<PAGE>
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 January 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)
_______________
Delaware 77-0521696
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2933 Bunker Hill Lane, Santa Clara, California 95054
(Address of principal executive offices) (zip code)
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 February 10, 2000, there were 22,666,339 shares of the Registrant's Common
Stock outstanding, par value $0.001.
1
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VIRATA CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
-----
<S> <C>
PART I. Financial Information
---------------------
Item 1 Condensed Consolidated Financial Statements (unaudited) 3
Condensed Consolidated Balance Sheet as of January 2, 2000 and March 31, 1999 3
Condensed Consolidated Statement of Operations for the three and 4
nine month periods ended January 2, 2000 and December 31, 1998
Condensed Consolidated Statement of Cash Flows for the nine month periods ended 5
January 2, 2000 and December 31, 1998
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3 Quantitative and Qualitative Disclosure about Market Risk 24
PART II. Other Information
-----------------
Item 1 Legal Proceedings 25
Item 2 Changes in Securities and Use of Proceeds 25
Item 3 Defaults Upon Senior Securities 25
Item 4 Submission of Matters to a Vote of Security Holders 25
Item 5 Other Information 26
Item 6 Exhibits and Reports on Form 8-K 26
Signatures 27
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1 - Condensed Consolidated Financial Statements.
VIRATA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
January 2, March 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 81,055 $ 8,616
Short-term investments -- 1,001
Accounts receivable, net 2,233 2,267
Inventories 1,374 264
Other current assets 1,995 1,232
--------- ---------
Total current assets 86,657 13,380
Property and equipment, net 2,862 2,479
Intangible assets 2,768 3,328
--------- ---------
Total assets $ 92,287 $ 19,187
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,895 $ 2,112
Accrued liabilities 2,493 1,887
Deferred revenue 575 489
Capital lease obligation, current 946 850
--------- ---------
Total current liabilities 6,909 5,338
Capital lease obligation, long-term 1,386 1,130
--------- ---------
Total liabilities 8,295 6,468
Stockholders' equity:
Convertible preferred stock -- 801
Common stock 20 211
Additional paid-in capital 145,463 62,964
Accumulated other comprehensive income 932 871
Unearned stock compensation (888) (1,500)
Accumulated deficit (61,535) (50,628)
--------- ---------
Total stockholders' equity 83,992 12,719
--------- ---------
Total liabilities and stockholders' equity $ 92,287 $ 19,187
========= =========
</TABLE>
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 Nine Months Ended
January 2, December 31, January 2, December 31,
2000 1998 2000 1998
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Revenues:
Semiconductor $ 2,430 $ 425 $ 5,923 $ 2,122
License 994 175 1,522 1,184
Services and royalty 307 700 1,115 1,775
Systems 338 417 1,186 1,757
-------- ------- --------- --------
Total revenues 4,069 1,717 9,746 6,838
-------- ------- --------- --------
Cost of revenues:
Semiconductor 1,659 246 3,600 1,579
License -- -- -- --
Services and royalty 146 138 484 367
Systems 115 374 606 1,075
-------- ------- --------- --------
Total cost of revenues 1,920 758 4,690 3,021
-------- ------- --------- --------
Gross profit 2,149 959 5,056 3,817
-------- ------- --------- --------
Operating expenses:
Research and development 3,045 2,553 8,175 6,139
Selling and marketing 1,192 710 3,088 2,091
General and administrative 1,477 965 3,780 4,064
Amortization of intangible assets 183 206 553 343
Amortization of stock compensation 206 363 711 1,046
Acquired in-process research and development -- -- -- 5,260
-------- ------- --------- --------
Total operating expenses 6,103 4,797 16,307 18,943
-------- ------- --------- --------
Loss from operations (3,954) (3,838) (11,251) (15,126)
Interest expense (74) (25) (166) (127)
Interest and other income (expense), net 693 673 510 368
-------- ------- --------- --------
Net loss $ (3,335) $(3,190) $ (10,907) $(14,885)
======== ======= ========= ========
Basic and diluted net loss per share $ (0.29) $ (1.60) $ (2.12) $ (7.85)
======== ======= ========= ========
Weighted average common shares - basic and
diluted 11,429 1,989 5,139 1,897
======== ======= ========= ========
Pro forma basic and diluted net loss per share $ (0.19) $ (0.24) $ (0.74) $ (1.11)
======== ======= ========= ========
Pro forma weighted average common shares -
basic and diluted 17,419 13,521 14,824 13,429
======== ======= ========= ========
</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>
Nine Months Ended
January 2, December 31,
2000 1998
---------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (10,907) $(14,885)
Adjustments to reconcile net (loss) to net cash used in operating
activities:
Provision for doubtful accounts and returns 157 1,334
Acquired in-process research and development expenses -- 5,260
Depreciation and amortization 1,709 1,185
Amortization of stock compensation 711 1,046
Change in assets and liabilities (net of acquisition balances):
Accounts receivable (147) 293
Inventories (1,118) (308)
Other current assets (809) 100
Accounts payable 844 (354)
Accrued liabilities 608 (1,030)
Deferred revenue 106 79
---------- --------
Net cash used in operating activities (8,846) (7,280)
---------- --------
Cash flows from investing activities:
Sale of short-term investments 1,001 --
Purchase of short-term investments -- (1,000)
Purchase of property and equipment, net (602) (859)
Acquisitions, net of cash acquired -- (5,149)
---------- --------
Net cash provided by (used in) investing activities 399 (7,008)
---------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible preferred stock 7,954 25,106
Proceeds from issuance of common stock 73,432 5
Repayment of capital lease obligations (652) (253)
Repayment of bank borrowings -- (417)
---------- --------
Net cash provided by financing activities 80,734 24,441
---------- --------
Effect of exchange rate changes on cash 152 578
---------- --------
Net increase in cash and cash equivalents 72,439 10,731
Cash and cash equivalents at the beginning of the period 8,616 767
---------- --------
Cash and cash equivalents at the end of the period $ 81,055 $ 11,498
========== ========
</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") provides communication processors combined
with integrated software modules to manufacturers of equipment utilizing digital
subscriber line ("DSL") technologies.
The Company's predecessor, Virata Limited, 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 predecessor company changed its name to Virata Limited. In July 1998, the
predecessor company completed its acquisition of RSA Communications, Inc.
("RSA"), a corporation organized in North Carolina. RSA was subsequently
renamed to Virata Raleigh Corporation. Effective October 3, 1999, the Company
changed its fiscal year such that each quarter ends on the Sunday closest to
the calendar quarter end. On October 12, 1999, Virata Limited issued 6,153,846
shares of series E convertible preferred stock at a purchase price of $1.30
per share in exchange for $8.0 million. In November 1999, the Company became
the holding company of Virata Limited, pursuant to a reorganization effected
as a share reconstruction under Section 425 of the United Kingdom Companies
Act of 1985. The reorganization has been accounted for on a historical basis.
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 January 2, 2000, the
results of its operations for the three and nine months ended January 2, 2000
and December 31, 1998 and its cash flows for the nine months ended January 2,
2000 and December 31, 1998. These financial statements should be read in
conjunction with the company's audited March 31, 1999 financial statements,
including the notes thereto, and the other information set forth therein
included in the Company's Registration Statement on Form S-1 (File No. 333-
86591). Operating results for the three and nine month periods ended January 2,
2000 are not necessarily indicative of the operating results that may be
expected for the year ending April 2, 2000.
On November 17, 1999, the Company completed its initial public offering of
5,750,000 shares of Common Stock (including the exercise of the underwriters'
overallotment option) at $14.00 per share. Net proceeds to the Company were
$73.4 million.
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 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.
6
<PAGE>
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 net
loss per share for the three and nine months ended January 2, 2000 and December
31, 1998 have been computed using the weighted average number of shares of
common stock outstanding, including the effect of the cancellation of all
outstanding ordinary and convertible preference shares of Virata Limited and the
issuance of shares of common stock of Virata Corporation in connection with the
reorganization. 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.
Pro forma net loss per share
Pro forma net loss per share for the three and nine months ended January 2,
2000 and December 31, 1998 have been computed using the weighted average
number of shares of common stock outstanding, including the pro forma effects
of: (i) the cancellation of all outstanding ordinary and convertible
preference shares and all other securities which are convertible into ordinary
or preference shares of Virata Limited, and (ii) the issuance of new ordinary
shares of Virata Limited to Virata Corporation and the issuance of shares of
common stock of Virata Corporation to the former shareholders of Virata
Limited. The resulting pro forma adjustment includes an increase in the
weighted average shares used to compute basic net loss per share for the three
and nine months ended January 2, 2000 and December 31, 1998. The calculation
of diluted net loss per share excludes potential shares of common stock as
their effect would be anti-dilutive.
The following table is a reconciliation of the numerators and denominators of
the basic and pro forma loss per share in thousands, except per share data:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 2, December 31, January 2, December 31,
2000 1998 2000 1998
----------- ----------- ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
Net loss used to compute net loss per common
share $ (3,335) $ (3,190) $ (10,907) $ (14,885)
========== ========== ========== ===========
Denominator used to compute basic and diluted
net loss per common share 11,429 1,989 5,139 1,897
Weighted average effect of pro forma conversion
of preferred stock 5,990 11,532 9,685 11,532
---------- ---------- ---------- -----------
Denominator used to compute pro forma net loss
per common share 17,419 13,521 14,824 13,429
========== ========== ========== ===========
Net loss per share - Basic and diluted $ (0.29) $ (1.60) $ (2.12) $ (7.85)
========== ========== ========== ===========
Net loss per share - Pro forma $ (0.19) $ (0.24) $ (0.74) $ (1.11)
========== ========== ========== ===========
</TABLE>
7
<PAGE>
Note 4--Supplemental Cash Flow Information (in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
January 2, December 31,
2000 1998
----------- -----------
(unaudited)
<S> <C> <C>
Supplemental noncash investing and financing activity:
Issuance of preferred stock for convertible loan............. $ -- $2,712
Issuance of stock and options in connection with acquisition. $ -- $2,912
Unearned compensation in connection with issuance of stock $ -- $ 98
options.....................................................
Issuance of warrants in connection with financing............ $ -- $ 949
</TABLE>
Note 5--Balance Sheet Components (in thousands)
<TABLE>
<CAPTION>
January 2, March 31,
2000 1999
-------- -------
(unaudited)
<S> <C> <C>
Accounts Receivable
Gross................................................ $2,477 $5,009
Allowance for doubtful accounts...................... (244) (2,742)
------ -----
Net.................................................. $2,233 $2,267
====== =====
</TABLE>
Note 6 -- Comprehensive Loss (in thousands)
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
Nine months ended Nine months ended
January 2, 2000 December 31, 1998
------------------------ ---------------------------
(unaudited)
<S> <C> <C>
Net loss................................................ $ (10,907) $(14,885)
Other comprehensive income
change in accumulated translation adjustments.......... (61) (203)
Total comprehensive income.............................. $ (10,968) $(15,088)
</TABLE>
Note 7--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.
8
<PAGE>
Note 8--Subsequent Events
The Company completed its acquisition of D2 Technologies, Inc. on February 10,
2000. D2 Technologies, a leading supplier of telephony and voice over IP
software, was privately-held and based in Santa Barbara, California. The
Company's acquisition of D2 Technologies will be accounted for using the
purchase method of accounting.
The total purchase price of $90 million, based on an agreed upon price per
share of the Company's common stock of $36.00 at the time the merger
agreement was executed, consisted of the issuance of 2,198,413 shares of the
Company's common stock, 466,165 options to purchase the Company's common
stock. The Company also incurred acquisition related expenses of approximately
$4.3 million consisting primarily of commissions, legal and other professional
fees.
The valuation of the acquired assets will be based on an independent appraisal.
The valuation is expected to be completed prior to April 2, 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, excluding adjustments for amortization of goodwill.
This pro forma financial information is not intended to be indicative of future
results. Unaudited pro forma consolidated results of operations are as follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
Nine months ended Nine months ended
January 2, 2000 December 31, 1998
------------------------ ---------------------------
(unaudited)
<S> <C> <C>
Revenues................................. $ 12,096 $ 8,654
Net loss................................. (10,510) (16,878)
Basic and diluted net loss per share..... (1.43) (4.12)
</TABLE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
Our predecessor, Virata Limited was incorporated in March 1993 in Cambridge,
England, as a spin-out from the Olivetti Research Laboratories (now AT&T
Laboratories). Until 1995, we were a development-stage company focused primarily
on product development. From our first production revenue shipment in April 1995
through March 1996, we focused on developing and delivering ATM-based, board-
level systems primarily for local area network applications. In mid-1996, we
began licensing our software suite and selling our semiconductors to developers
of broadband access products. In September 1997, we ceased development of our
systems products and focused exclusively on expanding our software offering and
developing additional semiconductors for the broadband marketplace with a focus
on the digital subscriber line, or DSL market.
In February 1998, the predecessor company changed its name to Virata Limited. In
July 1998, the predecessor company completed its acquisition of RSA
Communications, Inc. ("RSA"), a corporation organized in North Carolina. RSA was
subsequently renamed to Virata Raleigh Corporation. Effective October 3, 1999,
the Company changed its fiscal year such that each quarter ends on the Sunday
closest to the calendar quarter end. In November 1999, the Company became the
holding company of Virata Limited, pursuant to a reorganization effected as a
share reconstruction under Section 425 of the United Kingdom Companies Act of
1985.
We generate revenues from sales of semiconductors, systems-level products,
software licenses, maintenance, royalties and related design services.
Semiconductor revenues have come from two sources, our Proton family of
application specific integrated circuit ("ASIC") products and our ATOM family of
application specific standard parts ("ASSP"). An original equipment
manufacturer, or OEM, licenses our software, which permits them to purchase our
semiconductors for use in their products. We support our licensee customers
through the sale of maintenance contracts and design services. Since September
1997, we have sold our systems-level products primarily to one customer, and we
expect sales of these products to decline. We sell our products through a direct
sales force, which we believe most effectively allows us to serve our customers.
We also utilize sales representatives in Korea and Taiwan.
Our revenues to date have been concentrated with a small number of customers. We
expect this concentration to continue. For the fiscal year ended March 31, 1999,
two customers accounted for 22.6% and 15.7%, respectively, of our total
revenues. For the nine months ended December 31, 1998, three customers accounted
for 22.1%, 15.9% and 12.1%, respectively, of our total revenues. For the nine
months ended January 2, 2000, four customers accounted for 35.2%, 9.5%, 9.4% and
9.2%, respectively, of our total revenues.
International revenues accounted for 40.3% of our total revenues for the fiscal
year ended March 31, 1999, 53.5% of our total revenues for the nine months ended
December 31, 1998 and 43.1% of our total revenues for the nine months ended
January 2, 2000. International revenues are denominated solely in U.S. dollars,
which reduces our exposure to fluctuations in revenues attributable to changes
in
9
<PAGE>
foreign currency exchange rates. However, we experience risks inherent in
international business. These risks include extended collection time for
receivables, reduced ability to enforce contractual obligations and reduced
protection of our intellectual property. Our material costs are denominated in
U.S. dollars and our operating expenses are split between U.S. dollars and
British pounds sterling.
Our 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 January 2, 2000, we
had an accumulated deficit of $61.5 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 forward-looking statements, which reflect the Company's
current views with respect to future events, which may impact the Company's
results of operations and financials condition. In this Report, the words
"anticipates", "believes", "expects", "intends", "future" and similar
expressions identify forward-looking statements. These forward-looking
statements are subject to risks and uncertainties and other factors, including
without limitation those set forth below under the caption "Factors Which May
Affect Future Results," which could cause actual future results to differ
materially from historical results or those described in the forward-looking
statements. The forward-looking statements contained in this Report should be
considered in light of these and other factors. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of the date hereof.
Results of Operations
Three Months Ended December 31, 1998 and January 2, 2000
Total Revenues
Total revenues increased 137.0% from $1.7 million for the three months ended
December 31, 1998 to $4.1 million for the three months ended January 2, 2000.
Semiconductor and license revenues increased substantially while services and
royalty, and systems revenues decreased.
Semiconductor revenues increased 471.8% from $425,000 for the three months ended
December 31, 1998 to $2.4 million for the three months ended January 2, 2000.
The increase in semiconductor revenues, from 24.8% of total revenues for the
three months ended December 31, 1998 to 59.7% of total revenues for the three
months ended January 2, 2000, was due primarily to a substantial increase in
shipments of semiconductors to four customers. Sales to these customers totaled
$1.7 million in the three months ended January 2, 2000.
License revenues increased 468.0% from $175,000 for the three months ended
December 31, 1998 to $1.0 million for the three months ended January 2, 2000.
The increase in license revenues, from 10.2% of total revenues for the three
months ended December 31, 1998 to 24.4% of total revenues for the three months
ended January 2, 2000, was due primarily to an increase in the number of
licensees.
Services and royalty revenues decreased 56.1% from $700,000 for the three months
ended December 31, 1998 to $307,000 for the three months ended January 2, 2000.
The decrease in services and royalty revenues, from 40.8% of total revenues for
the three months ended December 31, 1998 to 7.5% of total revenues for the three
months ended January 2, 2000, was due primarily to a decrease in revenues
contributed by analog modem consulting engineering agreements.
Systems revenues decreased 18.9% from $417,000 for the three months ended
December 31, 1998 to $338,000 for the three months ended January 2, 2000. The
decrease in systems revenues, from 24.3% of total revenues for the three months
ended December 31, 1998 to 8.3% of total revenues for the three months ended
January 2, 2000, was the result of our decision in September 1997 to focus our
efforts on semiconductor sales.
Cost of Revenues and Gross Margin
Total cost of revenues consists primarily of costs paid to foundry vendors to
manufacture our semiconductors, costs attributable to design services and
software maintenance and operations expense.
10
<PAGE>
The increase in total cost of revenues, from $758,000 or 44.1% of total
revenues for the three months ended December 31, 1998 to $1.9 million 47.2% of
total revenues for the three months ended January 2, 2000, was primarily due
to the increase in cost associated with higher semiconductor unit sales.
Semiconductor gross margin decreased from 42.1% for the three months ended
December 31, 1998 to 31.7% for the three months ended January 2, 2000,
primarily due to product mix and an increase in sales volume discounts during
the three months ended January 2, 2000.
There are no costs of revenues associated with our software license revenues. As
noted above, license revenues increased 468.0% for the three months ended
January 2, 2000 as compared to the three months ended December 31, 1998. The
revenue increase positively impacted our total gross margin.
Services and royalty gross margin decreased from 80.3% for the three months
ended December 31, 1998 to 52.4% for the three months ended January 2, 2000,
primarily due to the result of costs incurred for design services.
Systems products gross margin increased from 10.3% for the three months ended
December 31, 1998 to 66.0% for the three months ended January 2, 2000, due
primarily to a change in customer mix.
Research and Development Expenses
Research and development expenses consist primarily of engineering staffing
costs and technology license fees. Research and development expenses increased
19.3% from $2.6 million for the three months ended December 31, 1998 to $3.0
million for the three months ended January 2, 2000. The increase was primarily
due to the addition of research and development personnel as a result of
accelerated new product development. In comparison to the previous period, the
number of new products under development increased substantially. We expect
research and development expenses to increase in absolute dollar amounts in
future periods as we further expand our research and development organization
and acquire additional intellectual property for inclusion in semiconductor
device designs.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee salaries, sales
commissions, travel and related costs, promotional materials and trade show
expenses. Sales and marketing expenses increased 67.9% from $710,000 for the
three months ended December 31, 1998 to $1.2 million for the three months
ended January 2, 2000. The increase was primarily due to the addition of sales
and marketing personnel and increased sales commissions associated with higher
revenues. We expect sales and marketing expenses to increase in absolute
dollar amounts in future periods as sales and marketing activities increase.
General and Administrative Expenses
General and administrative expenses consist primarily of employee salaries and
costs associated with legal, accounting and other professional service fees as
well as general corporate expenses. General and administrative expenses
increased 53.1% from $1.0 million for the three months ended December 31, 1998
to $1.5 million for the three months ended January 2, 2000. The increase was
primarily due to increased staff. We expect general and administrative
expenses to increase in absolute dollar amounts as we further invest in
infrastructure and incur additional expenses related to the anticipated growth
of our business and operation as a publicly held company.
11
<PAGE>
Amortization of Intangible Assets
Amortization of intangible assets is related to the intangible assets acquired
in the acquisition of RSA, which occurred in July 1998. Amortization of
intangible assets expense decreased 11.2% from $206,000 for the three months
ended December 31, 1998 to $183,000 for the three months ended January 2, 2000.
We are amortizing the intangible assets on a straight-line basis over 60 months
beginning in the quarter ended September 30, 1998.
Amortization of Stock Compensation
Through January 2, 2000, we recorded a total of $3.4 million of unearned stock
compensation. We recognized amortization of stock compensation of $363,000 for
the three months ended December 31, 1998 and $206,000 for the three months
ended January 2, 2000. We are amortizing the unearned stock compensation over
48 months.
Interest Expense
Interest expense resulted primarily from interest expense related to obligations
under capital leases and our revolving credit facility. Interest expense
increased from $25,000 for the three months ended December 31, 1998 to $74,000
for the three months ended January 2, 2000.
Interest Income and Other Income (Expense), Net
Interest income and other income (expense), net consists primarily of interest
earned on cash and cash equivalents, short-term investments and foreign
currency translation adjustments. Interest income and other income (expense),
net increased from $673,000 for the three months ended December 31, 1998 to
$693,000 for the three months ended January 2, 2000. The increase in interest
income and other income (expense), net was primarily due to higher average
cash balances in the three months ended January 2, 2000.
Income Taxes
Since inception, we have incurred net losses for federal and state tax purposes
and have not recognized any tax provision or benefit.
Nine Months Ended December 31, 1998 and January 2, 2000
Total Revenues
Total revenues increased 42.5% from $6.8 million for the nine months ended
December 31, 1998 to $9.7 million for the nine months ended January 2, 2000.
Semiconductor revenues increased 179.1% from $2.1 million for the nine months
ended December 31, 1998 to $5.9 million for the nine months ended January 2,
2000. The increase in semiconductor revenues, from 31.0% of total revenues for
the nine months ended December 31, 1998 to 60.8% of total revenues for the nine
months ended January 2, 2000, was due primarily to a substantial increase in
shipments of semiconductors to four customers. Sales to these customers totaled
$5.2 million in the nine months ended January 2, 2000.
License revenues increased 28.5% from $1.2 million for the nine months ended
December 31, 1998 to $1.5 million for the nine months ended January 2, 2000.
As a percentage of total revenue, license revenues decreased from 17.3% of
total revenues for the nine months ended December 31, 1998 to 15.6% of total
revenues for the nine months ended January 2, 2000. The increase in license
revenues was due primarily to an increase in the number of licensees, offset
by a substantial decrease in the average selling price for software licenses.
Services and royalty revenues decreased 37.2% from $1.8 million for the nine
months ended December 31, 1998 to $1.1 million for the nine months ended
January 2, 2000. The decrease in services and royalty revenues, from 26.0% of
total revenues for the nine months ended December 31, 1998 to 11.4% of total
revenues for the nine months ended January 2, 2000, was due primarily to the
reduction in royalty revenues from two customers.
Systems revenues decreased 32.5% from $1.8 million for the nine months ended
December 31, 1998 to $1.2 million for the nine months ended January 2, 2000. The
decrease in systems revenues, from 25.7% of total revenues for the
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nine months ended December 31, 1998 to 12.2% of total revenues for the nine
months ended January 2, 2000, was the result of our decision in September 1997
to focus our efforts on semiconductor sales.
Cost of Revenues and Gross Margin
Total cost of revenues consists primarily of costs paid to foundry vendors to
manufacture our semiconductors, costs attributable to design services and
software maintenance and operations expense. The increase in total cost of
revenues, from $3.0 million or 44.2% of total revenues for the nine months
ended December 31, 1998, to $4.7 million or 48.1% of total revenues for the
nine months ended January 2, 2000, was primarily due to the increase in cost
associated with higher semiconductor unit sales.
Semiconductor gross margin increased, from 25.6% for the nine months ended
December 31, 1998 to 39.2% for the nine months ended January 2, 2000 primarily
due to product mix and an increase in sales volume during the nine months
ended January 2, 2000.
There are no costs of revenues associated with our software license revenues. As
noted above, license revenues increased 28.5% for the nine months ended January
2, 2000 as compared to the nine months ended December 31, 1998. The revenue
increase positively impacted our total gross margin.
Services and royalty gross margin decreased from 79.3% for the nine months
ended December 31, 1998 to 56.6% for the nine months ended January 2, 2000,
primarily due to costs incurred for design services and expenses associated
with royalty revenues.
Systems products gross margin increased from 38.8% for the nine months ended
December 31, 1998 to 48.9% for the nine months ended January 2, 2000, primarily
due to a change in customer mix.
Research and Development Expenses
Research and development expenses consist primarily of engineering staffing
costs and technology license fees. Research and development expenses increased
33.2% from $6.1 million for the nine months ended December 31, 1998 to $8.2
million for the nine months ended January 2, 2000. The increase was primarily
due to the addition of research and development personnel, which grew from 72 to
93 engineers as a result of accelerated new product development. In comparison
to the previous period, the number of new products under development increased
substantially. We expect research and development expenses to increase in
absolute dollar amounts in future periods as we further expand our research and
development organization and acquire additional intellectual property for
inclusion in semiconductor device designs.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee salaries, sales
commissions, travel and related costs, promotional materials and trade show
expenses. Sales and marketing expenses increased 47.7% from $2.1 million for the
nine months ended December 31, 1998 to $3.1 million for the nine months ended
January 2, 2000. The increase was primarily due to the addition of sales and
marketing personnel and increased sales commissions associated with higher
revenues. We expect sales and marketing expenses to increase in absolute dollar
amounts in future periods as sales and marketing activities increase .
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 decreased 7.0% from $4.1 million for the
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nine months ended December 31, 1998 to $3.8 million for the nine months ended
January 2, 2000. The decrease was primarily due to a decrease in bad debt
expense from $1.3 million for the nine months ended December 31, 1998 to
$206,000 for the nine months ended January 2, 2000, offset by increased staff
performing general and administrative tasks. We expect general and
administrative expenses to increase in absolute dollar amounts as we further
invest in infrastructure and incur additional expenses related to the
anticipated growth of our business and operation as a publicly held company.
Amortization of Intangible Assets
Amortization of intangible assets is related to the intangible assets acquired
in the acquisition of RSA Communications, which occurred in July 1998.
Amortization of intangible assets increased 61.2% from $343,000, or 5.0% of
total revenues, for the nine months ended December 31, 1998 to $553,000, or 5.6%
of total revenues, for the nine months ended January 2, 2000. We are amortizing
the intangible assets on a straight-line basis over 60 months beginning in the
quarter ended September 30, 1998.
Amortization of Stock Compensation
Through January 2, 2000, we recorded a total of $3.4 million of unearned
million stock compensation. We recognized amortization of stock compensation
of $1.0 million for the nine months ended December 31, 1998 and $711,000 for the
nine months ended January 2, 2000. 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 the
acquisition of RSA Communications, which occurred in July 1998. Based on a
valuation by an independent appraiser, $5.3 million of the $9.3 million
purchase price was allocated to in-process research and development. For the
nine months ended December 31, 1998 we recorded expenses of $5.3 million, or
76.9% of revenue. No expense was recorded for the nine months ended January 2,
2000.
Interest Expense
Interest expense resulted primarily from interest expense related to obligations
under capital leases and our revolving credit facility. Interest expense
increased from $127,000 for the nine months ended December 31, 1998 to $166,000
for the nine months ended January 2, 2000.
Interest Income and Other Income (Expense), Net
Interest income and other income (expense), net consists primarily of interest
earned on cash and cash equivalents, short-term investments and foreign
currency translation adjustments. Interest income and other income (expense),
net increased from $368,000 for the nine months ended December 31, 1998 to
$510,000 for the nine months ended January 2, 2000. The increase in interest
income and other income (expense), net was primarily due to higher average
cash balances in the nine months ended January 2, 2000.
Income Taxes
Since inception, we have incurred net losses for federal and state tax purposes
and have not recognized any tax provision or benefit.
Liquidity and Capital Resources
We have financed our operations primarily through venture capital and corporate
investments in our convertible preferred stock and our initial public offering
of common stock in November 1999, which total approximately $142.0 million in
aggregate net proceeds through January 2, 2000.
Our cash and cash equivalents increased $72.4 million to $81.1 million for the
nine months ended January 2, 2000. The increase was primarily due to net
proceeds of our initial public offering of $73.4 million and net proceeds from
the sale of convertible preferred stock of $8.0.
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Net cash used in operating activities for the nine months ended January 2,
2000 of $8.8 million was primarily due to net operating losses of $10.9
million, an increase in inventories and other current assets of $1.1 million
and $809,000 respectively, partially offset by depreciation and amortization
of $2.4 million and increases in accounts payable and accrued liabilities of
$844,000 and $608,000, respectively.
Net cash provided by investing activities was $399,000 for the nine months
ended January 2, 2000, which reflected net purchases of property and equipment
of $602,000, offset by the sale of short-term investments of $1.0 million.
Net cash provided by financing activities was $80.7 million for the nine
months ended January 2, 2000. Net cash provided by financing activities was
attributable primarily due to proceeds from the issuance of common stock
through our initial public offering of $73.4 million, issuance of convertible
preferred stock of $8.0 million, offset by repayments on capital lease
obligations of $652,000.
Our working capital at January 2, 2000 was approximately $79.7 million as
compared to $8.0 million at March 31, 1999. The Company's current ratio
increased to 12.5 to 1.0, as of January 2, 2000, from 2.5 to 1.0, as of March
31, 1999. The average days sales outstanding rate decreased to 49 days from 84
days in the third quarter of fiscal 2000 over the last quarter of fiscal 1999.
We have a loan and security agreement that provides for borrowings up to $3.0
million. The agreement bears interest at prime rate plus one-half percent, and
all outstanding advances are due in August 2000. Borrowings are secured by our
property, equipment, intellectual property, inventory and receivables and
require that we comply with certain financial covenants including the
maintenance of specific minimum ratios. As of January 2, 2000, we were in
compliance with or had requested waivers for such financial covenants, and we
had no outstanding debt under this agreement.
We plan to continue to invest in our infrastructure, including information
systems, to gain efficiencies and meet the demands of our markets and customers.
We believe our current cash, cash equivalents, and short-term investments will
be sufficient to meet our anticipated cash needs for working capital and capital
expenditures for the next 12 months. Therefore, if cash generated from
operations is insufficient to satisfy our long-term liquidity requirements, we
may seek to sell additional equity or debt securities or to obtain an additional
credit facility. If additional funds are raised through the issuance of debt
securities, these securities could have rights, preferences and privileges
senior to holders of common stock, and the terms of any debt could impose
restrictions on our operations. The sale of additional equity or debt securities
could result in additional dilution to our stockholders, and additional
financing may not be available in amounts or on terms acceptable to us, if at
all. If we are unable to obtain this additional financing, we may be required to
reduce the scope of our planned product development and marketing efforts, which
could harm our business, financial condition and operating results.
Year 2000 Compliance
The term ``Year 2000 issue'' is a general term used to describe the various
problems that may result from the improper processing of dates and date-
sensitive calculations by computers and other machinery as the Year 2000 is
approached and reached. To address the Year 2000 issue, we assembled a team that
was responsible for evaluating our state of readiness in connection with the
Year 2000 issue. The team evaluated and tested our internal computer systems and
equipment, contacted significant suppliers and other critical business partners
to assess their readiness plans, and developed contingency plans for key
functions.
None of our semiconductor products, embedded software or systems-level products
contain any date-related information or circuitry, nor do they have any
functionality specific to time of day, week, month or year. The only exception
to the preceding sentence is that we delivered ATM video storage system devices
to less than 50 customers in 1995 and 1996 for use in experimental near-video-
on-demand. We believe any Year 2000 problems arising in such devices would in
any event cause only negligible loss of functionality to such devices. However,
we cannot be certain of or control the use and application of our products in
conjunction with third party software development or operating systems, and the
failure of such third party products due to Year 2000 problems could harm our
development or sales activities related to such third party products.
We have not experienced any material internal or supplier problems relating to
the Year 2000 issue. The Company will continue to monitor the Year 2000
compliance of its operating systems and equipment. Accordingly, there can be no
assurance that the Company and its suppliers, customers or other business
partners will not experience any Year 2000 problems in the future.
Factors Which May Affect Future Results
Risks Relating to Our Business
Because we have a limited operating history selling products to the digital
subscriber line, or DSL, market, we cannot be sure that we can successfully
implement our business strategy
We have not had a long history of selling our products to the DSL market or
generating significant revenues and many of our products have only recently been
introduced. Furthermore, we have limited historical financial data that can be
used in evaluating our business and our prospects and in projecting future
operating results. For example, we cannot forecast operating expenses based on
our historical results because they are limited, and we are instead required to
forecast expenses based in part on future revenue projections. Most of our
expenses are fixed in the short term and we may not be able to quickly reduce
spending if our revenue is lower than we had projected. Therefore net losses in
a given quarter could be greater than expected. In addition, our ability to
forecast accurately our quarterly revenue is limited, making it difficult to
predict the quarter in which sales will occur.
You must consider our prospects in light of the risks, expenses and difficulties
we might encounter because we are at an early stage of development in a new and
rapidly evolving market. Many of these risks are described under the sub-
headings below. We may not successfully address any or all of these risks and
our business strategy may not be successful.
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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 $10.9 million, $17.2
million, $10.3 million, and $8.5 million for the nine months ended January 2,
2000 and the fiscal years ended March 31, 1999, 1998, and 1997, respectively. We
expect to continue to incur net losses, and these losses may be substantial.
Further, we expect to incur substantial negative cash flow in the future.
Accordingly, our ability to continue to operate our business and implement our
business strategy may be hampered and the value of our stock may decline.
Because we may not be able to achieve or sustain profitability or positive cash
flow, the price of our stock may decline and we may not be able to implement our
business strategy
Due to our continuing substantial capital expenditures and product development,
sales, marketing and administrative expenses, we will need to generate
significant revenues to achieve profitability and positive cash flow. We cannot
be sure that we will be able to generate such revenues or achieve profitability
or positive cash flow. Even if we do achieve profitability and positive cash
flow, we may not be able to sustain or increase profitability or cash flow on a
quarterly or annual basis. Our ability to generate future revenues will depend
on a number of factors, many of which are beyond our control. These factors
include:
* the rate of market acceptance of high speed network access;
* the rate of market acceptance of our products and the demand for equipment
that incorporates our products;
* changes in industry standards governing DSL technologies;
* the extent and timing of new customer transactions;
* personnel changes, particularly those involving engineering and technical
personnel;
* regulatory developments; and
* general economic trends.
Due to these factors, we cannot forecast with any degree of accuracy what our
revenues will be in future periods and we may not be able to achieve or sustain
profitability or positive cash flow. Our ability to continue to operate our
business and implement our business strategy may thus be hampered and the value
of our stock may decline.
Because our operating results from quarter to quarter may fluctuate, the price
of our stock may decline
Our revenues, expenses and operating results have fluctuated in the past and are
likely to fluctuate significantly in the future on a quarterly and an annual
basis due to a number of factors, many of which are outside our control. For
example, our results of operations have been negatively affected by the
following:
* the loss of or decrease in sales to a major customer or failure to complete
significant transactions;
* the timing and size of semiconductor orders from, and shipments to, our
existing and new customers;
* unexpected delays in introducing new or enhanced products, including
manufacturing delays;
* the volume and average cost of products manufactured; and
* the timing and size of expenses, including expenses of developing new
products and product improvements.
Accordingly, our revenues, expenses and results of operations could vary
significantly in the future, and you should not rely upon period-to-period
comparisons as indications of future performance. Such fluctuations may make our
stock unattractive to investors and result in a decline in the price of our
stock.
Because our business is dependent upon the broad deployment of DSL services by
telecommunications service providers, we may not be able to generate substantial
sales of our products if such deployment does not occur
Our products are incorporated in equipment that is targeted at end-users of DSL
technologies. Consequently, the success of our products may depend upon the
decision by telecommunications service providers to broadly deploy DSL
technologies and the timing of such deployment. If telecommunications service
providers do not offer DSL services on a timely basis or if there are technical
difficulties with the deployment of DSL services, sales of our
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products may decline, which would have a negative impact on our results of
operations. Factors that may impact this deployment include:
* a prolonged approval process, including laboratory tests, technical trials,
marketing trials, initial commercial deployment and full commercial
deployment;
* the development of a viable business model for DSL services, including the
capability to market, sell, install and maintain DSL services;
* cost constraints, such as installation costs and space and power requirements
at the telecommunications service provider's central office;
* evolving industry standards for DSL technologies; and
* government regulation.
Because our products are components of other equipment, if equipment
manufacturers do not incorporate our products in their equipment, we may not be
able to generate sales of our products in volume quantities
Our products are not sold directly to the end-user, rather they are components
of other products. As a result, we rely upon equipment manufacturers to design
our products into their equipment. We further rely on this equipment to be
successful. If equipment that incorporates our products is not accepted in the
marketplace, we may not achieve sales of our products in volume quantities,
which would have a negative impact on our results of operations.
Because the requirements of our customers frequently change, we may not be able
to anticipate trends in the markets for our products, which could result in a
decline in sales of our products
We must anticipate the price, performance and functionality requirements of
equipment manufacturers who design DSL equipment. We must also successfully
develop products that meet these requirements and make these products available
on a timely basis and in sufficient quantities. If we do not anticipate trends
in the DSL market and meet the requirements of manufacturers of DSL equipment,
then we may be unable to generate substantial sales of our products, which would
have a negative impact on our results of operations. While we have a strategy of
licensing and partnering with as many key participants in our markets as
possible, some equipment manufacturers will be more successful than others in
developing and marketing their products that incorporate our semiconductor
products and it is difficult for us to predict which of these customers will
generate revenues for us. Our product sales are almost completely dependent upon
the relative success of our customers in the marketplace for high-speed network
access equipment.
Because we depend on third party foundries to manufacture, assemble and test our
products, we may experience delays in receiving semiconductor devices
We do not own or operate a semiconductor fabrication facility, rather our
semiconductor devices are generally sourced at different foundries. We intend to
continue to rely on third-party foundries and other specialist suppliers for all
of our manufacturing, assembly and testing requirements. However, these
foundries are not obligated to supply products to us for any specific period, in
any specific quantity or at any specific price, except as may be provided in a
particular purchase order that has been accepted by one of them. As a result, we
cannot directly control semiconductor delivery schedules, which could lead to
product shortages, quality assurance problems and increases in the costs of our
products. In addition, we have occasionally experienced delays in receiving
semiconductor devices from foundries due to foundry scheduling and process
problems. To date, such delays have not had a material affect on our results of
operations. However, we may experience delays in the future and we cannot be
sure that we will be able to obtain semiconductors within the time frames and in
the volumes required by us at an affordable cost or at all. Any disruption in
the availability of semiconductors or any problems associated with the delivery,
quality or cost of the fabrication assembly and testing of our products could
significantly hinder our ability to deliver our products to our customers and
may result in a decrease in sales of products. If the foundries we currently use
are unable to provide us with semiconductors, we may be required to seek a new
manufacturer of our semiconductors, and we cannot be certain that a new
manufacturer of our semiconductors will be available. Furthermore, switching to
a new manufacturer could require six months or more and would involve
significant expense and disruption to our business.
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Because we depend on third party foundries, if there is a shortage in worldwide
foundry capacity, we may not be able to obtain sufficient manufacturing capacity
to meet our requirements
From time to time there may be shortages in worldwide foundry capacity due to
increases in semiconductor demand or other factors. In the event of such a
shortage, we may not be able to obtain a sufficient allocation of foundry
capacity to meet our product needs. In addition, such a shortage could lengthen
our products' manufacturing cycle and cause a delay in the shipments of our
products to our customers. This could ultimately lead to a loss of sales of our
products and have a negative impact on our results of operations.
Because we may be required to enter into financial and other arrangements with
foundries in order to secure foundry capacity, our earnings or the ownership of
our stockholders may be diluted
Allocation of a foundry's manufacturing capacity may be influenced by a
customer's size or the existence of a long-term agreement with the foundry. To
address foundry capacity constraints, other semiconductor suppliers that rely on
third-party foundries have utilized various arrangements, including equity
investments in or loans to independent component manufacturers, in exchange for
guaranteed production capacity, joint ventures to own and operate foundries, or
``take or pay'' contracts that commit a company to purchase specified quantities
of components over extended periods. While we are not currently a party to any
of these arrangements, we may decide to enter into such arrangements in the
future. We cannot be sure, however, that these arrangements will be available to
us on acceptable terms or at all. Any of these arrangements could require us to
commit substantial capital. The need to commit substantial capital could require
us to obtain additional debt or equity financing, which could result in dilution
to our earnings or the ownership of our stockholders. We cannot be sure that
this additional financing, if required, would be available when needed or, if
available, could be obtained on terms acceptable to us.
Because the manufacture of our products is complex, the foundries on which we
depend may not achieve the necessary yields or product reliability that our
business requires
The manufacture of our products is a highly complex and precise process,
requiring production in a highly controlled environment. Changes in the
manufacturing processes or the inadvertent use of defective or contaminated
materials by a foundry could adversely affect such a foundry's ability to
achieve acceptable manufacturing yields and product reliability. If the
foundries we currently use do not achieve the necessary yields or product
reliability, our customer relationships could suffer. This could ultimately lead
to a loss of sales of our products and have a negative impact on our results of
operations.
Because we depend on a license from Advanced RISC Machines to manufacture
certain of our planned ATOM products, the loss or inability to maintain the
license could result in increased costs or delays in the manufacturing of our
products
Our ATOM products feature embedded ARM RISC microprocessors and, accordingly,
are required to be manufactured under a license from Advanced RISC Machines, or
ARM, the owner of the intellectual property to the ARM RISC microprocessor. In
the past, we were required to use foundries with an ARM license for the
manufacture of our ATOM products. In June 1999, we obtained a per semiconductor
design ARM license, which means that we are now able to select foundry suppliers
that best meet our quality, delivery and cost objectives regardless of whether
they have their own ARM license or not. With this greater flexibility, we are
able to assume more of the manufacturing and quality control responsibilities,
including contracting for wafer processing, assembly and testing from separate
suppliers. If we lose or are unable to maintain the per semiconductor design
license, we would be required to seek alternative fabrication facilities in our
manufacturing of our ATOM products. Without the ARM license, the number of
fabrication facilities we could use in our manufacturing would be substantially
reduced to those fabrication facilities that themselves have been directly
licensed by Advanced RISC Machines. Accordingly, the loss of, or our inability
to maintain the ARM license may result in increased costs or delays in our
ability to manufacture our products and could harm our results of operations. In
addition, ARM is only required to indemnify us against intellectual property
infringement claims up to a specified dollar amount.
Because our customer base is concentrated, the loss of one or more of our
customers may result in a loss of a significant amount of our revenues
A relatively small number of customers account for a large percentage of our
total revenues. We expect this trend to continue. Our business will be seriously
harmed if we do not generate as much revenue as we expect from these
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customers, experience a loss of any of our significant customers or suffer a
substantial reduction in orders from these customers. For the fiscal year ended
March 31, 1999, two customers accounted for 22.6% and 15.7%, respectively, of
our total revenues. For the nine months ended January 2, 2000, four customers
accounted for 35.2%, 9.5%, 9.4% and 9.2%, 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 technology, rather than continue to purchase
semiconductors from third parties like us. If we are not successful in
maintaining relationships with key customers and winning new customers, sales of
our products may decline. In addition, because a significant portion of our
business has been and is expected to continue to be derived from orders placed
by a limited number of large customers, variations in the timing of these orders
can cause significant fluctuations in our operating results.
Because manufacturers of DSL equipment may be reluctant to change their sources
of components, if we do not achieve design wins with manufacturers of DSL
equipment, we may be unable to secure sales from these customers in the future
Once a manufacturer of DSL equipment has designed a supplier's semiconductor
into its products, the manufacturer may be reluctant to change its source of
semiconductors due to the significant costs associated with qualifying a new
supplier. Accordingly, our failure to achieve design wins with manufacturers of
DSL equipment which have chosen a competitor's semiconductor could create
barriers to future sales opportunities with these manufacturers.
Because our customers are not subject to binding agreements, we cannot be
certain that we will sell any of our products
Achieving a design win with a customer does not create a binding commitment from
that customer to purchase our products. Rather, a design win is solely an
expression of interest by potential customers in purchasing our products and is
not supported by binding commitments of any nature. Accordingly, a customer can
choose at any time to discontinue using our products in their designs or product
development efforts. Even if our products are chosen to be incorporated into a
customer's products, we still may not realize significant revenues from that
customer if their products are not commercially successful. Therefore, we cannot
be sure that any design win will result in purchase orders for our products, or
that these purchase orders will not be later canceled. Our inability to convert
design wins into actual sales and any cancellation of a purchase order could
have a negative impact on our financial condition and results of operations.
Because our customers may cancel orders, we may not be able to recoup expenses
incurred in anticipation of sales of our products
We work closely with our customers to determine their future product needs and
receive a rolling forecast for products. We have incurred and expect to continue
to incur expenses based upon these sales forecasts. However, our customer
purchase agreements generally contain no minimum purchase requirements and
customers typically purchase our products pursuant to short-term purchase orders
that may be canceled without charge if notice is given within an agreed-upon
period. Therefore, we cannot be sure that the actual product revenues which we
will receive will be commensurate with the level of expenses that we will incur
based on forecasts we receive from our customers in any future period. As a
result, cancellations, deferrals or reductions in pending purchase orders could
have a negative impact on our financial condition and results of operations.
Because most of our revenues have been and will be derived from a limited number
of products, we may not be able to generate sufficient revenues to sustain our
business if any of these products fail to gain market acceptance
For the fiscal year ended March 31, 1999, approximately 21.6% and 10.7%,
respectively, of our total revenues were generated from sales of our Hydrogen
product and Proton family of products. For the nine months ended January 2,
2000, approximately 41.7%, 34.5% and 23.8%, respectively, of our semiconductor
revenues were generated from sales of our Proton family and Hydrogen and Helium
products. We expect that our Proton family will represent a diminishing
proportion of our total revenues while a substantial portion of our total
revenues will be derived from our Hydrogen, Helium and Lithium products in the
foreseeable future. Therefore, broad market acceptance of the Hydrogen, Helium
and Lithium products is critical to our success. We cannot be sure that our
products will attain broad market acceptance. The failure of our products to
achieve broad market acceptance could result in a decrease in our revenues,
which would have a negative impact on our results of operations and financial
condition.
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Because our products typically have lengthy sales cycles, we may experience
substantial delays between incurring expenses related to research and
development and the generation of sales revenue and may not ultimately sell a
large volume of our products
It usually takes more than one year, occasionally more than two years, for us to
realize volume shipments of our semiconductor products after we first contact a
customer. We first work with customers to achieve a design win, which may take
six months or longer, at which time we sell a source code license. Our customers
then complete the design, testing and evaluation of their systems and begin the
marketing process, a period which typically lasts an additional three to six
months or longer. As a result, a significant period of time may elapse between
our sales efforts and our realization of revenues, if any, from volume
purchasing of our products by our customers.
Because our products are complex, the detection of errors in our products may be
delayed, and if we deliver products with defects, our credibility will be
harmed, and the sales and market acceptance of our products may decrease
Our products are complex and may contain errors, defects and bugs when
introduced. If we deliver products with errors, defects or bugs, our credibility
and the market acceptance and sales of our products could be significantly
harmed. Furthermore, the nature of our products may also delay the detection of
any such error or defect. If our products contain errors, defects and bugs, then
we may be required to expend significant capital and resources to alleviate
these problems. This could result in the diversion of technical and other
resources from our other development efforts. Any actual or perceived problems
or delays may also adversely affect our ability to attract or retain customers.
Because defects in our products may give rise to product liability claims
against us, we may be required to incur increased expenses and divert management
resources away from our operations
The occurrence of any defects, errors or failures in our products could lead to
product liability claims or lawsuits against us or against our customers. In
addition, we have agreed to indemnify certain of our customers in certain
limited circumstances against liability from defects in our products. A
successful product liability claim could result in substantial cost and divert
management's attention and resources, which would have a negative impact on our
financial condition and results of operations. Although we have not experienced
any product liability claims to date, the sale and support of our products
entail the risk of these claims.
Because we sell a significant portion of our products in countries other than
the US, we may be subject to political, economic and other conditions affecting
such countries that could result in increased operating expenses and regulation
of our products
One of our principal subsidiaries is incorporated under the laws of, and its
principal offices are located in, the United Kingdom. In addition, international
revenues accounted for 40.3% of our total revenues for the fiscal year ended
March 31, 1999 and 43.1% of our total revenues for the nine months ended
January 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. We expect that further significant expansion will be required to
address potential growth in our customer base and market opportunities. If we
are unable to manage growth effectively, we may not be able to take advantage of
market opportunities, develop or enhance our products or our technical
capabilities, execute our business plan or otherwise respond to competitive
pressures or unanticipated
20
<PAGE>
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.
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 acquisition of D2 Technologies, Inc., a privately-
held corporation based in Santa Barbara, California, a leading supplier of
telephony and voice over IP software. As part of our business strategy, from
time to time, we expect to review 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 current agreements or negotiations underway
with respect to any material acquisitions, we may make acquisitions of
businesses, products or technologies in the future. However, we cannot be sure
that we will be able to locate suitable acquisition opportunities. Future
acquisitions by us could result in the following, any of which could seriously
harm our results of operations or the price of our stock:
* issuances of equity securities that would dilute our current stockholder's
percentages ownership;
* large one-time write-offs;
* the incurrence of debt and contingent liabilities;
* difficulties in the assimilation and integration of the operations,
personnel, technologies, products and the information systems of the acquired
companies;
* diversion of management's attention from other business concerns;
* contractual disputes;
* risks of entering geographic and business markets in which we have no or
limited prior experience; and
* potential loss of key employees of acquired organizations.
Our products require significant training and support, and because of our
limited resources, we may not be able to support the development of and demand
for our products
The development of equipment using our products requires significant training
and support. If we are unable to provide this training and support for our
products, more time may be necessary to complete the implementation process and
customer satisfaction may be adversely affected. In addition, our suppliers may
not be able to meet increased demand for our products. We cannot be sure that
our systems, procedures or controls or those of our suppliers' will be adequate
to support the anticipated growth in our operations or the demand for our
products. This may result in a decline in the sales of our products and have a
negative impact on our results of operations.
Our executive officers and key personnel are critical to our business, and
because there is significant competition for personnel in our industry, we may
not be able to attract and retain such qualified personnel
Our success depends to a significant degree upon the continued contributions of
our executive management team, and our technical, marketing, sales customer
support and product development personnel. The loss of such personnel could
significantly harm our business, financial condition and results of operations.
We do not have any life insurance or other insurance covering the loss of any of
our key employees. Because our products are specialized and complex, our success
depends upon our ability to attract, train and retain qualified personnel,
including qualified technical, marketing and sales personnel. However, the
competition for personnel is intense and we may have difficulty attracting and
retaining such personnel. In addition, companies in the communications, software
and semiconductor industries have frequently made unfair hiring practices claims
against competitors who have hired away such companies' personnel. We cannot be
sure that these claims will not be made against us in the future as we seek to
hire qualified personnel, or that any of these claims would be decided in our
favor. We may incur substantial costs in defending ourselves against any such
claims, regardless of their merits.
21
<PAGE>
Risks Relating to our Industry
Because the markets in which we compete are highly competitive and many of our
competitors have greater resources than us, we cannot be certain that our
products will be accepted in the marketplace or capture market share
The market for software and communications semiconductor solutions is intensely
competitive and characterized by rapid technological change, evolving standards,
short product life cycles and price erosion. We expect competition to intensify
as current competitors expand their product offerings and new competitors enter
the market. Given the highly competitive environment in which we operate, we
cannot be sure that any competitive advantages enjoyed by our products would be
sufficient to establish and sustain our products in the market. Any increase in
price or other competition could result in erosion of our market share, to the
extent we have obtained market share, and would have a negative impact on our
financial condition and results of operations. We cannot be sure that we will
have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully.
We face competition from a variety of vendors, including software and
semiconductor companies, which generally vary in size and in the scope and
breadth of products and services offered. We also face competition from
customers' or prospective customers' own internal development efforts. Many of
the companies that compete, or may compete in the future, against us have longer
operating histories, greater name recognition, larger installed customer bases
and significantly greater financial, technical and marketing resources. These
competitors may also have pre-existing relationships with our customers or
potential customers. As a result, they may be able to introduce new
technologies, respond more quickly to changing customer requirements or devote
greater resources to the development, promotion and sale of their products than
we can. Our competitors may successfully integrate the functionality of our
software and communication processors into their products and thereby render our
products obsolete. Further, in the event of a manufacturing capacity shortage,
these competitors may be able to manufacture products when we are unable to do
so.
We believe our principal competitors include or will include Alcatel
Microelectronics, Analog Devices, Centillium Technology, Conexant Systems,
GlobeSpan, Lucent Technologies, Motorola and Texas Instruments. In addition,
there have been a number of announcements by other semiconductor companies
including IBM and Intel and smaller emerging companies that they intend to enter
the market segments adjacent to or addressed by our products.
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
22
<PAGE>
Our success is dependent, in part, on our ability, in a timely and cost-
effective manner, to:
* successfully develop, introduce and market new and enhanced products at
competitive prices in order to meet changing customer needs;
* respond effectively to new technological changes or new product announcements
by others;
* effectively use and offer leading technologies; and
* maintain close working relationships with our key customers.
We cannot be sure that we will be successful in these pursuits, that the growth
in demand will continue or that our products will achieve market acceptance. Our
failure to develop and introduce new products that are compatible with industry
standards and that satisfy customer requirements or the failure of our products
to achieve broad market acceptance could have a negative impact on our ability
to sell our products and our results of operations.
Because the development of new products requires substantial time and expense,
we may not be able to recover our development costs
The pursuit of necessary technological advances and the development of new
products require substantial time and expense. Improvements to existing products
or the introduction of new products by us or our competitors have the potential
to replace or provide lower cost alternatives to our existing products or render
these products obsolete, unmarketable or inoperable. The mere announcement of
any improvement or new product could cause potential customers to defer or
cancel purchases of existing products and services. Therefore, we cannot be sure
that we will be able to recover the costs of the development of our products or
succeed in adapting our business to advancements.
Because other high speed data transmission technologies may compete effectively
with digital subscriber line services, our products may not capture marketshare
DSL services are competing with a variety of different broadband data
transmission technologies, including cable modems, satellite and other wireless
technologies. If any technology that is competing with DSL technology is more
reliable, faster, less expensive or has other advantages over DSL technology,
then the demand for our semiconductors may decrease, which would have a negative
impact on our operating results.
Because price competition among our competitors and volume purchases by large
customers may result in a decrease in the average per unit selling price of our
products, our gross margins for our products may decline
We expect that price competition among our competitors and volume purchases of
our products at discounted prices will have a negative impact on our gross
margin for these products. We anticipate that average per unit selling prices of
DSL semiconductors will continue to decline as product technologies mature.
Since we do not manufacture our own products, we may be unable to reduce our
manufacturing costs in response to declining average per unit selling prices.
Many of our competitors are larger with greater resources and therefore may be
able to achieve greater economies of scale and would be less vulnerable to price
competition. Further, we expect that average per unit selling prices of our
products will decrease in the future due to volume discounts to our large
customers. These declines in average per unit selling prices will generally lead
to declines in our gross margins for these products.
Because the measures on which we rely to protect our intellectual property
rights afford only limited protections, we may lose any competitive advantage we
may have
The measures on which we rely to protect our intellectual property afford only
limited protection and we cannot be certain that these safeguards will
adequately protect our intellectual property and other valuable competitive
information. In addition, the laws of some countries in which we sell or plan to
sell our products, including the Peoples' Republic of China, Korea and certain
other Asian countries, may not protect our proprietary rights as fully as do the
laws of the United Kingdom or the United States. If we are unable to adequately
protect our proprietary rights, we may lose any competitive advantage we may
have over our competitors. This may have a negative impact on sales of our
products and our results of operations.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use trade secrets or
other information that we regard as proprietary. Our competitors may also
independently develop similar technologies. Moreover, through our participation
in various industry groups, we have entered into cross-licenses for intellectual
property necessary to the implementation of certain types of
23
<PAGE>
standards-compliant products. Such cross-licenses may limit our ability to
enforce our intellectual property rights against competitors.
Because our industry is characterized by frequent litigation over intellectual
property rights, we may be required to incur substantial expenses and divert
management resources
The industries in which we compete are characterized by numerous allegations of
patent infringement among competitors. Such an infringement claim could be
asserted against us or by us in the future. The defense or prosecution of any
such claim could result in us incurring substantial expenses and diverting
significant management attention and other resources away from our operations.
In the event of an adverse result in any future litigation or claim, we may be
required:
* to pay substantial damages, including treble damages if we are held to have
willfully infringed on the intellectual property of another;
* to halt the manufacture, use and sale of infringing products or technology;
* to forfeit a competitive advantage;
* to expend significant resources to develop non-infringing technology; or
* to obtain licenses to the infringing technology, which may not be available
on commercially reasonable terms, or at all.
Because our products may be required to meet certain industry standards, we may
be required to pay substantial royalties to the owners of the intellectual
property underlying the standards
In order for us to comply with the International Telecommunications Union V.34,
V.90 and ADSL standards, the software embedded in our current and planned future
products may use the proprietary technology of various parties advancing or
promoting these standards. Where such owners are members of such working group
or union, they must provide a license upon reasonable terms, which may include
the payment of a reasonable royalty. However, if such owners are not members of
such working group or union, there may be no limit on the terms or the amount of
the royalty with respect to such proprietary technology. As a result, the
cumulative effect of the terms and royalties with respect to the use of the
proprietary technology necessary to meet such industry standards could increase
the cost of our products to the point that they are no longer competitive and
could limit our ability to meet certain industry standards.
Because our products and those of our customers are subject to government
regulations, changes in current or future laws or regulations could cause sales
of our products to decline
The jurisdiction of the Federal Communications Commission, or the FCC, extends
to the entire U.S. communications industry, including our customers and their
products and services that incorporate our products. Future FCC regulations
affecting the U.S. communications services industry, our customers or our
products may have a negative impact on our business. For example, FCC regulatory
policies that affect the availability of data and Internet services may impede
our customers' penetration into certain markets or affect the prices that they
are able to charge. This may cause sales of our products to decline. In
addition, international regulatory bodies have introduced new regulations for
the communications industry. Delays caused by our compliance with regulatory
requirements may result in order cancellations or postponements of product
purchases by our customers, which would have a negative impact on our results of
operations and financial condition.
ITEM 3 - Quantitative And Qualitative Disclosure About Market Risk.
Management believes that the market risk associated with the Company's market
risk sensitive instruments as of January 2, 2000 is not material, and therefore,
disclosure is not required.
24
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1 - Legal Proceedings.
None.
ITEM 2 - Changes In Securities and Use of Proceeds.
In October 1999, Virata Limited completed the sale of an aggregate of 6,153,846
series E preference shares ("Series E Stock") in a private placement for
aggregate gross proceeds of $8.0 million to Siemens Information and
Communication Networks, Inc., Olivetti Telemedia Investments B.V. and LSI Logic
Inc. The issuance and sale of the Series E Stock was exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Regulation D or Regulation S promulgated thereunder
On November 17, 1999, the Company completed the reorganization of Virata
Limited, pursuant to which (i) each share of Virata Limited's previously
outstanding ordinary and preference shares were cancelled, (ii) Virata Limited
issued 64,811,364 new ordinary shares to the Company, thereby becoming a
wholly-owned subsidiary of the Company, (iii) the Company assumed all of the
outstanding options and warrants of Virata Limited, (iv) the Company effected
a 1 for 6.7 reverse stock split of the Common and (v) the Company issued
14,672,048 shares of its 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 17, 1999, the Company completed the issuance and sale of all of
the 5,750,000 shares of its common stock, (including the exercise of the
underwriters' overallotment option) registered pursuant to the Registration
Statement for the Company's initial public offering, filed on Form S-1 under the
Securities Act of 1933, as amended (File No. 333-86591).
The managing underwriters of the offering were Credit Suisse First Boston,
Warburg Dillon Read LLC and Thomas Weisel Partners LLC. The total price to the
public, underwriting discounts and commissions and proceeds to the Company were
$80.5 million, $5.6 million and $73.4 million, respectively. The Company
estimates that $1.9 million of other expenses in connection with the Offering
have been incurred. None of such amounts were direct or indirect payments to
directors or officers of the Company or their associates, to persons owning 10
percent or more of any class of equity securities of the Company or to
affiliates of the Company.
The Company used $483,000 of the net proceeds to repay our revolving credit
facility with Venture Banking Group and plans to use the balance for general
corporate purposes, including working capital. The remaining net proceeds have
been invested in cash, cash equivalents and short term investments. The use of
the proceeds from the offering does not represent a material change in the use
of proceeds described in the prospectus.
ITEM 3 - Defaults Upon Senior Securities.
None.
ITEM 4 - Submission Of Matters To A Vote Of Security Holders.
On October 11, 1999, Virata Limited obtained the written consent of its
shareholders with respect to the issuance and sale of the Series E Stock and
the amendment of the Virata Limited Registration Rights Agreement to include the
holders of the Series E Stock.
On October 28, 1999, Virata Limited obtained the approval of its shareholders
with respect to its reorganization as a wholly-owned subsidiary of the
Company, pursuant to a share reconstruction under Section 425 of the UNited
Kingdom Companies Act of 1985.
On November 17, 1999, the Company obtained the written consent of its
shareholders with respect to (i) the amendment and restatement of the Company's
Certificate of Incorporation to effect the 1 for 6.7 reverse stock split,
25
<PAGE>
(ii) the entering into indemnity agreements with the Company's officers and
directors, (iii) the adoption of the Company's 1999 Stock Incentive Plan, (iv)
the adoption of the Company's 1999 Employee Stock Purchase Plan, and (v) the
adoption of the Company's 1999 Non-Employee Director Compensation Plan.
ITEM 5 - Other Information.
None.
ITEM 6 - Exhibits And Reports On Form 8-K.
Exhibits
3.1 Amended and Restated Certificate of Incorporation of Virata
Corporation**
3.2 Amended and Restated Bylaws of Virata Corporation**
10.1 1999 Stock Incentive Plan**
10.2 1999 Employee Stock Purchase Plan**
10.3 Form of Indemnity Agreement**
10.4 Registration Rights Agreement**
10.5 Form of Non-Employee Director Plan**
27.1 Financial Data Schedule
** Previously filed with the Company's Registration on Form S-1 (File No.
333-86591)
Reports on Form 8-K
None.
26
<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
Date: February 15, 2000
By: /s/ Charles Cotton
-----------------
Charles Cotton
Chief Executive Officer
(Principal Executive Officer)
Date: February 15, 2000
By: /s/ Andrew Vought
-----------------
Andrew Vought
Chief Financial Officer,
Senior Vice President Finance
and Administration and Secretary
(Principal Accounting Officer)
27
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation of Virata
Corporation**
3.2 Amended and Restated Bylaws of Virata Corporation**
10.1 1999 Stock Incentive Plan**
10.2 1999 Employee Stock Purchase Plan**
10.3 Form of Indemnity Agreement**
10.4 Registration Rights Agreement**
10.5 Non-Employee Director Plan**
27.1 Financial Data Schedule
** Previously filed with the Company's Registration on Form S-1 (File No. 333-
86591).
28
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