<PAGE>
As filed with the Securities and Exchange Commission on July 13, 2000.
Registration No. 333-39912
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------
AMENDMENT NO. 2
To
FORM S-1
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>
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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
Gregory J. Conklin Wilson Sonsini Goodrich & Rosati, P.C.
Gibson, Dunn & Crutcher LLP One Market
One Montgomery Street, Telesis Tower Spear Street Tower
San Francisco, California 94104 San Francisco, California 94105
(415) 393-8200 (415) 947-2000
</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. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of To Be Offering Price Aggregate Registration
Securities to be Registered Registered Per Share Offering Price fee
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value........ 2,875,000(1) $71.00(2) $204,125,000 $53,900
--------------------------------------------------------------------------------------------------
</TABLE>
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(1) Represents additional shares being registered by the registrant. In
connection with the original filing of this Registration Statement on June
22, 2000, the registrant registered 4,600,000 shares of its common stock
at a proposed maximum offering price per share of $45.38 and a proposed
maximum aggregate offering price of $208,748,000, and paid a registration
fee of $55,150. The aggregate number of shares of common stock being
registered by the registrant under this Registration Statement is
7,475,000, which number includes 620,000 shares that are being sold by the
selling stockholders and 975,000 shares that the underwriters have the
option to purchase from the registrant solely to cover over-allotments, if
any.
(2) Represents the actual offering price to the public of the shares being
registered.
--------------
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.
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<PAGE>
6,500,000 Shares
VIRATA CORPORATION
Common Stock
------------
We are selling 5,880,000 shares of common stock and the selling stockholders
are selling 620,000 shares of common stock. We will not receive any of the
proceeds from the sale of the shares being sold by the selling stockholders.
The underwriters have an option to purchase a maximum of 975,000 additional
shares from us to cover over-allotments of shares.
Our common stock is quoted on The Nasdaq Stock Market's National Market under
the symbol "VRTA." The last reported sale price of our common stock on July 12,
2000 was $71.06 per share.
Investing in our common stock involves risks. See "Risk Factors" on page 8.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Virata Stockholders
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Per Share............ $71.00 $3 .60 $67.40 $67.40
Total................ $461,500,000 $23,430,000 $396,284,862 $41,785,138
</TABLE>
Delivery of the shares of common stock will be made on or about July 18,
2000.
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
UBS Warburg LLC
Robertson Stephens
Thomas Weisel Partners LLC
The date of this prospectus is July 13, 2000.
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Special Note Regarding Forward-Looking Statements........................ 22
Use Of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Price Range Of Common Stock.............................................. 23
Capitalization........................................................... 24
Dilution................................................................. 25
Selected Consolidated Financial Data..................................... 26
Management's Discussion And Analysis Of Financial Condition And Results
Of Operations........................................................... 28
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business................................................................... 43
Management................................................................. 58
Certain Transactions....................................................... 69
Principal And Selling Stockholders......................................... 72
Description Of Capital Stock............................................... 74
Shares Eligible For Future Sale............................................ 78
Underwriting............................................................... 80
Notice To Canadian Residents............................................... 83
Legal Matters.............................................................. 84
Experts.................................................................... 84
Where to Find Additional Information....................................... 84
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.
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights information that we more fully describe
elsewhere in this prospectus. You should read this entire prospectus carefully,
including the section entitled "Risk Factors."
Virata Corporation
We provide communications processors combined with integrated software
modules to manufacturers of equipment utilizing digital subscriber line, or
DSL, and fixed broadband wireless technologies. These "integrated software on
silicon" product solutions enable our customers to develop a diverse range of
DSL and wireless equipment, including modems, gateways, routers, wireless
receivers and wireless base stations targeted at the voice and high-speed data
network access, or broadband local loop 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.
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, while fixed wireless extends broadband service to markets which
DSL does not serve economically, including geographically remote markets.
To meet the demands of these rapidly growing markets, 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 and networking
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;
. delivers the required functionality and performance at a compelling
price; and
. is compliant with relevant industry standards.
By adopting our solutions, our customers enjoy numerous benefits including:
. faster time-to-market;
. reduced product cost;
. the opportunity to focus their engineering resources on product
differentiation and improvement;
. the ability to design multiple products using different subsets of our
modular software; and
. the ability to re-use software extensions they develop on future
generations of their products.
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;
3
<PAGE>
. licensing our software to all our customers;
. leveraging our flexible semiconductor and software designs to introduce
an expanding range of communications processors and software modules;
. delivering market-leading features and functionality, such as voice over
DSL and network quality of service solutions; 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 June 9, 2000, we had licensed our software to over 80 companies. These
customers have developed, or are developing, 132 designs of which more than 40
are currently shipping. Additionally, we have shipped more than one million
units of our helium semiconductor product as of the date of this prospectus.
Our largest customers in terms of revenue include Orckit Communications and
Westell Technologies.
Our commercial, financial and operational headquarters are located in Santa
Clara, California. Research and development facilities and/or sales offices are
located in Cambridge, England, Raleigh, North Carolina, Santa Barbara,
California, Kfar Saba, Israel, Marlborough, Massachusetts, Taipei, Taiwan and
several other locations around the world. 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 a part of this prospectus.
Recent Developments
We acquired D2 Technologies, Inc. on February 10, 2000. Based in Santa
Barbara, California, D2 Technologies supplies telephony and voice over IP
software and, prior to its acquisition, was privately-held. The total purchase
price consisted of 4,396,826 shares of our common stock, the assumption of
options to purchase 932,330 shares of our common stock and direct acquisition
related expenses of approximately $4.2 million.
We acquired Inverness Systems, Ltd. on April 27, 2000. Based in Kfar Saba,
Israel, Inverness Systems provides network software solutions and, prior to its
acquisition, was privately-held. The total purchase price consisted of
2,006,440 shares of our common stock, the assumption of options to purchase
517,896 shares of our common stock and direct acquisition related expenses of
approximately $750,000.
On June 5, 2000, we introduced our Azurite chipset, which enables the design
of DSL Integrated Access Devices, or IADs, that provide combined voice and data
services for the high-volume residential and small to mid-size office markets.
The Azurite family of voice and data IAD chipsets is a combination of our
Helium or Beryllium semiconductors and software with voice algorithms, and
voice control systems that we acquired from D2 Technologies.
On June 20, 2000, we signed a definitive agreement to acquire privately held
Excess Bandwidth Corporation. Under the terms of the agreement, we will issue
6,302,317 shares of our common stock or options to purchase shares of our
common stock in exchange for all of Excess Bandwidth's issued and outstanding
shares of capital stock and options and warrants to purchase shares of its
capital stock. In addition, we will incur an estimated $8.1 million in direct
acquisition costs. The transaction is expected to provide us with symmetric DSL
physical layer capabilities targeted at the high-growth markets for both
business premises and central office equipment. This offering is not contingent
on the closing of our acquisition of Excess Bandwidth Corporation. The
acquisition is expected to close during the third quarter of calendar 2000.
4
<PAGE>
On June 20, 2000, we announced that our fiscal 2001 first quarter revenues
for the period ended July 2, 2000 are expected to be approximately $25-27
million, which represents an average 115 percent increase from the prior
quarter's $12.0 million in revenues. We had not expected to attain such amount
of revenues until our fiscal 2001 second quarter. In addition, we expect to
ship three times more communications processors for the first quarter compared
to the prior quarter, including our millionth Helium processor. We expect to
announce our complete first quarter 2001 results on July 25, 2000.
----------------
Virata(R), ATMOS(R) and ATOM(R) are our registered trademarks. The Virata
Logo, ISOS(TM), Proton(TM), Hydrogen(TM), Helium(TM), Lithium(TM),
Beryllium(TM), Boron(TM), Neon(TM), Magnesium(TM) and Azurite(TM) are also our
trademarks and may be the subject of pending trademark applications. This
prospectus also makes reference to trademarks of other companies.
5
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by us......................... 5,880,000 shares
Common stock offered by the selling stockholders... 620,000 shares
Common stock to be outstanding after the offering.. 55,078,772 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. We
may also use proceeds to
pursue acquisitions of
complementary products,
technologies or
businesses. See "Use of
Proceeds."
Nasdaq National Market symbol...................... VRTA
</TABLE>
The common stock outstanding after this offering is based on 49,198,772
shares outstanding on June 9, 2000. Our common stock outstanding after this
offering excludes:
. 9,289,730 shares of our common stock that may be issued upon exercise of
stock options and warrants outstanding as of June 9, 2000, with a
weighted average exercise price of $12.02 per share;
. 2,655,064 other shares of our common stock reserved for issuance under
our stock plans; and
. an aggregate of approximately 6,302,317 shares of our common stock that
will be issued and/or subject to outstanding options or repurchase
rights upon the completion of our anticipated acquisition of Excess
Bandwidth Corporation.
See "Capitalization," "Management--Non-Employee Director Compensation Plan,"
"--Employee Stock Option Plans" and "--Employee Stock Purchase Plan" and
"Description of Capital Stock."
------------
Except as otherwise indicated, information in this prospectus reflects the
two-for-one stock split of our common stock effective as of May 18, 2000 (all
share and per share amounts have been retroactively restated to reflect the
stock split), and assumes no exercise of the underwriters' over-allotment
option.
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 per share data)
<TABLE>
<CAPTION>
Year Ended
-----------------------------
March 31, March April 2,
1998 31, 1999 2000
--------- -------- --------
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Semiconductors................................. $ 505 $ 2,784 $ 14,041
Systems, license, services and royalty......... 8,426 6,472 7,736
-------- -------- --------
Total revenues............................... 8,931 9,256 21,777
Total cost of revenues........................... 3,787 3,997 11,239
-------- -------- --------
Gross profit..................................... 5,144 5,259 10,538
-------- -------- --------
Operating expenses:
Research and development....................... 3,987 8,323 12,331
Sales and marketing............................ 4,076 2,917 5,350
General and administrative..................... 4,917 5,567 5,976
Amortization of intangible assets, National
Insurance Contribution on options and stock
compensation.................................. 2,270 7,203 15,199
-------- -------- --------
Total operating expenses..................... 15,250 24,010 38,856
-------- -------- --------
Loss from operations............................. (10,106) (18,751) (28,318)
Interest and other income (expense), net......... (172) 1,594 2,210
-------- -------- --------
Net loss......................................... $(10,278) $(17,157) $(26,108)
======== ======== ========
Net loss per share:
Basic and diluted.............................. $ (3.00) $ (4.46) $ (1.40)
======== ======== ========
Weighted average shares........................ 3,428 3,845 18,672
======== ======== ========
<CAPTION>
As of April 2, 2000
-----------------------------
Pro
Pro Forma As
Actual Forma Adjusted
--------- -------- --------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........................ $ 60,193 $ 61,119 $456,284
Working capital.................................. 70,631 59,605 454,770
Total assets..................................... 181,362 533,917 929,082
Total long term liabilities...................... 1,178 2,321 2,321
Total stockholders' equity....................... 161,788 498,326 893,491
</TABLE>
See Note 1 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 2,006,440 shares of our common
stock in connection with our acquisition of Inverness Systems, Ltd. and
5,898,290 shares of our common stock in connection with our anticipated
acquisition of Excess Bandwidth Corporation.
The pro forma as adjusted numbers give effect to our receipt of the net
proceeds from our sale of 5,880,000 shares of common stock in this offering at
a public offering price of $71.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us. 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 $26.1 million, $17.2
million and $10.3 million for the fiscal year ended April 2, 2000 and the
fiscal years ended March 31, 1999 and 1998, 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;
8
<PAGE>
. changes in industry standards governing DSL technologies;
. the extent and timing of new customer transactions;
. 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 effect 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.
9
<PAGE>
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 adequate sales of our products
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
this equipment to be successful. If equipment that incorporates our products
is not accepted in the marketplace, we may not achieve adequate sales volume
of our products, which would have a negative effect 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, we may be unable to generate substantial sales of our
products, which would have a negative effect 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 manufactured at independent 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 effect 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 our 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
10
<PAGE>
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 effect on our results of operations.
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 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
manufacturing processes or the inadvertent use of defective or contaminated
materials by a foundry could adversely affect the 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 effect on our results of operations.
Because we depend on a license from Advanced RISC Machines to manufacture
certain of our planned communicator processor products, our loss of or
inability to maintain the license could result in increased costs or delays
in the manufacturing of our products
Our communicator processor 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 communicator
processor 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 communicator processor 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.
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Because we rely on the technology of third parties, the loss of or inability
to obtain the third party technology could result in increased costs or delays
in the production or improvement of our products
We currently license technology of third parties to develop and manufacture
our products, including licenses from Advanced RISC Machines and Broadcom. If
any of these third party providers were to change their product offerings or
terminate our licenses, we would incur additional developmental costs and,
perhaps, delays in production, or be forced to modify our existing or planned
software product offerings, an expensive and time consuming process. In
addition, if the cost of any of these third party licenses or products
significantly increases, we could suffer a resulting increase in costs or
delays in our ability to manufacture our products or provide complete customer
solutions and this could harm our results of operations. We cannot be sure that
such third party licenses or substitutes will be available on commercially
favorable terms.
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 from these customers. For the fiscal year ended
April 2, 2000, Orckit Communications and Westell Technologies accounted for
23.1% and 15.1%, respectively, of our total revenues. For the fiscal year ended
March 31, 1999, Com21 and Orckit Communications accounted for 22.6% and 15.7%,
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 and software
technology, rather than continue to purchase semiconductors and software 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
and software 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.
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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 April 2, 2000, approximately 44.6%, 30.9% and
24.5%, respectively, of our semiconductor revenues were generated from sales
of our Helium and Hydrogen products and our Proton family. We expect that our
Proton family and Hydrogen products will represent a diminishing proportion of
our total revenues while a substantial portion of our total revenues will be
derived from our Helium and Beryllium products in the foreseeable future.
Therefore, broad market acceptance of the Helium and Beryllium 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 often 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.
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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 existence 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 have significant operations in countries outside of the United
States, 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
A significant portion of our operations occur outside the United States.
One of our principal subsidiaries is incorporated under the laws of, and its
principal offices are located in, the United Kingdom. We also have a
subsidiary and sales office in Taipei, Taiwan and sales offices in several
other countries. In addition, on April 27, 2000, we completed the acquisition
of Inverness Systems, Ltd, a privately-held corporation based in Israel. Our
international operations are subject to a number of risks, including foreign
currency exchange rate fluctuations; longer sales cycles; multiple,
conflicting and changing governmental laws and regulations; protectionist laws
and business practices that favor local competition; difficulties in
collecting accounts receivable; and political and economic instability. In
addition, in September 1999, Taiwan was affected by a significant earthquake.
Recently there have been additional earthquakes and the risk of future
earthquakes is significant due to the proximity of major earthquake fault
lines in the area. Taiwan has also suffered from political unrest. Any future
earthquakes, fire, flooding or other natural disasters, political unrest,
labor strikes or work stoppages in Taiwan likely would result in the
disruption of our operations at that facility. Finally, as a result of our
acquisition of Inverness Systems, we are directly affected by the political,
economic and military conditions affecting Israel. Any major hostilities
involving Israel could significantly harm our business. Israel's economy has
been subject to numerous destabilizing factors, including low foreign exchange
reserves, fluctuations in world commodity prices, military conflicts and civil
unrest. Although Israel has entered into various agreements with certain Arab
countries and the Palestinian Authority, and various declarations have been
signed in connection with efforts to resolve some of the economic and
political problems in the Middle East, we cannot predict whether or in what
manner these problems will be resolved. In addition, some of the officers and
employees of Inverness are currently obligated to perform annual reserve duty
and are subject to being called to active duty at any time under emergency
circumstances. We cannot assess the full impact of these requirements on our
workforce or business should this occur and we cannot predict the effect on us
of any expansion or reduction of their obligations.
Because we incur a charge for National Insurance Contribution on any gain in
the per share price of our stock for stock options granted to our United
Kingdom employees, a significant rise in our stock price may harm our results
of operations and cash flows
Under the laws of the United Kingdom, we must record a charge for National
Insurance Contribution on options incurred on any gain in our per share price
for stock options granted to our United Kingdom employees. The charge is
calculated in the United Kingdom as the difference between the market value of
our common stock at the close of the period and the exercise price of the
option multiplied by a 12.2% tax rate. The calculation is applied to all
options issued to our UK employees, vested and unvested. Due to the
significant movement in our per share price in the fiscal year ended April 2,
2000, the charge recorded was $4.5 million, creating a cash payment obligation
payable upon exercise of vested options by a UK employee. The charge will be
revised to take account of the movement in our stock price at each future
balance sheet date. Accordingly, a significant rise in our stock price may
result in recorded charges which may harm our results of operations and cash
payment obligations.
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Because we sell a significant portion of our products in countries other than
the United States, we may be subject to political, economic and other
conditions affecting such countries that could result in increased reduced
revenue for our products
International revenues accounted for 43.6% of our total revenues for the
fiscal year ended April 2, 2000. We expect that sales to our 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 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. Recently, we completed the acquisitions of D2 Technologies,
Inc., a privately-held corporation based in Santa Barbara, California, and
Inverness Systems, Ltd, a privately-held corporation based in Kfar Saba,
Israel. In addition, we have entered into an agreement to acquire Excess
Bandwidth Corporation, a privately held corporation based in Cupertino,
California. Our continued success will depend significantly on our ability to
integrate these new operations and new personnel. 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.
Because Excess Bandwidth has not completed development of its chip designs,
we may not be able to effectively compete in the SDSL market
Excess Bandwidth has only recently begun testing of its first
communications processor designs. If the designs do not work as intended or
require substantial redesign, we may not be able to introduce these
communications processors as products and ship them to customers, or may be
delayed in our introduction of products. Excess Bandwidth's design of its
communications processors is dependent upon the efforts of Debajyoti Pal. The
loss of Dr. Pal's services for any reason would delay or prevent the
completion of the design of products by Excess Bandwidth. Excess Bandwidth
licenses the imbedded microprocessor for its communications processors from
MIPS Technologies, Inc. Loss of the MIPS license for any reason would require
a redesign of the communications processors currently under development by
Excess Bandwidth and could result in delay in introduction of products. If any
of these events occur we would not realize significant revenues from the
products under development by Excess Bandwidth.
We may engage in future acquisitions that could dilute our stockholders'
equity and harm our business, results of operations and financial condition
Recently, we completed the acquisitions of D2 Technologies, Inc., a
privately-held corporation based in Santa Barbara, California, and Inverness
Systems, Ltd, a privately-held corporation based in Kfar Saba, Israel.
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D2 Technologies is a supplier of telephony and voice over IP software.
Inverness Systems is a supplier of network software solutions. In addition, we
have entered into an agreement to acquire Excess Bandwidth Corporation, a
privately held corporation based in Cupertino, California. Excess Bandwidth
develops advanced algorithms for high-bandwidth communications applications
and implements those algorithms as communications processors. We cannot assure
you that the anticipated acquisition will close when anticipated or at all.
As part of our business strategy, from time to time, we expect to review
other opportunities to acquire and may acquire other businesses or products
that will complement our existing product offerings, augment our market
coverage or enhance our technological capabilities. Although we have no other
current agreements or negotiations underway with respect to any material
acquisitions, we may make additional acquisitions of businesses, products or
technologies in the future. However, we cannot be sure that we will be able to
locate suitable acquisition opportunities. The acquisitions that we have
completed, have agreed to complete and which we may complete in the future
could result in the following, any of which could seriously harm our results
of operations or the price of our stock:
. issuances of equity securities that would dilute our current
stockholder's percentages ownership;
. large one-time write-offs;
. the incurrence of debt and contingent liabilities;
. difficulties in the assimilation and integration of the operations,
personnel, technologies, products and the information systems of the
acquired companies;
. diversion of management's attention from other business concerns;
. contractual disputes;
. risks of entering geographic and business markets in which we have no or
only limited prior experience; and
. potential loss of key employees of acquired organizations.
Use of our products requires significant training and support and, because of
our limited resources, we may not be able to support the 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
significant numbers 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
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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 addition, all of our employees in the
United Kingdom and Israel have employment agreements governed by the laws of
the United Kingdom and Israel, respectively. Our employment agreements do not
contain anti-competition clauses.
Risks Relating to our Industry
Because the markets in which we compete are highly competitive and many of our
competitors have greater resources than we have, 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, Broadcom, Centillium Communications, Conexant
Systems, GlobeSpan, Lucent Technologies, Motorola and Texas Instruments. In
addition, there have been a number of announcements by other semiconductor
companies including Intel and smaller emerging companies that they intend to
enter the market segments adjacent to or addressed by our products.
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
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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
achieve anticipated unit growth
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.
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 effect 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 and have 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.
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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 States, the United Kingdom, or Israel. 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;
. halt the manufacture, use and sale of infringing products or technology;
. forfeit a competitive advantage;
. expend significant resources to develop non-infringing technology; or
. 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 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 FCC, extends
to the entire U.S. communications industry, including our customers and their
products and services that incorporate our
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products. Future FCC regulations affecting the U.S. communications services
industry, our customers or our products may have a negative effect 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 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.
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 our principal stockholders and management may have the ability to
control stockholder votes, the premium over the market price that an acquiror
might otherwise pay for our stock may be reduced and any merger or takeover
may be delayed
Immediately following the offering, our executive officers and directors
and their affiliates will beneficially own or control approximately 21.3% of
our common stock (assuming no purchases of shares of common stock in this
offering by our officers and directors and their affiliates). See "Principal
and Selling Stockholders." Accordingly, our executive officers, directors and
their affiliates, as a group, may have a significant influence on the election
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.
20
<PAGE>
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, which may include research and development of new products
and sales and marketing efforts. We may also use proceeds to pursue
acquisitions of complementary products, technologies or businesses.
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.
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 55,078,772
shares of common stock outstanding (and approximately 56,053,772 shares
outstanding if we issue shares upon exercise of the underwriters' over-
allotment option), based on the number of shares outstanding as of June 9,
2000. See "Description of Capital Stock--Common Stock." Of these shares,
approximately 49,300,000 are freely tradable without restriction or further
registration under the federal securities laws or subject to the provisions of
Rule 144. See "Shares Eligible for Future Sale." In addition, as of June 9,
2000, there were outstanding options and warrants to purchase 9,289,730 shares
of our common stock. We have granted registration rights to the holders of
approximately 10,930,000 shares of our common stock. See "Description of
Capital Stock-- Registration Rights." In the future, we may grant additional
options or grant additional registration rights with respect to our common
stock.
Members of our management, our directors, the selling stockholders and
various other stockholders have entered into lock-up agreements that restrict
their ability to sell shares of our common stock for a period that will expire
90 days after the date of this offering. Following this lock-up period, 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 these sales
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.
21
<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 these forward-looking
statements after the date of this prospectus to conform these statements to
actual results.
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<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the common stock offered by us are
estimated to be approximately $395.2 million (or $460.9 million if the over-
allotment option is exercised in full), based on a public offering price per
share of $71.00, after deducting underwriting discounts and commissions and
estimated offering expenses payable by us. See "Underwriting." We will not
receive any proceeds from the sale of shares by the selling stockholders.
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. We also believe
opportunities may exist to expand our current business through acquisitions
including complementary products, technologies or businesses, and we may use a
portion of the proceeds for such purposes. We are not currently party to any
contracts or letters of intent with respect to any acquisitions other than with
respect to Excess Bandwidth. 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 loan and security
agreement currently prohibits the payment of dividends.
PRICE RANGE OF COMMON STOCK
Our common stock began trading on The Nasdaq Stock Market's National Market
under the symbol "VRTA" effective November 17, 1999. Prior to that date, there
was no public market for our common stock. The following table sets forth for
the periods indicated the high and low sales prices for our common stock, as
reported on The Nasdaq Stock Market:
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Fiscal Year Ending April 2, 2000
Third Quarter (beginning November 17, 1999)................ $ 20.50 $11.69
Fourth Quarter............................................. $111.00 $13.50
Fiscal Year Ending April 1, 2001
First Quarter (through July 12, 2000)...................... $ 72.25 $28.56
</TABLE>
The last reported sale price for our common stock on The Nasdaq Stock Market
was $71.06 per share on July 12, 2000. As of June 9, 2000, there were
approximately 214 holders of record of our common stock.
23
<PAGE>
CAPITALIZATION
The table below sets forth the following information:
. our actual capitalization as of April 2, 2000.
. our pro forma capitalization as of April 2, 2000, giving effect to the
issuance of 2,006,440 shares of our common stock in connection with our
acquisition of Inverness Systems, Ltd. on April 27, 2000 and 5,898,290
shares of our common stock in connection with our anticipated acquisition
of Excess Bandwidth Corporation subsequent to the year end.
. our pro forma as adjusted capitalization as of April 2, 2000, giving
effect to the sale of 5,880,000 shares of common stock offered by us in
this offering at an offering price of $71.00 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 April 2, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
and per share data)
(unaudited)
<S> <C> <C> <C>
Long-term liabilities......................... $ 1,178 $ 2,321 $ 2,321
-------- --------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000
shares authorized, no shares issued and
outstanding, actual, pro forma and pro
forma as adjusted.......................... -- -- --
Common stock, $0.001 par value, 450,000,000
shares authorized actual, pro forma and pro
forma as adjusted, 46,568,006 shares issued
and outstanding, actual; 54,472,736 shares
issued and outstanding, pro forma;
60,352,736 shares issued and outstanding,
pro forma as adjusted...................... 47 55 61
Additional paid-in capital.................... 238,833 655,861 1,051,020
Accumulated other comprehensive income........ 335 335 335
Unearned stock compensation................... (691) (691) (691)
Accumulated deficit........................... (76,736) (157,234) (157,234)
-------- --------- ---------
Total stockholders' equity................ 161,788 498,326 893,491
-------- --------- ---------
Total capitalization...................... $162,966 $ 500,647 $ 895,812
======== ========= =========
</TABLE>
For the purposes of this table, our common stock outstanding after this
offering is based on 46,568,006 shares outstanding on April 2, 2000. Our common
stock outstanding after this offering excludes shares of that were issuable
upon exercise of stock options and warrants outstanding as of April 2, 2000,
and other shares that were reserved for issuance under our stock plans as of
April 2, 2000. See "Management--Non-Employee Director Compensation Plan", "--
Employee Stock Option Plans" and "--Employee Stock Purchase Plan" and
"Description of Capital Stock."
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<PAGE>
DILUTION
As of April 2, 2000, our net tangible book value was approximately $72.7
million, or $1.56 per share of our common stock, based on 46,568,006 shares of
common stock outstanding. The 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 April 2, 2000 was approximately
$63.0 million or $1.16 per share of our common stock, based on 54,472,736 pro
forma shares of common stock outstanding. Our pro forma net tangible book value
as of April 2, 2000 is calculated after giving effect to the issuance of
2,006,440 shares of our common stock in connection with our acquisition of
Inverness Systems, Ltd. on April 27, 2000 and 5,898,290 shares of our common
stock in connection with our anticipated acquisition of Excess Bandwidth
Corporation subsequent to the year end.
Our pro forma as adjusted net tangible book value as of April 2, 2000 was
approximately $458.2 million, or $7.59 per share of our common stock, after
giving effect to the receipt of the net proceeds from the sale of the 5,880,000
shares of common stock offered by us at a public offering price of $71.00 per
share, after deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
This amount represents an immediate increase in pro forma net tangible book
value of $6.43 per share to the existing stockholders and an immediate dilution
of $63.41 per share to purchasers of common stock in the offering. The
following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Public offering price per share............................... $71.00
Pro forma net tangible book value per share as of April 2,
2000....................................................... $1.16
Increase in net tangible book value per share attributable
to new investors........................................... 6.43
-----
Pro forma as adjusted net tangible book value per share after
the offering................................................. 7.59
------
Dilution in net tangible book value per share to new
investors.................................................... $63.41
======
</TABLE>
For purposes of this table, our common stock outstanding after this offering
excludes shares that were issuable upon exercise of stock options and warrants
outstanding as of April 2, 2000 and other shares that were reserved for
issuance under our stock plans as of April 2, 2000. See "Capitalization,"
"Management--Non-Employee Director Compensation Plan", "--Employee Stock Option
Plans" and "--Employee Stock Purchase Plan" and "Description of Capital Stock."
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected consolidated statement of operations data for each of
the three fiscal years ended April 2, 2000, March 31, 1999 and 1998 and
selected consolidated balance sheet data as of April 2, 2000 and March 31, 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 the fiscal years ended March 31,
1996 and 1997 and selected consolidated balance sheet data as of March 31,
1996, 1997 and 1998 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. since July 17,
1998, the closing date of the acquisition. Information for the fiscal year
ended April 2, 2000 includes the results of operations of D2 Technologies, Inc.
since February 10, 2000, the closing date of the acquisition.
Effective October 3, 1999, we changed our fiscal year such that each quarter
ends on the Sunday closest to the calendar quarter end.
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------
March 31, March 31, March 31, March 31, April 2,
1996 1997 1998 1999 2000
--------- --------- --------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
Semiconductors ............ $ -- $ -- $ 505 $ 2,784 $ 14,041
License ................... 85 971 1,570 1,628 3,717
Services and royalty ...... 333 1,134 1,206 2,367 1,724
Systems ................... 2,424 4,848 5,650 2,477 2,295
------- ------- -------- -------- --------
Total revenues .......... 2,842 6,953 8,931 9,256 21,777
------- ------- -------- -------- --------
Cost of revenues:
Semiconductors ............ -- -- 325 2,421 9,651
License ................... -- -- -- -- 107
Services and royalty ...... 55 185 192 528 701
Systems ................... 1,854 3,754 3,270 1,048 780
------- ------- -------- -------- --------
Total cost of revenues .. 1,909 3,939 3,787 3,997 11,239
------- ------- -------- -------- --------
Gross profit................. 933 3,014 5,144 5,259 10,538
------- ------- -------- -------- --------
Operating expenses:
Research and development... 4,402 3,518 3,987 8,323 12,331
Sales and marketing........ 4,037 4,753 4,076 2,917 5,350
General and
administrative............ 2,096 3,410 4,917 5,567 5,976
Restructuring costs........ -- -- 1,871 -- --
National Insurance
Contribution on options... -- -- -- -- 4,471
Amortization of intangible
assets.................... -- -- -- 549 4,497
Amortization of stock
compensation.............. -- -- 399 1,394 907
Acquired in-process
research and development.. -- -- -- 5,260 5,324
------- ------- -------- -------- --------
Total operating
expenses................ 10,535 11,681 15,250 24,010 38,856
------- ------- -------- -------- --------
Loss from operations......... (9,602) (8,667) (10,106) (18,751) (28,318)
Interest and other income
(expense), net.............. 264 127 (172) 1,594 2,210
------- ------- -------- -------- --------
Net loss..................... $(9,338) $(8,540) $(10,278) $(17,157) $(26,108)
======= ======= ======== ======== ========
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------
March 31, March 31, March 31, March 31, April 2,
1996 1997 1998 1999 2000
--------- --------- --------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net loss per share:
Basic and diluted............ $(2.99) $(2.68) $(3.00) $(4.46) $(1.40)
====== ====== ====== ====== ======
Weighted average shares...... 3,128 3,186 3,428 3,845 18,672
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
March 31, March 31, March 31, March 31, April 2,
1996 1997 1998 1999 2000
--------- --------- --------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents ... $1,315 $ 3,752 $ 767 $ 8,616 $60,193
Working capital (deficit) ... 451 6,346 (3,653) 8,042 70,631
Total assets ................ 4,422 12,066 5,950 19,187 181,362
Total long term liabilities
............................ 48 875 738 1,130 1,178
Total stockholders' equity
(deficit) .................. 1,850 6,857 (3,085) 12,719 161,788
</TABLE>
27
<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
Our predecessor company, Virata Limited, was formed in 1993 as Advanced
Telecommunications Modules Limited, a corporation organized in the United
Kingdom, as a spin-out from the Olivetti Research Laboratories (now AT&T
Laboratories). Until 1995, we were a development-stage company focused
primarily on product development. From our 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 digital subscriber line, or DSL, market. In
February 1998, our predecessor company changed its name to Virata Limited. In
July 1998, Virata Limited acquired RSA Communications, Inc., a corporation
organized in North Carolina. RSA Communications was subsequently renamed Virata
Raleigh Corporation. Effective October 3, 1999, Virata Limited changed its
fiscal year such that each quarter ends on the Sunday closest to the calendar
quarter end.
On November 16, 1999, we completed a reorganization of Virata Limited,
pursuant to which:
. each of Virata Limited's previously outstanding ordinary and preference
shares were cancelled;
. Virata Limited issued 64,811,364 new ordinary shares to Virata
Corporation, a newly formed Delaware corporation, thereby becoming our
wholly-owned subsidiary;
. we assumed all of the outstanding options and warrants of Virata Limited;
. we effected a 1 for 6.7 reverse stock split of our common stock; and
. we issued 29,344,096 shares of our common stock to the former
shareholders of Virata Limited.
The reorganization was effected pursuant to a share reconstruction under
Section 425 of the United Kingdom Companies Act of 1985.
On February 10, 2000, we completed the acquisition of D2 Technologies Inc.,
a provider of digital voice and telephony software solutions. On April 27,
2000, we completed the acquisition of Inverness Systems Ltd., a provider of
networking software solutions. In addition, on June 20, 2000 we entered into an
agreement to acquire Excess Bandwidth Corporation, a developer of advanced
algorithims for high-bandwidth communications applications.
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 the following locations: Santa Clara, California; Cambridge, England;
Raleigh, North Carolina; Santa Barbara, California; Kfar Saba, Israel;
Marlborough, Massachusetts; and Taipei, Taiwan. We believe that our strategy of
locating research and development in Cambridge, Raleigh, and Santa Barbara, 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
28
<PAGE>
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 generate revenues from sales of semiconductors, systems-level products,
software licenses and maintenance, royalties and related design services.
Semiconductor revenues have come from two sources, our Proton family of
application specific integrated circuit, or ASIC, products and our ATOM family
of application specific standard products, or ASSP. Original equipment
manufacturers, or OEMs, license 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 sales representatives in Korea.
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 the American
Institute of Certified Public Accountants, or AICPA, 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 and 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 April 2, 2000, our backlog was
approximately $24.9 million, including the backlog for semiconductors, which
was approximately $20.5 million.
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
29
<PAGE>
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 have been working with customers for this product for only
a short time. 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 fiscal
2001.
Our revenues to date have been concentrated with a small number of
customers. We expect this concentration to continue. For the fiscal year ended
April 2, 2000, Orckit Communications and Westell Technologies accounted for
23.1% and 15.1%, respectively, of our total revenues. 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 fiscal year ended March 31, 1998,
Com21, Orckit Communications, and Escalate Networks accounted for 16.6%, 10.4%,
and 10.4%, respectively, of our total revenues.
International revenues accounted for 43.6% for the fiscal year ended April
2, 2000, 40.3% for the fiscal year ended March 31, 1999 and 44.2% of total
revenues for the fiscal year ended March 31, 1998. Sales to customers in Israel
represented 23.3%, 16.5%, and 10.8%, of total revenues for the fiscal year
ended April 2, 2000, March 31, 1999 and March 31, 1998, respectively.
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. Our material costs are denominated in U.S. dollars and
our operating expenses are primarily in U.S. dollars and British pounds
sterling.
We recorded a charge for National Insurance Contribution on options which
will be incurred on a gain in our per share price for stock options granted to
our United Kingdom employees. Due to the significant movement in our per share
price in the fiscal year ended April 2, 2000, the charge recorded was
$4.5 million. The charge in the United Kingdom is calculated as the difference
between the market value of our common stock at the close of the period and the
exercise price of the option multiplied by a 12.2% tax rate. The calculation is
applied to all options issued to our UK employees, vested and unvested. The
charge will be revised to reflect the movement in our stock price at each
future balance sheet date. The allocation of the $4.5 million charge, by
department, is $2.0 million to research and development, $1.0 million to sales
and marketing, and $1.5 million to general and administrative.
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. The aggregate purchase price was allocated to the net 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 and charged to operations at
the date of the acquisition. For more information on the valuation of the
acquired in-process research and development, see Note 4 of notes to
consolidated financial statements. 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 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 information showing our unaudited
30
<PAGE>
pro forma results of operations including RSA Communications for the fiscal
year ended March 31, 1999, see Virata Corporation Pro Forma Combined Financial
Information.
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 April 2, 2000, we
had an accumulated deficit of $76.7 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
April 2, 2000. However, we continue to operate at a loss, with operating
expenses exceeding revenues.
On June 20, 2000, we announced that our fiscal 2001 first quarter revenues
for the period ended July 2, 2000 are expected to be approximately $25-27
million, which represents an average 115 percent increase from the prior
quarter's $12 million in revenues. We had not expected to attain such amount of
revenues until our fiscal 2001 second quarter. In addition, we expect to ship 3
times more communications processors for the first quarter compared to the
prior quarter, including our millionth Helium processor. We expect to announce
our complete first quarter 2001 results on July 25, 2000.
Acquisition of D2 Technologies
We acquired D2 Technologies, Inc. on February 10, 2000. Based in Santa
Barbara, California, D2 Technologies develops, markets and supports innovative
digital signal processing (DSP) solutions for the next generation telephony
products. D2 Technologies serves the computer and Internet telephony markets
with robust and cost-effective DSP solutions.
Under the terms of the purchase agreement, 4,396,826 shares of our common
stock, with an aggregate value of approximately $79.1 million (based on an
agreed upon price per share of our common stock of $18.00) were exchanged for
all of the issued and outstanding capital stock of D2 Technologies. In
addition, all of the outstanding options to purchase shares of D2 Technologies'
capital stock were exchanged for options to purchase 932,330 shares of our
common stock with an aggregate fair value of approximately $13.6 million. We
valued the options using the Black-Scholes option pricing model. Including
direct acquisition costs of approximately $4.2 million, the aggregate purchase
price of D2 Technologies was approximately $96.9 million. The acquisition has
been accounted for as a purchase business combination.
D2 Technologies had 19 completed products at the date of acquisition that
were classified into five product groups: telephony algorithms, echo
cancellation products, standard voice coders, proprietary voice coders and fax
and data products. The individual products and algorithms are entirely
independent from each other. The value of the completed technology is based on
the net cash flow forecast, discounted at a cost of capital of 18.0%. The
acquired in-process technology are mainly related to the fax and data products
and include the Fax Modem Data Pump, Fax Relay Protocols and Single Sample Echo
Cancellers and Standard Voice Coders. The acquired in-process technology is
also valued using the net cash flow forecast, discounted at a higher cost of
capital of 23.0% to reflect the uncertainty of its future use. We do not
consider it to have reached technological feasibility and therefore, charged it
to operations upon acquisition.
Financial information for the fiscal year ended April 2, 2000 includes the
results of operations for D2 Technologies from February 10, 2000. For
information showing our unaudited pro forma results of operations including D2
Technologies for the period ended April 2, 2000, see Virata Corporation Pro
Forma Combined Financial Information.
31
<PAGE>
Acquisition of Inverness Systems Ltd.
We acquired Inverness Systems, Ltd., a privately-held Israeli company, on
April 27, 2000. Inverness Systems maintains offices in Kfar Saba, in Israel,
and in Marlborough, Massachusetts. Inverness Systems is a software company with
expertise spanning many technologies, including ATM, voice over ATM, xDSL, IP
Routing, Multi-Protocol Label Switching or MPLS, Frame Relay and Network
Simulation. Inverness Systems' source code solutions and network simulation
products are designed to facilitate fast-to-market product development programs
for advanced communications products.
Under the terms of the purchase agreement, 2,006,440 shares of our common
stock, with an aggregate value of approximately $77.6 million (based on an
agreed upon price per share of our common stock of $38.67), were exchanged for
all of the issued and outstanding capital stock of Inverness Systems. In
addition, all of the outstanding options and warrants to purchase shares of
Inverness Systems' capital stock were exchanged for options to purchase 517,896
shares of our common stock with an aggregate fair value of approximately $20.0
million. We valued the options using the Black-Scholes option pricing model.
Including direct acquisition costs of approximately $750,000, the aggregate
purchase price of Inverness Systems was approximately $98.4 million. The
acquisition has been accounted for as a purchase business combination.
Inverness Systems completed products were classified into three product
groups: ATM products, IP products and NetSIM products. The value of the
completed technology is based on the net cash flow forecast, discounted a cost
of capital of 22.6%. The acquired in-process technology is related to IP
products, mainly MPLS. The value of the in-process technologies is also based
on the net cash flow forecast; however, discounted a higher cost of capital of
27.6% to reflect the uncertainty of its future use. We do not consider it to
have reached technological feasibility and, therefore, charged it to operations
upon acquisition.
Financial information for the fiscal year ended April 2, 2000 does not
include the results of operations for Inverness Systems. For information
showing our unaudited pro forma results of operations including Inverness for
the period ended April 2, 2000, see Virata Corporation Pro Forma Combined
Financial Information.
Acquisition of Excess Bandwidth Corporation
On June 20, 2000, we entered into a definitive agreement to acquire Excess
Bandwidth Corporation, a privately-held company with offices in Cupertino,
California, in a stock-for-stock transaction. Excess Bandwidth develops
advanced algorithms for high-bandwidth communications applications and
implements these algorithms as communications processors. Product plans include
physical layer and mixed signal semiconductors to address each of the modern
symmetric DSL technologies including SDSL, HDSL2 and G.shdsl.
Under the terms of the agreement, we expect to issue approximately 4,052,252
shares of our common stock, with an aggregate value of approximately $202.5
million (based on an agreed upon price per share of our common stock of
$49.98), in exchange for all of the issued and outstanding capital stock of
Excess Bandwidth. In addition, all of the oustanding employee options and
warrants to purchase shares of Excess Bandwidth's capital stock and other
stock-based compensation awards will be exchanged for options to purchase an
estimated 404,027 shares of our common stock and an estimated 1,846,038 shares
of our common stock subject to certain repurchase rights by us, with an
aggregate value of $112.5 million. We valued the options and warrants using the
Black-Scholes option pricing model. Including direct acquisition costs of
approximately $8.1 million, the aggregate purchase price of Excess Bandwidth
will be approximately $323.1 million. The acquisition will be accounted for as
a purchase business combination and is expected to close in the third quarter
of calendar 2000.
32
<PAGE>
Summary of Purchase Price Allocations
The valuations of intangible assets acquired were based on independent
appraisals. Assuming that the acquisition had occurred on April 2, 2000, the
purchase price allocations would have been as follows (see also the Unaudited
Pro Forma Condensed Combined Financial Statements):
<TABLE>
<CAPTION>
Inverness Excess
D2 Technologies Systems Bandwidth Total
--------------- --------- --------- --------
<S> <C> <C> <C> <C>
Fair value of assets acquired
and liabilities assumed....... $ 1,234 $ 2,317 $ (6,858) $ (3,307)
Assembled workforce............ 760 580 1,504 2,844
Customer base.................. 1,001 1,200 -- 2,201
Contracts and other
intangibles................... 1,006 -- 4,611 5,617
Technology..................... 15,872 9,510 68,426 93,808
In-process research and
development................... 5,324 1,170 79,328 85,822
Goodwill....................... 71,712 83,573 176,118 331,403
------- ------- -------- --------
Total.......................... $96,909 $98,350 $323,129 $518,388
======= ======= ======== ========
</TABLE>
Stock Split
On March 21, 2000, our board of directors approved a two-for-one split of
our common stock that was applicable to stockholders of record on May 4, 2000.
The stock split, approved by our stockholders on May 1, 2000, was effective May
18, 2000. Unless specifically noted otherwise, all references to share and per
share data for all periods presented have been adjusted to give effect to this
split.
33
<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>
Year Ended
------------------------------
March 31, March 31, April 2,
1998 1999 2000
--------- --------- --------
<S> <C> <C> <C>
Consolidated Statement of Operations Data as a
Percentage of Total Revenues:
Revenues:
Semiconductors.................................. 5.7% 30.1% 64.5%
License......................................... 17.6 17.6 17.0
Services and royalty............................ 13.4 25.5 8.0
Systems......................................... 63.3 26.8 10.5
------ ------ ------
Total revenues................................ 100.0 100.0 100.0
------ ------ ------
Cost of revenues:
Semiconductors.................................. 3.6 26.2 44.3
License......................................... -- -- 0.5
Services and royalty............................ 2.2 5.7 3.2
Systems......................................... 36.6 11.3 3.6
------ ------ ------
Total cost of revenues........................ 42.4 43.2 51.6
------ ------ ------
Gross margin...................................... 57.6 56.8 48.4
------ ------ ------
Operating expenses:
Research and development........................ 44.6 89.9 56.6
Sales and marketing............................. 45.6 31.5 24.6
General and administrative...................... 55.1 60.2 27.4
Restructuring costs............................. 20.9 -- --
National Insurance Contribution on options...... -- -- 20.5
Amortization of intangible assets............... -- 5.9 20.6
Amortization of stock compensation.............. 4.5 15.1 4.2
Acquired in-process research and development.... -- 56.8 24.5
------ ------ ------
Total operating expenses...................... 170.7 259.4 178.4
------ ------ ------
Loss from operations.............................. (113.1) (202.6) (130.0)
Interest and other income (expense), net.......... (2.0) 17.2 10.1
------ ------ ------
Net loss.......................................... (115.1)% (185.4)% (119.9)%
====== ====== ======
</TABLE>
Fiscal Years Ended April 2, 2000, March 31, 1999 and 1998
Total Revenues
Total revenues increased 135.3% from $9.3 million for the fiscal year ended
March 31, 1999 to $21.8 million for the fiscal year ended April 2, 2000. Total
revenues increased 3.6% from $8.9 million for the fiscal year ended March 31,
1998 to $9.3 million for the fiscal year ended March 31, 1999.
Semiconductor revenues increased 404.3% to $14.0 million for the fiscal year
ended April 2, 2000 compared to $2.8 million for the fiscal year ended March
31, 1999. Semiconductor revenues for the fiscal year ended March 31, 1999
increased 451.1% to $2.8 million compared to approximately $500,000 during the
fiscal year ended March 31, 1998. As a growing number of software licensees
began initial trials and deployments of broadband access devices, semiconductor
revenues increased from 30.1% of total revenues for the fiscal year ended
March 31, 1999 to 64.5% of total revenues for the fiscal year ended April 2,
2000.
34
<PAGE>
License revenues increased 128.3% to $3.7 million for the fiscal year ended
April 2, 2000 compared to $1.6 million for the fiscal year ended March 31,
1999. The increase in license revenues in absolute dollars was primarily the
result of expanding our software licensee customer base and additional license
revenues earned by D2 Technologies. Year over year, license revenues decreased
to 17.0% of total revenues as semiconductor revenues continue to grow. 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,
1999 and 1998.
Services and royalty revenues decreased 27.2% to $1.7 million, or 8.0% of
total revenues, for the fiscal year ended April 2, 2000, compared to $2.4
million, or 25.5% of total revenues, for the fiscal year ended March 31, 1999.
The decrease was due primarily to the reduction in royalty revenues from two
customers. Services and royalty revenues increased 96.3% to $2.4 million for
the fiscal year ended March 31, 1999, compared to $1.2 million, or 13.5% of
total revenues, for the fiscal year ended March 31, 1998. The increase from the
fiscal year ended March 31, 1998 to fiscal year ended March 31, 1999 was due
primarily to revenues contributed by Virata Raleigh Corporation under analog
modem consulting engineering agreements.
Systems revenues decreased 7.3% to $2.3 million for the fiscal year ended
April 2, 2000 compared to $2.5 million for the fiscal year ended March 31,
1999. Systems revenues decreased 56.2% to $2.5 million for the fiscal year
ended March 31, 1999 compared to $5.7 million for the fiscal year ended March
31, 1998. The decrease in systems revenue to 10.5% of total revenues for the
fiscal year ended April 2, 2000 from 26.8% of total revenues for the fiscal
year ended March 31, 1999 and from 63.3% of total revenues for the fiscal year
ended March 31, 1998 was primarily due to our decision in September 1997 to
focus our sales and development efforts on semiconductor devices for the DSL
market.
Cost of Revenues and Gross Margin
Total cost of revenues consists primarily of costs paid to foundry vendors
to manufacture our semiconductors, costs attributable to design services and
software maintenance and operations expense. Cost of revenues increased to
$11.2 million, or 51.6% of total revenues, for the fiscal year ended April 2,
2000, from $4.0 million, or 43.2% of total revenues, for the fiscal year ended
March 31, 1999. Total cost of revenues was $3.8 million, or 42.4% of total
revenues, for the fiscal year ended March 31, 1998.
Semiconductor gross margin increased to 31.3% for the fiscal year ended
April 2, 2000. The increase was primarily due to product mix and an increase in
sales volume. Semiconductor gross margin decreased to 13.0% for the fiscal year
ended March 31, 1999 from 35.6% for the fiscal year ended March 31, 1998. The
decrease was primarily due to reduced selling prices for existing products. 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.
Software license gross margin was 97.1% for the fiscal year ended April 2,
2000 primarily due to costs incurred with license contracts assumed following
the D2 Technologies acquisition. There were no costs of revenues associated
with our software license revenues for the fiscal years ended March 31, 1999
and 1998.
Services and royalty revenues gross margin decreased to 59.3% for the fiscal
year ended April 2, 2000 from 77.7% for the fiscal year ended March 31, 1999,
and from 84.1% for the fiscal year ended March 31, 1998 as the result of a less
favorable mix of design services revenues and higher margin royalty revenues.
Systems product gross margin increased to 66.0% for the fiscal year ended
April 2, 2000 from 57.7% for the fiscal year ended March 31, 1999. The increase
was primarily due to decreased operations support related to systems products
and a narrower systems product range. Gross margin for systems products was
42.1% for the fiscal year ended March 31, 1998.
35
<PAGE>
Research and Development Expenses
Research and development expenses consist primarily of engineering staffing
costs and technology license fees. Research and development expenses increased
48.2% from $8.3 million to $12.3 million for the fiscal year ended April 2,
2000. The increase was primarily due to the addition of research and
development personnel as a result of accelerated new product development and
the addition of personnel as a result of the acquisition of D2 Technologies. In
the fiscal year ended April 2, 2000, a charge of $2.0 million was recorded for
National Insurance Contribution on options for the research and development
group. This expense is listed separately in our financial results and is
calculated for stock options granted to United Kingdom employees as the
difference between the option exercise price and the fair value of the
underlying common stock at the balance sheet date. See "National Insurance
Contribution on options" below. Research and development expenses increased
108.8% to $8.3 million for the fiscal year ended March 31, 1999 from $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 as well as the
addition of personnel as a result of the acquisition of RSA Communications.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee salaries, sales
commissions, travel and related costs, promotional materials and trade show
expenses. Sales and marketing expenses increased 83.4% from $2.9 million to
$5.4 million for the fiscal year ended April 2, 2000. The increase was
primarily due to the addition of sales and marketing personnel and increased
sales commissions associated with higher revenues. In the fiscal year ended
April 2, 2000, a charge of approximately $961,000 was recorded for National
Insurance Contribution on options for the sales and marketing group. See
"National Insurance Contribution on options" below. Sales and marketing
expenses decreased 28.4% to $2.9 million for the fiscal year ended March 31,
1999 from $4.1 million for the fiscal year ended March 31, 1998. The decrease
in sales and marketing expenses resulted from our reduced emphasis on systems-
level products from September 1997 and increased focus on semiconductor
products.
General and Administrative Expenses
General and administrative expenses consist primarily of employee salaries
and costs associated with legal, accounting and other professional service
fees, bad debt expense as well as general corporate expenses. General and
administrative expenses increased 7.3% from $5.6 million to $6.0 million for
the fiscal year ended April 2, 2000. The increase was primarily due to
increased staff and the addition of costs as a result of being a publicly
traded company. In the fiscal year ended April 2, 2000, a charge of $1.5
million was recorded for National Insurance Contribution for the general and
administrative group. See "National Insurance Contribution on options" below.
General and administrative expenses increased 13.2% to $5.6 million for the
fiscal year ended March 31, 1999 from $4.9 million for the fiscal year ended
March 31, 1998. The increase was primarily due to increased staff performing
general and administrative tasks 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.
National Insurance Contribution on options
We recorded a charge for National Insurance Contribution taxes which will be
incurred on a gain in our per share price for stock options granted to our
United Kingdom employees. Due to the significant movement in our per share
price in the fiscal year ended April 2, 2000, the charge recorded was
$4.5 million. The charge is calculated in the United Kingdom as the difference
between the market value of our stock at the close of the
36
<PAGE>
period and the exercise price of the option multiplied by a 12.2% tax rate. The
calculation is applied to all options issued to our UK employees, vested and
unvested. The charge will be revised to reflect the movement in our stock price
at each future balance sheet date. The allocation of the $4.5 million charge,
by department, is $2.0 million to research and development, $1.0 million to
sales and marketing, and $1.5 million to general and administrative.
Amortization of Intangible Assets
Amortization of intangible assets expense is related to the intangible
assets acquired in the acquisition of RSA Communications, which occurred in
July 1998, and the acquisition of D2 Technologies, which occurred in February
2000.
Amortization of intangible assets for the fiscal year ended April 2, 2000
relating to the acquisition of D2 Technologies was $3.8 million. We are
amortizing the intangible assets from the D2 Technologies acquisition over 24
to 48 months beginning in the quarter ended April 2, 2000.
Amortization of intangible assets for the fiscal year ended April 2, 2000
relating to the RSA Communications acquisition was approximately $743,000.
During the fiscal year ended March 31, 1999, amortization of intangible assets
expense was approximately $549,000. We are amortizing the intangible assets
from the RSA Communications acquisition on a straight-line basis over 60 months
beginning in the quarter ended September 30, 1998.
Amortization of Stock Compensation
During the fiscal years ended April 2, 2000 and March 31, 1999 and 1998, we
recorded a total of $3.4 million of unearned stock compensation. We recognized
amortization of stock compensation of approximately $907,000 for the fiscal
year ended April 2, 2000, $1.4 million for the fiscal year ended March 31, 1999
and approximately $399,000 for the fiscal year ended March 31, 1998. We are
amortizing the unearned stock compensation over 48 months.
Acquired In-Process Research and Development Expense
Acquired in-process research and development expense is related to our
acquisitions.
For the fiscal year ended April 2, 2000, the expense relates to the
acquisition of D2 Technologies, which occurred in February 2000. Based on a
valuation by an independent appraiser, $5.3 million of the $96.9 million
purchase price was allocated to in-process research and development.
For the fiscal year ended March 31, 1999, the expense relates to the
acquisition of RSA Communications, which occurred in July 1998. 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.
Interest Expense
Interest expense increased to approximately $200,000 for the fiscal year
ended April 2, 2000 from approximately $155,000 for the fiscal year ended March
31, 1999. The increase in interest expense was primarily due to interest
expense associated with capital equipment under our lease facility and
borrowings under our revolving credit facility. Interest expense was
approximately $214,000 for the fiscal year ended March 31, 1998. The decrease
in interest expense was primarily due to interest expense associated with
capital equipment under our lease facility.
Interest and Other Income, Net
Interest and other income, 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
37
<PAGE>
years ended April 2, 2000, March 31, 1999 and 1998 was $1.6 million,
approximately $786,000, and approximately $121,000, respectively. Interest
income for each fiscal year corresponded to the average cash balance during the
years. During the fiscal year ended April 2, 2000, foreign exchange gain was
approximately $800,000 and in income tax refund was $39,000. During the fiscal
year ended March 31, 1999, the foreign exchange gain was approximately
$427,000, and an income tax refund was approximately $531,000. Losses at RSA,
subsequent to its acquisition, allowed for the income tax refund. During the
fiscal year ended March 31, 1998 foreign exchange losses were approximately
$80,000.
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 April 2,
2000, we had approximately $33.1 million, $25.9 million and $30.0 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.
As of April 2, 2000, we had deferred tax assets of $24.3 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.
38
<PAGE>
Quarterly Results of Operations
The following table sets forth our consolidated operating results for each
of the five quarters ended April 2, 2000. 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
--------------------------------------------
Mar. June
31, 30, Oct. 3, Jan. 2, Apr. 2,
1999 1999 1999 2000 2000
------- ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
Semiconductors................. $ 662 $ 1,419 $ 2,074 $ 2,430 $ 8,118
License........................ 444 274 254 994 2,195
Services and royalty........... 592 373 435 307 609
Systems........................ 720 599 249 338 1,109
------- ------- ------- ------- --------
Total revenues............... 2,418 2,665 3,012 4,069 12,031
------- ------- ------- ------- --------
Cost of revenues:
Semiconductors................. 842 811 1,130 1,659 6,051
License........................ -- -- -- -- 107
Services and royalty........... 161 138 200 146 217
Systems........................ (27) 324 167 115 174
------- ------- ------- ------- --------
Total cost of revenues....... 976 1,273 1,497 1,920 6,549
------- ------- ------- ------- --------
Gross profit..................... 1,442 1,392 1,515 2,149 5,482
Operating expenses:
Research and development....... 2,184 2,549 2,581 3,045 4,156
Sales and marketing............ 826 923 973 1,192 2,262
General and administrative..... 1,503 903 1,400 1,477 2,196
National Insurance Contribution
on options.................... -- -- -- -- 4,471
Amortization of intangible
assets........................ 206 194 176 183 3,944
Amortization of stock
compensation.................. 348 266 239 206 196
Acquired in-process research
and development............... -- -- -- -- 5,324
------- ------- ------- ------- --------
Total operating expenses..... 5,067 4,835 5,369 6,103 22,549
------- ------- ------- ------- --------
Loss from operations............. (3,625) (3,443) (3,854) (3,954) (17,067)
Interest and other income
(expense), net.................. 1,353 428 (703) 619 1,866
------- ------- ------- ------- --------
Net loss......................... $(2,272) $(3,015) $(4,557) $(3,335) $(15,201)
======= ======= ======= ======= ========
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------
Mar. 31, June 30, Oct. 3, Jan. 2, Apr. 2,
1999 1999 1999 2000 2000
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
As a Percentage of Total
Revenues:
Revenues:
Semiconductors.............. 27.4 % 53.2 % 68.9 % 59.8 % 67.5 %
License..................... 18.3 10.3 8.4 24.4 18.2
Services and royalty........ 24.5 14.0 14.4 7.5 5.1
Systems..................... 29.8 22.5 8.3 8.3 9.2
------- ------- ------- ------ -------
Total revenues............ 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------ -------
Cost of revenues:
Semiconductors.............. 34.8 30.4 37.5 40.8 50.3
License..................... -- -- -- -- 0.9
Services and royalty........ 6.6 5.2 6.6 3.6 1.8
Systems..................... (1.1) 12.2 5.5 2.8 1.4
------- ------- ------- ------ -------
Total cost of revenues.... 40.3 47.8 49.6 47.2 54.4
------- ------- ------- ------ -------
Gross profit.................. 59.7 52.2 50.4 52.8 45.6
Operating expenses:
Research and development.... 90.3 95.6 85.7 74.8 34.5
Sales and marketing......... 34.2 34.6 32.3 29.3 18.8
General and administrative.. 62.2 33.9 46.5 36.3 18.3
National Insurance
Contribution on options.... -- -- -- -- 37.2
Amortization of intangible
assets..................... 8.5 7.3 5.8 4.5 32.8
Amortization of stock
compensation............... 14.4 10.0 7.9 5.1 1.6
Acquired in-process research
and development............ -- -- -- -- 44.3
------- ------- ------- ------ -------
Total operating expenses.. 209.6 181.4 178.2 150.0 187.5
------- ------- ------- ------ -------
Loss from operations.......... (149.9) (129.2) (127.8) (97.2) (141.9)
Interest and other income
(expense), net............... 56.0 16.1 (23.3) 15.2 15.5
------- ------- ------- ------ -------
Net loss...................... (93.9)% (113.1)% (151.1)% (82.0)% (126.4)%
======= ======= ======= ====== =======
</TABLE>
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--Because our operating results from quarter to quarter may
fluctuate, the price of our stock may decline."
Liquidity and Capital Resources
We have financed our operations primarily through venture capital and
corporate investments in our convertible preferred stock and through our
initial public offering of common stock in November 1999, which have resulted
in approximately $142.0 million aggregate net proceeds to us through April 2,
2000.
Our cash and cash equivalents together with our short-term investments
increased $68.6 million to $78.2 million for the fiscal year ended April 2,
2000. The increase in these accounts was primarily due to net proceeds of our
initial public offering in November 1999 of $73.0 million and net proceeds from
the sale of convertible preferred stock in October 1999 of $8.0 million. Our
cash and cash equivalents increased $51.6 million to $60.2 million for the
fiscal year ended April 2, 2000.
Net cash used in operating activities for the fiscal year ended April 2,
2000 of $7.0 million was primarily due to net operating losses of $26.1
million, an increase in accounts receivables and other current assets of
$4.2 million and $1.6 million respectively, partially offset by depreciation
and amortization of $6.3 million,
40
<PAGE>
acquired in-process research and development expenses of $5.3 million in
connection with the acquisition of D2 Technologies, and increases in accounts
payable, accrued liabilities, accrued employee benefits, accrued National
Insurance Contribution on options expense, and deferred revenue of $2.8
million, $2.2 million, $1.7 million, $4.5 million, and $1.3 million,
respectively. 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, acquired in-process
research and development expenses of $5.3 million in connection with the
acquisition of RSA Communications, 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 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 investing activities was $22.1 million for the fiscal year
ended April 2, 2000, which reflected the net purchase of short-term investments
of $17.0 million, $3.6 million of cash paid in connection with our acquisition
of D2 Technologies net of cash acquired, and net purchases of property and
equipment of $1.4 million. 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. Net cash used in investing activities
was approximately $174,000 for the fiscal year ended March 31, 1998, which
primarily reflected purchases of property and equipment.
Net cash provided by financing activities was $81.1 million for the fiscal
year ended April 2, 2000. Net cash provided by financing activities was
attributable primarily to proceeds from the issuance of common stock through
our initial public offering of $73.0 million, issuance of convertible preferred
stock of $8.0 million, partially offset by repayments on capital lease
obligations of $1.0 million. Net cash provided by financing activities was
$25.6 million and $2.8 million for the fiscal years ended March 31, 1999 and
1998, respectively. 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.
Our working capital at April 2, 2000 was approximately $70.6 million as
compared to $8.0 million at March 31, 1999. Our current ratio increased to 4.8
to 1.0, as of April 2, 2000, from 2.5 to 1.0, as of March 31, 1999.
We have a loan and security agreement 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 April 2, 2000, we had obtained
waivers for such financial covenants, and we had no outstanding debt under this
agreement.
We plan to continue to invest in our infrastructure, including information
systems, to gain efficiencies and meet the demands of our markets and
customers. We believe our current cash, cash equivalents, and short-term
investments will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for the next 12 months. Thereafter, 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 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.
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<PAGE>
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements."
SAB 101 summarizes certain of the Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. We do not
expect the adoption of SAB 101 to have a material effect on our results of
operations.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of APB
25. This Interpretation clarifies (a) the definition of employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after
either December 15, 1998 or January 12, 2000. To the extent that this
Interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are recognized on a prospective basis
from July 1, 2000. We do not expect the adoption of FIN 44 to have a material
effect on our results of operations.
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 April 2, 2000, 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 the United Kingdom, the United States and Israel and
sell products 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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<PAGE>
BUSINESS
In addition to historical information, this prospectus contains forward-
looking statements that involve risks and uncertainties. Our actual results
could differ significantly from the results discussed in these 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," as well as those discussed below and
elsewhere in this prospectus.
Introduction
We provide 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 equipment, including modems,
gateways, routers, fixed wireless receivers and base stations targeted at the
voice and high-speed data network access, or broadband, market. We believe our
systems expertise, products and support services enable 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 June
9, 2000 we have licensed our software to over 80 companies. These customers
have developed, or are developing, 132 designs of which more than 40 are
currently shipping. Additionally, we have shipped more than one million units
of our Helium semiconductor product as of the date of this prospectus.
Our predecessor company, Virata Limited, was formed in 1993 as Advanced
Telecommunications Modules Limited, a corporation organized in the United
Kingdom, as a spin-out from the Olivetti Research Laboratories (now AT&T
Laboratories). Until 1995, we were a development-stage company focused
primarily on product development. From our 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 digital subscriber line, or DSL, market. In
February 1998, the predecessor company changed its name to Virata Limited. In
July 1998, Virata Limited acquired RSA Communications, Inc., a corporation
organized in North Carolina. RSA Communications was subsequently renamed Virata
Raleigh Corporation. On November 16, 1999, we completed a reorganization of
Virata Limited and the initial public offering of Virata Corporation. On
February 10, 2000, we completed the acquisition of D2 Technologies Inc., a
provider of digital voice and telephony software solutions. On April 27, 2000,
we completed the acquisition of Inverness Systems Ltd., a provider of
networking software solutions. On June 20, 2000, we entered into an agreement
to acquire Excess Bandwidth Corporation, a developer of advanced algorithms for
high-bandwidth communication applications.
Industry Background
The amount of data being carried over the Internet and private
communications networks has grown dramatically in recent years. 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
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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. The passage of the Federal Telecommunications Act of 1996
started to change this historical pricing structure, and the merger of AT&T and
TCI completed in 1999 accelerated this change. The Federal Telecommunications
Act intensified the competitive environment by requiring incumbent local
exchange carriers, or ILECs, 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 U.S. companies, including Covad
Communications, MCI WorldCom, NorthPoint Communications, Rhythms NetConnections
and Sprint, are now deploying high-speed services using DSL technologies over
the copper infrastructure owned by the ILECs. The growing deployment of high
speed cable modems by cable system operators provides additional pressure on
the ILECs to modify their high speed data line pricing. In particular, AT&T has
announced plans to offer broadband and interactive services, including
telephony, on a broad scale over its 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, ILECs in the United States,
including SBC, Bell Atlantic and US West, are now aggressively committing their
resources to deploy DSL services. Service providers in Asia and Europe are also
rapidly deploying DSL.
DSL enables data transmission speeds of 128 kilobits per second, or Kbps, to
52 megabits per second, or 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. It 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.
Data, voice and video can all be delivered over DSL, enabling service
providers to offer a wide range of new value-add services. To date, the focus
has been on the application of DSL technologies to deliver high-speed access to
the Internet. Even more exciting opportunities lie ahead with the introduction
of voice and video over DSL services. Home and office gateways that include
voice telephony capabilities--typically known as Integrated Access Devices or
IADs--can deliver multiple lines of toll-quality voice over a single twisted
copper pair to the home or business. Voice over DSL requires sophisticated
voice processing algorithms, highly capable call-control software to support
the interface to the public telephone system and advanced user features, as
well as specially tuned and extended network protocol software to ensure toll-
quality audio. While the technical challenges of voice IADs are substantial,
voice support is fast becoming the next major requirement for DSL equipment
manufacturers. Over the next two years, IADs are projected to absorb new
application capabilities, including but not limited to secure data transmission
and distributed video reception capability.
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. As a result, existing users may suffer
performance degradation or security breaches as new users are added to
the network. Because each DSL connection is dedicated to a single user,
DSL does not suffer from this kind of service degradation and enables a
higher level of security.
. Broad coverage. As most 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.
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. 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.
Fixed wireless serves similar needs to those served by DSL, and its fixed
wireless communications processing requirements are similar in many respects to
those of DSL communications processing. Firstly, and most importantly, it
provides high speed data access to the Internet. Secondly, it is capable in
some circumstances of supporting advanced applications such as voice. Fixed
wireless may present a more cost-effective solution in the following
circumstances:
. if copper loop infrastructure is unsuitable, for example, if the copper
local loop is more than 18,000 feet long;
. in a sparsely populated area;
. if there is a scarcity of copper local loop, as is often the case in
sparsely populated areas for emerging economy markets, then it can be
quicker to deploy wireless because it does not involve placing physical
infrastructure in the ground; and
. for service providers who neither own nor have access to fixed-line
local loop infrastructure.
Equipment manufacturers encounter a number of challenges meeting the demands
of the growing broadband local-loop 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. These building blocks include the following:
. The analog front end which receives and transmits the electronic signal and
converts that signal to either analog or digital streams;
. The physical layer semiconductor, or PHY, which 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; and
. The layer 2 and 3 processor, which 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 building works, or 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
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<PAGE>
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. On June 5, 2000 we introduced our Azurite chipset which
enables the design of DSL Integrated Access Devices that provide combined
voice and data services for the high-volume residential and small to mid-
size office markets. The Azurite family of voice and data IAD chipsets is
a combination of our Helium or Berylium semiconductor and software with
voice algorithms, and voice control systems recently acquired from D2
Technologies.
. High Levels of Integration. We offer solutions that integrate software
with layer 2 and 3 semiconductors, freeing OEMs from the time consuming
and complex task of purchasing and incorporating discrete components from
a number of vendors. In addition, we offer several products that
integrate a layer 2 and 3 semiconductor and software with an AFE, thereby
further simplifying the design process for our customers.
. 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 DSL Forum,
ATM Forum, IETF, ITU and other industry standards. The 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 extensive expertise in providing solutions
that integrate communications processors with software for the content
and connection enabling layers of the
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broadband communications network. While we have chosen initially to focus
on the DSL market, our core technologies are capable of supporting a
number of broadband access alternatives, including fixed wireless, which
has similar processing requirements to those of DSL.
. 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.
. Deliver market-leading features and functionality, such as voice over DSL
and network quality of service solutions. We are building on our core
technologies to add market leading features and functionality, enhancing
the value of our products. The first set of added features we are
developing includes voice over DSL and network quality of service
solutions.
. 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 July 1998, D2
Technologies, Inc. in February 2000 and Inverness Systems Ltd. in April
2000. In addition, on June 20, 2000, we entered into an agreement to
acquire Excess Bandwidth Corporation. We believe completing further
selective acquisitions will be important to remain competitive as a
complete solutions provider to manufacturers of broadband access
equipment.
Products
We specialize in communications processors that are integrated with a
comprehensive suite of software for broadband local loop, including DSL,
equipment manufacturers. We offer solutions which are either PHY-independent or
include an ADSL/V.90 PHY. Our PHY-independent communications processors perform
the critical content encapsulation and content routing functionality required
in broadband local loop equipment, which is commonly referred to as layer 2 and
3 processing. Our system combines multiple elements required for managing the
addressing, routing, switching and protocol conversions needed to encapsulate
and route information packets. Our PHY-inclusive solutions incorporate all the
functionality of the PHY-independent products together with an ADSL/V.90 PHY
all on the same semiconductor. This choice of a PHY-independent or PHY-
integrated product, each featuring integration of a communications processor
and software, provides our customers a comprehensive, tested, self sufficient
solution that replaces semiconductors, software and support previously sourced
from multiple vendors.
Our ATOM family of application specific standard products, or ASSPs, enable
OEMs to focus on the DSL market. These communications processors combine the
relevant elements of the Proton ASICs with at least one embedded ARM RISC
microprocessor, and different family members offer either a PHY-independent or
PHY-integrated solution. ATOM devices also provide Ethernet, PCI or USB network
interfaces as well as Utopia for connection to physical layer devices and other
semiconductors and MII and serial interfaces for connection of next-generation
home-area-networking semiconductors.
PHY-Independent Products
Our Hydrogen, Helium and Lithium ASSPs support physical layer devices from a
broad range of vendors. While Hydrogen features a single embedded ARM RISC
microprocessor, Helium and Lithium contain two
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ARM RISC microprocessors to separate protocol and network processing. The
following is a list of our PHY-independent ATOM family products:
<TABLE>
<CAPTION>
Introduction
Product Interfaces Target Applications Date
------- -------------------------------- ------------------------ ------------
<C> <C> <S> <C>
Hydrogen......... PCI, Utopia 1 and ATM25 PHY DSL internal and August 1997
external modems and set-
top boxes
Helium........... USB, Utopia 1/2, ADSL T1.432, DSL external modems, June 1999
HDLC and 10BaseT Ethernet gateways, routers,
DSLAMs and DLC line
cards
Lithium.......... PCI, Utopia 1/2 and ADSL T1.432 DSL internal and October 1999
external modems,
gateways and set-top
boxes
PHY-Integrated Products
We have also developed a new generation of ATOM products which combine ADSL
PHY layer processing along with the layer 2 and 3 functionality of Helium and
Lithium into a single highly integrated device. The first PHY-integrated
products we have developed for this market are Beryllium and Boron. Each of
these devices is offered with a separate analog front end semiconductor called
Neon.
<CAPTION>
Introduction
Product Interfaces Target Applications Date
------- -------------------------------- ------------------------ ------------
<C> <C> <S> <C>
Beryllium........ ADSL, V.90, PCI, USB and MII ADSL/V.90 external March 2000
interfaces (for 10/100 Ethernet bridges, routers and
and homephone-line networking) gateways
Boron............ ADSL, V.90, PCI and USB ADSL/V.90 internal and March 2000
interfaces external
modems
</TABLE>
Beryllium and Boron take the communications processing capabilities of
Helium and Lithium and add an on-chip ADSL transceiver or PHY eliminating a
large and expensive component from ADSL equipment. Representing the industry's
first "ADSL home router on a chip," Beryllium can lower equipment costs by a
substantial amount. Using our patented technology, Beryllium has also delivered
superior performance at longer distances from the central office versus the
current generation of ADSL routers in performance tests that we have
undertaken. The Boron chip was designed around the same flexible and integrated
architecture as Beryllium, shares the same long loop performance capabilities,
but is targeted specifically at single-PC ADSL modems and achieves an even
lower cost point.
Beryllium provides a highly integrated solution for ADSL bridges and
routers, with the ability to provide local area interfaces such as 10/100
Ethernet, HomePNA (using home telephone wiring for the home network), home
powerline and home wireless. It is also well suited for voice IADs. Boron
provides a highly integrated solution for both USB and PCI ADSL modems. By
utilizing the Beryllium and Boron solutions teamed with the Neon analog front
end chip and a separate V.90 analog front end, equipment manufacturers will be
able to offer products that are functional with either dial-up 56KBS V.90 or
ADSL networks. Because of their dual V.90 and ADSL character, Beryllium and
Boron will allow the consumer to buy an "ADSL-ready" solution and subsequently
upgrade from V.90 to ADSL network access without any changes to their equipment
once ADSL services are available from the consumer's service provider.
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Chipset Products
We have developed a chipset product, Azurite, targeted at the voice-over-
DSL, or VoDSL, IAD equipment market. IADs are customer-premises equipment that
enable multiple lines of voice to be delivered over a single copper pair
simultaneous with the support of broadband data over DSL on the same copper
pair. VoDSL services can be used by business and consumers. We believe that
Azurite represents the most complete solution for IAD manufacturers. Azurite
consists of one of our communications processors, either Helium or Beryllium, a
Magnesium DSP, and our networking and voice software. It includes the ability
to interoperate with popular central-office voice-control protocols, such as
those implemented by our technology partners CopperCom and Jetstream, and
provides seamless integration between the DSL data and voice subsystems.
Azurite is supported by hardware reference design kits that provide a complete
VoDSL IAD solution. We currently expect to begin shipments of Azurite with our
Helium processors in the second quarter of fiscal year 2001.
Other Semiconductor Products
We have also developed a voice-processing product, Magnesium, that consists
of a Texas Instrument's C54-compatible DSP, manufactured for us by TI, bundled
with our vCore voice processing software and sold under our brand. We believe
that Magnesium, including vCore, brings the advantages of our integrated
software on silicon approach to the voice processing market, by providing a
rich set of algorithm implementations and by providing a flexible software
environment in which customers can quickly select and combine the voice
processing algorithms of their choice. Voice processing applications include
speaker-phones, next-generation GSM equipment, and broadband local-loop voice
equipment. We currently expect to begin shipments of Magnesium in July 2000 as
an integral part of the Azurite chipset solutions.
We currently also offer the Proton family of application specific integrated
circuits, or ASICs. We first introduced the Proton ASICs in 1995. They 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. While we are still realizing revenue from our
Proton family of products, we have integrated the functionality of the Proton
family of products into our new, more advanced ASSPs and thus expect the Proton
family to constitute a declining percentage of our revenues in the future.
Semiconductor Products Under Development
We are developing new PHY-independent and PHY-inclusive semiconductors with
higher feature content such as voice, video and security capabilities and
higher performance levels to meet the ever increasing demands of broadband
equipment manufacturers. On June 5, 2000 we introduced our Azurite chipset,
which enables the design of DSL IADs that provide combined voice and data
services for the high-volume residential and small to mid-size office markets.
The Azurite family of voice and data IAD chipsets is a combination of our
Helium or Beryllium semiconductors and software with voice algorithms and voice
control systems recently acquired from D2 Technologies. We currently expect to
be shipping these products for customers to use in development efforts in the
second quarter of fiscal 2001.
Software Products
Our extensive suite of software is key to providing flexible, off-the-shelf
communications processing solutions. Multiple software modules deliver
management and support for functions at the link, protocol and physical layers.
These modules either operate on top of ATMOS, our operating system kernel,
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, these
modules complete a customized, sophisticated system which supports multiple
functions including quality of service, system management, bridging, tunneling,
address translation, signaling and routing. The addition of the communications
algorithms for the ITU ADSL and V.90 standards complements the layer 2 and 3
code for our PHY-integrated solutions. We also offer customers a full set of
software development tools including compilers, linkers and other special-
purpose tools.
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The recent acquisitions of D2 Technologies and Inverness Systems
substantially broaden and deepen the range of software capabilities we are able
to offer our customers as well as provide new points of contact with many of
the world's leading telecommunications equipment manufacturers. D2
Technologies' software assets in the voice over IP arena include voice coders;
advanced telephony functions including PBX functionality, speaker phone, voice
conferencing and echo cancellation. Inverness Systems' complementary
capabilities include Frame Relay; advanced routing including: ATM, AAL-2, SSCS
and Open Shortest Path First, or OSPF; BGP4; and Multi-Protocol Label
Switching, or MPLS.
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:
Reference Design Services
Our Customer Services and Solutions group specializes in speeding customers'
time to market by developing reference designs featuring board-level DSL
hardware and integrated software products. Examples include modem solutions
featuring ADSL PHYs supplied by ST Microelectronics or Analog Devices. We
recently introduced an SDSL router design kit which teams our Helium processor
with a SDSL PHY marketed by Conexant.
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 comprehensive training in the use of our semiconductors and
software development systems. Our Technical Advice Center delivers technical
assistance to customers and manages our extranet site, which is accessible to
all of our customers, through which we deliver new software and documentation
and take action on bug reports. Our technical consultants, field application
engineers (FAEs) and, as appropriate, development engineers assist our
customers throughout the product development cycle, and may include formal and
informal design reviews.
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 layer, protocol layer, voice 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 layer 2 and 3 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.
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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 voice algorithms 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 required for on-chip ADSL or V.90 PHY-layer processing, voice or
video processing. 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 code and lower
memory requirements than is possible through 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 kernel, either ATMOS or VxWorks controls
processing on the protocol processor.
The modular construction of the software architecture makes it easier to add
further functionality. 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 analog modem market and have leveraged that
expertise to develop the solutions required for the ITU ADSL standards. PHY
layer code is executed in our Beryllium and Boron communications processors
using a compact, low power DSP supported by fixed function hardware blocks.
Voice Algorithms and Digital Signal Processing
Advanced telephony and voice solutions also require DSP algorithms which we
access through our recent acquisition of D2 Technologies. Algorithms include
basic encoding such as G.711 and G.726; advanced encoding such as G.728 and
G.729; echo cancellation including single and multi reflector G.168; fax relay;
and
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voicemail capability. The G.xxx algorithm implementations are based on ITU
standards, and achieve an industry leading level of algorithmic performance
measured in DSP millions-of-instructions-per-second, or MIPS, for a given
number of voice channels, saving customers money by enabling them to use less
powerful DSPs than they would otherwise have to for their applications. Voice
algorithms typically run on a DSP external to our communications processor. Our
communications processors include interfaces that allow them to easily connect
to popular voice DSPs including the C54xx series from Texas Instruments.
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. The acquisition of Inverness Systems broadens and deepens our
existing software through the addition of Frame Relay, advanced IP routing and
MPLS capabilities.
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.
Anticipated Acquisition of Excess Bandwidth Corporation
On June 20, 2000, we entered into an Agreement and Plan of Merger with
Excess Bandwidth. We believe the acquisition will provide us with symmetric DSL
PHY capabilities targeted at the markets for both business premises and central
office equipment. Excess Bandwidth develops advanced algorithms for high-
bandwidth communications applications and implements those algorithms as
communications processors. Excess Bandwidth is presently testing its first two
integrated circuit designs and has not yet shipped product to customers. It has
three patent applications pending in the United States. Excess Bandwidth has 50
employees including 40 physical layer and analog designers and was founded in
1998 by Dr. Debajyoti Pal and Stanford Professor Thomas Kailath. Excess
Bandwidth leases approximately 27,000 square feet of office and laboratory
space in Cupertino, California under two leases that expire in 2001 and 2007.
The merger agreement sets forth the terms and conditions of the merger of a
wholly owned subsidiary of ours with and into Excess Bandwidth. Upon
consummation of the proposed acquisition, Excess Bandwidth will become a wholly
owned subsidiary of ours. Under the terms of the merger agreement, we expect to
issue 4,052,252 shares of our common stock in exchange for all of the issued
and outstanding capital stock of Excess Bandwidth. In addition, all of the
outstanding employee options and warrants to purchase shares of Excess
Bandwidth's capital stock and other stock-based compensation awards will be
exchanged for options to purchase an estimated 404,027 shares of our common
stock and an estimated 1,846,038 shares of our common stock subject to certain
repurchase rights by us. Ten percent of the shares of our common stock to be
issued pursuant to the acquisition will be placed in an escrow. Consummation of
the acquisition is subject to a number of customary conditions, including the
approval of the acquisition by the shareholders of Excess Bandwidth, compliance
with all applicable provisions of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 and the expiration or termination of all applicable waiting
periods. Affiliates of Excess Bandwidth holding more than 50% of Excess
Bandwidth's common stock and preferred stock have agreed to vote in favor of
the anticipated acquisition. The anticipated acquisition is expected to close
in the third quarter of calendar 2000, will be accounted for as a purchase and
will result in a charge related to the write-off of in-process research and
development. We cannot assure you that the anticipated acquisition will close
when anticipated or at all.
Our common stock will be issued to the shareholders of Excess Bandwidth
pursuant to a permit from the California Department of Corporation after a
fairness hearing and, as a consequence, may be resold by them without
registration under the Securities Act. The holders of Excess Bandwidth common
and preferred stock
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have agreed to restrict their sales of our common stock during the first year
after the closing of the acquisition. Holders of Excess Bandwidth preferred
stock, who will receive an aggregate of 2,773,250 shares of our common stock,
may sell 15% of their Virata common stock each quarter beginning 90 days after
the completion of the offering of common stock hereunder. Holders of Excess
Bandwidth common stock, who will receive an aggregate of 3,125,040 shares of
our common stock, may sell 15% of their Virata common stock beginning 90 days
after completion of this offering and may sell their remaining shares one year
after the closing date of the acquisition.
Customers
We sell our products to established telecommunications equipment vendors,
modem manufacturers and broadband access equipment companies, including more
than 80 customers who have licensed our software as of June 9, 2000. Several of
our largest customers by revenue include (in alphabetical order): Adaptive
Broadband, Allied Data, Arescom, Com21, Coppercom, Diamond Multimedia,
Ericsson, Netopia, Orckit Communications, Westell Technologies, Xavi
Technologies, and Zhone.
Our customers have developed or are developing 132 equipment designs based
on our semiconductors and software as of June 9, 2000. Of these 132 designs,
more than 40 are currently shipping as of June 9, 2000.
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 fiscal year ended April 2, 2000, Orckit Communications
and Westell Technologies accounted for 23.1% and 15.1%, 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.
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. Following training, 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 FAEs and 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 Korea, we work with
representative firms.
Our sales team consists of qualified engineers who are located in
California, Massachusetts, North Carolina, the United Kingdom, Israel, Taiwan,
Hong Kong and Japan providing coverage of the United States, Europe and Asia.
The sales team is supported by FAEs and development engineers that work
directly with customers on their new product developments.
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.
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Research and Development
As of June 9, 2000, we had 145 engineers based in California, England, North
Carolina, Israel and Massachusetts. Of these engineers, 57 have advanced
degrees, including 12 with Ph.D.s. Several individuals were early developers in
analog modem software, voice algorithms, IP telephony and ATM technologies.
Since mid-1998, we have invested a significant portion of our research and
development expenditures in the development of Beryllium and Boron and
associated software to address the ADSL market. Consistent with our strategy to
enhance our capabilities by pursuing selective acquisitions, we recently
acquired D2 Technologies and Inverness Systems, each of which creates new
market opportunities for us. 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 staff and capabilities.
Our research and development expenditures were $4.0 million and $8.3 million in
the fiscal years ended March 31, 1998, 1999 and $12.3 million, excluding the
National Insurance Contribution on options accrual of $2.0 million, in the
fiscal year ended April 2, 2000, respectively. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition".
Manufacturing
We outsource the wafer 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 Hydrogen and Helium communications processors have all been
sourced from suppliers that deliver fully assembled and tested products. For
our most recent semiconductor product introductions, which include the Lithium,
Beryllium and Boron communications processors, we separately outsource the
wafer fabrication, assembly and test functions from different contractors. This
improves manufacturing efficiency and lowers overall product costs. The
Hydrogen, Helium and Lithium 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. Our Beryllium and Boron
communications processors are supplied by UMC under the provisions of this
license. We have expanded our operations team so that we are able to assume
more of the manufacturing and quality control responsibilities as well as
develop and maintain contractor relationships with multiple suppliers.
Our inventory storage and warehousing function is provided by a global
freight forwarding service provider to fulfill our worldwide customer demand.
We have also initiated drop shipments from several of our third party
manufacturing locations, to enable more timely product delivery to our rapidly-
expanding worldwide customer base. Our ordering systems are undergoing
continual business-process-level improvements, resulting in shortened order
commit lead times and product sourcing cycle times. We have experienced
significant improvements in lead times, to both our customers and from our
vendors due to our improved communication delivery systems.
We only employ standard processes at high-quality, high-volume
manufacturers. We have undergone rigorous third party quality and reliability
evaluations of our products, which resulted in the successful certification of
our semiconductors for high-volume, commodity-type applications. We rely on
third party suppliers including semiconductor foundries for substantially all
of our semiconductor requirements and have taken action to ensure we can obtain
products within the time frames and in the volumes required by us at an
affordable cost. We have a capacity and pricing arrangement with UMC which
covers all Virata-required wafers through calendar 2001. Third party foundries
supplying the Proton products, however, are not obligated to supply products to
us for any specific period, in any specific quantity or at any specific price.
Virata has several long-term relationships with these foundries, and on some
occasions we have
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experienced delays and may in the future experience delays in receiving
semiconductors from these foundries. Any problems associated with the delivery,
quality or cost of the assembly and testing of our products could impact 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 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-independent ASSPs: devices from
Intel through their pending acquisition of BASIS Communications and
Motorola;
. Beryllium and Boron, our PHY-integrated, ADSL/V.90 products: devices from
Alcatel Microelectronics, Analog Devices, Centillium Communications,
Conexant Systems, GlobeSpan, Lucent Technologies and Texas Instruments;
and
. Software: operating systems and software stacks from Wind River Systems
and its recently acquired subsidiary, Integrated Systems; and networking
and protocol layer software from Netplane Systems, Inc., Microsoft and
Trillium; and voice software from Broadcom through their 1999 acquisition
of Hothaus and Texas Instruments through their 1999 acquisition of
Telogy.
In addition, there have been a number of announcements by other
semiconductor 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
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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.
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 June 9, 2000, we have been granted or acquired three patents in the
United States and three in the United Kingdom. In addition, we received notice
of allowance for four additional patents in the United States. Our patents have
expiration dates ranging from 2016 to 2017. In addition, we have sixteen patent
applications pending in the United Kingdom and fifteen pending in the United
States. We also have counterpart 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." The Virata
Logo, "ISOS," "Proton," "Hydrogen," "Helium," "Lithium," "Beryllium," "Boron,"
"Neon," "Azurite," and "Magnesium" are also our trademarks.
Legal Proceedings
We are not currently a party to any material legal proceedings, nor to our
knowledge, is any such proceeding threatened.
Employees
As of June 9, 2000, we had 248 full-time employees in our worldwide
operations. Of that total, 145 were primarily engaged in engineering, 56 were
engaged in sales and marketing and the remainder were engaged in operational,
financial and administrative functions.
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None of our employees are covered by, nor are we a party to, any collective
bargaining agreement. We believe our employee relations are good.
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. Additionally, we lease the following space for our other
facilities:
. approximately 16,600 square feet of office and laboratory space in
Cambridge, England, under three leases that expire in 2003, 2004 and
2005;
. approximately 13,200 square feet of office space in Raleigh, North
Carolina, under a lease that expires in September 2003;
. approximately 15,000 square feet of office and laboratory space in Santa
Barbara, California under leases that expire in January 2002 and April
2002;
. approximately 2,100 square feet of office and laboratory space in Kfar
Saba, Israel under a lease that expires in December, 2001;
. approximately 2,800 square feet of office space in Marlborough,
Massachusetts under a lease that expires in August 2004; and
. approximately 1,950 square feet of office space in Taipei, Taiwan under a
lease that expires in August 2001.
We may need to expand our office space within the next 12 months.
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MANAGEMENT
Directors and Executive Officers
Our directors and executive officers as of June 9, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Charles Cotton................... 53 Chief Executive Officer and Director
Michael Gulett................... 47 President, Chief Operating Officer
Andrew Vought.................... 45 Senior Vice President, Finance, Chief
Financial Officer and Secretary
Martin Jackson................... 40 Chief Technology Officer and Director
Thomas Cooper.................... 51 Senior Vice President, Corporate
Development
Duncan Greatwood................. 32 Vice President, Marketing
Dr. Hermann Hauser............... 51 Chairman of the Board
Marco De Benedetti............... 37 Director
Gary Bloom....................... 39 Director
Bandel Carano.................... 38 Director
Professor Andrew Hopper.......... 47 Director
Peter Morris..................... 44 Director
Patrick Sayer.................... 42 Director
Giuseppe Zocco................... 34 Director
</TABLE>
Charles Cotton has been our Chief Executive Officer and a member of our
board of directors 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 Inc., a supplier of digital access control and
connectivity solutions. Mr. Vought holds a 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.
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 DSL Forum. Mr.
Jackson holds an M.A. in Electrical Sciences from the University of Cambridge.
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Thomas Cooper is our Senior Vice President, Corporate Development and has
been employed by us in various capacities since January 1995. 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 a 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, and previously served as
our Vice President, European Sales after joining us in November 1997. Prior to
joining 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.
Dr. Hermann Hauser is one of our co-founders and has served as our Chairman
since March 1993. Dr. Hauser's principal occupation is Director of Amadeus
Capital Partners Ltd., a venture capital fund management company a position he
has held since December 1997. Dr. Hauser has also co-founded more than 20 other
high technology 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 has served as a member of our board of directors since
July 1994. Mr. De Benedetti has been the Chairman and Managing Director of
Telecom Italia Mobile S.p.A., Europe's largest cellular phone operator 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 from 1990 to July 1999. 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 has served as a member of our board of directors since February
1999. Mr. 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 has served as a member of our board of directors since May
1995. Mr. 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 Corp., Metaware Communications Corp, Wireless
Facilities Inc. and several private companies. Mr. Carano holds both a M.S. and
a B.S. in Electrical Engineering from Stanford University.
Professor Andrew Hopper is one of our co-founders and has served as a member
of our board of directors since March 1993. 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.
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Peter T. Morris has served as a member of our board of directors since May
1995. Mr. Morris is a General Partner of New Enterprise Associates, a private
venture capital firm, 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 Inc., Packeteer Inc. and several private companies. Before joining New
Enterprise Associates, Mr. Morris served in various capacities with Telebit
Corporation 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 has served as a member of our board of directors since June
1998. Mr. Sayer has been a General Partner of Lazard Freres et Cie, a French
investment bank, since 1982, 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 a director of Financiere et
Industrielle Gaz et Eaux and 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 has served as a member of our board of directors since June
1998. Mr. 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 a 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, Inc.
Board Committees
Our board of directors currently consists of ten directors and has an
executive committee, compensation committee, audit committee and director
compensation committee.
Executive Committee. The executive committee of our board of directors
consists of Messrs. Hauser, Carano, Cotton and Morris. The executive committee
is authorized to act with respect to all matters arising before the board,
except where prohibited by Delaware law.
Compensation Committee. The compensation committee reviews, approves and/or
makes recommendations to the board regarding all forms of compensation provided
to our executive officers, including stock compensation and loans. In addition,
the compensation committee reviews, approves and/or makes recommendations on
stock compensation arrangements for all of our other employees. As part of the
foregoing, the compensation committee administers our stock incentive and other
employee benefit plans. The members of the compensation committee are Messrs.
Hauser, Carano and Zocco.
Audit Committee. The audit committee monitors 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 also consults 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 has 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 Messrs. Morris, Sayer and
Zocco. On April 25, 2000 our board adopted an audit committee charter that
meets the requirements of the Securities and Exchange Commission and The Nasdaq
Stock Market.
Director Compensation Committee. The director compensation committee reviews
and make recommendations to the board regarding all forms of compensation
provided to our non-employee directors. As
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part of the foregoing, the director compensation committee administers our 1999
Non-Employee Director Compensation Plan. The members of the director
compensation committee are 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. Directors who are not our employees or employees of our affiliates
will receive compensation in the form of stock options for serving on our board
of directors. See "--Non-Employee Director Compensation Plan." No additional
compensation is paid with respect to service on or 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.
Non-Employee Director Compensation Plan
We have a 1999 Non-Employee Director Compensation Plan. The purposes of the
plan is to enable us to attract, retain and motivate our non-employee directors
and the members of our technology advisory board, which will advise the company
on technology matters, by providing for or increasing the proprietary interests
of such non-employee directors in our stock. The non-employee compensation plan
provides for automatic grants of stock options to purchase shares of our common
to eligible non-employee directors, made up of an initial grant of an option to
purchase 80,000 shares that vests over four years upon election to the board of
directors and then successive 20,000 share grants which will vest over one
year. In addition, members of our technology advisory board may be granted
options to purchase shares of our common stock in an amount to be determined at
the discretion of the director compensation committee, subject to board
approval. The maximum number of shares of our common stock that may be issued
under the non-employee director compensation plan is 2,000,000 shares, subject
to adjustment in the event of recapitalizations or changes in our common stock.
All option grants will have a per share exercise price equal to the fair market
value of a share of our common stock on the date of grant of the option.
The stock options under the non-employee director compensation plan will be
effected by way of individual option agreements with each recipient. An option
may be exercised in whole or in part from time to time and lapses on the tenth
anniversary from the date of its grant. In the event of a change in control of
the company, all unvested options then outstanding shall immediately become
vested. All options are non-transferable, but form part of the option holder's
estate in the event of death. In the event an option holder ceases to be
eligible to participate in the non-employee director compensation plan, all
unvested options shall immediately terminate. Such option holder will then have
a period of 12 months in which to exercise the vested portion of the option,
subject to a shorter or longer period in certain circumstances. Upon the
expiration of the exercise period, any options that remain unexercised will
lapse.
The non-employee director compensation plan is administered by our director
compensation committee. The director compensation committee may amend or
terminate the non-employee director compensation plan at any time and in any
matter, subject to the rights of recipients of awards under the plan and
required board or stockholder approvals. Unless terminated earlier by the
director compensation committee or the board of directors, the plan will
terminate in November 2009 or upon a change of control of the company.
As of June 9, 2000 there were options outstanding to purchase 640,000 shares
of our common stock issued to our non-employee directors. No options have been
issued to members of out technology advisory board to date. The outstanding
options are exercisable at a price per share of $7.00. On April 13, 2000, we
filed a registration statement on Form S-8 with respect to the shares or our
common stock issuable under the 1999 non-employee director compensation plan.
As a result, shares of common stock issued under such plan after the date the
registration statement was filed will be freely tradable, except for shares
held by our affiliates.
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Compensation Committee Interlocks and Insider Participation
Our compensation committee was established in November 1999. Prior to that
date, all compensation decisions were made by our full board of directors,
including the determination of the compensation of all executive officers,
including Mr. Cotton in his capacity of Chief Executive Officer. We are not
aware of any interlocking relationship existing between our board of directors
or 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 April 2, 2000 to
our Chief Executive Officer and the other four most highly compensated
executive officers who were serving as executive officers as of April 2, 2000
(the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------ ------------------------
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation
--------------------------- ------ -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Charles Cotton................ 2000 $247,967 $107,497 277,014 $11,431(1)
Chief Executive Officer and
Director 1999 224,940 60,000 216,416 24,000
Michael Gulett(2)............. 2000 234,900 86,458 217,014 2,000(3)
President and Chief Operating
Officer 1999 82,372 54,167 477,610 1,827
Andrew Vought................. 2000 192,415 92,500 199,400 2,000(4)
Senior Vice President,
Finance, 1999 184,875 40,000 111,938 1,230
Chief Financial Officer and
Secretary
Thomas Cooper................. 2000 169,776 38,125 79,700 2,000(5)
Senior Vice President
Corporate Development 1999 153,606 30,250 164,176 1,273
Duncan Greatwood.............. 2000 139,800 11,475 112,088 6,689(6)
Vice President, Marketing 1999 123,971 21,675 13,432 5,087
</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, the amounts for
fiscal year 1999 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 a matching contribution paid by us for the benefit of Mr. Cooper
under our 401(k) plan.
(6) Represents an accrued pension contribution paid by us for the benefit of
Mr. Greatwood under our pension arrangement.
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Option Grants in Fiscal Year Ended April 2, 2000
<TABLE>
<CAPTION>
Potential
Individual Grants Realizable
------------------------------------------------- Value at Assumed
Percent of Annual Rates of
Number of Total Options Stock Price
Shares Granted to Appreciation For
Underlying Employees Exercise or Option Term (3)
Options in Fiscal Base Price Expiration -------------------
Name Granted Year (1) Per Share (2) Date 5% 10%
---- ---------- ------------- ------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Charles Cotton.......... 197,014 4.2% $ 4.36 6/15/2006 $349,291 $ 813,995
80,000 1.7% 18.00 12/7/2006 586,225 1,366,153
Michael Gulett.......... 197,014 4.2% 4.36 6/15/2006 349,291 813,995
20,000 0.4% 18.00 12/7/2006 146,556 341,538
Andrew Vought........... 119,400 2.5% 4.36 6/15/2006 211,687 493,321
80,000 1.7% 18.00 12/7/2006 586,225 1,366,153
Thomas Cooper........... 59,700 1.3% 4.36 6/15/2006 105,843 246,660
20,000 0.4% 18.00 12/7/2006 146,556 341,538
Duncan Greatwood........ 7,462 0.2% 2.35 4/20/2006 7,124 16,601
74,626 1.6% 4.36 6/15/2006 132,306 308,329
30,000 0.6% 14.47 12/7/2006 176,710 411,810
</TABLE>
--------
(1) Based on options to purchase a total of 4,701,738 shares of our common
stock granted during the fiscal year ended April 2, 2000.
(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 through
November 16, 1999, or as reported on the Nasdaq Stock Market after November
16, 1999.
(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 April 2, 2000. We have no outstanding stock
appreciation rights.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year In-the-Money Options
Shares End at Fiscal Year End (2)
Acquired on Value ------------------------- -------------------------
Name Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles Cotton.......... 20,000 $1,558,190 361,371 492,651 $17,619,309 $21,957,647
Michael Gulett.......... 40,000 3,000,000 119,205 535,419 5,673,216 24,772,878
Andrew Vought........... 227,594 533,885 31,637 313,293 1,538,151 13,504,706
Thomas Cooper........... 10,000 641,763 179,612 188,588 8,728,779 8,578,306
Duncan Greatwood........ 6,000 458,175 13,373 130,027 647,095 5,691,504
</TABLE>
--------
(1) The "value realized" upon the exercise of stock options was determined by
the difference between the exercise price and the fair market value of the
common stock on the date of exercise.
(2) Based on a fair market value of our common stock as of April 2, 2000 equal
to $49.94 per share, less the exercise price payable for such shares.
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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 April 2, 2000, Mr. Cotton had received options
to purchase an aggregate of 874,022 shares of our common stock at a weighted
average exercise price of $3.54 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.
Michael Gulett. Under the terms of his employment agreement dated October
14, 1998, Mr. Gulett receives an annual base salary of $233,281, 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 April 2, 2000, Mr. Gulett had received options to purchase an aggregate
of 694,624 shares of our common stock at a weighted average exercise price of
$3.37 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
$191,888 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 April 2, 2000, Mr. Vought had received options to
purchase an aggregate of 572,524 shares of our common stock at a weighted
average exercise price of $4.20 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.
Thomas Cooper. Under the terms of his employment agreement dated December
16, 1994, Mr. Cooper receives an annual base salary of $169,310, 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 April
2, 2000, Mr. Cooper had received options to purchase an aggregate of 378,200
shares of our common stock at a weighted average exercise price of $2.86 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.
Duncan Greatwood. Under the terms of his employment agreement dated December
10, 1998, Mr. Greatwood receives an annual base salary of (Pounds)90,100. Mr.
Greatwood is entitled to participate in our stock incentive plans. As of
April 2, 2000, Mr. Greatwood had received options to purchase an aggregate of
149,400 shares of our common stock at a weighted average exercise price of
$5.54 per share. In general, these options vest equally over four years. We may
terminate Mr. Greatwood's employment for cause at any time, or without cause
upon one month written notice from the termination date. Mr. Greatwood may
voluntarily resign upon one month written notice of his intention to leave.
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Employee Stock Option Plans
Virata Corporation 1999 Stock Incentive Plan
We have a 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. The maximum number of shares of our common stock that may be issued
under the stock incentive plan is 9,600,000 shares, subject to an automatic
annual increase on the first day of each of our fiscal year beginning in 2001
equal to the lesser of (i) 2,000,000 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.
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
422 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 June 9, 2000 there were options outstanding to purchase 7,473,396
shares of our common stock under the 1999 Stock Incentive Plan. The outstanding
options are exercisable at a weighted-average price per share of approximately
$13.51 and generally vest over a four-year period from the date of grant. 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.
On April 13, 2000, we filed a registration statement on form S-8 with
respect to the shares of our common stock issuable under the 1999 Stock
Incentive Plan. As a result, shares of common stock issued under such plan
after the date the registration statement was filed will be freely tradable,
except for shares held by our affiliates.
D2 Technologies, Inc. Tandem Stock Option Plan
In connection with our acquisition of D2 Technologies, Inc., we assumed the
D2 Technologies, Inc. Tandem Stock Option Plan. The purpose of this plan is to
reward employees, consultants and independent contractors of D2 Technologies
for their contributions to D2 Technologies' growth and profits. The
compensation committee of our board of directors administers this plan. The
maximum number of shares of our common stock that could be issued under this
plan is 932,330.
Options granted under the plan are either options intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code or
options not intended to so qualify, or nonqualified stock options. The exercise
price of nonqualified options cannot be lower than 85% of the fair market value
of the common
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<PAGE>
stock on the grant date. The exercise price of incentive stock options cannot
be lower than 100% of the fair market value of the common stock on the grant
date, and in the case of incentive or nonqualified stock options granted to
holders of more than 10% of our voting power, not less than 110% of the fair
market value. The aggregate fair market value of the shares of common stock for
which one or more options granted to any employee may for the first time become
exercisable as incentive options during any one calendar year cannot exceed
$100,000. The term of an incentive stock option cannot exceed ten years, and
the term of an incentive or nonqualified stock option granted to a holder of
more than 10% of our voting power cannot exceed five years.
Options generally vest over four years with the first 25% vesting at the end
of the first year and one-thirty-sixth each month thereafter, but may not vest
at a rate less than 20% per year over a five year period. An option may be
exercised only once during any calendar quarter and not more than twice in any
calendar year. We have first refusal rights with respect to any proposed
disposition by option holders except in specified circumstances. Options
granted under this plan must be exercised within six months of the option
holder's death or disability, or thirty days after termination of employment
from us for any other reason, but in no event no later than the expiration of
the option's term. We have the right to repurchase any shares upon an option
holder's termination from us or an option holder's death.
As of June 9, 2000, 745,112 shares of common stock were reserved for
issuance under this plan, all of which were subject to outstanding options at a
weighted average price of $7.93 per share, and 187,218 shares of our common
stock had been issued upon the exercise of options granted under the plan. No
shares were available for future grants. All options are non-transferable and
non-assignable, except to the extent permitted by Section 424 of the Internal
Revenue Code.
Our board of directors may amend, suspend or terminate this plan at any
time, subject to the rights of recipients of awards under the plan, and
required stockholder approvals. Unless terminated sooner, this plan will
terminate automatically in 2006.
On May 23, 2000, we filed a registration statement on Form S-8 with respect
to the shares of our common stock issuable under the D2 Technologies, Inc.
Tandem Stock Option Plan. As a result, shares of common stock issued under such
plan after the date the registration statement was filed will be freely
tradable, except for shares held by our affiliates.
Inverness Systems Ltd. Share Option Plan (1997)
In connection with our acquisition of Inverness Systems Ltd., we assumed the
Inverness Systems Ltd. Employee Share Option Plan (1997). The purpose of this
plan is to provide incentives to the employees of Inverness. The share option
committee of the board of directors administers this plan. The maximum number
of shares of our common stock that may be issued under this plan is 517,896.
The plan is governed by the laws of the State of Israel.
The officers and employees of Inverness are eligible to participate in this
plan, except for employee directors serving on the share option committee at
the time of the grant. Options granted under this plan are intended to qualify
under Section 102 of the Israel Income Tax Ordinance, New Version. Unless the
board of directors determines otherwise, options will vest over three years at
a rate of 33% per year. The exercised options may be held in trust by a trustee
specified in the plan. Unless otherwise determined by the share option
committee, the exercise price per share is the par value of the ordinary
shares. The term of a stock option cannot exceed ten years from the grant date.
Options granted under this plan must be exercised within three months of the
grantee's death, total disability or termination of employment from us without
cause. If the grantee is terminated for cause, all options granted to such
grantee will ipso facto expire and terminate. Options granted under this plan
are not transferable by the grantee other than by will or by the laws or
descent and distribution.
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As of June 9, 2000, 406,256 shares of common stock were reserved for
issuance under this plan, all of which were subject to outstanding options at a
weighted average price of $0.034 per share, and 111,640 shares of our common
stock had been issued upon the exercise of options granted under the plan. No
shares were available for future grants.
Our board of directors may amend, suspend or terminate this plan at any
time, subject to the rights of grantees of awards under the plan, and required
stockholder approvals. This plan will remain effective until terminated by the
board of directors.
On May 23, 2000, we filed a registration statement on Form S-8 with respect
to the shares of our common stock issuable under the Inverness Systems Ltd.
Employee Share Option Plan (1997). As a result, shares of common stock issued
under such plan after the date the registration statement was filed will be
freely tradable, except for shares held by our affiliates.
Excess Bandwidth Corporation
Upon completion of our anticipated acquisition of Excess Bandwidth
Corporation, we expect to assume Excess Bandwidth's existing 1998 Equity
Incentive Plan and the outstanding awards granted thereunder.
Employee Stock Purchase Plan
We have a 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 2,200,000
shares of common stock have 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 2002, 2003, 2004 and 2005 equal to the lesser of
(i) 1,000,000 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 is implemented by a series of overlapping
offering periods with a duration of not more than 24 months and provides a
means by which employees may purchase our common stock through payroll
deductions. The first offering period began on November 17, 1999 and will
terminate on the last business day in October 2001. Future offering periods
will be determined by the compensation committee. Each offering period
generally consists 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 began on November 17, 1999 and ended
on April 30, 2000, with subsequent purchase periods ending on October 31, 2000,
April 30, 2001 and October 31, 2001.
Our employees, or those of any subsidiary, 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 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
67
<PAGE>
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 4,000 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.
On April 13, 2000, we filed a registration statement on form S-8 with
respect to the shares or our common stock issuable under the 1999 Employee
Stock Purchase Plan. As a result, shares of common stock issued under such plan
after the date the registration statement was filed will be freely tradable,
except for shares held by our affiliates.
Employee Benefit Plans
We have five benefit plans, one in the United Kingdom, one in Israel, and
three plans 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 April 2, 2000, March 31, 1999 and 1998 were $141,800, $112,600,
and $109,400, 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. We provide a 50%
matching contribution to the retirement plan of up to $2,000 per calendar year
per employee. Contributions for the year ended April 2, 2000 and March 31, 1999
were $178,500 and $58,000, respectively.
The D2 Technologies plan includes a medical plan, long-term disability, IRC
Section 125 premium payment plan, and COBRA.
The Inverness Systems plan in the United States includes a medical plan,
dental plan, 401(k) plan, IRC Section 125 premium payment plan and COBRA.
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.
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<PAGE>
CERTAIN TRANSACTIONS
The following is a description of transactions during our last three fiscal
years 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."
During the past three fiscal years ended April 2, 2000, we have issued
shares of our stock as follows (the following information gives effect to the
reorganization in November 1999 and the two-for-one stock split of our common
stock in May 2000):
. 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 subsequently converted into 1,128,032
shares of our common stock in June 1998;
. 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 were
subsequently converted into 298,510 shares of our common stock in June
1998;
. in June 1998, we sold 11,634,240 shares of our common stock in a private
placement at a purchase price of $2.34 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,
Olivetti Telemedia Investments B.V. and various other investors, 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 conversion of company securities with an
aggregate value of $16,635,368, we issued 3,550,014 shares of our common
stock 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 various employees or principals of
Index Securities S.A. to purchase, 748,202 shares of our common stock in
a private placement at an exercise price of $2.35 in connection with
Index Securities S.A. acting as placement agent in our June 1998 private
placement financing that was subsequently exercised in February 2000;
. in June 1998, we issued a 10,242 shares of our common stock 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 October 1999, we issued 1,836,966 shares of our common stock in a
private placement at a purchase price of $4.36 per share and aggregate
proceeds of $8,000,000 to Olivetti Telemedia Investments B.V. and two
other investors; and
. in February 2000, we issued 4,396,826 shares of our common stock to David
Wong and the other former shareholders of D2 Technologies in connection
with our acquisition of D2 Technologies.
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<PAGE>
Our current executive officers, directors and 5% stockholders participated
in the foregoing transactions as follows (the following information gives
effect to the reorganization in November 1999):
<TABLE>
<CAPTION>
Number of
Shares of
Name of Purchaser Common Stock
----------------- ------------
<S> <C>
Financiere et Industrielle Gaz et Eaux............................. 3,446,874
David Wong......................................................... 3,098,824
Olivetti International S.A. ....................................... 1,097,074
Charles Cotton..................................................... --
Michael Gulett..................................................... --
Andrew Vought...................................................... --
Martin Jackson..................................................... --
Thomas Cooper...................................................... --
Duncan Greatwood................................................... --
Dr. Hermann Hauser(1).............................................. 35,252
Marco De Benedetti(2).............................................. 1,097,074
Gary Bloom(3)...................................................... 1,967,530
Bandel Carano(4)................................................... 3,727,020
Professor Andrew Hopper(5)......................................... 18,762
Peter Morris(6).................................................... 2,618,880
Patrick Sayer(7)................................................... 3,446,874
Giuseppe Zocco(8).................................................. 1,046,712
Directors and executive officers as a group (14 persons)........... 13,958,104
</TABLE>
--------
(1) Represents shares of our common stock 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.
(2) Represents shares of our common stock issued to Olivetti Telemedia
Investments B.V., an affiliate of Olivetti International S.A., of which Mr.
De Benedetti is a director. Mr. De Benedetti disclaims all beneficial
ownership of these shares.
(3) Represents shares of our common stock issued to Oracle Corporation, of
which Mr. Bloom is an Executive Vice President. Mr. Bloom disclaims all
beneficial ownership of these shares.
(4) Represents shares of our common stock issued to Oak Investment Partners and
Oak VI Affiliates Fund, L.P., of which Mr. Carano is the General Partner.
Mr. Carano disclaims all beneficial ownership of these shares.
(5) Includes 8,536 shares of our common stock issued upon conversion of bridge
notes in June 1998.
(6) Represents shares of our common stock issued to New Enterprise Associates,
of which Mr. Morris is the General Partner. Mr. Morris disclaims all
beneficial ownership of these shares.
(7) Represents shares of our common stock issued to Financiere et Industrielle
Gaz et Eaux, of which Mr. Sayer is a director. Mr. Sayer disclaims all
beneficial ownership of these shares.
(8) Represents shares of our common stock issued to Index Securities S.A. and
its affiliates, with which Mr. Zocco is affiliated. Mr. Zocco disclaims all
beneficial ownership to all but 175,486 of these shares.
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 April 2, 2000, we had aggregate sales to Acorn of
approximately $128,000. Dr. Hauser, Professor Hopper and Mr. De Benedetti were
directors of Acorn and have no affiliation with Pace Micro Technology.
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<PAGE>
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 and is able to design, manufacture and sell products incorporating
integrated circuits purchased from us. Professor Hopper is a director of ABL.
As of April 2, 2000, we have received approximately $1.6 million in license
fees and product purchases from ABL and there was an outstanding balance owed
to us of $17,600.
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 $5.8 million in fees
to ARM under these agreements as of April 2, 2000.
Olivetti International S.A. 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 April 2, 2000, we
had aggregate sales to Olivetti and its affiliates of approximately $26,000 and
purchases from Olivetti and its affiliates of approximately $650. Olivetti
holds approximately 6.8% of our common stock.
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
April 2, 2000, we had aggregate sales to Telemedia of approximately $89,300 and
purchases from Telemedia of approximately $34,000. Dr. Hauser, Professor Hopper
and Mr. De Benedetti serve as directors of Telemedia.
Santa Barbara Connected Systems Corporation
D2 Technologies, which we acquired in February 2000, is a party to a
Software Assignment, License and Maintenance Agreement with Santa Barbara
Connected Systems Corporation, under which D2 Technologies will provide Santa
Barbara Connected Systems with a license to certain software and technical
assistance. The revenue under the agreement is expected to be approximately
$50,000. In addition, for the three years ended April 2, 2000, D2 Technologies
had sales to Santa Barbara Connected Systems of approximately $755,000, of
which more than $100,000 has been written off by D2 Technologies or exchanged
for equity. D2 Technologies owns approximately 4% and David Wong owns
approximately 15% of Santa Barbara Connected Systems. In addition, Mr. Wong is
a director of Santa Barbara Connected Systems.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our outstanding shares of common stock as of June 9, 2000 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;
. all of our directors and executive officers as a group; and
. all other selling stockholders.
Unless otherwise indicated, and subject to community property laws where
applicable, to our knowledge 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 June 9, 2000 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 June 9,
2000, an aggregate of 49,198,772 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 and no exercise by the underwriters of their over-
allotment option. Unless otherwise indicated, the address for each person
listed is: 2933 Bunker Hill Lane, Suite 201, Santa Clara, California 95054.
<TABLE>
<CAPTION>
Shares Shares
Named Executive Officers, Beneficially Owned Number Beneficially Owned
Directors Prior To Offering of Shares After the Offering
and greater than 5% ------------------ Being ------------------
Stockholders Number Percent Offered Number Percent
------------------------- ---------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Olivetti International S.A.
14, rue Aldringen, L2951
Luxembourg .................. 3,335,878 6.8 -- 3,335,878 6.1
Financiere et Industrielle Gaz
et Eaux
3, Rue Jacques Bingen, 75017
Paris, France................ 3,130,188 6.4 -- 3,130,188 5.7
David Wong.................... 2,698,824 5.5 -- 2,698,824 4.9
Charles Cotton(1)............. 393,537 * -- 393,537 *
Michael Gulett(2)............. 184,711 * -- 184,711 *
Andrew Vought(3).............. 286,622 * -- 286,622 *
Martin Jackson(4)............. 131,932 * -- 131,932 *
Thomas Cooper(5).............. 189,732 * -- 189,732 *
Duncan Greatwood(6)........... 35,027 * -- 35,027 *
Dr. Hermann Hauser(7)......... 500,523 1.0 -- 500,523 *
Marco De Benedetti(8)......... 3,349,211 6.8 -- 3,349,211 6.1
Gary Bloom(9)................. 1,088,587 2.2 -- 1,088,587 2.0
Bandel Carano(10)............. 1,867,651 3.8 -- 1,867,651 3.4
Prof. Andrew Hopper(11)....... 459,855 * -- 459,855 *
Peter Morris.................. 46,878 * -- 46,878 *
Patrick Sayer(12)............. 3,143,521 6.4 -- 3,143,521 5.7
Giuseppe Zocco(13)............ 275,774 * -- 275,774 *
Executive officers and
directors as a group
(14 persons)(14)............. 11,953,561 23.8 -- 11,953,561 21.3
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Prior To Number Owned After the
Offering of Shares Offering
----------------- Being -----------------
Selling Stockholders Number Percent Offered Number Percent
-------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Jonathan Masel................... 308,242 * 67,078 241,164 *
Jonathan Masel Holdings Ltd...... 308,242 * 67,078 241,164 *
Jonathan Masel Investments Ltd... 308,242 * 67,078 241,164 *
Super Tech Venture Capital
Corp............................ 222,672 * 33,401 189,271 *
Apex Venture Capital Corp........ 89,068 * 13,360 75,708 *
Holland Venture B.V.............. 385,368 * 346,832 38,536 *
Global Business Investment
Corp............................ 55,668 * 20,736 34,932 *
Chieh-Wen Tsai................... 31,182 * 1,000 30,182 *
Richard Lowenthal................ 19,488 * 2,923 16,565 *
Ling Niu......................... 4,872 * 480 4,392 *
Joanne Masel..................... 154 * 34 120 *
All Selling Stockholders as a
group
(11 persons).................... 1,733,198 3.5 620,000 1,113,198 2.0
</TABLE>
--------
* Less than 1% of the outstanding common stock.
(1) Represents options to purchase 393,537 shares of common stock exercisable
within 60 days of June 9, 2000.
(2) Includes options to purchase 182,903 shares of common stock exercisable
within 60 days of June 9, 2000.
(3) Includes options to purchase 63,028 shares of common stock exercisable
within 60 days of June 9, 2000.
(4) Represents options to purchase 131,932 shares of common stock exercisable
within 60 days of June 9, 2000.
(5) Includes options to purchase 188,420 shares of common stock exercisable
within 60 days of June 9, 2000.
(6) Represents options to purchase 35,027 shares of common stock exercisable
within 60 days of June 9, 2000.
(7) Represents 487,190 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, and an option to purchase 13,333
shares of common stock exercisable within 60 days of June 9, 2000.
(8) Represents 3,335,878 shares held by Olivetti International S.A. and an
option to purchase 13,333 shares of common stock exercisable within 60
days of June 9, 2000. Mr. De Benedetti disclaims all beneficial ownership
of the Olivetti shares.
(9) Represents 1,075,254 shares held by Oracle Corporation, of which Mr. Bloom
is an Executive Vice President, and an option to purchase 13,333 shares of
common stock exercisable within 60 days of June 9, 2000. Mr. Bloom
disclaims all beneficial ownership of the Oracle shares.
(10) Represents 1,854,318 shares of our common stock beneficially owned by Oak
Investment Partners and Oak VI Affiliates Fund. L.P., of which Mr. Carano
is the General Partner, and an option to purchase 13,333 shares of common
stock exercisable within 60 days of June 9, 2000. Mr. Carano disclaims all
beneficial ownership of the Oak Investment Partners and Oak VI Affiliates
Fund shares.
(11) Includes an option to purchase 13,333 shares of common stock exercisable
within 60 days of June 9, 2000.
(12) Represents 3,130,188 shares of our common stock beneficially owned by
Financiere et Industrielle Gaz et Eaux, of which Mr. Sayer is a director,
and an option of purchase 13,333 shares of common stock exercisable within
60 days of June 9, 2000. Mr. Sayer disclaims all beneficial ownership of
the Financiere et Industrielle Gaz et Eaux shares.
(13) Includes an option to purchase 13,333 shares of common stock exercisable
within 60 days of June 9, 2000 and 134,355 shares of our common stock
beneficially owned by Index Securities S.A. and its affiliates, with which
Mr. Zocco is affiliated. Mr Zocco disclaims all beneficial ownership of
the Index shares.
(14) Includes options held by our executive officers and directors to purchase
aggregate of 1,101,511 shares of our common stock exercisable within 60
days of June 9, 2000.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 450,000,000 shares of common stock,
$0.001 par value, and 5,000,000 shares of preferred stock, $0.001 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. See "Certain Provisions in our Certificate
of Incorporation and Bylaws".
Common Stock
As of June 9, 2000, there were 49,198,772 shares of common stock outstanding
(which number excludes 9,289,730 shares of our common stock that may be issued
upon the exercise of stock options and warrants outstanding as of June 9, 2000,
2,655,064 other shares of our common stock reserved for issuance under our
stock plans and an aggregate of approximately 6,302,317 million shares of our
common stock that will be issued and/or subject to outstanding options or
repurchase rights upon the completion of our acquisition of Excess Bandwidth
Corporation). Upon completion of this offering, there will be 55,078,772 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
As of June 9, 2000, there are 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 is 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.
Registration Rights
As of June 9, 2000, approximately 10,930,000 shares of our common stock have
registration rights pursuant to various agreement. The following description of
our registration rights agreements below is not complete and is qualified by
our registration rights agreements that are included as exhibits to the
Registration Statement of which this prospectus is a part.
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<PAGE>
Virata Corporation Registration Rights Agreement
Approximately 9,400,000 shares of our common stock have rights under the
Virata Corporation registration rights agreement. Any time after May 15, 2000
holders of at least 50% of the registrable securities under this agreement may
request that we file a registration statement with respect to at least 30% of
the registrable securities held by such holders, such securities having 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 various limitations and conditions. The holders of
registrable securities under this agreement are entitled to two such demand
registrations. In the event we propose to register any of our common stock
under the Securities Act, holders of registrable securities under this
agreement also have the opportunity to include their registrable securities in
such registration, subject to various limitations and conditions.
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 under this agreement 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 Form S-3 registrations in any twelve-month
period.
We will bear substantially all costs (other than underwriting discounts and
selling commissions) incurred in connection with a registration required by the
agreement, subject to various conditions and limitations. 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.
D2 Technologies Registration Rights Agreement
In connection with our acquisition of D2 Technologies, Inc., we granted
rights with respect to the registration of our common stock under the
Securities Act to the former shareholders of D2 Technologies. Approximately
660,000 shares of our common stock are currently subject to this agreement.
Holders of registrable securities under the D2 Technologies registration rights
agreement were entitled to notice of and the inclusion of their registrable
shares in this offering, subject to the underwriters' right to limit the number
of shares included in the offering and other conditions. Approximately 71,900
shares of our common stock will be registered in this offering by stockholders
exercising rights under this agreement. Following this offering, holders of
rights under the agreement may be entitled to receive notice of and include
their registrable shares in future registrations by us on Form S-1 or S-3,
subject to various limitations and exceptions.
In the event that this offering is not completed or less than all of the
shares subject to the agreement are registered in this offering, we may be
required to prepare and file a registration statement under the Securities Act
registering all or the remaining number of such holders' registrable shares
under the agreement, subject to various conditions and limitations; however, we
are not obligated to effect more than one such registration.
We will bear substantially all costs (other than underwriting discounts and
selling commissions) incurred in connection with, and are required to use our
best efforts to effect, a registration required by the agreement, subject to
various conditions and limitations. The registration rights under the D2
Technologies registration rights agreement terminate as to registrable
securities upon (1) the sale of all registrable securities by the holders under
the agreement, (2) any sale or transfer pursuant to a registration statement or
Rule 144, (3) the date upon which such registrable shares may be sold under
Rule 144(k), and (4) the sale or transfer of such registrable shares to a
person or entity to whom the registration rights are not transferable under the
agreement.
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<PAGE>
Inverness Systems Registration Rights Agreement
In connection with our acquisition of Inverness Systems Ltd., we granted
rights with respect to the registration of our common stock under the
Securities Act to the former shareholders of Inverness Systems. Approximately
870,000 shares of our common stock are currently subject to this agreement.
Holders of registrable securities under the Inverness Systems registration
rights agreement were entitled to notice of and the inclusion of their
registrable shares in this offering, subject to the underwriters' right to
limit the number of shares included in the offering and other conditions.
Approximately 548,100 shares of our common stock will be registered in this
offering by stockholders exercising rights under the Inverness Systems
registration rights agreement. Following this offering, holders of rights under
the agreement may be entitled to receive notice of and include their
registrable shares in future registrations by us on Form S-1 or S-3, subject to
various limitations and exceptions.
In the event that this offering is not completed and we do not undertake a
subsequent offering by August 25, 2000, or less than all of the shares subject
to the agreement are registered in this offering, we may be required to prepare
and file a registration statement under the Securities Act registering all or
the remaining number of such holders' registrable shares under the agreement,
subject to various conditions and limitations; however, we are not obligated to
effect more than one such registration. In addition, upon the release of shares
from escrow created in connection with the acquisition, we may be required to
file a registration statement on Form S-3 with respect to such shares, subject
to various conditions and limitations.
We will bear substantially all costs (other than underwriting discounts and
selling commissions) incurred in connection with, and are required to use our
best efforts to effect, a registration required by the agreement, subject to
various conditions and limitations. The registration rights under the Inverness
Systems registration rights agreement terminate as to registrable securities
upon (1) the sale of all registrable securities by the holders under the
agreement, (2) any sale or transfer pursuant to a registration statement or
Rule 144, (3) the date upon which such registrable shares may be sold under
Rule 144(k), and (4) the sale or transfer of such registrable shares to a
person or entity to whom the registration rights are not transferable under the
agreement.
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 ten. Our bylaws
provide that our board of directors is 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
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<PAGE>
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.
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.
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
Our common stock is listed on The Nasdaq Stock Market's National Market
under the symbol "VRTA."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and based upon shares outstanding as of
June 9, 2000, there will be approximately 55,078,772 shares of our common stock
outstanding, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options. Of these shares, approximately
38,501,053 are freely tradable without restriction or further registration
under the federal securities laws and approximately 10,794,453 may be publicly
sold subject to certain restrictions or limitations, including Rule 144. In
addition, as of June 9, 2000 there were outstanding options and warrants to
purchase approximately 9,289,730 shares of our common stock.
On April 13, 2000, we filed a registration statement on Form S-8 with
respect to an aggregate of 19,800,000 shares of our common stock issuable or
issuable in the future under our 1999 Stock Incentive Plan, 1999 Employee Stock
Purchase Plan and 1999 Non-Employee Director Compensation Plan. As a result,
shares of common stock issued under such plans after the date the registration
statement was filed will be freely tradable without further registration,
except for shares held by our affiliates. In connection with our acquisitions
of D2 Technologies and Inverness Systems, we filed a registration statement on
Form S-8 on May 23, 2000, with respect to an aggregate of 1,450,226 shares of
our common stock issuable pursuant to our assumption of the D2 Technologies
Tandem Stock Option Plan and the Inverness Systems Employee Share Option Plan
(1997). As a result, shares of common stock issued under such plans after the
date the registration statement was filed will be freely tradable without
further registration, except for shares held by our affiliates.
In connection with this offering, our executive officers, directors and
various stockholders, including the selling stockholders, who are expected to
hold in the aggregate approximately 14,529,717 shares of common stock after
this offering, have agreed that they will not offer, sell, pledge or otherwise
dispose of, directly or indirectly, any shares of our common stock or any
securities convertible into or exchangeable or exercisable for shares of our
common stock, for a period beginning on the effective date of this offering and
continuing for a period not to exceed 90 days thereafter, without the prior
written consent of Credit Suisse First Boston Corporation. Assuming Credit
Suisse First Boston Corporation does not release stockholders from these
agreements prior to the expiration of the lock-up period, the following shares
will be eligible for sale in the public market at the following times:
. beginning 90 days following this offering, approximately 10,717,695
shares will be available for sale in the public market, some of which are
securities held by our affiliates; and
. the remaining 3,812,022 shares will be eligible for sale from time to
time thereafter, subject in some cases to compliance with Rule 144.
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 under the Securities Act.
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 550,788 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 various other conditions, Rule 701 under the Securities Act, as
currently in effect, permits the resale of securities originally purchased
78
<PAGE>
from us by our employees, directors, officers, consultants or advisers 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.
As of June 9, 2000, approximately 10,930,000 shares of our common stock had
been granted various rights of registration under the federal securities laws.
See "Description of Capital Stock--Registration Rights." Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act, except for shares
purchased by affiliates, immediately upon the effectiveness of such
registration. In the future, we may grant additional options or grant
additional registration rights.
In connection with our anticipated acquisition of Excess Bandwidth
Corporation, the holders of Excess Bandwidth common and preferred stock have
agreed to restrict their sales of our common stock during the first year after
the closing of the acquisition. Holders of Excess Bandwidth preferred stock,
who will receive an aggregate of 2,773,250 shares of our common stock, may sell
15% of their Virata common stock each quarter beginning 90 days after the
completion of the offering of common stock hereunder. Holders of Excess
Bandwidth common stock, who will receive an aggregate of 3,125,040 shares of
our common stock, may sell 15% of their Virata common stock beginning 90 days
after completion of this offering and may sell their remaining shares one year
after the closing date of the acquisition.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated July 12, 2000, we and the selling stockholders have agreed to
sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, UBS Warburg LLC, FleetBoston Robertson Stephens Inc. 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............................. 2,627,300
UBS Warburg LLC.................................................... 1,160,900
FleetBoston Robertson Stephens Inc. ............................... 1,160,900
Thomas Weisel Partners LLC......................................... 1,160,900
Banc of America Securities LLC..................................... 65,000
Dain Rauscher Incorporated......................................... 65,000
E*Offering Corp. .................................................. 65,000
Frost Securities, Inc. ............................................ 65,000
Invomed Associates LLC ............................................ 65,000
Kaufman Bros., L.P. ............................................... 65,000
---------
Total............................................................ 6,500,000
=========
</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 the underwriters a 30-day option to purchase up to 975,000
additional shares at the 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 $2.17 per share. The
underwriters and selling group members may allow a discount of $0.10 per share
on sales to other broker/dealers. After the 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
and the selling stockholders 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.................. $3.60 $3.60 $21,195,138 $24,711,768
Expenses payable by us.. $0.19 $0.16 $ 1,120,000 $ 1,120,000
Underwriting discounts
and commissions paid
by the selling
stockholders........... $3.60 $3.60 $ 2,234,862 $ 2,234,862
Expenses payable by the
selling stockholders... $ -- $ -- $ -- $ --
</TABLE>
We estimate that our out of pocket expenses for this offering will be
approximately $1,120,000.
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<PAGE>
We 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 of 1933
relating to, any additional 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 any offer, sale, pledge,
disposition or filing, without the prior written consent of Credit Suisse
First Boston Corporation for a period not to exceed 90 days after the date of
this prospectus, except issuances pursuant to the exercise of employee stock
options outstanding on the date hereof, new grants of options in the ordinary
course of business, issuances in connection with our anticipated acquisition
of Excess Bandwidth Corporation, and issuances in connection with future
acquisitions, if any, as long as the aggregate market value of the securities
issued in all such acquisitions does not exceed $67 million and such
securities may not be sold by the holders thereof within 90 days after the
date of this prospectus.
Our executive officers, directors and other stockholders, who are expected
to hold an aggregate of approximately 14,529,717 shares of our common stock
after this offering, have agreed that they will not offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly any shares of our
common stock or securities convertible into or exchangeable or exercisable for
any shares of our common stock, enter into a transaction which would have the
same effect, or publicly disclose the intention to make any such offer, sale,
pledge or disposition without, in each case, the prior written consent of
Credit Suisse First Boston Corporation, for a period of 90 days after the date
of this prospectus.
We and the selling stockholders 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.
Our common stock is listed on The Nasdaq Stock Market's National Market
under the symbol "VRTA."
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and passive market making 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 the underlying security
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.
. In passive market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to limitations,
make bids for or purchases of the common stock until the time, if any, at
which a stabilizing bid is made.
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.
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
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<PAGE>
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.
From time to time, Credit Suisse First Boston Corporation has provided
financial advisory services to us for customary fees and may provide such
services to us in the future. In particular, Credit Suisse First Boston
Corporation is acting as our financial advisor in connection with the
acquisition of Excess Bandwidth Corporation and will be receiving customary
fees for such services. In addition, Thomas Weisel Partners LLC, one of the
representatives of the several underwriters, is acting as Excess Bandwidth
Corporation's financial advisor and will receive customary fees for the
services they render to Excess Bandwidth Corporation in connection with the
acquisition.
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
numerous public offerings of equity securities. 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.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters
for sale to their online brokerage account holders. Internet distributions
will be allocated by the underwriters that will make internet distributions on
the same basis as other allocations.
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<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.
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<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
Wilson Sonsini Goodrich & Rosati, P.C., San Francisco, California.
EXPERTS
The consolidated financial statements of Virata Corporation as of March 31,
1999 and April 2, 2000 and for each of the three years in the period ended
April 2, 2000 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 D2 Technologies, Inc. as of December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999
included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
The financial statements of Inverness Systems, Ltd. as of December 31, 1998
and 1999 and for each of the three years in the period ended December 31, 1999
included in this prospectus have been audited by Ernst & Young LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
The financial statements of Excess Bandwidth Corporation as of March 31,
2000 and 1999, for the year ended March 31, 2000, and for the periods from
April 23, 1998 (date of inception) to March 31, 1999 and 2000, 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 accounting and auditing.
WHERE TO FIND ADDITIONAL INFORMATION
We have 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. You may obtain
information on the operation of the public reference room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. 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.
We are subject to the information and periodic requirements of the
Securities Exchange Act and, accordingly, file periodic reports, proxy
statements and other information with the Securities and Exchange Commission.
Such periodic reports, proxy statements and other information are available for
inspection and copying at the Securities and Exchange Commission's public
reference rooms, and the website of the Securities and Exchange Commission
referred to above.
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<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
D2 Technologies, Inc.
Report of Independent Public Accountants................................... F-23
Balance Sheets............................................................. F-24
Statements of Operations................................................... F-25
Statements of Shareholders' Equity......................................... F-26
Statements of Cash Flows................................................... F-27
Notes to Financial Statements.............................................. F-28
Inverness Systems Limited
Report of Independent Auditors............................................. F-35
Consolidated Balance Sheets................................................ F-36
Consolidated Statements of Operations...................................... F-37
Statements of Changes in Shareholders' Equity.............................. F-38
Consolidated Statements of Cash Flows...................................... F-39
Notes to Consolidated Financial Statements................................. F-40
Excess Bandwidth Corporation
Report of Independent Accountants.......................................... F-49
Balance Sheets............................................................. F-50
Statements of Operations................................................... F-51
Statements of Shareholders' Equity (Deficit)............................... F-52
Statements of Cash Flows................................................... F-53
Notes to Financial Statements.............................................. F-54
Pro Forma Condensed Combined Financial Statements (Unaudited)
Pro forma Condensed Combined Balance Sheet (unaudited)..................... F-63
Pro forma Condensed Statement of Operations (unaudited).................... F-64
</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 at March 31, 1999 and April 2, 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended April 2, 2000, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
April 26, 2000, except as to
the first paragraph of
Note 14, which is as of
April 27, 2000, and the
second paragraph of Note
14, which is as of May
18, 2000.
F-2
<PAGE>
VIRATA CORPORATION
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, April 2,
1999 2000
--------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 8,616 $ 60,193
Short-term investments................................... 1,001 18,006
Accounts receivables, net of allowance for doubtful
accounts and returns of $2,742 and $295, respectively... 2,267 7,524
Inventories.............................................. 264 409
Other current assets..................................... 1,232 2,895
-------- --------
Total current assets................................... 13,380 89,027
Property and equipment, net................................ 2,479 3,222
Intangible assets, net..................................... 3,328 89,113
-------- --------
Total assets........................................... $ 19,187 $181,362
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................................... $ 2,112 $ 4,887
Accrued liabilities...................................... 1,018 3,484
Accrued employee benefits................................ 869 2,555
Accrued National Insurance Contribution on options....... -- 4,471
Deferred revenue......................................... 489 2,215
Capital lease obligations, current....................... 850 784
-------- --------
Total current liabilities.............................. 5,338 18,396
Capital lease obligations, long-term....................... 1,130 1,178
-------- --------
Total liabilities...................................... 6,468 19,574
-------- --------
Commitments (Note 9)
Stockholders' Equity
Convertible preferred stock, $0.02 par value; 86,100,000
at March 31, 1999, no shares authorized at April 2, 2000;
51,431,179 and no shares issued and outstanding at March
31, 1999 and April 2, 2000, respectively................. 801 --
Preferred stock, $0.001 par value; 5,000,000 shares
authorized at April 2, 2000, no shares issued and
outstanding.............................................. -- --
Common stock, $0.001 par value; 95,000,000 and 450,000,000
shares authorized at March 31, 1999 and April 2, 2000,
respectively; 4,004,020 and 46,568,006 shares issued and
outstanding at March 31, 1999 and April 2, 2000,
respectively............................................. 4 47
Additional paid-in capital................................ 63,171 238,833
Accumulated other comprehensive income.................... 871 335
Unearned stock compensation............................... (1,500) (691)
Accumulated deficit....................................... (50,628) (76,736)
-------- --------
Total stockholders' equity............................. 12,719 161,788
-------- --------
Total liabilities and stockholders' equity............. $ 19,187 $181,362
======== ========
</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 March April 2,
31, 1998 31, 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Semiconductors................................ $ 505 $ 2,784 $ 14,041
License....................................... 1,570 1,628 3,716
Services and royalty.......................... 1,206 2,367 1,724
Systems....................................... 5,650 2,477 2,296
-------- -------- --------
Total revenues.............................. 8,931 9,256 21,777
-------- -------- --------
Cost of revenues:
Semiconductors................................ 325 2,421 9,651
License....................................... -- -- 107
Services and royalty.......................... 192 528 701
Systems....................................... 3,270 1,048 780
-------- -------- --------
Total cost of revenues...................... 3,787 3,997 11,239
-------- -------- --------
Gross profit.................................... 5,144 5,259 10,538
-------- -------- --------
Operating expenses:
Research and development...................... 3,987 8,323 12,331
Sales and marketing........................... 4,076 2,917 5,350
General and administrative.................... 4,917 5,567 5,976
Restructuring costs........................... 1,871 -- --
National Insurance Contribution on options*... -- -- 4,471
Amortization of intangible assets............. -- 549 4,497
Amortization of stock compensation............ 399 1,394 907
Acquired in-process research and development.. -- 5,260 5,324
-------- -------- --------
Total operating expenses.................... 15,250 24,010 38,856
-------- -------- --------
Loss from operations............................ (10,106) (18,751) (28,318)
Interest expense................................ (214) (155) (200)
Interest and other income, net.................. 42 1,749 2,410
-------- -------- --------
Net loss........................................ $(10,278) $(17,157) $(26,108)
-------- -------- --------
Basic and diluted net loss per share............ $ (3.00) $ (4.46) $ (1.40)
======== ======== ========
Weighted average common shares--basic and
diluted........................................ 3,428 3,845 18,672
======== ======== ========
--------
* National Insurance Contribution on options (Note 6):
Research and development...................... $ -- $ -- $ 2,036
Sales and marketing........................... -- -- 961
General and administrative.................... -- -- 1,474
-------- -------- --------
$ -- $ -- $ 4,471
======== ======== ========
</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
Preferred Accumulated Total
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, 1997......... 22,320 $1,709 3,290 $ 3 27,604 $ 729 -- $(23,193) $ 6,852 $ (8,149)
========
Issuance of
common stock for
cash............ -- -- 242 1 51 -- -- -- 52 --
Unearned stock
compensation.... -- -- -- -- 1,958 -- (1,958) -- -- --
Amortization of
unearned stock
compensation.... -- -- -- -- -- -- 399 -- 399 --
Currency
translation
adjustment...... -- -- -- -- -- (110) -- -- (110) (110)
Net loss........ -- -- -- -- -- -- -- (10,278) (10,278) (10,278)
------- ------ ------ ---- -------- ----- ------ -------- -------- --------
Balance, March
31, 1998......... 22,320 1,709 3,532 4 29,613 619 (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 10 458 -- 3,578 -- -- -- 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............ -- -- 14 -- 7 -- -- -- 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 --
Unrealized gain
on investments.. -- -- -- -- -- 1 -- -- 1 1
Currency
translation
adjustment...... -- -- -- -- -- 251 -- -- 251 251
Net loss........ -- -- -- -- -- -- -- (17,157) (17,157) (17,157)
------- ------ ------ ---- -------- ----- ------ -------- -------- --------
Balance, March
31, 1999......... 51,431 801 4,004 4 63,171 871 (1,500) (50,628) 12,719 (16,905)
========
Issuance of
Series E
convertible
preferred stock
for cash........ 6,154 615 -- -- 7,339 -- -- -- 7,954 --
Reorganization
to US Delaware
corporation..... (57,585) (1,416) 24,902 25 1,391 -- -- -- -- --
Issuance of
common upon
initial public
offering........ -- -- 11,500 12 73,001 -- -- -- 73,013 --
Issuance of
common stock for
cash............ -- -- 1,032 1 1,129 -- -- -- 1,130 --
Issuance of
common stock and
options for
acquisition..... -- -- 4,396 4 92,705 -- -- -- 92,709 --
Issuance of
common stock
upon exercise of
warrants........ -- -- 734 1 (1) -- -- -- -- --
Unearned stock
compensation.... -- -- -- -- 98 -- (98) -- -- --
Amortization of
unearned stock
compensation.... -- -- -- -- -- -- 907 -- 907 --
Currency
translation
adjustment...... -- -- -- -- -- (536) -- -- (536) (536)
Net loss........ -- -- -- -- -- -- -- (26,108) (26,108) (26,108)
------- ------ ------ ---- -------- ----- ------ -------- -------- --------
Balance, April 2,
2000............. -- $ -- 46,568 $ 47 $238,833 $ 335 $ (691) $(76,736) $161,788 $(26,644)
======= ====== ====== ==== ======== ===== ====== ======== ======== ========
</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 March 31, April 2,
31, 1998 1999 2000
-------- ---------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(10,278) $(17,157) $(26,108)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts and
returns.................................... 1,075 1,458 157
Acquired in-process research and
development................................ -- 5,260 5,324
Depreciation and amortization............... 1,079 1,695 6,269
Amortization of stock compensation.......... 399 1,394 907
Changes in current assets and liabilities
(excluding the effect of acquisitions):
Accounts receivable....................... (1,651) (739) (4,207)
Inventories............................... 393 158 (167)
Other current assets...................... (445) 82 (1,648)
Accounts payable.......................... (339) 248 2,797
Accrued liabilities....................... 280 (2,131) 2,213
Deferred revenue.......................... 306 184 1,286
Accrued employee benefits................. -- 48 1,686
Accrued National Insurance Contribution on
options.................................. -- -- 4,471
-------- -------- --------
Net cash used in operating activities... (9,181) (9,500) (7,020)
-------- -------- --------
Cash flows from investing activities:
Sale of short-term investments................ -- -- 21,024
Purchase of short-term investments............ -- (1,000) (38,029)
Purchase of property and equipment, net....... (174) (2,127) (1,447)
Cash paid in connection with acquisition, net
of cash acquired............................. -- (5,149) (3,598)
-------- -------- --------
Net cash used in investing activities... (174) (8,276) (22,050)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible
preferred stock, net of issuance costs....... -- 25,106 7,954
Proceeds from issuance of common stock........ 52 7 74,143
Proceeds from capital leases.................. 11 1,201 --
Repayments of capital lease obligations....... (277) (318) (1,004)
Proceeds from convertible loan................ 2,606 -- --
Proceeds from (repayment of) bank borrowings.. 417 (417) --
-------- -------- --------
Net cash provided by financing
activities activities.................. 2,809 25,579 81,093
-------- -------- --------
Effect of exchange rate changes on cash......... 24 46 (446)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (6,522) 7,849 51,577
-------- -------- --------
Cash and cash equivalents at beginning of
period......................................... 7,289 767 8,616
-------- -------- --------
Cash and cash equivalents at end of period...... $ 767 $ 8,616 $ 60,193
======== ======== ========
</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. The Company is a provider of
solutions that integrate communication processors with a suite of software for
the digital subscriber line ("DSL") equipment market.
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. In February 2000, the
Company completed its acquisition of D2 Technologies, Inc., a company organized
in California (see Note 4). On April 27, 2000 we completed the acquisition of
Inverness Systems Ltd., a provider of networking software solutions (see Notes
4 and 14).
The historical financial statements presented are those of Virata Limited.
In August 1999, Virata Corporation was created and, immediately prior to its
initial public offering ("IPO"), Virata Corporation became the holding company
of Virata Limited. The reorganization was 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.
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.
Stock Split
On March 21, 2000, the Company's Board of Directors approved a two-for-one
split of the Company's common stock that was applicable to stockholders of
record on May 4, 2000. The stock split became effective on May 18, 2000. Unless
specifically noted otherwise, all references to share and per share data for
all periods presented have been adjusted to give effect to this split.
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 the
American Institute of Certified Public Accountants ("AICPA") 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
F-7
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 for
the specific upgrade, 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 April 2,
2000 and March 31, 1999, $53.3 million and $7.1 million, 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.
Short-term Investments
Short term 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 Accumulated Other Comprehensive Income. The cost of
these investments at April 2, 2000 and March 31, 1999 was $18.0 million and
$1.0 million, respectively. Gains and losses on the sale of available-for-sale
securities would be 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, short term investments, accounts
receivable, accounts payable, accrued liabilities approximate fair value due to
their short maturities.
Segment 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 April 2, 2000, 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 United States, Europe and Asia. 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 following customers accounted for 10% or more of total revenues:
<TABLE>
<CAPTION>
Year Ended
----------------------------
March 31, March 31, April 2,
1998 1999 2000
--------- --------- --------
Revenues
--------
<S> <C> <C> <C>
Customer A.................................... 10% 16% 23%
Customer B.................................... 17% 23% 15%
Customer C.................................... 10% -- --
</TABLE>
Revenues from customers located outside the United States were 44% in 2000,
40% in 1999 and 44% in 1998. The Company has $1,800,000 and $1,700,000 invested
in identifiable tangible assets in Europe as of March 31, 1999 and April 2,
2000, respectively. The remaining identifiable tangible assets are located in
the United States.
The following customers account for 10% or more of total accounts
receivable:
<TABLE>
<CAPTION>
March 31, April 2,
1999 2000
--------- --------
Accounts Receivable
-------------------
<S> <C> <C>
Customer A.............................................. 54% 11%
Customer B.............................................. 11% --
Customer D.............................................. -- 25%
</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 investigates potential impairments of its long lived assets 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.
Intangible assets
Intangible assets consist of technology, contracts, customer base, assembled
workforce and goodwill, which are being amortized on a straight line basis over
their estimated lines ranging from two to five years.
F-9
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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,
------------
April 2,
1998 1999 2000
----- ------ --------
<S> <C> <C> <C>
Series A convertible preferred stock................... 269 269 --
Series B convertible preferred stock................... 2,068 208 --
Series C convertible preferred stock .................. 1,194 836 --
Series D convertible preferred stock................... -- 10,219 --
Convertible preferred stock warrants................... 21 420 --
Common stock warrants.................................. 22 22 102
Common stock options................................... 1,432 4,334 8,166
----- ------ -----
5,006 16,308 8,268
===== ====== =====
</TABLE>
Stock compensation
The Company accounts for stock compensation arrangements in accordance with
provision of Accounting Principles Board ("APB") Opinion 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 Opinion 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 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 during the fiscal years ended April 2, 2000, March
31, 1999 and 1998 the Company recognized (losses) gains of $543,000, $432,000,
and $(80,000), respectively.
F-10
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. 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.
In December 1999, the Securities and Exchange Commissions issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements."
SAB 101 summarizes certain of the Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company does not expect the adoption of SAB 101 to have a material effect on
its results of operations.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of APB
25. This Interpretation clarifies (a) the definition of employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after
either December 15, 1998 or January 12, 2000. To the extent that this
Interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this interpretation are recognized on a prospective basis
from July 1, 2000. The Company has not yet determined the impact, if any, of
adopting this Interpretation.
Note 2--Supplemental Cash Flow Information (in thousands):
<TABLE>
<CAPTION>
Year ended
--------------------------
April
March 31, March 31, 2,
1998 1999 2000
--------- --------- ------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid for interest...................... $ 197 $ 180 $ 188
===== ====== ======
Supplemental noncash investing and financing
activity:
Issuance of preferred stock for convertible
loan....................................... $ -- $2,712 $ --
===== ====== ======
Issuance of warrants in connection with
financing.................................. $ -- $ 949 $ --
===== ====== ======
Property and equipment purchased with
capital
leases..................................... $ 361 $ 929 $1,295
===== ====== ======
</TABLE>
F-11
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Balance Sheet Components (in thousands):
<TABLE>
<CAPTION>
April
March 31, 2,
1999 2000
--------- ------
<S> <C> <C>
Other current assets:
Prepaid expenses....................................... $ 564 $1,541
Deposits............................................... 113 99
Other current assets................................... 555 1,255
------- ------
$ 1,232 $2,895
======= ======
Property and equipment, net:
Office equipment....................................... $ 2,856 $4,727
Furniture and fixtures................................. 247 254
Leasehold improvements................................. 429 440
Research and development equipment..................... 3,039 3,426
------- ------
6,571 8,847
Less: Accumulated depreciation and amortization........ (4,092) (5,625)
------- ------
$ 2,479 $3,222
======= ======
</TABLE>
Property and equipment includes $3,485,000 and $3,843,000 of computer
equipment and internal-use software under capital leases at March 31, 1999 and
April 2, 2000 respectively. Accumulated amortization of assets under capital
leases totaled $2,015,000 and $3,044,000 at March 31, 1999 and April 2, 2000
respectively.
<TABLE>
<CAPTION>
March 31, April
1999 2, 2000
--------- -------
<S> <C> <C>
Intangible assets:
Goodwill.............................................. $3,877 $75,572
Technology............................................ -- 15,872
Contracts............................................. -- 1,006
Customer base......................................... -- 1,001
Assembled workforce................................... -- 760
------ -------
3,877 94,211
Less: Accumulated amortization........................ (549) (5,098)
------ -------
$3,328 $89,113
====== =======
</TABLE>
Note 4--Acquisitions
RSA Communications:
The Company completed its acquisition of RSA Communications Inc. 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.
F-12
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 an independent
appraiser. The allocation is summarized below (in thousands):
<TABLE>
<S> <C>
In-process research and development................................ $5,260
Goodwill........................................................... 3,877
Net tangible assets................................................ 138
------
Total purchase price............................................. $9,275
======
</TABLE>
The total purchase price of $9,275,000 million consisted of 459,700 shares
of the Company's common stock valued at $1,417,000 million, 606,500 shares of
series D convertible preferred stock valued at $667,000, options to purchase
594,925 shares of common stock valued at $1,505,000 million, cash of $5,332,000
million and acquisition related expenses, consisting primarily of legal and
other professional fees, of approximately $354,000. 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 $0.46 per share.
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 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 at the date of acquisition.
The V.90 Modem Software project was completed subsequent to its acquisition
in 1998 and has been licensed to one 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%.
F-13
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 present 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................... (3.08) (4.82)
</TABLE>
D2 Technologies
The acquisition of D2 Technologies, Inc. ("D2 Technologies") was completed
on February 10, 2000. Based in Santa Barbara, California, D2 Technologies
develops, markets and supports innovative digital signal processing (DSP)
solutions for the next generation telephony products. D2 Technologies serves
the computer and Internet telephony markets with robust and cost-effective DSP
solutions. Its customers include some of the largest telecommunications and
internet companies in the industry whose markets range form high-capacity
telecommunications systems to personal communications products.
Under the terms of the merger agreement, 4,396,826 shares of Virata common
stock were exchanged for all of the outstanding common stock of D2
Technologies. In addition, employee options to purchase shares of D2
Technologies common stock were exchanged for options to purchase 932,330
shares of Virata common stock. The Company valued the options using the Black-
Scholes option pricing model, applying an expected life of four years, a
weighted average risk-free rate of 6.64%, and expected dividend yield of zero
percent, a volatility of 55% and a deemed fair value of common stock of $18.00
per share.The acquisition has been accounted for as a purchase business
combination. The aggregate purchase price is as follows (in thousands):
<TABLE>
<S> <C>
Shares of Virata common stock..................................... $79,143
Options to purchase Virata common stock........................... 13,566
Direct acquisition costs.......................................... 4,200
-------
$96,909
=======
</TABLE>
F-14
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Based on a valuation by an independent appraiser, the purchase price of D2
Technologies was allocated as follows:
<TABLE>
<S> <C>
Fair value of assets acquired and liabilities assumed............. $ 1,234
Assembled workforce............................................... 760
Customer base..................................................... 1,001
Contracts......................................................... 1,006
Technology........................................................ 15,872
In-process research and development............................... 5,324
Goodwill.......................................................... 71,712
-------
Total............................................................. $96,909
=======
</TABLE>
D2 Technologies has 19 completed products that comprise the completed
technology at the date of acquisition. They are classified into five products
groups as follows:
Telephony Algorithms
Echo Cancellation Products
Standard Voice Coders
Proprietary Voice Coders
Fax and Data Products
The individual products and algorithms are entirely independent from each
other. The value of the completed technology is based on the net cash flow
forecast, discounted at a cost of capital of 18.0%. The acquired in-process
technology are mainly related to the fax and data products and include the Fax
Modem Data Pump, Fax Relay Protocols and Single Sample Echo Cancellers and
Standard Voice Coders. The acquired in-process technology is also valued using
the net cash flow forecast, discounted at a higher cost of capital of 23.0% to
reflect the uncertainty of its future use. The company does not consider it to
have reached technological feasibility and accordingly charged it to operations
upon acquisition.
Financial information for the fiscal year ended April 2, 2000 includes the
results of operations for D2 Technologies from February 10, 2000.
The following unaudited pro forma financial information presents the
consolidated results of the Company as if the acquisitions had occurred at the
beginning of each period, and includes adjustments for amortization of
intangible assets. 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, April 2,
1999 2000
--------- --------
(unaudited)
<S> <C> <C>
Revenues................................................ $ 11,480 $ 23,281
Net loss................................................ (47,365) (45,689)
Basic and diluted net loss per share.................... (5.66) (1.98)
</TABLE>
Inverness Systems Ltd.
On March 21, 2000, Virata entered into a definitive agreement to acquire
Inverness Systems, Ltd., a privately-held Israeli Company, in a stock for stock
transaction. Inverness Systems maintains offices in Kfar Saba and Jerusalem, in
Israel as well as in Marlborough, Massachusetts.
F-15
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inverness Systems is a software company with expertise spanning many
technologies, including ATM, voice over ATM, xDSL, IP Routing, Multi-Protocol
label Switching (MPLS), Frame Relay and Network Simulation. Inverness' source
code solutions and network simulation products facilitate fast-to-market
product development programs for advanced communication products.
Under the terms of the agreement, Virata will issue 2,006,440 shares and
517,896 options to purchase shares of Virata common stock to shareholders of
Inverness Systems common and preferred stock. The acquisition will be accounted
for as a purchase business combination. Accordingly, the purchase price will be
allocated to the net tangible and identifiable intangible assets acquired and
liabilities assumed on the closing date. The valuation of the intangible assets
acquired will be determined by an independent appraiser and are expected to
include complete technology, workforce in place and customer base.
The total purchase price of $98.4 million consists of 2,006,440 shares of
the Virata's common stock valued at $77.6 million, options to purchase 517,896
shares of Virata, valued at $20.0 million and estimated acquisition expenses of
$0.8 million, consisting mainly of legal, accounting and financial advisory
fees. The Company valued the options using the Black-Scholes option pricing
model, applying an expected life of four years, a weighted average risk-free
rate of 6.5%, an expected dividend yield off zero percent, a volatility of 55%
and a deemed fair value of common stock of $38.67 per share.
The results of operations of Inverness Systems have not been included in the
consolidated statement of operations of the Company.
The following unaudited pro forma financial information presents the
consolidated results of the Company as if the acquisitions had occurred at the
beginning of each period, and includes adjustments for amortization of
intangible assets. 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 April 2,
31, 1999 2000
-------- --------
(unaudited)
<S> <C> <C>
Revenues................................................. $ 13,573 $ 26,026
Net loss................................................. (70,704) (69,253)
Basic and diluted net loss per share..................... (6.81) (2.88)
</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
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 year ended April 2, 2000, were $2,296,000. The Company fully
utilized its restructuring accrual as of March 31, 1999.
F-16
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--National Insurance Contribution on Options:
We recorded a charge for National Insurance Contribution taxes which may be
incurred on a gain in the Company's per share price for stock options granted
to our United Kingdom employees. The requirement to book this charge came into
effect on April 5, 1999. Due to the significant movement in Virata's per share
price in the fiscal year ended April 2, 2000, the charge recorded was $4.5
million. The provision is calculated as the difference between the market value
of Virata stock at the close of the period and the strike price of the option
multiplied by 12.2%. The calculation is applied to all options issued to our UK
employees, vested and unvested. The provision will be revised to take account
of the movement in Virata's stock price at each balance sheet date. The
allocation of the $4.5 million expense, by department is $2.0 million to
research and development, $1.0 million to sales and marketing, and $1.5 million
to general and administrative.
Note 7--Income Taxes:
No income tax provision was recorded for the three years ended April 2, 2000
because the Company incurred net losses in such periods.
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
March 31, April 2,
1999 2000
--------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $ 12,647 $21,939
Temporary differences............................... 1,764 2,105
Other............................................... 67 303
-------- -------
14,478 24,347
Valuation allowance................................... (14,478) (24,347)
-------- -------
$ -- $ --
======== =======
</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 April 2, 2000, the Company has approximately $33.1 million, $25.9 million
and $30.0 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 8--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.
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. 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. The warrant was exercised and converted into 14,490
shares of the Company's common stock in February 2000.
F-17
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has a loan and security agreement 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 April 2, 2000, we
had obtained waivers for such financial covenants, and we had no outstanding
debt under this agreement.
Note 9--Commitments:
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through August 2005. Net rent
expense for the years ended April 2, 2000, March 31, 1999 and 1998 was
$606,000, $536,000, and $372,000, 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
March 31, Leases Leases
----------- ------- ---------
<S> <C> <C>
2001..................................................... 919 892
2002..................................................... 735 666
2003..................................................... 544 449
2004..................................................... 7 434
2005..................................................... -- 73
2006..................................................... -- 30
------ ------
Total minimum lease payments............................. 2,205 $2,544
======
Less: Amount representing interest....................... (243)
------
Present value of capital lease obligations............... 1,962
Less: Current portion.................................... (784)
------
Long-term portion of capital lease obligations......... $1,178
======
</TABLE>
Note 10--Preferred Stock:
Under the Company's Certificate of Incorporation, as amended, the Company is
authorized to issue 5,000,000 shares of preferred stock. As of April 2, 2000,
there are no shares outstanding of our preferred stock outstanding. However,
the Company's certificate of incorporation provides that the preferred stock be
divisible into and issuable in one or more series. The rights and preferences
of the different series may be established by the Company's board of directors
without further action by Virata stockholders. The Company's board of directors
is 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.
F-18
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11--Stock Option Plans:
In November 1999, the Company adopted the 1999 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 ten 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.
Upon the acquisition of D2 Technologies, the Company assumed the stock
option plan for D2 Technologies and reserved a total of 932,330 shares of the
Company's common stock for issuance under the plan.
During the period from April 1, 1996 through November 16, 1999, the date of
the Company's initial public offering, the Company recorded $3,392,000 of
unearned 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 $907,000, $1,394,000 and $399,000
for the years ended April 2, 2000, March 31, 1999 and 1998, respectively.
In November 1999, the Company adopted the 1999 Employee Stock Purchase Plan
("ESPP") and reserved a total of 1,200,000 shares of the Company's common stock
for issuance thereunder, 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) 1,000,000 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 an amount unanimously determined by the board of directors.
Under the ESPP, eligible employees are permitted to contribute up to 15% of
their compensation, as defined, to the purchase of the Company's common stock
at a price which 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.
In November 1999, the Company adopted the 1999 Non-employee Director
Compensation Plan (the "Director's Plan") and reserved a total of 2,000,000
shares of the Company's common stock for issuance thereunder. Each non-employee
director who becomes a member of the Board of Directors will initially be
granted an option for 80,000 shares of the Company's common stock at an
exercise price per share equal to the fair market value of a share of common
stock on the date of grant or, if the non-employee director was serving as a
board member on November 16, 1999, at an exercise price per share equal to the
initial offering price per share to the public in the Company's initial public
offering. These options will vest proportionately each month over a period of
four years. On the fourth anniversary and on each anniversary thereafter, each
member of the Board of Directors will be granted an option to purchase an
additional 20,000 shares of the Company's common stock at an exercise price per
share equal to the fair market value of a share of common stock on the date of
grant. These options will vest proportionately each month over a period of one
year.
F-19
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes activity under the Company's Plan from March
31, 1997 through April 2, 2000:
<TABLE>
<CAPTION>
Outstanding Options
---------------------
Weighted-
Shares Average
Available Number of Exercise
for Grant Shares Price
---------- ---------- ---------
<S> <C> <C> <C>
Balance, March 31, 1997.................. 562,966 828,898 0.37
Shares reserved for grant.............. 600,640 -- --
Options granted........................ (1,815,672) 1,815,672 0.80
Options exercised...................... -- (243,332) 0.20
Options canceled....................... 969,614 (969,614) 0.80
---------- ----------
Balance, March 31, 1998.................. 317,548 1,431,624 0.67
Shares reserved for grant.............. 2,996,484 -- --
Options granted........................ (3,098,566) 3,098,566 2.04
Options exercised...................... -- (14,398) 0.34
Options canceled....................... 182,748 (182,748) 2.35
---------- ----------
Balance, March 31, 1999.................. 398,214 4,333,044 2.55
Shares reserved for grant.............. 6,253,696 -- --
Options granted........................ (5,187,816) 5,187,816 11.39
Options exercised...................... -- (1,031,304) 1.10
Options canceled....................... 323,208 (323,208) 2.46
---------- ----------
Balance, April 2, 2000 .................. 1,787,302 8,166,348 7.83
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding at April 2, Options Exercisable
2000 at April 2, 2000
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Outstanding Price
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.07-$ 6.42....... 6,189,826 5.5 $ 2.58 1,788,180 $ 1.34
$ 6.84-$10.26....... 706,262 6.6 7.11 -- --
$14.47-$18.00....... 696,000 6.7 16.70 10,492 18.00
$21.72-$37.56....... 162,450 6.8 24.20 -- --
$42.19-$49.94....... 126,210 7.0 49.27 -- --
$62.25-$72.38....... 106,400 6.9 71.08 -- --
$75.38-$86.06....... 179,200 7.0 75.97 -- --
--------- ---------
8,166,348 1,798,672
========= =========
</TABLE>
The total number of options exercisable at April 2, 2000, March 31, 1999 and
1998 was 1,798,672, 1,342,112 and 406,434, respectively.
F-20
<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 March April 2,
31, 1998 31, 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported............................... $(10,278) $(17,157) $(26,108)
Pro forma................................. (10,974) (19,707) (31,969)
Basic and diluted net loss per share:
As reported............................... $ (3.00) $ (4.46) $ (1.40)
Pro forma................................. (3.20) (5.12) (1.71)
</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 5.1% to 6.7% and 4.5% to 5.8% and
5.6% to 6.6% and a volatility of 55%, 70%, and 70%, for the years ended April
2, 2000, March 31, 1999, and 1998, respectively. The weighted average fair
value of options granted during fiscal year 2000, 1999 and 1998 was $7.83,
$0.44 and $.047, respectively.
Warrants for Common Stock
In connection with a consulting agreement, the Company issued a warrant to
purchase 150,000 shares of common stock for $0.04 per share in July 1997. The
Company valued the warrant using the Black-Scholes option pricing model,
applying an 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 $0.45. 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
150,000 shares of the Company's common stock in September 1999.
In connection with a lease agreement, the Company issued warrants to
purchase 69,705 shares of series C convertible preferred stock and 163,636
shares of series D convertible preferred stock for $1.50 and $1.10 per share,
respectively, in the period September 1996 to May 1999. Such warrants are
convertible into 101,724 shares of the Company's common stock and are
outstanding at April 2, 2000 and expire in the period September 2001 to May
2009. The Company valued the warrants using the Black-Scholes option pricing
model, applying an expected life of five years, a weighted average risk-free
rate of 4.81% and 6.6%, an expected dividend yield of zero percent, a
volatility of 70% and a deemed fair value of common stock between $0.74 and
$1.03, respectively. The Company determined that the fair value of the warrants
was not significant at the date of grant.
In connection with the series D convertible preferred stock financing, the
Company issued warrants to purchase 1,595,054 shares of series D convertible
preferred stock for $1.10 per share in June 1998. Such warrants are convertible
into 748,212 shares of the Company's common stock and are outstanding at April
2, 2000 and expire in June 2003. The Company valued the warrants using the
Black-Scholes option pricing model, applying an 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 Company determined that the fair value of the warrants was not significant
at the date of grant.
F-21
<PAGE>
VIRATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12--Employee Benefit Plans
The Company has three benefit plans, one in the United Kingdom, and two
plans 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 April 2, 2000, March 31, 1999 and 1998 were $141,800,
$112,600, and $109,400, 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. The Company provides
50% matching contribution to the retirement plan of up to $2,000 per calendar
year per employee. Contributions for the year ended April 2, 2000 and March
31, 1999 were $178,500 and $58,000, respectively.
The D2 Technologies plan includes a medical plan, long-term disability, IRC
Section 125 premium payment plan, and COBRA.
Note 13--Related Party Transactions:
The Company had revenues of $1,321,000, $549,000, and $82,000 during the
years ended March 31, 1998, 1999 and April 2, 2000, respectively, to related
parties. At April 2, 2000, March 31, 1999 and 1998, there were accounts
receivable from related parties in the amounts of $17,600, $154,000, and
$5,000, respectively.
The Company made purchases of $5,786,000, zero and $35,000, for the three
years ended April 2, 2000, respectively, from related parties. At April 2,
2000, there were accounts payable from related parties totaling $1,884,000.
Note 14--Subsequent Events:
On April 27, 2000, the Company completed the acquisition of Inverness
Systems, Ltd., a privately-held Israeli Company, in a stock for stock
transaction (see Note 4).
On May 18, 2000, the stock split approved by the Company's stockholders
(see Note 1) became effective.
Note 15--Subsequent Event (unaudited):
On June 20, 2000, the Company signed a definitive agreement to acquire
Excess Bandwidth Corporation ("Excess Bandwidth") in exchange for 5,898,290
shares of the Company's common stock. In addition, employee options to
purchase shares of Excess Bandwidth common stock will be exchanged for options
to purchase 404,027 shares of the Company's common stock.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
D2 Technologies, Inc.:
We have audited the accompanying balance sheets of D2 Technologies, Inc. (a
California corporation) as of December 31, 1999 and 1998, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. 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 in accordance with auditing standards generally
accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of D2 Technologies, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Los Angeles, California
January 26, 2000
F-23
<PAGE>
D2 TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
---------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 611,573 $127,033
Accounts receivable, net of allowance for doubtful
accounts of $110,000 and $50,000 at December 31, 1999 and
1998, respectively....................................... 1,077,942 316,803
Note receivable........................................... -- 10,000
Prepaid expenses and other current assets................. 74,046 8,000
Deferred tax asset........................................ 81,435 127,584
---------- --------
Total current assets.................................... 1,844,996 589,420
---------- --------
PROPERTY AND EQUIPMENT, net................................. 82,217 40,606
---------- --------
DEPOSITS AND OTHER ASSETS................................... 14,496 5,597
---------- --------
$1,941,709 $635,623
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable to related parties....... $ -- $175,000
Accounts payable.......................................... 69,684 5,844
Accrued profit sharing.................................... 70,000 30,109
Accrued commissions....................................... 35,633 293
Accrued expenses.......................................... 116,169 54,640
Income taxes payable...................................... -- 13,176
Deferred revenue.......................................... 416,398 297,456
---------- --------
Total current liabilities............................... 707,884 576,518
---------- --------
COMMITMENTS (Note 12)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value: Authorized--500,000 shares;
Issued and outstanding--500,000 shares at December 31,
1999..................................................... 1,000,000 --
Common stock, no par value: Authorized--10,000,000 shares;
Issued and outstanding,--5,068,750 and 5,040,000 shares
at December 31, 1999 and 1998, respectively.............. 128,083 23,070
Retained earnings......................................... 105,742 36,035
---------- --------
1,233,825 59,105
---------- --------
$1,941,709 $635,623
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
D2 TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
For each of the three years in the period ended December 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
NET REVENUES................................ $2,668,198 $1,404,565 $1,078,090
COSTS AND EXPENSES.......................... 2,567,670 1,425,895 1,175,024
---------- ---------- ----------
Income (loss) from operations............... 100,528 (21,330) (96,934)
OTHER INCOME (EXPENSE):
Interest, net............................. 1,268 (11,727) (8,384)
Other, net................................ 14,860 3,711 (6,704)
---------- ---------- ----------
Income (loss) before provision for
(benefit from) income taxes.............. 116,656 (29,346) (112,022)
PROVISION FOR (BENEFIT FROM) INCOME TAXES... 46,949 (47,379) (70,819)
---------- ---------- ----------
Net income (loss)........................... $ 69,707 $ 18,033 $ (41,203)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-25
<PAGE>
D2 TECHNOLOGIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For each of the three years in the period ended December 31, 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------ ------------------ Retained
Shares Amount Shares Amount Earnings Total
------- ---------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996................... -- $ -- 5,000,000 $ 20,270 $ 59,205 $ 79,475
Net loss.............. -- -- -- -- (41,203) (41,203)
------- ---------- --------- -------- -------- ----------
BALANCE, December 31,
1997................... -- -- 5,000,000 20,270 18,002 38,272
Exercise of stock
options.............. -- -- 40,000 2,800 -- 2,800
Net income............ -- -- -- -- 18,033 18,033
------- ---------- --------- -------- -------- ----------
BALANCE, December 31,
1998................... -- -- 5,040,000 23,070 36,035 59,105
Conversion of note
payable to preferred
stock................ 87,500 175,000 -- -- -- 175,000
Issuance of preferred
stock for cash....... 412,500 825,000 -- -- -- 825,000
Exercise of stock
options.............. -- -- 28,750 2,013 -- 2,013
Issuance of stock
options for
services............. -- -- -- 103,000 -- 103,000
Net income............ -- -- -- -- 69,707 69,707
------- ---------- --------- -------- -------- ----------
BALANCE, December 31,
1999................... 500,000 $1,000,000 5,068,750 $128,083 $105,742 $1,233,825
======= ========== ========= ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
D2 TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
For each of the three years in the period ended December 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $ 69,707 $ 18,033 $(41,203)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation............................... 29,742 19,952 17,684
Deferred taxes............................. 46,149 (69,715) (75,067)
Compensation expense in connection with
stock options issued for services......... 103,000 -- --
Changes in operating assets and liabilities:
Accounts receivable........................ (761,139) (143,067) 117,640
Prepaid expenses and other current assets.. (66,046) 17,359 (17,339)
Deposits and other assets.................. (8,899) (3,398) 4,488
Accounts payable........................... 63,840 2,776 (7,527)
Accrued expenses........................... 136,760 50,540 (41,288)
Income taxes payable....................... (13,176) 13,176 --
Deferred revenue........................... 118,942 234,752 (37,746)
--------- --------- --------
Net cash provided by (used in) operating
activities.............................. (281,120) 140,408 (80,358)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......... (71,353) (18,336) (23,227)
Note receivable.............................. 10,000 (10,000) --
--------- --------- --------
Net cash used in investing activities.... (61,353) (28,336) (23,227)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITES:
Exercise of stock options.................... 2,013 2,800 --
Issuance of preferred stock.................. 825,000 -- --
Borrowings under notes payable to related
parties..................................... -- -- 100,000
Repayment of notes payable to related
parties..................................... -- -- (25,000)
--------- --------- --------
Net cash provided by financing
activities.............................. 827,013 2,800 75,000
--------- --------- --------
NET INCREASE (DECREASE) IN CASH................ 484,540 114,872 (28,585)
CASH, beginning of year........................ 127,033 12,161 40,746
========= ========= ========
CASH, end of year.............................. $ 611,573 $ 127,033 $ 12,161
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
D2 TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
1. Organization and Business
D2 Technologies, Inc. (the Company) was founded in 1993 in Santa Barbara,
California. The Company develops, markets and supports Digital Signal
Processing solutions for telephony products.
2. Summary of Significant Accounting Policies
a. Revenue Recognition
The Company recognizes revenue for software licenses and post-contract
support services in accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 97-2 "Software Revenue
Recognition," which supercedes SOP 91-1, "Software Revenue Recognition" and
Statement of Financial Accounting Standards (SFAS) No. 48, "Revenue Recognition
when Right of Return Exists."
Software license revenue is recorded at the time of shipment, net of
estimated allowances for product returns and uncollectable amounts. Post-
contract support is offered for a fixed fee and is recognized as revenue over
the term of the agreement.
The Company receives royalties from certain customers related to sales of
the customers' products that use the Company's software. Royalty revenue is
recorded in the period in which the Company's customers sell their products to
the final customer.
b. Software Development Costs
Under the provisions of SFAS No. 86 "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," the Company is required to
capitalize software development costs when "technological feasibility" of the
product has been established and anticipated future revenues assure recovery of
the capitalized amounts. Because of the relatively short time period between
"technological feasibility" and product release, the amount of software
development costs available to be capitalized are minimal and thus have not
been capitalized.
c. Deferred Revenue
Deferred revenue primarily relates to post-contract support and service
agreements, which are billed in advance and are recognized as revenue over the
term of the agreement for support agreements and as services are provided for
service agreements.
d. Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
accelerated methods over estimated lives of five to seven years. The Company
capitalizes expenditures which materially increase asset lives and charges
ordinary repairs and maintenance to operations as incurred. When assets are
sold or otherwise disposed of, the cost and related accumulated depreciation
and amortization are removed from the accounts and any resulting gain or loss
is included in operations.
e. Income Taxes
The Company provides for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS No.
109, deferred income tax assets and liabilities are computed
F-28
<PAGE>
D2 TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
based on the temporary differences between the financial statement and income
tax basis of assets and liabilities using the currently enacted marginal income
tax rate.
Realization of the net deferred tax assets is dependent on generating
sufficient taxable income during the periods in which the temporary differences
will reverse. If realization is uncertain a valuation allowance is recorded to
state the net deferred tax assets at realizable value.
f. Statements of Cash Flows
The Company prepares its statements of cash flows using the indirect method
in accordance with SFAS No. 95, "Statement of Cash Flows."
g. 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.
3. Concentrations of Risk
Financial instruments that subject the Company to credit risk consist
primarily of trade accounts receivable. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for potential credit
losses. At times, various customers have accounts receivable balances greater
than ten percent of total accounts receivable. The Company had two and four
customers that had balances greater than ten percent of total accounts
receivable at December 31, 1999 and 1998, respectively. These concentrations
are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C>
42% 29%
10% 27%
-- 16%
-- 15%
--- ---
52% 87%
=== ===
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, the Company had
several customers with annual net revenues greater than 10 percent of total net
revenues for each respective year. These concentrations are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C>
20% 29% 28%
16% 23% 16%
10% -- 16%
-- -- 11%
-- -- 10%
--- --- ---
46% 52% 81%
=== === ===
</TABLE>
At times the Company holds cash balances at financial institutions in excess
of federally insured amounts. The Company's operations and the majority of the
Company's customers are located in the United States.
F-29
<PAGE>
D2 TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
--------- --------
<S> <C> <C>
Computer equipment...................................... $ 177,359 $111,948
Furniture and fixtures.................................. 17,753 11,811
--------- --------
195,112 123,759
Less--accumulated depreciation.......................... (112,895) (83,153)
--------- --------
$ 82,217 $ 40,606
========= ========
</TABLE>
5. Notes Payable to Related Parties
As of December 31, 1998, the Company owed $175,000 to shareholders/officers
under various note payable agreements. The notes bore interest at eight percent
annually. In September 1999, these notes were converted to preferred stock (See
Note 8).
6. Income Taxes
The provision for (benefit from) income taxes for the years ended December
31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Current:
Federal...................................... $ -- $ 21,536 $ 3,448
State........................................ 800 800 800
------- -------- --------
800 22,336 4,248
------- -------- --------
Deferred....................................... 46,149 (69,715) (75,067)
------- -------- --------
$46,949 $(47,379) $(70,819)
======= ======== ========
</TABLE>
Differences between the provision (benefit) for income taxes and income
taxes at the statutory federal income tax rate for the years ended December 31,
1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- -------------------- --------------------
Amount Percentage Amount Percentage Amount Percentage
------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory
federal rate........... $39,663 34.0 % $ (9,978) (34.0)% $(38,087) (34.0)%
State income tax, net of
federal benefit........ 6,467 5.5 (1,627) (5.5) (6,210) (5.5)
Permanent differences... 1,671 1.4 2,034 6.9 (119) (0.1)
R&D credits............. -- -- (31,512) (107.4) (13,808) (12.3)
Other................... (852) (0.7) (6,296) (21.4) (12,595) (11.3)
------- ---- -------- ------ -------- -----
$46,949 40.2 % $(47,379) (161.4)% $(70,819) (63.2)%
======= ==== ======== ====== ======== =====
</TABLE>
The Company prepares its tax returns on a cash basis. As such, the
components of the net deferred tax asset or liability primarily consist of
temporary differences related to deferred revenue, reserves and other cash-to-
accruals adjustments.
F-30
<PAGE>
D2 TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The gross deferred tax assets (liabilities) at December 31, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Deferred tax assets:
Cash to accrual................................... $ 318,683 $ 235,365
R&D credit carryforward........................... 7,771 3,773
Deferred revenue.................................. 165,870 118,387
Allowance for doubtful accounts................... 43,818 19,900
Compensation related.............................. 40,685 --
---------- ---------
576,827 377,425
---------- ---------
Deferred tax liabilities:
Cash to accrual................................... (490,971) (237,908)
Depreciation...................................... (4,421) (11,933)
---------- ---------
(495,392) (249,841)
---------- ---------
Net deferred tax asset............................ $ 81,435 $ 127,584
========== =========
</TABLE>
7. Related Party Transactions
The Company owns approximately 5.5 percent of the outstanding shares of one
of its customers. In addition, the Company's majority shareholder also holds
shares in this customer (the Related Entity). Due to uncertainty about the
realizability of the Company's investment in the Related Entity (recorded under
the cost method), the investment has been fully reserved in all periods
presented.
The Company recorded revenues from the Related Entity in the amounts of
$131,371, $361,118 and $262,595 in 1999, 1998 and 1997, respectively. The
Company had accounts receivable in the amounts of $18,063 and $6,692 from the
Related Entity at December 31, 1999 and 1998, respectively.
In 1997, the Company adopted a performance unit, or phantom stock plan (the
plan) to provide the Company's employees an incentive to work productively on
projects involving the Related Entity and to reward the Company's employees for
the successes of the Related Entity. Each performance unit entitled the
recipient to receive from the Company a cash payment in an amount equal to the
net selling price (as defined) of one share of the Related Entity's stock. The
Company has issued 252,667 of performance units through December 31, 1999.
Based on the estimated fair value of the Related Entity's stock at December 31,
1999, there are no amounts due in connection with these performance units at
December 31, 1999. The Company has not recorded any amounts in the accompanying
financial statements related to this plan.
The Company had notes payable to officers/shareholders of the Company (see
Note 5).
8. Preferred Stock
In 1999, the Company amended its articles of incorporation to allow for the
issuance of 500,000 shares of preferred stock. The preferred stock has
liquidation preference over common stock in the amount of $2.00 per share, plus
any declared and unpaid dividends. Each share of preferred stock may be
converted, at the option of the holder, into one share of common stock. An
automatic conversion to common stock exists and would activate upon certain
predetermined conditions. Each share is entitled to voting rights equal with
one common share.
In 1999, the Company issued 412,500 shares of preferred stock for $825,000
and converted a note payable in the amount of $175,000 to 87,500 additional
shares of preferred stock (see Note 5). As of December 31,
F-31
<PAGE>
D2 TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
1999, none of the preferred stock had been converted to common stock and no
dividends had been declared or paid.
9. Stock Options
Under its Tandem Stock Option Plan, the Company may grant incentive and non-
qualified stock options to employees, directors and others at the discretion of
the board of directors covering up to 1,200,000 shares of common stock. As of
December 31, 1999, 343,250 shares were available for future grant under the
plan. The Company generally grants options at prices not less than 100 percent
of the fair market value, as determined by the board of directors, at the date
of grant. The options granted have varied vesting periods.
The table below summarizes the option activity for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Weighted Exercisable
Weighted Average Fair Weighted
Number Average Value of Average
of Exercise Options Granted Exercise
Shares Price During the Year Exercisable Price
------- -------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at December
31, 1996............... 170,000 $0.07
Granted................. 60,000 0.07 $0.03
------- ----- =====
Outstanding at December
31, 1997............... 230,000 0.07 110,311 $0.07
======= =====
Granted................. 40,000 0.07 $0.02
=====
Exercised............... (40,000) 0.07
------- -----
Outstanding at December
31, 1998............... 230,000 0.07 126,144 $0.07
======= =====
Granted................. 608,000 1.17 $0.42
=====
Exercised............... (28,750) 0.07
Cancelled............... (21,250) 0.07
------- -----
Outstanding at December
31, 1999............... 788,000 $0.90 184,270 $0.06
======= ===== ======= =====
</TABLE>
The table below summarizes information about options outstanding at December
31, 1999:
<TABLE>
<CAPTION>
Number Weighted Average Number
Range of Outstanding at Weighted Average Exercise Price Exercisable at
Exercise December 31, Remaining of Options December 31,
Prices 1999 Contractual Life Outstanding 1999
-------- -------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
$0.01 30,000 1.6 years $0.01 30,000
$0.07 536,000 9.0 years $0.07 154,270
$0.50 120,000 9.7 years $0.50 --
$5.33 72,000 9.9 years $5.33 --
$8.00 30,000 10.0 years $8.00 --
------- ----- -------
788,000 $0.90 184,270
======= ===== =======
</TABLE>
As permitted by SFAS No. 123 "Accounting for Stock-Based Compensation," the
Company continues to apply the accounting rules of Accounting Principles Board
(APB) No. 25 governing the recognition of compensation expense for employee
stock options. Such accounting rules measure compensation expense on the first
date at which both the exercise price and the number of shares are known.
Expense is only recognized in circumstances where the exercise price is less
than the fair market value at the measurement date. No such expense has been
recorded in the accompanying statements of operations.
F-32
<PAGE>
D2 TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Under the requirements of SFAS No. 123 pro forma disclosure of compensation
expense using the fair value method is required to be disclosed if the Company
applies APB No. 25. Pro forma compensation has been computed by estimating the
fair value of options at the date of grant using the Black-Scholes option
pricing model.
The following assumptions were used in estimating the fair value of options:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected life in years................................... 7 7 7
Weighted average interest rate........................... 5.62% 5.45% 6.09%
</TABLE>
No dividend yield was used since the Company historically has not paid
dividends, and no volatility was used since the Company is privately held. Pro
forma additional compensation expense was immaterial in 1999, 1998 and 1997,
respectively.
In 1999, the Company issued 30,000 options to purchase common stock to a
consultant. The estimated fair value of these options was computed using the
Black-Scholes option pricing model. The Company recorded $103,000 of
compensation expense related to these options in 1999.
In connection with a merger agreement (see Note 14), all of the outstanding
options granted under the Tandem Stock Option Plan will be exchanged for
options to purchase common shares of the acquiring company.
10. Stock Split
In July 1999, the board of directors approved a ten to one split of the
Company's common stock. All shares for all periods presented have been
retroactively restated to give effect to the stock split.
11. Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Cash paid for income taxes....................... $ 35,176 $ 3,861 $16,000
Cash paid for interest........................... 15,300 14,000 6,000
Non cash investing and financing activities:
Conversion of note payable to preferred stock.. 175,000 -- --
</TABLE>
12. Commitments
a. Lease Commitments
The Company leases office space under non-cancelable operating lease
agreements expiring on January 31, 2002. Future minimum lease payments under
this agreement as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
2000.......................................................... $183,949
2001.......................................................... 219,740
2002.......................................................... 18,312
--------
Total......................................................... $422,001
========
</TABLE>
F-33
<PAGE>
D2 TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Rent expense under non-cancelable operating leases for the years ended
December 31, 1999, 1998 and 1997 was $108,325, $90,686 and $80,956,
respectively.
The Company subleased a portion of its office space to a third party.
Sublease revenue was $14,055, $10,172 and $4,107 for the years ended 1999, 1998
and 1997, respectively. The sublease agreement expired in November 1999.
b. Other Matters
In 1999, the Company entered into an agreement with a business partner to
jointly develop a product. As part of this agreement, the Company agreed to
purchase 250,000 shares of the business partner's stock at $1.00 per share and
the business partner agreed to purchase 125,000 shares of the Company's stock
at $2.00 per share. Pursuant to the terms of the agreement, the Company has set
aside 125,000 shares of common stock. As of December 31, 1999, neither the
Company nor the business partner had begun performance under the agreement and
none of the shares had been exchanged.
13. Profit Sharing Plan
The Company has established a profit sharing program whereby employees can
share in the Company's pre-tax profit. Contributions are made pursuant to
defined terms and in no event exceed fifteen percent of the Company's pre-tax
profit. The Company recorded expense of $83,362, $22,788 and $7,321 in 1999,
1998 and 1997, respectively.
14. Subsequent Events
On January 23, 2000, the Company entered in an agreement to be acquired
through a merger whereby the Company will exchange all outstanding shares for
shares of the acquiring company in a transaction valued at approximately $90
million as of January 23, 2000.
From January 1 through January 26, 2000, the Company granted 369,000 options
under the Tandem Stock Option Plan and no specific plan with a weighted average
exercise price of $12.98.
F-34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Inverness Systems Ltd.
We have audited the accompanying consolidated balance sheets of Inverness
Systems Ltd. and its subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. 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 audit in accordance with generally accepted auditing
standards in the United States. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Inverness Systems Ltd. and its subsidiary December 31, 1999 and 1998, and
the consolidated results of their operations and cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles in the United States.
/s/ Kost, Forer & Gabbay
A Member of Ernst & Young
International
Tel-Aviv, Israel
March 29, 2000
F-35
<PAGE>
INVERNESS SYSTEMS LTD.
CONSOLIDATED BALANCE SHEETS
(in U.S. dollars)
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 327,855 $ 57,869
Short-term deposits.................................... 1,340,638 --
Trade receivables...................................... 814,903 515,738
Government authorities for grants and participation.... 32,507 75,000
Government authorities................................. 76,136 57,876
Other accounts receivable and prepaid expenses......... 74,832 16,079
---------- ---------
Total current assets................................. 2,666,871 722,562
Severance pay fund...................................... 85,544 35,408
Fixed assets, net (Note 3).............................. 245,542 139,953
---------- ---------
Total assets......................................... $2,997,957 $ 897,923
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term bank loan (Note 4)..... $ 7,020 $ 7,020
Trade payables......................................... 75,629 68,623
Employees and payroll accruals......................... 142,197 135,449
Deferred revenues...................................... 101,931 19,094
Other liabilities and accrued expenses................. 192,828 125,508
---------- ---------
Total current liabilities............................ 519,605 355,694
Long-term Liabilities:
Long-term bank loan (Note 4)........................... 5,165 12,185
Accrued severance pay.................................. 156,577 96,809
---------- ---------
Total long-term liabilities.......................... 161,742 108,994
---------- ---------
Commitments and Contingent Liabilities (Note 6)
Shareholders' Equity:
Ordinary shares of NIS 0.01 par value (Note 5):
Authorized--1,510,000 and 2,100,000 at December 31,
1999 and 1998, respectively; Issued and outstanding
865,000 and 864,900 at December 31, 1999 and 1998,
respectively......................................... 2,659 2,659
Preferred shares of NIS 0.01 par value (Note 5):
Authorized--600,000 and 0 at December 31, 1999 and
1998, respectively; Issued and outstanding 400,000
and 0 at December 31, 1999 and 1998, respectively.... 1,000 --
Aggregate liquidation preference of $ 142,381 as of
December 31, 1999.....................................
Management shares of NIS 0.01 par value (Note 5):
Authorized--0 and 10,000 at December 31, 1999 and
1998, respectively; Issued and outstanding 0 and 100
at December 31, 1999 and 1998, respectively.......... -- *
Additional paid-in capital............................. 2,844,220 789,720
Deferred stock compensation............................ (104,496) (103,213)
Accumulated deficit.................................... (426,773) (255,931)
---------- ---------
Total shareholders' equity........................... 2,316,610 433,235
---------- ---------
Total liabilities and shareholders' equity........... $2,997,957 $ 897,923
========== =========
</TABLE>
--------
(*) Less than one U.S. dollar
The accompanying notes are an integral part of the consolidated financial
statements.
F-36
<PAGE>
INVERNESS SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
In U.S. dollars
<TABLE>
<CAPTION>
Year ended
December 31,
---------------------------------
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Revenues (Note 9a and 9b)................... $2,744,996 $2,093,194 $ 860,449
Cost of revenues............................ 456,341 300,366 122,446
---------- ---------- ---------
Gross profit................................ 2,288,655 1,792,828 738,023
---------- ---------- ---------
Operating expenses:
Research and development, net............... 648,781 612,208 565,783
Sales and marketing, net.................... 1,455,906 802,375 308,061
General and administrative.................. 376,838 227,996 165,191
---------- ---------- ---------
Total operating expenses.................... 2,481,525 1,642,579 1,039,035
---------- ---------- ---------
Operating income (loss)..................... (192,870) 150,249 (301,012)
Financial income (expenses), net............ 5,719 4,636 (9,218)
---------- ---------- ---------
Income (loss) before taxes on income........ (187,151) 154,885 (310,230)
Taxes on income (Note 7).................... 16,309 (101,000) --
---------- ---------- ---------
Net income (loss)........................... $ (170,842) $ 53,885 $(310,230)
========== ========== =========
Basic earnings (loss) per share............. $ (0.18) $ 0.06 $ (0.37)
========== ========== =========
Weighted average number of ordinary shares
used in computing basic earnings (loss) per
share...................................... 865,000 865,000 831,667
========== ========== =========
Diluted earnings (loss) per share........... $ (0.18) $ 0.05 $ (0.37)
========== ========== =========
Weighted average number of ordinary shares
used in computing diluted earning (loss)
per share.................................. 865,000 1,065,159 831,667
========== ========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-37
<PAGE>
INVERNESS SYSTEMS LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
In U.S. dollars
<TABLE>
<CAPTION>
Additional Deferred Total
Share paid-in stock Accumulate shareholders'
capital capital compensation deficit equity
------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance as of January 1,
1997................... $2,242 $ 199,606 $ -- $ 414 $ 202,262
Issuance of shares,
net.................. 374 199,626 -- -- 200,000
Exercise of warrants.. 43 688 -- -- 731
Deferred stock
compensation......... -- 324,800 (324,800) -- --
Amortization of
deferred stock
compensation......... -- -- 145,379 -- 145,379
Net loss.............. -- -- -- (310,230) (310,230)
------ ---------- --------- --------- ----------
Balance as of December
31, 1997............... 2,659 724,720 (179,421) (309,816) 238,142
Deferred stock
compensation......... -- 65,000 (65,000) -- --
Amortization of
deferred stock
compensation......... -- -- 141,208 -- 141,208
Net income............ -- -- -- 53,885 53,885
------ ---------- --------- --------- ----------
Balance as of December
31, 1998............... 2,659 789,720 (103,213) (255,931) 433,235
Issuance of shares,
net.................. 1,000 1,960,000 -- -- 1,961,000
Deferred stock
compensation........... -- 94,500 (94,500) -- --
Amortization of
deferred stock
compensation......... -- -- 93,217 -- 93,217
Net loss.............. -- -- -- (170,842) (170,842)
------ ---------- --------- --------- ----------
Balance as of December
31, 1999............... $3,659 $2,844,220 $(104,496) $(426,773) $2,316,610
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-38
<PAGE>
INVERNESS SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In U.S. dollars
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------------------
1999 1998 1997
---------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ (170,842) $ 53,885 $(310,230)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Amortization of deferred stock
compensation............................. 93,217 141,208 145,379
Depreciation.............................. 56,542 38,345 23,989
Increase in trade receivables............. (299,165) (256,699) (257,301)
Increase in other accounts receivable and
prepaid expenses (34,520) (53,792) (21,917)
Increase in trade payables................ 7,006 52,053 6,555
Other liabilities and accrued expenses.... 156,905 123,460 149,605
Accrued severance pay, net................ 9,632 19,326 42,075
Other..................................... (3,797) -- --
---------- -------- ---------
Net cash provided by (used in) operating
activities................................. (185,022) 117,786 (221,845)
---------- -------- ---------
Cash flows from investing activities:
Proceeds from short-term deposits........... (1,340,638) -- --
Proceeds from sale of fixed assets.......... 11,860 -- --
Purchase of fixed assets.................... (170,194) (59,146) (88,758)
---------- -------- ---------
Net cash used in investing activities......... (1,498,972) (59,146) (88,758)
---------- -------- ---------
Cash flows from financing activities:
Issuance of shares, net..................... 1,961,000 -- 200,731
Principal payments of long-term bank loan... (7,020) (7,020) (7,020)
---------- -------- ---------
Net cash provided by (used in) financing
activities................................... 1,953,980 (7,020) 193,711
---------- -------- ---------
Increase (decrease) in cash and cash
equivalents.................................. 269,986 51,620 (116,892)
Cash and cash equivalents at the beginning
of the year.................................. 57,869 6,249 123,141
---------- -------- ---------
Cash and cash equivalents at the end of the
year......................................... $ 327,855 $ 57,869 $ 6,249
========== ======== =========
Supplemental disclosure of cash flows
information:
Cash paid during the year for:
Interest.................................. $ 17,087 $ 14,881 $ 8,041
========== ======== =========
Income taxes.............................. $ 85,653 $ 7,507 $ 59,302
========== ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-39
<PAGE>
INVERNESS SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars
Note 1--General:
Inverness Systems Ltd. was incorporated in Israel and commenced operations
in February 1993. In July 1997, Inverness Systems Inc., a wholly-owned
subsidiary of Inverness Systems Ltd. was incorporated in the State of Delaware
and commenced operations.
The Company's products are marketed in the United States through its
subsidiary and to the Far East, Israel and Europe by the Israeli parent
company. As for major customers, see Note 9b.
The Company is engaged in the development and marketing of software
products, which are sold to manufacturers of communication equipment,
particularly in the field of telecommunication.
Note 2--Significant Accounting Policies:
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principals in United States.
a.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 amounts reported in the financial statements
and their accompanying notes. Actual results could differ from those
estimates.
b.Financial statements in U.S. dollars:
The majority of the Company's sales are made outside Israel in U.S.
dollars, and a portion of the Company's costs are incurred in U.S. dollars.
The U.S. dollar is also the currency of the primary economic environment in
which the Company operates. Therefore, the functional and reporting
currency for the Company is the U.S. dollar.
The Company's transactions and balances denominated in U.S. dollars are
presented at their original amounts. Non-dollar transactions and balances
have been remeasured to U.S. dollars in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 52 of the U.S. Financial
Accounting Standards Board ("FASB"). All transaction gains and losses from
remeasurement of monetary balance sheet items denominated in non-dollar
currencies are reflected in the statements of operations as financial
income or expenses, as appropriate.
c.Principles of consolidation:
The consolidated financial statements include the accounts of Inverness
Systems Ltd. and its wholly-owned U.S. subsidiary, Inverness Systems Inc.
Intercompany balances and transactions have been eliminated in
consolidation.
d.Cash equivalents:
Cash equivalents are considered to be highly liquid investments which
include unrestricted short-term bank deposits with original maturities of
three months or less.
e.Short-term deposits:
The Company classifies deposits with maturities of more than three months
and less than one year as short-term deposits. The short-term deposits are
presented at their cost, including accrued interest.
F-40
<PAGE>
INVERNESS SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
f.Fixed assets:
Fixed assets are stated at cost less accumulated depreciation. Depreciation
is calculated by the straight-line method over the estimated useful lives
of the assets at the following annual rates:
<TABLE>
<CAPTION>
%
------
<S> <C>
Computers and peripheral equipment................................ 20--33
Motor vehicles.................................................... 15
Office furniture and equipment.................................... 6--15
</TABLE>
g. Revenue recognition:
Revenues from software license agreements are recognized according to
Statement of Position 97-2, "Software Revenue Recognition" as amended, upon
delivery of the software when collection is probable; all license payments
are due within one year; the license fee is otherwise fixed or
determinable; and persuasive evidence of an agreement exists.
In December 1998, the AICPA issued Statement Of Position 98-9 ("SOP 98-9"),
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions". SOP 98-9 amends SOP 98-4 to extend the deferral to
the application of certain passages of SOP 97-2 provided by SOP 98-4
through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. The Company and its subsidiary
does not foresee any material impact of this new Statement on its
consolidated balance sheets or results of operations.
Deferred revenues include unearned amounts received under maintenance and
support contracts.
Revenues from maintenance and support contracts are recognized ratably over
the contractual period or as services are performed.
h. Research and development expenses:
Research and development costs are charged to the statement of operations
as incurred. SFAS No. 86 "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed", requires capitalization of certain
software development costs subsequent to the establishment of technological
feasibility.
Costs incurred by the Company between the establishment of technological
feasibility and the point at which the product is ready for general release
have been insignificant. Therefore, research and development costs have
been expensed.
i.Government grants:
Royalty-bearing grants from the Office of the Chief Scientist of the
Ministry of Industry and Trade in Israel for funding certain approved
research projects are recognized at the time the Company is entitled to
such grants on the basis of the related costs incurred and are presented as
a reduction of research and development costs. Development grants for the
years ended December 31, 1999, 1998 and 1997 amounted to $ 30,898, $ 75,000
and $ 88,265, respectively.
The Company also received non-royalty-bearing grants from the Fund for
Encouragement of Marketing Activity. These grants are recognized at the
time the Company is entitled to such grants on the basis of the related
costs incurred and are presented as a reduction of sales and marketing
costs. Marketing grants for the years ended December 31, 1999, 1998 and
1997 amounted to $ 50,000, $ 0 and $ 11,605, respectively.
F-41
<PAGE>
INVERNESS SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
j.Concentrations of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, short-term deposits and trade receivables. Cash and cash
equivalents and short-term deposits are deposited with major banks in
Israel and the United States. The Company's trade receivables are mainly
derived from sales to customers in the United States.
k.Fair value of financial instruments:
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents, short-term deposits trade receivables and trade
payables--The carrying amounts of these items approximate their fair value
due to the short-term maturities of such instruments.
Long-term loans--The carrying amounts of the Company's borrowing
arrangements approximate their fair value. The fair value was estimated
using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
l.Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share is computed based on the weighted average
number of common shares outstanding during each year including contingent
shares. Diluted earnings per share is computed based on the weighted
average number of common shares outstanding during each year, plus the
dilutive potential of common shares considered outstanding during the year,
in accordance with SFAS No. 128, "Earnings Per Share".
All convertible Preferred shares, outstanding stock options and warrants
have been excluded from the calculation of diluted net loss per Ordinary
share because all such of these securities are anti-dilutive for the years
ended December 31, 1999 and 1997. The total number of shares related to
outstanding securities excluded from the calculations of diluted net loss
per share were 578,021 and 50,924 for the year ended December 31, 1999 and
1997, respectively.
m.Accounting for stock-based compensation:
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Options Issued to
Employees ("APB-25"). Under APB 25, when the exercise price of the
Company's employee option is less than the fair value of the underlying
Ordinary Shares on the date of the grant, compensation expense is
recognized. The pro forma information with respect to the fair value of
option is provided in accordance with the provision of statement No. 123.
The Company applies SFAS No. 123, "Accounting for Stock-Based
Compensation", with respect to warrants issued to non-employees. SFAS No.
123 requires the use of option valuation models to measure the fair value
of the warrants at the date of grant.
n. Severance pay:
The Company's liability for severance pay, is calculated pursuant to
Israeli severance pay law, based on the most recent salary of the employees
multiplied by the number of years of employment as of the balance sheet
date. The Company records as expense the net increase in its funded or
unfunded severance liability. Employees are entitled to one month salary
for each year of employment, or a portion thereof. The Company's liability
is fully provided by monthly deposits with severance pay fund, insurance
policies and by an accrual.
F-42
<PAGE>
INVERNESS SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The deposited funds include profits accumulated up to the balance sheet
date. The deposited funds may be withdrawn only upon complying with the
Israeli severance pay law or labor agreements. The value of deposited funds
are based on the cash surrendered value of these policies, and include
immaterial profits.
Severance pay expense for the years ended December 31, 1999, 1998 and 1997
was $ 40,992, $ 49,857 and $ 61,835, respectively.
o.Income taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") 109, "Accounting for Income Taxes".
This Statement prescribes the use of the liability method whereby deferred
tax assets and liability account balances are determined based on
differences between financial reporting and tax based on assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. The Company
provides a valuation allowance, if necessary, to reduce deferred tax assets
to their estimated realizable value.
p. Impact of recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which will
be effective for fiscal years beginning after June 15, 2000. This Statement
establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement also requires that
changes in the derivative's fair value be recognized in earnings unless
specific hedge accounting criteria are met. The Company does not expect the
impact of this new Statement on the Company's consolidated balance sheet or
results of operations to be material.
Note 3--Fixed Assets:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Cost:
Computers and peripheral equipment................... $257,556 $123,344
Office furniture and equipment....................... 72,014 49,799
Motor vehicles....................................... 40,369 40,369
-------- --------
369,939 213,512
-------- --------
Accumulated depreciation:
Computers and peripheral equipment................... 89,556 49,875
Office furniture and equipment....................... 14,862 9,556
Motor vehicles....................................... 19,979 14,128
-------- --------
124,397 73,559
-------- --------
Depreciated cost....................................... $245,542 $139,953
======== ========
</TABLE>
As for charges, see Note 6c.
Note 4--Long-Term Bank Loan:
The loan is linked to the U.S. dollar and bears interest at the rate of
LIBOR+ 2%. Maturities of the outstanding loan for the two years subsequent to
December 31, 1999 are $ 7,020 in 2000 and $ 5,165 in 2001.
F-43
<PAGE>
INVERNESS SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Share Capital:
a. Changes during the year:
In February 1999, the Company issued 400,000 Preferred shares in
consideration of $ 2 million.
b.Composed of NIS 0.01 par value shares as follows:
<TABLE>
<CAPTION>
Issued and
Authorized December outstanding
31, December 31,
------------------- ---------------
1999 1998 1999 1998
--------- --------- ------- -------
<S> <C> <C> <C> <C>
Ordinary shares (1)......................... 1,510,000 2,100,000 865,000 864,900
========= ========= ======= =======
Preferred shares (2)........................ 600,000 -- 400,000 --
========= ========= ======= =======
Management shares (3)....................... -- 10,000 -- 100
========= ========= ======= =======
</TABLE>
--------
(1) Ordinary shares confer upon their holders voting rights, the right to
receive cash dividends and the right to a share in excess assets upon
liquidation of the Company.
(2) Preferred shares confer upon their holders voting rights, the right to
receive 8% cumulative dividends which will be paid when and if declared and
a liquidation preference to receive the grater of the accumulated
dividends, or the sale price received by the Company for such shares. The
Preferred shares are convertible into Ordinary shares of a one-for-one
basis at any time at the holders' discretion.
(3) Management shares confer upon their holders the same rights as those of
Ordinary shares and, in addition, the right to receive up to $ 80,000 in
dividends, prior to the distribution of any dividends in any year. Under
1999 share purchase agreement, all management shares have been converted
into Ordinary shares.
c.Stock warrants:
During 1997, the Company issued 15,000 warrants, each warrant to purchase
one Ordinary Share, to marketing advisors in respect of their services. All
the warrants were exercised in November 1997.
d. Stock option plan:
Stock options granted under the Company's 1997 Stock Option and Incentive
Plan ("the Plan") are exercisable at an exercise price which is less than
the fair market value at date of grant and, subject to termination of
employment, expire ten years from the date of grant and are generally
exercisable in four equal annual installments commencing one year from the
date of grant. In January 1999, the Company increased the number of shares
available for grant by 81,000 shares. The amount of options reserved under
1997 Stock Option Plan was 22,000 as of December 31, 1999.
A summary of the stock options activities in 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
average average average
Amount exercise price Amount exercise price Amount exercise price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the
beginning of the year.. 237,000 $ 0 223,000 $ 0 -- $0
Granted................. 41,000 $0.20 14,000 $0.14 223,000 $0
Outstanding at the end
of the year............ 278,000 $0.04 237,000 $ 0 223,000 $ 0
</TABLE>
F-44
<PAGE>
INVERNESS SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amount of options exercisable as of December 31, 1999, 1998 and 1997
was 228,901, 177,102 and 94,334, at a weighted average exercise price of $
0, $ 0 and $ 0.02 respectively.
Under SFAS No. 123, pro forma information regarding net income and earnings
per share is required as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using the Black-
Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997: risk-free interest rates of 6%, 5.5%
and 6%, dividend yields of 0% for each of the three years, expected
volatility of 0.001 for each of the three years and a weighted-average
expected life of the options of 5 years for each of the three years.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require subjective
assumptions, including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly
different from traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable measure
of the fair value of its employee stock options.
The weighted-average fair value of the options at their grant dates in
1999, 1998 and 1997 was $ 2.36, $2.39 and $ 1.6, respectively.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. Because
SFAS No. 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until the year
2002.
Pro forma information under SFAS 123:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1999 1998 1997
--------- ------- ---------
U.S. dollars in thousands
<S> <C> <C> <C>
Net income (loss) as reported................. $(170,842) $53,885 $(310,230)
Pro forma net income (loss)................... $(171,823) $53,885 $(310,230)
Pro forma basic earnings (loss) per share..... $ (0.19) $ 0.06 $ (0.32)
Pro forma diluted earnings (loss) per share... $ (0.19) $ 0.05 $ (0.32)
</TABLE>
Note 6--Commitments and Contingent Liabilities:
a. Lease commitments:
The Company and its subsidiary lease their facilities and vehicles under
non-cancelable operating lease agreements for a periods through 2004.
Future minimum lease commitments under non-cancelable operating leases for
the years ended December 31, are as follows:
<TABLE>
<CAPTION>
Year
----
<S> <C>
2000 100,034
2001 64,282
2002 62,724
2003 56,941
2004 34,118
-------
318,099
</TABLE>
F-45
<PAGE>
INVERNESS SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
b.Royalties
The Company is committed to pay royalties to the Chief Scientist of
Ministry of Industry and Trade at a rate of 3% on sales of products
developed with funds provided by the Chief Scientist, up to the amount
equal to 100% of dollar-linked research and development grants related to
such projects, from the Chief Scientist. As of December 31, 1999, the
Company has an outstanding contingent liability of $ 186,309.
c.Charges:
The Company has placed a fixed charge on its share capital and on short-
term deposits in favor of the bank. The Company has a floating charge on
its assets, in favor of the bank.
Note 7--Taxes on Income:
a.Tax benefits under the Law for the Encouragement of Capital Investments, 1959
("the Law"):
In December, 1995, the production facilities of the Company were awarded
the status of an "Approved Enterprise" under the Law.
According to the provisions of the Law, the Company has elected to enjoy
"Alternative Benefits"--waiver of grants in return for tax exemption--and
accordingly, its income from the "Approved Enterprise" is tax-exempt for a
period of 2 years, and for an additional period of 5 to 8 years, is subject
to reduced tax rates of 10% to 25%, depending upon the proportion of
foreign ownership of the Company.
The period of tax benefits, detailed above, is subject to limits of the
earlier of 12 years from the commencement of production, or 14 years, from
the approval date.
The Law also grants entitlement to claim accelerated depreciation on
machinery and equipment used by the "Approved Enterprise", during the first
five tax years.
In the event of distribution of cash dividends from tax exempt income, as
mentioned above, the Company would have to pay income tax equal to 10%-25%
of the amount distributed. The tax exempt income attributable to the
"Approved Enterprise" can be distributed to shareholders without subjecting
the Company to taxes only upon the complete liquidation of the Company. The
retained tax exempt profits as of December 31, 1999 are approximately
$280,000. If these retained tax exempt profits are distributed in a manner
other than upon complete liquidation of the Company, they would be taxed at
a corporate tax rate applicable to such profits as if the Company had not
elected alternative tax benefits (currently 25% of an "approved
enterprise") and an income tax liability of approximately $70,000 would be
incurred.
The Company currently has no plans to distribute dividends and intends to
retain future earnings to finance the development of its business.
Should the Company derive income from sources other than the "Approved
Enterprise" during the relevant period of benefits, such income will be
taxable at regular corporate tax rates of 36%.
b.Tax benefits under the Israeli Law for the Encouragement of Industry
(Taxation), 1969:
The Company is an "industrial company" under the above law and, as such, is
entitled to certain tax benefits, including accelerated depreciation,
deduction of public offering expenses in three equal annual installments,
and deduction of 12.5% per annum on the purchase of certain intangible
property rights.
F-46
<PAGE>
INVERNESS SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
c.Measurement of results for tax purposes under the Income Tax Law
(Inflationary Adjustments), 1985:
Results for tax purposes are measured in terms of earnings in NIS after
certain adjustments for increases in the Israeli Consumer Price Index
("CPI"). As explained in Note 2b, the financial statements are measured in
U.S. dollars. The difference between the annual change in the Israeli CPI
and in the NIS/dollar exchange rate causes a further difference between
taxable income and the income before taxes shown in the financial
statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company
has not provided deferred income taxes on the difference between the
reporting currency and the tax bases of assets and liabilities.
d. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Operating loss carryforward.............................. $ -- $ 16,000
Other reserve and allowances............................. 32,000 38,000
-------- --------
Net deferred tax asset before valuation allowance........ 32,000 54,000
Valuation allowance...................................... (32,000) (54,000)
-------- --------
Net deferred tax asset................................... $ -- $ --
======== ========
</TABLE>
The Company has provided 100% valuation allowance in respect of deferred
tax assets resulting from tax loss carryforwards in 1998. Management
currently believes that, since the Company has a history of losses and a
four year tax exemption, it is more likely than not that the deferred tax
assets regarding the loss carryforwards and other temporary differences
will not be realized.
e.Net operating losses carryforward:
The Company has no accumulated losses for tax purposes as of December 31,
1999.
f. Income (loss) before income taxes is comprised as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------------------
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Domestic................................... $ 53,697 $(113,706) $(324,268)
Foreign.................................... (240,848) 268,591 14,038
---------- --------- ---------
$(187,151) $ 154,885 $(310,230)
========== ========= =========
g. Provisions for tax income (expense) are comprised as follows:
Domestic (current)......................... $ (39,257) $ -- $ --
Foreign (current).......................... 55,566 (101,000) --
---------- --------- ---------
$ 16,309 $(101,000) $ --
========== ========= =========
</TABLE>
F-47
<PAGE>
INVERNESS SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
h. Reconciliation of the theoretical tax expense to the actual tax expense:
A reconciliation of theoretical tax expense, assuming all income is taxed
at the statutory rate applicable to the income of companies in Israel, and
the actual tax expense, is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Income (loss) before taxes on income, as
reported...................................... $(187,151) $154,885 $(310,230)
========= ======== =========
Statutory tax rate in Israel................... 36% 36% 36%
========= ======== =========
Theoretical tax expense (benefit).............. (67,374) 55,758 (111,683)
Increase (decrease) in taxes resulting from:
Items for which valuation allowance was
provided..................................... 11,411 (16,582) 18,693
Tax adjustment in respect of inflation in
Israel....................................... (15,065) (7,981) (4,447)
Non-deductible expenses....................... 149,249 112,958 97,437
Tax rate differences.......................... 25,759 (43,153) --
Tax benefits applicable to "Approved
Enterprises" (1).............................. (103,637) -- --
Utilization of operating carryforward tax
losses for which a valuation allowance had
been provided................................. (16,652) -- --
--------- -------- ---------
Actual tax expense............................. $ (16,309) $101,000 $ --
========= ======== =========
(1) Basic and diluted net loss per share of the
benefit resulting from the approved
enterprise.................................. $ (0.12) $ -- $ --
========= ======== =========
</TABLE>
Note 9--Reportable Segments and Major Customers:
The Company operates in one industry segment, the development and marketing
telecommunication software products. Operations in Israel include research and
development, marketing and sales. Operations in the United States include
marketing and sales. The following is a summary of operations within geographic
areas based on customer's location.
a.Geographical information:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1999 1998 1997
---------- ---------- --------
U.S. dollars in thousands
<S> <C> <C> <C>
1. Revenues:
United States................................ $2,218,125 $1,695,200 $667,975
Far East..................................... 359,024 151,367 --
Israel....................................... 138,400 102,245 171,091
Europe....................................... 29,447 144,382 21,383
---------- ---------- --------
$2,744,996 $2,093,194 $860,449
========== ========== ========
2. Long-lived assets:
Israel....................................... 157,046 130,580 114,923
United States................................ 88,496 9,373 4,229
---------- ---------- --------
$ 245,542 $ 139,953 $119,152
========== ========== ========
</TABLE>
b. Major customer:
Revenues from one customer represents approximately 15% of the Company's
consolidated revenues for the year ended December 31, 1999.
F-48
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Excess Bandwidth Corporation
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Excess Bandwidth
Corporation (a development stage company) at March 31, 2000 and March 31, 1999
and the results of its operations and its cash flows for the year ended March
31, 2000 and for the periods from April 23, 1998 (date of inception) to March
31, 1999 and March 31, 2000, in conformity with accounting principles generally
accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
May 23, 2000
F-49
<PAGE>
EXCESS BANDWIDTH CORPORATION
(A development stage company)
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31,
---------------
2000 1999
------- ------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 598 $4,516
Prepaid expenses and other current assets................... 583 36
------- ------
Total current assets...................................... 1,181 4,552
Property and equipment, net................................. 2,280 544
Other assets................................................ 573 --
------- ------
Total assets.............................................. $ 4,034 $5,096
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................ $ 1,140 $ 85
Accrued liabilities......................................... 2,389 48
Deferred research and development funding................... -- 125
Current portion of capital leases........................... 418 97
Current portion of notes payable............................ 1,528 25
------- ------
Total current liabilities................................. 5,475 380
Deferred research and development funding................... -- 300
Long-term portion of capital leases......................... 936 280
Long-term portion of note payable........................... 45 73
------- ------
Total liabilities......................................... 6,456 1,033
------- ------
Commitments and contingencies (Note 7)
Mandatorily redeemable series A convertible preferred stock:
no par value; 4,516,094 shares authorized; 4,391,556 shares
issued and outstanding Liquidation preference: $4,475...... 4,436 4,436
Shareholders' equity (deficit):
Common stock: no par value; 25,000,000 shares authorized;
7,807,620 and 5,000,000 shares issued and outstanding....... 271 5
Additional paid-in capital.................................. 6,578 --
Deferred stock-based compensation........................... (5,638) --
Notes receivable from shareholders.......................... (61) --
Deficit accumulated during development stage................ (8,008) (378)
------- ------
Total shareholders' equity (deficit)...................... (6,858) (373)
------- ------
Total liabilities and shareholders' equity (deficit)...... $ 4,034 $5,096
======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
EXCESS BANDWIDTH CORPORATION
(A development stage company)
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Period from Period from
April 23, 1998, April 23, 1998,
(date of (date of
Year Ended inception) to inception) to
March 31, 2000 March 31, 1999 March 31, 2000
-------------- --------------- ---------------
<S> <C> <C> <C>
Operating expenses:
General and administration..... $ 1,092 $ 89 $ 1,181
Sales and marketing............ 424 8 432
Research and development....... 6,127 303 6,430
------- ----- -------
Loss from operations............. 7,643 400 8,043
Interest income, net............. (13) (22) (35)
------- ----- -------
Net loss..................... $(7,630) $(378) $(8,008)
======= ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
EXCESS BANDWIDTH CORPORATION
(A development stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Common Stock Additional Receivable Deferred During the Shareholders'
---------------- Paid in from Stock-Based Development Equity
Shares Amount Capital Shareholders Compensation Stage (Deficit)
--------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders at $0.001
per share for cash in
April 1998............. 5,000,000 $ 5 $ -- $ -- $ -- $ -- $ 5
Deficit accumulated
during the development
stage.................. -- -- -- -- -- (378) (378)
--------- ---- ------ ----- ------- ------- -------
Balance at March 31,
1999................... 5,000,000 5 -- -- -- (378) (373)
Exercise of stock
options................ 2,317,620 205 -- -- -- -- 205
Exercise of stock
options in exchange for
notes receivable....... 490,000 61 -- (61) -- -- --
Issuance of warrants.... -- -- 144 -- -- -- 144
Deferred stock-based
compensation........... -- -- 6,434 -- (5,638) -- 796
Deficit accumulated
during the development
stage.................. -- -- -- -- -- (7,630) (7,630)
--------- ---- ------ ----- ------- ------- -------
Balance at March 31,
2000................... 7,807,620 $271 $6,578 $ (61) $(5,638) $(8,008) $(6,858)
========= ==== ====== ===== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
EXCESS BANDWIDTH CORPORATION
(A development stage company)
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Period from Period from
April 23, 1998, April 23, 1998,
(date of (date of
Year Ended inception) to inception) to
March 31, 2000 March 31, 1999 March 31, 2000
-------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss...................... $(7,630) $ (378) $(8,008)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Stock-based compensation
expense.................... 796 -- 796
Depreciation and
amortization............... 392 28 420
Changes in assets and
liabilities:
Prepaid expenses and other
current assets............. (547) (36) (583)
Other assets................ (429) -- (429)
Accounts payable............ 1,055 85 1,140
Accrued liabilities......... 2,341 48 2,389
Deferred research and
development credit......... (425) 425 --
------- ------ -------
Net cash used in operating
activities............... (4,447) 172 (4,275)
------- ------ -------
Net cash flows from investing
activities:
Purchase of property and
equipment.................... (931) (71) (1,002)
Proceeds from sale of property
and equipment................ 25 -- 25
------- ------ -------
Net cash used in financing
activities............... (906) (71) (977)
------- ------ -------
Cash flows from financing
activities:
Proceeds from issuance of
common stock................. 205 5 210
Proceeds from issuance of
preferred stock, net......... -- 4,436 4,436
Borrowing under note payable.. 1,500 -- 1,500
Repayment of note payable
obligations.................. (25) (2) (27)
Repayment of capital lease
obligations.................. (245) (24) (269)
------- ------ -------
Net cash provided by
financing activities..... 1,435 4,415 5,850
------- ------ -------
Net increase (decrease) in cash
and cash equivalents........... (3,918) 4,516 598
Cash and cash equivalents at
beginning of year.............. 4,516 -- --
------- ------ -------
Cash and cash equivalents at end
of year........................ $ 598 $4,516 $ 598
======= ====== =======
Supplemental disclosure of cash
flow information:
Property and equipment
acquired under capital
leases....................... $ 1,222 $ 401 $ 1,623
======= ====== =======
Property and equipment
acquired under note payable.. $ -- $ 100 $ 100
======= ====== =======
Cash paid for interest........ $ 129 $ 11 $ 140
======= ====== =======
Issuance of warrants.......... $ 144 $ -- $ 144
======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
EXCESS BANDWIDTH CORPORATION
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
1.The Company and Summary of Significant Accounting Policies
The Company
Excess Bandwidth Corporation (the "Company") was incorporated in California
on April 23, 1998 to develop chipsets and modules for Digital Subscriber
Loop applications.
Basis of presentation
The Company has had limited operations to date and its activities have
consisted primarily of raising capital, developing products and recruiting
personnel. Accordingly, the Company is considered to be in the development
stage at March 31, 2000, as defined in Statement of Financial Accounting
Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage
Enterprises." The accompanying financial statements should not be regarded
as typical for a normal operating period. The Company's fiscal year ends on
March 31. The Company's one reportable segment operates wholly in the
United States.
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
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents.
Research and development
Research and development costs are charged to operations as incurred.
Income taxes
Income taxes are accounted for using an asset and liability approach. The
asset and liability approach requires the recognition of taxes payable or
refundable for the current year and deferred tax liabilities and assets for
the future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. The measurements of current
and deferred tax liabilities and assets are based on provisions of
currently enacted tax laws; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, the Company cannot determine will more likely than not
be realized.
Concentration of credit risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents. The Company places its cash primarily in checking and money
market accounts. The Company's investment policy limits the amount of
credit exposure to any one issuer.
F-54
<PAGE>
EXCESS BANDWIDTH CORPORATION
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization are computed using the straight-line method
based upon the shorter of the estimated useful lives of the assets or the
lease term of the respective assets, if applicable.
Stock-based compensation
Employee stock-based compensation is recognized using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation expense for stock options is measured as the
excess, if any, of the fair value of the Company's stock at the date of
grant over the amount an individual must pay to acquire the stock and
amortized over the vesting period and is recognized using the straight-line
method over the vesting period of the options. All transactions with other
than employees in which goods and services are the consideration received
for the issuance of equity instruments, such as stock options, are expensed
based on the fair value of the consideration received or the fair value of
the equity instruments issued, whichever is more reliably measured. The
Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), for employee stock-based transactions.
Comprehensive income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which is effective for years
beginning after December 15, 1997. This statement establishes standards for
the reporting and display of comprehensive income and its components.
Comprehensive income is defined to include all changes in equity during a
period except those resulting from investments by owner and distributions
to owners. The Company adopted SFAS 130 in 1998; however, since inception,
there were no components of other comprehensive income for disclosure.
Recent accounting pronouncements
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133." SFAS 137 amends Statement of Financial Accounting
Standards no. 133, "Accounting for Derivative Instruments and Hedging
Activities," to defer its effective date to all fiscal quarters of all
fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting
and reporting standards for derivative instruments including standalone
instruments, as forward currency exchange contracts and interest rate swaps
or embedded derivatives and requires that these instruments be market-to-
market on an ongoing basis. These market value adjustments are to be
included either in the income statement or stockholders' equity, depending
on the nature of the transaction. The Company is required to adopt SFAS 133
in the first quarter of the fiscal year 2001. SFAS 133 is not expected to
have any material impact on the Company's financial statements.
In April 2000, the Financial Accounting Standards Board issued FASB
interpretation of No. 44, Accounting for Certain Transactions Involving
Stock Compensation, an interpretation of APB Opinion No. 25. Among other
issues, this interpretation clarifies the definition of employees for
purposes of applying Opinion No. 25, the criteria for determining whether a
plan qualifies as a non-compensatory plan, the
F-55
<PAGE>
EXCESS BANDWIDTH CORPORATION
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
accounting consequence of various modifications to the terms of a
previously fixed stock option or award and the accounting for an exchange
of stock compensation awards in a business combination. This interpretation
is effective July 1, 2000, but certain conclusions in the interpretation
covers specific events that occur after either December 15, 1998, or
January 12, 2000. To the extent that interpretation covers events occurring
during the period after December 15, 1998, or January 12, 2000, but before
the effective date of July 1, 2000, the effect of applying this
interpretation is recognized on a prospective basis from July 1, 2000. FIN
44 is not expected to have any material impact on the Company's financial
statements.
2.Balance Sheet Data
<TABLE>
<CAPTION>
Useful March 31,
Lives ------------
In Years 2000 1999
---------- ------ ----
(in
thousands)
<S> <C> <C> <C>
Property and equipment,
net:
Equipment............... 3 $1,210 $378
Furniture and fixtures.. 4 19 27
Software................ 3 1,240 166
Leasehold improvements.. Lease term 231 1
------ ----
2,700 572
Less: Accumulated
depreciation and
amortization........... (420) (28)
------ ----
$2,280 $544
====== ====
</TABLE>
Assets leased under capital leases amounted to $1,623,000 and $401,000 less
accumulated depreciation of $297,000 and $28,000 at March 31, 2000 and
1999, respectively.
<TABLE>
<CAPTION>
March 31,
-----------
2000 1999
------ ----
(in
thousands)
<S> <C> <C>
Accrued liabilities:
Payroll and related expenses................................... $ 131 $31
Other.......................................................... 446 17
Development termination expenses (Note 6)...................... 1,812 --
------ ---
$2,389 $48
====== ===
</TABLE>
3.Notes Payable, Capital Leases and Associated Warrants
In February 2000, the Company issued Convertible Promissory Notes amounting
to $1,500,000. These notes bear interest at 8% per annum and are due and
payable in full upon demand of the note holders. At March 31, 2000 the
notes are outstanding and are classified as a current liability. The notes
are convertible into stock of the Company in the next financing round that
raises a minimum of $5 million. The conversion price is equal to the price
of shares issued in the next financing round. These notes were converted
into Series B preferred stock subsequent to the year-end (Note 8).
Pursuant to the issuance of these promissory notes, the Company granted
warrants to purchase up to $150,000 of the Company's capital stock. These
warrants may be exercised at any date for a period of five years from the
date of grant at an exercise price equal to the price of shares issued in
the Company's next sale of capital stock. These warrants were recorded as a
debt issuance cost at their estimated fair value of $77,000. These warrants
were outstanding in full at March 31, 2000.
F-56
<PAGE>
EXCESS BANDWIDTH CORPORATION
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
During February 1999, the Company issued a long-term note payable for
$100,000 in respect of equipment purchases, of which $73,000 and $98,000
was outstanding as of March 31, 2000 and 1999, respectively. The note bears
interest at approximately 10% per annum and is secured by the equipment
acquired by the Company.
Through March 31, 2000 and 1999, the Company obtained $1,222,000 and
$401,000, respectively of machinery, computers, software and equipment
under capital leases. At March 31, 2000 and 1999 the balance of the capital
lease obligations were $1,354,000 and $377,000, respectively.
In July 1999, in connection with the capital lease agreements, the Company
granted a warrant to purchase 110,403 shares of Series A Convertible
Preferred Stock at $1.019 a share. The warrant may be exercised at any date
for a period of seven years from the date of grant at an exercise price of
$1.019 per share. The warrant was recorded as a discount to the capital
lease obligation at its estimated fair value of $67,000 and will be
recorded as interest expense over the life of the capital leases. The
warrant is outstanding in full at March 31, 2000. Amortization expense
associated with this warrant recognized in the year ended March 31, 2000 is
$17,000.
Future minimum lease payments under the non-cancelable capital leases are
as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending March 31,
---------------------
<S> <C>
2001............................................................... $ 573
2002............................................................... 576
2003............................................................... 466
2004............................................................... 20
2005............................................................... 22
------
Total minimum lease payments................................... 1,657
Less amount representing interest.................................. (303)
------
Present value of future minimum lease payments..................... 1,354
Less current portion............................................... (418)
------
Long-term portion.................................................. $ 936
======
</TABLE>
Future minimum payments under the non-cancelable note payable are as
follows (in thousands):
<TABLE>
<CAPTION>
Period ending March 31,
-----------------------
<S> <C>
2001.................................................................. $28
2002.................................................................. 31
2003.................................................................. 14
---
$73
===
</TABLE>
4.Income Taxes
No provision for federal and state income taxes has been recorded since
inception as the Company has incurred net losses. As of March 31, 2000 and
1999, deferred tax assets, related primarily to deferred research and
development funding, net operating losses and research and development
credit carryforwards, amounted to approximately $3,220,000 and $242,000,
respectively. A valuation allowance has been provided in an amount equal to
these assets because sufficient uncertainty exists regarding the
realizability of these assets.
F-57
<PAGE>
EXCESS BANDWIDTH CORPORATION
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
At March 31, 2000 and 1999, the Company has research and development credit
carryforwards of approximately $183,000 and $25,000, respectively, for
federal and $172,000 and $31,000, respectively, for California tax purposes
available to reduce future taxable income.
The amounts of and the benefit from credits that can be carried forward may
be impaired or limited in certain circumstances. Events which may cause
changes in the Company's net operating loss and credits carryforwards
include, but are not limited to, a cumulative stock ownership change of
greater than 50%, as defined, over a three-year period.
5.Mandatorily Redeemable Convertible Preferred Stock
Convertible preferred stock
The Company is authorized to issue 4,516,094 shares of Series A convertible
preferred stock ("Series A"), of which 4,391,556 shares were issued at
$1.019 per share in February 1999.
Voting
Each holder of shares of the Series A preferred stock shall be entitled to
the number of votes equal to the number of shares of Common Stock into
which such shares of Series A preferred stock could be converted, shall
have voting rights and powers equal to the voting rights and powers of the
Common Stock and shall be entitled to notice of any shareholders' meeting
in accordance with the Bylaws of the Corporation.
Conversion
Each share of Series A preferred stock shall be convertible, at the option
of the holder, at any time after the date of issuance of such share, at the
office of the Corporation or any transfer agent for such stock, into such
number of fully paid and nonassessable shares of Common Stock as is
determined by dividing $1.019 by the conversion price in effect to such
share on the date the certificate is surrendered for conversion. The
initial conversion price is $1.019 per share and is adjusted for certain
dilutive issuances, splits and combinations.
Each share of Series A preferred stock shall automatically be converted
into shares of Common Stock at the conversion price at the time in effect
for such Series A preferred stock immediately upon the closing of a public
offering of at least $7,500,000 at a minimum price of $5.00 per share.
Automatic conversion may also occur by written consent of a majority of the
outstanding shares of Series A preferred stock.
Dividends
Holders of Series A are entitled to receive non-cumulative dividends at a
rate of 8% per share per annum, when and if declared by the Board of
Directors, prior to payment of dividends on Common Stock. To date, no
dividends have been declared.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, or a merger where less than 50% of the
voting power is maintained by existing shareholders of the Company, holders
of the Series A are entitled to receive $1.019 per share, plus any declared
but unpaid dividends, prior to any distribution to the holders of Common
Stock.
F-58
<PAGE>
EXCESS BANDWIDTH CORPORATION
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
6.Shareholders' Equity
Common stock
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 25,000,000 shares of no par value common stock (the "Common
Stock").
During the period ending March 31, 1999, a total of 5,000,000 shares of
Common Stock were issued to the Company's founders ("Founders' Shares") in
exchange for cash proceeds. The Company has the right to repurchase the
founders shares at the proposed consideration price offered to the
stockholder from a third party.
Equity Incentive Plan
In April 1998, the Board of Directors adopted the 1998 Equity Incentive
Plan (the "Plan") which provides for the issuance of Common Stock or the
granting of stock options to employees, directors and consultants of up to
5,830,189 shares of Common Stock. Options granted under the Plan are
exercisable for periods not exceeding 10 years from the grant date. The
price of stock issued and options granted under the Plan are determined by
the Board of Directors. Options generally vest 25% after the first year and
ratably each month over the subsequent thirty-six months.
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
Weighted
Average
Weighted Fair
Shares Average Value of
Available Options Exercise Options
for Grant Outstanding Price Granted
---------- ----------- -------- --------
<S> <C> <C> <C> <C>
Shares authorized................. 3,830,189 -- $ -- $ --
Options granted................... (1,310,000) 1,310,000 0.07 0.04
---------- ----------
Balance at March 31, 1999......... 2,520,189 1,310,000
Shares authorized................. 2,000,000 -- -- --
Options granted................... (3,577,995) 3,577,995 0.11 0.06
Options exercised................. -- (2,807,620) 0.10 0.05
Options cancelled................. 840,375 (840,375) 0.08 0.07
---------- ----------
Balance at March 31, 2000......... 1,782,569 1,240,000
========== ==========
</TABLE>
The following table summarizes information about stock options outstanding
as of March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Exercisable
----------------------------------------------------------------------------
Weighted
Range Average
of Remaining Average
Exercise Number Contractual Exercise
Price Outstanding Life Shares Price
-------- ----------- ----------- ------ --------
<S> <C> <C> <C> <C>
$0.10.............................. 1,006,000 9.44 36,000 $0.10
0.15.............................. 170,000 9.92 -- --
0.35.............................. 64,000 10.00 -- --
--------- ------
1,240,000 36,000
========= ======
</TABLE>
At March 31, 2000, 2,537,909 shares of Common Stock issued under the equity
incentive plan are subject to repurchase.
F-59
<PAGE>
EXCESS BANDWIDTH CORPORATION
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company has recorded a deferred compensation charge of approximately
$7.6 million associated with the options granted. The charge is being
amortized on a straight-line basis over the 4 year vesting term of the
options. Amortization of the deferred compensation in fiscal 2000 amounted
to $796,000.
The fair value of each option is estimated on the date of grant using the
minimum value method with the following assumptions for grants during the
applicable period: no annual dividend yield; weighted-average risk-free
interest rate of 6.32% and 6.04% for options granted during the year ended
March 31, 2000 and the period ended March 31, 1999, respectively, and an
expected option term of four years, for all years presented. The pro forma
compensation expense determined under SFAS 123 for options granted during
the year ended March 31, 2000 and for the period ended March 31 1999, was
not material.
Stock-based compensation expense related to stock options granted to
consultants as the stock options are earned. The fair value of stock
options granted is calculated at each reporting date using the Black-
Scholes option pricing model. As a result, the stock-based compensation
expense will fluctuate as the fair market value of our common stock
fluctuates. The Company believes that the fair value of the stock options
are more reliably measurable than the fair value of the services received.
Charges associated with the grant of stock options to consultants, were not
material for the year ended March 31, 2000 and for the period from April
23, 1998 (inception) to March 31, 2000.
7.Commitments and Contingencies
Development Agreement and Technology License Agreement
On May 14, 1998, the Company entered into a Development Agreement and a
Technology License Agreement with an unrelated third party. Under the terms
of the agreement, the third party paid $1,000,000 in May 1998 to the
Company to fund initial research and development. An amount of $575,000 was
recorded as a reduction of research and development expense in the period
ended March 31, 1999, in accordance with the agreement and a total of
$425,000 was deferred as of March 31, 1999 for recognition against future
expense. In June 1999, the Company received prepaid royalties of $500,000
under the agreement.
In March 2000, the Company concluded a General Release Agreement which
cancelled the warrant previously granted and extinguished all obligations
to repay development funding and prepaid royalties received under the
Technology License Agreement. In consideration for this release, the
Company agreed to issue 352,941 Series B preferred shares and to make a
cash payment of $580,000. These transactions occurred in April 2000 (Note
8) and the Company has accrued the total liability of $1,812,000 at
March 31, 2000. The Company has recorded in the year ended March 31, 2000 a
net research and development expense of $887,000 resulting from these
transactions.
Lease obligations
The Company leases its principal office facility and equipment under long-
term operating leases.
Future minimum lease payments under all noncancelable operating leases are
as follows (in thousands):
<TABLE>
<S> <C>
2001 (net of tenant sublease income of $259)....................... $ 646
2002 (net of tenant sublease income of $43)........................ 898
2003............................................................... 966
2004............................................................... 968
2005............................................................... 1,009
Thereafter......................................................... 1,691
------
$6,178
======
</TABLE>
F-60
<PAGE>
EXCESS BANDWIDTH CORPORATION
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Rental expense for the year ended March 31, 2000, for the period from April
23, 1998 (inception) to March 31, 1999 and for the period from April 23,
1998 (inception) to March 31, 2000 under all operating leases was $281,000,
$70,000 and $351,000, respectively.
8.Subsequent Events
In April 2000, the Company issued 3,289,898 shares of Series B Preferred
Stock, at a price of $3.49 per share. Rights, preferences and privileges of
Series B shares are similar to Series A. These new shares included the
conversion of the convertible promissory notes (Note 3), and the shares
issued pursuant to the General Release Agreement (Note 7). Net cash
proceeds received subsequent to March 31, 2000 for the shares issued were
$8,700,000, net of issuance costs.
9. Merger with Virata Corporation (unaudited)
On June 20, 2000 the Company entered into a Definitive Agreement with
Virata Corporation, a Delaware corporation, in which Virata Corporation
would acquire all issued and outstanding stock of the Company.
F-61
<PAGE>
VIRATA CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands)
On February 10, 2000, Virata Corporation ("Virata") completed its
acquisition of D2 Technologies, Inc. ("D2 Technologies"). Under the terms of
the merger agreement, 4,396,826 shares of Virata common stock were exchanged
for all of the outstanding common stock of D2 Technologies. In addition,
employee options to purchase shares of D2 Technologies common stock were
exchanged for options to purchase 932,330 shares of Virata common stock.
On April 27, 2000, Virata completed its acquisition of Inverness Systems,
Ltd. ("Inverness"). Under the terms of the agreement, 2,006,440 shares of
Virata common stock were exchanged for all of the outstanding common and
preferred stock of Inverness. In addition, employee options to purchase shares
of Inverness common stock were exchanged for options to purchase 517,896 shares
of Virata common stock.
On June 20, 2000, Virata entered into a definitive agreement to acquire
Excess Bandwidth Corporation ("Excess Bandwidth"). Under the terms of the
agreement, Virata will issue approximately 5,898,290 shares of Virata common
stock and 404,027 options to purchase shares of Virata common stock, to the
shareholders and option holders of Excess Bandwidth common and preferred stock.
These acquisitions will be accounted for as a purchase business combinations
and, accordingly, the purchase price will be allocated to the net tangible and
identifiable intangible assets acquired and liabilities assumed on the closing
dates. The allocations of the purchase price of both acquisitions to the net
tangible and identifiable intangible assets and goodwill were based on
independent appraisals. The aggregate purchase price of the acquisitions are as
follows:
<TABLE>
<CAPTION>
D2 Excess
Technologies Inverness Bandwidth Total
------------ --------- --------- --------
<S> <C> <C> <C> <C>
Shares of Virata common stock.... $79,143 $77,590 $295,002 $451,735
Options to purchase Virata common
stock........................... 13,566 20,010 19,998 53,574
Direct acquisition costs......... 4,200 750 8,129 13,079
------- ------- -------- --------
$96,909 $98,350 $323,129 $518,388
======= ======= ======== ========
</TABLE>
The accompanying unaudited pro forma condensed balance sheet combines the
audited consolidated balance sheet of Virata as of April 2, 2000, with the
audited balance sheets of Inverness as of December 31, 1999 and Excess
Bandwidth as of March 31, 2000, and gives effect to the acquisitions as if they
occurred on April 2, 2000. The balance sheet of D2 Technologies as of April 2,
2000, is included in the audited consolidated balance sheet of Virata since the
acquisition of D2 Technologies occurred on February 10, 2000.
The accompanying unaudited pro forma condensed combined statement of
operations combines Virata's audited consolidated statement of operations for
the year ended April 2, 2000 with D2 Technologies' audited statement of
operations for the year ended December 31, 1999, Inverness' audited statement
of operations for the year ended December 31, 1999 and Excess Bandwidths'
audited statement of operations for the year ended March 31, 2000, and gives
effect to the acquisitions as if they occurred on April 1, 1999. The results of
operations of D2 Technologies for the period from the date of acquisition
(February 10, 2000) through April 2, 2000, are included in Virata's audited
consolidated statement of operations for the year ended April 2, 2000.
F-62
<PAGE>
VIRATA CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
Excess
Virata Inverness Bandwidth
-------- ------------ ---------
April 2, December 31, March 31, Pro Forma Pro Forma
2000 1999 2000 Adjustments Combined
-------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 60,193 $ 328 598 $ 61,119
Short-term
investments.......... 18,006 -- -- 18,006
Accounts receivable,
net.................. 7,524 815 -- 8,339
Inventories........... 409 -- -- 409
Other current assets.. 2,895 1,524 583 5,002
-------- ------ ------- -------- ---------
Total current
assets............. 89,027 2,667 1,181 92,875
-------- ------ ------- -------- ---------
Property and equipment,
net.................... 3,222 246 2,280 5,748
Intangible and other
assets................. 89,113 86 573 345,522 A 435,294
-------- ------ ------- -------- ---------
Total assets........ $181,362 $2,999 4,034 $345,522 $ 533,917
======== ====== ======= ======== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 4,887 $ 76 1,140 $ 6,103
Accrued and other
liabilities.......... 10,510 335 2,389 8,879 B 22,113
Deferred revenue...... 2,215 102 -- 2,317
Capital lease
obligation, current.. 784 -- 418 1,202
Note payable,
current.............. -- 7 1,528 1,535
-------- ------ ------- -------- ---------
Total current
liabilities........ 18,396 520 5,475 8,879 33,270
Capital lease
obligation, long-
term................. 1,178 -- 936 2,114
Note payable, long-
term................. -- 5 45 50
Other long-term
liabilities.......... -- 157 -- 157
-------- ------ ------- -------- ---------
Total liabilities... 19,574 682 6,456 8,879 35,591
-------- ------ ------- -------- ---------
Mandatorily redeemable
series A convertible
preferred stock........ -- -- 4,436 (4,436) --
Stockholders' equity:
Convertible preferred
stock.................. -- 1 -- (1)E --
Common stock............ 47 3 271 (266)E,F 55
Additional paid-in
capital................ 238,833 2,844 6,578 407,606 E,F 655,861
Note receivable from
shareholder............ -- -- (61) 61 --
Accumulated other
comprehensive income... 335 -- -- 335
Unearned stock
compensation........... (691) (104) (5,638) 5,742 E (691)
Accumulated deficit..... (76,736) (427) (8,008) (72,063)E (157,234)
-------- ------ ------- -------- ---------
Total stockholders'
equity............... 161,788 2,317 (6,858) 341,079 498,326
-------- ------ ------- -------- ---------
Total liabilities
and stockholders'
equity............. $181,362 $2,999 $ 4,034 $345,522 $ 533,917
======== ====== ======= ======== =========
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
combined financial statements
F-63
<PAGE>
VIRATA CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
April 2, December 31, December 31, March 31,
2000 1999 1999 2000
-------- ------------ ------------ ---------
D2 Excess Pro Forma
Virata Technologies Inverness Bandwidth Adjustments Combined
-------- ------------ ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 21,777 $2,668 $2,745 -- $ (1,164)D $ 26,026
Cost of revenues........ 11,239 456 -- 269 C 11,964
-------- ------ ------ ------ --------- ---------
Gross profit............ 10,538 2,668 2,289 -- (1,433)C,D 14,062
Operating expenses...... 38,856 2,567 2,482 7,643 106,324 C,D 157,872
-------- ------ ------ ------ --------- ---------
Income (loss) from
operations............. (28,318) 101 (193) (7,643) (107,757) (143,810)
Interest and other
income (expense), net.. 2,210 16 6 13 (6)D 2,239
-------- ------ ------ ------ --------- ---------
Income (loss) before
income taxes........... (26,108) 117 (187) (7,630) (107,763) (141,571)
Provision for (benefit
from) income taxes..... -- 47 (16) -- -- 31
-------- ------ ------ ------ --------- ---------
Net income (loss)....... $(26,108) $ 70 $ (171) (7,630) $(107,763) $(141,602)
======== ====== ====== ====== ========= =========
Basic and diluted net
loss per share......... $ (1.40) $ (4.97)
Weighted average common
shares--basic and
diluted................ 18,672 9,829 G 28,501
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
combined financial statements
F-64
<PAGE>
Pro Forma Adjustments and Assumptions
(in thousands)
The valuations of intangible assets acquired were based on independent
appraisals. Assuming that the acquisitions had occurred on April 2, 2000, the
purchase price allocations would have been as follows:
<TABLE>
<CAPTION>
D2 Inverness Excess
Technologies Systems Bandwidth Total
------------ --------- --------- --------
<S> <C> <C> <C> <C>
Fair value of assets acquired and
liabilities...................... $ 1,234 $ 2,317 $ (6,858) $ (3,307)
Assembled workforce............... 760 580 1,504 2,844
Customer base and other
intangibles...................... 1,001 1,200 -- 2,201
Contracts......................... 1,006 -- 4,611 5,617
Completed technology.............. 15,872 9,510 68,426 93,808
In-process research and
development...................... 5,324 1,170 79,328 85,822
Goodwill.......................... 71,712 83,573 176,118 331,403
------- ------- -------- --------
Total........................... $96,909 $98,350 $323,129 $518,388
======= ======= ======== ========
</TABLE>
A. Reflects the recording of intangible assets associated with the
acquisitions of Inverness and Excess Bandwidth. The intangible assets
associated with the acquisition of D2 Technologies are included in the
audited consolidated balance sheet of Virata since the acquisition of D2
Technologies occurred on February 10, 2000.
B. Reflects the accrual for estimated direct costs resulting from the
acquisitions. These costs are primarily for financial advisory,
accounting and legal fees. The actual amounts ultimately incurred could
differ from the estimated amounts. The estimated costs are reflected in
the unaudited combined balance sheet as a component of purchase price.
C. Reflects the amortization expense of intangible assets resulting from
the acquisition of D2 Technologies, Inverness and Excess Bandwidth as if
they occurred on April 1, 1999, using estimated useful lives between one
and five years.
D. To eliminate results of operations of D2 Technologies for the two month
period from acquisition to April 2, 2000, that are included in the
consolidated results of operations for Virata for the year ended April
2, 2000.
E. To eliminate the shareholders' equity accounts of Inverness and of
Excess Bandwidth.
F. To reflect the issuance of Virata common stock for the acquisitions of
Inverness and Excess Bandwidth.
G. Pro Forma weighted average shares used in the calculation of Virata pro
forma combined net loss per share have been computed by adding Virata
historical weighted average shares outstanding to common shares to be
issued for the acquisitions of D2 Technologies, Inverness and Excess
Bandwidth. Pro forma weighted average shares excludes shares issued that
are subject to repurchase by Virata.
F-65
<PAGE>
[LOGO APPEARS HERE]
<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............................................. $ 109,050
NASD fee......................................................... 35,000
Nasdaq National Market listing fee............................... 35,000
Printing and engraving costs..................................... 225,000
Legal fees and expenses.......................................... 250,000
Accounting fees and expenses..................................... 325,000
Blue Sky fees and expenses....................................... 3,000
Transfer agent and registrar fees and expenses................... 3,500
Miscellaneous.................................................... 134,450
----------
Total.......................................................... $1,120,000
==========
</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 Bylaws 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 bylaw, 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, we have issued securities of Company as
follows (the following information gives effect to the reorganization in
November 1999):
. in July 1997, we issued a warrant to purchase 22,388 shares of our common
stock in a private placement to Dr. Robert W. Wilmott at an exercise
price per share of $0.27 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;
. in July 1998, we issued 459,700 shares of our common stock in a private
placement at a purchase price of $3.08 per share and aggregate proceeds
of $1,416,800 to Munther Qubain in connection with the acquisition of RSA
Communications, Inc.;
. we have issued an aggregate of 1,837,212 shares of our common stock in
connection with the exercise of options by our employees between April 1,
1997 and June 9, 2000;
. in September 1997, we issued a warrant to purchase 2,864 shares of our
common stock in a private placement to Comdisco Ventures at an exercise
price per share of $4.19 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 10,535 shares of our
common stock in a private placement to Venture Banking Group, an entity
of Greater Bay Bancorp, at an exercise price per share of $5.70 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 16,554 shares of our common stock at
an exercise price per share of $3.62;
. 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 subsequently converted into 1,128,032
shares of our common stock in June 1998;
. 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
subsequently converted into 298,510 shares of our common stock in June
1998;
. in June 1998, we sold 11,634,240 shares of our common stock in a private
placement at a purchase price of $2.34 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, 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.
II-2
<PAGE>
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, we issued a warrant to Index Securities S.A. to purchase,
748,212 shares of our common stock in a private placement at an exercise
price of $2.35 in connection with Index Securities S.A. acting as
placement agent in our June 1998 private placement financing;
. in June 1998, we issued a 10,242 shares of our common stock 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 284,740 shares of our common stock 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 51,172 shares of our
common stock in a private placement to Comdisco Ventures at an exercise
price per share of $2.35 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 25,586 shares of our common
stock in a private placement to Comdisco Ventures at an exercise price
per share of $2.35 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;
. in October 1999, we issued 1,836,966 shares of our common stock in a
private placement at a purchase price of $4.36 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;
. in February 2000, we issued 4,396,826 shares of our common stock to David
Wong and various other former shareholders of D2 Technologies in
connection with our acquisition of D2 Technologies; and
. in April 2000, we issued 2,011,624 shares of our common stock to Jonathan
Masel and various other former shareholders of Inverness Systems in
connection with our acquisition of Inverness Systems.
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.
II-3
<PAGE>
Item 16. Exhibits.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<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*
2.3 Agreement and Plan of Merger among Virata Corporation, D2
Technologies, Inc., VC Acquisition, Inc. and David Y. Wong, as
Securityholder Agent, dated as of January 23, 2000+**
2.4 Share Purchase Agreement among Virata Corporation and Jonathan
Masel, Joanne Masel, Menachem Student, David St. Charles, Peter
Simon, Holland Venture B.V., Docor International B.V., dated as
of March 21, 2000+***
2.5 Agreement and Plan of Merger among Virata Corporation, Excess
Bandwidth Corporation, VC Acquisition, Inc. and Steve Dines, as
Securityholder Agent, dated as of June 20, 2000+#
3.1 Amended and Restated Certificate of Incorporation of Virata
Corporation, as filed with the Secretary of State of the State
of Delaware on November 17, 1999+++
3.2 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Virata Corporation, as filed with the
Secretary of State of the State of Delaware on May 2, 2000+++
3.3 Amended and Restated Bylaws of Virata Corporation, as currently
in effect+++
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*
10.2 Warrant Agreement between Virata Limited and Index Securities,
S.A., dated as of June 4, 1998*
10.3 Form of Warrant between Virata Limited and Comdisco, Inc.*
10.4 Lease between WHC-SIX Real Estate Limited Partnership and
Advanced Telecommunications Modules, Inc., a California
corporation, dated June 26, 1996*
10.5 Lease Agreement between Lake Partners, L.L.C. and RSA
Communications, Inc., dated as of July 1, 1998*
10.6 Lease between Universities Superannuation Scheme Limited and
Advanced Telecommunications Modules Limited, dated 1994*
10.7 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*
10.8 Lease between Virata Limited and Comdisco, Inc., dated September
30, 1996*
10.9 Loan and Security Agreement among Venture Banking Group, Virata
Santa Clara Corporation and Virata Raleigh Corporation, dated
as of August 27, 1999*
10.10 Collateral Assignment, Patent Mortgage and Security Agreement
between Virata Ltd. and Venture Banking Group, dated as of
August 27, 1999*
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
10.11 Agreement between ARM Limited and Virata Ltd., dated June 2,
1999++*
10.12 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*
10.13 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*
10.14 Settlement Agreement between Virata Limited and Cirrus Logic,
Inc., a California corporation, dated as of June 19, 1998*
10.15 Development, Production, Supply and License Agreement between
Advanced Telecommunications Modules Limited and Symbios
Incorporated, a Delaware corporation, dated as of August 16,
1997*
10.16 1999 Stock Incentive Plan+++
10.17 1999 Employee Stock Purchase Plan+++
10.18 Non-Employee Director Plan+++
10.19 D2 Technologies Inc. Tandem Stock Option Plan++++
10.20 Inverness Systems Ltd. Employee Share Option Plan (1997)++++
10.21 Inverness Systems Ltd. Supplemental Stock Option Plan++++
10.22 Form of Indemnity Agreement*
10.23 Employment Agreement--Charles Cotton*++
10.24 Employment Agreement--Michael Gulett*++
10.25 Employment Agreement--Andrew Vought*++
10.26 Employment Agreement--Martin Jackson*++
10.27 Employment Agreement--Thomas Cooper*++
10.28 Employment Agreement--Duncan Greatwood+++++
10.29 Registration Rights Agreement by and among Virata Corporation
and the Investors, dated November 17, 1999*
10.30 Registration Rights Agreement by and among Virata Corporation
and David Y. Wong, as Securityholder Agent, dated February 10,
2000+++
10.31 Registration Rights Agreement by and among Virata Corporation
and Jonathan Masel, as Shareholders' Agent, dated April 27,
2000+++
21.1 List of Subsidiaries of Virata Corporation (previously filed as
an exhibit to this Registration Statement on Form S-1)
23.1 Independent Accountants' Consent from PricewaterhouseCoopers LLP
regarding Virata Corporation
23.2 Independent Public Accountants' Consent from Arthur Andersen LLP
regarding D2 Technologies, Inc.
23.3 Independent Auditors Consent from Kost, Forer and Gabbay
regarding Inverness Systems, Ltd.
23.4 Independent Accountants' Consent from PricewaterhouseCoopers LLP
regarding Excess Bandwidth Corporation
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
23.5 Consent of Gibson, Dunn & Crutcher LLP (included in their
opinion filed as
Exhibit 5.1)
24.1 Power of Attorney (previously filed as an exhibit to this
Registration Statement on Form S-1)
27.1 Financial Data Schedule (previously filed as an exhibit to this
Registration Statement on Form S-1)
</TABLE>
--------
+ Filed without schedules.
++ A management contract or compensatory plan or arrangement.
++Confidential treatment has been requested for selected sections of this
exhibit.
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 333-86591).
** Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on February 1, 2000.
*** Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on April 4, 2000.
+ Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (No. 333-34742).
++ Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (No. 333-37672).
+++ Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended April 2, 2000.
# Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on June 22, 2000.
(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.
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. 2 to its 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 13th day of July, 2000.
VIRATA CORPORATION
/s/ Charles Cotton
By: _________________________________
Charles Cotton
Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to 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
--------- ----- ----
<S> <C> <C>
/s/ Charles Cotton Chief Executive Officer and July 13, 2000
____________________________________ Director (Principal
Charles Cotton Executive Officer)
* Senior Vice President, Chief July 13, 2000
____________________________________ Financial Officer and
Andrew Vought Secretary (Principal
Financial Officer and
Principal Accounting
Officer)
* Chairman of the Board July 13, 2000
____________________________________
Dr. Hermann Hauser
* Director July 13, 2000
____________________________________
Marco De Benedetti
* Director July 13, 2000
____________________________________
Gary Bloom
* Director July 13, 2000
____________________________________
Bandel Carano
* Director July 13, 2000
____________________________________
Andrew Hopper
* Director July 13, 2000
____________________________________
Martin Jackson
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director July 13, 2000
____________________________________
Peter Morris
* Director July 13, 2000
____________________________________
Patrick Sayer
* Director July 13, 2000
____________________________________
Giuseppe Zocco
</TABLE>
*By: /s/ Charles Cotton
-------------------------------
Charles Cotton
Attorney-in-Fact
II-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors ofVirata Corporation
In connection with our audits of the consolidated financial statements of
Virata Corporation at March 31, 1999 and April 2, 2000 and for each of the
three years in the period ended April 2, 2000 which consolidated 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 presents fairly, in all material respects, the information
set forth therein when read in conjunction with related consolidation financial
statements.
/s/ PricewaterhouseCoopers, LLP
San Jose, California
April 26, 2000 except as to the first paragraph of Note 14, which is as of
April 27, 2000, and the second paragraph of Note 14, which is as of May 18,
2000
<PAGE>
SCHEDULE II
VIRATA CORPORATION
VALUATION AND QUALIFYING ACCOUNT
<TABLE>
<CAPTION>
Balance at Charged to
Beginning Costs and Balance at
Description of Period Expenses Deductions End of Period
----------- ---------- ---------- ---------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended March 31,
1998................... $ 713 $1,075 $ 221 $1,567
Year ended March 31,
1999................... 1,567 1,458 283 2,742
Year ended April 2,
2000................... 2,742 -- 2,447 295
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<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*
2.3 Agreement and Plan of Merger among Virata Corporation, D2
Technologies, Inc., VC Acquisition, Inc. and David Y. Wong, as
Securityholder Agent, dated as of January 23, 2000+**
2.4 Share Purchase Agreement among Virata Corporation and Jonathan
Masel, Joanne Masel, Menachem Student, David St. Charles, Peter
Simon, Holland Venture B.V., Docor International B.V., dated as
of March 21, 2000+***
2.5 Agreement and Plan of Merger among Virata Corporation, Excess
Bandwidth Corporation, VC Acquisition, Inc. and Steve Dines, as
Securityholder Agent, dated as of June 20, 2000+#
3.1 Amended and Restated Certificate of Incorporation of Virata
Corporation, as filed with the Secretary of State of the State
of Delaware on November 17, 1999+++
3.2 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Virata Corporation, as filed with the
Secretary of State of the State of Delaware on May 2, 2000+++
3.3 Amended and Restated Bylaws of Virata Corporation, as currently
in effect+++
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*
10.2 Warrant Agreement between Virata Limited and Index Securities,
S.A., dated as of June 4, 1998*
10.3 Form of Warrant between Virata Limited and Comdisco, Inc.*
10.4 Lease between WHC-SIX Real Estate Limited Partnership and
Advanced Telecommunications Modules, Inc., a California
corporation, dated June 26, 1996*
10.5 Lease Agreement between Lake Partners, L.L.C. and RSA
Communications, Inc., dated as of July 1, 1998*
10.6 Lease between Universities Superannuation Scheme Limited and
Advanced Telecommunications Modules Limited, dated 1994*
10.7 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*
10.8 Lease between Virata Limited and Comdisco, Inc., dated September
30, 1996*
10.9 Loan and Security Agreement among Venture Banking Group, Virata
Santa Clara Corporation and Virata Raleigh Corporation, dated
as of August 27, 1999*
10.10 Collateral Assignment, Patent Mortgage and Security Agreement
between Virata Ltd. and Venture Banking Group, dated as of
August 27, 1999*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
10.11 Agreement between ARM Limited and Virata Ltd., dated June 2,
1999++*
10.12 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*
10.13 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*
10.14 Settlement Agreement between Virata Limited and Cirrus Logic,
Inc., a California corporation, dated as of June 19, 1998*
10.15 Development, Production, Supply and License Agreement between
Advanced Telecommunications Modules Limited and Symbios
Incorporated, a Delaware corporation, dated as of August 16,
1997*
10.16 1999 Stock Incentive Plan+++
10.17 1999 Employee Stock Purchase Plan+++
10.18 Non-Employee Director Plan+++
10.19 D2 Technologies Inc. Tandem Stock Option Plan++++
10.20 Inverness Systems Ltd. Employee Share Option Plan (1997)++++
10.21 Inverness Systems Ltd. Supplemental Stock Option Plan++++
10.22 Form of Indemnity Agreement*
10.23 Employment Agreement--Charles Cotton*++
10.24 Employment Agreement--Michael Gulett*++
10.25 Employment Agreement--Andrew Vought*++
10.26 Employment Agreement--Martin Jackson*++
10.27 Employment Agreement--Thomas Cooper*++
10.28 Employment Agreement--Duncan Greatwood+++++
10.29 Registration Rights Agreement by and among Virata Corporation
and the Investors, dated November 17, 1999*
10.30 Registration Rights Agreement by and among Virata Corporation
and David Y. Wong, as Securityholder Agent, dated February 10,
2000+++
10.31 Registration Rights Agreement by and among Virata Corporation
and Jonathan Masel, as Shareholders' Agent, dated April 27,
2000+++
21.1 List of Subsidiaries of Virata Corporation (previously filed as
an exhibit to this Registration Statement on Form S-1)
23.1 Independent Accountants' Consent from PricewaterhouseCoopers LLP
regarding Virata Corporation
23.2 Independent Public Accountants' Consent from Arthur Andersen LLP
regarding D2 Technologies, Inc.
23.3 Independent Auditors Consent from Kost, Forer and Gabbay
regarding Inverness Systems, Ltd.
23.4 Independent Accountant's Consent from PricewaterhouseCoopers LLP
regarding Excess Bandwidth Corporation
23.5 Consent of Gibson, Dunn & Crutcher LLP (included in their
opinion filed as Exhibit 5.1)
24.1 Power of Attorney (previously filed as an exhibit to this
Registration Statement on Form S-1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
27.1 Financial Data Schedule (previously filed as an exhibit to this
Registration Statement on Form S-1)
</TABLE>
--------
+ Filed without schedules.
++ A management contract or compensatory plan or arrangement.
++Confidential treatment has been requested for selected sections of this
exhibit.
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 333-86591).
** Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on February 1, 2000.
*** Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on April 4, 2000.
+ Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (No. 333-34742).
++ Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (No. 333-37672).
+++ Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended April 2, 2000.
# Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on June 22, 2000.
