software was determined
using a modified version of the relief from royalty avoided by the Company
upon the purchase of RSA Communications. Royalty rates were estimated based on
past contracts and unit sales were estimated based on the size of the total
market from industry analysis. The avoided royalty payments by the Company
were then calculated for the life of the product. The net cash flow was
discounted back to the present value at a risk-adjusted discount rate of 40%.
The algorithms which require a special skill set for their development were
valued using the replacement cost method which considered costs incurred
through the valuation date.
The goodwill is being amortized on a straight line basis over the estimated
period of benefit of five years.
The following unaudited pro forma financial information presents the
consolidated results of the Company as if the acquisition had occurred at the
beginning of each period, and includes adjustments for amortization of
goodwill. This pro forma financial information is not intended to be
indicative of future results. Unaudited pro forma consolidated results of
operations are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended March
31,
------------------
1998 1999
-------- --------
(unaudited)
<S> <C> <C>
Revenues................................................. $ 13,251 $ 10,075
Net loss................................................. (11,931) (19,224)
Basic and diluted net loss per share..................... (0.92) (1.44)
</TABLE>
Note 5--Restructuring:
In September 1997, the Company implemented a new business strategy focusing
on semiconductors and reduced the resources allocated to its systems line of
business. A restructuring plan was implemented in the second half of the
fiscal year ended March 31, 1998, which resulted in one time charges of
$1,871,000 in the fiscal year ended March 31, 1998. Approximately, $900,000 of
the restructuring charge represents employee costs, $900,000 represent asset
write downs and $71,000 related to other restructuring costs. As of March 31,
F-14
<PAGE>
1998 the Company had reduced the operations of the systems business including
reducing headcount from the prior years level by approximately 33%. The Company
continues to sell its systems products to one principal customer and systems
revenues for the six months ended October 3, 1999 were $848,000.
The following table lists the components of the restructuring accrual for
the year ended March 31, 1999 (in thousands).
<TABLE>
<CAPTION>
Employee Asset
Costs Write down Other Total
-------- ---------- ----- ------
<S> <C> <C> <C> <C>
Reserve provided as at April 1, 1997......... $ 900 $ 900 $ 71 $1,871
Reserve utilized........................... (783) (900) (25) (1,708)
----- ----- ---- ------
Balance at March 31, 1998.................... 117 -- 46 163
Reserve utilized........................... (117) -- (46) (163)
----- ----- ---- ------
Balance at March 31, 1999.................... $ -- $ -- $-- $ --
===== ===== ==== ======
</TABLE>
Note 6--Income Taxes:
No income tax provision was recorded for the three years ended March 31,
1999 and the six months ended September 30, 1998 and October 3, 1999 because
the Company incurred net losses in such periods.
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
March 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $ 9,011 $ 12,647
Temporary differences...................................... 751 1,764
Other...................................................... -- 67
------- --------
9,762 14,478
------- --------
Valuation allowance.......................................... (9,762) (14,478)
------- --------
$ -- $ --
======= ========
</TABLE>
The deferred tax asset has been fully reserved due to the uncertainty of the
Company's ability to realize this asset in the future.
At March 31, 1999, the Company has approximately $14.2 million, $11.7
million and $23.2 million in federal, state and foreign net operating loss
carryforwards, respectively, to reduce future taxable income. The net operating
loss carryforwards expire between 2002 and 2019 for both federal and state
purposes, if not utilized.
Note 7--Borrowings:
A convertible loan in the amount of $2,712,000 was converted to 2,402,710
shares of series D convertible preferred stock valued at $1.10 per share on
June 4, 1998. The value of the stock was determined by the series D convertible
preferred stock offering price of $1.10, also on June 4, 1998. The loan was
drawn in December 1997 bearing interest at the rate of 10% per annum and was
due to related parties.
Short term borrowings represent the Company's overdraft facility which is
collaterized by the assets of the Company.
In connection with a loan and security agreement, the Company issued a
warrant to purchase 35,294 shares of series D convertible preferred stock at an
exercise price of $1.70 per share. This warrant is outstanding at
F-15
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 1999 and expires December 12, 2002. The Company valued the warrant
using the Black-Scholes option pricing model, applying an expected life of 5
years, a weighted average risk free rate of 5.77%, an expected dividend yield
of zero percent, a volatility of 70% and a deemed fair value of common stock of
$0.95. The Company determined that the fair value of the warrant was not
significant at the date of grant.
Note 8--Commitments:
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through March 2005. The
Company also subleased to third parties a certain property under a
noncancelable operating lease which expired in July 1999. Net rent expense for
the three years ended March 31, 1999 was $281,000, $372,000 and $536,000,
respectively. The terms of the facility lease provide for rental payments on a
graduated scale. The Company recognizes rent expense on a straight-line basis
over the lease period, and has accrued for rent expense incurred but not paid.
Future minimum lease payments under noncancelable operating and capital
leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending Capital Operating Sublease
March 31, Leases Leases Income
----------- ------- --------- --------
<S> <C> <C> <C>
2000............................................ $ 987 $ 708 $ 43
2001............................................ 638 718 --
2002............................................ 455 555 --
2003............................................ 111 438 --
2004............................................ -- 327 --
2005............................................ -- 55 --
------ ------ ----
Total minimum lease payments and sublease
income......................................... 2,191 $2,801 $ 43
====== ====
Less: Amount representing interest.............. (211)
------
Present value of capital lease obligations...... 1,980
Less: Current portion........................... (850)
------
Long-term portion of capital lease
obligations.................................. $1,130
======
</TABLE>
Note 9--Convertible Preferred Stock:
Convertible preferred stock at March 31, 1999 consists of the following:
<TABLE>
<CAPTION>
Shares Issued and
Outstanding
---------------------
March 31,
---------------------
Shares Liquidation
Series Authorized 1998 1999 Amount
------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
A............................... 3,100,000 1,798,720 1,798,720 $ 1,438,976
B............................... 25,000,000 13,854,556 1,394,406 1,561,735
C............................... 8,000,000 6,666,667 4,666,667 7,000,000
D............................... 50,000,000 -- 43,571,386 47,928,525
---------- ---------- ---------- -----------
86,100,000 22,319,943 51,431,179 $57,929,236
========== ========== ========== ===========
</TABLE>
On June 4, 1998, existing investors were given the opportunity to convert
their shares of series A, B and C convertible preferred stock into series D
convertible preferred stock and new investors were given the
F-16
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
opportunity to purchase series D convertible preferred stock. The Company
issued 24,780,934 shares of series D convertible preferred stock for $1.10 per
share resulting in net proceeds after issuance costs of $24,390,000. The
Company also issued 15,123,062 shares of series D convertible preferred stock
as a result of existing stockholders opting to convert their shares of series B
and C convertible preferred stock into series D convertible preferred stock. In
June 1999, the series D convertible preferred stock conversion price was
reduced to $0.70 from $1.10 based on the Company's revenues for the year ended
March 31, 1999.
In connection with investment banking services provided during the June 1998
offering, the Company issued warrants to purchase an aggregate of 1,595,054
shares of series D convertible preferred stock at an exercise price of $1.10
per share. The warrants may be exercised at any time within five years after
issuance. The Company valued the warrants using the Black-Scholes option
pricing model, applying expected life of five years, a weighted average risk-
free rate of 5.52%, an expected dividend yield of zero percent, a volatility of
70% and a deemed fair value of common stock of $0.99. The fair market value of
the warrants of $1,719,000 has been netted against the proceeds from the
offering.
The holders of convertible preferred stock have various rights and
preferences as follows:
Voting
Each share of series A, B, C and D convertible preferred stock has voting
rights equal to an equivalent number of shares of common stock into which it is
convertible and votes together as one class with the common stock.
As long as at least 1,000,000 shares of series B, C and D convertible
preferred stock remain outstanding, the Company must obtain approval from 66
2/3% of the holders of convertible preferred stock in order to alter the
articles of incorporation as related to convertible preferred stock, or change
the authorized number of shares of convertible preferred stock. The Company
must obtain approval from 66 2/3% of the owners of issued shares of the Company
to create a new class of stock or effect a merger, consolidation or sale of
assets where the existing shareholders retain less than 50% of the voting stock
of the surviving entity.
Dividends
Holders of series A, B C and D convertible preferred stock are entitled to
participate in dividends on a pro-rata basis irrespective of the class of
stock. No dividends on convertible preferred stock or common stock have been
declared by the Board of Directors from inception through October 3, 1999.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners
of the Company's common stock and convertible preferred stock own less than 51%
of the resulting voting power of the surviving entity, the holders of series A,
B, C and D convertible preferred stock are entitled to receive an amount of
$0.80, $1.12, $1.50 and $1.10 per share, respectively, plus any declared but
unpaid dividends prior to and in preference to any distribution to the holders
of common stock. The remaining assets, if any, shall be distributed pro-rata
amongst all stockholders on an as converted basis. Should the Company's legally
available assets be insufficient to satisfy the liquidation preferences, the
funds will be distributed first to the series D convertible preferred
stockholders, plus any unpaid dividends and the remainder to the other
convertible preferred stockholders.
F-17
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Conversion
Each share of series A, B, C and D convertible preferred stock is
convertible, at the option of the holder, according to a conversion ratio,
subject to adjustment for dilution. Each share of series A, B, C and D
convertible preferred stock automatically converts into the number of shares of
common stock into which such shares are convertible at the then effective
conversion ratio upon the closing of a public offering of common stock at a per
share price of at least $3.00 per share with gross proceeds of at least
$7,500,000 or the Company completes a public offering in the United Kingdom of
common stock at a per share price of at least 50 pence per share. Shares of
series B, C and D convertible preferred stock also convert automatically upon
the consent of the respective holders of the majority of convertible preferred
stock.
At October 3, 1999, the Company reserved 1,799,000, 1,394,000, 5,600,000 and
68,469,000 shares of common stock for the conversion of series A, B, C and D
convertible preferred stock, respectively.
Warrants for Convertible Preferred Stock
In connection with a lease agreement, the Company issued warrants to
purchase 69,705 shares of series C and 109,091 shares of series D convertible
preferred stock for $1.50 and $1.10 per share, respectively, in the period
September 1996 to September 1998. Such warrants are outstanding at March 31,
1999 and expire in the period September 2001 to September 2008. The Company
valued the warrants using the Black-Scholes option pricing model, applying
expected life of five years, a weighted average risk-free rate of 6.6% and
4.81%, an expected dividend yield of zero percent, a volatility of 70% and a
deemed fair value of common stock of $0.74 and $0.85, respectively. The Company
determined that the fair value of the warrants was not significant at the date
of grant.
Note 10--Stock Option Plans:
In April 1998, the Company adopted the 1998 Stock Option Plan (the "Plan").
The Plan provides for the granting of stock options to employees and
consultants of the Company. Options granted under the Plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
("ISO") may be granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may be
granted to Company employees and consultants.
Options under the Plan may be granted for periods of up to seven years and
at prices no less than 85% of the estimated fair value of the shares on the
date of grant as determined by the Board of Directors, provided, however, that
(i) the exercise price of an ISO and NSO shall not be less than 100% and 85% of
the estimated fair value of the shares on the date of grant, respectively, and
(ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall
not be less than 110% of the estimated fair value of the shares on the date of
grant, respectively. To date, options granted generally vest over four years.
Options expire at the earlier of 90 days after the employee ceases employment
or seven years after the effective date of the grant of the options.
During the period from April 1, 1996 through March 31, 1999, the Company
recorded $3,293,000 of deferred stock compensation for the excess of the deemed
fair market value over the exercise price at the date of grant related to
options granted in 1998 and 1999. The compensation expense is being recognized
over the option vesting period of four years. The Company amortized $399,000,
$1,394,000 and $505,000 (unaudited) for the years ended March 31, 1998 and
1999, and the six months ended October 3, 1999, respectively.
F-18
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes activity under the Company's Plan from March
31, 1996 through October 3, 1999:
<TABLE>
<CAPTION>
Outstanding Options
---------------------
Weighted-
Shares Average
Available Number of Exercise
for Grant Shares Price
----------- ---------- ---------
<S> <C> <C> <C>
Balance, March 31, 1996...................... 2,898,208 2,101,792 $0.07
Shares reserved for grant.................. -- -- --
Options granted............................ (2,136,000) 2,136,000 0.20
Options exercised.......................... -- (337,254) 0.07
Options canceled........................... 1,123,731 (1,123,731) 0.22
----------- ----------
Balance, March 31, 1997...................... 1,885,939 2,776,807 0.11
Shares reserved for grant.................. 2,012,143 -- --
Options granted............................ (6,082,500) 6,082,500 0.24
Options exercised.......................... -- (815,161) 0.06
Options canceled........................... 3,248,208 (3,248,208) 0.24
----------- ----------
Balance, March 31, 1998...................... 1,063,790 4,795,938 0.20
Shares reserved for grant.................. 10,038,221 -- --
Options granted............................ (10,380,194) 10,380,194 0.61
Options exercised.......................... -- (48,229) 0.10
Options canceled........................... 612,208 (612,208) 0.70
----------- ----------
Balance, March 31, 1999...................... 1,334,025 14,515,695 0.47
Shares reserved for grant (unaudited)...... 9,938,969 -- --
Options granted (unaudited)................ (7,759,500) 7,759,500 1.27
Options exercised (unaudited).............. -- (131,955) 0.23
Options canceled (unaudited)............... 439,190 (439,190) 0.44
----------- ----------
Balance, October 3, 1999 (unaudited)......... 3,952,684 21,704,050 0.76
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding at March 31, Options Exercisable
1999 at March 31, 1999
------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Outstanding Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.02 - $0.08 730,000 2.5 $0.05 721,111 $0.05
$0.16 869,792 3.9 0.16 633,822 0.16
$0.24 - $0.25 5,065,694 5.4 0.24 3,141,139 0.24
$0.70 7,850,209 6.3 0.70 -- 0.70
---------- ---------
14,515,695 4,496,072
========== =========
</TABLE>
The total number of options exercisable at March 31, 1997 and 1998 was
612,589 and 1,361,552, respectively.
F-19
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value disclosures
If compensation cost for the Company's stock-based compensation plan had
been determined based on the fair value at the grant dates for the awards under
a method prescribed by SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below (in thousands, except per
share data):
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported..................................... $(8,540) $(10,278) $(17,157)
Pro forma....................................... (8,777) (10,974) (19,707)
Basic and diluted net loss per share:
As reported..................................... $ (0.80) $ (0.90) $ (1.33)
Pro forma....................................... (0.82) (0.96) (1.53)
</TABLE>
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes pricing method with the following assumptions:
expected dividend yield of zero percent; weighted average expected option term
of four years; risk free interest rates of 6.1% to 6.7%, 5.6% to 6.6% and 4.5%
to 5.8% and a volatility of 70% for the three years ended March 31, 1999. The
weighted average fair value of options granted during 1997, 1998 and 1999 was
$0.72, $0.93 and $0.88, respectively.
Warrants for Common Stock
In connection with a consulting agreement, the Company issued a warrant to
purchase 75,000 shares of common stock for $0.08 per share in July 1997. This
warrant is outstanding at March 31, 1999 and expires in July 2007. The Company
valued the warrant using the Black-Scholes option pricing model, applying
expected life of five years, a weighted average risk-free rate of 6.62%, an
expected dividend yield of zero percent, a volatility of 70% and a deemed fair
value of common stock of $0.89. Using the Black-Scholes pricing model, the
Company determined that the fair value of the warrant was not significant at
the date of grant. The warrant was exercised and converted into 75,000 shares
of the Company's common stock in September 1999.
Note 11--Employee Benefit Plans
The Company has two benefit plans, one in the United Kingdom, and a separate
plan in the United States. The United Kingdom plan includes private health
care, permanent health insurance, death in service coverage and a pension
arrangement. In addition, under the United Kingdom Plan, the Company matches
pension contributions of up to 5% of an employee's salary. Contributions for
the years ended March 31, 1997, 1998 and 1999 were $105,500, $109,400, and
$112,600, respectively.
The United States plan includes a medical plan, life insurance, accidental
death and dismemberment insurance, long-term disability, IRC Section 125
premium payment plan, COBRA and a 401 (k) retirement plan. Under the United
States plan, effective with the acquisition of RSA in July 1998, the Company
also provides 50% matching contribution to the retirement plan of up to $2,000
per calendar year per employee. Contributions for the year ended March 31, 1999
amounted to $58,000.
Note 12--Related Party Transactions:
In fiscal year 1999, related parties converted $1,454,000 of a 10%
convertible loan into 1,279,205 shares of series D convertible preferred stock.
F-20
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company had sales of $921,000, $82,000 and $549,000 for the three years
ended March 31, 1999, respectively, to related parties. At March 31, 1997, 1998
and 1999, there were accounts receivable from related parties in the amounts of
$148,000, $5,000 and $154,000, respectively, included in the balance sheets.
Note 13--Subsequent Events:
Initial Public Offering
In June 1999, the Board of Directors of Virata Limited authorized management
to file a registration statement with the Securities and Exchange Commission to
permit the Company to sell shares of its common stock to the public. In
association with the offering, the Board of Directors authorized soliciting the
shareholders for their approval of: (i) the cancellation of all outstanding
convertible preferred and common stock and all other securities convertible
into preferred or common stock of Virata Limited, (ii) the issuance of new
common shares of Virata Limited to Virata Corporation and the issuance of
shares of common stock of Virata Corporation to the former shareholders of
Virata Limited, and (iii) a reverse stock split. These events are to occur
immediately after the registration statement becomes effective.
The pro forma earnings per share after the effect of the 1 for 6.7 reverse
stock split is as follows (in thousands, except for per share data):
<TABLE>
<CAPTION>
Six Months Six Months
Year Ended March 31, Ended Ended
--------------------------- September 30, October 3,
1997 1998 1999 1998 1999
------- -------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Net loss................. $(8,540) $(10,278) $(17,157) $(11,695) $(7,572)
Pro forma weighted
average common shares--
basic and diluted
(unaudited)............. 1,593 1,714 1,923 1,909 1,994
Pro forma basic and
diluted net loss per
share (unaudited)....... $ (5.36) $ (6.00) $ (8.92) $ (6.13) $ (3.80)
</TABLE>
Borrowing Agreement
On August 29, 1999, the Company entered into a loan and security agreement
with Venture Banking Group, an entity of Greater Bay Bancorp that provides for
borrowings up to $3.0 million. The agreement bears interest at prime rate plus
one-half percent, and all outstanding advances are due in August 2000.
Borrowings are secured by the Company's property, equipment, intellectual
property, inventory, and receivables and require the Company to comply with
certain financial covenants including the maintenance of specific minimum
ratios. As of October 3, 1999, the Company was in compliance with or had
obtained waivers for such financial covenants, and the Company had $483,000
outstanding debt under this agreement, bearing interest of 8.75%.
Series E Convertible Preferred Stock
On October 12, 1999 the Company issued 6,153,846 shares of series E
convertible preferred stock at a purchase price of $1.30 per share in exchange
for $8.0 million.
Warrants for Convertible Preferred Stock
In May 1999, in connection with a lease agreement, the Company issued a
warrant to purchase 54,545 shares of series D convertible preferred stock for
$1.10 per share. The warrant expires in May 2009. The Company valued the
warrant using the Black-Scholes option pricing model, applying an expected life
of ten years, a weighted average risk free rate of 5.26%, an expected dividend
yield of zero percent, a volatility of 70% and a deemed fair value of common
stock of $1.03 per share.
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Virata Raleigh Corporation
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholder's equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of RSA
Communications, Inc. at March 31, 1997 and 1998, and the results of its
operations and its cash flows for the year ended March 31, 1997, the period
from April 1, 1997 through June 5, 1997 and the period from June 6, 1997
through March 31, 1998, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards 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.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
August 19, 1999
F-22
<PAGE>
RSA COMMUNICATIONS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
March 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 6,384 $ 822,482
Accounts receivable, net of allowance for doubtful
accounts of $0 and $10,000 at March 31, 1997 and
1998, respectively................................ 262,139 1,063,100
Prepaid and other assets........................... 79,384 19,041
----------- -----------
Total current assets............................. 347,907 1,904,623
Receivable from parent ............................ 639,362 --
Deferred income taxes.............................. -- 481,795
Property and equipment, net........................ 1,065,550 110,303
----------- -----------
Total assets..................................... $ 2,052,819 $ 2,496,721
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................... $ 198,649 $ 236,413
Accrued liabilities................................ 475,464 764,731
Deferred revenue................................... 11,512 12,000
Stock appreciation rights ......................... -- 1,870,866
----------- -----------
Total current liabilities........................ 685,625 2,884,010
Negative goodwill.................................. -- 252,305
Commitments (Note 5)............................... -- --
Stockholder's equity (deficit):
Common stock, 10,000 shares authorized, 10,000
shares and 6,000 shares issued and outstanding at
March 31, 1997 and 1998, respectively............. 2,000,000 6
Accumulated deficit................................ (632,806) (639,600)
----------- -----------
Total stockholder's equity (deficit)............. 1,367,194 (639,594)
----------- -----------
Total liabilities and stockholder's equity
(deficit)....................................... $ 2,052,819 $ 2,496,721
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
RSA COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Period from Period from
April 1, 1997 June 6, 1997
Year ended through through
March 31, 1997 June 5, 1997 March 31, 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Software products................ $ 1,087,703 $ 1,197 $1,938,877
Consulting services.............. 544,760 3,024 2,376,936
----------- --------- ----------
Total revenues................. 1,632,463 4,221 4,315,813
----------- --------- ----------
Operating expenses:
Research and development and cost
of consulting services.......... 1,301,607 308,557 2,157,842
Selling, general and
administrative.................. 1,036,908 203,907 893,560
Compensation from stock
appreciation rights............. -- -- 1,870,866
----------- --------- ----------
Total operating expenses....... 2,338,515 512,464 4,922,268
----------- --------- ----------
Loss from operations........... (706,052) (508,243) (606,455)
Other income (expense), net........ (6,250) -- 57,217
----------- --------- ----------
Loss before income taxes....... (712,302) (508,243) (549,238)
Income tax provision............... 126,500 -- 90,362
----------- --------- ----------
Net loss....................... $ (838,802) $(508,243) $ (639,600)
=========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
RSA COMMUNICATIONS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
For the year ended March 31, 1997, the period from April 1, 1997 through
June 5, 1997 and the period from June 6, 1997 through March 31, 1998
<TABLE>
<CAPTION>
Common Stock
-----------------
Accumulated
Shares Amount Deficit Total
------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, March 31, 1996............. 10,000 $2,000,000 $ 205,996 $2,205,996
Net loss for the year ended March
31, 1997......................... -- -- (838,802) (838,802)
------ ---------- ----------- ----------
Balance, March 31, 1997............. 10,000 2,000,000 (632,806) 1,367,194
Net loss for the period from April
1, 1997 through June 5, 1997....... -- -- (508,243) (508,243)
------ ---------- ----------- ----------
Balance, June 5, 1997............... 10,000 $2,000,000 $(1,141,049) $ 858,951
------ ---------- ----------- ----------
- -------------------------------------------------------------------------------
Issuance of common stock on June 6,
1997 in conjunction with
acquisition (see Note 2)........... 6,000 $ 6 $ -- $ 6
Net loss for the period from June
6, 1997 through March 31, 1998... -- -- (639,600) (639,600)
------ ---------- ----------- ----------
Balance, March 31, 1998............. 6,000 $ 6 $ (639,600) $ (639,594)
====== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
RSA COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Period from
April 1, 1997 June 6, 1997
Year Ended through through
March 31, 1997 June 5, 1997 March 31, 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operations:
Net loss.......................... $ (838,802) $(508,243) $ (639,600)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation..................... 285,215 65,243 23,241
Amortization of negative
goodwill........................ -- -- (50,458)
Provision for doubtful accounts.. -- -- 10,000
Compensation related to stock
appreciation rights............. -- -- 1,870,866
Change in assets and liabilities:
Accounts receivable............. 2,693,111 221,239 (1,032,200)
Prepaids and other current
assets......................... 47,747 64,061 (3,719)
Receivable from parent.......... (1,757,186) 867,495 --
Deferred income taxes........... -- -- (481,795)
Accounts payable................ 180,727 (188,144) 225,906
Accrued liabilities............. 234,019 16,250 693,792
Deferred revenue................ 7,502 (11,512) 12,000
----------- --------- -----------
Net cash provided by operating
activities.................... 852,333 526,389 628,033
Cash flows from investing
activities:
Acquisition of property and
equipment........................ (626,728) (204,786) (133,544)
Repayment of notes payable........ (500,000) -- --
----------- --------- -----------
Net cash used by investing
activities.................... (1,126,728) (204,786) (133,544)
Cash flows from financing
activities:
Issuance of common stock.......... -- -- 6
----------- --------- -----------
Net increase (decrease) in cash and
cash equivalents.................. (274,395) 321,603 494,495
Cash and cash equivalents,
beginning of period............... 280,779 6,384 327,987
----------- --------- -----------
Cash and cash equivalents, end of
period............................ $ 6,384 $ 327,987 $ 822,482
=========== ========= ===========
Supplemental cash flow information:
Cash paid for income taxes........ $ 126,500 $ -- $ 572,157
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
RSA COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
RSA Communications, Inc. ("RSA") develops software applications and provides
custom engineering services to the communications industry by providing
systems-level design expertise for applications requiring embedded modem
technology. The Company utilizes proprietary firmware code modules for a wide
range of traditional, controllerless, and soft modem implementations from
single modem designs to complex, multiple-modem network applications.
Basis of Presentation
Prior to June 6, 1997, RSA was a wholly-owned subsidiary of Pacific
Communications Sciences, Inc. ("PCSI"), which was a wholly-owned subsidiary of
Cirrus Logic, Inc. Effective June 6, 1997, RSA was acquired from PCSI by
Raleigh Communications, Inc., which was created for the sole purpose of
acquiring RSA. Immediately following the acquisition, Raleigh Communications,
Inc. was merged into RSA.
The financial statements of RSA for the fiscal year ended March 31, 1997 and
the period from April 1, 1997 to June 5, 1997, represent the results of
operations and financial position of RSA based on the carrying values of its
assets and liabilities prior to the acquisition by Raleigh Communications . The
financial statements of RSA for the period subsequent to the acquisition by
Raleigh Communications, Inc. (June 6, 1997 to March 31, 1998) reflect the
impact on RSA's financial position and results of operations of the purchase
accounting adjustments discussed in Note 2.
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.
Cash and Cash Equivalents
RSA considers all highly liquid investments with a maturity of three months
or less at the time of purchase to be cash equivalents.
Significant Customers and Concentration of Credit Risk
RSA operates in a very competitive industry that has been characterized by
rapid technological change, short product life cycles, cyclical market patterns
and heightened foreign and domestic competition. Significant technological
changes in the industry could affect operating results adversely.
RSA markets and sells its software and consulting services to a narrow base
of customers. Sales to one customer comprised 69% of total revenues for the
fiscal year ended March 31, 1997. Sales to two customers comprised 54% and 18%
of total revenues for the period from June 6, 1997 to March 31, 1998. RSA
performs ongoing credit evaluations of its customers' financial condition and
generally does not require collateral. RSA maintains allowances for potential
losses, and such losses have been within management's expectations. At March
31, 1997 one customer accounted for 27% of total accounts receivable and a
second customer accounted for 22% of total accounts receivable. At March 31,
1998, one customer accounted for 65% of total accounts receivable and a second
customer accounted for 31% of total accounts receivable.
F-27
<PAGE>
RSA COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
RSA's cash and cash equivalents as of March 31, 1997 and 1998 are primarily
on deposit with one U.S. financial institution and may, at times, exceed
federal insured amounts.
Fair Value of Financial Instruments
Carrying amounts of certain of RSA's financial instruments including cash
and cash equivalents, accounts receivable, accounts payable, accrued expenses
and other liabilities approximate fair value due to their short maturities.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over the estimated useful lives of the related assets, generally two to
five years. Gains and losses upon asset disposal are taken into income in the
year of disposition.
Revenue Recognition
Software license revenue is recognized upon delivery of the product if
collection is considered probable and remaining vendor obligations are
insignificant and do not exceed one year. An accrual for the estimated costs of
warranty and post-sale customer support is recorded upon delivery of the
related products. RSA does not offer extended support and maintenance services.
RSA has adopted the requirements of Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," for all contracts entered into after March 31,
1998. The adoption of SOP 97-2 is not expected to materially impact the
financial position or results of operations of RSA.
RSA recognizes revenue from its consulting services using the completed
contract method of accounting. Provisions for anticipated losses are made in
the period in which they first become determinable.
Software Development Costs
Software development costs are included in consulting and research and
development costs and are expensed as incurred. After technological feasibility
is established, software development costs are capitalized until the related
software products are available for general release. The capitalized cost is
then amortized on a straight-line basis over the estimated product life. RSA
has defined technological feasibility as the establishment of a working model
that typically occurs when beta testing commences. To date, RSA has not
capitalized any software development costs as the date at which technological
feasibility is achieved and the availability of the software products for
general release have substantially coincided.
Income Taxes
RSA accounts for income taxes using the liability method whereby deferred
tax assets and liabilities are determined based on the differences between
financial reporting and tax bases of assets and liabilities, measured at tax
rates that will be in effect when the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
Negative Goodwill
Negative goodwill of $302,763 was recorded upon the acquisition of RSA by
Raleigh Communications, Inc. on June 6, 1997 (see Note 2). Negative goodwill is
amortized using the straight-line method over a period of five years.
Accumulated amortization of negative goodwill as of March 31, 1998 was $50,458.
F-28
<PAGE>
RSA COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Acquisition
Effective June 6, 1997, all the outstanding common stock of RSA was acquired
from PCSI by Raleigh Communications, Inc. Raleigh Communications, Inc., which
was a holding company established for the purpose of acquiring RSA, was merged
into RSA simultaneously with the acquisition. The acquisition was accounted for
using the purchase method of accounting with the result that the beginning
values of tangible and intangible assets and liabilities of RSA were recorded
based on their respective estimated fair values at the date of purchase.
However, as the entire purchase price of RSA was contingent upon certain future
events, the value of all intangible and long term assets were reduced to zero
and negative goodwill was recognized in the amount necessary to reduce net
assets to zero. The purchase price for RSA was as follows:
(a) 50% of the gross proceeds from (i) the subsequent sale of all or
substantially all of the stock or assets of RSA to a third party or
(ii) a subsequent merger or other transfer of RSA with or into a third
party, not to exceed $2,000,000.
(b) 3% of the annual gross revenues of RSA in excess of $3,000,000. This
section (b) does not apply after the payments called for in (a) are
made to PCSI, or the promissory note (described below) is paid in full.
In conjunction with this transaction, RSA entered into a promissory note
with PCSI with the principal sum being the amount determined in (a) above. The
principal amount will not exceed $2,000,000, bears no interest and is payable
in full at the time of closing of a sale or merger. The promissory note can
also be settled at any time prior to a sale or merger by payment of $2,000,000.
For financial reporting purposes this promissory note was not recorded at the
date of the acquisition due to the contingent nature of the sales price.
A summary of the purchase accounting entry made on June 6, 1997 to record
assets and liabilities of RSA based on the purchase price paid by Raleigh
Communications, Inc. was as follows:
<TABLE>
<S> <C>
Cash and cash equivalents......................................... $ 327,987
Accounts receivable............................................... 40,900
Prepaids and other current assets................................. 15,322
Accounts payable.................................................. (10,507)
Accrued liabilities............................................... (70,939)
Negative goodwill................................................. (302,763)
---------
$ --
=========
</TABLE>
3. Accounts Receivable
Accounts receivable consisted of the following at March 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Trade accounts receivable................................ $ 221,339 $ 1,073,100
Unbilled receivables..................................... 40,800 --
--------- -----------
262,139 1,073,100
Less: Allowance for doubtful accounts.................... -- (10,000)
--------- -----------
$ 262,139 $ 1,063,100
========= ===========
</TABLE>
F-29
<PAGE>
RSA COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment
Property and equipment consisted of the following at March 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
----------- ---------
<S> <C> <C>
Office furniture and equipment.......................... $ 1,267,008 $ 4,228
Computer software and equipment......................... 4,464,804 129,316
----------- ---------
5,731,812 133,544
Less: Accumulated depreciation.......................... (4,666,262) (23,241)
----------- ---------
$ 1,065,550 $ 110,303
=========== =========
</TABLE>
5. Commitments
RSA leases its office facilities and certain equipment under noncancelable
operating leases expiring through June 2000. Future minimum lease payments
under the noncancelable operating leases at March 31, 1998 were as follows:
<TABLE>
<S> <C>
1999............................... $ 121,500
2000............................... 124,730
2001............................... 21,044
---------
$ 267,274
=========
</TABLE>
Rent expense for the fiscal year ended March 31, 1997 and for the period
from April 1, 1997 through June 5, 1997 was $566,599 and $118,286,
respectively.
Rent expense for the period from June 6, 1997 through March 31, 1998 was
$89,261.
6. Stockholder's Equity
Stock Appreciation Rights
The stock appreciation rights relate to RSA's phantom stock option plan
which was established in November 1997, to provide benefits to its employees
and consultants. At the commencement of the plan RSA authorized the issuance of
up to 6,000 phantom stock units ("PSU") under the plan. Each PSU consists of a
right to receive from RSA, upon the occurrence of a payment event, the same net
consideration as is received (1) for one share of common stock of RSA in a
merger with or into another corporation, (2) for one share of stock in a sale
of substantially all of the stock or assets of RSA, or (3) per share proceeds
from the liquidation of RSA. No payments will be made under the PSUs until a
payment event (described above) occurs. However, in the event of an initial
public offering, each PSU will immediately convert into one share of common
stock. In the event of termination of employment, either voluntarily or
involuntarily, prior to a payment event, the participant forfeits all rights
under the PSUs.
During the period that the PSU is outstanding, the ultimate amount of
compensation inherent in the award is not determinable. APB No. 25, "Accounting
for Stock Issued to Employees" and FASB Interpretation No. 28 require interim
calculations of the amount of compensation inherent in the award (variable
accounting) if it is probable that the payment event will occur. This amount is
equal to the increase in the fair value of the stock since the date of the
award, multiplied by the total number of shares or units outstanding,
regardless of the exercisable status of the awards. At March 31, 1998, 3,875
PSUs, had been issued and were outstanding.
F-30
<PAGE>
RSA COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Estimated compensation expense recorded related to these PSUs was $1,870,866
for the period from June 6, 1997 through March 31, 1998 based on the estimated
purchase price of RSA by Virata Limited (see Note 9).
7. Income Taxes
RSA's provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Period from Period from
April 1, 1997 June 6, 1997
Year ended through through
March 31, June 5, March 31,
1997 1997 1998
---------- ------------- ------------
<S> <C> <C> <C>
Current:
Federal................................. $ -- $-- $ 481,795
State................................... -- -- 90,362
Foreign Taxes........................... 126,500 -- --
-------- ---- ---------
126,500 -- 572,157
-------- ---- ---------
Deferred:
Federal................................. -- -- (481,795)
-------- ---- ---------
Income tax provision.................... $126,500 $-- $ 90,362
======== ==== =========
</TABLE>
RSA's effective tax differs from the statutory federal income tax as shown
in the following table:
<TABLE>
<CAPTION>
Period from
Year Period from June 6, 1997
ended April 1, 1997 through
March 31, through March 31,
1997 June 5, 1997 1998
--------- ------------- ------------
<S> <C> <C> <C>
Statutory federal income tax benefit.... $(242,183) $(176,803) $(186,739)
State taxes, net of federal benefit..... (21,512) (12,846) (28,335)
Goodwill................................ 2,038 1,081 (17,157)
Nondeductible expenses.................. 316,528 175,722 26,733
Change in valuation allowance........... 71,629 12,846 423,205
Research and development credit
utilized............................... -- -- (53,345)
Foreign tax credit utilized............. -- -- (74,000)
--------- --------- ---------
Income tax provision.................... $ 126,500 $ -- $ 90,362
========= ========= =========
</TABLE>
Temporary differences which give rise to significant portions of the
deferred tax assets were as follows at March 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
Deferred tax assets: ------- --------
<S> <C> <C>
Accrued compensation....................................... $ -- $901,500
Net operating loss carryforwards........................... 14,215 --
Accrued expenses........................................... 57,414 3,500
------- --------
Total deferred tax assets.................................. 71,629 905,000
Valuation allowance........................................ (71,629) (423,205)
======= ========
Net deferred tax assets.................................... $ -- $481,795
======= ========
</TABLE>
F-31
<PAGE>
RSA COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The deferred asset of $481,795 at March 31, 1998 was realized subsequent to
March 31, 1998 in the form of a net operating loss carryback from the
subsequent period. RSA has provided a valuation allowance against the remaining
deferred tax asset due to the uncertainty regarding realizability.
8. Related Party Transactions
During the year ended March 31, 1997 and the period from April 1, 1997
through June 5, 1997, while owned by PCSI, RSA performed work for PCSI. The
expenses incurred for such work have been charged back to PCSI through
intercompany accounts. The amounts charged back are shown as a reduction of
expense in the accompanying statements of operations. For the year ended March
31, 1997 and the period from April 1, 1997 through June 5, 1997, engineering
and research and development have been reduced by $2,739,121 and $321,503,
respectively, for amounts charged back to PCSI. Selling, general and
administrative expenses include $841,974 and $124,734 of charge backs for the
year ended March 31, 1997 and the period from April 1, 1997 through June 5,
1997, respectively.
9. Subsequent Event
In March 1998, RSA entered into an agreement to be acquired by Virata
Limited. The acquisition was consummated on July 17, 1998, on which date RSA
paid PCSI $2,039,191. This amount represented the $2,000,000 due under the
promissory note (see Note 2) and 3% of annual gross revenues in excess of
$3,000,000 for the period from June 6, 1997 through March 31, 1998 (see Note
2).
On August 18, 1999 RSA changed its name from RSA Communications, Inc. to
Virata Raleigh Corporation.
F-32
<PAGE>
VIRATA CORPORATION
PRO FORMA COMBINED FINANCIAL INFORMATION
(Unaudited)
On July 17, 1998, the Company completed its acquisition of RSA in a
transaction accounted for as a purchase business combination. Under the
purchase method of accounting, the aggregate purchase price is required to be
allocated to the tangible and identifiable intangible assets acquired and
liabilities assumed on the basis of their fair values on the acquisition date.
The unaudited pro forma combined statement of operations is based on the
individual statement of operations of the Company for the fiscal year ended
March 31, 1999 and RSA for the period from April 1, 1998 to July 16, 1998.
RSA's operating results for the period from July 17, 1998 to March 31, 1999
are included in the Company's historical consolidated statement of operations
for the fiscal year ended March 31, 1999. Adjustments have been made to such
information to give effect to the acquisition of RSA, as if the acquisition had
occurred on April 1, 1998.
The information has been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission and is provided for
comparative purposes only. The pro forma information does not purport to be
indicative of the results that actually would have occurred had the combination
been effected at the beginning of the periods presented.
F-33
<PAGE>
VIRATA CORPORATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
Year Ended March 31, 1999
-------------------------------------------
Virata RSA Adjustments Pro Forma
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues......................... $ 9,256 $ 819 $ -- $ 10,075
Cost of revenues................. 3,997 486 -- 4,483
-------- -------- ------ ---------
Gross profit..................... 5,259 333 -- 5,592
Operating expenses:
Research and development....... 8,323 1,353 -- 9,676
Sales and marketing............ 2,917 371 -- 3,288
General and administrative..... 5,567 459 -- 6,026
Amortization of intangible
assets........................ 549 -- 226 (A) 775
Amortization of stock
compensation.................. 1,394 -- -- 1,394
Acquired in-process research
and development............... 5,260 -- -- 5,260
-------- -------- ------ ---------
Total operating expenses..... 24,010 2,183 226 26,419
-------- -------- ------ ---------
Loss from operations............. (18,751) (1,850) (226) (20,827)
Interest expense................. (155) -- -- (155)
Interest and other income........ 1,749 9 -- 1,758
-------- -------- ------ ---------
Net loss......................... $(17,157) $ (1,841) $ (226) $ (19,224)
======== ======== ====== =========
Basic and diluted net loss per
share........................... $ (1.33) $ (1.44)
======== =========
Weighted average common shares--
basic and diluted............... 12,881 13,321
======== =========
Unaudited pro forma basic and
diluted net loss per share
(Note 3)........................ $ (1.42) $ (1.58)
======== =========
Pro forma weighted average
shares--basic and diluted....... 12,075 12,181
======== =========
</TABLE>
F-34
<PAGE>
VIRATA CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(Unaudited)
Note 1--Basis of Presentation:
In July 1998, the Company acquired RSA, a privately held company
specializing in analog modem software development.
The unaudited combined pro forma information presented is not necessarily
indicative of the future consolidated results of operations of the Company or
the consolidated results of operations that would have resulted had the
acquisition taken place on April 1, 1998. The unaudited pro forma combined
statement of operations for the fiscal year ended March 31, 1999 reflects the
effects of the acquisition, assuming the related events occurred as of April
1, 1998 for the purposes of the unaudited pro forma statement of operations.
Note 2--Purchase Price Allocation:
The unaudited pro forma combined financial statements reflect a total
purchase price of $9,275,000 consisting of 1,540,000 shares of the Company's
common stock valued at $1,417,000, 606,500 shares of Series D preferred
convertible stock valued at $667,000, 1,993,000 stock options valued at
$1,505,000, cash of $5,332,000 and acquisition related expenses of
approximately $354,000 consisting primarily of legal and other professional
fees. The company valued the options using the Black-Scholes option pricing
model, applying expected life of four years, a weighted average risk free rate
of 5.47%, an expected dividend yield of zero percent, a volatility of 70% and
a deemed fair value of common stock of $0.92.
The valuation of the purchased in-process research and development of
$5,260,000 was based on the result of an independent appraisal which was
determined using the income-based approach for modem chips and replacement
cost method for software algorithm. The purchased in-process technology was
not considered to have reached technological feasibility and had no
alternative future use. Accordingly, the amount was charged to operations at
the date of acquisition.
The goodwill is being amortized on a straight-line basis over the estimated
period of benefit of five years.
The Company's allocation of RSA's aggregate purchase price to the tangible
and identifiable intangible assets acquired in connection with this
acquisition were based on fair values as determined by independent appraisers.
The allocation is summarized below (in thousands):
<TABLE>
<S> <C>
In-process research and development.................................. $5,260
Goodwill............................................................. 3,877
Net assets........................................................... 138
------
Total purchase price............................................... $9,275
======
</TABLE>
Note 3--Unaudited Pro Forma Combined Net Loss Per Share:
The net loss per share and shares used in computing the net loss per share
for the fiscal year ended March 31, 1999 is based upon the historical weighted
average common shares outstanding. The Virata common stock issuable upon the
exercise of the stock options and warrants have been excluded as the effect
would be anti-dilutive. In addition to the shares used in computing the net
loss per share above, pro forma net loss per share is calculated to effect:
(i) the cancellation of all outstanding convertible preferred and common stock
and all other securities convertible into preferred or common stock of Virata
Limited, (ii) the issuance of new common shares of Virata Limited to Virata
Corporation and the issuance of shares of common stock of Virata Corporation
to the former shareholders of Virata Limited, and (iii) a one for 6.7 reverse
common stock split. These events are to occur immediately prior to the initial
public offering.
F-35
<PAGE>
VIRATA CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION--(Continued)
(Unaudited)
The 1,540,000 shares of common stock and the 606,500 shares of Series D
convertible preferred stock issued in connection with the purchase price of RSA
have been included in the calculation of pro forma basic and diluted net loss
per share for the fiscal year ended March 31, 1999 as follows in thousands:
<TABLE>
<S> <C>
Shares used in computing basic and diluted net loss per share...... 12,881
Adjustment to reflect the assumed conversion of common stock issued
in connection with the purchase of RSA............................ 440
-------
Shares used in computing basic and diluted net loss per share...... 13,321
-------
Adjustment to reflect the 1 for 6.7 reverse common stock split..... (11,332)
Adjustment to reflect events to occur upon the initial public
offering.......................................................... 10,152
Adjustment to reflect the issuance of the series D convertible
preferred stock in connection with the acquisition and the events
to occur upon the initial public offering......................... 40
-------
Shares used in computing pro forma basic and diluted net loss per
share............................................................. 12,181
=======
</TABLE>
Note 4--Purchase Adjustments:
The following adjustment was applied to the Company's historical financial
statements and those of RSA to arrive at the pro forma consolidated Statement
of Operations.
(A) To record annual amortization of goodwill that is being amortized over
the estimated period of benefit of five years.
F-36
<PAGE>
[LOGO OF VIRATA]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following costs and expenses, other than underwriting discounts and
commissions, payable by the Registrant in connection with this offering. All
amounts are estimates except the SEC registration fee, the NASD filing fee and
the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 16,000
NASD fee...................................................... 6,825
Nasdaq National Market listing fee............................ 95,000
Printing and engraving costs.................................. 250,000
Legal fees and expenses....................................... 500,000
Accounting fees and expenses.................................. 350,000
Blue Sky fees and expenses.................................... 3,000
Transfer agent and registrar fees and expenses................ 3,500
Miscellaneous................................................. 26,695
----------
Total....................................................... $1,250,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities
incurred in legal proceedings involving such persons because of their being or
having been an officer or director. Article VIII of the Registrant's
Certificate of Incorporation and the Registrant's By-laws provide that all
persons who the Registrant is empowered to indemnify pursuant to the
provisions of Section 145 of the Delaware General Corporation Law (or any
similar provision or provisions of applicable law at the time in effect),
shall be indemnified by the Registrant to the full extent permitted thereby
except that no person shall be indemnified for any expenses or amounts paid
with respect to any action to recover short swing profits under Section 16(b)
of the Securities Exchange Act of 1934, as amended. The foregoing right of
indemnification shall not be deemed to be exclusive of any other rights to
which those seeking indemnification may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors, or otherwise. In
addition, the Registrant has entered into Indemnity Agreements with its
directors and certain of its officers.
Section 102(b) of the Delaware General Corporation Law permits a
corporation, by so providing in its certificate of incorporation, to eliminate
or limit director's liability to the corporation and its stockholders for
monetary damages arising out of certain alleged breaches of their fiduciary
duty. Section 102(b)(7) provides that no such limitation of liability may
affect a director's liability with respect to any of the following: (i)
breaches of the director's duty of loyalty to the corporation or its
stockholders; (ii) acts or omissions not made in good faith or which involve
intentional misconduct of knowing violations of law; (iii) liability for
dividends paid or stock repurchased or redeemed in violation of the Delaware
General Corporation law; or (iv) any transaction from which the director
derived an improper personal benefit. Section 102(b)(7) does not authorize any
limitation on the ability of the corporation or its stockholders to obtain
injunction relief, specific performance or other equitable relief against
directors.
Reference is made to the Underwriting Agreement, the proposed form of which
is filed as Exhibit 1.1, pursuant to which the underwriters agree to indemnify
the directors and certain officers of the Registrant and certain other persons
in certain circumstances.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
During the past three fiscal years and the six months ended October 3,
1999, we have issued securities of Virata Limited as follows (the following
information does not give effect to the 1 for 6.7 reverse stock split):
Issuances of Ordinary Shares.
. In July 1997, we issued a warrant to purchase 75,000 ordinary shares in
a private placement to Dr. Robert W. Wilmott at an exercise price per
share of $0.08 in exchange for consulting services valued at $18,000 by
our board which were provided to us by Dr. Wilmott; this warrant was
exercised in full by Dr. Wilmott in September 1999; and
. In July 1998, we issued 1,540,000 ordinary shares in a private placement
at a purchase price of $0.92 per share and aggregate proceeds of
$1,416,800 to Munther Qubain in connection with the acquisition of RSA
Communications, Inc.; and
. We have issued an aggregate of 1,332,599 ordinary shares in connection
with the exercise of options by our employees.
Issuances of Preference Shares.
. in June 1996 and October 1996, we issued 2,713,670 series B preference
shares in a private placement at a purchase price of (Pounds)0.70 per
share and aggregate proceeds of (Pounds)1,899,569 to 3i Group plc, New
Enterprise Associates, Oak Investment Partners VI and Oak VI Affiliates
Fund;
. in June 1996, we issued 6,666,667 series C preference shares in a
private placement at a purchase price of $1.50 per share and aggregate
proceeds of $10,000,000 to Oracle Corporation;
. in October 1996, we issued a warrant to purchase 61,705 series C
preference shares in a private placement to Comdisco Ventures at an
exercise price per share of $1.50 in connection with an equipment
financing pursuant to the terms of a master equipment financing
agreement; in exchange for the warrant, we were able to negotiate more
favorable terms for the master agreement than would otherwise be
available, and our board determined that the value of such "more
favorable terms" was approximately $28,656;
. in September 1997, we issued a warrant to purchase 8,000 series C
preference shares in a private placement to Comdisco Ventures at an
exercise price per share of $1.50 in connection with an equipment
financing pursuant to the terms of a master equipment financing
agreement; in exchange for the warrant, we were able to negotiate more
favorable terms for the master agreement than would otherwise be
available, and our board determined that the value of such "more
favorable terms" was approximately $6,806;
. in December 1997, we issued a warrant to purchase 35,294 series C
preference shares in a private placement to Venture Banking Group, an
entity of Greater Bay Bancorp, at an exercise price per share of $1.70
in connection with the extension of a loan and security agreement; in
exchange for the warrant, we were able to negotiate more favorable terms
for the loan and security agreement than would otherwise be available,
and our board determined that the value of such "more favorable terms"
was approximately $31,613; in June 1998, this warrant automatically
converted into a warrant to purchase 35,294 series D preference shares
at an exercise price per share of $1.70;
. in December 1997 and January 1998, we issued bridge notes in the
aggregate amount of $2,642,980 in a private placement to 3i Group plc,
New Enterprise Associates, Oak Investment Partners VI, Oak VI Affiliates
Fund, Oracle Corporation, Olivetti Telemedia Investments B.V., Professor
Hopper and Elserino Piol that were convertible into our series D
preference shares;
. in March 1998, we issued a bridge note in the amount of $700,000 in a
private placement to The Index Special Situations Fund Ltd. that was
convertible into our series D preference shares;
. in June 1998, we sold 24,780,934 series D preference shares in a private
placement at a purchase price of $1.10 per share and aggregate proceeds
of $27,259,027 to Oak Investment Partners VI,
II-2
<PAGE>
Financiere et Industrielle Gaz et Eaux, New Enterprise Associates,
Oracle Corporation, 3i Group plc, The British Bank of the Middle East,
Moore Global Investments Ltd, Lombard Odier & Cie, Olivetti Telemedia
Investments B.V., Elara Ltd, The Index Special Situations Fund, Ltd.,
Bank Morgan Stanley AG ZH, Societe Financiere Mirelis S.A., Pharos
Genesis Fund Ltd., Pharos Fund Ltd., Pictet & Cie Banquiers, Remington
Investment Strategies LP, Lighthouse Partners USA, LP, Faisal Finance
(Jersey) Ltd., Banque SCS Alliance S.A., Crescent International Ltd.,
Denmore Investments Ltd., 4C Ventures LP, Galba Anstalt, L.B. Finance
S.A., Jordana-Gerhardt Family Trust u/d/t 3/21/97, Oak VI Affiliates
Fund, ppon Pictet & Cie, Societe Financiere Mirelis S.A., Marcuard Cook
& Cie S.A., Banca Del Gottardo, Bank Julius Baes Zurich, Banque Privee
ed. De Rothschild, Algonquin Trust S.A., Manpower S.A., Bank Julius Bar
& CO AG, Rex A. Sherry & Lori Kargionis-Sherry, Trustees of the Sherry
Family Trust, Lighthouse Genesis Partners USA, LP, Credit Suisse Private
Banking, Archery Capital, Fondation de Prevoyance Manpower, Ayers-Plant
Family Trust, Messrs. D. Bertholet, T. Thornhill, M. Bertholet, R.
Bishop, T. Saint-Loup, J. Metzger, T Bungener, M. Sullivan, T. Keegen,
D. Castagna, P. Harvey, and G. Guthrie, in which Index Securities S.A.
acted as placement agent and received a fee of 7% of the aggregate
proceeds and warrants;
. in June 1998, in connection with the conversion of bridge notes in the
aggregate amount of $3,342,980, we issued 3,039,073 series D preference
shares in a private placement to 3i Group plc, New Enterprise
Associates, Oak Investment Partners VI, Oak VI Affiliates Fund, Oracle
Corporation, Olivetti Telemedia Investments B.V., The Index Special
Situations Fund Ltd., Professor Hopper and Elserino Piol;
. in June 1998, in connection with conversion of 12,460,150 series B
preference shares and 2,000,000 series C preference shares with an
aggregate value of $16,635,368, we issued 15,123,062 series D preference
shares in a private placement to 3i Group plc, 4C Ventures LP, New
Enterprise Associates, Oak Investment Partners VI, and Oak VI Affiliates
Fund and Oracle Corporation;
. in June 1998, we issued a warrant to Messrs. G. Rimer, N. Rimer, D.
Rimer, G. Zocco, B. Dalle, H. Lebret, J. Peterschmitt, and Genevest S.A.
to purchase, 1,595,054 series D preference shares in a private placement
at an exercise price of $1.10 in connection with Index Securities S.A.
acting as placement agent in our series D preference share financing;
. in June 1998, we issued a 21,818 series D preference shares in a private
placement to Professor Hopper for aggregate consideration of $24,000,
representing the amount of the fee Professor Hopper would have received
for serving on our technology advisory board;
. in July 1998, we issued 606,500 series D preference shares in a private
placement for aggregate consideration of $667,150 to Munther Qubain in
connection with the acquisition of RSA Communications;
. in September 1998, we issued a warrant to purchase 109,091 series D
preference shares in a private placement to Comdisco Ventures at an
exercise price per share of $1.10 in connection with an equipment
financing pursuant to the terms of a master equipment financing
agreement; in exchange for the warrant, we were able to negotiate more
favorable terms for the master agreement than would otherwise be
available, and our board determined that the value of such "more
favorable terms" was approximately $118,457;
. in May 1999, we issued a warrant to purchase 54,545 series D preference
shares in a private placement to Comdisco Ventures at an exercise price
per share of $1.10 in connection with an equipment financing pursuant to
the terms of a master equipment financing agreement; in exchange for the
warrant, we were able to negotiate more favorable terms for the master
agreement than would otherwise be available, and our board determined
that the value of such "more favorable terms" was approximately $73,885;
and
. in October 1999, we issued 6,153,846 series E preference shares in a
private placement at a purchase price of $1.30 per share and aggregate
proceeds of $8,000,000 to Siemens Information and Communication
Networks, Inc., Olivetti Telemedia Investments B.V. and LSI Logic Inc.
II-3
<PAGE>
The issuance and sale of the above securities were exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act
or Regulation D or Regulation S promulgated thereunder. The recipients of
securities in each such transaction represented their intentions to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof, and appropriate legends were affixed
to the share certificates issued in such transactions. All recipients had
adequate access to information about the Registrant.
Immediately prior to the consummation of this offering, all of the
outstanding ordinary and preference shares of Virata Limited will be
cancelled, new ordinary shares of Virata Limited will be issued to Virata
Corporation and shares of common stock of Virata Corporation will be issued to
the former shareholders of Virata Limited. These transactions will take place
immediately prior to the consummation of this offering and will be effected
pursuant to a share reconstruction under Section 425 of the United Kingdom
Companies Act of 1985. Any securities that are convertible or exercisable into
ordinary shares or preference shares of Virata Limited will become convertible
or exercisable into shares of one common stock upon consummation of the share
reconstruction.
Item 16. Exhibits
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------- ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement**................................
2.1 Agreement and Plan of Merger among Virata Limited, Virata
Acquisition Sub, Inc., a Delaware corporation, RSA
Communications, Inc., a Delaware corporation, and Munther
Qubain, an individual, dated as of June 1, 1998+**..............
2.2 Amendment No. 1 to Agreement and Plan of Merger among Virata
Limited, Virata Acquisition Sub, Inc., a Delaware corporation,
RSA Communications, Inc., a Delaware corporation, and Munther
Qubain, an individual, dated as of June 25, 1998**..............
Form of Amended and Restated Certificate of Incorporation of
3.1 Virata Corporation**............................................
3.2 Amended and Restated Bylaws of Virata Corporation**.............
4.1 Specimen form of Virata Corporation's Common Stock Certificate..
5.1 Opinion of Gibson, Dunn & Crutcher LLP..........................
10.1 Agreement with Gaz et Eaux and Board with respect to Board of
Directors and other shareholder rights**........................
10.4 Form 1 of 1998 Stock Incentive Plan Agreement of Virata
Limited**.......................................................
10.5 Form 2 of 1998 Stock Incentive Plan Agreement of Virata
Limited**.......................................................
10.6 Form of 1998 Nonqualified Stock Option Plan Agreement of Virata
Limited**.......................................................
10.7 Warrant Agreement between Virata Limited and Index Securities,
S.A., dated as of June 4, 1998**................................
10.8 Form of Warrant between Virata Limited and Comdisco, Inc.**.....
10.9 Lease between WHC-SIX Real Estate Limited Partnership and
Advanced Telecommunications Modules, Inc., a California
corporation, dated June 26, 1996**..............................
10.10 Lease Agreement between Lake Partners, L.L.C. and RSA
Communications, Inc., dated as of July 1, 1998**................
10.11 Lease between Universities Superannuation Scheme Limited and
Advanced Telecommunications Modules Limited, dated 1994**.......
10.12 License to Subunderlet among Universities Superannuation Scheme
Limited, Royal Insurance (U.K.) Limited, Hill Samuel Investment
Services Group Limited, and Advanced Telecommunications Modules
Limited, dated 1995**...........................................
10.13 Lease between Virata Limited and Comdisco, Inc., dated September
30, 1996**......................................................
10.14 Loan and Security Agreement among Venture Banking Group, Virata
Santa Clara Corporation and Virata Raleigh Corporation, dated as
of August 27, 1999**............................................
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------- ----------- ----
<C> <S> <C>
10.15 Collateral Assignment, Patent Mortgage and Security Agreement
between Virata Ltd. and Venture Banking Group, dated as of
August 27, 1999**...............................................
10.16 Agreement between ARM Limited and Virata Ltd., dated June 2,
1999++**........................................................
10.17 Amendment No. 1 to License and Technical Co-Operation Agreement
for ATM Technology between Ing. C. Olivetti & C., S.p.A. and
Advanced Telecommunications Modules Limited, dated September 19,
1994**..........................................................
10.18 License and Technical Co-Operation Agreement for ATM Technology
between Ing. C. Olivetti & C., S.p.A. and Advanced
Telecommunications Modules Limited, dated December 3, 1993**....
10.19 Settlement Agreement between Virata Limited and Cirrus Logic,
Inc., a California corporation, dated as of June 19, 1998**.....
10.20 Development, Production, Supply and License Agreement between
Advanced Telecommunications Modules Limited and Symbios
Incorporated, a Delaware corporation, dated as of August 16,
1997**..........................................................
10.21 Form of 1999 Stock Incentive Plan**.............................
10.22 Form of 1999 Employee Stock Purchase Plan.......................
10.23 Form of Indemnity Agreement**...................................
10.24 Employment Agreement--Charles Cotton**..........................
10.25 Employment Agreement--Michael Gulett**..........................
10.26 Employment Agreement--Andrew Vought**...........................
10.27 Employment Agreement--Martin Jackson**..........................
10.28 Employment Agreement--Thomas Cooper**...........................
10.29 Form of Registration Rights Agreement**.........................
10.30 Form of Non-Employee Director Plan..............................
21.1 List of Subsidiaries of Virata Corporation**....................
23.1 Independent Accountants' Consent from PricewaterhouseCoopers LLP
regarding Virata Corporation....................................
23.2 Independent Accountants' Consent from PricewaterhouseCoopers LLP
regarding RSA Communications, Inc...............................
23.3 Consent of Gibson, Dunn & Crutcher LLP (to be included in their
opinion filed as Exhibit 5.1)...................................
24.1 Power of Attorney**.............................................
27.1 Financial Data Schedule**.......................................
99.1 Letter from Virata Corporation to United Kingdom participants in
the directed share program......................................
</TABLE>
- --------
+ Filed without schedules.
++ Confidential treatment has been requested for selected sections of this
exhibit.
** Filed previously.
(b) Financial Statement Schedule
The following financial statement schedule is filed with Part II of this
Registration Statement:
Schedule of valuation and qualifying accounts and reserves
Schedules not listed above for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under applicable instructions or are inapplicable and therefore have
been omitted.
II-5
<PAGE>
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 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Registrant's
Amended Certificate of Incorporation, the Registrant's Bylaws, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act is part of this Registration
Statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 3 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Palo Alto, State of California, on the 8th day of November, 1999.
VIRATA CORPORATION
By: /s/ Charles Cotton
-----------------------------------
Charles Cotton
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement on Form S-1 has been signed
below by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
Chief Executive Officer November 8, 1999
/s/ Charles Cotton and Director
___________________________________ (Principal Executive
Charles Cotton Officer)
* Senior Vice President, November 8, 1999
___________________________________ Chief Financial Officer
Andrew Vought and Secretary (Principal
Financial Officer and
Principal Accounting
Officer)
* Chairman of the Board November 8, 1999
___________________________________
Dr. Hermann Hauser
* Director November 8, 1999
___________________________________
Marco De Benedetti
* Director November 8, 1999
___________________________________
Gary Bloom
* Director November 8, 1999
___________________________________
Bandel Carano
* Director November 8, 1999
___________________________________
Andrew Hopper
* Director November 8, 1999
___________________________________
Martin Jackson
* Director November 8, 1999
___________________________________
Peter Morris
* Director November 8, 1999
___________________________________
Patrick Sayer
* Director November 8, 1999
___________________________________
Giuseppe Zocco
/s/ Charles Cotton
*By: _______________________________
Charles Cotton
As attorney-in-fact
pursuant to power of attorney
previously filed
with the Securities and Exchange
Commission
</TABLE>
II-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Stockholders of Virata Corporation
In connection with our audits of the financial statements of Virata
Corporation as of March 31, 1998 and 1999, and for each of the three years in
the period ended March 31, 1999, which financial statements are included in the
Prospectus, we have also audited the financial statement schedule listed in
Item 16(b) herein. In our opinion, this financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included herein.
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 20, 1999, except as to Note 13
which is as of October 12, 1999
<PAGE>
SCHEDULE II
VIRATA CORPORATION
VALUATION AND QUALIFYING ACCOUNT
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
- ----------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended March 31, 1997........ $ 602 $ 111 $ -- $ 713
Year ended March 31, 1998........ 713 1,075 221 1,567
Year ended March 31, 1999........ 1,567 1,458 283 2,742
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------- ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement**................................
2.1 Agreement and Plan of Merger among Virata Limited, Virata
Acquisition Sub, Inc., a Delaware corporation, RSA
Communications, Inc., a Delaware corporation, and Munther
Qubain, an individual, dated as of June 1, 1998+**..............
2.2 Amendment No. 1 to Agreement and Plan of Merger among Virata
Limited, Virata Acquisition Sub, Inc., a Delaware corporation,
RSA Communications, Inc., a Delaware corporation, and Munther
Qubain, an individual, dated as of June 25, 1998**..............
Form of Amended and Restated Certificate of Incorporation of
3.1 Virata Corporation**............................................
3.2 Amended and Restated Bylaws of Virata Corporation**.............
4.1 Specimen form of Virata Corporation's Common Stock Certificate..
5.1 Opinion of Gibson, Dunn & Crutcher LLP..........................
10.1 Agreement with Gaz et Eaux and Board with respect to Board of
Directors and other shareholder rights**........................
10.4 Form 1 of 1998 Stock Incentive Plan Agreement of Virata
Limited**.......................................................
10.5 Form 2 of 1998 Stock Incentive Plan Agreement of Virata
Limited**.......................................................
10.6 Form of 1998 Nonqualified Stock Option Plan Agreement of Virata
Limited**.......................................................
10.7 Warrant Agreement between Virata Limited and Index Securities,
S.A., dated as of June 4, 1998**................................
10.8 Form of Warrant between Virata Limited and Comdisco, Inc.**.....
10.9 Lease between WHC-SIX Real Estate Limited Partnership and
Advanced Telecommunications Modules, Inc., a California
corporation, dated June 26, 1996**..............................
10.10 Lease Agreement between Lake Partners, L.L.C. and RSA
Communications, Inc., dated as of July 1, 1998**................
10.11 Lease between Universities Superannuation Scheme Limited and
Advanced Telecommunications Modules Limited, dated 1994**.......
10.12 License to Subunderlet among Universities Superannuation Scheme
Limited, Royal Insurance (U.K.) Limited, Hill Samuel Investment
Services Group Limited, and Advanced Telecommunications Modules
Limited, dated 1995**...........................................
10.13 Lease between Virata Limited and Comdisco, Inc., dated September
30, 1996**......................................................
10.14 Loan and Security Agreement among Venture Banking Group, Virata
Santa Clara Corporation and Virata Raleigh Corporation, dated as
of August 27, 1999**............................................
10.15 Collateral Assignment, Patent Mortgage and Security Agreement
between Virata Ltd. and Venture Banking Group, dated as of
August 27, 1999**...............................................
10.16 Agreement between ARM Limited and Virata Ltd., dated June 2,
1999++**........................................................
10.17 Amendment No. 1 to License and Technical Co-Operation Agreement
for ATM Technology between Ing. C. Olivetti & C., S.p.A. and
Advanced Telecommunications Modules Limited, dated September 19,
1994**..........................................................
10.18 License and Technical Co-Operation Agreement for ATM Technology
between Ing. C. Olivetti & C., S.p.A. and Advanced
Telecommunications Modules Limited, dated December 3, 1993**....
10.19 Settlement Agreement between Virata Limited and Cirrus Logic,
Inc., a California corporation, dated as of June 19, 1998**.....
10.20 Development, Production, Supply and License Agreement between
Advanced Telecommunications Modules Limited and Symbios
Incorporated, a Delaware corporation, dated as of August 16,
1997**..........................................................
10.21 Form of 1999 Stock Incentive Plan**.............................
10.22 Form of 1999 Employee Stock Purchase Plan.......................
10.23 Form of Indemnity Agreement**...................................
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------- ----------- ----
<C> <S> <C>
10.24 Employment Agreement--Charles Cotton**.........................
10.25 Employment Agreement--Michael Gulett**.........................
10.26 Employment Agreement--Andrew Vought**..........................
10.27 Employment Agreement--Martin Jackson**.........................
10.28 Employment Agreement--Thomas Cooper**..........................
10.29 Form of Registration Rights Agreement**........................
10.30 Form of Non-Employee Director Plan.............................
21.1 List of Subsidiaries of Virata Corporation**...................
23.1 Independent Accountants' Consent from PricewaterhouseCoopers
LLP regarding Virata Corporation...............................
23.2 Independent Accountants' Consent from PricewaterhouseCoopers
LLP regarding RSA Communications, Inc..........................
23.3 Consent of Gibson, Dunn & Crutcher LLP (to be included in their
opinion filed as Exhibit 5.1)..................................
24.1 Power of Attorney**............................................
27.1 Financial Data Schedule**......................................
99.1 Letter from Virata Corporation to United Kingdom participants
in the directed share program..................................
</TABLE>
- --------
+ Filed without schedules.
++ Confidential treatment has been requested for selected sections of this
exhibit.
** Filed previously.
<PAGE>
Exhibit 4.1
COMMON STOCK COMMON STOCK
NUMBER [LOGO of VIRATA] SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
C- CUSIP 927646 10 9
SEE REVERSE FOR CERTAIN DEFINITIONS
This certifies that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.001 PER SHARE, OF
Virata Corporation
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of said Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/S/ ILLEGIBLE VIRATA CORPORATION /S/ ILLEGIBLE
SECRETARY CORPORATE CHAIRMAN
SEAL
AUG. 31,
1999
DELAWARE
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, N.Y.)
Transfer Agent and Registrar,
BY
Authorized Signature
<PAGE>
Virata Corporation
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND
THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS. SUCH REQUEST MUST BE MADE TO THE CORPORATION'S SECRETARY AT THE
PRINCIPAL EXECUTIVE OFFICE OF THE CORPORATION.
Keep this Certificate in a safe place. If it is lost, stolen or destroyed,
the Corporation will require a bond of indemnity as a condition to the issuance
of a replacement certificate.
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - _______Custodian_____________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as tenants Act________________
in common (State)
UNIF TRF MIN ACT - _______ Custodian (until age ___)
(Cust)
__________ under Uniform Transfers
(Minor)
to Minors Act ____________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
__________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
____________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated__________________
X ________________________________________________
X ________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By_____________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM) PURSUANT TO S.E.C. RULE 17AD-15.
<PAGE>
Exhibit 5.1
November 8, 1999
(415) 393-8200 03778-00007
Virata Corporation
2933 Bunker Hill Lane
Suite 201
Santa Clara, California 95054
Re: Virata Corporation
Registration Statement on Form S-1
(Registration No.333-86591)
Ladies and Gentlemen:
We have acted as counsel for Virata Corporation, a Delaware corporation
(the "Company"), in connection with the registration by the Company of shares of
the Company's Common Stock, $0.001 par value per share (the "Common Stock"),
pursuant to the above-referenced Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act"). The Company proposes to issue and sell the Common Stock to a group of
underwriters (the "Underwriters") represented by Credit Suisse First Boston,
Warburg Dillon Read LLC and Thomas Weisel Partners LLC for offering to the
public.
On the basis of such investigation as we have deemed necessary, we are of
the opinion that (i) the Common Stock has been duly authorized and (ii) when
issued and sold pursuant to the Registration Statement and in accordance with
the terms of the underwriting agreement between the Company and the
Underwriters, substantially in the form filed as an exhibit to the Registration
Statement, the Common Stock will be legally issued, fully paid and
nonassessable.
The Company is a Delaware corporation. We are not admitted to practice in
Delaware. However, we are familiar with the Delaware General Corporation Law
and have made such
<PAGE>
Virata Corporation
November 8, 1999
Page 2
review thereof as we consider necessary for the purpose of this opinion. Subject
to the foregoing, this opinion is limited to the present laws of the State of
Delaware and the State of California, and to the present federal laws of the
United States of America.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" contained in the prospectus that forms a part of the
Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required under Section 7 of the
Act or the General Rules and Regulations of the Securities and Exchange
Commission.
Very truly yours,
/s/ GIBSON, DUNN & CRUTCHER LLP
<PAGE>
EXHIBIT 10.22
VIRATA CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests of
Virata Corporation by providing Eligible Employees with the opportunity to
acquire a proprietary interest in the Corporation through participation in a
payroll-deduction based employee stock purchase plan designed to qualify under
Section 423 of the Code.
Capitalized terms used and not otherwise defined herein shall have the
meanings assigned to such terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
This Plan will be supervised and administered by the Plan Administrator.
Except as otherwise set forth in this Plan, the Plan Administrator will have
full authority to interpret and construe any provision of the Plan, to adopt,
amend and rescind any rules and regulations deemed necessary, desirable or
appropriate for administering the Plan or in order to comply with the
requirements of Code Section 423, and to make all other determinations necessary
or advisable for the administration of the Plan. Decisions of the Plan
Administrator will be final and binding on all parties having an interest in the
Plan.
Notwithstanding the foregoing, with respect to any grant of purchase rights
subject to, and intended to be exempt from, Section 16 of the 1934 Act, such
grant shall be made in accordance with the applicable provisions of Rule 16b-3
of the Rules promulgated under the 1934 Act.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan will be shares of authorized
but unissued or reacquired Common Stock, including shares of Common Stock
purchased on the open market. Subject to Section III.B. below, the maximum
number of shares of Common Stock which may be issued over the term of the Plan
shall not exceed 600,000 shares, plus an automatic annual increase on the first
day of each of the Corporation's fiscal years beginning in 2001, 2002, 2003,
2004 and 2005 equal to the lesser of (i) 500,000 shares of Common Stock; (ii)
one percent (1%) of the total number of shares of Common Stock outstanding on
the last day of the immediately preceding fiscal year and (iii) an amount
unanimously determined by the Board.
B. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, then, unless the terms of
such transaction or this Plan shall provide otherwise, the Plan Administrator
will make appropriate adjustments to (i) the maximum number and class of
<PAGE>
securities issuable under the Plan, (ii) the maximum number and class of
securities purchasable per Participant on any one Purchase Date, and (iii) the
number and class of securities and the price per share in effect under each
outstanding purchase right in order to prevent the dilution or enlargement of
benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock will be offered for purchase under the Plan
through a series of successive offering periods (each an "Offering Period"), as
determined by the Plan Administrator, until such time as (i) the maximum number
of shares of Common Stock available for issuance under the Plan shall have been
purchased or (ii) the Plan shall have been sooner terminated.
B. Each Offering Period will be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date. The initial Offering Period will commence at the Effective Time and
terminate on the last business day in October 2001. Subsequent Offering Periods
will commence as designated by the Plan Administrator. The Plan Administrator
shall have the power to change the duration and/or the frequency of Offering
Periods with respect to future offerings without stockholder approval if such
change is announced at least five (5) days prior to the scheduled beginning of
the first Offering Period to be affected.
C. Each Offering Period will generally consist of four successive
Purchase Intervals each terminating one day prior to the date which is six
months following the beginning of such intervals. The last day of a Purchase
Interval will be the Purchase Date for such Purchase Interval. Purchase
Intervals will generally run from the first business day in May each year to the
last business day in October of the same year and from the first business day in
November each year to the last business day in April of the following year.
However, the first Purchase Interval in effect under the initial Offering Period
will commence at the Effective Time and terminate on the last business day in
April 2000. The Plan Administrator will have the power to change the duration
and/or frequency of Purchase Periods with respect to future purchases without
stockholder approval if such change is announced at least five (5) days prior to
the scheduled beginning of the first Purchase Period to be affected.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an Offering Period be less than the Fair Market Value per
share of Common Stock on the start date of that Offering Period, then that
Offering Period will automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new Offering Period will
commence on the next business day following such Purchase Date. The new
Offering Period will terminate on the termination date of the original Offering
Period, unless a shorter duration is established by the Plan Administrator
within ten (10) business days following the start date of that Offering Period.
2
<PAGE>
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of
any Offering Period under the Plan may enter that Offering Period on such start
date or on any subsequent Semi-Annual Entry Date within that Offering Period,
provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after the
start date of an Offering Period may enter that Offering Period on any
subsequent Semi-Annual Entry Date within that Offering Period, provided he or
she remains an Eligible Employee.
C. The date an Eligible Employee enters an Offering Period will be
designated his or her Entry Date for purposes of that Offering Period.
D. To participate in the Plan for a particular Offering Period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement, a payroll deduction
authorization and certain representations and warranties) and file such forms
with the Plan Administrator (or its designate) on or before his or her scheduled
Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes of
acquiring shares of Common Stock during an Offering Period may be any integral
multiple of one percent (1%) of the Base Salary paid to the Participant during
each Purchase Interval within that Offering Period, up to a maximum of fifteen
percent (15%), or such other percentage as the Plan Administrator may establish
from time to time before the commencement of an Offering Period. The deduction
rate so authorized will continue in effect throughout the Offering Period,
except to the extent such rate is changed in accordance with the following
guidelines:
(i) The Participant may, at any time during the Offering Period,
reduce his or her rate of payroll deduction to become effective as soon as
reasonably possible after filing the appropriate form with the Plan
Administrator. The Participant may not, however, effect more than one (1)
such reduction per Purchase Interval.
(ii) The Participant may, prior to the commencement of any new
Purchase Interval within the Offering Period, increase the rate of his or
her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the fifteen percent
(15%) maximum, or such other percentage as the Plan Administrator may
establish from time to time before the commencement of an Offering Period)
will become effective on the start date of the first Purchase Interval
following the filing of such form. The Participant may not, however,
effect more than one (1) such increase per Purchase Interval.
3
<PAGE>
(iii) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section VIII herein, the Plan
Administrator may decrease a Participant's payroll deductions during any
Offering Period scheduled to end during the current calendar year to 0%.
Payroll deductions will re-commence at the rate previously authorized by
the Participant at the beginning of the first Offering Period which is
scheduled to end in the following calendar year, unless terminated by the
Participant pursuant to the terms of the Plan.
B. Payroll deductions will begin on the first pay day following the
Participant's Entry Date into the Offering Period and will (unless sooner
terminated by the Participant) continue through the pay day ending with or
immediately prior to the last day of that Offering Period. The amounts so
collected will be credited to the Participant's book account under the Plan, but
no interest will be paid on the balance from time to time outstanding in such
account. The amounts collected from the Participant shall not be held in any
segregated account or trust fund and may be commingled with the general assets
of the Corporation and used for general corporate purposes.
C. Payroll deductions will automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. Subject to Sections VII.A. and VIII, the Participant's acquisition
of Common Stock under the Plan on any Purchase Date will neither limit nor
require the Participant's acquisition of Common Stock on any subsequent Purchase
Date, whether within the same or a different Offering Period.
E. Individual accounts will be maintained for each Participant in the
Plan. Statements of account will be given to Participants at least annually,
which statements will set forth the aggregate amounts of payroll deductions, the
per share purchase price, the number of Shares purchased and the remaining cash
balance, if any.
VII. PURCHASE RIGHTS
A. Grant of Purchase Right. A Participant will be granted a separate
-----------------------
purchase right for each Offering Period in which he or she participates. The
purchase right will be granted on the Participant's Entry Date into the Offering
Period and will provide the Participant with the right to purchase shares of
Common Stock, in a series of successive installments over the remainder of such
Offering Period, upon the terms set forth below. The Participant shall execute
a stock purchase agreement embodying such terms and such other provisions (not
inconsistent with the Plan) as the Plan Administrator may deem advisable.
Under no circumstances will purchase rights be granted under the Plan to
any Eligible Employee if such individual would, immediately after the grant, own
(within the meaning of Code Section 424(d)) or hold outstanding options or other
rights to purchase, stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Corporation or any
Corporate Affiliate.
4
<PAGE>
B. Exercise of the Purchase Right. Each purchase right will be
------------------------------
automatically exercised in installments on each successive Purchase Date within
the Offering Period, and shares of Common Stock will accordingly be purchased on
behalf of each Participant (other than Participants whose payroll deductions
have previously been refunded pursuant to the Termination of Purchase Right
provisions below) on each such Purchase Date. The purchase will be effected by
applying the Participant's payroll deductions for the Purchase Interval ending
on such Purchase Date to the purchase of whole shares of Common Stock at the
purchase price in effect for the Participant for that Purchase Date.
C. Purchase Price. The purchase price per share at which Common Stock
--------------
will be purchased on the Participant's behalf on each Purchase Date within the
Offering Period shall not be less than eighty-five percent (85%) of the lower of
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that Offering Period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date. However, for each Participant whose Entry Date is
other than the start date of the Offering Period, the clause (i) amount shall in
no event be less than the Fair Market Value per share of Common Stock on the
start date of that Offering Period.
D. Number of Purchasable Shares. The number of shares of Common Stock
----------------------------
purchasable by a Participant on each Purchase Date during the Offering Period
will be the number of whole shares obtained by dividing the amount collected
from the Participant through payroll deductions during the Purchase Interval
ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed two thousand (2,000) shares, subject to adjustments under Section III.B.
No fractional shares will be purchased.
E. Excess Payroll Deductions. Any payroll deductions not applied to the
-------------------------
purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock will be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable by the Participant on the
Purchase Date will be promptly refunded.
F. Termination of Purchase Right. In addition to Section X, the following
-----------------------------
provisions shall govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next scheduled
Purchase Date in the Offering Period, terminate his or her outstanding
purchase right by filing the appropriate form with the Plan Administrator
(or its designate), and no further payroll deductions will be collected
from the Participant with respect to the terminated purchase right. Any
payroll deductions collected during the Purchase Interval in which such
termination occurs will be refunded to the Participant as soon as
reasonably possible.
5
<PAGE>
(ii) The termination of such purchase right shall be irrevocable, and
the Participant may not subsequently rejoin the Offering Period for which
the terminated purchase right was granted. In order to resume
participation in any subsequent Offering Period, such individual must re-
enroll in the Plan (by making a timely filing of the prescribed enrollment
forms) on or before his or her scheduled Entry Date into that Offering
Period.
(iii) Should the Participant cease to remain an Eligible Employee for
any reason (including death, disability or change in status) while his or
her purchase right remains outstanding, then that purchase right shall
immediately terminate, and all of the Participant's payroll deductions for
the Purchase Interval in which the purchase right so terminates will be
refunded as soon as reasonably possible. However, should the Participant
cease to remain in active service by reason of an approved unpaid leave of
absence, then the Participant will have the right, exercisable up until the
last business day of the Purchase Interval in which such leave commences,
to (a) withdraw all the payroll deductions collected to date on his or her
behalf for that Purchase Interval or (b) have such funds held for the
purchase of shares on his or her behalf on the next scheduled Purchase
Date. In no event, however, will any further payroll deductions be
collected on the Participant's behalf during such leave. Upon the
Participant's return to active service, his or her payroll deductions under
the Plan will automatically resume at the rate in effect at the time the
leave began, unless the Participant withdraws from the Plan prior to his or
her return.
G. Corporate Transaction. Each outstanding purchase right will
---------------------
automatically be exercised, immediately prior to the effective date of any
Corporate Transaction, by applying the payroll deductions of each Participant
for the Purchase Interval in which such Corporate Transaction occurs to the
purchase of whole shares of Common Stock at a purchase price per share not less
than eighty-five percent (85%) of the lower of (i) the Fair Market Value per
share of Common Stock on the Participant's Entry Date into the Offering Period
in which such Corporate Transaction occurs or (ii) the Fair Market Value per
share of Common Stock immediately prior to the effective date of such Corporate
Transaction, unless the Board determines, in the exercise of its sole discretion
and in lieu of the automatic exercise of all outstanding purchase rights, to
shorten the Offering Period then in progress by setting a new Purchase Date (the
"New Purchase Date"). If the Board shortens the Offering Period in lieu of the
automatic exercise of each Participant's outstanding purchase rights in the
event of a Corporate Transaction, the Board will notify each Participant in
writing, at least ten (10) days prior to the New Purchase Date, that the
Purchase Date on which he or she may exercise the purchase right has been
changed to the New Purchase Date and that his purchase right will be exercised
automatically on the New Purchase Date, unless prior to such date he or she has
withdrawn from the Offering Period as provided in paragraph F. However, the
applicable limitation on the number of shares of Common Stock purchasable per
Participant will continue to apply to any such purchase, and the clause (i)
amount above shall not, for any Participant whose Entry Date for the Offering
Period is other than the start date of that Offering Period, be less than the
Fair Market Value per share of Common Stock on that start date.
6
<PAGE>
The Corporation will use its reasonable efforts to provide at least ten
(10) days prior written notice of the occurrence of any Corporate Transaction,
and Participants will, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Corporate Transaction and receive a refund of their accumulated payroll
deductions.
H. Proration of Purchase Rights. Should the total number of shares of
----------------------------
Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator will make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, will
be refunded.
I. Designation of Beneficiary.
--------------------------
(a) A Participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the Participant's account under
the Plan in the event of such Participant's death subsequent to the end of the
Offering Period but prior to delivery to him or her 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 prior to the Purchase Date of the Offering Period.
If a Participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the Participant
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 Corporation 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 Corporation), the Corporation, in its 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 Corporation, then to such other person as the Corporation may designate.
J. Assignability. The purchase right shall be exercisable only by the
-------------
Participant and shall not be assignable or transferable (other than by will, the
laws of descent and distribution or as provided in paragraph I hereof) by the
Participant. Any such attempt at assignment or transfer shall be without
effect, except that the Corporation may treat such act as an election to
withdraw from an Offering Period in accordance with paragraph F.
K. Stockholder Rights. A Participant shall have no stockholder rights
------------------
with respect to the shares subject to his or her outstanding purchase right
until the shares are purchased on the Participant's behalf in accordance with
the provisions of the Plan and the Participant has become a holder of record of
the purchased shares.
7
<PAGE>
L. Employment Rights. Nothing in the Plan shall confer upon the
-----------------
Participant any right to continue in the employ of any Participant Corporation
or any Corporate Affiliate for any period of specific duration or interfere with
or otherwise restrict in any way the rights of the Participant Corporation (or
any Corporate Affiliate employing such person) or of the Participant, which
rights are hereby expressly reserved by each, to terminate such person's
employment at any time for any reason, with or without cause.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire Common
Stock pursuant to any purchase right outstanding under this Plan if and to the
extent such accrual, when aggregated with (i) rights to purchase Common Stock
accrued under any other purchase right granted under this Plan and (ii) similar
rights accrued under other employee stock purchase plans (within the meaning of
Code Section 423) of a Participant Corporation or any Corporate Affiliate, would
otherwise permit such Participant to purchase more than Twenty-Five Thousand
Dollars ($25,000) worth of stock of the Corporation or any Corporate Affiliate
(determined on the basis of the Fair Market Value per share on the date or dates
such rights are granted) for each calendar year such rights are at any time
outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding purchase
right will accrue in a series of installments on each successive Purchase
Date during the Offering Period on which such right remains outstanding.
(ii) No right to acquire Common Stock under any outstanding purchase
right will accrue to the extent the Participant has already accrued in the
same calendar year the right to acquire Common Stock under one (1) or more
other purchase rights at a rate equal to Twenty-Five Thousand Dollars
($25,000) worth of Common Stock (determined on the basis of the Fair
Market Value per share on the date or dates of grant) for each calendar
year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right will be refunded as soon as reasonably possible.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article will be controlling.
8
<PAGE>
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. This Plan was adopted by the Board on November ____, 1999 and will
become effective at the Effective Time; provided no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until and unless (i) the Plan shall have been approved by the
stockholders of the Corporation and (ii) the exercise of such purchase right and
the issuance and delivery of such Shares pursuant thereto shall comply with all
applicable provisions or requirements of law, domestic or foreign, including,
without limitation, the 1933 Act, the 1934 Act, the rules and regulations
promulgated thereunder, applicable state securities laws and the requirements of
any stock exchange (or the Nasdaq National Market, if applicable) upon which the
Common Stock may then be listed.
B. In the event such stockholder approval is not obtained, or such
compliance is not effected, within twelve (12) months after the date on which
the Plan is adopted by the Board, the Plan will terminate and have no further
force or effect, and all sums collected from Participants during the initial
Offering Period hereunder will be refunded as soon as reasonably possible.
C. Unless sooner terminated by the Board, the Plan will terminate upon the
earliest of (i) the last business day in October 2010, (ii) the date on which
all shares available for issuance under the Plan will have been sold pursuant to
purchase rights exercised under the Plan or (iii) the date on which all purchase
rights are exercised in connection with a Corporate Transaction. No further
purchase rights will be granted or exercised, and no further payroll deductions
will be collected, under the Plan following such termination.
X. AMENDMENT AND TERMINATION OF THE PLAN
A. The Plan Administrator may alter, amend, suspend or discontinue the
Plan at any time and for any reason to become effective immediately following
the close of any Purchase Interval, subject to the following:
(i) The Plan Administrator may not, without the approval of the
Corporation's stockholders, (1) materially increase the number of shares of
Common Stock issuable under the Plan or the maximum number of shares
purchasable per Participant on any one Purchase Date, except for
permissible adjustments in accordance with Section III.B., (2) alter the
purchase price formula so as to reduce the purchase price payable for the
shares of Common Stock purchasable under the Plan or (3) materially
increase the benefits accruing to Participants under the Plan or materially
modify the requirements for eligibility to participate in the Plan.
(ii) Except as provided in Sections III, VII.G. or in paragraph B
below, no amendment or termination of the Plan may affect purchase rights
previously granted such that the rights of any Participant are adversely
affected; provided that the Plan or an Offering Period may be amended or
terminated by the Plan Administrator on a Purchase Date or by the Plan
Administrator's setting a new Purchase Date with respect to an Offering
Period and Purchase Period then in progress if the Plan Administrator
determines that the amendment or termination of the Plan and/or the
Offering Period is in
9
<PAGE>
the best interests of the Corporation and the stockholders, is necessary in
order to comply with applicable law, or if continuation of the Plan and/or
the Offering Period would cause the Corporation to incur adverse accounting
charges as a result of a change after the effective date of the Plan in the
generally accepted accounting rules applicable to the Plan.
B. Notwithstanding the paragraph A, without stockholder consent and
without regard to whether any Participant rights may be considered to have been
adversely affected, the Plan Administrator will be entitled to change the
Offering Periods and Purchase Periods, limit the frequency and/or number of
changes in the amount withheld during an Offering Period, reduce the payroll
deduction rate for any or all Participants, establish the exchange ratio
applicable to amounts withheld in a currency other than U.S. dollars, permit
payroll withholding in excess of the amount designated by a Participant in order
to adjust for delays or mistakes in the Corporation's processing of properly
completed withholding elections, establish reasonable waiting and adjustment
periods and/or accounting and crediting procedures to ensure that amounts
applied toward the purchase of Common Stock for each Participant properly
correspond with amounts withheld from the Participant's compensation, and
establish such other limitations or procedures as the Plan Administrator
determines in its sole discretion advisable which are consistent with the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the Plan will
be paid by the Corporation.
B. All notices or other communications by a Participant to the Corporation
under or in connection with the Plan will be deemed to have been duly given when
received in the form specified by the Corporation at the location, or by the
person, designated by the Corporation for the receipt thereof.
C. The provisions of the Plan will be governed by the laws of the State of
Delaware without resort to that State's conflict of laws rules.
10
<PAGE>
Schedule A
----------
Corporations Participating in
Employee Stock Purchase Plan
As of the Effective Time
------------------------
Virata Corporation
Virata Limited
Virata Santa Clara Corporation
Virata Raleigh Corporation
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Base Salary shall mean the (i) regular base salary paid to a
-----------
Participant by one or more Participating Companies during such individual's
period of participation in one or more Offering Periods under the Plan plus (ii)
any pre-tax contributions made by the Participant to any Code Section 401(k)
salary deferral plan or any Code Section 125 cafeteria benefit program now or
hereafter established by a Participating Corporation or any Corporate Affiliate.
The following items of compensation shall not be included in Base Salary: (i)
all overtime payments, bonuses, commissions (other than those functioning as
base salary equivalents), profit-sharing distributions and other incentive-type
payments and (ii) any and all contributions (other than Code Section 401(k) or
Code Section 125 contributions) made on the Participant's behalf by the
Corporation or any Corporate Affiliate under any employee benefit or welfare
plan now or hereafter established.
B. Board shall mean the Corporation's Board of Directors.
-----
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock, par value
------------
$0.001 per share.
E. Corporate Affiliate shall mean any direct or indirect parent or
-------------------
subsidiary corporation of a Participating Corporation (as determined in
accordance with Code Section 424), whether now existing or subsequently
established.
F. Corporate Transaction shall mean either of the following stockholder-
---------------------
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more than
fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or substantially
all of the assets of the Corporation in complete liquidation or dissolution
of the Corporation.
G. Corporation shall mean Virata Corporation, a Delaware corporation, and
-----------
any corporate successor to all or substantially all of the assets or voting
stock of Virata Corporation which shall by appropriate action adopt the Plan.
H. Effective Time shall mean the time at which the Underwriting Agreement
--------------
is executed and finally priced. Any Corporate Affiliate which becomes a
Participating Corporation
<PAGE>
after such Effective Time shall designate a subsequent Effective Time with
respect to its Participants.
I. Eligible Employee shall mean any Employee as defined in paragraph J who
-----------------
shall be employed by a Participating Corporation prior to the first day of each
Offering Period of the Plan.
J. Employee shall mean any individual who is an employee of a
--------
Participating Corporation for purposes of tax withholding under the Code whose
customary employment with a Participating Corporation or any Corporate Affiliate
is at least twenty (20) hours per week and more than five (5) months in any
calendar year. For purposes of the Plan, the employment relationship shall be
treated as continuing intact while the individual is on sick leave or other
leave of absence approved by the Participating Corporation. Where the period of
leave exceeds 90 days and the individual's right to re-employment is not
guaranteed either by statute or by contract, the employment relationship will be
deemed to have terminated on the 91st day of such leave.
K. Entry Date shall mean the date an Eligible Employee first commences
----------
participation in the Offering Period in effect under the Plan. The earliest
Entry Date under the Plan will be the Effective Time.
L. Fair Market Value per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq National
Market, then the Fair Market Value will be the closing selling price per
share of Common Stock on the date in question, as such price is reported by
the National Association of Securities Dealers on the Nasdaq National
Market or any successor system. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value will
be the closing selling price on the last preceding date for which such
quotation exists.
(ii) If the Common Stock is at the time listed on any stock exchange,
then the Fair Market Value will be the closing selling price per share of
Common Stock on the date in question on the stock exchange determined by
the Plan Administrator to be the primary market for the Common Stock, as
such price is officially quoted in the composite tape of transactions on
such exchange. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value will be the closing
selling price on the last preceding date for which such quotation exists.
(iii) For purposes of the initial Offering Period which begins at the
Effective Time, the Fair Market Value will be deemed to be equal to the price
per share at which the Common Stock is sold in the initial public offering
pursuant to the Underwriting Agreement.
M. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
<PAGE>
N. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
--------
O. Participant shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.
P. Participating Corporation shall mean the Corporation and such Corporate
-------------------------
Affiliate or Affiliates as may be authorized from time to time by the Board to
extend the benefits of the Plan to their Eligible Employees. The Participating
Corporations in the Plan as of the Effective Time are listed in attached
Schedule A.
Q. Plan shall mean the Corporation's Employee Stock Purchase Plan, as set
----
forth in this document.
R. Plan Administrator shall mean the Compensation Committee of the Board.
------------------
S. Purchase Date shall mean the last business day of each Purchase
-------------
Interval. The initial Purchase Date will be the last business day of April 2000.
T. Purchase Interval shall mean each successive six (6)-month period
-----------------
within the Offering Period at the end of which there will be purchased shares of
Common Stock on behalf of each Participant.
U. Semi-Annual Entry Date shall mean the first business day in November
----------------------
and May each year on which an Eligible Employee may first enter an Offering
Period.
V. Underwriting Agreement shall mean the agreement between the Corporation
----------------------
and the underwriter or underwriters managing the initial public offering of the
Common Stock.
<PAGE>
EXHIBIT 10.30
VIRATA CORPORATION
NON-EMPLOYEE DIRECTOR COMPENSATION PLAN
---------------------------------------
1. Purpose
This 1999 Non-Employee Director Compensation Plan (the "Plan") is intended
to promote the interests of Virata Corporation, a Delaware corporation (the
"Corporation"), by providing eligible non-employee directors of the Corporation
and eligible members of the Corporation's Technology Advisory Board with an
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation and an incentive for such persons to
remain in the service of the Corporation. Under the Plan, each Eligible
Participant (as defined below) shall automatically receive each year an option
to purchase Common Stock of the Corporation.
2. Eligibility
The individuals who shall be eligible to participate ("Eligible
Participants") in the Plan shall be limited to:
(a) each person serving on the Corporation's Board of Directors (the
"Board") who is not a full-time employee of the Corporation or any Affiliate (as
such term is defined under Rule 1-02(b) of the rules and regulations promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of
the Corporation (a "Non-Employee Board Member"); and
(b) each person serving on the Corporation's Technology Advisory Board
("Technology Advisory Board") who is not a full-time employee of the Corporation
or any Affiliate of the Corporation (a "Non-Employee Technology Advisory Board
Member");
provided that, any person who becomes a Non-Employee Board Member or a Non-
- -------- ----
Employee Technology Advisory Board Member after the Effective Date (as defined
below) and was an employee of the Corporation or any Affiliate of the
Corporation at any time during the preceding 12-month period, shall not be
deemed an Eligible Participant under the Plan until the beginning of the
Corporation's next fiscal year; provided further that, a person shall
-----------------
immediately cease to be an Eligible Participant under the Plan in the event such
person no longer satisfies the requirements set forth in subsections (a) and (b)
above, as the case may be.
3. Administration of the Plan
The Plan will be administered by the Director Compensation Committee of the
Board. Except as otherwise set forth in this Plan, the Director Compensation
Committee will have full authority to interpret and construe any provision of
the Plan, to adopt, amend and rescind any rules and regulations deemed
necessary, desirable or appropriate for administering the Plan and
<PAGE>
to make all other determinations necessary or advisable for the administration
of the Plan. Decisions of the Plan Administrator will be final and binding on
all parties having an interest in the Plan. Notwithstanding the foregoing, to
the extent necessary to cause the grants of shares of common stock or options
therefor under the Plan to be exempt from the requirements of Section 16b of the
Exchange Act, any action taken by the Director Compensation Committee shall be
approved by the Board.
4. Stock Subject To The Plan
(a) The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares of Common Stock
purchased by the Corporation on the open market. The maximum number of shares
of Common Stock that may be issued over the term of the Plan shall not exceed
1,000,000 shares.
(b) Shares of Common Stock subject to outstanding Options shall be
available for subsequent issuance under the Plan to the extent those Options
expire or terminate for any reason prior to exercise in full. Shares of Common
Stock issued under the Plan and subsequently cancelled or repurchased by the
Corporation, at the original issue price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent Option
grants or direct stock issuances under the Plan. However, should the exercise
price of an Option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an Option or the vesting of a stock issuance under the Plan,
then the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the Option is exercised
or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such Option or stock issuance.
(c) If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, then, unless the terms of such
transaction or this Plan shall provide otherwise, appropriate adjustments will
be made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities for which grants are
subsequently to be made under the Plan to Eligible Participants, and (iii) the
number and/or class of securities and the exercise price per share in effect
under each outstanding Option under the Plan. Such adjustments to the
outstanding Options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such Options. The
adjustments determined by the Director Compensation Committee shall be final,
binding and conclusive.
<PAGE>
5. Annual Retainer Fee
Each Eligible Participant (an "Optionee") will receive an annual option
(the "Options") as follows:
(a) Each Non-Employee Board Member will receive (i) with respect to
the Corporation's fiscal year ending in the year 2000, (A) if such Non-Employee
Director is serving as a director on the Effective Date of the Plan, an option,
granted on the Effective Date, to purchase _____________ shares of Common Stock
at an exercise price equal to the initial public offering price to the public in
the Corporation's initial public offering ("IPO") of its Common Stock, and (B)
if such Non-Employee Director was not serving as a director on the Effective
Date, an option, granted on the date of his or her election as a director,
purchase ______________ shares of Common Stock, proportionately reduced to
reflect the remaining portion of the Corporation's fiscal year from the date
such Non-employee Director was elected as a director, at an exercise price equal
to the fair market value of the Common Stock on the date of grant; and (ii) with
respect to the Corporation's fiscal years ending after the year 2000, for all
Non-Employee Directors, each year an option, granted on the first trading day of
the Corporation's Common Stock on the Nasdaq National Market during the
applicable fiscal year or after the date of his or her election as a director,
whichever is later, to purchase ______________ shares of Common Stock,
proportionately reduced, if necessary, to reflect the remaining portion of the
Corporation's fiscal year ending after the date such Non-employee Director was
elected as a director, at an exercise price equal to the fair market value of
the Common Stock on the date of grant.
(b) Each Non-Employee Technology Advisory Board Member will receive
(i) with respect to the Corporation's fiscal year ending in the year 2000, (A)
if such Non-Technology Advisory Board Member is serving as a member of the
Technology Advisory Board on the Effective Date of the Plan, an option, granted
on the Effective Date, to purchase _____________ shares of Common Stock at an
exercise price equal to the initial public offering price to the public in the
Corporation's initial public offering ("IPO") of its Common Stock, and (B) if
such Non-Employee Technology Advisory Board Member was not serving as a member
of the Technology Advisory Board on the Effective Date, an option, granted on
the date of his or her election as a member of the Technology Advisory Board,
purchase ______________ shares of Common Stock, proportionately reduced to
reflect the remaining portion of the Corporation's fiscal year from the date
such Non-Employee Technology Advisory Board Member was elected to the Technology
Advisory Board, at an exercise price equal to the fair market value of the
Common Stock on the date of grant; and (ii) with respect to the Corporation's
fiscal years ending after the year 2000, for all Non-Employee Technology
Advisory Board Members, each year an option, granted on the first trading day of
the Corporation's Common Stock on the Nasdaq National Market during the
applicable fiscal year or after the date of his or her election as a member of
the Technology Advisory Board, whichever is later, to purchase ______________
shares of Common Stock, proportionately reduced, if necessary, to reflect the
remaining portion of the Corporation's fiscal year ending after the date such
Non-Employee Technology Advisory Board Member was elected to the Technology
Advisory Board, at an exercise price equal to the fair market value of the
Common Stock on the date of grant.
<PAGE>
6. Option Vesting and Terms
(a) Vesting of Option. Shares of Common Stock underlying each Option
-----------------
shall vest and in a series of twelve (12) successive monthly installments during
the fiscal year in which the Option was granted (or such lesser number or
installment equal to the number of whole months remaining in the fiscal year in
case of a person who first becomes an Eligible Participant during the fiscal
year) and shall become exercisable on the last day of each month during the
fiscal year.
(b) Option Term. Each Option shall have a term of ten (10) years
-----------
measured from the applicable date of grant (the "Option Term").
(c) Termination of Eligible Participant Status. The following
------------------------------------------
provisions shall govern the exercise of all Options held by an Optionee at the
time such Optionee ceases to be an Eligible Participant for any reason:
(i) On the date the Optionee ceases to be an Eligible
Participant, any portion of an Option that is unvested shall immediately
terminate.
(ii) Subject to subsection (iii) below, the Optionee (or, in the
event of Optionee's death, the personal representative of the Optionee's
estate or the person or persons to whom the Option is transferred pursuant
to the Optionee's will or in accordance with the laws of descent and
distribution) shall have a period of twelve (12) months following the date
the Optionee ceases to be an Eligible Participant in which to exercise any
portion of the Option that was vested as of the date the Optionee ceased to
be an Eligible Participant; provided that, in the event the Optionee ceases
--------
to be an Eligible Participant due the fact that the Optionee is or becomes
an employee of the Corporation or an Affiliate of the Corporation, then the
Optionee shall have until the later of (A) twelve (12) months following the
date the Optionee ceases to be an Eligible Participant and (B) 90 days
after such Optionee ceases to be an employee of the Corporation or a
Affiliate of the Corporation in which to exercise any portion of the Option
that was vested as of the date the Optionee ceased to be an Eligible
Participant.
(iii) Notwithstanding subsection (ii) above, in no event shall
any Option remain exercisable after the expiration of the Option Term for
such Option. Upon earlier of (A) the expiration of the applicable period
set forth in subsection (ii) above and (B) the expiration of the Option
Term, any remaining unexercised portion of the Option shall immediately
terminate and cease to be outstanding.
(d) Additional Terms. The Director Compensation Committee, in its
----------------
sole and absolute discretion, may determine any additional terms and conditions
of Options granted under this Plan, including terms, conditions and restrictions
contained in a stock option agreement between the Eligible Participant and the
Company.
<PAGE>
7. Change In Control
(a) In the event of a Change in Control (as defined below), the
unvested portion of any Option granted under the Plan shall immediately
terminate. Following the consummation of the Change in Control, the securities
subject to the vested portion of each outstanding Option shall be appropriately
adjusted such that upon exercise of the Option, the Optionee shall receive the
number and class of securities which would have been issuable to the Optionee
upon consummation of such Change in Control had the Option been exercised
immediately prior to such Change in Control. Appropriate adjustments shall also
be made to the exercise price payable per share under each outstanding Option,
provided the aggregate exercise price payable for such securities shall remain
the same.
(b) The grant of Options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
(c) "Change in Control" shall mean a change in ownership or control of
the Corporation effected through either of the following transactions:
(i) a reorganization, merger, consolidation or similar
transaction in which securities possessing more than fifty percent (50%) of
the total combined voting power of the Corporation's outstanding securities
are transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
8. Tax Withholding
The Corporation's obligation to deliver shares of Common Stock upon the
exercise of Options or the issuance or vesting of such shares under the Plan
shall be subject to the satisfaction of all applicable Federal, state and local
income and employment tax withholding requirements.
9. Effective Date And Term Of The Plan
(a) This Plan was adopted by the Board on __________________, 1999 and
will become effective immediately prior to the effectiveness of the IPO (the
"Effective Date"); provided that no Options granted under the Plan may be
exercised, and no shares of Common Stock shall be issued under the Plan, until
and unless (i) the Plan shall have been approved by the stockholders of the
Corporation and (ii) the exercise of any Option and the issuance and delivery of
such shares of Common Stock pursuant thereto shall comply with all applicable
provisions or requirements of law, domestic or foreign, including, without
limitation, the Securities Act of
<PAGE>
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, applicable state securities laws and the requirements of any stock
exchange (or the Nasdaq National Market, if applicable) upon which the Common
Stock may then be listed.
(b) Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the tenth anniversary of the Effective Date, (ii) the
date on which all shares of Common Stock available for issuance under the Plan
shall have been issued, or (iii) the termination of all outstanding Options in
connection with a Change in Control. Upon the termination of the Plan, all
outstanding Options granted pursuant to the Plan shall thereafter continue to
have force and effect until such Options shall terminate in accordance with the
provisions of this Plan.
10. Amendment Of The Plan
The Director Compensation Committee may alter, amend, suspend or
discontinue the Plan at any time and for any reason; provided that:
(a) the Plan may not be amended to increase the number of shares of
Common Stock issuable under the Plan without the approval of the Corporation's
stockholders, except for permissible adjustments in accordance with Section 4;
(b) no such amendment or modification shall adversely affect the
rights and obligations with respect to Options at the time outstanding under the
Plan unless the Optionees so affected consent to such amendment or modification;
provided that the Plan may be amended or terminated by the Director Compensation
Committee if the Director Compensation Committee determines that the amendment
or termination of the Plan is in the best interests of the Corporation and its
stockholders, is necessary in order to comply with applicable law, or if
continuation of the Plan would cause the Corporation to incur adverse accounting
charges as a result of a change after the effective date of the Plan in the
generally accepted accounting rules applicable to the Plan;
(c) a change in the amount of the Annual Retainer Fee shall require
the approval of the Board; and
(d) to the extent necessary to cause the grants of shares of common
stock or options therefor under the Plan to be exempt from the requirements of
Section 16b of the Exchange Act, any action taken by the Director Compensation
Committee shall be approved by the Board.
11. Assignability
Any Option shall be exercisable only by the Eligible Participant and shall
not be assignable or transferable (other than by will, the laws of descent and
distribution or as provided in paragraph I hereof) by the Eligible Participant.
Any such attempt at assignment or transfer shall be without effect.
<PAGE>
12. No Stockholder, Employment or Continuing Service Rights
(a) An Eligible Participant shall have no stockholder rights with
respect to the shares of Common Stock subject to his or her outstanding Options
until the shares Common Stock subject to such Options are purchased by the
Eligible Participant in accordance with the provisions of the Plan and the
Participant has become a holder of record of the purchased shares.
(b) Nothing in the Plan shall confer upon any Eligible Participant
any right to continue to serve the Corporation or any Affiliate of the
Corporation as a member of the Board, as member of the Technology Advisory
Board, as an employee or in any other capacity for any specific duration or to
interfere with or otherwise restrict in any way the rights of the Corporation,
any Affiliate of the Corporation, the Corporation's stockholders or the Eligible
Participant, which rights are hereby expressly reserved by each, to terminate
the Eligible Participant's service as a member of the Board, as a member of the
Technology Advisory Board, as an employee or with respect to any other capacity
in which the Eligible Participant may serve the Corporation or any Affiliate of
the Corporation.
13. General Provisions
(a) All costs and expenses incurred in the administration of the Plan
will be paid by the Corporation.
(b) All notices or other communications by an Eligible Participant to
the Corporation under or in connection with the Plan will be deemed to have been
duly given when received in the form specified by the Corporation at the
location, or by the person, designated by the Corporation for the receipt
thereof.
(c) The provisions of the Plan will be governed by the laws of the
State of Delaware without resort to that State's conflict of laws rules.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 3 to the Registration
Statement on Form S-1 (No. 333-86591) of our reports dated August 20, 1999
except as to note 13 which is as of October 12, 1999, relating to the
financial statements and financial statement schedule of Virata Corporation,
which appear in such Registration Statement. We also consent to the reference
to us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Jose, California
November 8, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 3 to the Registration
Statement on Form S-1 (No. 333-86591) of our report dated August 19, 1999,
relating to the financial statements of RSA Communications, Inc. which appear
in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
November 8, 1999
<PAGE>
EXHIBIT 99.1
This document is important. If you are in any doubt about the contents of this
document you should consult a person authorised under the Financial Services Act
1986 who specialises in advising on the acquisition of shares and other
securities.
This document, which constitutes a prospectus relating to Virata Corporation
(the "Company"), has been drawn up in accordance with the Public Offer of
Securities Regulations 1995 (the "Regulations") and delivered to the Registrar
of Companies in England and Wales for registration as required by Regulation
4(2) of those Regulations.
The Company and the directors of the Company, whose names appear on page 55 of
the US Preliminary Prospectus (as defined in this document), accept
responsibility for the information contained in this document. To the best of
the knowledge and belief of the directors of the Company, the information
contained in this document is in accordance with the facts and the prospectus
makes no admission likely to affect the import of such information.
Application has been made for the common stock of the Company to be approved for
listing on The Nasdaq Stock Market's National Market under the symbol "VRTA".
Quotation on the Nasdaq National Market is expected to be approved on or before
16/th/ November 1999, subject to official notice of issuance.
VIRATA CORPORATION
Offer of up to 250,000 shares of common stock of US$0.001 each
(anticipated to be at a price per share of between US$9.00 and US$11.00)
This document is issued by the Company, the contents having been approved solely
for the purposes of Section 57 of the Financial Services Act 1986 by Credit
Suisse First Boston (Europe) Limited, which is regulated by The Securities and
Futures Authority Limited.
Credit Suisse First Boston (Europe) Limited is acting exclusively for the
Company and no one else in connection with the transactions and arrangements
proposed in this document and will not be responsible to anyone other than the
Company for providing the protections afforded to customers of Credit Suisse
First Boston (Europe) Limited or for giving advice to any other person in
relation to the transactions and arrangements proposed in this document.
<PAGE>
Virata
Virata Corporation
2933 Bunker Hill Lane
Suite 201
Santa Clara, CA 95054
USA
Tel: 408 566 1000
Fax: 408 980 8250
www.virata.com
2 November 1999
Dear Sir/Madam,
Offer of shares of common stock ("Shares") of
Virata Corporation (the "Company") in the United Kingdom
I write to you in connection with the Company's directed share program (the
"Program") constituting part of its initial public offering ("IPO"). This letter
sets out the terms of an offer to you under the Program (the "Offer"). It also
contains certain information that is required to be distributed in connection
with the Offer.
The information in this letter should be read in conjunction with the Company's
US preliminary prospectus (the "US Preliminary Prospectus") which comprises part
of the Company's Registration Statement on Form S-1 (no. 333-86591) that was
initially filed with the US Securities and Exchange Commission on
3/rd/September, 1999 and amended by Amendment No. 1 to the Registration
Statement on 14/th/ October, 1999 and Amendment No. 2 to the Registration
Statement on 26/th/ October, 1999 (collectively, the "Registration Statement").
A copy of the US Preliminary Prospectus, which forms part of this document, is
annexed to this letter.
The information contained in this document (including the US Preliminary
Prospectus) is not complete and may be changed. The Company may not sell the
Shares until the Registration Statement is effective. This document (including
the US Preliminary Prospectus) is not an offer to sell the Shares and it is not
soliciting an offer to buy the Shares in any jurisdiction where the offer or
sale is not permitted.
Terms of the Offer
The Offer is being made to certain employees, consultants and independent
contractors of the Company and Virata Limited and certain other persons
identified by the Company or nominated by the foregoing. The total number of
Shares available for purchase by you is that number set out in the enclosed
indication of interest form (the "Indication of Interest Form").
<PAGE>
The Indication of Interest Form is personal to you and may not be assigned or
transferred by you. An aggregate total of 250,000 Shares are being made
available under the Program to all participants.
The minimum investment is 250 Shares. Thereafter, depending on the number of
Shares allocated for purchase by you (as set out on the enclosed Indication of
Interest Form), you may purchase any multiple of 250 Shares, up to the maximum
allocated to you.
The price at which Shares will be available under the Offer will be determined
on the effective date of the Registration Statement by the Company and the
underwriters identified in the US Preliminary Prospectus. The estimated range of
the purchase price per Share is between US$9.00 and US$11.00 per Share. The
actual price of the Shares may exceed this range. The application, once made in
accordance with the terms of the Offer, is revocable by you at any time up to
the effective date of the Registration Statement (expected to be on or about 16
November, 1999) without obligation or commitment of any kind on your part. You
should be aware, however, that once the Registration Statement becomes
effective, the application made by you may not be revoked. This will mean that,
once the amount payable by you per Share under the Offer is determined, you may
not revoke your application, even if the actual price payable per Share is
materially outside of the range referred to above, provided that if the range is
greater or less than the higher and lower limits set out above (respectfully) by
more than 20%, an amendment to the Registration Statement will be filed and you
will be able to revoke your application at any time until the Registration
Statement, as amended, becomes effective.
Procedure for application
All applications must be made by using an account set up with Morgan Stanley
Dean Witter. You will find enclosed with this document (which includes the US
Preliminary Prospectus), a Participant Communication Package which the following
other documents:
(1) an Indication of Interest Form;
(2) a new account form for directed share program (the "New Account Form"); and
(3) Forms W-8 and 1001 (for non-US citizens or non-US residents).
All of these documents must be completed and signed by you as indicated. Further
instructions for their completion are set out below:
(a) The Indication of Interest Form
Applications must be made on the accompanying Indication of Interest Form
and may be made only on the terms and conditions set out therein or below.
The Offer will open at 10.00 a.m. London time on 3rd November 1999 and will
close at 5.00 p.m. London time on 12/th/ November 1999 (the "Expiration
Time").
<PAGE>
The Company has appointed Morgan Stanley Dean Witter as paying agents in
respect of the Offer. Duly completed and signed Indication of Interest
Forms (together with the duly completed and signed New Account Form and
Forms W-8 and 1001), together with a cheque or banker's draft for US$2,000
to open the account with Morgan Stanley Dean Witter, must be sent as soon
as possible to Morgan Stanley Dean Witter, Attn: Wayne Cymrot, 333 West San
Carlos, Suite 1100, San Jose, California, 95110, USA, so as to arrive prior
to the Expiration Time.
The US$2,000 is required to set up an account and is not deemed to be a
deposit on the Shares to be purchased in the Program. Cheques or banker's
drafts must be denominated in dollars, drawn on a bank or a branch of a
bank in the United Kingdom and must be payable to "Morgan Stanley Dean
Witter". Alternatively, arrangements should be made for the electronic
transfer of the amount payable to Morgan Stanley Dean Witter by contacting
Morgan Stanley Dean Witter on +1 408 947 3716.
Other than the US$2,000 required to open up your Morgan Stanley Dean Witter
account, no other money should be sent with the Indication of Interest
Form. Should the Registration Statement become effective, Morgan Stanley
Dean Witter or the Company will send a letter to you giving instructions as
to how to pay for any Shares allocated to you.
If no Shares are allotted to you (or Shares with a value of less than
US$2,000 are allotted to you) the monies paid by you (or the balance
remaining) will be returned by cheque (without interest) within 14 days of
the Registration Statement becoming effective (or, if the Registration
Statement does not become effective prior to 30/th/ November, 1999, within
14 days after request is made to Morgan Stanley Dean Witter).
(b) Timing of application
The duly completed and signed Indication of Interest Form (together with
the duly completed and signed New Account Form and Forms W-8 and 1001 and
the cheque or banker's draft for US$2,000 ) must arrive at the offices of
Morgan Stanley Dean Witter Attn: Wayne Cymrot, 333 West San Carlos, Suite
1100, San Jose, California, 95110, USA, by the Effective Time. Applicants
should allow at least five business days for delivery through the post and
should use first class air-mail. Applications may be accepted in whole or
in part.
Given the timing, you are urged to send in your Indication of Interest
Form, your duly completed and signed New Account Form and Forms W-8 and
1001 and the cheque or banker's draft for US$2,000 as soon as possible.
(c) Share certificates
After the effective date of the Registration Statement, any Shares
allocated to (and purchased by) you will be held in your Morgan Stanley
Dean Witter account (set up in accordance with the New Account Form). If
you wish to receive certificates for your Shares or have any questions
regarding you account, please contact your Morgan
<PAGE>
Stanley Dean Witter Financial Advisor (whose name appears on the New
Account Form) who will explain the procedure for obtaining a share
certificate. Once you have received the share certificate, changes of name
and/or address may be made by mailing the certificate, with a letter of
instruction, to the Transfer Agent, American Stock Transfer & Trust Company
at 40 Wall Street, 46/th/ Floor, New York City, New York 10005 USA, phone
800.937.5449.
(d) Irrevocability
No offer to buy the Shares will be accepted and no part of the purchase
price can be received until the Registration Statement has become
effective, and any such offer may be withdrawn or revoked, without
obligation or commitment of any kind, at any time prior to notice of its
acceptance given after the effective date.
(e) Limited offer
This document is only intended for the person to whom it was sent. No other
person receiving a copy of this document may treat the same as constituting
an invitation to him, or her.
(f) Risk
All documents and cheques or banker's drafts posted by or to applicants
will be sent at their own risk.
(g) Applicable law
The Offer is made on the basis of English Law, which will govern all
contracts resulting from applications.
(h) Confirmations
In making the application, the applicant confirms that no reliance is
placed on any information or representation relating to the Company other
than that contained in this document (which includes the US Preliminary
Prospectus) and the accompanying forms.
The Company plans to raise approximately US$50,000,000 in the IPO. If the
aggregate number of Shares allocated for the Offer are not purchased under the
Offer, such excess Shares may be sold to the public by the underwriters
identified in the US Preliminary Prospectus. The directors are of the opinion
that there is no minimum amount required to be raised under the Offer for the
purposes of paragraph 21(a) of Schedule 1 to the Public Offering of Securities
Regulations 1995.
The business address of the directors of the Company (whose names are set out in
page 55 of the US Preliminary Prospectus) are all 2933 Bunker Hill Lane,
Suite 201, Santa Clara, California 95054, USA.
<PAGE>
Except as set out in the US Preliminary Prospectus and this letter, none of the
directors of the Company is beneficially interested in any Shares or other
securities issued by the Company.
Accounts
Set out below is a report by the Company's accountants, PricewaterhouseCoopers
LLP, of Ten Almaden Boulevard, Suite 1600, San Jose, California 95113, USA, with
respect to the state of affairs and profit and losses shown by the Company's
accounts (and the accounts of its subsidiary undertakings) for the last three
years, which have been prepared in accordance with applicable laws. These
accounts do not constitute statutory accounts as referred to in Section 240 of
the Companies Act 1985 (as amended).
"REPORT OF INDEPENDENT ACCOUNTANTS
The Directors
Virata Corporation
2933 Bunker Hill Lane
Santa Clara
California 95054
2 November, 1999
Dear Sirs,
Introduction
We report on the financial information set out below. This financial information
has been prepared for inclusion in the Prospectus dated 2 November, 1999 ("the
Prospectus") of Virata Corporation ("the Company").
The Company was formed in 1993 as Advanced Telecommunications Modules Limited, a
corporation organized in the United Kingdom, as a spin-off from Olivetti
Research Laboratories. In February 1998, the Company changed its name to Virata
Limited. In July 1998, the Company completed its acquisition of RSA
Communications, Inc. ("RSA Communications"), a corporation organized in North
Carolina. RSA was subsequently renamed to Virata Raleigh Corporation.
The historical financial statements presented are those of Virata Limited. In
August 1999, Virata Corporation was created and as of October 3, 1999 it had no
operations, assets or issued shares. Immediately prior to the initial public
offering ("IPO"), Virata Corporation will become the holding company of Virata
Limited.
The Company and its subsidiaries are referred to as "the Group".
Basis of preparation
The financial information set out below is based on the audited consolidated
financial statements of the Company for the three years ended March 31, 1999 and
has been prepared
<PAGE>
on the basis set out below and in conformity with accounting principles
generally accepted in the United States.
Responsibility
Such financial statements are the responsibility of the directors of the
Company, who approved their issue.
The directors of the Company are responsible for the contents of the Prospectus
in which this report is included.
It is our responsibility to compile the financial information set out in our
report from the financial statements, to form an opinion on the financial
information and to report our opinion to you.
Basis of opinion
We conducted our work in accordance with auditing standards generally accepted
in the United States. Our work included an assessment of evidence relevant to
the amounts and disclosures in the financial information. The evidence included
that previously obtained by us relating to the audit of the financial statements
underlying the financial information. Our work also included an assessment of
significant estimates and judgements made by those responsible for the
preparation of the financial statements underlying the financial information and
whether the accounting policies are appropriate to the circumstances of the
Company, consistently applied and adequately disclosed.
We planned and performed our work so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial information
is free from material misstatement, whether caused by fraud or other
irregularity or error.
We do not report whether in our opinion the report gives a true and fair view of
the state of affairs and profit or loss of the Company as our audit has been
conducted in accordance with auditing standards generally accepted in the United
States and accordingly our opinion is based on those standards.
Opinion
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
the Company at March 31, 1997, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1999, in conformity with accounting principles generally accepted in
the United States.
<PAGE>
Consent
We consent to the inclusion in the Prospectus of this report and accept
responsibility for this report for the purposes of paragraph 45(2)(b)(iii) of
Schedule 1 of the Public Offers of Securities Regulations 1995.
<PAGE>
VIRATA CORPORATION
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma
Stockholder
Equity at
March 31, October 3, October 3,
--------------------------
1997 1998 1999 1999 1999
------- -------- -------- ---------- -----------
(unaudited) (unaudited)
ASSETS (Note 2)
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.............................................. $ 7,272 $ 767 $ 8,616 $ 4,137
Short-term investments................................................. - - 1,001 -
Accounts receivables, net of allowance for doubtful accounts
and returns of $168, $1,567, $2,742 and $630, respectively......... 1,562 2,091 2,267 1,180
Inventories............................................................ 820 434 264 705
Other current assets................................................... 579 1,352 1,232 1,392
-------- -------- -------- ----------
Total current assets............................................... 10,233 4,644 13,380 7,414
Property and equipment, net............................................... 1,833 1,306 2,479 2,198
Intangible assets......................................................... - - 3,328 2,950
-------- -------- -------- ----------
Total assets....................................................... $ 12,066 $ 5,950 $ 19,187 $ 12,562
======== ======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable....................................................... $ 2,044 $ 1,727 $ 2,112 $ 2,100
Accrued liabilities.................................................... 1,896 2,641 1,887 2,282
Deferred revenue....................................................... 174 317 489 458
Convertible loan from related parties.................................. - 2,712 - -
Short-term borrowings.................................................. - 417 - -
Capital lease obligations, current..................................... 223 483 850 854
-------- -------- -------- ----------
Total current liabilities............................................ 4,337 8,297 5,338 5,694
Capital lease obligations, long-term...................................... 877 738 1,130 986
-------- -------- -------- ----------
Total liabilities.................................................... 5,214 9,035 6,468 6,680
-------- -------- -------- ----------
Commitments (Note 8)
Stockholder's Equity (Deficit)
Convertible preferred stock, $0.02 par value at March 31, 1997, 1998
and 1999 and October 3, 1999 and $0.001 par value at pro forma;
36,100,000, 36,100,000, 86,100,000 and 86,100,000 (unaudited) and
5,000,000 (unaudited) shares authorized at March 31, 1997, 1998 and
1999, and October 3, 1999, and pro forma, respectively, 22,319,943,
22,319,943, 51,431,179, 51,431,179 (unaudited) and zero (unaudited)
shares issued and outstanding at March 31, 1997, 1998 and 1999,
October 3, 1999 and pro forma, respectively (liquidation preference
$57,929 (unaudited) at October 3, 1999).............................. 1,709 1,709 801 801 -
Common stock, $0.01 par value at March 31, 1997, 1998 and 1999 and
October 3, 1999 and $0.001 par value at pro forma; 45,000,000,
45,000,000, 95,000,000 and 95,000,000 (unaudited) and 40,000,000
(unaudited) shares authorized at March 31, 1997, 1998 and 1999,
October 3, 1999 and pro forma, respectively; 10,937,254, 11,752,415,
13,340,644, 13,547,599, (unaudited) and 14,472,161 (unaudited)
shares issued and outstanding at March 31, 1997, 1998 and 1999,
October 3, 1999, and pro forma, respectively......................... 171 185 211 215 14
Additional paid-in capital................................................ 27,436 29,432 62,964 63,095 71,997
Accumulated other comprehensive income.................................... 729 619 871 1,064 1,064
Unearned stock compensation............................................... - (1,559) (1,500) (1,093) (1,093)
Accumulated deficit....................................................... (23,193) (33,471) (50,628) (58,200) (58,200)
-------- -------- -------- ---------- -----------
Total stockholders' equity (deficit)................................. 6,852 (3,085) 12,719 5,882 $ 13,782
-------- -------- -------- ---------- ===========
Total liabilities and stockholders' equity (deficit)................. $ 12,066 $ 5,950 $ 19,187 $ 12,562
======== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
VIRATA CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31, Six Months Ended
----------------------------- ---------------------
1997 1998 1999 September October
30, 1998 3, 1999
------- -------- -------- --------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues
Semiconductors $ - $ 505 $ 2,784 $ 1,697 $ 3,493
License 971 1,570 1,628 1,009 528
Services and royalty 1,134 1,206 2,367 1,075 808
Systems 4,848 5,650 2,477 1,340 848
------- -------- -------- --------- -------
Total revenues 6,953 8,931 9,256 5,121 5,677
Cost of revenues:
Semiconductors - 325 2,421 1,333 1,941
License - - - - -
Services and royalty 185 192 528 229 338
Systems 3,754 3,270 1,048 701 491
------- -------- -------- --------- -------
Total cost of revenues 3,939 3,787 3,997 2,263 2,770
------- -------- -------- --------- -------
Gross profit 3,014 5,144 5,259 2,858 2,907
------- -------- -------- --------- -------
Operating expenses:
Research and development 3,518 3,987 8,323 3,586 5,130
Sales and marketing 4,753 4,076 2,917 1,381 1,896
General and administrative 3,410 4,917 5,567 3,099 2,303
Restructuring costs - 1,871 - - -
Amortization of intangible assets - - 549 137 370
Amortization of stock compensation - 399 1,394 683 505
Acquired in-process research and development - - 5,260 5,260 -
------- -------- -------- --------- -------
Total operating expenses 11,681 15,250 24,010 14,146 10,204
------- -------- -------- --------- -------
Loss from operations (8,667) (10,106) (18,751) (11,288) (7,297)
Interest expense (72) (214) (155) (102) (92)
Interest income and other income (expense), net 199 42 1,749 (305) (183)
------- -------- -------- --------- -------
Net loss $(8,540) $(10,278) $(17,157) $ (11,695) $(7,572)
======= ======== ======== ========= =======
Basic and diluted net loss per share $ (0.80) $ (0.90) $ (1.33) $ (0.91) $ (0.57)
======= ======== ======== ========= =======
Weighted average common shares - basic and diluted 10,676 11,482 12,881 12,790 13,359
======= ======== ======== ========= =======
Unaudited pro forma basic and diluted net loss per share (Note 1) $ (1.42) $ (0.60)
======== =======
Pro forma weighted average shares - basic and diluted 12,075 12,642
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
VIRATA CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended March 31, Six Months Ended
------------------------------ --------------------------
1997 1998 1999 September 30, October 3,
------ ------ ------ 1998 1999
------------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(8,540) $(10,278) $(17,157) $(11,695) $(7,572)
Adjustments to reconcile net loss to net cash used
in operating activities:
Provision for doubtful accounts and returns 111 1,075 1,458 1,334 157
Acquired in-process research and development - - 5,260 5,260 -
Depreciation and amortization 1,085 1,079 1,695 673 1,162
Amortization of stock compensation - 399 1,394 683 505
Changes in current assets and liabilities:
Accounts receivable (797) (1,651) (739) 327 914
Inventories (129) 393 158 76 (430)
Other current assets (615) (445) 82 478 (174)
Accounts payable 1,027 (339) 248 534 9
Accrued liabilities 818 280 (2,083) (1,614) 376
Deferred revenue - 306 184 (21) (22)
------- -------- -------- --------- --------
Net cash used in operating activities (7,040) (9,181) (9,500) (3,965) (5,075)
------- -------- -------- --------- --------
Cash flows from investing activities:
Sale of short-term investments - - - - 1,001
Purchase of short-term investments - - (1,000) - -
Purchase of property and equipment, net (622) (174) (2,127) (618) (299)
Cash paid in connection with acquisition, net of
cash acquired - - (5,149) (5,149) -
------- -------- -------- --------- --------
Net cash (used in) provided by
investing activities (622) (174) (8,276) (5,767) 702
------- -------- -------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible preferred
stock, net of issuance costs 13,125 - 25,106 25,106 -
Proceeds from issuance of common stock 25 52 7 5 37
Proceeds from capital leases 227 11 1,201 20 -
Repayments of capital lease obligations (122) (277) (318) (104) (414)
Proceeds from convertible loan - 2,606 - - -
Proceeds from (repayment of) bank borrowings - 417 (417) (417) -
------- -------- -------- --------- --------
Net cash provided by (used in)
financing activities 13,255 2,809 25,579 24,610 (377)
------- -------- -------- --------- --------
Effect of exchange rate changes on cash 380 24 46 756 271
------- -------- -------- --------- --------
Net increase (decrease) in cash and cash equivalents 5,973 (6,522) 7,849 15,634 (4,479)
------- -------- -------- --------- --------
Cash and cash equivalents at beginning of period 1,316 7,289 767 767 8,616
------- -------- -------- --------- --------
Cash and cash equivalents at end of period $ 7,289 $ 767 $ 8,616 $ 16,401 $ 4,137
======= ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
VIRATA CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Convertible Preferred Common Stock Additional Other
Stock Paid-in Comprehensive
Shares Amount Shares Amount Capital Income (Loan)
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996 12,940 $ 1,564 10,600 $ 165 $ 14,437 $ 338
Issuance of Series B convertible preferred stock 2,713 45 - - 3,080 -
Issuance of Series C convertible preferred stock 6,667 100 - - 9,900 -
Issuance of common stock for cash - - 337 6 19 -
Net loss - - - - - -
Currency translation adjustment - - - - - 391
------------------------------------------------------------------------
Balance, March 31, 1997 22,320 1,709 10,937 171 27,436 729
Issuance of common stock for cash - - 815 14 38 -
Unearned stock compensation - - - - 1,958 -
Amortization of unearned stock compensation - - - - - -
Net loss - - - - - -
Currency translation adjustment - - - - - (110)
------------------------------------------------------------------------
Balance, March 31, 1998 22,320 1,709 11,752 185 29,432 619
Change in the par value Series A convertible
preferred stock - (1,366) - - 1,366 -
Issuance of Series D convertible preferred stock
and warrants 24,781 410 - - 24,672 -
Issuance of Series D convertible preferred stock,
common stock and options for acquisition 606 10 1,540 25 3,553 -
Issuance of Series D convertible preferred
stock upon conversion of debt 3,039 38 - - 2,576 -
Issuance of Series D convertible preferred stock
for cash 22 - - - 24 -
Issuance of common stock for cash - - 49 1 6 -
Exchange of Series B and Series C convertible stock
to Series D convertible preferred stock 663 - - - - -
Unearned stock compensation - - - - 1,335 -
Amortization of unearned stock compensation - - - - - -
Net loss - - - - - -
Unrealized gain on investments - - - - - 1
Currency translation adjustment - - - - - 251
------------------------------------------------------------------------
Balance, March 31, 1999 51,431 801 13,341 211 62,964 871
Issuance of common stock for cash (unaudited) - - 207 4 33 -
Unearned stock compensation (unaudited) - - - - 98 -
Amortization of unearned stock compensation
(unaudited) - - - - - -
Net loss (unaudited) - - - - - -
Currency translation adjustment (unaudited) - - - - - 193
------------------------------------------------------------------------
Balance, October 3, 1999 (unaudited) 51,431 $ 801 13,548 $ 215 $ 63,095 $ 1,064
======== ======= ======== ======= ========== ============
<CAPTION>
Total Total
Stockholders' Comprehensive
Unearned Stock Accumulated Equity Income
Compensation Deficit (Deficit)
<S> <C> <C> <C> <C>
Balance, March 31, 1996 $ - $ (14,653) $ 1,851 $ -
Issuance of Series B convertible preferred stock - - 3,125 -
Issuance of Series C convertible preferred stock - - 10,000 -
Issuance of common stock for cash - - 25 -
Net loss - (8,540) (8,540) (8,540)
Currency translation adjustment - - 391 391
-----------------------------------------------------------------
Balance, March 31, 1997 - (23,193) 6,852 (8,149)
=============
Issuance of common stock for cash - - 52 -
Unearned stock compensation (1,958) - - -
Amortization of unearned stock compensation 399 - 399 -
Net loss - (10,278) (10,278) (10,278)
Currency translation adjustment - - (110) (110)
-----------------------------------------------------------------
Balance, March 31, 1998 (1,559) (33,471) (3,085) (10,388)
=============
Change in the par value Series A convertible
preferred stock - - - -
Issuance of Series D convertible preferred stock
and warrants - - 25,082 -
Issuance of Series D convertible preferred stock,
common stock and options for acquisition - - 3,588 -
Issuance of Series D convertible preferred
stock upon conversion of debt - - 2,614 -
Issuance of Series D convertible preferred stock
for cash - - 24 -
Issuance of common stock for cash - - 7 -
Exchange of Series B and Series C convertible stock
to Series D convertible preferred stock - - - -
Unearned stock compensation (1,335) - - -
Amortization of unearned stock compensation 1,394 - 1,394 -
Net loss - (17,157) (17,157) (17,157)
Unrealized gain on investments - - 1 1
Currency translation adjustment - - 251 251
-----------------------------------------------------------------
Balance, March 31, 1999 (1,500) (50,628) 12,719 (16,905)
=============
Issuance of common stock for cash (unaudited) - - 37 -
Unearned stock compensation (unaudited) 98 - - -
Amortization of unearned stock compensation
(unaudited) 505 - 505 -
Net loss (unaudited) - (7,572) (7,572) (7,572)
Currency translation adjustment (unaudited) - - 193 193
-----------------------------------------------------------------
Balance, October 3, 1999 (unaudited) $ (1,093) $ (58,200) $ 5,882 $ (7,379)
============= ============== ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
13
12
<PAGE>
Note 1 - The Company and Summary of Significant Accounting Policies:
The Company
Virata Corporation (the "Company") was formed in 1993 as Advanced
Telecommunications Modules Limited, a corporation organized in the United
Kingdom, as a spin-off from Olivetti Research Laboratories. In February 1998,
the Company changed its name to Virata Limited. In July 1998, the Company
completed its acquisition of RSA Communications, Inc. ("RSA Communications"), a
corporation organized in North Carolina (see Note 4). RSA was subsequently
renamed to Virata Raleigh Corporation.
The historical financial statements presented are those of Virata Limited.
In August 1999, Virata Corporation was created and as of October 3, 1999 it had
no operations, assets or issued shares. Immediately prior to the initial public
offering ("IPO"), Virata Corporation will become the holding company of Virata
Limited (see Note 13). The reorganization will be accounted for on a historical
basis.
Effective October 3, 1999, the Company changed the fiscal year such that
each quarter ends on the Sunday closest to the calander quarter end.
The Company is a provider of solutions that integrate communication
processors with a suite of software for the digital subscriber line equipment
market.
Principles of consolidation and basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Interim financial information (unaudited)
The accompanying interim consolidated financial statements as of October 3,
1999 and for the six months ended September 30, 1998 and October 3, 1999 are
unaudited but have been prepared on the same basis as the annual financial
statements and, in the opinion of management, reflect all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the Company's financial condition at October 3, 1999 and the results of
operations and cash flows for the six months ended September 30, 1998 and
October 3, 1999. The results of operations of any interim period are not
necessarily indicative of the results of operations for the full year.
Use of estimates
The preparation of consolidated 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 consolidated
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
<PAGE>
Revenues from the sale of both semiconductors and systems are recognized
upon shipment to customers. Allowances are provided for estimated returns at
the time of shipment. The Company recognizes software license revenue under
Statement of Position ("SOP") 97-2, Software Revenue Recognition, and SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. When contracts contain multiple elements and vendor-specific
objective evidence exists for all undelivered elements, the Company accounts for
the delivered elements in accordance with the "Residual Method" prescribed by
SOP 98-9. Software licenses are generally recognized as revenue upon shipment
of the software product. In the event the Company grants customers the right to
specified upgrades, license revenue is deferred until delivery of the specific
upgrade. If vendor-specific objective evidence of fair value does not exist,
then the entire license fee is deferred until the delivery of the specified
upgrade. The Company recognizes revenues from maintenance and support services
provided to licensees ratably over the term of the agreement, generally one
year, and recognizes revenues from design services provided to customers as the
services are performed.
Cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At March 31,
1998 and 1999, $767,000 and $7,142,000, respectively, of money market funds and
certificate of deposits, the fair value of which approximates costs, are
included in cash and cash equivalents. The Company deposits cash and cash
equivalents with high credit quality financial institutions.
Investments
Investments consist of high quality debt securities with original maturity
dates greater than ninety days. In accordance with Statement of Financial
Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", the Company's investments are classified as
available-for-sale and, at the balance sheet date, are reported at fair value,
with the unrealized gains and losses, net of related taxes, reported as a
component of Other Comprehensive Income (Loss). The cost of these investments
at March 31, 1999 was $1,000,000. Gains and losses on the sale of available-
for-sale securities are determined using the specific-identification method.
Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other liabilities approximate fair value due to their short
maturities. Based upon borrowing rates currently available to the Company for
leases with similar terms, the carrying value of capital lease obligations
approximate fair value.
Segment information
Effective April 1, 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Company identifies its operating segments based on business activities,
management responsibility and geographical location. During each of the three
years in the period ended March 31, 1999, the Company operated in one operating
segment, primarily in the United States and Europe.
<PAGE>
Concentration of credit risk
Financial instruments that potentially subject the Company to a concentration
of credit risk consist of cash, cash equivalents, and accounts receivable. The
Company's accounts receivable are derived from revenues earned primarily from
customers located in the U.S. and Europe. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The Company maintains an allowance for doubtful
accounts receivable based upon the expected collectibility of accounts
receivable.
The Company currently has the following concentrations of revenues and
trade accounts receivables:
<TABLE>
<CAPTION>
Six Months ended
Year Ended March 31, October 3, 1999
--------------------------------
1999
---------------
1997 1998 1998
--------- --------- -------- ---------------
(unaudited)
Revenues
- --------
<S> <C> <C> <C> <C>
Customer A..................... - 10% 16% 52%
Customer B..................... 21% 17% 22% 12%
Customer C..................... - 10% 3% -
</TABLE>
Revenues from customers located outside the United States were 47% in
1997, 44% in 1998 and 40% in 1999. The Company has $974,000 and $1,800,000
invested in identifiable tangible assets in Europe as of March 31, 1998 and
1999, respectively. The remaining identifiable tangible assets are located in
the United States.
<TABLE>
<CAPTION>
March 31, October 3,
------------------------------------------
1997 1998 1999 1999
--------- -------- -------- -----------
(unaudited)
Accounts Receivable
- -------------------
<S> <C> <C> <C> <C>
Customer A..................... - 23% 54% 72%
Customer B..................... 22% 11% 11% 2%
Customer C..................... - 28% - -
Customer D..................... - 18% - -
Customer E..................... 19% - - -
Customer F..................... 19% - - -
</TABLE>
Inventories
Inventories consist solely of finished goods and are stated at the lower
of cost or market, cost being determined using the first-in, first-out method.
Property and equipment
Property and equipment are recorded at cost. Depreciation and
amortization are computed on a straight-line basis over the estimated useful
lives of the assets, as follows:
<TABLE>
<S> <C>
Computer and network equipment and software............. 2-3 years
Furniture and office equipment.......................... 5 years
Research and development equipment...................... 2-3 years
</TABLE>
<PAGE>
Leasehold improvements are amortized on a straight-line basis over the
life of the lease, or the useful life of the assets, whichever is shorter.
Impairment of long-lived assets
The Company evaluates the recoverability of long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121. "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" ("SFAS No. 121"). SFAS No. 121 requires recognition of impairment of long-
lived assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.
Intangible assets
Intangible assets consist of goodwill, which is being amortized on a
straight-line basis over five years.
The Company investigates potential impairments of its goodwill on an
exception basis when evidence exists that events or changes in circumstances may
have made recovery of the carrying value unlikely. An impairment loss is
recognized when the expected undiscounted future net cash flows is less than the
carrying amount of the asset. No such losses have been identified to date.
Recent accounting pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No.
133 until fiscal years beginning after June 15, 2000. The Company will adopt
SFAS No. 133 during its year ending March 31, 2002. To date, the Company has not
engaged in derivative or hedging activities. The Company is unable to predict
the impact of adopting SFAS No. 133 if it were to engage in derivative and
hedging activities in the future.
Net loss per share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin ("SAB") No. 98. Under the
provisions of SFAS No. 128 and SAB No. 98, basic and diluted net loss per share
is computed by dividing the net loss available to holders of common stock for
the period by the weighted average number of shares of common stock outstanding
during the period. The calculation of diluted net loss per share excludes
potential shares of common stock if their effect is anti-dilutive. Potential
common stock consists of shares of common stock issuable upon the exercise of
stock options and warrants and shares issuable upon conversion of the Series A,
B, C, and D convertible preferred stock.
The following tables sets forth potential shares of common stock as
converted that are not included in the diluted net loss per share calculation
above because to do so would be anti-dilutive for the period indicated (in
thousands):
<PAGE>
<TABLE>
<CAPTION>
March 31,
------------------------------- -------------------------
September 30, October 3,
1997 1998 1999 1998 1999
-------- -------- -------- ------------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Series A convertible preferred stock....... 1,799 1,799 1,799 1,799 1,799
Series B convertible preferred stock....... 13,855 13,855 1,394 1,394 1,394
Series C convertible preferred stock....... 8,000 8,000 5,600 5,600 5,600
Series D convertible preferred stock....... - - 68,469 68,469 68,469
Convertible preferred stock warrant........ 74 139 2,817 2,817 2,903
Common stock warrant....................... - 75 75 75 -
Common stock options....................... 2,777 4,796 14,516 11,664 21,704
------ ------ ------ ------ -------
26,505 28,664 94,670 91,818 101,869
====== ====== ====== ====== =======
</TABLE>
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended March 31, 1999 is computed
using the weighted average number of shares of common stock outstanding,
including the pro forma effects of: (i) the cancellation of all outstanding
convertible preferred and common stock and all other securities convertible into
preferred or common stock of Virata Limited, (ii) the issuance of new common
shares of Virata Limited to Virata Corporation and the issuance of shares of
common stock of Virata Corporation to the former shareholders of Virata Limited,
and (iii) a 1 for 6.7 reverse common stock split, effective upon the closing of
the Company's IPO as if such transaction occurred on April 1, 1998, or at the
date of original stock issuance, if later. The resulting pro forma adjustment
includes a decrease in the weighted average shares used to compute basic net
loss per share for the fiscal year ended March 31, 1999 and the six months ended
October 3, 1999. The calculation of diluted net loss per share excludes
potential shares of common stock as their effect would be anti-dilutive.
Unaudited Pro Forma Stockholders' Equity
The Board of Directors have authorized the filing of a registration
statement with the Securities and Exchange Commission to register shares of its
common stock in connection with a proposed IPO. If the IPO is consummated under
the terms presently anticipated (i) all outstanding convertible preferred and
common stock and all other securities convertible into preferred or common stock
of Virata Limited will be cancelled (ii) new common shares of Virata Limited
will be issued to Virata Corporation and Virata Corporation will issue shares of
common stock to the former shareholders of Virata Limited, and (iii) a 1 for 6.7
reverse stock split will be effected on all common shares. In October 1999, the
Company issued 6,153,846 shares of series E convertible preferred stock for net
proceeds of $7.9 million (see Note 13). These events have been reflected in the
unaudited pro forma stockholders' equity.
Stock compensation
The Company accounts for stock compensation arrangements in accordance with
provision of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees" and complies with the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25, unearned
stock compensation is based on the difference, if any, on the date of the grant,
between the fair value of the Company's common stock and the exercise price.
Unearned stock compensation is amortized and expensed in accordance with FASB
Interpretation No. 28. The Company
<PAGE>
accounts for stock issued to non-employees in accordance with the provisions of
SFAS No.123 and Emerging Issues Task Force Issue No. 96-18, "Accounting for
Equity Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
Comprehensive income
Comprehensive income consists of foreign currency translation gains and
losses and other unrealized gains and losses arising from the valuation of
short-term investments and is presented in the Consolidated Statement of
Stockholders' Equity (Deficit). Balance sheet accounts of foreign operations are
translated using the period-end exchange rate, and income statement accounts are
translated on a monthly basis using the average exchange rate for the period.
Unrealized gains and losses on translation adjustments are recorded in
stockholders' equity as other comprehensive income. The currency translation
adjustments are not adjusted for income taxes as they relate to indefinite
investments in non-U.S. subsidiaries. Foreign currency transaction gains and
losses are included as a component of other income and expense and as of March
31, 1997, 1998 and 1999 the Company recognized (losses) gains of $(198,000),
$(80,000) and $432,000, respectively.
Note 2 - Supplemental Cash Flow Information (in thousands):
<TABLE>
<CAPTION>
Six Months
Year Ended March 31, Ended
---------------------- -------------------
September October
1997 1998 1999 30, 1998 3, 1999
----- ------ ------ --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental cash flow information:
Cash paid for income taxes........... $ 800 $ 800 $ 800
===== ====== ======
Cash paid for interest............... $ 55 $ 197 $ 180
===== ====== ======
Supplemental noncash investing and
financing activity:
Issuance of preferred stock for
convertible loan....................... $ - $ - $2,712 $ - $ -
===== ====== ====== ===== =====
Issuance of stock and options in
connection with acquisition............ $ - $ - $2,921 $ - $ -
===== ====== ====== ===== =====
Unearned compensation in
connection with issuance of stock
options................................ $ - $1,958 $1,335 $ - $ 98
===== ====== ====== ===== =====
Issuance of warrants in connection
with financing......................... $ - $ - $ 949 $ - $ -
===== ====== ====== ===== =====
Property and equipment purchased
with capital leases.................... $ 754 $ 361 $ - $ 257 $ 297
===== ====== ====== ===== =====
</TABLE>
<PAGE>
Note 3 - Balance Sheet Components (in thousands):
<TABLE>
<CAPTION>
March 31,
-----------------------------
1997 1998 1999
------- ------- ------
<S> <C> <C> <C>
Other current assets:
Prepaid expenses....................................... $ 447 $ 293 $ 564
Deposits............................................... 90 346 113
Other current assets................................... 42 713 555
------- ------- -------
$ 579 $ 1,352 $ 1,232
======= ======= =======
Property and equipment, net:
Office equipment....................................... $ 1,770 $ 2,156 $ 2,856
Furniture and fixtures................................. 192 206 247
Leasehold improvements................................. 131 136 429
Research and development equipment..................... 1,679 1,881 3,039
------- ------- -------
3,772 4,379 6,571
Less: Accumulated depreciation and amortization........ (1,939) (3,073) (4,092)
------- ------- -------
$ 1,833 $ 1,306 $ 2,479
======= ======= =======
</TABLE>
Property and equipment includes $843,000, $2,200,000 and $3,485,000 of
computer equipment and internal-use software under capital leases at March 31,
1997, 1998 and 1999, respectively. Accumulated amortization of assets under
capital leases totaled $52,000, $1,319,000 and $2,015,000 at March 31, 1997,
1998 and 1999, respectively.
<TABLE>
<CAPTION>
March 31,
---------------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Intangible assets:
Goodwill............................................. $ - $ - $3,877
Less: Accumulated amortization....................... - - (549)
------ ------ ------
$ - $ - $3,328
====== ====== ======
Accrued liabilities:
Compensation accrual................................. $ 317 $ 821 $ 869
Royalty obligation................................... 521 532 -
Contract accrual..................................... - 422 -
Other................................................ 1,058 866 1,018
------ ------ ------
$1,896 $2,641 $1,887
====== ====== ======
</TABLE>
In fiscal year 1998, the Company recorded an accrual for $422,000 related
to an obligation of the Company to reimburse suppliers for cancelled purchase
orders related to systems products.
Note 4 - Acquisition of RSA Communications:
The Company completed its acquisition of RSA Communications on July 17,
1998. RSA Communications was privately-held and based in Raleigh, North
Carolina, specializing in analog modem software development. The Company's
acquisition of RSA Communications was accounted for as a purchase business
combination.
<PAGE>
The Company's allocation of RSA Communications' aggregate purchase price to
the tangible and identifiable intangible assets acquired in connection with this
acquisition were based on fair values as determined by independent appraisers.
The allocation is summarized below (in thousands):
<TABLE>
<S> <C>
In-process research and development............ $ 5,260
Goodwill....................................... 3,877
Net assets..................................... 138
--------
Total purchase price........................... $ 9,275
========
</TABLE>
The total purchase price of $9,275,000 million consisted of 1,540,000
shares of the Company's common stock valued at $1,417,000 million, 606,500
series D convertible preferred stock valued at $667,000, options to purchase
1,993,000 shares of common stock valued at $1,505,000 million, cash of
$5,332,000 million and acquisition related expenses of approximately $354,000
consisting primarily of legal and other professional fees. The Company valued
the options using the Black-Scholes option pricing model, applying expected life
of four years, a weighted average risk-free rate of 5.47%, an expected dividend
yield of zero percent, a volatility of 70% and a deemed fair value of common
stock of $0.92 per share.
The core technologies acquired in the RSA acquisition were the ADSL PHY
software and voiceband modem protocol software. The significant in-process
research and development projects include V.90 Modem Software and two software
algorithms, the Modem Modulation Software Algorithm and the ADSL Software
Algorithm.
The valuation of the acquired in-process research and development of
$5,260,000 was based on the result of an independent appraisal which was
determined using the income-based approach for V.90 Modem Software and the
replacement cost method for software algorithms. The acquired in-process
technology was not considered to have reached technological feasibility at the
time it was acquired and had no alternative future use. Accordingly, the amount
was charged to operations upon acquisition.
The V.90 Modem Software project was completed subsequent to its acquisition
in 1998 and has been licensed to a customer. At the time of the acquisition this
project was approximately 90% complete, and the fair value assigned to this
project was $2.435 million.
The Modem Modulation Software Algorithm includes certain software that
provides modulation/demodulation functions of a voiceband modem, and certain
software for a voiceband modem that provides functions such as control, error
correction and data compression. At the time of the acquisition, this project
was approximately 90% complete, and the fair value assigned to this project was
$2.4. million. This project was subsequently terminated.
The ADSL software algorithm is a complete software stack that is compliant
with the ITU ADSL standards. The fair value assigned to this project was
$425,000 at the time of this acquisition when this project was approximately 35%
complete. The project is currently 85% complete and has a remaining expected
development cost of $375,000. The remaining risks affecting the timely
completion and commercialization of this project are minimal. The remaining
uncertainties that might affect the outcome of this project are related to the
size of the developing ADSL market.
<PAGE>
The income method of valuation for the V.90 Modem Software was determined
using a modified version of the relief from royalty avoided by the Company upon
the purchase of RSA Communications. Royalty rates were estimated based on past
contracts and unit sales were estimated based on the size of the total market
from industry analysis. The avoided royalty payments by the Company were then
calculated for the life of the product. The net cash flow was discounted back to
the present value at a risk-adjusted discount rate of 40%.
The algorithms which require a special skill set for their development were
valued using the replacement cost method which considered costs incurred through
the valuation date.
The goodwill is to be amortized on a straight-line basis over the estimated
period of benefit of five years.
The following unaudited pro forma financial information presents the
consolidated results of the Company as if the acquisition had occurred at the
beginning of each period, and includes adjustments for amortization of goodwill.
This pro forma financial information is not intended to be indicative of future
results. Unaudited pro forma consolidated results of operations are as follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------
1998 1999
------------------------
(unaudited)
<S> <C> <C>
Revenues................................ $ 13,251 $ 10,075
Net loss................................ (11,931) (19,224)
Basic and diluted net loss per share.... (0.92) (1.44)
</TABLE>
Note 5 - Restructuring:
In September 1997, the Company implemented a new business strategy focusing
on semiconductors and reduced the resources allocated to its systems line of
business. A restructuring plan was implemented in the second half of the fiscal
year ended March 31, 1998, which resulted in one time charges of $1,871,000 in
the fiscal year ended March 31, 1998. Approximately $900,000 of the
restructuring charge represents employee costs, $900,000 represent asset write
downs and $71,000 related to other restructuring costs. As of March 31, 1998 the
Company had reduced the operations of the systems business including reduced
headcount from the prior years level by approximately 33%. The Company continues
to sell its systems products to one principal customer and systems revenues for
the six months ended October 3, 1999 were $848,000.
The following table lists the components of the restructuring accrual for
the year ended March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Employee Asset
Costs Write down Other Total
-------- ---------- ----- -------
<S> <C> <C> <C> <C>
Reserve provided as at April 1, 1997..... $ 900 $ 900 $ 71 $ 1,871
Reserve utilized........................ (783) (900) (25) (1,708)
------ ------ ----- -------
Balance at March 31, 1998................ 117 - 46 163
Reserve utilized........................ (117) - (46) (163)
------ ------ ----- -------
Balance at March 31, 1999................ $ - $ - $ - $ -
====== ====== ===== =======
</TABLE>
Note 6 - Income Taxes:
<PAGE>
No income tax provision was recorded for the three years ended March 31,
1999 and the six months ended September 30, 1998 and October 3, 1999 because the
Company incurred net losses in such periods.
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
March 31,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..... $ 7,222 $ 9,011 $ 12,647
Temporary differences................ 560 751 1,764
Other................................ - - 67
------- ------- --------
7,782 9,762 14,478
------- ------- --------
Valuation allowance................... (7,782) (9,762) (14,478)
------- ------- --------
$ - $ - $ -
======= ======= ========
</TABLE>
The deferred tax asset has been fully reserved due to the uncertainty of
the Company's liability to realize this asset in the future.
At March 31, 1999, the Company has approximately $14.2 million, $11.7
million and $23.2 million in federal, state and foreign net operating loss
carryforwards, respectively, to reduce future taxable income. The net operating
loss carryforwards expire between 2002 and 2019 for both federal and state
purposes, if not utilized.
Note 7 - Borrowings:
A convertible loan in the amount of $2,712,000 was converted to 2,402,710
shares of series D convertible preferred stock valued at $1.10 per share on June
4, 1998. The value of the stock was determined by the series D convertible
preferred stock offering price of $1.10, also on June 4, 1998. The loan was
drawn in December 1997 bearing interest at the rate of 10% per annum and was due
to related parties.
Short term borrowings represent the Company's overdraft facility which is
collaterized by the assets of the Company.
In connection with a loan and security agreement, the Company issued a
warrant to purchase 35,294 shares of series D convertible preferred stock at an
exercise price of $1.70 per share. This warrant is outstanding at March 31, 1999
and expires December 12, 2002. The Company valued the warrant using the Black-
Scholes option pricing model, applying an expected life of 5 years, a weighted
average risk free rate of 5.77%, an expected dividend yield of zero percent, a
volatility of 70% and a deemed fair value of common stock of $0.95. The Company
determined that the fair value of the warrant was not significant at the date of
the grant.
Note 8 - Commitments:
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through March 2005. The Company
also subleased to third parties a certain property under a noncancelable
operating lease which
<PAGE>
expired in July 1999. Net rent expense for the three years ended March 31, 1999
was $281,000, $372,000 and $536,000, respectively. The terms of the facility
lease provide for rental payments on a graduated scale. The Company recognizes
rent expense on a straight-line basis over the lease period, and has accrued for
rent expense incurred but not paid.
Future minimum lease payments under noncancelable operating and capital
leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending Capital Operating Sublease
March 31, Leases Leases Income
- ----------- --------- ----------- ----------
<S> <C> <C> <C>
2000............................................... $ 987 $ 708 $ 43
2001............................................... 638 718 -
2002............................................... 455 555 -
2003............................................... 111 438 -
2004............................................... - 327 -
2005............................................... - 55 -
--------- ----------- ----------
Total minimum lease payments and sublease income... 2,191 $ 2,801 $ 43
========= =========== ==========
Less: Amount representing interest................. (211)
---------
Present value of capital lease obligations......... 1,980
Less: Current portion.............................. (850)
=========
Long-term portion of capital lease obligations.. $ 1,130
=========
</TABLE>
Note 9 - Convertible Preferred Stock
Convertible preferred stock at March 31, 1999 consists of the following:
<TABLE>
<CAPTION>
Shares Issued and Outstanding
---------------------------------------------------------
March 31,
---------------------------------------------------------
Shares Liquidation
Series Authorized 1997 1998 1999 Amount
- ------ ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
A...................... 3,100,000 1,798,720 1,798,720 1,798,720 $ 1,438,976
B...................... 25,000,000 13,854,556 13,854,556 1,394,406 1,561,735
C...................... 8,000,000 6,666,667 6,666,667 4,666,667 7,000,000
D...................... 50,000,000 - - 43,571,386 47,928,525
86,100,000 22,319,943 22,319,943 51,431,179 57,929,236
</TABLE>
On June 4, 1998, existing investors were given the opportunity to convert
their shares of series A, B and C convertible preferred stock into series D
convertible preferred stock and new investors were given the opportunity to
purchase series D convertible preferred stock. The Company issued 24,780,934
shares of series D convertible preferred stock for $1.10 per share resulting in
net proceeds after issuance costs of $24,390,000. The Company also issued
15,123,062 shares of series D convertible preferred stock as a result of
existing stockholders opting to convert their shares of series B and C
convertible preferred stock into series D convertible preferred stock. In June
1999, the series D convertible preferred stock conversion price was reduced to
$0.70 from $1.10 based on the Company's revenues for the year ended March 31,
1999.
In connection with investment banking services provided during the June
1998 offering, the Company issued warrants to purchase an aggregate of 1,595,054
shares of series
<PAGE>
D convertible preferred stock at an exercise price of $1.10 per share. The
warrants may be exercised at any time within five years after issuance. The
Company valued the warrants using the Black-Scholes option pricing model,
applying expected life of five years, a weighted average risk-free rate of 5.2%,
an expected divided yield of zero percent, a volatility of 70% and a deemed fair
value of common stock of $0.99. The fair market value of the warrants of
$1,719,000 has been netted against the proceeds from the offering.
The holders of convertible preferred stock have various rights and
preferences as follows:
Voting
Each share of series A, B, C and D convertible preferred stock has voting
rights equal to an equivalent number of shares of common stock into which it is
convertible and votes together as one class with the common stock.
As long as at least 1,000,000 shares of series B, C and D convertible
preferred stock remain outstanding, the Company must obtain approval from 662/3%
of the holders of convertible preferred stock in order to alter the articles of
incorporation as related to convertible preferred stock, or change the
authorized number of shares of convertible preferred stock. The Company must
obtain approval from 662/3% of the owners of issued shares of the Company to
create a new class of stock or effect a merger, consolidation or sale of assets
where the existing shareholders retain less than 50% of the voting stock of the
surviving entity.
Dividends
Holders of series A, B, C and D convertible preferred stock are entitled to
participate in dividends on a pro-rata basis irrespective of the class of stock.
No dividends on convertible preferred stock or common stock have been declared
by the Board of Directors from inception through October 3, 1999.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners of
the Company's common stock and convertible preferred stock own less than 51% of
the resulting voting power of the surviving entity, the holders of series A, B,
C and D convertible preferred stock are entitled to receive an amount of $0.80,
$1.12, $1.50 and $1.10 per share, respectively, plus any declared but unpaid
dividends prior to and in preference to any distribution to the holders of
common stock. The remaining assets, if any, shall be distributed pro-rata
amongst all stockholders on an as converted basis. Should the Company's legally
available assets be insufficient to satisfy the liquidation preferences, the
funds will be distributed first to the series D convertible preferred
stockholders, plus any unpaid dividends and the remainder to the other
convertible preferred stockholders.
Conversion
Each share of series A, B, C and D convertible preferred stock is
convertible, at the option of the holder, according to a conversion ratio,
subject to adjustment for dilution. Each share of series A, B, C and D
convertible preferred stock automatically converts into the number of shares of
common stock into which such shares are convertible at the then
<PAGE>
effective conversion ratio upon the closing of a public offering of common stock
at a per share price of at least $3.00 per share with gross proceeds of at least
$7,500,000 or the Company completes a public offering in the United Kingdom of
common stock at a per share price of at least 50 pence per share. Shares of
series B, C and D convertible preferred stock also convert automatically upon
the consent of the respective holders of the majority of convertible preferred
stock.
At October 3, 1999, the Company reserved 1,799,000, 1,394,000, 5,600,000
and 68,469,000 shares of common stock for the conversion of series A, B, C and D
convertible preferred stock, respectively.
Warrants for Convertible Preferred Stock
In connection with a lease agreement, the Company issued warrants to
purchase 69,705 shares of series C and 109,091 shares of series D convertible
preferred stock for $1.50 and $1.10 per share, respectively, in the period
September 1996 to September 1998. Such warrants are outstanding at March 31,
1999 and expire in the period September 2001 to September 2008. The Company
valued the warrants using the Black-Scholes option pricing model, applying
expected life of five years, a weighted average risk-free rate of 6.6% and
4.81%, an expected dividend yield of zero percent, a volatility of 70% and a
deemed fair value of common stock of $0.74 and $0.85, respectively. The Company
determined that the fair value of the warrants was not significant at the date
of grant.
Note 10 - Stock Option Plans:
In April 1998, the Company adopted the 1998 Stock Option Plan (the "Plan").
The Plan provides for the granting of stock options to employees and consultants
of the Company. Options granted under the Plan may be either incentive stock
options or nonqualified stock options. Incentive stock options ("ISO") may be
granted only to Company employees (including officers and directors who are also
employees). Nonqualified stock options ("NSO") may be granted to Company
employees and consultants.
Options under the Plan may be granted for periods of up to seven years and
at prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a 10% shareholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively. To date, options granted generally vest over four years. Options
expire at the earlier of 90 days after the employee ceases employment or seven
years after the effective date of the grant of the options.
During the period from April 1, 1996 through March 31, 1999, the Company
recorded $3,293,000 of deferred stock compensation for the excess of the deemed
fair market value over the exercise price at the date of grant related to
options granted in 1998 and 1999. The compensation expense is being recognized
over the option vesting period of four years. The Company amortized $399,000,
$1,394,000 and $505,000 (unaudited) for the years ended March 31, 1998 and 1999,
and the six months ended October 3, 1999, respectively.
The following table summarizes activity under the Company's Plan from March
31, 1996 through October 3, 1999:
<PAGE>
<TABLE>
<CAPTION>
Outstanding Options
--------------------------
Shares Number of Weighted-
Available for Shares Average
Grant Exercise
Price
------------- ---------- -----------
<S> <C> <C> <C>
Balance, March 31, 1996........................... 2,898,208 2,101,792 $ 0.07
Shares reserved for grant.................... - - -
Options granted.............................. (2,136,000) 2,136,000 0.20
Options exercised............................ - (337,254) 0.07
Options canceled............................. 1,123,731 (1,123,731) 0.22
------------- ----------
Balance, March 31, 1997........................... 1,885,939 2,776,807 0.11
Shares reserved for grant.................... 2,012,143 - -
Options granted.............................. (6,082,500) 6,082,500 0.24
Options exercised............................ - (815,161) 0.06
Options canceled............................. 3,248,208 (3,248,208) 0.24
------------- ----------
Balance, March 31, 1998........................... 1,063,790 4,795,938 0.20
Shares reserved for grant.................... 10,038,221 - -
Options granted.............................. (10,038,194) 10,380,194 0.61
Options exercised............................ - (48,229) 0.10
Options canceled............................. 612,208 (612,208) 0.70
------------- ----------
Balance, March 31, 1999........................... 1,334,025 14,515,695 0.47
Shares reserved for grant (unaudited) 9,938,969 - -
Options granted (unaudited).................. (7,759,500) 7,759,500 1.27
Options exercised (unaudited)................ - (131,955) 0.23
Options canceled (unaudited)................. 439,190 (439,190) 0.44
------------- ----------
Balance, October 3, 1999 (unaudited).............. 3,952,684 21,704,050 0.76
============= ==========
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding at March 31, 1999 Options Exercisable
at March 31, 1999
------------------------------------- -------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Price Outstanding Life Exercise Price Outstanding Exercise Price
- -------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.02 - $0.08 730,000 2.5 $0.05 721,111 $0.05
$0.16 869,792 3.9 0.16 633,822 0.16
$0.24 - $0.25 5,065,694 5.4 0.24 3,141,139 0.24
$0.70 7,850,209 6.3 0.70 0.70
---------- -----------
14,515,695 4,496,072
========== ===========
</TABLE>
The total number of options exercisable at March 31, 1997 and 1998 was
612,589 and 1,361,552, respectively.
Fair value disclosures
If compensation cost for the Company's stock-based compensation plan had
been determined based on the fair value at the grant dates for the awards under
a method
<PAGE>
prescribed by SFAS No. 123, the Company's net loss would have been increased to
the pro forma amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------
1997 1998 1999
----------- ----------- ----------
<S> <C> <C> <C>
Net loss:
As reported................................ $ (8,540) $ (10,278) $ (17,157)
Pro forma.................................. (8,777) (10,974) (19,707)
Basic and diluted net loss per share:
As reported................................ $ (0.80) $ (0.90) $ (1.33)
Pro forma.................................. (0.82) (0.96) (1.53)
</TABLE>
The Company calculated the fair value of each option on the date of grant
using the Black-Scholes pricing method with the following assumption: expected
dividend yield of zero percent; weighted average expected option term of four
years; risk free interest rates of 6.1% to 6.7%, 5.6% to 6.6% and 4.5% to 5.8%
and a volatility of 70% for the three years ended March 31, 1999. The weighted
average fair value of options granted during 1997, 1998 and 1999 was $0.72,
$0.93 and $0.88, respectively.
Warrants for Common Stock
In connection with a consulting agreement, the Company issued a warrant to
purchase 75,000 shares of common stock for $0.08 per share in July 1997. This
warrant is outstanding at March 31, 1999 and expires in July 2007. The Company
valued the warrant using the Black-Scholes option pricing model, applying
expected life of five years, a weighted average risk-free rate of 6.62%, an
expected dividend yield of zero percent, a volatility of 70% and a deemed fair
value of common stock of $0.89. Using the Black-Scholes pricing model, the
Company determined that the fair value of the warrant was not significant at the
date of grant. The warrant was exercised and converted into 75,000 shares of the
Company's common stock in September 1999.
Note 11 - Employee Benefit Plans
The Company has two benefit plans, one in the United Kingdom, and a
separate plan in the United States. The United Kingdom plan includes private
health care, permanent health insurance, death in service coverage and a pension
arrangement. In addition, under the United Kingdom Plan, the Company matches
pension contributions of up to 5% of an employee's salary. Contributions for the
years ended March 31, 1997, 1998 and 1999 were $105,500, $109,400, and $112,600
respectively.
The United States plan includes a medical plan, life insurance, accidental
death and dismemberment insurance, long-term disability, IRC Section 124 premium
payment plan, COBRA and a 401 (k) retirement plan. Under the United States plan,
effective with the acquisition of RSA in July 1998, the Company also provides
50% matching contribution to the retirement plan of up to $2,000 per calendar
year per employee. Contributions for the year ended March 31, 1999 amounted to
$58,000.
Note 12 - Related Party Transactions:
In fiscal year 1999, related parties converted $1,454,000 of a 10%
convertible loan into 1,279,205 shares of series D convertible preferred stock.
<PAGE>
The Company had sales of $921,000, $82,000 and $549,000 for the three years
ended March 31, 1999, respectively, to related parties. At March 31, 1997, 1998
and 1999, there were accounts receivable from related parties in the amounts of
$148,000, $5,000 and $154,000, respectively, included in the balance sheets.
Note 13 - Subsequent Events
Initial Public Offering
In June 1999, the Board of Directors of Virata Limited authorized
management to file a registration statement with the Securities and Exchange
Commission to permit the Company to sell shares of its common stock to the
public. In association with the offering, the Board of Directors authorized
soliciting the shareholders for their approval of: (i) the cancellation of all
outstanding convertible preferred and common stock and all other securities
convertible into preferred or common stock of Virata Limited, (ii) the issuance
of new common shares of Virata Limited to Virata Corporation and the issuance of
shares of common stock of Virata Corporation to the former shareholders of
Virata Limited, and (iii) a reverse stock split. These events are to occur
immediately after the Registration Statement becomes effective.
Borrowing Agreement
On August 29, 1999, the Company entered into a loan and security agreement
with Venture Banking Group, an entity of Greater Bay Bancorp that provides for
borrowings up to $3.0 million. The agreement bears interest at prime rate plus
one-half percent, and all outstanding advances are due in August 2000.
Borrowings are secured by the Company's property, equipment, intellectual
property, inventory and receivables and require the Company to comply with
certain financial covenants including the maintenance of specific minimum
ratios. As of October 3, 1999, the Company was in compliance with or had
obtained waivers for such financial covenants, and the Company had $483,000
outstanding debt under this agreement, bearing interest of 8.75%.
Series E Convertible Preferred Stock
On October 12, 1999 the Company issued 6,153,846 shares of series E
convertible preferred stock at a purchase price of $1.30 per share in exchange
for $8.0 million.
Warrants for Convertible Preferred Stock
In May 1999, in connection with a lease agreement, the Company issued a
warrant to purchase 54,545 shares of series D convertible preferred stock for
$1.10 per share. The warrant expires in May 2009. The Company valued the warrant
using the Black-Scholes option pricing model, applying an expected life of ten
years, a weighted average risk free rate of 5.26%, an expected dividend yield of
zero percent, a volatility of 70% and a deemed fair value of common stock of
$1.03 per share.
Yours faithfully
PricewaterhouseCoopers LLP"
<PAGE>
Tax on income from Shares
UK resident individual shareholders in the Company will be subject to UK income
tax at their marginal rate of tax on the full amount of the gross dividend, that
is the dividend received in cash plus any tax withheld by the US authorities.
Any such tax withheld by the US authorities should be available to reduce the UK
income tax liability on the dividend received. Any US tax withheld in excess of
the UK income tax liability on the dividend cannot be set off against other UK
tax liabilities or recovered in any other way.
Other information
The Company is a holding company. The Company's direct and indirect subsidiaries
will, on completion of the Offering (as set out in the US Preliminary
Prospectus), be as follows:
<TABLE>
<CAPTION>
Name Country of incorporation Percentage of issued
share capital held
<S> <C> <C>
Virata Limited England and Wales 100%
Virata Santa Clara Corporation USA 100%*
Virata Raleigh Corporation USA 100%*
</TABLE>
* shares held by Virata Limited
The Company was organised as a corporation under the Delaware General
Corporation Law on 31st August 1999 in the State of Delaware, USA. The liability
of the stockholders of the Company is limited.
Yours faithfully,
/s/ H. Hauser
Herman Hauser
