<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2000.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-28157
---------------------------------
Virata Corporation
(Exact name of registrant as specified in its charter)
---------------------------------
<TABLE>
<S> <C>
Delaware 77-0521696
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
<TABLE>
<S> <C>
2933 Bunker Hill Lane, Santa Clara,
California 95054
(Address of principal executive offices) (zip code)
</TABLE>
Registrant's telephone number, including area code: (408) 566-1000
---------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
As of August 7, 2000, there were 56,237,147 shares of the Registrant's
Common Stock outstanding, par value $0.001.
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<PAGE>
VIRATA CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<C> <S> <C>
PART I. Financial Information
Item 1 Condensed Consolidated Financial Statements (unaudited)......... 3
Condensed Consolidated Balance Sheet as of July 2, 2000 and
April 2, 2000.................................................. 3
Condensed Consolidated Statement of Operations for the three
month periods ended July 2, 2000 and June 30, 1999............. 4
Condensed Consolidated Statement of Cash Flows for the three
month periods ended July 2, 2000 and June 30, 1999............. 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 12
Item 3 Quantitative and Qualitative Disclosure about Market Risk....... 30
PART II. Other Information
Item 1 Legal Proceedings............................................... 31
Item 2 Changes in Securities and Use of Proceeds....................... 31
Item 3 Defaults Upon Senior Securities................................. 31
Item 4 Submission of Matters to a Vote of Security Holders............. 31
Item 5 Other Information............................................... 31
Item 6 Exhibits and Reports on Form 8-K................................ 31
Signatures.............................................................. 33
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1--Condensed Consolidated Financial Statements.
VIRATA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, unaudited)
<TABLE>
<CAPTION>
July 2, April 2,
2000 2000(A)
-------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................. $ 54,251 $ 60,193
Short-term investments.................................... 18,115 18,006
Accounts receivable, net.................................. 16,219 7,524
Inventories............................................... 2,284 409
Other current assets...................................... 2,828 2,895
-------- --------
Total current assets.................................... 93,697 89,027
Property and equipment, net................................. 4,328 3,222
Intangible assets........................................... 174,844 89,113
Other assets................................................ 392 --
-------- --------
Total assets............................................ $273,261 $181,362
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.......................................... $ 8,890 $ 4,887
Accrued liabilities....................................... 3,115 3,484
Accrued employee benefits................................. 2,763 2,555
Accrued National Insurance Contribution on options........ 6,718 4,471
Deferred revenue.......................................... 2,130 2,215
Capital lease obligation, current......................... 686 784
-------- --------
Total current liabilities............................... 24,302 18,396
Capital lease obligation, long-term......................... 968 1,178
-------- --------
Total liabilities....................................... 25,270 19,574
Stockholders' equity:
Common stock.............................................. 49 47
Additional paid-in capital................................ 337,340 238,833
Accumulated other comprehensive income.................... 664 335
Unearned stock compensation............................... (541) (691)
Accumulated deficit....................................... (89,521) (76,736)
-------- --------
Total stockholders' equity.............................. 247,991 161,788
-------- --------
Total liabilities and stockholders' equity.............. $273,261 $181,362
======== ========
</TABLE>
--------
(A) The information in this column is derived from the Company's audited
financial statements for fiscal year ended April 2, 2000.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
VIRATA CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
-----------------
June
July 2, 30,
2000 1999
-------- -------
<S> <C> <C>
Revenues:
Semiconductor............................................. $ 21,465 $ 1,419
License................................................... 4,157 274
Services and royalty...................................... 968 373
Systems................................................... 1,106 599
-------- -------
Total revenues.......................................... 27,696 2,665
-------- -------
Cost of revenues:
Semiconductor............................................. 14,092 811
License................................................... 124 --
Services and royalty...................................... 186 138
Systems................................................... 458 324
-------- -------
Total cost of revenues.................................. 14,860 1,273
-------- -------
Gross profit............................................ 12,836 1,392
-------- -------
Operating expenses:
Research and development.................................. 5,032 2,549
Selling and marketing..................................... 4,366 923
General and administrative................................ 3,318 903
National Insurance Contribution on options................ 2,520 --
Amortization of intangible assets......................... 9,949 194
Amortization of stock compensation........................ 150 266
Acquired in-process research and development.............. 1,170 --
-------- -------
Total operating expenses................................ 26,505 4,835
-------- -------
Loss from operations........................................ (13,669) (3,443)
Interest expense............................................ (95) (49)
Interest and other income, net.............................. 979 477
-------- -------
Net loss................................................ $(12,785) $(3,015)
======== =======
Basic and diluted net loss per share.................... $ (0.26) $ (0.76)
======== =======
Weighted average common shares--basic and diluted....... 48,417 3,984
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
VIRATA CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
-----------------
June
July 2, 30,
2000 1999
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $(12,785) $(3,015)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts and returns.............. -- 189
Acquired in-process research and development expenses.... 1,170 --
Depreciation and amortization............................ 10,475 643
Amortization of stock compensation....................... 150 266
Change in assets and liabilities (net of acquisition
balances):
Accounts receivable.................................... (7,268) (26)
Inventories............................................ (1,895) (108)
Other current assets................................... 434 (624)
Other assets........................................... (392) --
Accounts payable....................................... 3,836 (187)
Accrued liabilities.................................... (1,008) 485
Accrued employee benefits.............................. (449) --
Accrued National Insurance Contribution on options..... 2,520 --
Deferred revenue....................................... (675) (30)
-------- -------
Net cash used in operating activities................ (5,887) (2,407)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments........................... -- 1,001
Purchase of property and equipment, net.................. (1,385) (53)
Cash acquired in acquisition, net........................ 541 --
-------- -------
Net cash provided by (used in) investing activities.. (844) 948
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock................... 909 --
Proceeds from capital leases............................. -- 31
Repayment of capital lease obligations................... (232) (81)
-------- -------
Net cash provided by (used in) financing activities.. 677 (50)
-------- -------
Effect of exchange rate changes on cash.................... 112 (598)
-------- -------
Net decrease in cash and cash equivalents.................. (5,942) (2,107)
Cash and cash equivalents at the beginning of the period... 60,193 8,616
-------- -------
Cash and cash equivalents at the end of the period......... $ 54,251 $ 6,509
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
VIRATA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Basis of Presentation
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. On April 27, 2000, the Company completed the
acquisition of Inverness Systems Ltd., a provider of networking software
solutions (see Notes 6).
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.
On November 16, 1999, the Company completed its IPO of 11,500,000 shares of
Common Stock (including the exercise of the underwriters' overallotment
option) at $7.00 per share. Net proceeds to the Company were $73.4 million.
Effective October 3, 1999, the Company changed the fiscal year such that
each quarter ends on the Sunday closest to the calendar quarter end.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation of the Company's financial condition as of
July 2, 2000, and the results of its operations and its cash flows for the
three months ended July 2, 2000 and June 30, 1999. These financial statements
should be read in conjunction with the Company's audited financial statements,
including the notes thereto, and the other information set forth therein
included in the Company's Annual Report on Form 10-K for the fiscal year ended
April 2, 2000. Operating results for the three month period ended July 2, 2000
are not necessarily indicative of the operating results that may be expected
for the fiscal year ending April 1, 2001.
Note 2--Revenue Recognition
Revenues from the sale of both semiconductors and systems are recognized
upon shipment to customers. Allowances are provided for estimated returns at
the time of shipment. The Company recognizes software license revenue under
Statement of Position ("SOP") 97-2, Software Revenue Recognition, and SOP 98-
9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions. When contracts contain multiple elements and vendor-
specific objective evidence exists for all undelivered elements, the Company
accounts for the delivered elements in accordance with the "Residual Method"
prescribed by SOP 98-9. Software licenses are generally recognized as revenue
upon shipment of the software product. In the event the Company grants
customers the right to specified upgrades, license revenue is deferred until
delivery of the specific upgrade. If vendor-specific objective evidence of
fair value for the specified period does not exist, the entire license fee is
deferred until the delivery of the specified upgrade. The Company recognizes
revenues from
6
<PAGE>
VIRATA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
maintenance and support services provided to licensees ratably over the term
of the agreement, generally over one year, and recognizes revenues from design
services provided to customers as the services are performed.
Note 3--Earnings Per Share
Net loss per share
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards, ("SFAS") No. 128, "Earnings per Share" and SEC
Staff Accounting Bulletin ("SAB") No. 98. Under the provisions of SFAS No. 128
and SAB No. 98, basic and diluted net loss per share is computed by dividing
the net loss available to holders of common stock for the period by the
weighted average number of shares of common stock outstanding during the
period. The calculation of diluted net loss per share excludes potential
shares of common stock if their effect is anti-dilutive. Potential common
stock consists of shares of common stock issuable upon the exercise of stock
options and warrants and shares issuable upon conversion of the Series A, B,
C, and D convertible preferred stock.
Note 4--Supplemental Cash Flow Information (in thousands)
<TABLE>
<CAPTION>
Three Months
Ended
----------------
July 2, June 30,
2000 1999
------- --------
(unaudited)
<S> <C> <C>
Supplemental cash flow information
Cash paid for interest...................................... $ 81 $33
======= ===
Supplemental noncash investing and financing activity:
Issuance of stock and options in connection with
acquisition................................................ $97,600 $--
======= ===
Unearned compensation in connection with issuance of stock
options.................................................... $ -- $98
======= ===
</TABLE>
Note 5--Balance Sheet Components (in thousands)
<TABLE>
<CAPTION>
July 2, April
2000 2, 2000
----------- -------
(unaudited)
<S> <C> <C>
Accounts Receivable
Gross.................................................... $16,957 $ 7,819
Allowance for doubtful accounts.......................... (738) (295)
------- -------
$16,219 $ 7,524
======= =======
Property and equipment, net
Office equipment......................................... $ 5,420 $ 4,727
Furniture and fixtures................................... 338 254
Automobiles.............................................. 40 --
Leasehold improvements................................... 561 440
Research and development equipment....................... 3,958 3,426
------- -------
10,317 8,847
Less: Accumulated depreciation and amortization.......... (5,989) (5,625)
------- -------
$ 4,328 $ 3,222
======= =======
</TABLE>
7
<PAGE>
VIRATA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
July 2, April
2000 2, 2000
----------- -------
(unaudited)
<S> <C> <C>
Intangible assets
Goodwill................................................. $160,045 $75,572
Technology............................................... 25,382 15,872
Contracts................................................ 1,006 1,006
Customer base............................................ 2,141 1,001
Assembled workforce...................................... 1,340 760
Tradename................................................ 60 --
-------- -------
189,974 94,211
Less: Accumulated amortization........................... (15,130) (5,098)
-------- -------
$174,844 $89,113
======== =======
</TABLE>
Note 6--Acquisitions
Inverness Systems Ltd.
The Company acquired Inverness Systems, Ltd., a privately-held Israeli
company, on April 27, 2000. Inverness Systems maintains offices in Kfar Saba,
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 the
Company's common stock, with an aggregate value of approximately $77.6 million
(based on the fair market value of the Company's 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. The Company 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.
Based on a valuation by an independent appraiser, the purchase price of
Inverness Systems was allocated as follows:
<TABLE>
<S> <C>
Fair value of assets acquired and liabilities assumed............... $ 1,417
Assembled workforce................................................. 580
Customer base....................................................... 1,140
Tradename........................................................... 60
Technology.......................................................... 9,510
In-process research and development................................. 1,170
Goodwill............................................................ 84,473
-------
Total............................................................. $98,350
=======
</TABLE>
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
8
<PAGE>
VIRATA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
at 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 at a higher cost of
capital of 27.6% to reflect the uncertainty of its future use. The Company
does not consider it to have reached technological feasibility and, therefore,
charged it to operations upon acquisition.
The financial information for the three months ended July 2, 2000 includes
the results of operation for Inverness Systems from April 28, 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>
Three Months
Ended
------------------
July 2, June 30,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Revenues................................................. $ 27,697 $ 3,628
Net loss................................................. (15,420) (8,951)
Basic and diluted net loss per share..................... (0.32) (1.49)
</TABLE>
Note 7--National Insurance Contribution on options:
The charge for National Insurance Contribution on options is based on a tax
applied in the United Kingdom on the gain in our stock price for stock options
granted to our United Kingdom employees, both vested and unvested. The charge
is calculated on each option granted 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. Due primarily
to the significant movement in our stock price from April 2, 2000 to July 2,
2000, the charge recorded during the period was $2.5 million. The charge will
be revised quarterly to reflect the movement in our stock price at each future
balance sheet date. The allocation of the $2.5 million charge by department is
approximately $600,000 to research and development, approximately $500,000 to
sales and marketing, and approximately $1.4 million to general and
administrative.
Note 8--Comprehensive Loss (in thousands)
The components of comprehensive loss, net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months
Ended
-----------------
June
July 2, 30,
2000 1999
-------- -------
(unaudited)
<S> <C> <C>
Net loss................................................. $(12,785) $(3,015)
Other comprehensive income:
Change in accumulated currency translation
adjustments........................................... 329 (355)
-------- -------
Comprehensive loss....................................... $(12,456) $(3,370)
======== =======
</TABLE>
Note 9--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, approved by the
9
<PAGE>
VIRATA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's 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.
Note 10--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. Virata will
adopt SFAS No. 133 during its year ending March 31, 2002. To date, Virata has
not engaged in derivative or hedging activities. Virata 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 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. The Company does not expect the adoption of SAB 101 to have a
material effect on its results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25". FIN 44
clarifies the application of Opinion No. 25 for (a) the definition of employee
for purposes of applying Opinion No. 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequences 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. FIN 44 is effective July 1, 2000, but
certain conclusions cover specific events that occur after either December 15,
1998, or January 12, 2000. The adoption of certain provisions of FIN 44 prior
to March 31, 2000 did not have a material impact on the financial statements.
Management does not expect that the adoption of the remaining provisions will
have a material effect on the financial position or results of operations of
the Company.
Note 11--Subsequent Events
Acquisition of Excess Bandwidth Corporation
On June 20, 2000, the Company entered into a definitive agreement to
acquire Excess Bandwidth Corporation ("Excess Bandwidth"), 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, the Company expect to issue approximately
4,052,252 shares of its common stock, with an aggregate value of approximately
$202.5 million (based the fair market value of its common stock of $49.98), 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 the Company's common stock and an estimated 1,846,038 shares
of the Company's common stock subject to certain repurchase rights by the
Company, with an aggregate value of $112.5 million. The Company valued the
options and warrants using the Black-Scholes option pricing model. Including
direct
10
<PAGE>
VIRATA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
during the Company's fiscal quarter ending October 1, 2000.
The following unaudited pro forma financial information presents the
consolidated results of the Company as if the acquisition had occurred at the
beginning of each period, and includes adjustments for amortization of
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>
Three Months Ended
--------------------
July 2, June 30,
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
Revenues............................................... $ 27,696 $ 2,665
Net loss............................................... (35,514) (23,122)
Basic and diluted net loss per share................... (0.68) (2.88)
</TABLE>
Follow-On Offering
On July 13, 2000, the Company completed its follow-on offering of 6,855,000
shares of Common Stock (including the exercise of the underwriters'
overallotment option) at $71.00 per share. Net proceeds to the Company were
approximately $462 million.
Acquisition of Agranat Systems, Inc.
On July 24, 2000, the Company entered into a definitive agreement to
acquire Agranat Systems, Inc. ("Agranat"), a privately-held company with
offices in Maynard, Massachusetts, in a stock-for-stock transaction. Agranat
Systems, Inc. is a leading provider of embedded Web management solutions.
Through the EmWeb family, Agranat delivers the software technology,
development tools, and design support enabling developers to create web-
managed products. End users of these products can remotely access, configure,
and manage devices or applications via the Internet using a standard web
browser interface.
Under the terms of the agreement, the Company expects to issue
approximately 492,000 shares of its common stock, with an aggregate value of
approximately $27.1 million (based on the fair market value of its common
stock of $55.08), in exchange for all of the issued and outstanding capital
stock of Agranat Systems, including assumed options. The acquisition will be
accounted for as a purchase business combination and is expected to close
during the Company's fiscal quarter ending October 1, 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>
Three Months
Ended
------------------
July 2, June 30,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Revenues................................................. $ 28,615 $ 2,957
Net loss................................................. (14,917) (5,626)
Basic and diluted net loss per share..................... (0.30) (1.26)
</TABLE>
11
<PAGE>
ITEM 2--Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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 November 16, 1999, we completed our initial public offering of
11,500,000 shares of our common stock (including the exercise of the
underwriters' overallotment option) at $7.00 per share. Net proceeds to us
were $73.4 million.
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 a
definitive agreement to acquire privately-held Excess Bandwidth Corporation, a
developer of advanced algorithms for high-bandwidth communications
applications. On July 24, 2000, we entered into a definitive agreement to
acquire privately-held Agranat Systems, Inc., a leading provider of embedded
Web management solutions.
On March 21, 2000, the 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.
Subsequent to the period ending July 2, 2000, we completed our follow-on
offering of 6,855,000 shares of our common stock (including the exercise of
the underwriters' overallotment option) at $71.00 per share on July 13, 2000.
Net proceeds to us were approximately $462 million. In addition, certain of
our stockholders sold an aggregate of 620,000 shares of our common stock in
the follow-on offering pursuant to the same terms on which the company's
shares were sold.
Our revenues to date have been concentrated with a small number of
customers. We expect this concentration to continue. For the three months
ended July 2, 2000, Westell Technologies accounted for 34.2% of our total
revenues.
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For the three months ended June 30, 1999, Orckit Communications, Com21 and
Netpotia accounted for 39.8%, 17.2% and 10.2%, respectively, of our total
revenues.
International revenues accounted for 23.7% for the three months ended July
2, 2000, and 51.0% for the three months ended June 30, 1999. Sales to
customers in Israel represented 0.7%, and 40.0%, of total revenues for the
three months ended July 2, 2000, and June 30, 1999, respectively (see the
revenues by geographic region percentage breakdown in the table below). Almost
all of our international revenues are transacted 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, British
pounds sterling, and Israeli shekel.
<TABLE>
<CAPTION>
Three Months
Ended
----------------
July 2, June 30,
2000 1999
------- --------
<S> <C> <C>
Revenues by Geographic Region
North America............................................... 76.3% 49.0%
Asia........................................................ 21.6% 5.0%
Europe...................................................... 1.4% 6.0%
Israel...................................................... 0.7% 40.0%
</TABLE>
We recorded a charge for National Insurance Contribution on options, which
is based on a tax applied in the United Kingdom on the gain in our stock price
for stock options granted to our United Kingdom employees, both vested and
unvested. The charge is calculated on each option granted 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. Due primarily to the significant movement in our stock price from
April 2, 2000 to July 2, 2000, the charge recorded during the period was $2.5
million. The charge will be revised quarterly to reflect the movement in our
stock price at each future balance sheet date. The allocation of the $2.5
million charge by department is approximately $600,000 to research and
development, approximately $500,000 to sales and marketing, and approximately
$1.4 million to general and administrative.
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 July 2,
2000, we had an accumulated deficit of $89.5 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.
Forward-looking Statements
This Report contains a number 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 Quarterly Report. 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 Quarterly Report.
Results of Operations
Three Months Ended July 2, 2000 and June 30, 1999
Total Revenues
Total revenues increased 939.2% from $2.7 million for the three months
ended June 30, 1999 to $27.7 million for the three months ended July 2, 2000.
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Semiconductor revenues increased 1,412.7% to $21.5 million for the three
months ended July 2, 2000, compared to $1.4 million for the three months ended
June 30, 1999. As a growing number of software licensees began initial trials
and deployments of broadband access devices, semiconductor revenues increased
to 77.5% of total revenues for the three months ended July 2, 2000, compared
to 53.2% of total revenues for the three months ended June 30, 1999.
License revenues increased 1,417.2% to $4.2 million for the three months
ended July 2, 2000, compared to $274,000 for the three months ended June 30,
1999. License revenues also increased to 15.0% of total revenues for the three
months ended July 2, 2000, compared to 10.3% of total revenues for the three
months ended June 30, 1999. The increase in license revenues was primarily the
result of expanding our software licensee customer base and additional license
revenues earned by D2 Technologies and Inverness Systems.
Services and royalty revenues increased 159.5% to $ 968,000, or 3.5% of
total revenues, for the three months ended July 2, 2000, compared to $373,000,
or 14.0% of total revenues, for the three months ended June 30, 1999. The
increase in absolute dollars was primarily a result of expanding our licensee
customer base, including additional licenses earned by D2 Technologies and
Inverness Systems, thus increasing our service revenues, and additional
royalty revenues generated by D2 Technologies and Inverness Systems.
Systems revenues increased 84.6% to $1.1 million for the three months ended
July 2, 2000, compared to $599,000 for the three months ended June 30, 1999.
Although the systems revenues in absolute dollars increased, systems revenue
decreased to 4.0% of total revenues for the three months ended July 2, 2000
from 22.5% of total revenues for the three months ended June 30, 1999. This
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,
software maintenance and operations expense. Cost of revenues increased to
$14.9 million, or 53.7% of total revenues, for the three months ended July 2,
2000, from $1.3 million, or 47.8% of total revenues, for the three months
ended June 30, 1999.
Semiconductor gross margin decreased to 34.3% for the three months ended
July 2, 2000, from 42.8 % for the three months ended June 30, 1999. The
decrease was primarily due to the impact of an approximately $1.7 million
reserve for our older, lower margin Hydrogen product. This end-of-life
transition was successfully completed two quarters earlier than we originally
expected, allowing our customers to accelerate the introduction of lower cost
solutions. We believe our gross margin may continue to fluctuate as
semiconductors become a greater percentage of total revenues, and because
increased competition and more consumer oriented markets may impact average
selling price.
License gross margin was 97.0% for the three months ended July 2, 2000
primarily due to costs incurred with license contracts assumed following the
D2 Technologies and the Inverness Systems acquisitions. There were no costs of
revenues associated with our software license revenues for the three months
ended June 30, 1999.
Services and royalty gross margin improved to 80.8% for the three months
ended July 2, 2000 from 63.0% for the three months ended June 30, 1999 as the
result of a favorable mix of design services revenues and higher margin
royalty revenues following the D2 Technologies and the Inverness Systems
acquisitions.
Systems gross margin increased to 58.6% for the three months ended July 2,
2000 from 45.9% for the three months ended June 30, 1999. The increase was
primarily due to decreased operations support related to systems products and
a narrower systems product range.
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Research and Development Expenses
Research and development expenses consist primarily of engineering staffing
costs and technology license fees. Research and development expenses increased
97.4% to $5.0 million for the three months ended July 2, 2000, from $2.5
million for the three months ended June 30, 1999. 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 and Inverness Systems. In the three
months ended July 2, 2000, a charge of approximately $600,000 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.
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 373.0% to $4.4 million for
the three months ended July 2, 2000, from $923,000 for the three months ended
June 30, 1999. The increase was primarily due to the addition of sales and
marketing personnel and increased sales commissions associated with higher
revenues. In the three months ended July 2, 2000, a charge of approximately
$500,000 was recorded for National Insurance Contribution on options for the
sales and marketing group. See "National Insurance Contribution on Options"
below.
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 267.4% to $3.3 million for the three months
ended July 2, 2000, from $903,000 for the three months ended June 30, 1999.
The increase was primarily due to increased staff and the addition of costs as
a result of being a publicly traded company. In the three months ended July 2,
2000, a charge of approximately $1.4 million was recorded for National
Insurance Contribution for the general and administrative group. See "National
Insurance Contribution on Options" below.
National Insurance Contribution on Options
The charge for National Insurance Contribution on options is based on a tax
applied in the United Kingdom on the gain in our stock price for stock options
granted to our United Kingdom employees, both vested and unvested. The charge
is calculated on each option granted 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. Due primarily
to the significant movement in our stock price from April 2, 2000 to July 2,
2000, the charge recorded during the period was $2.5 million. The charge will
be revised quarterly to reflect the movement in our stock price at each future
balance sheet date. The allocation of the $2.5 million charge by department is
approximately $600,000 to research and development, approximately $500,000 to
sales and marketing, and approximately $1.4 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, the acquisition of D2 Technologies, which occurred in February
2000, and the acquisition of Inverness Systems, which occurred in April 2000.
Amortization of intangible assets for the three months ended July 2, 2000 was
approximately $9.9 million. We are amortizing the intangible assets over the
expected lives of the assets of between 24 to 60 months.
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<PAGE>
Amortization of Stock Compensation
Through July 2, 2000, we recorded a total of $3.4 million of unearned stock
compensation. We recognized amortization of stock compensation of
approximately $150,000 for the three months ended July 2, 2000, and $266,000
for the three months ended June 30, 1999. 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 three months ended July 2, 2000, the expense relates to the April
2000 acquisition of Inverness Systems. Based on a valuation by an independent
appraiser, approximately $1.2 million of the $98.4 million purchase price was
allocated to in-process research and development. 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 at 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 at 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.
Interest Expense
Interest expense increased to approximately $95,000 for the three months
ended July 2, 2000 from approximately $49,000 for the three months ended June
30, 1999. The increase 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, and foreign exchange gains
and losses. Interest income for the three months ended July 2, 2000 and June
30, 1999 was approximately $1.1 million and $91,000, respectively. Interest
income for each three month period corresponded to the average cash balance
during the period. During the three months ended July 2, 2000, foreign
exchange gain was approximately $1,000. During the three months ended June 30,
1999, the foreign exchange gain was approximately $386,000.
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 July 2,
2000.
Our cash and cash equivalents together with our short-term investments
decreased $5.8 million to $72.4 million for the three months ended July 2,
2000. The decrease in these accounts was primarily due to cash used in
operations. Our cash and cash equivalents decreased $5.9 million to $54.3
million for the three months ended July 2, 2000.
Net cash used in operating activities for the three months ended July 2,
2000 of $5.9 million was primarily due to a net loss of $12.8 million, an
increase in accounts receivables, inventories, and other assets of
$7.3 million, $1.9 million, and $392,000 respectively, and a decrease in
accrued liabilities, accrued employee benefits, and deferred revenue of $1.0
million, $449,000, and $675,000 respectively, partially offset by depreciation
and amortization of $10.5 million, amortization of stock compensation of
$150,000, acquired in-process research and development expenses in connection
with the acquisition of Inverness Systems of
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<PAGE>
$1.2 million, a decrease in other current assets of $434,000, and increases in
accounts payable, and accrued National Insurance Contribution on options of
$3.8 million and $2.5 million, respectively. Net cash used in operating
activities for the three months ended June 30, 1999 of $2.4 million was
primarily due to net operating losses of $3.1 million and an increase in
current assets of $624,000, partially offset by depreciation and amortization
of $643,000, amortization of stock compensation of $266,000, and an increase
in accrued liabilities of $485,000.
Net cash used in investing activities was $844,000 for the three months
ended July 2, 2000, which reflected $541,000 of cash received in connection
with our acquisition of Inverness, net of cash acquisition expenses, and net
purchases of property and equipment of $1.4 million. Net cash provided by
investing activities was $948,000 for the three months ended June 30, 1999,
primarily due to sales of short-term investments.
Net cash provided by financing activities was $677,000 for the three months
ended July 2, 2000. Net cash provided by financing activities was attributable
primarily to proceeds from the issuance of common stock through our employee
stock purchase plan and employee stock option plan of $909,000, partially
offset by repayments on capital lease obligations of $232,000. Net cash used
by financing activities was $50,000 for the three months ended June 30, 1999
primarily due to proceeds from equipment lease financing less repayments on
capital lease obligations.
Our working capital at July 2, 2000 was approximately $69.4 million as
compared to $70.6 million at April 2, 2000. Our current ratio decreased to 3.9
to 1.0, as of July 2, 2000, from 4.8 to 1.0, as of April 2, 2000.
Subsequent to the period ending July 2, 2000, we completed a follow-on
offering of 6,855,000 shares of Common Stock (including the exercise of the
underwriters' overallotment option) at $71.00 per share on July 13, 2000. Net
proceeds to us were approximately $462 million.
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 July 2, 2000 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.
Risk Factors
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
17
<PAGE>
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 $12.8 million, $26.1
million, $17.2 million and $10.3 million for the three months ended July 2,
2000, 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;
. 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.
18
<PAGE>
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.
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
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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 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.
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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.
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.
Because our customer base is concentrated, the loss of one or more of our
customers may result in a loss of a significant amount of our revenues.
A relatively small number of customers account for a large percentage of
our total revenues. We expect this trend to continue. Our business will be
seriously harmed if we do not generate as much revenue as we expect from these
customers, experience a loss of any of our significant customers or suffer a
substantial reduction in
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orders from these customers. For the three months ended July 2, 2000, Westell
Technologies accounted for 34.2% of our total revenues. For the three months
ended June 30, 1999, Orckit Communications, Com21 and Netpotia accounted for
39.8%, 17.2% and 10.2%, 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.
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 three months ended July 2, 2000, approximately 76.6%, 21.9% and
1.4%, respectively, of our semiconductor revenues were generated from sales of
our Helium products, Hydrogen products, and our Proton family. We expect that
our Proton family and Hydrogen products will represent a diminishing
proportion of our
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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.
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
Significant portions 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
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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 three months ended July 2,
2000, the charge recorded was $2.5 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.
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 23.7% of our total revenues for the
three months ended July 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 agreements to acquire Excess
Bandwidth Corporation, a privately held corporation based in Cupertino,
California and Agranat Systems Inc, a privately-held company with offices in
Maynard, Massachusetts. Our continued success will depend significantly on our
ability to integrate these new operations and new personnel. We expect that
further
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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 Symmetric DSL 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. 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 agreements to acquire Excess Bandwidth Corporation, a privately
held corporation based in Cupertino, California, and Agranat Systems Inc, a
privately-held company with offices in Maynard, Massachusetts. Excess
Bandwidth develops advanced algorithms for high-bandwidth communications
applications and implements those algorithms as communications processors and
Agranat Systems delivers the software technology, development tools, and
design support enabling developers to create web-managed products. We cannot
assure you that the anticipated acquisitions 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;
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. 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 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 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
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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, Intel, Lucent Technologies, Motorola and Texas
Instruments. In addition, there have been a number of announcements by other
semiconductor companies 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 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.
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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.
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
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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 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.
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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 competition;
. 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.
ITEM 3--Quantitative And Qualitative Disclosure 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 July 2, 2000, all of our investments were
in money market funds, certificates of deposits or high quality commercial
paper.
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. Management believes that the
market risk associated with the Company's market risk sensitive instruments as
of July 2, 2000 is not material.
30
<PAGE>
PART II--OTHER INFORMATION
ITEM 1--Legal Proceedings.
None.
ITEM 2--Changes In Securities and Use of Proceeds.
The Company acquired Inverness Systems Ltd. on April 27, 2000. In
connection with the acquisition, the Company issued 2,006,440 shares of its
common stock to the shareholders of Inverness Systems in exchange for all of
the issued and outstanding capital stock of Inverness Systems. The shares were
issued pursuant to exemptions by reason of Section 4 (2) and Regulation S of
the Securities Act of 1933. These sales were made in private transactions
without general solicitation or advertising. Also in connection with the
acquisition, the Company assumed options to purchase 517,896 shares of our
common stock. The Company filed a Registration Statement on Form S-8 with
respect to the shares of our stock issuable upon exercise of such options on
May 23, 2000.
ITEM 3--Defaults Upon Senior Securities.
None.
ITEM 4--Submission Of Matters To A Vote Of Security Holders.
The Company held a special meeting of shareholders on May 1, 2000. At such
meeting, the following actions were voted upon:
Proposal to approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
the Company's Common Stock from 40,000,000 to 450,000,000 to accommodate a 2
for 1 stock split of the Company's Common Stock and to provide the Company
with adequate flexibility in the future with respect to the issuance of its
Common Stock.
<TABLE>
<CAPTION>
Votes
Votes For Against Withheld Abstentions Non-Votes
--------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C>
13,001,748 683,456 0 0 9,619,639
</TABLE>
ITEM 5--Other Information.
None.
ITEM 6--Exhibits And Reports On Form 8-K
<TABLE>
<CAPTION>
Exhibits
--------
<C> <S>
2.1 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+*
2.2 Agreement and Plan of Merger among Virata Corporation, Excess
Bandwidth Corporation, VC Acquisition, Inc. and Steve Dines, as
Security holder 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***
10.1 Registration Rights Agreement by and among Virata Corporation and
Jonathan Masel, as Shareholders' Agent, dated April 27, 2000***
27.1 Financial Data Schedule
</TABLE>
31
<PAGE>
--------
+ Filed without schedules.
* Incorporated by reference to the Company's Current Report on Form 8-K
filed on April 3, 2000.
** Incorporated by reference to the Company's Current Report on Form 8-K
filed on June 22, 2000.
*** Incorporated by reference to the Company's Form 10-K for the fiscal year
ended April 2, 2000 filed on June 6, 2000.
Reports on Form 8-K
The Company filed four reports on Form 8-K during the three months ended
July 2, 2000. Information regarding the items reported on is as follows:
<TABLE>
<CAPTION>
Date Item Reported On
---- ----------------
<C> <S>
April 3, 2000 The Company announced its agreement to acquire Inverness
Systems, Ltd.
April 21, 2000 The Company reported consolidated financial statements
reflecting the acquisition of D2 Technologies, Inc.
May 5, 2000 The Company announced the completion of the acquisition of
Inverness Systems, Ltd.
June 22, 2000 The Company announced its agreement to acquire Excess
Bandwidth Corporation.
</TABLE>
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
VIRATA CORPORATION
/s/ Charles Cotton
Date: August 16, 2000 By __________________________________
Charles Cotton
Chief Executive Officer
(Principal Executive Officer)
/s/ Andrew Vought
Date: August 16, 2000 By __________________________________
Andrew Vought
Chief Financial Officer,
Senior Vice President Finance and
Administration and Secretary
(Principal Accounting Officer)
33
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1 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+*
2.2 Agreement and Plan of Merger among Virata Corporation, Excess
Bandwidth Corporation, VC Acquisition, Inc. and Steve Dines, as
Security holder 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***
10.1 Registration Rights Agreement by and among Virata Corporation and
Jonathan Masel, as Shareholders' Agent, dated April 27, 2000***
27.1 Financial Data Schedule
</TABLE>
--------
+ Filed without schedules.
* Incorporated by reference to the Company's Current Report on Form 8-K
filed on April 3, 2000.
** Incorporated by reference to the Company's Current Report on Form 8-K
filed on June 22, 2000.
*** Incorporated by reference to the Company's Form 10-K for the fiscal year
ended April 2, 2000 filed on June 6, 2000.
34
