<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 2, 2000
REGISTRATION NO. 333-31382
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STANFORD MICRODEVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3674 77-0073042
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
726 PALOMAR AVENUE
SUNNYVALE, CA 94086
(408) 616-5400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT VAN BUSKIRK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
STANFORD MICRODEVICES, INC.
726 PALOMAR AVENUE
SUNNYVALE, CA 94086
(408) 616-5400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN E. BOCHNER ROBERT M. MATTSON, JR.
STEVEN V. BERNARD TAMARA P. TATE
SUSAN P. KRAUSE CRAIG S. MORDOCK
WILSON SONSINI GOODRICH & ROSATI BRANDON C. PARRIS
PROFESSIONAL CORPORATION MORRISON & FOERSTER LLP
650 PAGE MILL ROAD 19900 MACARTHUR BOULEVARD
PALO ALTO, CA 94304 12TH FLOOR
(650) 493-9300 IRVINE, CA 92612
(949) 251-7500
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE OFFERED(1) SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(2)
- ----------------------------------------------------------------------------------------------------------------------------
Common stock, $0.001 par value.......... 4,600,000 $14.00 $64,400,000 $17,002
- ----------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Includes 600,000 shares to cover underwriter over allotments.
(2) Fee previously paid. Estimated solely for the purpose of calculating the
amount of the registration fee pursuant to Rule 457(a).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
The information in this preliminary prospectus is not complete and may
be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is declared
effective. This preliminary prospectus is not an offer to sell these
securities and we are not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 2, 2000
LOGO
- --------------------------------------------------------------------------------
4,000,000 SHARES
COMMON STOCK
- --------------------------------------------------------------------------------
This is the initial public offering of Stanford Microdevices, Inc. and we are
offering 4,000,000 shares of our common stock. We anticipate the initial public
offering price will be between $12.00 and $14.00 per share. We have applied to
list our common stock on the Nasdaq National Market under the symbol "SMDI."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO AND STANFORD
PUBLIC COMMISSIONS MICRODEVICES
---------------- -------------- ------------
<S> <C> <C> <C>
Per share $ $ $
Total $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to 600,000 additional
shares to cover over-allotments.
DEUTSCHE BANC ALEX. BROWN
BANC OF AMERICA SECURITIES LLC
CIBC WORLD MARKETS
ROBERTSON STEPHENS
The date of this prospectus is , 2000
<PAGE> 3
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that investors
should consider before investing in our common stock. Investors should carefully
read the entire prospectus, including "Risk Factors" and the financial
statements, before making an investment decision.
OUR BUSINESS
We are a leading designer and supplier of high performance radio frequency,
or RF, components for communications equipment. Our products are used primarily
in wireless communications equipment to enable and enhance the transmission and
reception of voice and data signals. Our customers include communications
equipment manufacturers and a private label reseller of our RF components. We
design our products to meet the rapidly evolving performance requirements for
mobile wireless applications, such as cellular and mobile data networks,
broadband wireline applications, such as coaxial cable and fiber optic networks,
and fixed wireless applications, such as local and wide area site-to-site data
networks.
We offer a broad line of products that range in complexity from discrete
components to integrated circuits and multi-component modules. We believe our
products are well suited for existing and future communications networks which
are expected to be increasingly centered on data transmission in addition to
voice. We have adopted a fabless operating strategy, which we believe is unique
in the RF components industry. We outsource the manufacturing of our
semiconductor wafers to several wafer fabrication facilities, or third-party
wafer fabs, that use leading-edge process technologies. We focus internally on
our RF design and development expertise and select what we believe to be the
optimal process technology for any given application without the constraint of a
captive wafer fab facility. Our fabless operating strategy, combined with our RF
design and test expertise, gives us the flexibility necessary to deliver a
comprehensive line of high quality products at compelling prices to our
customers.
Our objective is to become the leading supplier of RF components for
wireless and broadband wireline communications infrastructure equipment. We
intend to achieve this objective by providing a comprehensive portfolio of high
performance and high value standard and customized RF components optimized for
their target applications. We recently established a separate business unit
focused on developing customized products for our customers' specific RF
applications. We plan to focus on expanding our product development initiatives
in wireless and broadband wireline infrastructure markets. We will also continue
to invest in research and development in the areas of semiconductor materials,
device modeling, RF circuit design, packaging technology, and test and
measurement.
We sell our products worldwide through U.S.-based distributors, through a
private label reseller who sells our products under its brand and through our
direct sales force. Our products are also sold through a worldwide network of
independent sales representatives whose orders are fulfilled either by us or our
distributors. We are expanding our marketing efforts to create awareness for our
products within our target markets and to support our direct and indirect sales
efforts.
We were incorporated in California on May 20, 1985 as Matrix Microassembly
Corporation. We began doing business as Stanford Microdevices in 1992. On
November 21, 1997 we reincorporated in Delaware as Stanford Microdevices, Inc.
Our principal executive offices are located at 726 Palomar Avenue, Sunnyvale,
California 94086. Our telephone number at that location is (408) 616-5400. Our
web site is located at www.stanfordmicro.com. The information contained on, or
linked to, our web site does not constitute part of this prospectus.
1
<PAGE> 4
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Stanford Microdevices........ 4,000,000 shares
Common stock to be outstanding after this offering... 25,627,412 shares
Use of proceeds...................................... For working capital and general corporate
purposes. See "Use of Proceeds" on page 16 for
more detailed information.
Proposed Nasdaq National Market symbol............... SMDI
</TABLE>
The number of shares of common stock to be outstanding upon completion of
this offering is based on the number of shares outstanding as of March 31, 2000.
This number assumes the conversion into common stock of all of our mandatorily
redeemable convertible preferred stock outstanding on that date and the net
exercise of outstanding warrants to purchase approximately 719,230 shares of our
common stock (assuming an initial public offering price of $13.00 per share),
and excludes:
- 5,266,530 shares subject to outstanding options under our Amended and
Restated 1998 Stock Plan;
- 1,667,818 shares plus annual increases available for future option grants
under our Amended and Restated 1998 Stock Plan; and
- 300,000 shares plus annual increases that will be available for issuance
under our 2000 Employee Stock Purchase Plan upon completion of this
offering.
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
----------- ------ ------ ------ -------- ------ --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues................................. $3,185 $4,712 $6,898 $8,231 $ 18,065 $2,877 $ 7,264
Gross profit................................. 828 1,484 2,928 3,377 8,069 1,222 4,379
Income (loss) from operations................ 149 125 1,165 373 (2,523) 159 176
Net income (loss)............................ 137 101 1,105 279 (2,554) 114 206
Net income (loss) applicable to common
stockholders............................... 137 101 1,105 279 (24,411) 114 (25,718)
Pro forma net income (loss) (unaudited)...... $ (2,666) $ 90 $ 206
Pro forma basic net income (loss) per share
(unaudited)................................ $ (0.16) $ 0.01
Pro forma diluted net income (loss) per share
(unaudited)................................ $ (0.16) $ 0.01
Shares used to compute pro forma basic net
income (loss) per share (unaudited)........ 16,825 21,675
Shares used to compute pro forma diluted net
income (loss) per share (unaudited)........ 16,825 26,314
</TABLE>
See note 1 of the notes to consolidated financial statements for an
explanation of the determination of the number of shares used to compute the pro
forma basic and diluted per share amount.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000 (UNAUDITED)
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,777 $ 3,777 $50,537
Working capital............................................. 7,240 7,240 54,000
Total assets................................................ 23,625 23,625 70,385
Long term obligations, less current portion................. 1,608 1,608 1,608
Mandatorily redeemable convertible preferred stock.......... 64,781 -- --
Total stockholders' equity (net capital deficiency)......... (53,021) 11,760 58,520
</TABLE>
The pro forma balance sheet data summarized above assumes the conversion of
all outstanding shares of mandatorily redeemable convertible preferred stock
into common stock upon completion of this offering on a one-to-one basis. The
pro forma as adjusted data above
2
<PAGE> 5
adjusts the pro forma amounts to reflect the application of the net proceeds
from the sale of 4,000,000 shares of common stock offered by us at an assumed
initial public offering price of $13.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses.
Stanford Microdevices is our trademark. All other brand names or trademarks
appearing in this prospectus are the property of their respective holders.
-------------------------
Unless otherwise indicated, all information in this prospectus assumes:
- that the underwriters have not exercised their option to purchase
additional shares;
- conversion of all shares of mandatorily redeemable convertible preferred
stock into shares of common stock upon completion of this offering;
- the net exercise of outstanding warrants to purchase approximately
719,230 shares of common stock (assuming an initial public offering price
of $13.00 per share);
- the filing of an amended and restated certificate of incorporation upon
completion of this offering, to increase our authorized common stock and
authorize a class of 5,000,000 shares of undesignated preferred stock;
and
- that our first fiscal quarter ends on March 31, 2000 for convenience of
presentation. The actual ending date of the first quarter of fiscal 2000
was April 2, 2000.
3
<PAGE> 6
RISK FACTORS
This offering involves a high degree of risk. Investors should carefully
consider the risks and uncertainties and the other information in this
prospectus before deciding whether to invest in shares of our common stock. Any
of the following risks could cause the trading price of our common stock to
decline.
RISKS RELATED TO OUR BUSINESS
WE MAY NOT MEET QUARTERLY FINANCIAL EXPECTATIONS, WHICH COULD CAUSE OUR STOCK
PRICE TO DECLINE.
Our quarterly operating results are likely to vary significantly in the
future based upon a number of factors related to our industry and the markets
for our products, over many of which we have little or no control. We operate in
a highly dynamic industry and future results could be subject to significant
fluctuations, particularly on a quarterly basis. These fluctuations could cause
us to fail to meet quarterly financial expectations, which could cause our stock
price to decline rapidly and significantly. Factors contributing to the
volatility of our stock price include:
- the timing and success of new product and technology introductions by us
or our competitors;
- availability of raw materials, semiconductor wafers and manufacturing
capacity or fluctuations in our manufacturing yields;
- changes in selling prices for our integrated circuits due to competitive
or currency exchange rate pressures;
- changes in our product mix;
- changes in the relative percentage of products sold through distributors
as compared to direct sales;
- market acceptance of our products; and
- changes in customer purchasing cycles.
Due to the factors discussed above, investors should not rely on
quarter-to-quarter comparisons of our results of operations as indicators of
future performance.
OUR RELIANCE ON THIRD-PARTY WAFER FABS TO MANUFACTURE OUR SEMICONDUCTOR WAFERS
MAY CAUSE A SIGNIFICANT DELAY IN OUR ABILITY TO FILL ORDERS AND LIMITS OUR
ABILITY TO ASSURE PRODUCT QUALITY AND TO CONTROL COSTS.
We do not own or operate a semiconductor fabrication facility. We currently
rely on four third-party wafer fabs to manufacture substantially all of our
semiconductor wafers. Each of these third-party wafer fabs is our sole source
for wafers manufactured using a particular process technology. Substantially all
of our products sold in 1999 and a majority of our products during the first
three months of 2000 were manufactured in gallium arsenide by TRW. The supply
agreement with TRW provides us with a guaranteed supply of wafers through
December 31, 2000. We may not be able to negotiate an extension to this
agreement on favorable terms, if at all. We also may not be successful in
forming an alternative supply arrangement that provides us with a sufficient
supply of gallium arsenide wafers. In addition, we have only recently begun
working with two of our four principal third-party wafer fabs. The loss of one
of our third-party wafer fabs, in particular TRW, or any delay or reduction in
wafer
4
<PAGE> 7
supply will impact our ability to fulfill customer orders, perhaps materially,
and could damage our relationships with our customers, either of which would
significantly harm our business and operating results. Because there are limited
numbers of third-party wafer fabs that use the particular process technologies
we select for our products and that have sufficient capacity to meet our needs,
using alternative or additional third-party wafer fabs would require an
extensive qualification process that could prevent or delay product shipments.
Our reliance on these third-party wafer fabs involves several additional
risks, including reduced control over the manufacturing costs, delivery times,
reliability and quality of our components produced from these wafers. The
fabrication of semiconductor wafers is a highly complex and precise process.
Minute impurities, difficulties in the fabrication process, defects in the masks
used to print circuits on a wafer, wafer breakage or other factors can cause a
substantial percentage of wafers to be rejected or numerous die on each wafer to
be nonfunctional. We expect that our customers will continue to establish
demanding specifications for quality, performance and reliability that must be
met by our products. Our third-party wafer fabs may not be able to achieve and
maintain acceptable production yields in the future. These risks are heightened
with respect to our two newest third-party wafer fabs which have not yet
produced wafers in volume for us. To the extent our third-party wafer fabs
suffer failures or defects, we could experience lost revenues, increased costs,
and delays in, cancellations or rescheduling of orders or shipments, any of
which would harm our business.
In the past, we have experienced delays in product shipments from our
third-party wafer fabs, which in turn delayed product shipments to our
customers. We may in the future experience similar delays or other problems,
such as inferior wafer quality, reduced manufacturing yields and inadequate
wafer supply.
OUR RELIANCE ON SUBCONTRACTORS TO PACKAGE OUR PRODUCTS COULD CAUSE A DELAY IN
OUR ABILITY TO FULFILL ORDERS OR COULD INCREASE OUR COST OF REVENUES.
We do not package the RF components that we sell but rather rely on
subcontractors to package our products. Packaging is the procedure of
electrically bonding and encapsulating the integrated circuit into its final
protective plastic or ceramic casing. We provide the wafers containing the
integrated circuits and, in some cases, packaging materials to third-party
packagers. Although we currently work with five packagers, substantially all of
our net revenues in 1999 and the first three months of 2000 were attributable to
products packaged by one subcontractor, MPI Corporation of Manila, Philippines.
A relative of one of our principal stockholders controls MPI. We do not have
long-term contracts with our third-party packagers stipulating fixed prices or
packaging volumes. Therefore, in the future we may be unable to obtain
sufficient high quality or timely packaging of our products. The loss or
reduction in packaging capacity of any of our current packagers, particularly
MPI, would significantly damage our business. In addition, increased packaging
costs will adversely affect our profitability.
The fragile nature of the semiconductor wafers that we use in our
components requires sophisticated packaging techniques and can result in low
packaging yields. If our packaging subcontractors fail to achieve and maintain
acceptable production yields in the future, we could experience increased costs,
including warranty expense and costs associated with customer support, delays in
or cancellations or rescheduling of orders or shipments, product returns or
discounts and lost revenues, any of which would harm our business.
WE DEPEND ON TWO DISTRIBUTORS FOR A SIGNIFICANT PORTION OF OUR SALES, THE LOSS
OF ANY ONE OF WHICH WOULD LIMIT OUR ABILITY TO SUSTAIN AND GROW OUR REVENUES.
Historically, two distributors, Avnet Electronics Marketing and Richardson
Electronics, have accounted for a significant portion of our sales. In 1999,
sales through Richardson Electronics
5
<PAGE> 8
represented 38% of our net revenues and sales through Avnet Electronics
Marketing represented 13% of our net revenues. In the three months ended March
31, 2000, sales through Richardson Electronics represented 39% of our net
revenues and sales through Avnet Electronics Marketing represented 24% of our
net revenues. These distributors principally purchase our standard components
for resale to their customers. Our contracts with these distributors do not
require them to purchase our products and may be terminated by them at any time
without penalty. If our distributors fail to successfully market and sell our
products, our revenues could be materially adversely affected. The loss of
either of our current distributors and our failure to develop new and viable
distribution relationships would limit our ability to sustain and grow our
revenues.
WE DEPEND ON MINICIRCUITS LABORATORIES FOR A SUBSTANTIAL PORTION OF OUR REVENUES
AND THE LOSS OF MINICIRCUITS AS A CUSTOMER OR A DECREASE IN PURCHASES BY
MINICIRCUITS WOULD ADVERSELY AFFECT OUR REVENUES.
Sales to Minicircuits Laboratories, a private label reseller of our
products, account for a significant portion of our revenues. For example, 36% of
our net revenues in 1998, 41% of our net revenues in 1999 and 31% of our net
revenues in the three months ended March 31, 2000 were attributable to sales to
Minicircuits. We expect that we will continue to rely on sales to Minicircuits
for a significant portion of our future revenues. In addition to reselling
products of Stanford Microdevices and other RF component suppliers, Minicircuits
also designs and supplies their own RF components. Our current contract with
Minicircuits does not require Minicircuits to purchase our products in the
future. If we were to lose Minicircuits as a customer, or if Minicircuits
substantially reduced its purchases, our business and operating results would be
adversely affected.
STANFORD UNIVERSITY HAS FILED A LAWSUIT AGAINST US ALLEGING TRADEMARK
INFRINGEMENT. IF THIS LAWSUIT IS DECIDED AGAINST US, WE COULD BE FORCED TO
CHANGE OUR CORPORATE NAME, LOSE BRAND RECOGNITION, PAY DAMAGES AND INCUR
SIGNIFICANT LITIGATION COSTS.
On March 17, 2000, Stanford University filed a complaint against us
alleging, among other things, infringement by us of its trademark using the name
"Stanford" and from use of any logo containing the letter "S" on a red
background. Stanford University has requested preliminary and permanent
injunctions prohibiting us from infringing its trademark, and seeks compensatory
damages, exemplary and punitive damages, costs and attorneys' fees. A hearing on
the request for preliminary injunction is currently scheduled for May 8, 2000.
If Stanford University is granted the preliminary injunction, we would be
compelled to immediately cease using our logo and/or our corporate name.
Similarly, if we successfully defend the preliminary injunction request and
ultimately lose the lawsuit, we may be prohibited from using our logo and/or
corporate name. If we are prohibited from using our name or logo, our brand
recognition that we have built over several years could be significantly
impaired, which could severely damage our business and operating results. We
would also need to invest significant capital in rebranding our products and, in
general, our company. In addition, we may be liable for monetary damages and
other costs of litigation. Even if we are successful in defending the lawsuit
and the preliminary injunction request, we may incur significant legal expenses
and our management may expend significant time in the defense. See
"Business -- Legal Proceedings" for a description of this litigation.
6
<PAGE> 9
INTENSE COMPETITION IN OUR INDUSTRY COULD PREVENT US FROM INCREASING REVENUES
AND SUSTAINING PROFITABILITY.
The RF semiconductor industry is intensely competitive and is characterized
by the following:
- rapid technological change;
- rapid product obsolescence;
- shortages in wafer fabrication capacity;
- price erosion; and
- unforeseen manufacturing yield problems.
We compete primarily with other suppliers of high-performance RF components
used in the infrastructure of communications networks such as Agilent, Alpha
Industries, Anadigics, Conexant, Infineon, M/A-COM, Minicircuits Laboratories,
NEC, RF Micro Devices, TriQuint Semiconductor and Watkins-Johnson. We also
compete with communications equipment manufacturers who manufacture RF
components internally such as Ericsson, Lucent, Motorola and Nortel Networks. We
expect increased competition both from existing competitors and from a number of
companies that may enter the RF component market, as well as future competition
from companies that may offer new or emerging technologies. In addition, many of
our current and potential competitors have significantly greater financial,
technical, manufacturing and marketing resources than we have. As a result,
communications equipment manufacturers may decide not to buy from us due to
their concerns about our size, financial stability or ability to interact with
their logistics systems. Our failure to successfully compete in our markets
would have a material adverse effect on our business, financial condition and
results of operations.
OUR BUSINESS STRATEGY IS DEPENDENT ON SUCCESSFUL MARKETING AND SALES OF RF
COMPONENTS PRODUCED USING THREE PROCESS TECHNOLOGIES WITH WHICH WE HAVE LIMITED
EXPERIENCE.
We shipped our first products using silicon germanium and indium gallium
phosphide in the fourth quarter of 1999. In addition, although we plan to act as
a reseller of products manufactured using the laterally diffused metal oxide
semiconductor process, we have not yet generated any revenues from resale of
these products. As a result, investors have a very limited basis upon which to
evaluate the demand for, and market acceptance of, our products manufactured
using these technologies. If our products using these technologies do not meet
customer expectations or if the market for these products fails to develop or
develops more slowly than we expect, our business would be harmed.
IF WE FAIL TO INTRODUCE NEW PRODUCTS IN A TIMELY AND COST-EFFECTIVE MANNER, OUR
ABILITY TO SUSTAIN AND INCREASE OUR REVENUES COULD SUFFER.
The markets for our products are characterized by frequent new product
introductions, evolving industry standards and changes in product and process
technologies. Because of this, our future success will in large part depend on:
- our ability to continue to introduce new products in a timely fashion;
- our ability to improve our products and to adapt to new process
technologies in a timely manner;
- our ability to adapt our products to support emerging and established
industry standards; and
- market acceptance of our products.
7
<PAGE> 10
We estimate that the development cycles of our products from concept to
production could last up to 12 months. We have in the past experienced delays in
the release of new products. We may not be able to introduce new products in a
timely and cost-effective manner which would impair our ability to sustain and
increase our revenues.
PRODUCT QUALITY, PERFORMANCE AND RELIABILITY PROBLEMS COULD DISRUPT OUR BUSINESS
AND HARM OUR FINANCIAL CONDITION.
Our customers demand that our products meet stringent quality, performance
and reliability standards. RF components such as those we produce may contain
undetected defects or flaws when first introduced or after commencement of
commercial shipments. We have from time to time experienced product quality,
performance or reliability problems. In addition, some of our products are
manufactured using process technologies that are relatively new and for which
long-term field performance data are not available. As a result, defects or
failures may occur in the future relating to our product quality, performance
and reliability. If these failures or defects occur, we could experience lost
revenues, increased costs, including warranty expense and costs associated with
customer support, delays in or cancellations or rescheduling of orders or
shipments and product returns or discounts, any of which would harm our
business.
SOURCES FOR CERTAIN COMPONENTS AND MATERIALS ARE LIMITED, WHICH COULD RESULT IN
DELAYS OR REDUCTIONS IN PRODUCT SHIPMENTS.
The semiconductor industry from time to time is affected by limited
supplies of certain key components and materials. For example, we rely on
limited sources for certain packaging materials. If we, or our packaging
subcontractors, are unable to obtain these or other materials in the required
quantity and quality, we could experience delays or reductions in product
shipments, which would materially and adversely affect our profitability.
Although we have not experienced any significant difficulty to date in obtaining
these materials, these shortages may arise in the future. We cannot guarantee
that we would not lose potential sales if key components or materials are
unavailable, and as a result, we are unable to maintain or increase our
production levels.
IF COMMUNICATIONS EQUIPMENT MANUFACTURERS INCREASE THEIR INTERNAL PRODUCTION OF
RF COMPONENTS, OUR REVENUES WOULD DECREASE AND OUR BUSINESS WOULD BE HARMED.
Currently, communications equipment manufacturers obtain their RF
components by either developing them internally or by buying widely available
standard RF components from third-party distributors. We have historically
generated substantially all of our revenues through sales of standard components
to these manufacturers through our distributors. If communications equipment
manufacturers increase their internal production of RF components and reduce
purchases of RF components from third parties, our revenues would decrease and
our business would be harmed.
WE HAVE RECENTLY ESTABLISHED A BUSINESS UNIT FOCUSED ON DESIGNING RF COMPONENTS
FOR SPECIFIC EQUIPMENT MANUFACTURERS. OUR FAILURE TO GROW THIS BUSINESS UNIT
WOULD IMPAIR OUR ABILITY TO SUSTAIN AND INCREASE OUR REVENUES.
Communications equipment manufacturers have begun to work directly with
component suppliers such as us to design and build customized products for
specific needs. We have recently established a business unit focused on
designing RF components to meet these needs. Our business strategy is dependent
in part on this business unit to sustain and increase our revenues. This
business unit has not yet completed development of or shipped any products and
we cannot guarantee that we will be successful in developing this business unit.
8
<PAGE> 11
Development of this business unit will require us to expand our internal sales
force and successfully install logistic and supply chain software and processes
to manage this business unit. Each of these tasks will require significant
management attention and expenditure of resources. Even with this attention and
these expenditures, we may be unsuccessful in operating this business unit and
this business unit may not generate any revenues.
We may spend considerable sums developing components for a particular
application or a potential customer. We do not expect that these customers will
have any contractual obligation to purchase these products and we many never
realize any revenues from sales of these products. In addition, if the recent
trend of outsourcing the design and manufacture of customized components to
third parties is reversed, we would not be able to execute this element of our
business strategy.
THIRD-PARTY WAFER FABS WHO MANUFACTURE THE SEMICONDUCTOR WAFERS FOR OUR PRODUCTS
MAY COMPETE WITH US IN THE FUTURE.
Several third-party wafer fabs independently produce and sell RF components
directly to communications equipment manufacturers. We currently rely on certain
of these third-party wafer fabs to produce the semiconductor wafers for our
products and, in the case of UltraRF, for the production of the RF components
which we plan to resell to communications equipment manufacturers. These
third-party wafer fabs possess confidential information concerning our products
and product release schedules. We cannot guarantee that they would not use our
confidential information to compete with us. Competition from these third-party
wafer fabs may result in reduced demand for our products and could damage our
relationships with these third-party wafer fabs, thereby harming our business.
PERCEIVED RISKS RELATING TO PROCESS TECHNOLOGIES WE MAY ADOPT IN THE FUTURE TO
MANUFACTURE OUR PRODUCTS COULD CAUSE RELUCTANCE AMONG POTENTIAL CUSTOMERS TO
PURCHASE OUR PRODUCTS.
We may adopt new process technologies in the future to manufacture our
products. Prospective customers of these products may be reluctant to purchase
these products based on perceived risks of these new technologies. These risks
could include concerns related to manufacturing costs and yields and
uncertainties about the relative cost-effectiveness of products produced using
these new technologies. If our products fail to achieve market acceptance, our
business, financial condition and results of operations would be materially
adversely affected.
WE MAY ENCOUNTER DIFFICULTIES IN MANAGING OUR GROWTH.
We are experiencing a period of rapid growth and expansion that will
continue to place a significant strain on our management and other resources.
The number of our employees has increased from 24 at December 31, 1998 to 77 at
December 31, 1999 and 91 at March 31, 2000. To accommodate this growth, we must
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the improvement of the accounting and other
internal management systems. This may require substantial managerial and
financial effort, and our efforts in this regard may not be successful. Our
current systems, procedures and controls may not be adequate to support our
operations. If we fail to improve our operational, financial and management
information systems, or fail to effectively motivate or manage our new and
future employees, our business could be harmed.
Several members of our senior management joined us in 1999, including
Robert Van Buskirk, our President and Chief Executive Officer, and Thomas
Scannell, our Vice President,
9
<PAGE> 12
Finance and Administration and Chief Financial Officer. We cannot guarantee that
our management team will be able to continue to work together effectively or
manage our growth successfully.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL,
WE MAY BE UNABLE TO PURSUE BUSINESS OPPORTUNITIES OR DEVELOP OUR PRODUCTS.
We believe that our future success will depend in large part upon our
continued ability to recruit, hire, retain and motivate highly skilled
technical, marketing and managerial personnel, who are in great demand.
Competition for these employees, particularly RF integrated circuit design
engineers, is intense. Our failure to hire additional qualified personnel in a
timely manner and on reasonable terms could adversely affect our business and
profitability. In addition, from time to time we may recruit and hire employees
from our customers, suppliers and distributors, which could damage our business
relationship with these parties. Our success also depends on the continuing
contributions of our senior management and technical personnel, all of whom
would be difficult to replace. The loss of key personnel could adversely affect
our ability to execute our business strategy, which could cause our results of
operations and financial condition to suffer. We may not be successful in
retaining these key personnel.
OUR LIMITED ABILITY TO PROTECT OUR PROPRIETARY INFORMATION AND TECHNOLOGY MAY
ADVERSELY AFFECT OUR ABILITY TO COMPETE.
Our future success and ability to compete is dependent in part upon our
proprietary information and technology. None of our technology is currently
patented. Instead, we rely on a combination of contractual rights and copyright,
trademark and trade secret laws and practices to establish and protect our
proprietary technology. We generally enter into confidentiality agreements with
our employees, consultants, resellers, wafer suppliers, customers and potential
customers, and strictly limit the disclosure and use of other proprietary
information. The steps taken by us in this regard may not be adequate to prevent
misappropriation of our technology. Additionally, our competitors may
independently develop technologies that are substantially equivalent or superior
to our technology. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain or use our products
or technology. In addition, the laws of some foreign countries do not protect
our proprietary rights to the same extent as do the laws of the United States.
OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, AND
RESULTING CLAIMS AGAINST US COULD BE COSTLY AND REQUIRE US TO ENTER INTO
DISADVANTAGEOUS LICENSE OR ROYALTY ARRANGEMENTS.
The semiconductor industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement and the violation of intellectual property rights. Although we
attempt to avoid infringing known proprietary rights of third parties in our
product development efforts, we expect that we may be subject to legal
proceedings and claims for alleged infringement by us or our licensees of
third-party proprietary rights, such as patents, trade secrets, trademarks or
copyrights, from time to time in the ordinary course of business. Any claims
relating to the infringement of third-party proprietary rights, even if not
meritorious, could result in costly litigation, divert management's attention
and resources, or require us to enter into royalty or license agreements which
are not advantageous to us. In addition, parties making these claims may be able
to obtain an injunction, which could prevent us from selling our products in the
United States or abroad. We may increasingly be subject to infringement claims
as the number of our products grows.
10
<PAGE> 13
OUR RELIANCE ON FOREIGN SUPPLIERS AND MANUFACTURERS EXPOSES US TO THE ECONOMIC
AND POLITICAL RISKS OF THE COUNTRIES IN WHICH THEY ARE LOCATED.
Independent third parties in other countries package all of our products
and supply some of our wafers and substantially all of the packaging materials
used in the production of our components. Due to our reliance on foreign
suppliers and packagers, we are subject to the risks of conducting business
outside the United States. These risks include:
- unexpected changes in, or impositions of, legislative or regulatory
requirements;
- shipment delays, including delays resulting from difficulty in obtaining
export licenses;
- tariffs and other trade barriers and restrictions;
- political, social and economic instability; and
- potential hostilities and changes in diplomatic and trade relationships.
In addition, we currently transact business with our foreign suppliers and
packagers in U.S. dollars. Consequently, if the currencies of our suppliers'
countries were to increase in value against the U.S. dollar, our suppliers may
attempt to raise the cost of our wafers, packaging materials, and packaging
services, which could have an adverse effect on our profitability.
A SIGNIFICANT PORTION OF OUR PRODUCTS ARE SOLD TO INTERNATIONAL CUSTOMERS EITHER
THROUGH OUR DISTRIBUTORS OR DIRECTLY BY US, WHICH EXPOSES US TO RISKS THAT MAY
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
A significant portion of our direct sales and sales through our
distributors were to foreign purchasers, particularly in countries located in
Asia. International direct sales approximated 2% of our total direct sales for
the year ended December 31, 1999. Based on information available from our
distributors, products representing approximately 43% of our total distribution
revenues, representing approximately 22% of our net revenues, were sold by our
distributors to international customers in 1999. Demand for our products in
foreign markets could decrease, which could have a materially adverse effect on
our results of operations. Therefore, our future operating results may depend on
several economic conditions in foreign markets, including:
- changes in trade policy and regulatory requirements;
- fluctuations in currency;
- duties, tariffs and other trade barriers and restrictions;
- trade disputes; and
- political instability.
ANY FUTURE ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISTRACTION
OF OUR MANAGEMENT AND DISRUPTIONS TO OUR BUSINESS.
We may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. From time
to time, we may engage in discussions and negotiations with companies regarding
our acquiring or investing in their businesses, products, services or
technologies. We may not be able to identify suitable acquisition or investment
candidates in the future, or if we do identify suitable candidates, we may not
be able to make such acquisitions or investments on commercially acceptable
terms or at all. If we acquire or invest in another company, we could have
difficulty assimilating that company's personnel, operations, technology or
products and service offerings. In addition, the key
11
<PAGE> 14
personnel of the acquired company may decide not to work for us. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations.
Furthermore, we may incur indebtedness or issue equity securities to pay for any
future acquisitions. The issuance of equity securities could be dilutive to our
existing stockholders. In addition, the accounting treatment for any acquisition
transaction may result in significant goodwill, which, when amortized, will
negatively affect our net income. As of the date of this prospectus, we have no
agreement to enter into any investment or acquisition transaction.
RISKS RELATED TO OUR INDUSTRY
OUR GROWTH DEPENDS ON THE GROWTH OF THE INFRASTRUCTURE FOR WIRELESS AND WIRELINE
COMMUNICATIONS. IF THIS MARKET DOES NOT CONTINUE TO GROW, OR IF IT GROWS AT A
SLOW RATE, DEMAND FOR OUR PRODUCTS WILL DIMINISH.
Our success will depend in large part on the continued growth of the
telecommunications industry in general and, in particular, the market for
wireless and wireline infrastructure components. We cannot assure you that the
market for these infrastructure products will continue to grow at historical
rates or at all. Even if the demand for infrastructure grows, we will need to
complete new product designs that meet the needs of our customers at a rate
consistent with the growth of the market. Our product and process development
efforts may not be successful in this regard.
THE TIMING OF THE ADOPTION OF INDUSTRY STANDARDS MAY NEGATIVELY IMPACT
WIDESPREAD MARKET ACCEPTANCE OF OUR PRODUCTS.
The markets in which we and our customers compete are characterized by
rapidly changing technology, evolving industry standards and continuous
improvements in products and services. If technologies or standards supported by
our or our customers' products become obsolete or fail to gain widespread
commercial acceptance, our business will be significantly damaged. In addition,
the increasing demand for wireless and wireline communications has exerted
pressure on standards bodies worldwide to adopt new standards for these
products, generally following extensive investigation of, and deliberation over,
competing technologies. The delays inherent in the standards approval process
may in the future cause the cancellation, postponement or rescheduling of the
installation of communications systems by our customers. These delays may in the
future have a material adverse effect on the sale of products by us and on our
business, financial condition and results of operations.
INDUSTRY-WIDE FLUCTUATIONS IN SUPPLY AND DEMAND FOR SEMICONDUCTOR PRODUCTS COULD
ADVERSELY IMPACT OUR BUSINESS.
The semiconductor industry has historically been characterized by wide
fluctuations in supply and demand for semiconductor products. From time to time,
demand for semiconductor products has decreased, often in connection with, or in
anticipation of, major additions of wafer fabrication capacity or maturing
product cycles or due to general economic conditions. In the past, diminished
product demand, production overcapacity and subsequent accelerated price erosion
have lasted for extended periods of time. These fluctuations may occur in the
future and could materially and adversely impact our business.
12
<PAGE> 15
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE.
Our common stock has never been sold in a public market and an active
trading market for our common stock may not develop or be sustained upon the
completion of this offering. We are negotiating the initial public offering
price of the common stock with the underwriters. However, the initial public
offering price may not be indicative of the prices that will prevail in the
public market after the offering, and the market price of the common stock could
fall below the initial public offering price. Investors should read the
"Underwriting" section for a discussion of the factors considered in determining
the initial public offering price.
In addition, the market price of our common stock could fluctuate widely in
response to the following factors:
- actual or anticipated variations in operating results;
- announcements of technological innovations, new products or new services
by us or by our competitors or customers;
- changes in financial estimates or recommendations by stock market
analysts regarding us or our competitors;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- additions or departures of key personnel;
- future equity or debt offerings or our announcements of these offerings;
and
- general market and economic conditions.
In addition, in recent years, the stock market in general, and the Nasdaq
National Market and the securities of technology companies in particular, have
experienced extreme price and volume fluctuations. These fluctuations have often
been unrelated or disproportionate to the operating performance of individual
companies. These broad market fluctuations may materially adversely affect our
stock price, regardless of our operating results.
WE MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH
INVESTORS MAY NOT AGREE AND IN WAYS THAT MAY NOT YIELD A FAVORABLE RETURN.
We will retain broad discretion over the use of proceeds from this
offering. Stockholders may not deem the actual uses desirable, and our use of
the proceeds may not yield a significant return or any return at all. We intend
to use the proceeds from this offering for research and development, working
capital and other general corporate purposes and to finance potential
acquisitions and investments. Because of the number and variability of factors
that determine our use of the net proceeds from this offering, we cannot
guarantee that these uses will not vary substantially from our currently planned
uses.
SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US, AND THEY MAY NOT
MAKE DECISIONS THAT REFLECT THE INTERESTS OF STANFORD MICRODEVICES OR OTHER
STOCKHOLDERS.
After this offering, our officers, directors and principal stockholders
(greater than 5% stockholders) will together control approximately 78.4% of our
outstanding common stock and our two founding stockholders will control 54.7% of
our outstanding common stock. As a result, these stockholders, if they act
together, and our founding stockholders acting alone, will
13
<PAGE> 16
be able to exert a significant degree of influence over our management and
affairs and control matters requiring stockholder approval, including the
election of all of our directors and approval of significant corporate
transactions. In addition, this concentration of ownership may delay or prevent
a change in control of Stanford Microdevices and might affect the market price
of our common stock. In addition, the interests of these stockholders may not
always coincide with the interests of Stanford Microdevices or the interests of
other stockholders.
OUR CHARTER AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS THAT MAY DELAY OR
PREVENT A CHANGE OF CONTROL.
Provisions of our charter and bylaws may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of us. These provisions could limit the price
that investors might be willing to pay in the future for shares of our common
stock. These provisions include:
- division of the board of directors into three separate classes;
- elimination of cumulative voting in the election of directors;
- prohibitions on our stockholders from acting by written consent and
calling special meetings;
- procedures for advance notification of stockholder nominations and
proposals; and
- the ability of the board of directors to alter our bylaws without
stockholder approval.
In addition, our board of directors has the authority to issue up to
5,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The issuance of
preferred stock, while providing flexibility in connection with possible
financings or acquisitions or other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of our
outstanding voting stock.
We are also subject to Section 203 of the Delaware General Corporation Law
that, subject to exceptions, prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years following the date that this stockholder became an interested stockholder.
The preceding provisions of our charter and bylaws, as well as Section 203 of
the Delaware General Corporation Law, could discourage potential acquisition
proposals, delay or prevent a change of control and prevent changes in our
management.
SOME PURCHASERS OF SHARES IN THIS OFFERING HAVE THE RIGHT TO RESCIND THEIR
PURCHASE OF THE SHARES, WHICH WOULD REDUCE THE NET PROCEEDS TO BE RECEIVED BY US
IN THIS OFFERING AND COULD HARM OUR BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
Prior to the effectiveness of the registration statement covering the
shares being sold in this offering, one of our officers provided written
materials to 21 individuals who we have designated as potential purchasers of up
to 37,000 shares in this offering through a directed share program. These
materials may constitute a prospectus that does not meet the requirements of the
Securities Act of 1933. The persons who received these written materials should
rely only on the disclosure contained in this prospectus and should not rely
upon the previously provided written materials in any manner in making a
decision whether to purchase shares in this offering.
If the distribution of these materials by us did constitute a violation of
the Securities Act of 1933, the recipients of these materials who purchase
shares in this offering would have the
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<PAGE> 17
right, for a period of one year from the date of their purchase of the shares,
to obtain recovery of the consideration paid in connection with their purchase
of shares or, if they had already sold the shares, sue us for damages resulting
from their purchase of shares. These damages could total up to approximately
$481,000 plus interest, based on an assumed initial public offering price of
$13.00 per share, if these investors seek recovery or damages after an entire
loss of their investment. If this occurs, our business, results of operations
and financial condition could be harmed.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of our common stock in the
market after this offering or the perception that such sales could occur. These
sales also might make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate. Please see "Shares
Eligible for Future Sale" for a description of sales that may occur in the
future.
WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK.
We currently intend to retain any future earnings for funding growth and,
therefore, do not anticipate paying any dividends in the foreseeable future.
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
We expect the initial public offering to be substantially higher than the
net tangible book value per share of our common stock. The net tangible book
value of a share of common stock purchased at an assumed initial public offering
price of $13.00 per share will be only $2.35. Additional dilution may be
incurred if holders of options to purchase our common stock, whether currently
outstanding or subsequently granted, exercise their options.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, forward-looking statements can be identified by
terminology such as "may," "will," "should," "expect," "anticipate," "intend,"
"plan," "believe," "estimate," "potential," or "continue," the negative of these
terms or other comparable terminology. These statements involve a number of
risks and uncertainties. Actual events or results may differ materially from any
forward-looking statement as a result of various factors, including those we
discuss in "Risk Factors" and elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as required by law, we undertake
no obligation to update publicly any forward-looking statements for any reason
after the date of this prospectus to conform these statements to actual results
or to changes in our expectations. Before investing in our common stock,
investors should be aware that the occurrence of the events described under
"Risk Factors" and elsewhere in this prospectus could have a material adverse
effect on our business, operating results and financial condition.
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<PAGE> 18
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 4,000,000 shares of
common stock we are offering at an assumed initial public offering price of
$13.00 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses will be approximately $46.8 million.
If the underwriters' over-allotment option is exercised in full, we estimate
that our net proceeds will be approximately $54.0 million. We expect to use the
net proceeds from this offering for general corporate purposes, including
working capital, research and development and capital expenditures. A portion of
the proceeds may also be used to acquire or invest in complementary businesses
or products or to obtain the right to use complementary technologies, although
there are no current plans, negotiations or discussions for any of these
transactions. Pending use of the net proceeds for the above purposes, we intend
to invest these funds in short-term, interest-bearing, investment grade
securities.
DIVIDEND POLICY
In the past, we have operated as an S corporation for federal tax purposes
and we have paid dividends to the holders of our common stock. We became a C
corporation in October 1999 and we currently anticipate that we will retain all
of our future earnings for use in the expansion and operation of our business
and do not anticipate paying any cash dividends in the foreseeable future.
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<PAGE> 19
CAPITALIZATION
The following table shows:
- our actual capitalization as of March 31, 2000;
- our capitalization as of March 31, 2000 on a pro forma basis to reflect
the automatic conversion of all outstanding shares of mandatorily
redeemable convertible preferred stock into shares of common stock upon
the closing of this offering; and
- our pro forma capitalization as of March 31, 2000 as adjusted to reflect
the net exercise of outstanding warrants and the receipt of the estimated
net proceeds from the sale of common stock offered by us at an assumed
initial public offering price of $13.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses.
The following table does not include:
- 5,266,530 shares of common stock subject to outstanding options as of
March 31, 2000 at a weighted average exercise price of $1.59 per share;
- 1,667,818 additional shares plus annual increases available for future
grant under our Amended and Restated 1998 Stock Plan; or
- 300,000 shares plus annual increases that will be available for issuance
under our 2000 Employee Stock Purchase Plan upon completion of this
offering.
This information should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
(UNAUDITED)
<S> <C> <C> <C>
Long-term debt, less current portion................... $ 1,608 $ 1,608 $ 1,608
Mandatorily redeemable convertible preferred stock,
$.001 par value, 6,000,000 shares authorized actual
and pro forma, 5,647,839 shares issued and
outstanding, actual; no shares issued or outstanding,
pro forma and pro forma as adjusted.................. 64,781 -- --
Stockholders' equity (net capital deficiency):
Preferred stock, $.001 par value, no shares
authorized, issued or outstanding actual and pro
forma; 5,000,000 shares authorized, no shares
issued and outstanding pro forma as adjusted...... -- -- --
Common stock, $.001 par value, 30,000,000 shares
authorized actual and pro forma; 15,260,343 shares
issued and outstanding actual, 20,908,182 shares
issued and outstanding pro forma; 200,000,000
shares authorized, 25,627,412 shares issued and
outstanding pro forma as adjusted................. 15 21 26
Additional paid-in capital............................. 6,326 71,101 117,856
Deferred stock compensation............................ (4,630) (4,630) (4,630)
Accumulated deficit.................................... (54,732) (54,732) (54,732)
------- -------- --------
Total stockholders' equity (net capital deficiency).... (53,021) 11,760 58,520
------- -------- --------
Total capitalization................................... $13,368 $ 13,368 $ 60,128
======= ======== ========
</TABLE>
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<PAGE> 20
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was
approximately $11.8 million, or $0.56 per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets reduced by
the amount of our total liabilities divided by the total number of shares of
common stock outstanding after giving effect to the automatic conversion of our
mandatorily redeemable convertible preferred stock into shares of common stock.
After giving effect to our sale of the 4,000,000 shares of common stock offered
by this prospectus, based upon an assumed initial public offering price of
$13.00 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us, our pro forma net
tangible book value at March 31, 2000 would have been $58.5 million, or $2.35
per share. This represents an immediate increase in pro forma net tangible book
value of $1.79 per share to existing stockholders and an immediate dilution of
$10.65 per share to new investors purchasing shares at the assumed initial
public offering price. Dilution is determined by subtracting pro forma net
tangible book value per share after this offering from the assumed initial
public offering price per share. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 13.00
Pro forma net tangible book value per share before the
offering as of March 31, 2000.......................... $ 0.56
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 1.79
-------
Pro forma net tangible book value per share after this
offering.................................................. 2.35
-------
Dilution per share to new investors......................... $ 10.65
=======
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 2000,
the difference between the number of shares of common stock purchased from us,
the total consideration paid, and the average price per share paid by existing
stockholders and by investors purchasing shares in this offering (based upon an
assumed initial public offering price of $13.00 per share before deducting
estimated underwriting discounts and commissions and estimated offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 20,908,182 83.9% $17,239,515 24.9% $ 0.82
New investors............. 4,000,000 16.1 52,000,000 75.1 $13.00
---------- ----- ----------- ----- ------
Total................... 24,908,182 100.0% $69,239,515 100.0% $ 2.78
========== ===== =========== ===== ======
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to 4,600,000, or 18.0% of the
total shares of common stock outstanding after this offering.
The above discussion and tables assume no exercise of stock options or
warrants outstanding as of March 31, 2000 and gives effect to the conversion of
all outstanding shares of mandatorily redeemable convertible preferred stock
into common stock. In the event that we issue additional shares of common stock
in the future, purchasers of common stock in this offering may experience
further dilution. As of March 31, 2000, there were options outstanding to
purchase 5,266,530 shares of common stock at a weighted average exercise price
of approximately $1.59 per share and warrants to purchase approximately 719,230
shares of common stock (assuming a net exercise of these warrants prior to the
closing of this offering and an assumed initial public offering price of
$13.00). We also had 1,667,818 shares of common stock available for issuance
under our Amended and Restated 1998 Stock Plan as of
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<PAGE> 21
March 31, 2000. To the extent these outstanding options or warrants are
exercised, or new options or rights are issued under our stock plans, new
investors will experience further dilution.
Assuming the exercise in full of all outstanding options and warrants, our
pro forma as adjusted net tangible book value at March 31, 2000 would be $2.16
per share, representing an immediate increase in net tangible book value of
$1.60 per share to our existing stockholders, and an immediate decrease in the
net tangible book value per share of $10.84 to the new investors.
Assuming the exercise in full of all outstanding options and warrants and
based on an assumed initial public offering price of $13.00 per share before
deducting estimated underwriting discounts and commissions and estimated
offering expenses, the percentage of shares purchased by existing stockholders
and new investors would decrease to 67.7% and 12.9% and the percentage of total
consideration paid by existing stockholders and new investors would decrease to
22.2% and 67.0%.
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<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated selected financial data should be read in
conjunction with the consolidated financial statements and related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement of
operations data for the years ended December 31, 1997, 1998 and 1999 and the
consolidated balance sheet data as of December 31, 1998 and 1999 have been
derived from consolidated financial statements that have been audited by Ernst &
Young LLP, independent auditors, included elsewhere in this prospectus. The
consolidated statement of operations data for the year ended December 31, 1996
and the consolidated balance sheet data as of December 31, 1996 and 1997 have
been derived from audited consolidated financial statements not included in this
prospectus. The consolidated statement of operations data for the year ended
December 31, 1995 and for the three months ended March 31, 1999 and 2000 and the
consolidated balance sheet data as of December 31, 1995 and as of March 31, 1999
and 2000 are derived from unaudited consolidated financial statements not
included in this prospectus and, in our opinion, include all adjustments,
consisting of normal recurring adjustments, which are necessary for a fair
presentation of the results of operations as of and for the relevant period.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
----------- ------- ------- ------- -------- ------- --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues:
Product revenues.............................. $ 1,296 $ 3,676 $ 5,963 $ 7,417 $ 17,248 $ 2,595 $ 7,042
Contract manufacturing revenues............... 1,889 1,036 935 814 817 282 222
------- ------- ------- ------- -------- ------- --------
Total net revenues.......................... 3,185 4,712 6,898 8,231 18,065 2,877 7,264
Cost of revenues (exclusive of amortization of
deferred stock compensation of $140 and $37 in
1999 and for the three months ended March 31,
2000, respectively)........................... 2,357 3,228 3,970 4,854 9,996 1,655 2,885
------- ------- ------- ------- -------- ------- --------
Gross profit.................................... 828 1,484 2,928 3,377 8,069 1,222 4,379
Operating expenses:
Research and development (exclusive of
amortization of deferred stock compensation
of $31 and $64 in 1999 and for the three
months ended March 31, 2000,
respectively)............................... 161 472 643 932 2,274 337 1,436
Sales and marketing (exclusive of amortization
of deferred stock compensation of $56 and
$73 in 1999 and for the three months ended
March 31, 2000, respectively)............... 169 373 461 1,107 2,951 504 1,522
General and administrative (exclusive of
amortization of deferred stock compensation
of $61 and $132 in 1999 and for the three
months ended March 31, 2000,
respectively)............................... 349 514 659 965 2,089 222 939
Special charges............................... -- -- -- -- 2,990 -- --
Amortization of deferred stock compensation... -- -- -- -- 288 -- 306
------- ------- ------- ------- -------- ------- --------
Total operating expenses.................... 679 1,359 1,763 3,004 10,592 1,063 4,203
------- ------- ------- ------- -------- ------- --------
Income (loss) from operations................... 149 125 1,165 373 (2,523) 159 176
Interest and other income (expense), net........ 1 (13) (10) (84) 17 (29) 118
Provision for income taxes...................... 13 11 50 10 48 16 88
------- ------- ------- ------- -------- ------- --------
Net income (loss)............................... $ 137 $ 101 $ 1,105 $ 279 $ (2,554) $ 114 $ 206
======= ======= ======= ======= ======== ======= ========
Accretion of mandatorily redeemable convertible
preferred stock............................... -- -- -- -- (21,857) -- (25,924)
------- ------- ------- ------- -------- ------- --------
Net income (loss) applicable to common
stockholders.................................. $ 137 $ 101 $ 1,105 $ 279 $(24,411) $ 114 $(25,718)
======= ======= ======= ======= ======== ======= ========
Basic and diluted net income (loss) per share
applicable to common stockholders............. $ 0.01 $ 0.01 $ 0.07 $ 0.02 $ (1.63) $ 0.01 $ (1.71)
======= ======= ======= ======= ======== ======= ========
Shares used to compute basic and diluted net
income (loss) per share applicable to common
stockholders.................................. 15,000 15,000 15,000 15,000 15,000 15,000 15,000
Pro forma net income (loss) (unaudited)......... $ (2,666) $ 90 $ 206
-------- ------- --------
Pro forma basic net income (loss) per share
(unaudited)................................... $ (0.16) $ 0.01
-------- --------
Pro forma diluted net income (loss) per share
(unaudited)................................... $ (0.16) $ 0.01
-------- --------
Shares used to compute pro forma basic net
income (loss) per share (unaudited)........... 16,825 21,675
-------- --------
Shares used to compute pro forma diluted net
income (loss) per share (unaudited)........... 16,825 26,314
-------- --------
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH 31,
---------------------------------------------------- -----------
1995 1996 1997 1998 1999 2000
----------- ------ ------ ------ ------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................... $114 $ 190 $ 486 $ 217 $10,965 $ 3,777
Working capital (deficit)........................... 438 199 (10) (854) 7,746 7,240
Total assets........................................ 550 1,649 3,742 3,806 19,719 23,625
Long term obligations, less current portion......... 118 63 147 813 1,299 1,608
Mandatorily redeemable convertible preferred
stock............................................. -- -- -- -- 38,857 64,781
Total stockholders' equity (net capital
deficiency)....................................... 333 267 588 10 (27,912) (53,021)
</TABLE>
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial statements
and notes included elsewhere in this prospectus. The discussion in this
prospectus contains forward-looking statements that involve risks, uncertainties
and assumptions, such as statements of our plans, objectives, expectations and
intentions. The cautionary statements made in this prospectus should be read as
being applicable to all related forward-looking statements wherever they appear
in this prospectus. Our actual results may differ materially from those
discussed here. Factors that could cause or contribute to the differences
include those discussed in "Risk Factors," as well as those discussed elsewhere
in this prospectus.
OVERVIEW
We are a leading designer and supplier of high performance RF components
for communications equipment manufacturers. Our products are used primarily in
wireless communications equipment to enable and enhance the transmission and
reception of voice and data signals.
We derive a majority of our revenues from the sale of standard RF
components, which we develop from our own specifications and sell primarily
through distributors. In early 2000, we launched a separate business unit
focused on designing customized products for specific RF applications for
communications equipment manufacturers. These products are still in development
and we do not expect to generate material revenues from this business unit until
at least 2001.
We sell our products worldwide through U.S.-based distributors, through a
private label reseller who sells our products under its brand and through our
direct sales force. Our products are also sold through a worldwide network of
independent sales representatives whose orders are fulfilled either by
distributors or us. Significant portions of our distributors' end sales are made
to their customers overseas.
From 1986 to 1995, we generated revenues primarily from design services and
contract manufacturing services for RF components. Net revenues from contract
manufacturing services as a percentage of our total net revenues declined
significantly from 1996 to 1999. Net revenues from contract manufacturing
services for Pulsar Microwave accounted for 11% of our total net revenues in
1997. Contract manufacturing customers represented less than 10% of our total
net revenues in 1998 and 1999 and for the three months ended March 31, 1999 and
March 31, 2000. In 1999, we made the strategic decision to discontinue our
contract manufacturing services although we continued to fulfill our contractual
obligations through March 31, 2000. There were no employee terminations,
facilities charges, disposals of assets or other costs associated with our
decision to discontinue our contract manufacturing services. We do not expect
this decision to have a material impact on our ongoing results of operations,
liquidity or capital resources.
For our direct sales and private label sales, we recognize revenues when
the product has been shipped, title has transferred, and no further obligations
remain. Although we have never experienced a delay in customer acceptance of our
products, should a customer delay acceptance in the future, our policy is to
delay revenue recognition until the products are accepted by a customer.
Revenues for contract manufacturing services are recognized when the completed
assemblies are shipped and no further obligations remain. Provisions for product
returns are recorded upon shipment. Revenues from our distributors are deferred
until the distributors resell the products to their customers.
22
<PAGE> 25
Two distributors, Avnet Electronics Marketing and Richardson Electronics,
and a private label reseller of our products, Minicircuits Laboratories,
accounted for a significant portion of our net revenues in 1997, 1998, 1999 and
the three months ended March 31, 2000. Sales to Minicircuits Laboratories
represented 49% of net revenues in 1997, 36% of net revenues in 1998, 41% of net
revenues in 1999 and 31% of net revenues in the three months ended March 31,
2000. Richardson Electronics represented 19% of net revenues in 1997, 40% of net
revenues in 1998, 38% of net revenues in 1999 and 39% of net revenues in the
three months ended March 31, 2000. Avnet Electronics Marketing represented 7% of
net revenues in 1997, 11% of net revenues in 1998, 13% of net revenues in 1999
and 24% of net revenues in the three months ended March 31, 2000. Richardson
Electronics and Avnet Electronics Marketing distribute our products to a large
number of end customers. We anticipate that sales through distributors and to
one or more private label resellers will continue to account for a substantial
portion of our net revenues.
Cost of revenues consists primarily of the costs of wafers from our
third-party wafer fabs, costs of packaging performed by third-party vendors,
costs of testing, and costs associated with procurement, production control,
quality assurance and manufacturing engineering. We subcontract our wafer
manufacturing and packaging and do only final testing and tape and reel assembly
at our facilities.
Historically, gross margins on our sales through our distributors, to
private label resellers and from our contract manufacturing services have
differed materially from each other. As a result, the relative mix of these
sales affects our gross margin. For example, in 1999 gross margin for these
three channels ranged from as low as 0% for contract manufacturing, and from 50
to 70% for our private label and distributor channel partners depending on the
mix of products sold. The low gross margin on contract manufacturing services
was a primary contributor to our decision to discontinue our contract
manufacturing services. We do not expect our decision to discontinue our
contract manufacturing services to have any material impact on our financial
operation in the future.
We do not recognize revenue from our sales to distributors until shipment
to the distributor's customer. We record the deferred margin on distributor
inventory on our balance sheet. As a result, the level of inventory at our
distributors can affect our reported gross margin for any particular period.
The gross margin on sales to our private label reseller is traditionally
lower than that on our distributor sales. We generally charge lower prices to
our private label reseller due to its commitment to higher volumes on particular
parts, its absorption of the risk of inventory obsolescence and its agreement to
incur the sales and marketing costs for the parts.
Through March 31, 2000, one packaging firm, MPI Corporation in Manila,
Philippines, packaged substantially all of our products. MPI also performed
substantially all of the manufacturing that related to our contract
manufacturing services. Relatives of our founding stockholders own MPI. Although
we added four additional packaging subcontractors in 1999, we anticipate that
MPI will continue to account for a substantial portion of our packaging in the
near future.
Research and development expenses consist primarily of salaries and related
expenses for personnel engaged in research and development, material costs for
prototype and test units and other expenses related to the design, development
and testing of our products and, to a lesser extent, fees paid to consultants
and outside service providers. We expense all of our research and development
costs as they are incurred.
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in marketing, sales and customer support
functions, as well as
23
<PAGE> 26
costs associated with trade shows, promotional activities, advertising and
public relations. We pay and expense commissions to our independent sales
representatives when revenues from the associated sale are recognized.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, information technology, and
human resources personnel and professional fees.
In recent years we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our engineering,
sales and marketing and technical support departments, and to establish an
administrative organization. Our full-time employees increased from 28 at March
31, 1999 to 91 at March 31, 2000. We expect to continue to spend significantly
in these areas as we continue to grow.
In connection with the grant of stock options to employees through March
31, 2000, we recorded deferred stock compensation within stockholders' equity of
approximately $5.2 million, representing the difference between the deemed fair
value of the common stock for accounting purposes and the exercise price of
these options at the date of grant. During the year ended December 31, 1999, we
amortized $288,000 of this deferred stock compensation. We amortized an
additional $306,000 of this deferred stock compensation during the three months
ended March 31, 2000. We will amortize the remaining deferred stock compensation
over the vesting period of the related options, generally four years. The amount
of deferred stock compensation expense to be recorded in future periods could
decrease if options for which accrued but unvested compensation has been
recorded are forfeited. The amount of deferred stock compensation expense could
increase for additional stock options granted to employees through the date of
our initial public offering. In addition, although we believe we have accurately
assessed the deemed fair value of our common stock for accounting purposes for
all relevant periods, the amount of deferred stock compensation expense
currently recorded for periods through March 31, 2000 may increase in the event
the Securities and Exchange Commission disagrees with our assessment.
In October 1999, we issued 5,647,839 shares of mandatorily redeemable
convertible preferred stock at $3.01 per share for net proceeds of approximately
$17.0 million. The holders of the mandatorily redeemable convertible preferred
stock have various rights and preferences, including, but not limited to,
redemption rights. In the fourth quarter of 1999 and the first quarter of 2000,
we recorded an increase to our accumulated deficit of $21.9 million and $25.9
million, respectively, related to the accretion of the mandatorily redeemable
convertible preferred stock to our estimate of its fair value to reflect its
redemption value. As a result, net income available to common stockholders was
reduced. Upon completion of this offering, the mandatorily redeemable
convertible preferred stock will be converted into shares of common stock and,
accordingly, we will not have similar accretion in the future, which may
increase net income available to common stockholders in future periods. An
increase or decrease in net income available to common stockholders will impact
our earnings per share in future periods.
We began operations in 1985 and began to generate revenues in 1987. Until
October 1999, we were organized as an S corporation for federal tax reporting
purposes and were wholly owned by our founders. In October 1999, we revoked our
election to be treated as an S corporation under the Internal Revenue Code.
24
<PAGE> 27
RESULTS OF OPERATIONS
The following table shows selected statement of operations data expressed
as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- --------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Product revenues................... 86.4% 90.1% 95.5% 90.2% 96.9%
Contract manufacturing revenues.... 13.6 9.9 4.5 9.8 3.1
----- ----- ----- ----- -----
Total net revenues.............. 100.0 100.0 100.0 100.0 100.0
Cost of revenues (exclusive of
deferred stock compensation)....... 57.6 59.0 55.3 57.5 39.7
----- ----- ----- ----- -----
Gross profit......................... 42.4 41.0 44.7 42.5 60.3
Operating expenses:
Research and development (exclusive
of deferred stock
compensation)................... 9.3 11.3 12.6 11.7 19.8
Sales and marketing (exclusive of
deferred stock compensation).... 6.7 13.5 16.3 17.6 21.0
General and administrative
(exclusive of deferred stock
compensation)................... 9.5 11.7 11.6 7.7 12.9
Special charges.................... -- -- 16.5 -- --
Amortization of deferred stock
compensation.................... -- -- 1.6 -- 4.2
----- ----- ----- ----- -----
Total operating expenses........ 25.5 36.5 58.6 37.0 57.9
----- ----- ----- ----- -----
Income (loss) from operations........ 16.9 4.5 (13.9) 5.5 2.4
Interest and other income (expense),
net................................ (0.2) (1.0) 0.1 (1.0) 1.6
Provision for income taxes........... 0.7 0.1 0.3 0.5 1.2
----- ----- ----- ----- -----
Net income (loss).................... 16.0% 3.4% (14.1)% 4.0% 2.8%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
Net Revenues
Net revenues increased from $2.9 million for the three months ended March
31, 1999 to $7.3 million for the three months ended March 31, 2000. This
increase was the result of more effective promotion of our products by us and
our distributors, increased sales of new products, increased availability of our
products due to higher inventory levels at our distributors and at our facility
and a favorable mix of products sold through both our direct and distribution
channels. Sales through our distributors were 49% of net revenues for the three
months ended March 31, 1999 and 63% of net revenues for the three months ended
March 31, 2000. Sales to our private label reseller comprised 37% of net
revenues for the three months ended March 31, 1999 and 31% of net revenues for
the three months ended March 31, 2000. Contract manufacturing comprised 10% of
net revenues for the three months ended March 31, 1999 and 3% of net revenues
for the three months ended March 31, 2000.
25
<PAGE> 28
Cost of Revenues
Cost of revenues increased from $1.7 million for the three months ended
March 31, 1999 to $2.9 million for the three months ended March 31, 2000
primarily as a result of increased volume related material, subcontractor and
direct labor costs, which added costs of approximately $1.0 million, indirect
operations personnel expenses and depreciation charges. Operations personnel
increased from 15 at March 31, 1999 to 28 at March 31, 2000.
Gross Profit
Gross profit increased from $1.2 million for the three months ended March
31, 1999 to $4.4 million for the three months ended March 31, 2000. Gross margin
increased from 42% for the three months ended March 31, 1999 to 60% for the
three months ended March 31, 2000. This increase is primarily attributable to a
decrease in wafer and packaging costs from our subcontractors due to higher
volumes, better utilization of our own testing operations, sales of higher
margin products and a decrease in lower margin contract manufacturing revenues
as a percentage of our total net revenues.
Operating Expenses
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$337,000 for the three months ended March 31, 1999 to $1.4 million for the three
months ended March 31, 2000. This increase is primarily the result of the
addition of new personnel, which added costs of approximately $440,000,
increased expenses for engineering materials, which added costs of approximately
$185,000, software and equipment depreciation charges and the opening of
additional research and development design centers. We opened a design center in
Long Beach, California in August of 1999 and in Ottawa, Canada in December of
1999. We anticipate that we will open additional design centers in other
locations in future periods. Research and development personnel increased from
five at March 31, 1999 to 27 at March 31, 2000. We expect that the absolute
dollar amount of research and development expenses will continue to increase as
we make additional investments in our technology and products.
SALES AND MARKETING. Sales and marketing expenses increased from $504,000
for the three months ended March 31, 1999 to $1.5 million for the three months
ended March 31, 2000. This increase is primarily attributable to increased
personnel, which added costs of approximately $406,000, advertising expenses,
which added costs of approximately $146,000, commissions to outside sales
representatives, which added costs of approximately $207,000, the opening of
additional facilities and compensation expense of $63,000 resulting from stock
options granted to non-employees. We opened our Long Beach facility in August of
1999 and a second Sunnyvale, California facility in March of 2000. Sales and
marketing personnel increased from five at March 31, 1999 to 22 at March 31,
2000. We expect increases in sales and marketing expenses to continue in future
periods as we continue to hire additional marketing and sales employees.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $222,000 for the three months ended March 31, 1999 to $939,000 for the
three months ended March 31, 2000. This increase is primarily attributable to
increased personnel, which added costs of approximately $334,000, professional
fees, which added costs of approximately $98,000 and the opening of our second
Sunnyvale facility. General and administrative personnel increased from three at
March 31, 1999 to 14 at March 31, 2000. We expect general and administrative
expenses to increase in absolute dollars in future periods as we expand our
administrative staff to support the growth of our operations.
26
<PAGE> 29
AMORTIZATION OF DEFERRED STOCK COMPENSATION. In connection with the grant
of stock options to employees through March 31, 2000, we recorded deferred stock
compensation within stockholders' equity of approximately $5.2 million,
representing the difference between the deemed fair value of the common stock
for financial statement reporting purposes and the exercise price of these
options at the date of grant. We recorded amortization of deferred stock
compensation of $306,000 for the three months ended March 31, 2000.
Interest and Other Income (Expense), Net
Interest and other income (expense), net includes income from our cash
investments and interest expense from capital lease financing obligations and
borrowings under our bank line of credit. We had net interest and other expense
of $29,000 for the three months ended March 31, 1999 and net interest and other
income of $118,000 for the three months ended March 31, 2000.
Provision for Income Taxes
We elected to be taxed as an S corporation under the Internal Revenue Code
through October 4, 1999. Consequently, our stockholders were taxed on their
proportionate share of our taxable income and no provision for federal income
taxes has been provided in the statement of operations for the years ended
December 31, 1997, 1998 and for the period from January 1, 1999 through October
4, 1999.
The provision for income taxes for the first quarter of fiscal 2000 is
based on our estimated tax rate for the year.
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Net Revenues
Net revenues increased from $6.9 million in 1997 to $8.2 million in 1998.
This increase was primarily due to the impact of hiring a professional sales
person in the fourth quarter of 1997 and the addition of a second distributor in
1997. These actions resulted in increased shipments by distributors to their
customers in 1998. Net revenues increased from $8.2 million in 1998 to $18.1
million in 1999. This increase was the result of more effective promotion of our
products by us and our distributors, increased demand from our private label
reseller and increased availability of our products due to higher inventory
levels at our distributors and at our facility. Sales through our distributors
were 25% of net revenues in 1997, 51% of net revenues in 1998 and 51% of net
revenues in 1999. Sales to our private label reseller comprised 49% of net
revenues in 1997, 36% of net revenues in 1998 and 41% of net revenues in 1999.
Contract manufacturing comprised 14% of net revenues in 1997, 10% of net
revenues in 1998 and 5% of net revenues in 1999.
Cost of Revenues
Cost of revenues increased from $4.0 million in 1997 to $4.9 million in
1998, primarily as a result of added costs relating to increased sales volume
and costs incurred to expand our internal testing operations in the second half
of 1998. In addition, we recorded compensation expense of $150,000 in 1998
resulting from stock options granted to non-employees. Cost of revenues
increased from $4.9 million in 1998 to $10.0 million in 1999. This increase was
the result of volume-related added costs for more material, which added costs of
approximately $3.4 million, personnel, which added costs of approximately
$850,000, and the depreciation expense for additional manufacturing equipment.
Operations personnel increased from 13 in 1998 to 26 in 1999.
27
<PAGE> 30
Gross Profit
Gross profit increased from $2.9 million in 1997 to $3.4 million in 1998.
Gross margin decreased from 42% in 1997 to 41% in 1998. This decrease is
primarily attributable to the increase in manufacturing related expenses
incurred in 1998, partially offset by an increase in sales of higher margin
products. Gross profit increased from $3.4 million in 1998 to $8.1 million in
1999. Gross margin increased from 41% in 1998 to 45% in 1999. This increase is
primarily attributable to a decrease in wafer and packaging costs from our
subcontractors due to our higher volumes, better utilization of our own testing
operations, and a decrease in contract manufacturing revenues as a percentage of
our total revenues.
Operating Expenses
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$643,000 in 1997 to $932,000 in 1998. This increase is primarily the result of
the addition of new personnel and increased expenses for engineering materials
related to new product development. Research and development personnel increased
from two employees in 1997 to four employees in 1998. Research and development
expenses increased from $932,000 in 1998 to $2.3 million in 1999. This increase
is primarily attributable to the addition of new personnel, which added costs of
approximately $621,000, increased expenses for engineering materials related to
new product development, which added costs of approximately $429,000 and the
opening of additional design centers. We opened a design center in Richardson,
Texas in the second half of 1998 and a design center in Long Beach, California
in August of 1999. We opened a design center in Ottawa, Canada in December of
1999. Research and development personnel increased from four in 1998 to 18 in
1999.
SALES AND MARKETING. Sales and marketing expenses increased from $461,000
in 1997 to $1.1 million in 1998. This increase is primarily attributable to
increased personnel, which added costs of approximately $209,000; advertising
expenses, which added costs of approximately $74,000 and commissions to outside
sales representatives, which added costs of approximately $131,000. Sales and
marketing personnel increased from two in 1997 to four in 1998. Sales and
marketing expenses increased from $1.1 million in 1998 to $3.0 million in 1999.
This increase is primarily attributable to increased personnel, which added
costs of approximately $652,000, commissions to outside sales representatives,
which added costs of approximately $293,000 and expenses related to the opening
of our Long Beach facility. Sales and marketing personnel increased from four in
1998 to 19 in 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $659,000 in 1997 to $965,000 in 1998. This increase is primarily
attributable to increased personnel and consulting fees and compensation expense
of $60,000 resulting from stock options granted to non-employees. General and
administrative expenses increased from $965,000 in 1998 to $2.1 million in 1999.
This increase is primarily attributable to increased personnel, which added
costs of approximately $589,000, professional fees and compensation expense of
$474,000 resulting from stock options granted to non-employees. General and
administrative personnel increased from three in 1998 to 14 in 1999.
SPECIAL CHARGES. In the fourth quarter of 1999, we paid a cash dividend of
$4.0 million to our common stockholders in connection with our Series A
preferred financing. This amount has been recorded in stockholders' equity as a
distribution to stockholders. We paid a total of $3.0 million to a common
stockholder and officer of Stanford Microdevices in December 1999 as a special
bonus to assist this officer with respect to the federal or state taxes
associated with the payment of the dividend and certain other items. We recorded
the $3.0 million as a special charge in the consolidated statement of operations
as this amount represents a non-recurring transaction that we do not consider to
be reflective of our ongoing operations.
28
<PAGE> 31
AMORTIZATION OF DEFERRED STOCK COMPENSATION. In connection with the grant
of stock options to employees through December 31, 1999, we recorded deferred
stock compensation within stockholders' equity of approximately $4.3 million,
representing the difference between the deemed fair value of the common stock
for financial statement reporting purposes and the exercise price of these
options at the date of grant. We recorded amortization of deferred stock
compensation of $288,000 during 1999.
Interest and Other Income (Expense), Net
Interest and other income (expense), net includes income from our cash
investments and interest expense from capital lease financing obligations and
borrowings under our bank line of credit. We had net interest and other expense
of $10,000 in 1997 and $84,000 in 1998 and net interest and other income of
$17,000 in 1999.
Provision for Income Taxes
We elected to be taxed as an S corporation under the Internal Revenue Code
through October 4, 1999. Consequently, our stockholders were taxed on their
proportionate share of our taxable income and no provision for federal income
taxes has been provided in the statement of operations for the years ended
December 31, 1997, 1998 and for the period from January 1, 1999 through October
4, 1999.
The provisions for income taxes of $50,000 in 1997, $10,000 in 1998 and
$48,000 in 1999 reflect state franchise taxes. We did not recognize any tax
benefit for our 1999 losses and fully reserved our deferred tax assets because
of our inability to predict with reasonable certainty sufficient future taxable
income. In addition, no tax planning strategies or net operating loss carryback
opportunities were available at December 31, 1999. Accordingly, we have
concluded that it is more likely that the deferred tax assets will not be
realized and have recorded a valuation allowance of $2.7 million. Future period
taxes may vary depending on our overall operating results, the mix of income
among tax jurisdictions and our ability to utilize the net operating loss
carryforwards.
As of December 31, 1999, we had net operating loss carryforwards for
federal and state tax purposes of approximately $1.5 million and $703,000,
respectively, available to offset future taxable income. The federal and state
net operating loss carryforwards expire in 2019 and 2004, respectively, if not
utilized. Utilization of net operating loss carryforwards may be subject to a
substantial annual limitation due to ownership change limitations provided by
the Internal Revenue Code and similar state provisions. The annual limitation
may result in the expiration of net operating loss carryforwards before
utilization.
29
<PAGE> 32
QUARTERLY RESULTS OF OPERATIONS
The following table presents a summary of our consolidated results of
operations for our five most recent quarters ended March 31, 2000. The
information for each of these quarters is unaudited and has been prepared on a
basis consistent with our audited consolidated financial statements appearing
elsewhere in this prospectus. This information includes all adjustments,
consisting only of normal recurring adjustments, that we considered necessary
for a fair presentation of this information when read in conjunction with our
audited consolidated financial statements and related notes appearing elsewhere
in this prospectus. Results of operations for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 1999 1999 2000
--------- -------- ------------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues:
Product revenues................. $2,595 $4,288 $4,828 $ 5,537 $7,042
Contract manufacturing
revenues...................... 282 220 145 170 222
------ ------ ------ ------- ------
Total net revenues............ 2,877 4,508 4,973 5,707 7,264
Cost of revenues (exclusive of
amortization of deferred stock
compensation of $88, $52 and $37
for the three months ended
September 30, 1999, December 31,
1999 and March 31, 2000,
respectively).................... 1,655 2,544 2,463 3,334 2,885
------ ------ ------ ------- ------
Gross profit....................... 1,222 1,964 2,510 2,373 4,379
Operating expenses:
Research and development
(exclusive of amortization of
deferred stock compensation of
$1, $30 and $64 for the three
months ended September 30,
1999, December 31, 1999 and
March 31, 2000,
respectively)................. 337 552 493 892 1,436
Sales and marketing (exclusive of
amortization of deferred stock
compensation of $15, $41 and
$73 for the three months ended
September 30, 1999, December
31, 1999 and March 31, 2000,
respectively)................. 504 682 710 1,055 1,522
General and administrative
(exclusive of amortization of
deferred stock compensation of
$6, $55 and $132 for the three
months ended September 30,
1999, December 31, 1999 and
March 31, 2000,
respectively)................. 222 434 514 919 939
Special charges.................. -- -- -- 2,990 --
Amortization of deferred stock
compensation.................. -- -- 111 177 306
------ ------ ------ ------- ------
Total operating expenses...... 1,063 1,668 1,828 6,033 4,203
------ ------ ------ ------- ------
Income (loss) from operations...... 159 296 682 (3,660) 176
Interest and other income
(expense), net................... (29) (34) (40) 120 118
Provision for income taxes......... 16 16 16 -- 88
------ ------ ------ ------- ------
Net income (loss).................. $ 114 $ 246 $ 626 $(3,540) $ 206
====== ====== ====== ======= ======
</TABLE>
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<PAGE> 33
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 1999 1999 2000
--------- -------- ------------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
PERCENTAGE OF NET REVENUES:
Net revenues:
Product revenues................. 90.2% 95.1% 97.1% 97.0% 96.9%
Contract manufacturing
revenues...................... 9.8 4.9 2.9 3.0 3.1
------ ------ ------ ------- ------
Total net revenues............ 100.0 100.0 100.0 100.0 100.0
Cost of revenues................... 57.5 56.4 49.5 58.4 39.7
------ ------ ------ ------- ------
Gross profit....................... 42.5 43.6 50.5 41.6 60.3
Operating expenses:
Research and development......... 11.7 12.3 9.9 15.6 19.8
Sales and marketing.............. 17.6 15.1 14.3 18.5 21.0
General and administrative....... 7.7 9.6 10.4 16.1 12.9
Special charges.................. -- -- -- 52.4 --
Amortization of deferred stock
compensation.................. -- -- 2.2 3.1 4.2
------ ------ ------ ------- ------
Total operating expenses...... 37.0 37.0 36.8 105.7 57.9
------ ------ ------ ------- ------
Income (loss) from operations...... 5.5 6.6 13.7 (64.1) 2.4
Interest and other income
(expense), net................... (1.0) (0.7) (0.8) 2.1 1.6
Provision for income taxes......... 0.5 0.4 0.3 -- 1.2
------ ------ ------ ------- ------
Net income (loss).................. 4.0% 5.5% 12.6% (62.0)% 2.8%
====== ====== ====== ======= ======
</TABLE>
FIVE QUARTERS ENDED MARCH 31, 2000
Net Revenues
Net revenues increased in each of the five quarters ended March 31, 2000.
These quarterly increases were the result of increased selling efforts and more
effective promotion of our products by us and our distributors, increased demand
from our private label reseller and increased availability of our products due
to higher inventory levels at our distributors and our facility. This last
factor was particularly significant in the increase from the first to second
quarter of 1999.
Cost of Revenues
Our cost of revenues increased from the first quarter of 1999 to the second
quarter of 1999 primarily as the result of increased sales volume. Cost of
revenues as a percentage of revenues decreased in this same time period due to
lower unit costs associated with higher volumes through our testing facilities
and packaging subcontractors. From the second quarter of 1999 to the third
quarter of 1999, cost of revenues decreased in absolute dollar terms due to a
special, one-time price discount granted to us by one of our major suppliers.
The trend of lower unit costs seen in the first and second quarters of 1999
continued in the third quarter and contributed to the decrease in cost of
revenues in absolute dollars during this time period. These same two factors
caused cost of revenues to decrease as a percentage of revenues from the second
quarter to the third quarter of 1999. Cost of revenues increased in the fourth
quarter of 1999 compared to the third quarter for several reasons. First, the
mix of products we shipped during this period consisted of products with higher
costs than in prior periods. Second, we suffered some manufacturing
inefficiencies. Third, we, based on an analysis of our inventory, took a higher
level of reserves for excess inventory. Finally, an increase in period
manufacturing expenses contributed to the increase in cost of revenues from the
third quarter to the fourth quarter of 1999. These same four factors led cost of
revenues to increase as a percentage of revenues during this period. Cost of
revenues increased from the fourth quarter of 1999 to the first quarter of 2000
primarily because of higher sales volume. However, cost of
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<PAGE> 34
revenues decreased as a percentage of revenues primarily due to our product mix.
Also influencing cost of revenues as a percentage of revenues in the first
quarter of 2000 were manufacturing efficiencies.
Operating Expenses
RESEARCH AND DEVELOPMENT. Research and development expenses increased in
the first two quarters of 1999 primarily as a result of the addition of
personnel and costs incurred for the development of new products. Research and
development expenses decreased in the third quarter of 1999 compared to the
second quarter of 1999 primarily as a result of lower materials costs for
prototype and test units, partially offset by the opening of our Long Beach
facility in the third quarter of 1999. Research and development expenses
increased in the fourth quarter of 1999 compared to the third quarter of 1999
primarily as a result of higher materials costs for prototype and test units and
increases in personnel. Research and development expenses increased in the first
quarter of 2000 primarily due to increases in personnel in our Texas, Long Beach
and Sunnyvale facilities and the increase in personnel in our Ottawa facility in
the fourth quarter of 1999.
SALES AND MARKETING. Sales and marketing expenses increased in each of the
five quarters ended March 31, 2000 primarily as a result of increased personnel,
higher volume-related sales commissions and the opening of our Long Beach
facility in the third quarter of 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
in each of the five quarters ended March 31, 2000 primarily as a result of
increased personnel and professional fees. Additionally, in the fourth quarter
of 1999, we recorded $342,000 of compensation expense resulting from stock
options granted to non-employees.
SPECIAL CHARGES. In the fourth quarter of 1999, we incurred a special
charge of $3.0 million related to a non-recurring bonus payment to a common
stockholder and officer of Stanford Microdevices.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We recorded amortization of
deferred stock compensation of $111,000 in the third quarter of 1999, $177,000
in the fourth quarter of 1999 and $306,000 in the first quarter of 2000.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income
(expense), net, increased to $120,000 in the fourth quarter of 1999 and totaled
$118,000 in the first quarter of 2000 as a result of interest income earned on
proceeds from the issuance of our mandatorily redeemable convertible preferred
stock.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through cash generated from
operations, equipment lease financing and through the private sale of
mandatorily redeemable convertible preferred stock. As of March 31, 2000, we had
cash and cash equivalents of $3.8 million and working capital of $7.2 million.
Our operating activities provided cash of $1.5 million in 1997, $1.3
million in 1998, $560,000 in 1999 and used cash of $946,000 in the three months
ended March 31, 2000. In 1997, cash provided by operating activities was
primarily attributable to net income of $1.1 million, an increase in deferred
margin on distributor inventory of $1.3 million, accrued liabilities of $264,000
and non-cash charges related to depreciation and amortization of $111,000. These
were partially offset by increases in accounts receivable of $687,000,
inventories of $477,000 and other assets of $217,000. In 1998, cash provided by
operating activities was primarily attributable to a $471,000 decrease in
accounts receivable and non-cash charges related to stock option compensation
and depreciation and amortization. These were partially offset by an increase in
accounts payable of $217,000 and deferred margin on
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<PAGE> 35
distributor inventory of $130,000. In 1999, cash provided by operating
activities was primarily attributable to increases in accounts payable of $1.9
million, deferred margin on distributor inventory of $1.8 million, accrued
liabilities of $523,000 and non-cash charges related to deferred stock
compensation amortization, stock option compensation and depreciation and
amortization. These were partially offset by increases in accounts receivable of
$752,000, inventories of $1.3 million and other assets of $486,000. In the three
months ended March 31, 2000, cash used in operating activities was primarily
attributable to increases in inventories of $2.8 million and accounts receivable
of $1.4 million. These were partially offset by increases in accrued expenses of
$1.5 million and deferred margin on distributor inventory of $1.2 million.
Our investing activities used cash of $293,000 in 1997, $41,000 in 1998,
$1.9 million in 1999 and $6.3 million in the three months ended March 31, 2000.
Our investing activities reflect purchases of available-for-sale securities,
manufacturing equipment and other fixed assets.
Our financing activities used cash of $869,000 in 1997 and $1.5 million in
1998 and provided cash of $12.0 million in 1999 and $33,000 in the three months
ended March 31, 2000. In 1997, cash used in financing activities consisted of
distributions to stockholders of $784,000 and equipment lease financing of
$85,000. In 1998, cash used in financing activities consisted of distributions
to stockholders of $1.1 million and equipment lease financing of $435,000. In
1999, cash provided by financing activities primarily resulted from $17.0
million of proceeds received from the issuance of mandatorily redeemable
convertible preferred stock. This was partially offset by dividends paid to our
stockholders of $4.4 million and equipment lease financing of $573,000. Our
December 31, 1999 net loss applicable to common stockholders includes $255,000
of accretion charges to increase the carrying amount of our mandatorily
redeemable convertible preferred stock to the amount we would be required to pay
if this preferred stock were to be redeemed. In the three months ended March 31,
2000, cash provided by financing activities was primarily attributable to
proceeds received from stock option exercises partially offset by equipment
lease financing.
We maintain a secured credit facility with a financial institution that
includes a $3.0 million line of credit. Borrowings under the revolving credit
line may be made and repaid at any time and bear interest at the base rate, as
announced by the lender, plus 0.5%. At March 31, 2000, there were no outstanding
amounts under this credit facility. At March 31, 2000, we were in violation of
one of our financial covenants under the credit facility due to payment of a
dividend and non-recurring special charges in the fourth quarter of 1999 and
first quarter of 2000. The financial institution has waived these violations. We
are in the process of negotiating a new credit facility with the same financial
institution to replace the existing line.
We currently anticipate that the net proceeds from this offering, together
with our current available cash and cash equivalents and cash generated from
operations will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months, although no
assurance can be given in this regard.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and hedging Activities. SFAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. SFAS 133 was to be effective for fiscal years beginning
after June 15, 1999. However, in July 1999, the Financial Accounting Standards
Board issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133. SFAS 137
defers for one year the effective date of SFAS 133 that will now apply to all
fiscal quarters of all fiscal
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<PAGE> 36
years beginning after June 15, 2000. We believe that the adoption of SFAS 133
will not have a material impact on our consolidated financial position, results
of operations or cash flows.
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position 98-1, or SOP 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
that entities capitalize certain costs related to internal use software once
certain criteria have been met. We adopted SOP 98-1 for the year ended December
31, 1999. The adoption of SOP 98-1 did not have a material impact on our
financial condition or results of operations.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of
Start-Up Activities. SOP 98-5 requires that all start-up costs related to new
operations must be expensed as incurred. In addition, all start-up costs that
were capitalized in the past must be written off when SOP 98-5 is adopted. We
adopted SOP 98-5 on January 1, 1999. The adoption of SOP 98-5 did not have a
material impact on our financial condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition, which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosures related to
revenue recognition policies. We believe that our revenue recognition policy is
in compliance with the provisions of SAB 101 and that the adoption of SAB 101
had no material effect on our financial position or results of operations.
EFFECT OF YEAR 2000
As of March 31, 2000, we had not experienced any disruptions related to
year 2000 issues, nor do we expect to experience any year 2000 related
disruption in the operation of our systems. To our knowledge, none of our
customers have experienced any year 2000 related issues with our products.
Additionally, to our knowledge, none of our manufacturing, packaging or other
suppliers have experienced any material year 2000 problems. Although most year
2000 problems should have become evident by March 31, 2000, additional year 2000
related problems may become evident only after that date. We will continue to
monitor our critical computer applications and those of our suppliers and
vendors throughout the year to ensure that any late year 2000 matters that may
arise are promptly addressed.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our sales have been made to predominantly U.S.-based customers and
distributors in U.S. dollars. As a result, we have not had any material exposure
to factors such as changes in foreign currency exchange rates. However, in
future periods, we expect to expand selling into foreign markets, including
Europe and Asia. Because our sales are denominated in U.S. dollars, a
strengthening of the U.S. dollar could make our products less competitive in
foreign markets.
At March 31, 2000, our cash and cash equivalents consisted primarily of
money market funds and commercial paper and our short term investments consisted
of commercial paper. We did not hold any derivative financial instruments or
long-term investments. Our interest income and expense are sensitive to changes
in the general level of interest rates. In this regard, changes in interest
rates can affect the interest earned on our cash equivalents.
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<PAGE> 37
BUSINESS
OVERVIEW
Stanford Microdevices is a leading designer and supplier of high
performance RF components for communications equipment manufacturers. Our
products are used primarily in wireless communications equipment to enable and
enhance the transmission and reception of voice and data signals. The
performance of the RF section of communications equipment -- which is used to
convert, process and amplify the high frequency signals that transmit voice or
data -- has a significant influence on the overall performance of communications
systems. We design our products to meet the rapidly evolving performance
requirements for mobile wireless applications such as cellular and mobile data
networks, broadband wireline applications such as coaxial cable and fiber optic
networks, and fixed wireless applications such as local and wide area
site-to-site data networks.
We offer a broad line of products that range in complexity from discrete
components to integrated circuits and multi-component modules. We believe our
products are well suited for existing and future communications networks which
are expected to be increasingly centered on data transmission in addition to
voice. We have adopted a fabless operating strategy, which we believe is unique
in the RF components industry. We outsource the manufacturing of our
semiconductor wafers to several wafer fabrication facilities, or third-party
wafer fabs, that use leading-edge process technologies. We focus internally on
our RF design and development expertise and select what we believe to be the
optimal process technology for any given application without the constraint of a
captive wafer fab facility. Our fabless operating strategy, combined with our RF
design and test expertise, gives us the flexibility necessary to deliver a
comprehensive line of high quality products at compelling prices to our
customers.
INDUSTRY BACKGROUND
Demand for Connectivity and Mobility Driving Investment in Communications
Infrastructure
Consumers and businesses are demanding increased connectivity, mobility,
functionality and bandwidth from telecommunications service providers. Increased
deployment and use of wireless communications systems and the rise of wireline
and wireless Internet applications offer users the potential for access any
time, anywhere to voice and data networks. International Data Corporation (IDC),
an independent market research firm, estimates that the number of worldwide
Internet users will increase from 196 million in 1999 to 399 million by 2002.
Users are also increasingly relying on networks for data services in addition to
traditional voice services. The U.S. Department of Commerce has estimated that
data traffic in the United States is doubling every 100 days. Wireless Internet
and other data services will significantly increase the performance demands on
wireless networks. IDC estimates that the number of worldwide subscribers for
wireless phone service will grow from 303 million in 1998 to 1.1 billion by
2003. IDC further estimates that the number of wireless subscribers in the
United States who are able to send and receive information over the Internet is
expected to increase from 7.9 million in 1999 to 61.5 million by 2003.
Communications service providers are making significant investments in
network infrastructure to enable and enhance connectivity for today's
information-driven economy. Wireless and broadband wireline communications
service providers are expanding capacity and offering a broader range of
services to support the changing needs of users. Competitive pressures are also
requiring service providers to offer increased bandwidth and to reduce operating
costs. In the case of wireless networks, communications service providers must
support a rapidly growing number of subscribers and the subscribers' demands for
more expanded service. In addition, wireless network operators are adopting new
standards such as third generation, or 3G, standards that enable the migration
from voice-only to integrated voice
35
<PAGE> 38
and high-speed data services, which are not fully supported by today's installed
infrastructure. MultiMedia Telecommunications Association estimates that the
number of subscribers to mobile data services, such as those enabled by 3G
standards, will rise to 16.5 million by 2003 -- representing a 40% compound
annual growth rate from 1999. Providers of broadband wireline services over
cable and fiber networks are also looking for network infrastructure solutions
to meet increasing performance requirements and to minimize their total cost of
ownership.
Challenges Facing Communications Equipment Manufacturers
Manufacturers of communications equipment must develop systems to meet the
requirements of communications service providers. In meeting these challenges,
equipment manufacturers face significant market and product performance
pressures. These include:
- SHORTER TIME TO MARKET -- The intensity of competition and the resulting
need to adopt new technologies is forcing communications equipment
manufacturers to develop and launch products in the shortest time
possible.
- HIGHER PERFORMANCE AND MORE RELIABLE SYSTEMS -- Communications equipment
manufacturers are facing increased demands from communications service
providers for greater bandwidth, which is a measure of a system's
capacity. System reliability is another key performance requirement due
to the high costs of equipment downtime and of maintaining communications
networks.
- REDUCED COSTS -- Communications service providers seek to minimize both
the up-front equipment acquisition costs as well as ongoing operating
costs as they upgrade their networks. Communications equipment
manufacturers must, as a result, offer a better value proposition.
Need for High Performance RF Components from Third-Party Suppliers
Communications equipment manufacturers are adopting new approaches in
designing systems to deliver the performance and feature improvements that
service providers require. In a typical communications system, the principal
functional blocks are the RF subsystem, which receives, amplifies and transmits
signals, the signal processor, which encodes and decodes digitized signals, and
the antenna. Since the RF subsystem receives the signal, interfaces with the
signal processor, and amplifies and transmits the signal, a system's performance
and signal quality are significantly affected by the RF subsystem.
Communications equipment manufacturers often do not have the internal expertise
or the time to address every aspect of a system's RF performance. To lower their
production costs and shorten product development cycles, equipment manufacturers
are increasingly seeking innovative RF components from third-party suppliers who
offer a broad range of high-performance products.
Most RF component suppliers have made significant investments in their own
wafer fabs. These wafer fabs are typically based on a single process technology.
A process technology is a method of manufacturing semiconductor devices and
circuits using a given wafer material. As a result, RF component suppliers
generally focus most of their attention on developing products using their own
process technology even if another process may be more appropriate for a given
application. To adopt one of these other process technologies, these component
suppliers would have to migrate their current facility to the other
technologies, make significant capital investments in new wafer fabs or develop
relationships with merchant wafer fabs. Because all of these steps are expensive
and time consuming, most RF component suppliers resist changing process
technologies. As a result, many of these component suppliers do not offer the
broadest range of products or may offer sub-optimal products for certain
applications.
Manufacturers of communications infrastructure equipment, such as base
stations used by wireless service providers, require components that are
optimized for a feature known as
36
<PAGE> 39
linearity. Linearity is a measure of signal quality. Many RF component suppliers
have optimized their products for power efficiency at the expense of linear
performance, making these products well suited for battery-powered, portable
applications, but not optimal for infrastructure applications. We believe these
suppliers would require new design techniques, process technologies and testing
capabilities to modify their products to address the market for infrastructure
equipment.
We believe that there is a substantial market opportunity for a third-party
supplier of high performance RF components who can meet the needs for
flexibility, performance and value required by communications equipment
manufacturers.
OUR SOLUTION
We design, develop and market a broad range of RF components using leading
process technologies for use in wireless and broadband wireline communications
equipment. Our products are designed to provide the following competitive
benefits to communications equipment manufacturers:
OPTIMAL SOLUTIONS. The combination of our design expertise and access
to several leading process technologies enables us to deliver optimal
solutions to our customers. Our fabless operating model provides us with
the flexibility to use multiple process technologies. Because each process
technology has a different impact on characteristics such as linearity,
frequency, operating voltage, output power, noise suppression and heat
dissipation, the selection of a process technology is critical to the
function of a component. Our components are designed to optimize
functionality by selecting the process technology that provides the
appropriate characteristics for the intended application. This approach
also enables us to quickly adapt to changes in product specifications or
market requirements.
HIGH PERFORMANCE FOR INFRASTRUCTURE APPLICATIONS. We design our
products specifically for communications infrastructure equipment. We have
made engineering trade-offs in favor of design characteristics that are
most important to infrastructure equipment manufacturers. Our products are
particularly well suited for communications equipment that require high
capacity, clear signals, longer product life and extended transmit and
receive range.
PRODUCT AND TECHNOLOGY BREADTH. Our product portfolio includes a broad
line of products that range in complexity from discrete components to
integrated circuits and multi-component modules designed to meet the varied
needs of our customers. We offer a wide range of solutions based on
different process technologies. The availability and breadth of our product
portfolio facilitate efficient customer sourcing and improve time to market
for communications equipment manufacturers.
PRICE PERFORMANCE. We believe that our combination of product quality
and high performance at competitive prices makes our products a compelling
value proposition for our customers.
OUR STRATEGY
Our objective is to become the leading supplier of RF components for
wireless and broadband wireline communications equipment. We intend to achieve
this objective by providing a comprehensive portfolio of high performance and
high value standard and customized RF components optimized for their target
applications. Our strategy consists of the following elements:
EXPAND PORTFOLIO OF STANDARD PRODUCTS AND DEVELOP INNOVATIVE CUSTOM
PRODUCTS. We will continue to design products that meet standard
specifications widely adopted by communications equipment manufacturers.
These standard products historically have
37
<PAGE> 40
constituted the core of our business and we anticipate that they will
continue to account for a significant portion of our revenues. In addition,
we gain significant economies of scale due to the high sales volumes of
these products. We plan to continue to invest significantly in research and
development to grow our portfolio of these products.
We recently established a separate business unit focused on developing
customized products for specific RF applications. We plan to focus on
expanding our product development initiatives in the wireless and broadband
wireline infrastructure markets. A key aspect of our new product focus will
be to design unique custom multi-component products that offer significant
price and performance advantages over current solutions. We believe that
some of these customized products can be marketed through our distribution
channels in the future as standard products.
LEVERAGE OUR FABLESS OPERATING MODEL. Our fabless strategy gives us
the flexibility to design products that are tailored for the intended
application. By avoiding the administrative and capital-intensive burden of
operating a captive wafer manufacturing facility, we will continue to
maintain the flexibility to adopt and leverage emerging process
technologies. We believe this approach is unique in the RF components
industry and plan to leverage the advantages it provides to offer optimized
solutions for our target markets.
CONTINUE TO INVEST IN OUR TECHNOLOGY AND PRODUCT QUALITY. We will
continue to invest in research and development in the areas of
semiconductor materials, device modeling, RF circuit design, packaging
technology, and test and measurement. We will also maintain and extend a
rigorous quality assurance program to ensure the highest product quality.
Our quality program includes periodic qualification testing of all
products, including extended lifetime testing under accelerated temperature
and other operating conditions, designed to simulate more extreme operating
conditions than would be encountered in most practical applications.
STRENGTHEN STRATEGIC TECHNOLOGY AND SUPPLIER RELATIONSHIPS. We have
formed supplier relationships with TRW, Nortel Networks, Temic
Semiconductors (an Atmel company) and UltraRF (a subsidiary of Spectrian),
and are engaged in joint development efforts with Nortel Networks, Temic
Semiconductors and UltraRF. We plan to strengthen these relationships by
continuing to engage in co-development projects on new products and
adaptations of existing products. We also will seek to establish strategic
technology and supplier relationships with additional third-party wafer
fabs as new process technologies emerge and to secure additional
fabrication capacity.
RECRUIT THE BEST TALENT AVAILABLE. The market for experienced RF
designers and application engineers is highly competitive. Our strategy is
to attract the best talent by offering the opportunity to work with leading
design and process technologies and the flexibility to work at any of our
design centers. We have design centers in Long Beach and Sunnyvale,
California, Ottawa, Canada and Richardson, Texas. By locating our design
centers in areas that have significant numbers of RF-related businesses, we
believe we are better able to recruit experienced design engineers locally.
We plan to open additional design centers in strategic locations and to
continue to recruit experienced RF design engineers at our existing design
centers.
MAINTAIN OUR DISTRIBUTION CHANNELS AND EXPAND OUR DIRECT MARKETING AND
SALES FORCE. We have long-standing relationships with our two worldwide
distributors, Avnet Electronics Marketing and Richardson Electronics, and
will continue to market our standard products through them and other
distributors. We plan to broaden our direct marketing efforts and expand
our direct sales force and sales representatives to market and sell our
customized products.
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PRODUCTS
We sell RF components used in the infrastructure of mobile wireless,
broadband wireline and fixed wireless communications networks. RF components
include low noise and power amplifiers, drivers, pre-drivers, switches,
modulators, demodulators, upconverters and downconverters. They convert, switch,
process and amplify the high frequency signals that carry the information to be
transmitted or received.
The following is a simplified illustration of the RF subsystems in the
transmitter and receiver sections of a typical communication system:
[SIMPLIED RF SUBSYSTEM DIAGRAM]
We classify our products broadly into two categories: standard products,
which we develop from our own specifications and generally sell through
distributors, and customized products under development, which we are designing
for particular applications by original equipment manufacturers and will sell
directly through our own sales force.
Our current product offerings address key functions in the transmission
section of a typical communication system and include:
- LOW NOISE AMPLIFIERS. These are components in the receiver section of an
RF system that receive signals from an antenna at extremely low levels
and amplify these signals. Due to the low noise characteristics of our
amplifiers, they can be used to amplify very weak signals.
- PRE-DRIVERS AND DRIVERS. A pre-driver is a component in the transmitter
section that provides the first stage of amplification in a power
amplifier chain. These amplifiers take very weak transmitted signals and
amplify them. A driver takes the amplified signals from a pre-driver and
further amplifies these signals before transmitting them to the last
stage of amplification. Our pre-drivers and drivers determine the overall
ability of an RF subsystem to work with signals of different strengths
with minimum distortion.
- POWER AMPLIFIERS. These components provide the final stage of signal
amplification to boost signal strength for transmission through the
antenna. Power amplifiers operate at different frequencies, power levels
and air interface standards. The majority of our power amplifier products
are linear amplifiers, which add a minimum amount of distortion to the
39
<PAGE> 42
input signal. Currently, we purchase our power amplifier products from a
third-party wafer fab for resale under our own brand.
- SWITCHES. These are used to direct RF signals to various ports within a
communications system. Our switches preserve signal strength and minimize
channel interference as they perform their functions.
- DISCRETE DEVICES. These are transistors which contain minimal circuitry
and are used as building blocks in a variety of component applications
such as oscillators, mixers and active circuits. Important attributes of
our discrete devices are wide frequency range, low noise and low power
consumption.
Products under development include:
- MODULATORS AND DEMODULATORS. These are components in the transmitter or
receiver section that combine digital information with an RF signal by
varying the phase and amplitude of the signal so that the resulting
signal can be transmitted or received.
- MIXERS, UPCONVERTERS AND DOWNCONVERTERS. These components are frequently
combined with amplifiers to accept low or high frequency signals, and mix
them with a local oscillator signal to produce a lower or higher
frequency signal for processing or transmission.
- WIRELINE INTEGRATED CIRCUITS. We are currently developing a high-speed
broadband wireline chip set which can be used in fiber optic and local
and wide area network applications. This chip set includes a
transimpedance amplifier, which amplifies the electrically converted
optical signal, a postamplifier, which minimizes signal loss, and a laser
driver, which energizes the laser.
Actual components, features and products could differ materially from those
currently under development as a result of a variety of factors, some or all of
which may be beyond our control.
PROCESS TECHNOLOGIES
We have expertise in designing and manufacturing RF components in multiple
process technologies. We design our products using four process technologies to
meet the price and performance requirements of our customers. These process
technologies are:
GALLIUM ARSENIDE HETEROJUNCTION BIPOLAR TRANSISTOR (GAAS HBT). GaAs
HBT technology is an effective alternative or complement to silicon
solutions in many high-performance RF applications. GaAs HBT has inherent
physical properties that allow electrons to move up to five times faster
than those of silicon. This results in integrated circuits that operate at
much higher speeds than silicon devices with lower power consumption. We
use GaAs HBT technology for applications that require high linearity and
low power consumption.
INDIUM GALLIUM PHOSPHIDE HETEROJUNCTION BIPOLAR TRANSISTOR (INGAP
HBT). InGaP HBT technology uses the same wafer material as GaAs HBT, but
offers performance advantages over GaAs HBT due to inherent properties
which generally result in less variation in wafer processing. As a result,
InGaP HBT typically results in higher manufacturing yields. We use this
process for products that require higher frequency, improved linearity,
enhanced noise performance or greater reliability. We are migrating our
products from the GaAs HBT process to the InGaP HBT process as this
technology matures.
SILICON GERMANIUM HETEROJUNCTION BIPOLAR TRANSISTOR (SIGE HBT). Like
GaAs HBT technology, SiGe HBT also achieves high operating speeds by using
a material that has
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<PAGE> 43
significantly higher electron mobility than silicon, but still uses silicon
wafers and established standard silicon processing. SiGe HBT technology
results in more predictable and improved manufacturing yields. We use this
process in the design and manufacture of our products to achieve high
frequency performance and significant economies of scale. Because of its
significantly lower cost, SiGe HBT is a good choice for processing more
integrated and complex components which require increased semiconductor
area.
LATERALLY DIFFUSED METAL OXIDE SEMICONDUCTOR (LDMOS). LDMOS technology
uses standard silicon materials in an alternative configuration to deliver
high-power solutions, high efficiency and superior linearity when compared
to traditional silicon transistors. Because the LDMOS process uses silicon,
LDMOS devices are less expensive than devices manufactured using gallium
arsenide wafers. Silicon dissipates heat more efficiently than gallium
arsenide, and has the capability to operate at higher voltages. As a
result, our products were designed using the LDMOS process for high-output
power applications required for transmitter applications.
Below is a summary of our current products and products under development
indicating the process technologies used in manufacturing:
<TABLE>
<CAPTION>
PROCESS TECHNOLOGY
---------------------------
GAAS INGAP SIGE LDMOS
---- ----- ---- -----
<S> <C> <C> <C> <C>
CURRENT PRODUCTS:
Low Noise Amplifiers.................................. X X
Pre-Drivers........................................... X X X
Drivers............................................... X X
Power Amplifiers...................................... X
Switches.............................................. X
Discrete Devices...................................... X X
PRODUCTS UNDER DEVELOPMENT:
Modulators and Demodulators........................... X
Mixers, Upconverters and Downconverters............... X
Wireline Integrated Circuits.......................... X X
</TABLE>
Actual components, features and products could differ materially from those
currently under development as a result of a variety of factors, some or all of
which may be beyond our control.
We shipped our first products using SiGe and InGaP in the fourth quarter of
1999 and have begun to design products using LDMOS. Although we currently offer
LDMOS power amplifiers as a reseller of UltraRF, we have not yet generated any
revenues from resale of these products.
CUSTOMERS
End customers for our products are primarily manufacturers of
communications infrastructure equipment. The following is a list of our 20
largest customers, based on 1999 revenues, who have purchased our products
either directly or through our distributors, Avnet Electronics Marketing and
Richardson Electronics:
<TABLE>
<S> <C>
Aerostar Industry Motorola
Air-Tech System MRV Communications
Editron Olson Technology
GSS Array Technologies Phase Atlantic
Hughes Network Systems Pulsar Microwave
Italtel Rohde & Schwarz
J Cort Systems Sam Ji Electronics
M/A-COM Microelectronics Sanmina Corporation
Microwave International Telaxis Communications
Minicircuits Laboratories Young Woo Telecom
</TABLE>
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<PAGE> 44
SALES, MARKETING AND CUSTOMER SUPPORT
We sell our products worldwide through U.S.-based distributors, through a
private label reseller who sells our products under its brand and through our
direct sales force. Our products are also sold through a worldwide network of
independent sales representatives whose orders are fulfilled either by us or our
distributors. Each of these channels is supported by our customer service and
marketing communication functions. We are expanding our marketing efforts to
create awareness for our products within our target markets and to support our
direct and indirect sales efforts. We have implemented an integrated mix of
marketing activities including trade journal advertisements, and public
relations and promotional events such as tradeshows, seminars and technical
conferences.
We generally sell our standard products through distributors. We believe
that sales through our distributors will continue to account for a significant
amount of our revenues in the foreseeable future. We plan to sell customized
products through our direct sales force to a targeted group of communications
equipment manufacturers. We believe this approach will enable us to work more
closely with these customers to gain a better understanding of, and more
effectively meet, their needs.
Our products are highly technical and our customers frequently consult with
us to select a component for a given application, determine product performance
under specified conditions unique to their system, or test a product for new
applications. To meet the needs of our customers, we provide support in all
stages of the sales process, from concept definition and product selection to
post-sale support. These services are provided by our applications engineering
organization, which works closely with our sales organization in all pre- and
post-sale activities. We intend to invest in expanding our applications
engineering organization to assist our customers.
As of March 31, 2000, we had 22 employees in our sales and marketing
organization, including seven application engineers.
OPERATIONS
Our products are designed at our four design centers located in North
America. We apply our expertise in packaging during the design phase to ensure
that our RF components meet high performance standards. The relationship between
a circuit and its package is critical to the reliability and electrical
performance of RF components. We outsource the fabrication of our semiconductor
wafers to several independent wafer fabs. Our four principal third-party wafer
fabs are:
- TRW for GaAs HBT;
- Nortel Networks for InGaP HBT;
- Temic Semiconductors for SiGe HBT; and
- UltraRF for LDMOS.
Our supply agreements with Nortel Networks, Temic Semiconductors and
UltraRF give us multi-year supply guarantees. Our supply agreement with TRW
includes supply guarantees through December 31, 2000. We will seek to extend our
supply agreements with these third-party wafer fabs while concurrently seeking
second sources for the wafers they supply. GEC Marconi and TriQuint
Semiconductor also manufacture limited quantities of semiconductor wafers for
us.
We have unconditional purchase obligations under these supply agreements.
Because the products we are purchasing are unique to us, our agreements with
these suppliers prohibit cancellation of our orders subsequent to the production
release of the products in our suppliers'
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<PAGE> 45
manufacturing facilities, regardless of whether our customers cancel orders. At
December 31, 1999, we had approximately $5.9 million of unconditional purchase
obligations.
Following production of wafers by our third-party wafer fabs, we perform
wafer inspection at our headquarters in Sunnyvale, California. As a result, we
are able to ensure that the wafers meet high standards of reliability required
for their use in communications equipment. Semiconductor packaging is then
outsourced to five offshore subcontractors and packaged components are returned
to our headquarters in Sunnyvale, California for final testing, quality
assurance, and tape and reel assembly for final shipment.
The following diagram illustrates this manufacturing flow:
[Flow Chart]
RESEARCH AND DEVELOPMENT
We focus our research activities in the areas of semiconductor materials,
device modeling, RF circuit design, packaging technology, and test and
measurement. In the area of semiconductor materials, we are focusing our
research efforts on two areas: heterojunctions, or semiconductor junctions made
out of two dissimilar semiconductor materials, and emerging semiconductor
materials that offer high linearity and low power consumption critical for
digital communications networks. In the area of device modeling, we are
expanding our library of device models which predict the performance of a
transistor within a circuit design.
Our circuit design efforts are focused on developing products that provide
repeatable performance and reliability and that are easy to use in
communications equipment design. Our products generally incorporate integrated
matching structures, eliminating the need for additional external components and
providing stable performance over a range of temperatures and varying supply
voltages. We also work closely with our third-party wafer fabs to design test
circuits for new process technologies.
In the area of packaging technology, we are developing specialized packages
that offer both high frequency performance and efficient heat dissipation. We
also work closely with our packaging subcontractors to research new package
designs and materials. We are building a team of experienced packaging engineers
to expand research and development in advanced RF packaging.
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<PAGE> 46
Our proprietary test and measurement techniques coupled with our packaging
expertise completes our back-end, or production, competency. We have a number of
high-speed automatic component testers that are capable of recording high
frequency data at extremely high throughput rates using our proprietary
software. We intend to continue to increase throughput rates by developing new
test software that accelerates data recording while adding the ability to
measure additional test parameters.
Our principal development work is concentrated on expanding the versatility
of existing products and developing customized solutions for targeted
communications equipment manufacturers. A key factor in this development work is
to design products with improved functionality by selecting the process
technology that provides the optimal performance and price for our customers.
Our ability to align our design expertise with leading process technologies
enables us to focus and adapt our research and development efforts to keep pace
with changing market requirements.
At March 31, 2000, we had 27 employees in our research and development
organization. We incurred research and development expenses of approximately
$643,000 in 1997, $932,000 in 1998, $2.3 million in 1999 and $1.4 million in the
three months ended March 31, 2000.
COMPETITION
The RF semiconductor industry is intensely competitive. Competition in our
markets is primarily affected by the ability to design standard and customized
products that meet customers' price and performance requirements in a sufficient
quantity and in a timely manner, the quality of customer service and technical
support, and the availability and breadth of product offerings.
We compete primarily with other suppliers of high performance RF components
used in the infrastructure of communications networks such as Agilent, Alpha
Industries, Anadigics, Conexant, Infineon, M/A-COM, Minicircuits Laboratories,
NEC, RF Micro Devices, TriQuint Semiconductor and Watkins-Johnson. We also
compete with current and potential communications equipment manufacturers who
manufacture RF components internally such as Ericsson, Lucent, Motorola and
Nortel Networks. We expect increased competition from existing competitors and
from a number of companies that may enter the RF component market, as well as
future competition from companies that may offer new or emerging technologies.
In addition, many of our current and potential competitors have significantly
greater financial, technical, manufacturing and marketing resources than we
have. Our failure to successfully compete in our markets would have a material
adverse effect on our business, financial condition and results of operations.
INTELLECTUAL PROPERTY
We rely upon a combination of copyright, trade secret and trademark laws to
protect our intellectual property. Third-party wafer fabs own the patents for
the process technologies used in the manufacture of our wafers. We do not
currently have any patents or patent applications pending. However, we intend to
seek patent protection for our future products and technologies where
appropriate and to protect our proprietary technology under U.S. and foreign
laws affording protection for integrated circuit designs, trademarks and trade
secrets.
We rely primarily upon trade secrets, technical know-how and other
unpatented proprietary information relating to our product development and
production activities. To protect our trade secrets, technical know-how and
other proprietary information, our employees are required to enter into
agreements providing for the maintenance of confidentiality and assignment of
rights to inventions made by them while employed by us. We also enter into
non-disclosure agreements to protect our confidential information delivered to
third parties and control access
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<PAGE> 47
to and distribution of our proprietary information. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology or to develop products with
the same functionality as our products. Monitoring unauthorized use of our
proprietary information is difficult and we cannot be certain that the steps we
have taken will prevent misappropriation of our technology, particularly in
foreign countries where the laws may not protect proprietary rights as fully as
do the laws of the United States.
Although we rely on copyright, trade secret and trademark law to protect
our technology, we believe that factors such as the technological and creative
skills of our personnel, new product developments, frequent product enhancements
and reliable product maintenance are more essential to establishing and
maintaining a technology leadership position. We can give no guarantee that
others will not develop technologies that are similar or superior to our
technology.
BACKLOG
At December 31, 1999, our backlog was approximately $11.5 million. We
include in our backlog all accepted product purchase orders for which delivery
has been specified within one year, including orders from distributors. Of the
$11.5 million in total backlog as of December 31, 1999, $10 million was
attributable to purchase orders by our distributors. We do not recognize revenue
from sales through our distributors until the distributor has sold our product
to their customer. Product orders in our backlog are subject to changes in
delivery schedules or to cancellation at the option of the purchaser without
significant penalty. Our backlog may vary significantly from time to time
depending upon the level of capacity available to satisfy unfilled orders.
Accordingly, although useful for scheduling production, backlog as of any
particular date may not be a reliable indicator of sales for any future period.
EMPLOYEES
As of March 31, 2000, we had 91 full time employees, including 22 in sales
and marketing, 27 in research and development, 28 in operations and 14 in
general and administrative functions. None of our employees are subject to a
collective bargaining agreement, and we believe that our relations with our
employees are good.
FACILITIES
Our headquarters are located in Sunnyvale, California in two buildings in
which we lease an aggregate of approximately 32,000 square feet. One lease
expires in 2002 and the other expires in 2004. We also lease approximately 5,000
square feet of office space in Richardson, Texas, approximately 3,000 square
feet of office space in Long Beach, California and approximately 3,800 square
feet of office space in Ottawa, Canada. We believe that our existing facilities
meet our current needs and that we will be able to obtain additional commercial
space as needed. We do not own any real estate.
LEGAL PROCEEDINGS
On March 17, 2000, the Board of Trustees of Stanford University filed a
complaint against us in the United States District Court of the Northern
District of California alleging, among other things, trademark infringement,
false designation of origin, dilution, and unfair competition. Stanford
University seeks a preliminary and permanent injunction against our use of the
name "Stanford" and any logo containing the letter "S" on a red background, and
also seeks compensatory damages, exemplary and punitive damages, costs and
attorneys' fees. A hearing for preliminary injunction has been scheduled for May
8, 2000. Based on our preliminary investigation, we believe that we have
meritorious defenses to Stanford University's claims and intend to vigorously
defend ourselves in any litigation that may arise from these claims. We are
unable at this time to predict the outcome of this litigation. If any litigation
were to be decided adversely to us, we could be enjoined from future use of the
"Stanford" name and from the use of a logo containing the letter "S", we might
be required to pay substantial damages, and we
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<PAGE> 48
could be subject to significant costs of litigation. See "Risk
Factors -- Stanford University has filed a lawsuit against us alleging trademark
infringement." We may also from time to time become involved in litigation
relating to claims arising from our ordinary course of business. These claims,
even if not meritorious, could result in the expenditure of significant
financial and managerial resources.
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<PAGE> 49
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names, ages, and positions of our current executive officers and
directors as of March 1, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John Ocampo..................... 40 Chairman of the Board and Chief Technology Officer
Robert Van Buskirk.............. 50 President, Chief Executive Officer and Director
Walter Baker.................... 33 Vice President and General Manager of Standard
Products Unit
Gary Gianatasio................. 59 Vice President and General Manager of Wireless
Infrastructure Products Unit
Guy Krevet...................... 53 Vice President, Operations
Susan Ocampo.................... 42 Treasurer
Gerald Quinnell................. 43 Chief Operating Officer and Vice President, Sales
and Marketing
Thomas Scannell................. 49 Vice President, Finance and Administration, Chief
Financial Officer, Secretary and Assistant
Treasurer
John Bumgarner, Jr.............. 57 Director
Peter Chung..................... 32 Director
Casimir Skrzypczak.............. 58 Director
</TABLE>
Executive Officers
JOHN OCAMPO, a co-founder of Stanford Microdevices, has served as our
Chairman of the Board and Chief Technology Officer since May 1999. From 1984 to
May 1999, Mr. Ocampo also served as our President and Chief Executive Officer.
From 1982 to 1984, Mr. Ocampo served as General Manager at Magnum Microwave, an
RF component manufacturer. From 1980 to 1982, he served as Engineering Manager
at Avantek, a telecommunications engineering company, now
Hewlett-Packard/Avantek. Mr. Ocampo holds a B.S.E.E. degree from Santa Clara
University.
ROBERT VAN BUSKIRK has served as our President and Chief Executive Officer
and as a director since June 1999. Before joining Stanford Microdevices, Mr. Van
Buskirk held the position of Executive Vice President of Business Development
and Operations from October 1998 to June 1999 at Multilink Technology
Corporation, a company specializing in the design, development, and marketing of
high bit-rate electronic products for advanced fiber optic transmission systems.
Prior to his position at Multilink, Mr. Van Buskirk held various management
positions at TRW, a semiconductor wafer manufacturer, including Executive
Director of the TRW GaAs telecom products business from August 1993 to October
1998. Mr. Van Buskirk holds a B.A. from California State University at Long
Beach.
WALTER BAKER has served as our Vice President and General Manager of the
Standard Products Unit since November 1999. Mr. Baker served as our Vice
President of Engineering from September 1998 to November 1999, and as
Engineering Manager of our design center in Richardson, Texas from September
1997 to September 1998. From June 1996 to September 1997, he was a Senior RFIC
Design Engineer at Fujitsu Electronics, a manufacturer of electronic components.
From May 1993 to June 1996, Mr. Baker held the position of Design Manager at ITT
General Transistor Corporation (GTC), a manufacturer of transistors. Mr. Baker
received his B.S.E.E from Texas A&M University, an M.S.E.E. degree from Georgia
Tech, and an M.B.A. from the University of Phoenix. Mr. Baker is a member of the
Institute of Electrical and Electronic Engineers.
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<PAGE> 50
GARY GIANATASIO has served as Vice President and General Manager of our
Wireless Infrastruture Products Unit since December 1999. From July 1997 through
November 1999, Mr. Gianatasio provided services to Stanford Microdevices as an
independent management consultant. From January 1997 to December 1999, Mr.
Gianatasio served as a principal of G. Gianatasio & Associates. From April 1990
to July 1997, Mr. Gianatasio held various positions at Spectrian Corporation, an
RF component company, most recently as Senior Vice President of Business
Development. Mr. Gianatasio holds a B.S. from San Jose State University.
GUY KREVET has served as our Vice President, Operations since November
1998. From June 1995 to November 1998, Mr. Krevet served as Vice President and
General Manager of Operation, Engineering, and Manufacturing for Avnet, Inc., a
distributor of electronic components and computer products. From April 1971 to
June 1995, Mr. Krevet served in various positions at Hewlett-Packard/Avantek,
most recently as Manufacturing Manager.
SUSAN OCAMPO is co-founder of Stanford Microdevices and has served as our
Treasurer since November 1999. From 1988 to November 1999, Mrs. Ocampo also
served as Chief Financial Officer and Secretary and as one of our directors.
Mrs. Ocampo holds a B.A. from Maryknoll College, in Manila, Philippines.
GERALD QUINNELL has served as our Vice President, Sales and Marketing and
Chief Operating Officer since November 1998. Mr. Quinnell served as President
and Chief Operating Officer of the RF and Microwave business unit of Avnet, Inc.
from June 1997 to September 1998, and as Corporate Vice President of Avnet,
Inc., from June 1997 to September 1998. From November 1988 to September 1998,
Mr. Quinnell served as Chief Operating Officer of Penstock, Inc., an RF and
microwave distribution company subsequently sold to Avnet, Inc. Mr. Quinnell
holds a B.S. from the University of Phoenix.
THOMAS SCANNELL has served as our Vice President, Finance and
Administration, Chief Financial Officer, Secretary and Assistant Treasurer since
November 1999. From November 1996 to May 1999 Mr. Scannell served as the Vice
President, Finance of Spectra-Physics Lasers, a laser manufacturer. From
November 1990 to November 1996, Mr. Scannell held the positions of Division
Controller and Assistant Corporate Controller at Raychem Corporation, a
materials science company. Mr. Scannell holds a B.A. and an M.B.A. from Stanford
University.
Directors
JOHN BUMGARNER, JR. has served as our director since December 1999. Mr.
Bumgarner has been a Senior Vice President of Corporate Development and Planning
at Williams, a communications and natural gas pipeline infrastructure company,
since 1979. Mr. Bumgarner currently serves as President of Williams
International and President of Williams Headquarters Building Group. Mr.
Bumgarner also serves as President of Strategic Investments for Williams
Communications. Mr. Bumgarner also serves as a director of MPSI, a global
software and database company, PowerTel, a telecommunications service provider
in Australia, Apco Argentina, an exploration and production company, and
Williams Communications, a telecommunications company. Mr. Bumgarner holds a
B.S. from the University of Kansas, and an M.B.A. from Stanford University.
PETER CHUNG has served as our director since October 1999. Mr. Chung is a
General Partner and Member of various entities affiliated with Summit Partners,
L.P., a venture capital and private equity firm, where he has been employed
since August 1994. Summit Partners, L.P. and its affiliates manage a number of
private equity funds, including Summit Ventures V, L.P., Summit V Companion
Fund, L.P., Summit V Advisors (QP) Fund, L.P., Summit V Advisors Fund, L.P. and
Summit Investors III, L.P. Prior to attending Stanford Business School, Mr.
Chung was a Financial Analyst with the Mergers and Acquisitions department at
Goldman, Sachs & Co. from 1989 to 1992. Mr. Chung also serves as a director of
ADVA AG Optical Networking, an optical networking systems company, Ditech
Communications Corporation, a developer of echo
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<PAGE> 51
cancellation and optical networking equipment, Somera Communications, Inc., a
supplier of telecommunications infrastructure equipment and services, Splash
Technology Holdings, Inc., a color server systems company, and several privately
held companies. Mr. Chung holds an A.B. from Harvard University and an M.B.A.
from Stanford University.
CASIMIR SKRZYPCZAK has served as our director since January 2000. Since
October 1999, Mr. Skrzypczak has been a Senior Vice President at Cisco Systems,
a networking systems company. Prior to joining Cisco, Mr. Skrzypczak served as a
Group President at Telcordia Technologies, a telecommunications company, from
July 1997 to October 1999. From September 1985 to June 1997, Mr. Skrzypczak
served as President of NYNEX Corporation, a telecommunications company. Mr.
Skrzypczak also serves as a director of JDS Uniphase, a fiber-optic products
manufacturer. Mr. Skrzypczak holds a B.E. from Villanova University and an
M.B.A. from Hofstra University.
Except for John Ocampo and Susan Ocampo, who are husband and wife, there
are no family relationships among any of our directors or executive officers.
BOARD OF DIRECTORS
Our board of directors is currently comprised of five directors. In
accordance with the terms of our certificate of incorporation, the terms of
office of our board of directors will be divided into three classes upon the
closing of this offering: Class I, whose term will expire at the annual meeting
of stockholders to be held in 2001, Class II, whose term will expire at the
annual meeting of stockholders to be held in 2002, and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2003. The Class
I directors will be Messrs. Chung and Van Buskirk, the Class II directors will
be Messrs. Bumgarner and Skrzypczak, and the Class III director will be Mr.
Ocampo. At each annual meeting of stockholders after the initial classification,
the successors to directors whose terms will then expire will be elected to
serve from the time of election and qualification until the third annual meeting
following election. Any additional directorships resulting from an increase in
the number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of our directors.
BOARD COMMITTEES
Our board of directors has a compensation committee and an audit committee.
The compensation committee was designated in September 1999 and the audit
committee was designated in November 1999. The compensation committee consists
of Messrs. Chung and Bumgarner. The compensation committee makes recommendations
regarding our stock option plans and all matters concerning executive
compensation. The audit committee consists of Messrs. Bumgarner, Chung and
Skrzypczak. The audit committee approves our independent auditors, reviews the
results and scope of annual audits and other accounting related services, and
evaluates our internal audit and control functions.
DIRECTOR COMPENSATION
We do not pay any cash compensation to directors for serving in that
capacity, although directors are reimbursed for expenses in connection with
attendance at board of directors and committee meetings. Directors are eligible
to participate in our Amended and Restated 1998 Stock Plan. Pursuant to our
Amended and Restated 1998 Stock Plan, all non-employee directors are
automatically granted an option to purchase 40,000 shares of common stock upon
their election to the board of directors and an option to purchase an additional
10,000 shares of common stock each year following the date of our annual
stockholder's meeting if on such date, he has served on our board of directors
for at least the previous six months. On December 29, 1999, we granted Mr.
Bumgarner an option to purchase 40,000 shares of common stock at an exercise
price of $3.50 per share. On January 13, 2000, we granted
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<PAGE> 52
Mr. Skrzypczak an option to purchase 40,000 shares of common stock at an
exercise price of $5.50 per share. Employee directors are also eligible to
participate in our employee stock purchase plan. See "-- Employee Benefit
Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee consists of Mr. Chung and Mr. Bumgarner. None of
our executive officers serves as a director or member of the compensation
committee or other board committee performing equivalent functions of another
entity that has one or more executive officers serving on the board of directors
or compensation committee of Stanford Microdevices. Prior to the formation of
the compensation committee, compensation decisions were made by the board of
directors beginning in May 1999 and prior to that by our President.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
We have entered into change of control agreements with Guy Krevet and Mr.
Quinnell which provide that these executive officers are entitled to a maximum
of six months of severance pay and acceleration of options in the event of the
termination of employment of such individual within twelve months of a change of
control of Stanford Microdevices. In addition, we have signed an offer letter
with Mr. Scannell that provides for six months of severance pay in the event Mr.
Scannell is terminated without cause and acceleration of all outstanding options
in the event of a change of control of Stanford Microdevices. We also signed an
offer letter with Mr. Gianatasio that provides for four months of severance pay
and one year acceleration of options in the event Mr. Gianatasio is terminated
without cause and acceleration of all outstanding options in the event of a
change of control of Stanford Microdevices.
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EXECUTIVE COMPENSATION
The following table sets forth in summary form information concerning the
compensation paid by us during the fiscal year ended December 31, 1999 to our
Chief Executive Officer and each of our four other most highly compensated
executive officers. These individuals are referred to as the named executive
officers in this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------
---------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- --------------------------- -------- -------- ------------ ------------------- ------------
<S> <C> <C> <C> <C> <C>
Robert Van Buskirk......... $ 93,461 $ 50,000 -- 342,180 $2,897
President and Chief
Executive Officer
John Ocampo................ 241,799 100,000 2,989,958 -- 17,932
Chairman of the Board and
Chief
Technology Officer
Susan Ocampo............... 217,673 100,000 -- -- 17,924
Treasurer
Gerald Quinnell............ 200,000 100,000 -- 119,924 3,293
Chief Operating Officer
and Vice President,
Sales and Marketing
Guy Krevet................. 154,038 75,000 -- 111,090 3,293
Vice President,
Operations
</TABLE>
The amount in the column entitled "Other Annual Compensation" for Mr.
Ocampo consists of amounts paid to Mr. Ocampo as a special bonus to assist Mr.
and Mrs. Ocampo with federal and state tax liabilities of Stanford Microdevices
paid by Mr. and Mrs. Ocampo while we were an S corporation and to assist Mr. and
Mrs. Ocampo in paying taxes they incurred as a result of the receipt of these
amounts and taxes associated with receipt of a dividend paid in 1999.
The amounts in the column entitled "All Other Compensation" consist of term
life insurance premiums paid by us and contributions by us of $2,500 to each
named executive officer's 401(k) plan account. We also paid Mr. and Mrs. Ocampo
$14,841 each pursuant to our profit sharing plan.
Mr. Van Buskirk joined Stanford Microdevices as our President and Chief
Executive Officer in May 1999. Mr. Van Buskirk's salary on an annualized basis
in 1999 was $225,000. Mr. Ocampo served as our President and Chief Executive
Officer until May 1999. Mrs. Ocampo served as our Chief Financial Officer and
Secretary until November 1999.
The table above excludes Mr. Scannell, our Vice President, Finance and
Administration, Chief Financial Officer and Secretary, who joined Stanford
Microdevices in November 1999. Mr. Scannell's annual salary is $175,000 and he
was granted an option to purchase 200,000 shares in 1999 at an exercise price of
$1.50 per share.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides summary information regarding stock options
granted to each of the named executive officers in 1999. The information
regarding stock options granted to
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<PAGE> 54
named executive officers as a percentage of total options granted to employees
in 1999 is based on options to purchase a total of 2,211,373 shares that were
granted to employees, consultants and directors in 1999, all pursuant to our
1998 Stock Plan. No stock appreciation or stock purchase rights were granted
during 1999.
Options were granted at an exercise price equal to the fair market value of
our common stock, as determined by the board of directors on the date of grant.
The potential realizable values set forth in the table below assume that
the fair market value of our common stock on the date of grant will appreciate
at the indicated rate compounded annually for the entire ten-year term of the
option and that the option is exercised and sold on the last day of its term.
The 5% and 10% assumed annual rates of compounded stock price appreciation are
mandated by rules of the Securities and Exchange Commission and do not reflect
our projections or estimates of future stock price growth.
All options indicated in the table below have a ten year term. The options
vest as to 25% of the shares one year from the vesting commencement date and the
remaining shares shall vest at the rate of 1/48 of the shares at the end of each
month thereafter, provided that the optionee remains our employee or a
consultant to Stanford Microdevices. In addition, Mr. Krevet and Mr. Quinnell
have agreements that provide for acceleration of vesting under certain
conditions as described in "-- Employment Agreements and Change of Control
Arrangements."
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- OPTION VALUE AT ASSUMED
NUMBER PERCENT OF TOTAL ANNUAL RATE OF STOCK
OF SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
---- ------------- ---------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert Van Buskirk... 200,000 9.0% $1.50 6/7/09 $188,668 $478,123
22,180 1.0 1.50 9/30/09 20,923 53,024
120,000 5.4 1.50 11/8/09 113,201 286,874
John Ocampo.......... -- -- -- -- -- --
Susan Ocampo......... -- -- -- -- -- --
Gerald Quinnell...... 39,924 1.8 1.50 9/30/09 37,662 95,443
80,000 3.6 1.50 11/08/09 75,467 191,249
Guy Krevet........... 11,090 0.5 1.50 9/30/09 10,462 26,512
100,000 4.5 1.50 11/8/09 94,334 239,061
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth for each of the named executive officers
certain information concerning the number of shares subject to both exercisable
and unexercisable stock options at December 31, 1999. Also reported are values
for "in-the-money" options that represent the positive spread between the
respective exercise prices of outstanding stock options and $3.50, which is the
fair market value of the common stock as of December 31, 1999 as determined in
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<PAGE> 55
good faith by our board of directors. No shares were acquired by the named
executive officers upon exercise of stock options during the year ended December
31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1999 AT DECEMBER 31, 1999
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert Van Buskirk.................. -- 342,180 $ -- $684,360
John Ocampo......................... -- -- -- --
Susan Ocampo........................ -- -- -- --
Gerald Quinnell..................... 108,313 371,611 273,176 895,472
Guy Krevet.......................... 30,087 181,003 75,882 404,298
</TABLE>
EMPLOYEE BENEFIT PLANS
AMENDED AND RESTATED 1998 STOCK PLAN
Our Amended and Restated 1998 Stock Plan provides for the grant of
incentive stock options to our employees, including our officers and employee
directors, and for the grant of nonstatutory stock options and stock purchase
rights to our employees, directors and consultants. This Amended and Restated
1998 Stock Plan was adopted by our board of directors and was approved by our
stockholders in February 2000.
A total of 7,194,691 shares of our common stock have been reserved for
issuance under our Amended and Restated 1998 Stock Plan. In addition, annual
increases will be added beginning in 2001, equal to the lesser of 1,500,000
shares, 3% of our outstanding shares on such date, or a lesser amount determined
by our board of directors. As of December 31, 1999, no options had been
exercised, options to purchase 5,231,373 shares of common stock were outstanding
and 1,963,318 were available for future grant.
Administration
Our board of directors or a committee of our board of directors administers
our Amended and Restated 1998 Stock Plan. The administrator has the power to
determine, among other things:
- the terms of the options or stock purchase rights granted, including the
exercise price of the option or stock purchase right;
- the number of shares subject to each option or stock purchase right;
- the exercisability of each option or stock purchase right; and
- the form of consideration payable upon the exercise of each option or
stock purchase right.
Options
The administrator determines the exercise price of options granted under
our Amended and Restated 1998 Stock Plan, but with respect to all incentive
stock options and nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Internal Revenue Code, the exercise price must at least equal the fair market
value of our common stock on the date of grant. The term of an incentive stock
option may not exceed ten years, except that with respect to any participant who
owns 10% or more of the voting power of all classes of our outstanding capital
stock, the term must not exceed five years and the exercise price must equal at
least 110% of the fair market value on the grant date. The administrator
determines the term of all other options.
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<PAGE> 56
No optionee may be granted an option to purchase more than 1,000,000 shares
in any fiscal year. In connection with his or her initial service, an optionee
may be granted an additional option to purchase up to 1,000,000 shares.
After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for 12 months. In all other cases, the option will
generally remain exercisable for three months. However, an option may never be
exercised later than the expiration of its term.
Stock Purchase Rights
The administrator determines the exercise price of stock purchase rights
granted under our Amended and Restated 1998 Stock Plan. Unless the administrator
determines otherwise, the restricted stock purchase agreement will grant us a
repurchase option that we may exercise upon the voluntary or involuntary
termination of the purchaser's service with us for any reason (including death
or disability). The purchase price for shares we repurchase will generally be
the original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to us. The administrator determines the rate at
which our repurchase option will lapse.
Transferability of Options and Stock Purchase Rights
Our Amended and Restated 1998 Stock Plan generally does not allow for the
transfer of options or stock purchase rights, other than by will or by the laws
of descent or distribution, and only the optionee may exercise an option or
stock purchase right during his or her lifetime.
Automatic Option Grants to Non-Employee Directors
Our Amended and Restated 1998 Stock Plan also provides for the automatic
grant of 40,000 shares of common stock to a director who first becomes a
non-employee director (except those directors who become non-employee directors
by ceasing to be employee directors). This option will vest as to 25% of the
shares subject to the option on each anniversary of the date of grant. Each
non-employee director will automatically be granted an option to purchase 10,000
shares each year following the date of our annual stockholder's meeting (except
after the first such annual meeting if it is held within six months of the date
of this offering) if on such date, he or she will have served on our board of
directors for at least the previous six months. All of these options will vest
as to 25% of the shares subject to the option on each anniversary of the date of
grant. All options automatically granted to non-employee directors will have a
term of ten years and the exercise price will be 100% of the fair market value
per share of common stock on the date of grant.
Adjustments upon Merger or Asset Sale
Our Amended and Restated 1998 Stock Plan provides that in the event of our
merger with or into another corporation or a sale of substantially all of our
assets, the successor corporation will assume or substitute an equivalent option
or right for each outstanding option or stock purchase right. If following the
assumption or substitution of an option automatically granted to one of our
outside directors any such outside director is terminated other than by his or
her voluntary resignation, then he or she will have the right to exercise the
option as to all of the shares subject to the option, including shares which
would not otherwise be exercisable.
If there is no assumption or substitution of outstanding options or stock
purchase rights, the administrator will provide notice to the optionee that he
or she has the right to exercise the option or stock purchase right as to all of
the shares subject to the option or stock purchase right, including shares which
would not otherwise be exercisable, for a period of 15 days from
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<PAGE> 57
the date of the notice. The option or stock purchase right will terminate upon
the expiration of the 15-day period.
Amendment and Termination of the Amended and Restated 1998 Stock Plan
Our Amended and Restated 1998 Stock Plan will automatically terminate in
2010, unless we terminate it sooner. In addition, our board of directors has the
authority to amend, suspend or terminate our Amended and Restated 1998 Stock
Plan provided it does not adversely affect any previously granted option or
stock purchase right or any previously issued shares of common stock.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 Employee Stock Purchase Plan was adopted by our board of
directors, and approved by our stockholders in February 2000 and is intended to
become effective upon completion of this offering. A total of 300,000 shares of
our common stock has been reserved for issuance, plus annual increases beginning
in 2001 equal to the lesser of 350,000 shares, 1% of the outstanding shares on
such date, or a lesser amount as may be determined by our board of directors. As
of the date of this prospectus, no shares have been issued under our 2000
Employee Stock Purchase Plan.
Structure of the 2000 Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan is intended to qualify under Section
423 of the Code and contains consecutive, overlapping 24-month offering periods.
Each offering period includes four six-month purchase periods. The offering
periods generally start on the first trading day on or after May 15 and November
15 of each year and terminate on the first trading day on or after the May 15 or
November 15 offering period commencement date 24 months later, except for the
first such offering period which will commence on the first trading day on or
after the effective date of this offering and will end on the first trading day
on or after May 15, 2002. The second offering period will commence on the first
trading day on or after November 15, 2000.
Eligibility
All of our employees are eligible to participate if they are customarily
employed by us or any participating subsidiary for at least 20 hours per week
and more than five months in any calendar year. However, an employee may not be
granted an option to purchase stock under the Purchase Plan if such employee:
- immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
- whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.
Purchases
Our Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 15% of their eligible compensation, which includes a
participant's base straight time gross earnings and commissions, but exclusive
of overtime pay, shift premium, incentive compensation, incentive payments,
bonuses and other compensation. A participant may purchase a maximum of 10,000
shares during a six-month purchase period.
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<PAGE> 58
Amounts deducted and accumulated by the participant are used to purchase
shares of our common stock at the end of each six-month purchase period. The
price is 85% of the lower of the fair market value of our common stock either:
- at the beginning of an offering period, or
- at the end of a purchase period.
If the fair market value at the end of a purchase period is less than the
fair market value at the beginning of the offering period, participants will be
withdrawn from the current offering period following their purchase of shares on
the purchase date and will be automatically re-enrolled in a new offering
period. Participants may end their participation at any time during an offering
period and will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with us.
Transferability of Rights
A participant may not transfer rights granted under our 2000 Employee Stock
Purchase Plan other than by will, the laws of descent and distribution or as
otherwise provided under the Purchase Plan.
Merger or Asset Sale
In the event of our merger with or into another corporation or a sale of
all or substantially all of our assets, a successor corporation will assume or
substitute each outstanding option. If the successor corporation refuses to
assume or substitute for the outstanding options, the offering period then in
progress will be shortened, and a new exercise date will be set.
Amendment and Termination of the 2000 Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan will terminate in 2010 unless we
terminate it sooner. Our board of directors has the authority to amend or
terminate our 2000 Employee Stock Purchase Plan, except that no such action may
adversely affect any outstanding rights to purchase stock under our 2000
Employee Stock Purchase Plan.
PROFIT SHARING PLAN
In January of 1997, we adopted a profit sharing plan that allows for
discretionary contributions to the plan at the discretion of our board of
directors out of our current or accumulated profits. Our contribution is limited
to 15% of eligible participants' annual compensation, subject to certain
adjustments. Our contributions were approximately $91,000 in 1997, $121,000 in
1998 and $127,000 in 1999. We intend to terminate this plan.
401(k) RETIREMENT PLAN
We maintain a tax-qualified retirement and deferred savings plan for our
employees, commonly known as a 401(k) plan. The 401(k) plan provides that each
participant may contribute up to 15% of his or her pre-tax gross compensation up
to a statutory limit, which was $10,000 in the 1999 calendar year. Under our
401(k) Plan, we make matching non-discretionary contributions to our 401(k) plan
of up to $2,500 per year for each participant in the plan. Under the 401(k)
plan, we may make discretionary contributions as determined by our board of
directors. In 1999, we made an aggregate of $51,000 in contributions to the
401(k) plan.
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<PAGE> 59
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
- breach of their duty of loyalty to the corporation or its stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
- any transaction from which the director derives an improper personal
benefit.
The limitation of liability in our certificate of incorporation does not
apply to liabilities arising under the federal or state securities laws and does
not affect the availability of equitable remedies such as injunctive relief or
rescission.
Our bylaws provide that we will indemnify our directors, officers,
employees and agents to the maximum extent permitted by Delaware law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any current or former officer, director, employee
or other agent of our company, or of another enterprise if serving at our
request, for any liability arising out of his or her actions in that capacity,
regardless of whether we would have the power to indemnify him or her against
liability under the provisions of Delaware law.
Prior to the effective time of this offering, we intend to enter into
agreements to indemnify our directors and officers, in addition to the
indemnification provided for in our bylaws. These agreements, among other
things, require us to indemnify our directors and officers for any and all
expenses including attorneys fees, and including any federal, state, local or
foreign taxes imposed on them as a result of the actual or deemed receipt of any
payments under the indemnification agreement, judgments, fines, penalties and
amounts paid in settlement (if such settlement is approved in advance by us,
which approval will not be unreasonably withheld) any action, suit or
proceeding, including any action by or in the right of Stanford Microdevices
arising out of the individual's status as a director, officer, employee, or
agent of Stanford Microdevices, any subsidiary of Stanford Microdevices or any
other company or enterprise to which the person provides services at our request
and to advance expenses incurred by the individual in connection with any
proceeding against the individual with respect to which the individual may be
entitled to indemnification by us. We believe that our certificate of
incorporation, by law provisions and indemnification agreements are necessary to
attract and retain qualified persons as directors and officers. Upon completion
of this offering, we will also maintain directors and officers liability
insurance.
At present, we are not aware of any pending litigation or proceeding
involving a director or officer in which indemnification is required or
permitted, and we are not aware of any threatened litigation or proceeding that
may result in a claim for indemnification.
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<PAGE> 60
CERTAIN TRANSACTIONS
The following is a description of transactions in the last three years to
which we have been a party, in which the amount involved in the transaction
exceeds $60,000 and in which any director, executive officer or holder of more
than 5% of our capital stock had or will have a direct or indirect material
interest other than compensation arrangements which are otherwise described
under "Management."
On September 30, 1999, we declared a cash dividend payable to all holders
of common stock as of October 1, 1999 in an aggregate amount of $4.0 million.
Mr. and Mrs. Ocampo, and trusts for their benefit, were the sole common
stockholders of Stanford Microdevices at the time of this dividend and received
payment of the entire $4.0 million. Mr. and Mrs. Ocampo are principal
stockholders of Stanford Microdevices and each is an executive officer. Mr.
Ocampo is our Chairman of the Board, and our Chief Technology Officer. Mrs.
Ocampo is our Treasurer. We also agreed to pay a special bonus to Mr. Ocampo in
recognition of Mr. and Mrs. Ocampo's active involvement, leadership, and
contributions to the rapid development of the Company through the end of 1999.
The total amount of the bonus was determined based on the activities of Mr. and
Mrs. Ocampo in their capacity as employees, and was approved by our Board of
Directors. The bonus was also intended to assist Mr. and Mrs. Ocampo with any
federal or state taxes, including a gross-up payment, associated with the
payment of the dividend in October 1999. A total of $3.0 million was paid to Mr.
and Mrs. Ocampo in December 1999 as a result of this agreement and to assist Mr.
and Mrs. Ocampo with their S corporation federal and state taxes for 1998 and
1999. We also paid additional dividends to Mr. and Mrs. Ocampo as follows:
$784,000 in 1997, $1,100,000 in 1998 and $388,000 in 1999.
In October 1999, we sold an aggregate 4,983,388 shares of our mandatorily
redeemable convertible preferred stock at a price per share of $3.01 to entities
affiliated with Summit Partners and in connection therewith issued warrants to
purchase up to 1,100,000 shares of common stock at an exercise price of $4.50
per share to entities affiliated with Summit Partners. Upon consummation of this
offering, each share of mandatorily redeemable convertible preferred stock will
automatically convert into one share of our common stock, and all unexercised
warrants will terminate. Mr. Chung, a director of Stanford Microdevices, is a
general partner in certain funds affiliated with Summit Partners. Summit
Partners is also entitled to registration rights with respect to the common
stock issued or issuable upon conversion of its mandatorily redeemable
convertible preferred stock and upon exercise of its warrants. We believe that
the shares issued in this transaction were sold at the then fair market value.
In the past, we have used the services of MPI Corporation of Manila,
Philippines, for the packaging of substantially all of our RF components and all
of our contract manufacturing services. MPI is owned by Jose Ocampo, a cousin of
John Ocampo, our co-founder, Chairman of the Board and Chief Technology Officer,
and a principal stockholder of Stanford Microdevices. We paid MPI an aggregate
of $1,902,000 in 1997, $1,056,000 in 1998 and $1,235,000 in 1999 for these
services. We also granted Jose Ocampo options to purchase 333,270 shares of
common stock at exercise prices ranging from $0.92 to $1.50.
We plan to enter into an indemnification agreement with each of our current
and future executive officers and directors.
See the description of certain change of control agreements entered into
with some of our officers described above under "Management -- Employment
Agreements and Change of Control Arrangements."
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<PAGE> 61
PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 31, 2000, and as adjusted to
reflect the sale of the shares of common stock offered hereby, certain
information with respect to the beneficial ownership of the common stock as to:
- each person known by us to own beneficially more than 5% of the
outstanding shares of our common stock;
- each of the named executive officers;
- each of our directors; and
- all of our directors and executive officers as a group.
Except as indicated in the table or footnotes below, and subject to
applicable community property laws, the persons named below have sole voting and
investment power with respect to all shares of common stock held by them.
Applicable percentage ownership in the table is based on 20,908,182 shares
of common stock outstanding as of March 31, 2000, and 24,908,182 shares
outstanding immediately following the completion of this offering. Beneficial
ownership is determined in accordance with the rules of the SEC. Shares of
common stock subject to options that are presently exercisable or exercisable
within 60 days of March 31, 2000 are deemed outstanding for the purpose of
computing the percentage ownership of the person or entity holding options or
warrants, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person or entity.
Unless otherwise indicated below, each person or entity named below has an
address in care of Stanford Microdevices' principal executive offices at 726
Palomar Avenue, Sunnyvale, California 94086.
<TABLE>
<CAPTION>
BENEFICIALLY OWNED
PERCENTAGE OF SHARES
NUMBER OF SHARES --------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
------------------------ ------------------ --------------- --------------
<S> <C> <C> <C>
5% Stockholders, Directors and Named Executive
Officers:
John and Susan Ocampo(1)....................... 14,012,242 67.0% 56.3%
Entities affiliated with Summit Partners
L.P.(2)...................................... 5,702,618 26.4 22.3
Robert Van Buskirk............................. -- * *
Guy Krevet(3).................................. 41,659 * *
Gerald Quinnell(4)............................. 149,971 * *
John Bumgarner, Jr............................. 71,428 * *
Peter Chung(5)................................. -- * *
Casimir Skrzypczak............................. 18,182 * *
All directors and executive officers as a
group (11 persons)(6)..................... 14,382,354 67.9% 57.1%
</TABLE>
- -------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Consists of 1,050,000 shares held by John Ocampo, 1,050,000 shares held by
Susan Ocampo, 7,954,063 shares held jointly by John and Susan Ocampo, as
community property, 1,500,000 shares held by John Ocampo and Susan Ocampo,
Trustees of Susan Ocampo Annuity Trust U/I Dtd. September 27, 1999,
1,500,000 shares held by John Ocampo and Susan Ocampo, Trustees of John
Ocampo Annuity Trust U/I dtd. September 27, 1999, 900,000 shares held by
Samat Partners, a California limited partnership and an aggregate of 58,179
shares held by a custodian and various trusts for the benefit of the
Ocampos' minor children. Mrs. Ocampo is the custodian and Mr. and Mrs.
Ocampo are co-trustees with a third person of each these trusts and share
voting and
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<PAGE> 62
dispositive authority over these shares. Mr. and Mrs. Ocampo disclaim
beneficial ownership of the shares held by these trusts except to the extent
of their pecuniary interest in these shares.
(2) Consists of 3,691,389 shares held by Summit Ventures V, L.P., 75,794 shares
held by Summit Investors III, L.P., 79,958 shares held by Summit V Advisors,
L.P., 874,599 shares held by Summit Ventures V Companion Fund, L.P., 261,648
shares held by Summit V Advisors (QP), L.P., and an aggregate of
approximately 719,230 shares subject to outstanding warrants exercisable
within 60 days of March 31, 2000 (assuming net exercise of the warrants and
an initial public offering price of $13.00 per share) held by these
entities. Summit Partners, LLC is the general partner of Summit Partners V,
L.P., which is the general partner of each of Summit Ventures V, L.P.,
Summit V Advisors, L.P., Summit V Advisors (QP), L.P. and Summit Ventures V
Companion Fund, L.P. Summit Partners, LLC, through an investment committee,
has voting and dispositive authority over the shares held by each of these
entities and Summit Investors III. The address of record for entities
affiliated with Summit Partners, L.P. is 499 Hamilton Avenue, Suite 200,
Palo Alto, CA 94301.
(3) Consists of 41,659 shares subject to outstanding options exercisable within
60 days of March 31, 2000.
(4) Consists of 149,971 shares subject to outstanding options exercisable within
60 days of March 31, 2000.
(5) Mr. Chung, one of our directors, is a member of Summit Partners LLC, the
general partner of Summit Ventures V, which is the general partner of each
of Summit Ventures V, L.P., Summit V Advisors, L.P., Summit Ventures V
Companion Fund, L.P. and Summit V Advisors Fund (QP), L.P. Summit Partners,
LLC, through an investment committee, has voting and dispositive authority
over the shares held by these entities and Summit Investors III, L.P. Mr.
Chung does not have voting or dispositive authority over these shares and
disclaims beneficial ownership except to the extent of his pecuniary
interest in these shares.
(6) Includes an aggregate of 280,502 shares subject to outstanding options
exercisable within 60 days of March 31, 2000.
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<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering our certificate of incorporation will be
amended and restated to provide for total authorized capital stock of
200,000,000 shares of common stock, $0.001 par value per share, and 5,000,000
shares of preferred stock, $0.001 par value per share.
The following summary does not purport to be complete and is subject to,
and qualified in its entirety by, the provisions of our restated certificate of
incorporation, which is included as an exhibit to the registration statement of
which this prospectus is a part, and by the provisions of applicable law.
COMMON STOCK
Assuming the conversion of all outstanding shares of mandatorily redeemable
convertible preferred stock into common stock as of March 31, 2000 and the net
exercise of outstanding warrants to purchase approximately 719,230 shares of our
common stock (assuming an initial public offering price of $13.00 per share),
there were 21,627,412 shares of common stock outstanding held of record by 61
stockholders. After giving effect to the sale of common stock offered hereby,
there will be 25,627,412 shares of common stock outstanding.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of common
stock have no preemptive rights or rights to convert their common stock into any
other securities. There are no redemption or sinking fund provisions applicable
to the common stock. All outstanding shares of common stock are fully paid and
non-assessable, and the shares of common stock to be issued upon completion of
this offering will be fully paid and non-assessable.
PREFERRED STOCK
Pursuant to our restated certificate of incorporation that will be filed
upon completion of this offering, our board of directors will have the
authority, without further action by the stockholders, to designate and issue up
5,000,000 shares of preferred stock in one or more series. Our board of
directors will also be able to designate the powers, preferences, privileges and
relative participating, optional or special rights and the qualifications,
limitations or restrictions of each series of preferred stock, including
dividend rights, conversion rights, voting rights, terms of redemption and
liquidation preferences, any or all of which may be greater than the rights of
the common stock. Our board, without stockholder approval, can issue preferred
stock with voting, conversion or other rights that could adversely affect the
voting power and other rights of the holders of common stock. Preferred stock
could thus be issued quickly with terms calculated to delay or prevent a change
in control of Stanford Microdevices or make removal of management more
difficult. Additionally, the issuance of preferred stock may have the effect of
decreasing the market price of the common stock, and may adversely affect the
voting and other rights of the holders of common stock. Upon the closing of this
offering, there will be no shares of preferred stock outstanding and we have no
present plans to issue any of the preferred stock.
REGISTRATION RIGHTS
Assuming the conversion of all outstanding mandatorily redeemable
convertible preferred stock into common stock upon completion of this offering,
the holders of 6,367,069 shares of common stock or their transferees are
entitled to registration rights with respect to these shares under the
Securities Act. These rights are provided under the terms of an agreement
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<PAGE> 64
between Stanford Microdevices and the holders of these securities. Subject to
limitations in the agreement, these registration rights include the following:
- The holders of at least a majority of these securities then outstanding
may require, on two occasions beginning six months after the date of this
prospectus, that we use our commercially reasonable efforts to register
these securities for public resale, provided that the anticipated
aggregate offering price of such public resale would exceed $10,000,000.
- If we register any of our common stock either for our own account or for
the account of other security holders, the holders of these securities
are entitled to include their shares of common stock in that
registration, subject to the ability of the underwriters to limit the
number of shares included in the offering, provided that these holders
may not be reduced below 30% of the total number of shares included in
the offering.
- The holders of these securities may also require us, not more than once
in any 12 month period, to register all or a portion of these securities
on Form S-3 when use of that form becomes available to us, provided,
among other limitations, that the proposed aggregate selling price, net
of any underwriters' discounts or commissions, is at least $2,500,000.
We will be responsible for paying all registration expenses other than
underwriting discounts and commissions, and the holders selling their shares
will be responsible for paying all selling expenses.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS
AND OF DELAWARE LAW
Charter Documents
Provisions of our charter and bylaws may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of us. These provisions are expected to
discourage coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of Stanford Microdevices to first
negotiate with us. These provisions could limit the price investors might be
willing to pay in the future for our common stock and could have the effect of
delaying or preventing a change in control. We believe that the benefits of
increased protection of our ability to negotiate with the proponent of an
unfriendly or unsolicited acquisition proposal outweigh the disadvantages of
discouraging these proposals because, among other things, negotiation will
result in an improvement of their terms. These provisions could limit the price
that investors might be willing to pay in the future for shares of our common
stock. These provisions include:
- division of the board of directors into three separate classes;
- elimination of cumulative voting in the election of directors;
- prohibitions on our stockholders from acting by written consent and
calling special meetings;
- procedures for advance notification of stockholder nominations and
proposals; and
- the ability of the board of directors to alter our bylaws without
stockholder approval.
In addition, subject to limitations prescribed by law, our board of
directors has the authority to issue up to 5,000,000 shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The issuance of preferred stock, while providing flexibility
in connection with possible financings or acquisitions or other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock.
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<PAGE> 65
Delaware Law
We are also subject to Section 203 of the Delaware General Corporation Law
which subject to certain exceptions prohibits a publicly held Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date the person became an
interested stockholder, unless:
- prior to the date of the transaction, the board of directors approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock outstanding at the time the transaction
commenced excluding for purposes of determining the number of shares
outstanding (a) shares owned by persons who are directors and also
officers and (b) shares held by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or following the date of the transaction the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders, by the affirmative vote of at least two-thirds
of the outstanding voting stock that is not owned by the interested
stockholder.
Generally, a "business combination" includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns or, within three years prior to the
determination of interested stockholder status, did own 15% or more of a
corporation's outstanding voting securities. We expect the existence of this
provision to have an anti-takeover effect with respect to transactions that our
board of directors do not approve in advance. We also anticipate that Section
203 may also discourage attempts that might result in a premium over the market
price for the shares of common stock held by stockholders. A Delaware
corporation may opt out of Section 203 with an express provision in its original
certificate of incorporation or an express provision in its certification of
incorporation or bylaws resulting from amendments approved by the holders of at
least a majority of the corporation's outstanding voting shares. We have not
opted out of Section 203.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services. ChaseMellon's address is 85 Challenger Road, Ridgefield
Park, New Jersey 07660 and its telephone number is (800) 356-2017.
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<PAGE> 66
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have outstanding 24,908,182 shares
of common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of options after March 31, 2000. Of these shares, the 4,000,000
shares sold in this offering will be freely tradable without restriction or
further registration under the Securities Act; provided however, that if shares
are purchased by "affiliates" as that term is defined in Rule 144 of the
Securities Act, their sales of shares would be subject to certain limitations
and restrictions that are described below.
The remaining 20,908,182 shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. All of these shares will be
subject to lock-up agreements described below on the effective date of the
offering. These shares will become eligible for sale as follows:
<TABLE>
<CAPTION>
NUMBER OF
DATE OF AVAILABILITY FOR SALE SHARES COMMENT
----------------------------- ---------- --------------------------------------
<S> <C> <C>
90th day after the effective date of
this offering....................... 0 All holders of securities are bound by
lock-up agreements
181st day after the date of this
prospectus.......................... 20,818,752 180-day lock-up expires; shares
saleable under Rule 144, 144(k) or 701
Various dates thereafter.............. 89,430 Restricted securities held for one
year or less as of the 181st day after
the date of this prospectus
</TABLE>
In addition, we have 1,667,818 shares of our common stock available for
future grant pursuant to our stock plans, and 5,266,530 shares subject to
outstanding options at March 31, 2000. All of these outstanding options are also
subject to a 180-day lock-up. We intend to register, prior to the expiration of
the lock-up, all of the shares of common stock reserved for issuance under our
stock option plans and under our employee stock purchase plan. This registration
will permit the resale of shares by non-affiliates in the public market without
restriction beginning on expiration of the lock-ups. We also have outstanding
warrants to purchase approximately 719,230 shares of common stock (assuming net
exercise of the warrants and the assumed initial public offering price of $13.00
per share). The shares subject to these warrants will be available for sale upon
expiration of the 180-day lock-up.
We, and each of our officers and directors and all of our stockholders and
option holders, have agreed with Deutsche Bank Securities Inc. not to sell or
otherwise dispose of any their shares for a period of 180 days after the date of
this prospectus without the prior written consent of Deutsche Bank Securities
Inc. Deutsche Bank Securities Inc., however, may in its sole discretion, at any
time and without notice, release all or any portion of the shares subject to
lock-up agreements. Deutsche Bank Securities Inc. does not have any current
plans to effect such a release.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 250,000 shares immediately after this offering; or
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<PAGE> 67
- the average weekly trading volume of the common stock on the Nasdaq
National Market System during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to other requirements regarding the
manner of sale, notice filing and the availability of current public information
about us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, would be entitled to sell
these shares under Rule 144(k) without regard to the requirements described
above. Therefore, unless otherwise restricted, "144(k) shares" may be sold
immediately upon the completion of this offering. Of the 20,908,182 shares of
common stock held by existing stockholders as of March 31, 2000, 898,148 shares
are eligible for resale pursuant to Rule 144(k).
RULE 701
In general, any employee, director, officer, consultant or advisor who
purchases shares from us in connection with a written compensatory plan or
contract before the effective date of the offering is entitled to resell these
shares 90 days after the effective date of the offering in reliance on Rule 144,
without having to comply with certain restrictions, including the holding
period, contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of these options, including exercises after the date of this
prospectus. Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other than
"affiliates" subject only to the manner of sale restrictions of Rule 144 and by
"affiliates" under Rule 144 without compliance with its one-year minimum holding
requirement. Of the 20,908,182 shares of common stock held by existing
stockholders as of March 31, 2000, 260,343 shares are eligible for resale
pursuant to Rule 701.
REGISTRATION RIGHTS
After this offering, the holders of 6,367,069 shares of our common stock
will be entitled to certain rights with respect to registration of such shares
under the Securities Act. Registration of these shares under the Securities Act
would result in these shares becoming freely tradeable without restriction under
the Securities Act (except for shares purchased by our affiliates). Investors
should look at "Description of Capital Stock -- Registration Rights" for a
description of those shares entitled to registration.
65
<PAGE> 68
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement the
underwriters named below, through their representatives Deutsche Bank Securities
Inc., Banc of America Securities LLC, CIBC World Markets Corp. and FleetBoston
Robertson Stephens Inc. have severally agreed to purchase from Stanford
Microdevices the following respective number of shares of common stock at a
public offering price less the underwriting discounts and commissions set forth
on the cover page of this prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Deutsche Bank Securities Inc. .............................
Banc of America Securities LLC.............................
CIBC World Markets Corp. ..................................
FleetBoston Robertson Stephens Inc. .......................
---------
Total.................................................... 4,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions precedent and that the underwriters will purchase all
shares of the common stock offered hereby, other than those covered by the
over-allotment option described below, if any of these shares are purchased.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover of this prospectus and to
dealers at a price that represents a concession not in excess of $ per share
under the public offering price. The underwriters may allow, and these dealers
may re-allow, a concession of not more than $ per share to other dealers.
After the initial public offering, representatives of the underwriters may
change the offering price and other selling terms.
We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to 600,000 additional
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered hereby. To the extent that
the underwriters exercise this option, each of the underwriters will become
obligated, subject to conditions, to purchase approximately the same percentage
of additional shares of common stock as the number of shares of common stock to
be purchased by it in the above table bears to the total number of shares of
common stock offered hereby. We will be obligated, pursuant to the option, to
sell these additional shares of common stock to the underwriters to the extent
the option is exercised. If any additional shares of common stock are purchased,
the underwriters will offer the additional shares on the same terms as those on
which the 4,000,000 shares are being offered.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The underwriting fee is % of the initial public offering price. We have
agreed to pay the underwriters the following
66
<PAGE> 69
fees, assuming either no exercise or full exercise by the underwriters of the
underwriters' over-allotment option:
<TABLE>
<CAPTION>
TOTAL FEES
----------------------------------------------
WITHOUT EXERCISE OF WITH FULL EXERCISE OF
FEE PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
------------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by Stanford
Microdevices....................
</TABLE>
In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $1,600,000.
We have agreed to indemnify the underwriters against some specified types
of liabilities, including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make in respect of
any of these liabilities.
Each of our officers and directors, and substantially all of our
stockholders and holders of options and warrants to purchase our stock, have
agreed not to offer, sell, contract to sell or otherwise dispose of, or enter
into any transaction that is designed to, or could be expected to, result in the
disposition of any shares of our common stock or other securities convertible
into or exchangeable or exercisable for shares of our common stock or
derivatives of our common stock owned by these persons prior to this offering or
common stock issuable upon exercise of options or warrants held by these persons
for a period of 180 days after the date of this prospectus without the prior
written consent of Deutsche Bank Securities Inc. This consent may be given at
any time without public notice. We have entered into a similar agreement with
the representatives of the underwriters, except that we may grant options and
sell shares pursuant to our Amended and Restated 1998 Stock Plan and our 2000
Employee Stock Purchase Plan without such consent. There are no agreements
between the representatives and any of our stockholders or affiliates releasing
them from these lock-up agreements prior to the expiration of the 180-day
period.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short position in our common stock for their own account. A short position
results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. Additionally, to cover these
over-allotments or stabilize the market price of our common stock, the
underwriters may bid for, and purchase, shares of our common stock in the open
market. Finally, the representatives, on behalf of the underwriters, may also
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
These transactions may be effected on the Nasdaq National Market or otherwise.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 400,000 shares for our vendors, employees, family
members of employees, customers and other third parties. The number of shares of
our common stock available for sale to the general public will be reduced to the
extent these reserved shares are purchased. Any reserved shares that are not
purchased by these persons will be offered by the underwriters to the general
public on the same basis as the other shares in this offering.
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<PAGE> 70
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock will
be determined by negotiation among Stanford Microdevices and the representatives
of the underwriters. Among the factors to be considered in determining the
public offering price will be:
- prevailing market conditions;
- our results of operations in recent periods;
- the present stage of our development;
- the market capitalizations and stages of development of other companies
that we and the representatives of the underwriters believe to be
comparable to us; and
- estimates of our business potential.
The estimated initial public offering price range set forth on the cover of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
LEGAL MATTERS
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California, will pass upon the validity of the common stock offered hereby for
Stanford Microdevices. Morrison & Foerster LLP, Irvine, California, will pass
upon certain legal matters in connection with this offering for the
underwriters.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedules at December 31, 1998 and 1999 and for each of
the three years in the period ended December 31, 1999 as set forth in their
report. We have included our financial statements and schedule in the prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
exhibits, schedules and amendments filed with this registration statement, under
the Securities Act with respect to the common stock to be sold under this
prospectus. Prior to the offering we were not required to file reports with the
SEC. This prospectus does not contain all the information set forth in the
registration statement. For further information about our company and the shares
of common stock to be sold in the offering, please refer to the registration
statement. Statements made in this prospectus concerning the contents of any
contract, agreement or other document filed as an exhibit to the registration
statement are summaries of the terms of contract, agreements or documents and
are not necessarily complete. Complete exhibits have been filed with the
registration statement.
The registration statement and exhibits may be inspected, without charge,
and copies may be obtained at prescribed rates, at the SEC's Public Reference
facility maintained by the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-732-0330. The registration statement and other
information filed with the SEC is available at the web site maintained by the
SEC on the worldwide web at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent accountants and quarterly
reports for the first three quarters of each fiscal year containing unaudited
financial statements.
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<PAGE> 71
STANFORD MICRODEVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency)............................................... F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 72
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Stanford Microdevices, Inc.
We have audited the accompanying consolidated balance sheets of Stanford
Microdevices, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (net capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Stanford Microdevices, Inc. at December 31, 1998 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
San Jose, California
February 16, 2000,
except for the fourth paragraph of
Note 11 as to which the
date is April 10, 2000.
F-2
<PAGE> 73
STANFORD MICRODEVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AS OF
----------------- MARCH 31, MARCH 31,
1998 1999 2000 2000
------ -------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 217 $ 10,965 $ 3,777
Short-term investments....................... -- -- 4,950
Accounts receivable, net of allowance for
doubtful accounts of $116, $100 and $100 at
December 31, 1998 and 1999 and March 31,
2000....................................... 929 1,681 3,053
Inventories.................................. 969 2,227 5,021
Other current assets......................... 14 348 696
------ -------- --------
Total current assets....................... 2,129 15,221 17,497
Property and equipment, net.................. 1,602 4,271 5,879
Deposits and other assets.................... 75 227 249
------ -------- --------
Total assets............................... $3,806 $ 19,719 $ 23,625
====== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (NET
CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable............................. $ 583 $ 2,493 $ 2,487
Accrued expenses............................. 449 972 2,491
Deferred margin on distributor inventory..... 1,534 3,287 4,460
Capital lease obligations, current portion... 417 723 819
------ -------- --------
Total current liabilities.................. 2,983 7,475 10,257
Capital lease obligations...................... 813 1,299 1,608
Mandatorily redeemable convertible preferred
stock........................................ -- 38,857 64,781
Commitments
Stockholders' equity (net capital deficiency):
Preferred stock, $0.001 par value:
Authorized shares -- 5,000,000 (pro forma)
Issued and outstanding shares -- none (pro
forma)..................................... -- -- $ --
Common stock, $0.001 par value:
Authorized shares -- 30,000,000
(actual) -- 200,000,000 (pro forma)
Issued and outstanding shares -- 15,000,000
at December 31, 1998 and 1999;
15,260,343 at March 31, 2000; 20,908,182
(pro forma)............................. 15 15 15 21
Additional paid-in capital................... 210 5,342 6,326 71,101
Deferred stock compensation.................. -- (4,255) (4,630) (4,630)
Retained earnings (accumulated deficit)...... (215) (29,014) (54,732) (54,732)
------ -------- -------- --------
Total stockholders' equity (net capital
deficiency)............................. 10 (27,912) (53,021) $ 11,760
------ -------- ======== ========
Total liabilities, mandatorily redeemable
convertible preferred stock and
stockholders' equity (net capital
deficiency)............................. $3,806 $ 19,719 $ 23,625
====== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 74
STANFORD MICRODEVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- ------------------
1997 1998 1999 1999 2000
------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Product revenues.......................... $ 5,963 $ 7,417 $ 17,248 $ 2,595 $ 7,042
Contract manufacturing revenues........... 935 814 817 282 222
------- ------- -------- ------- --------
Total net revenues...................... 6,898 8,231 18,065 2,877 7,264
Cost of revenues (exclusive of amortization
of deferred stock compensation of $140 and
$37 in 1999 and for the three months ended
March 31, 2000, respectively)............. 3,970 4,854 9,996 1,655 2,885
------- ------- -------- ------- --------
Gross profit................................ 2,928 3,377 8,069 1,222 4,379
Operating expenses:
Research and development (exclusive of
amortization of deferred stock
compensation of $31 and $64 in 1999 and
for the three months ended March 31,
2000, respectively)..................... 643 932 2,274 337 1,436
Sales and marketing (exclusive of
amortization of deferred stock
compensation of $56 and $73 in 1999 and
for the three months ended March 31,
2000, respectively)..................... 461 1,107 2,951 504 1,522
General and administrative (exclusive of
amortization of deferred stock
compensation of $61 and $132 in 1999 and
for the three months ended March 31,
2000, respectively)..................... 659 965 2,089 222 939
Special charges........................... -- -- 2,990 -- --
Amortization of deferred stock
compensation............................ -- -- 288 -- 306
------- ------- -------- ------- --------
Total operating expenses................ 1,763 3,004 10,592 1,063 4,203
------- ------- -------- ------- --------
Income (loss) from operations............... 1,165 373 (2,523) 159 176
Interest expense............................ 28 97 167 30 46
Interest and other income, net.............. 18 13 184 1 164
------- ------- -------- ------- --------
Income (loss) before taxes.................. 1,155 289 (2,506) 130 294
Provision for income taxes.................. 50 10 48 16 88
------- ------- -------- ------- --------
Net income (loss)........................... 1,105 279 (2,554) 114 206
Accretion of mandatorily redeemable
convertible preferred stock............... -- -- (21,857) -- (25,924)
------- ------- -------- ------- --------
Net income (loss) applicable to common
stockholders.............................. $ 1,105 $ 279 $(24,411) $ 114 $(25,718)
======= ======= ======== ======= ========
Historical basic and diluted net income
(loss) per share applicable to common
stockholders.............................. $ 0.07 $ 0.02 $ (1.63) $ 0.01 $ (1.71)
======= ======= ======== ======= ========
Shares used to compute historical basic and
diluted net income (loss) per share
applicable to common stockholders......... 15,000 15,000 15,000 15,000 15,000
======= ======= ======== ======= ========
</TABLE>
F-4
<PAGE> 75
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- ------------------
1997 1998 1999 1999 2000
------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Pro forma net income (loss) data
(unaudited):..............................
Income (loss) before taxes (as reported).... -- -- $ (2,506) 130 294
Pro forma provision for income taxes
(unaudited)............................... -- -- 160 40 88
-------- ------- --------
Pro forma net income (loss) (unaudited)..... -- -- $ (2,666) 90 $ 206
Pro forma basic net income (loss) per share
(unaudited)............................... -- -- $ (0.16) -- $ 0.01
Pro forma diluted net income (loss) per
share (unaudited)......................... -- -- $ (0.16) -- $ 0.01
Shares used to compute pro forma basic net
income (loss) per share (unaudited)....... 16,825 21,675
Shares used to compute pro forma diluted net
income (loss) per share (unaudited)....... 16,825 26,314
</TABLE>
See accompanying notes.
F-5
<PAGE> 76
STANFORD MICRODEVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
RETAINED STOCKHOLDERS'
COMMON STOCK ADDITIONAL DEFERRED EARNINGS EQUITY
------------------- PAID-IN STOCK (ACCUMULATED) (NET CAPITAL
SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) DEFICIENCY)
---------- ------ ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.... 15,000,000 $15 $ -- $ -- $ 252 $ 267
Distributions to
stockholders................ -- -- -- -- (784) (784)
Net income and comprehensive
net income.................. -- -- -- -- 1,105 1,105
---------- --- ------ ------- -------- --------
Balance at December 31, 1997.... 15,000,000 15 -- -- 573 588
Compensation expense related
to stock options to non-
employees................... -- -- 210 -- -- 210
Distributions to
stockholders................ -- -- -- -- (1,067) (1,067)
Net income and comprehensive
net income.................. -- -- -- -- 279 279
---------- --- ------ ------- -------- --------
Balance at December 31, 1998.... 15,000,000 15 210 -- (215) 10
Compensation expense related
to stock options to non-
employees................... -- -- 589 -- -- 589
Deferred stock compensation... -- -- 4,543 (4,543) -- --
Amortization of deferred stock
compensation................ -- -- -- 288 -- 288
Accretion of mandatorily
redeemable convertible
preferred stock............. -- -- -- -- (21,857) (21,857)
Distributions to
stockholders................ -- -- -- -- (4,388) (4,388)
Net loss and comprehensive net
loss........................ -- -- -- -- (2,554) (2,554)
---------- --- ------ ------- -------- --------
Balance at December 31, 1999.... 15,000,000 15 5,342 (4,255) (29,014) (27,912)
Exercise of stock options
(unaudited)................. 260,343 -- 240 -- -- 240
Compensation expense related
to stock options to non-
employees (unaudited)....... -- -- 63 -- -- 63
Deferred stock compensation
(unaudited)................. -- -- 681 (681) -- --
Amortization of deferred stock
compensation (unaudited).... -- -- -- 306 -- 306
Accretion of mandatorily
redeemable convertible
preferred stock
(unaudited)................. -- -- -- -- (25,924) (25,924)
Net income and comprehensive
net income (unaudited)...... -- -- -- -- 206 206
---------- --- ------ ------- -------- --------
Balance at March 31, 2000
(unaudited)................... 15,260,343 $15 $6,326 $(4,630) $(54,732) $(53,021)
========== === ====== ======= ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 77
STANFORD MICRODEVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- ------------------
1997 1998 1999 1999 2000
------ ------- ------- ------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................ $1,105 $ 279 $(2,547) $ 114 $ 206
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.............. 111 391 547 131 329
Compensation expense related to stock
options.................................. -- 210 589 30 63
Amortization of deferred stock
compensation............................. -- -- 281 -- 306
Changes in operating assets and
liabilities:
Accounts receivable...................... (687) 471 (752) (754) (1,372)
Inventories.............................. (477) 123 (1,258) (180) (2,794)
Other assets............................. (217) 128 (486) (1) (370)
Accounts payable......................... 86 (217) 1,910 587 (6)
Accrued expenses......................... 264 19 523 385 1,519
Deferred margin on distributor
inventory.............................. 1,273 (130) 1,753 196 1,173
------ ------- ------- ----- -------
Net cash provided by (used in)
operating activities................ 1,458 1,274 560 508 (946)
INVESTING ACTIVITIES
Purchases of available-for-sale securities... -- -- -- -- (4,950)
Purchases of property and equipment.......... (293) (41) (1,851) (7) (1,325)
------ ------- ------- ----- -------
Net cash used in investing activities........ (293) (41) (1,851) (7) (6,275)
FINANCING ACTIVITIES
Proceeds from issuance of mandatorily
redeemable convertible preferred stock..... -- -- 17,000 -- --
Principal payments on capital lease
obligations................................ (85) (435) (573) (128) (207)
Proceeds from loan payable................... -- -- 200 200 --
Repayment of loan payable.................... -- -- (200) -- --
Distributions to stockholders................ (784) (1,067) (4,388) (166) --
Proceeds from exercise of stock options...... -- -- -- -- 240
------ ------- ------- ----- -------
Net cash provided by (used in) financing
activities................................. (869) (1,502) 12,039 (94) 33
------ ------- ------- ----- -------
Increase (decrease) in cash.................. 296 (269) 10,748 407 (7,188)
Cash at beginning of period.................. 190 486 217 217 10,965
------ ------- ------- ----- -------
Cash at end of period........................ $ 486 $ 217 $10,965 $ 624 $ 3,777
====== ======= ======= ===== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest....................... $ 28 $ 97 $ 167 $ 30 $ 46
Cash paid for income tax..................... $ 7 $ 51 $ 24 $ 0 $ 0
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING
ACTIVITIES
Equipment acquired under capital lease....... $ 233 $ 1,405 $ 1,365 $ 141 $ 612
Accretion of mandatorily redeemable
convertible preferred stock................ $ -- $ -- $21,857 $ -- $25,924
Deferred stock compensation.................. $ -- $ -- $ 4,543 $ -- $ 681
</TABLE>
See accompanying notes.
F-7
<PAGE> 78
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Company was incorporated in California and began operations in 1985 as
Matrix Microassembly Corporation. In 1987, the Company sold its first products
and began to generate revenues. The Company began doing business as Stanford
Microdevices, Inc. in 1992. In November 1997, the Company reincorporated in
Delaware as Stanford Microdevices, Inc. The Company is a leading designer and
supplier of high performance RF components for communications equipment
manufacturers. Its products are used primarily in wireless communications
equipment to enable and enhance the transmission and reception of voice and data
signals. From 1985 through October 1999, the Company was organized as a
Subchapter S corporation for federal tax reporting purposes. In October 1999,
the Company's election to be treated as an S corporation under the Internal
Revenue Code was revoked.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Stanford Microdevices, Canada. Intercompany
balances and transactions have been eliminated.
Through December 31, 1999, the Company operated on calendar fiscal quarters
and a fiscal year ending December 31. Beginning in 2000, the Company will
operate on thirteen week fiscal quarters ending on the Sunday closest to the end
of the calendar quarter, with the exception of the fourth quarter, which will
end on December 31. The Company's first quarter of fiscal year 2000 ended on
April 2, 2000. For presentation purposes, the accompanying interim financial
statements refer to the quarter's calendar month end for convenience.
Unaudited Interim Financial Information
The accompanying consolidated financial statements and related notes as of
March 31, 2000 and for the three months ended March 31, 1999 and 2000 are
unaudited, but include all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of its
consolidated financial position, operating results, and cash flows for the
interim date and periods presented. Results for the three month period ended
March 31, 2000 are not necessarily indicative of results to be expected for the
full fiscal year of 2000 or for any future period.
Foreign Currency Translation
The Company uses the U.S. dollar as its functional currency for Stanford
Microdevices, Canada. All monetary assets and liabilities are remeasured at the
current exchange rate at the end of the period, nonmonetary assets and
liabilities are remeasured at historical exchange rates and revenues and
expenses are remeasured at average exchange rates in effect during the period.
Transaction gains and losses resulting from the process of remeasurement were
not material in any period presented.
F-8
<PAGE> 79
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenue from product sales to customers, other than distributors, is
generally recognized at the time the product is shipped, title has transferred,
and no obligations remain. In circumstances where a customer delays acceptance
of our product, the Company defers recognition of the revenue until acceptance.
To date, the Company has not had customers delay acceptance of its products. A
provision is made for estimated product returns as shipments are made. Product
returns for nondistributor customers were not material for any period presented.
Contract manufacturing revenue is recognized at the time of shipment of
completed assemblies when no further obligations remain.
The Company grants its distributors limited rights of return and certain
price adjustments on unsold inventory held by the distributors. Under the
Company's rights of return policy, its distributors may exchange product
currently in their inventory for other of the Company's product. This policy is
designed to allow the Company's distributors to efficiently obtain product that
they want. In practice, the Company will exchange any reasonable amount of
inventory requested by its distributors.
Under the Company's price adjustment policy, the Company will accept
credits from its distributors on previous sales to them. These credits are
designed to allow the distributors to pass back to the Company discounts they
were forced to grant to their end customers due to competitive pricing
situations. In practice, the Company will accept any reasonable credit requested
from its distributors.
The Company has limited control over the extent to which products sold to
distributors are sold to third party customers. Accordingly, the Company
recognizes revenues on sales to distributors at the time its products are sold
by the distributors to third party customers. The recognition of sales to
distributors and the related gross profit on the products held by distributors
is deferred until the sale to the third party customer. The deferred gross
profit is included as "deferred margin on distributor inventory" in the
accompanying balance sheets.
Advertising Expenses
The Company expenses its advertising costs in the period in which they are
incurred. Advertising expense was $60,000 in 1997, $134,000 in 1998, and
$366,000 in 1999.
F-9
<PAGE> 80
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Research and Development Costs
Research and development costs are charged to expense as incurred.
Cash, Cash Equivalents and Short-Term Investments
Cash equivalents consist of financial instruments which are readily
convertible to cash and have original maturities of three months or less at the
time of acquisition. The Company's cash and cash equivalents as of December 31,
1997, 1998 and 1999 and March 31, 2000 consisted primarily of bank deposits and
commercial paper and money market funds issued or managed by large financial
institutions in the United States. Cash equivalents are carried at cost which
approximates fair value. Short-term investments consist of commercial paper with
original maturities of greater than 90 days and remaining maturities of less
than one year. Short-term investments are classified as available-for-sale and
are reported at fair value, with unrealized gains and losses, net of tax,
recorded in stockholders' equity. The estimated fair market values of cash
equivalents and short-term investments are based on quoted market prices.
Cash equivalents as of December 31, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR MARKET
COST GAIN LOSS VALUE
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Cash equivalents:
Money market funds........................... $ 53 -- -- $ 53
Commercial paper............................. 10,800 -- -- 10,800
------- ------- ------- -------
Total cash equivalents......................... $10,853 -- -- $10,853
======= =======
</TABLE>
Cash equivalents and short-term investments as of March 31, 2000 were as
follows (in thousands) (unaudited):
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR MARKET
COST GAIN LOSS VALUE
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Money Market funds............................. $2,011 -- -- $2,011
Commercial Paper............................... 6,600 -- -- 6,600
------ ------- ------- ------
$8,611 -- -- $8,611
====== ======
Included in cash equivalents................... $3,661 -- -- $3,661
Included in short-term investments............. 4,950 -- -- 4,950
------ ------
$8,611 $8,611
====== ======
</TABLE>
Concentrations of Credit Risk, Customers and Suppliers
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash equivalents and
accounts receivable. The Company places its cash equivalents with high credit
financial institutions, primarily in money market accounts and
F-10
<PAGE> 81
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
commercial paper which are readily convertible to cash and have original
maturities of three months or less at the time of acquisition. The Company has
established guidelines relative to diversification and maturities that attempt
to maintain safety and liquidity. The Company has not experienced any losses on
its cash equivalents.
The Company's accounts receivables are primarily derived from revenue
earned from customers located in the United States. Sales to foreign customers
are generally denominated in U.S. dollars, minimizing currency risk to the
Company. The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral from its customers. The
Company maintains an allowance for doubtful accounts receivable based upon the
expected collectibility of accounts receivable.
A relatively small number of customers account for a significant percentage
of the Company's net revenues. For the year ended December 31, 1997, three
customers accounted for approximately 49%, 19% and 11% of net revenues,
respectively. For the year ended December 31, 1998, three customers accounted
for approximately 40%, 36% and 11% of net revenues, respectively. For the year
ended December 31, 1999, three customers accounted for approximately 41%, 38%
and 13% of net revenues, respectively. For the three months ended March 31,
1999, three customers accounted for approximately 37%, 39% and 10% of net
revenues, respectively. For the three months ended March 31, 2000, three
customers accounted for approximately 31%, 39% and 24% of net revenues,
respectively. The Company expects that the sale of its products to a limited
number of customers may continue to account for a high percentage of net
revenues for the foreseeable future.
Currently, the Company relies on a limited number of suppliers of materials
and labor for the significant majority of its product inventory but is pursuing
alternative suppliers. As a result, should the Company's current suppliers not
produce and deliver inventory for the Company to sell on a timely basis,
operating results may be adversely impacted.
Inventories
Inventories are stated at the lower of standard cost, which approximates
actual (first-in, first-out method) or market (estimated net realizable value).
The valuation of inventories at the lower of cost or market requires the use of
estimates regarding the amounts of current inventory that will be sold. These
estimates are dependent on the Company's assessment of current and expected
orders from its customers, including consideration that orders are subject to
cancellation with limited advance notice prior to shipment.
The components of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- MARCH 31,
1998 1999 2000
---- ------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Inventories:
Raw materials............................ $276 $ 914 $2,035
Work-in-process.......................... 212 659 1,987
Finished goods........................... 481 654 999
---- ------ ------
Total................................. $969 $2,227 $5,021
==== ====== ======
</TABLE>
F-11
<PAGE> 82
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation
and amortization. Property and equipment are depreciated for financial reporting
purposes using the straight-line method over the estimated useful lives of three
to seven years. Leasehold improvements are amortized using the straight-line
method over the shorter of the useful lives of the assets or the terms of the
leases. The Company periodically performs reviews to evaluate the recoverability
of its property and equipment based upon expected undiscounted cash flows and
recognizes impairment from the carrying value of property and equipment, if any,
based on the fair value of such assets. No asset impairment occurred in any of
the periods presented. Property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1998 1999 2000
------ ------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Property and equipment:
Machinery and equipment......................... $1,739 $3,600 $4,670
Computer equipment and software................. 121 1,274 1,442
Furniture and fixtures.......................... 47 101 505
Leasehold improvements.......................... 241 389 684
------ ------ ------
Total........................................ 2,148 5,364 7,301
Less accumulated depreciation and amortization.. 546 1,093 1,422
------ ------ ------
Property and equipment, net....................... $1,602 $4,271 $5,879
====== ====== ======
</TABLE>
Income Taxes
The Company previously elected to be taxed as an S corporation under
Subchapter S of the Internal Revenue Code. Consequently, the stockholders were
taxed on their proportionate share of the Company's taxable income and no
provision for Federal income taxes has been provided for periods in which the
Company elected to be taxed as an S corporation. Effective October 4, 1999, the
Company revoked its election to be treated as an S corporation under the
Internal Revenue Code.
Subsequent to October 4, 1999, the Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109 (FAS 109),
"Accounting for Income Taxes." FAS 109 requires the use of the liability method
of accounting for income taxes. Under the liability method, deferred income tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using enacted
tax rates and laws that will be in effect when the differences are expected to
reverse. The Company records a valuation allowance against deferred tax assets
when it is more likely than not that such assets will not be realized.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, accounts
receivable and accounts payable are carried at cost, which approximates their
fair value because of the short-term maturity of these instruments. The fair
value of capital lease obligations are estimated based on current interest rates
available to the Company for debt instruments with similar
F-12
<PAGE> 83
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
terms, degrees of risk, and remaining maturities. The carrying values of these
obligations approximate their fair values.
Stock-Based Compensation
As described in Note 5, the Company has elected to account for its employee
stock plans in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25), and to adopt
the disclosure-only provisions as required under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123).
The Company accounts for stock issued to nonemployees in accordance with
the provisions of FAS 123 and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."
Comprehensive Income (Loss)
The Company has adopted Statement of Accounting Standards No. 130,
"Reporting Comprehensive Income" (FAS 130). FAS 130 requires that all items
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company's comprehensive
net income (loss) was the same as its net income (loss) for the years ended
December 31, 1997, 1998 and 1999 and the three months ended March 31, 1999 and
2000.
Segments of an Enterprise
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" (FAS
131). FAS 131 superseded Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise." FAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. FAS 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The adoption
of FAS 131 did not affect the Company's results of operations or financial
position, see Note 9.
Net Income (Loss) Per Share
The Company computes net income (loss) per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (FAS
128) and SEC Staff Accounting Bulletin No. 98 (SAB 98). Under the provisions of
FAS 128 and SAB 98, basic net income (loss) per share is computed by dividing
the net income (loss) applicable to common stockholders for the period by the
weighted average number of shares of Common Stock outstanding during the period.
Diluted net income (loss) per share is computed by dividing the net income
(loss) applicable to common stockholders for the period by the weighted average
number of shares of Common Stock and potential Common Stock equivalents
outstanding
F-13
<PAGE> 84
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
during the period, if dilutive. Potential Common Stock equivalents include
incremental shares of Common Stock issuable upon the exercise of stock options
and warrants and upon conversion of Mandatorily Redeemable Convertible Preferred
Stock.
The following table sets forth the computation of basic and diluted net
income (loss) per share for the periods indicated (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- -------------------
1997 1998 1999 1999 2000
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss) applicable
to common stockholders.... $ 1,105 $ 279 $(24,411) $ 114 $(25,718)
======= ======== ======== ======= ========
Weighted average number of
common shares outstanding
during the period......... 15,000 15,000 15,000 15,000 15,000
======= ======== ======== ======= ========
Basic and diluted net income
(loss) per share
applicable to common
stockholders.............. $ 0.07 $ 0.02 $ (1.63) $ 0.01 $ (1.71)
======= ======== ======== ======= ========
</TABLE>
The effects of options to purchase 5,231,373 shares of Common Stock at an
average exercise price of $1.25 for the year ended December 31, 1999 have not
been included in the computation of diluted net loss per share as the effect
would have been antidilutive.
The effects of warrants to purchase 1,100,000 shares of Common Stock at an
average exercise price of $4.50 for the year ended December 31, 1999 have not
been included in the computation of diluted net loss per share as the effect
would have been antidilutive.
The effects of conversion of 5,647,839 shares of Mandatorily Redeemable
Convertible Preferred Stock for the year ended December 31, 1999 have not been
included in the computation of diluted net loss per share as the effect would
have been antidilutive.
The effects of options to purchase 3,020,000 and 3,100,222 shares of Common
Stock at an average exercise price of $0.92 for the year ended December 31, 1998
and the three months ended March 31, 1999, respectively, have no impact on the
computation of diluted net income per share because the option's exercise price
was not less than the estimated average market price of the Company's common
shares during that period.
The effects of options to purchase 5,266,530 shares of Common Stock at an
average exercise price of $1.59 for the three months ended March 31, 2000 have
not been included in the computation of diluted net loss per share as the effect
would have been antidilutive.
The options, warrants and Mandatorily Redeemable Convertible Preferred
Stock that were antidilutive in 1999 may be dilutive in future years'
calculations as they were still outstanding at December 31, 1999.
F-14
<PAGE> 85
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Pro Forma Net Income (loss) and Pro Forma Basic and Diluted Net Income
(loss) Per Share (Unaudited)
The pro forma tax provision for the year ended December 31, 1999 is based
on the tax rate the Company believes it would have incurred had the Company not
been an S Corporation for income tax purposes. The provision consists of federal
and state minimum taxes for which no carryback opportunity would have existed.
Pro forma basic and diluted net income (loss) per share for the year ended
December 31, 1999 and the three months ended March 31, 2000 is computed using
the weighted average number of shares of Common Stock outstanding, including the
pro forma effects of the automatic conversion of the Company's Mandatorily
Redeemable Convertible Preferred Stock into shares of the Company's Common Stock
effective upon the closing of the Company's initial public offering as if such
conversion occurred on October 4, 1999, the date of original issuance. The
shares used in calculating the pro forma basic and diluted net income (loss) per
share amounts also include the number of shares issuable upon the net exercise
of warrants to purchase the Company's Common Stock as such warrants expire upon
the completion of the Company's initial public offering. For the purposes of pro
forma net income (loss) per share, the Company assumes the warrants will be
exercised prior to or in connection with the completion of the initial public
offering. The shares used in calculating the pro forma basic and diluted net
income (loss) per share include the number of shares to be sold in the Company's
proposed initial public offering whose proceeds would be required to pay the
$4,000,000 dividend to stockholders paid by the Company in the fourth quarter of
1999. In addition, the shares used to compute pro forma diluted net income per
share include the weighted average effect of options outstanding, if dilutive.
The following table sets forth the computation of the number of shares used
to compute pro forma basic and diluted income (loss) per share (in thousands)
(unaudited):
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1999 MARCH 31, 2000
----------------- -------------------
BASIC DILUTED BASIC DILUTED
------ ------- ------- --------
<S> <C> <C> <C> <C>
Weighted average common stock outstanding......... 15,000 15,000 15,000 15,000
Conversion of Mandatorily Redeemable Convertible
Preferred Stock into Common Stock............... 1,346 1,346 5,648 5,648
Net exercise of warrants.......................... 171 171 719 719
Shares required to cover dividend to
stockholders.................................... 308 308 308 308
Common stock equivalents outstanding, if
dilutive........................................ -- -- -- 4,639
------ ------ ------ ------
Shares used to compute pro forma income (loss) per
share........................................... 16,825 16,825 21,675 26,314
</TABLE>
For the purposes of calculating pro forma basic and diluted net income
(loss) per share, net loss applicable to common stockholders has been adjusted
to eliminate accretion on the Company's Mandatorily Redeemable Convertible
Preferred Stock.
Pro Forma Stockholders' Equity (Unaudited)
If the offering contemplated by the Company is completed, each share of
Mandatorily Redeemable Convertible Preferred Stock outstanding will
automatically be converted into one
F-15
<PAGE> 86
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
share of Common Stock. Unaudited pro forma stockholders' equity at March 31,
2000, as adjusted for the assumed conversion of Mandatorily Redeemable
Convertible Preferred Stock based on the shares of Mandatorily Redeemable
Convertible Preferred Stock outstanding at March 31, 2000, is disclosed on the
balance sheet.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and hedging Activities: (FAS 133). FAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. FAS 133 was to be effective for fiscal years beginning after
June 15, 1999. However, in July 1999, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133" (FAS 137). FAS 137 defers for one year the effective
date of FAS 133 which will now apply to all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company does not believe the adoption of FAS
133 will have a material impact on its consolidated financial position, results
of operations or cash flows.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued SOP 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use, (SOP 98-1). SOP 98-1 requires that entities
capitalize certain costs related to internal use software once certain criteria
have been met. The Company adopted SOP 98-1 for the year ended December 31,
1999. The adoption of SOP 98-1 did not have a material impact on the Company's
financial condition or results of operations.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of
Start-Up Activities, (SOP 98-5). SOP 98-5 requires that all start-up costs
related to new operations must be expensed as incurred. In addition, all
start-up cost that were capitalized in the past must be written off when SOP
98-5 is adopted. The Company adopted SOP 98-5 on January 1, 1999. The adoption
of SOP 98-5 did not have a material impact on the Company's financial condition
or results of operations.
In December of 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition, which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosures related to
revenue recognition policies. We believe that our revenue recognition policy is
in compliance with the provisions of SAB 101 and that the adoption of SAB 101
had no material effect on our financial position or results of operations.
2. LINE OF CREDIT AND CAPITAL LEASE OBLIGATIONS
Line of Credit
The Company maintains a secured credit facility with Comerica Bank that
includes a $3,000,000 line of credit. Borrowings under the revolving credit line
may be made and repaid at any time and bear interest at the base rate (as
announced by the lender) plus 0.5%. In addition, borrowings under the revolving
credit line are subject to the Company's compliance with certain financial and
other covenants and are secured by certain of the Company's assets.
F-16
<PAGE> 87
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
At December 31, 1999, there were no outstanding amounts under this credit
facility. At December 31, 1999, the Company was in violation of one of its
covenants under the credit facility. Comerica Bank has waived these violations.
Capital Lease Obligations
The Company leases certain equipment under noncancelable lease agreements
that are accounted for as capital leases. Equipment under capital lease
arrangements and included in property and equipment aggregated approximately
$1,800,000 and $3,165,000 at December 31, 1998 and 1999, respectively. Related
accumulated depreciation was approximately $570,000 and $1,143,000 at December
31, 1998 and 1999, respectively. Depreciation expense related to assets under
capital leases is included in depreciation expense. In addition, the capital
leases are generally secured by the related equipment and the Company is
required to maintain liability and property damage insurance.
Future minimum lease payments under noncancelable capital leases at
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000....................................................... $ 877
2001....................................................... 691
2002....................................................... 513
2003....................................................... 229
------
Total minimum lease payments............................... 2,310
Less amounts representing interest......................... 288
------
Present value of minimum lease payments.................... 2,022
Less current portion....................................... 723
------
Long-term portion.......................................... $1,299
======
</TABLE>
3. COMMITMENTS
The Company leases its facilities under operating lease agreements. The
operating leases for the Company's facilities expire in 2001 through 2004.
Future minimum lease payments under these leases as of December 31, 1999 are as
follows (in thousands):
<TABLE>
<S> <C>
2000..................................................... $ 551
2001..................................................... 550
2002..................................................... 497
2003..................................................... 37
2004..................................................... 37
------
Total minimum lease payments............................. $1,672
======
</TABLE>
Rent expense under the operating leases was $91,000, $401,000, and $424,000
for the years ended December 31, 1997, 1998 and 1999, respectively.
Unconditional Purchase Obligations
The Company has unconditional purchase obligations to certain suppliers
that supply the Company's wafer requirements. Because the products the Company
purchases are unique to it,
F-17
<PAGE> 88
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
its agreements with these suppliers prohibit cancellation subsequent to the
production release of the products in its suppliers manufacturing facilities,
regardless of whether the Company's customers cancel orders. At December 31,
1999, the Company had approximately $5,900,000 of unconditional purchase
obligations.
4. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Mandatorily Redeemable Convertible Preferred Stock at December 31, 1999
consists of the following:
<TABLE>
<CAPTION>
SHARES SHARES LIQUIDATION REDEMPTION
AUTHORIZED OUTSTANDING PREFERENCE AMOUNT
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Series A........................ 6,000,000 5,647,839 $17,255,000 $38,857,000
</TABLE>
In October 1999, the Company issued 5,647,839 shares of Mandatorily
Redeemable Convertible Preferred Stock at $3.01 per share for net proceeds of
approximately $17,000,000. The holders of the Mandatorily Redeemable Convertible
Preferred Stock have various rights and preferences as follows:
Voting
Each share of Mandatorily Redeemable Convertible Preferred Stock has voting
rights equal to an equivalent number of shares of Common Stock into which it is
convertible and votes together with the holders of Common Stock.
As long as at least 1,412,000 shares of the originally issued shares of
Mandatorily Redeemable Convertible Preferred Stock are outstanding, the Company
must obtain approval from the holders of at least a majority of the then
outstanding shares of Mandatorily Redeemable Convertible Preferred Stock in
order to amend the amended restated certificate of incorporation or bylaws,
change the authorized number of directors of the Company, authorize or issue any
other equity security senior to or on parity with the Mandatorily Redeemable
Convertible Preferred Stock, alter or change the rights, preferences or
privileges of the Mandatorily Redeemable Convertible Preferred Stock, redeem or
purchase any shares of Preferred Stock or Common Stock other than by redemption
in accordance with the amended restated certificate of incorporation, liquidate,
dissolve or effect a recapitalization or reorganization in any form of
transaction, increase or decrease the number of authorized shares of Mandatorily
Redeemable Convertible Preferred Stock, dispose of more than 25% of the
Company's property or business, merge or consolidate with any other corporation
or effect a transaction in which more than 50% of the voting power of the
Company is disposed of.
Conversion
Each share of Mandatorily Redeemable Convertible Preferred Stock
outstanding is automatically convertible into one share of Common Stock, subject
to adjustment for dilution, and will be converted into Common Stock in the event
of the closing of a public offering of at least $30,000,000 in aggregate
proceeds at a minimum price of $7.53 per share. As of December 31, 1999, the
Company had reserved 5,647,839 shares of its Common Stock for issuance upon
conversion of the outstanding Mandatorily Redeemable Convertible Preferred
Stock.
F-18
<PAGE> 89
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Dividends
Holders of shares of Mandatorily Redeemable Convertible Preferred Stock are
entitled to receive cumulative dividends at the per annum rate of $0.18 per
share, prior to payment of dividends on any other class of stock. These
dividends accrue and cumulate whether or not declared by the Board of Directors,
but are not payable upon the successful completion of an initial public
offering. The Company has accrued such dividends at December 31, 1999 as
accretion to the Mandatorily Redeemable Convertible Preferred Stock redemption
value.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, holders of the Mandatorily Redeemable
Convertible Preferred Stock are entitled to receive $3.01 per share plus accrued
but unpaid dividends, prior to any distribution to the holders of Common Stock.
Any assets remaining after distribution of the preference amounts on the
Mandatorily Redeemable Convertible Preferred Stock will be distributed on a pro
rata basis to all holders of Mandatorily Redeemable Convertible Preferred Stock
and Common Stock until such time as the holders of the Mandatorily Redeemable
Convertible Preferred Stock have received $7.53 per share. Any assets remaining
after distribution of these amounts will be distributed on a pro rata basis to
holders of Common Stock.
Redemption
The holders of a majority of the then outstanding Mandatorily Redeemable
Convertible Preferred Stock may cause the Company to redeem their shares after
the seventh anniversary of the Mandatorily Redeemable Convertible Preferred
Stock issuance date in three annual installments. Redemption will be at the
greater of fair market value or the original issue price plus accrued but unpaid
dividends. During the fourth quarter of 1999 and the first quarter of 2000, the
Company recorded an increase to its accumulated deficit of $21,857,000 and
$25,924,000 related to accretion to the Mandatorily Redeemable Convertible
Preferred Stock redemption value. The Company estimated the fair value of a
share of Mandatorily Redeemable Convertible Preferred Stock to be approximately
equal to the value of common stock as of December 31, 1999 and March 31, 2000
using the deemed fair value of the common stock for financial statement
presentation purposes. Management believes the Mandatorily Redeemable
Convertible Preferred Stock is presented at redemption value as of December 31,
1999 and March 31, 2000.
5. STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Warrants
In connection with its sale of Mandatorily Redeemable Convertible Preferred
Stock, the Company issued warrants to purchase 1,100,000 shares of Common Stock
at $4.50 per share. The warrants are immediately exercisable and expire at the
earlier of October 5, 2002, the completion of an initial public offering of the
Company's Common Stock of greater than $4.50 per share, the sale or transfer of
substantially all of the assets of the Company or the closing of an acquisition
of the Company.
F-19
<PAGE> 90
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Common Stock
Each share of Common Stock is entitled to one vote. The holders of Common
Stock are also entitled to receive dividends from legally available assets of
the Company when and if declared by the Board of Directors, subject to the prior
rights of holders of Mandatorily Redeemable Convertible Preferred Stock.
At December 31, 1999, shares of Common Stock were reserved for future
issuance as follows:
<TABLE>
<S> <C>
Conversion of Mandatorily Redeemable Convertible
Preferred Stock..................................... 5,647,839
Warrants.............................................. 1,100,000
1998 Stock Plan....................................... 5,994,691
----------
12,742,530
==========
</TABLE>
Stock Option Plan
In January 1998, the Company established the 1998 Stock Plan (the 1998
Plan) under which stock options may be granted to employees, directors and
consultants of the Company and authorized 4,000,000 shares of Common Stock
thereunder. In 1999, Board of Directors approved increases in the number of
shares authorized for issuance under the 1998 Plan to 5,994,691. Under the 1998
Plan, nonstatutory stock options may be granted to employees, directors and
consultants, and incentive stock options (ISO) may be granted only to employees.
In the case of an ISO that is granted to an employee who, at the time of the
grant of such option, owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Company, the per share
exercise price shall not be less than 110% of the fair market value per share on
the date of grant. For ISO's granted to any other employee, the per share
exercise price shall not be less than 100% of the fair value per share on the
date of grant. The exercise price for nonqualified options may not be less than
85% of the fair value of Common Stock at the option grant date. Options
generally expire after ten years. Vesting and exercise provisions are determined
by the Board of Directors. Options generally vest over 4 years, 25% after the
first year and ratably each month over the remaining 36 months.
Rights to purchase stock may also be granted under the 1998 Plan with
terms, conditions, and restrictions determined by the Board of Directors.
F-20
<PAGE> 91
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
The following is a summary of option activity for the 1998 Plan:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
--------------------------------------------------------
PRICE WEIGHTED
SHARES NUMBER OF PER AVERAGE
AVAILABLE SHARES SHARE EXERCISE PRICE
---------- --------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997....... -- -- $-- $ --
Authorized....................... 4,000,000 -- $-- $ --
Granted.......................... (3,020,000) 3,020,000 $0.92 $0.92
Exercised........................ -- -- $-- $ --
Canceled......................... -- -- $-- $ --
---------- ---------
Balance at December 31, 1998....... 980,000 3,020,000 $0.92 $0.92
Authorized....................... 1,994,691 -- $-- $ --
Granted.......................... (2,211,373) 2,211,373 $0.92 - $ 3.50 $1.71
Exercised........................ -- -- $-- $ --
Canceled......................... -- -- $-- $ --
---------- ---------
Balance at December 31, 1999....... 763,318 5,231,373 $0.92 - $ 3.50 $1.25
Authorized (unaudited)........... -- -- $-- $ --
Granted (unaudited).............. (299,500) 299,500 $5.50 - $10.00 $6.93
Exercised (unaudited)............ -- (260,343) $0.92 $0.92
Canceled (unaudited)............. 4,000 (4,000) $1.50 $1.50
---------- ---------
Balance at March 31, 2000
(unaudited)...................... 467,818 5,266,530 $0.92 - $10.00 $1.59
========== =========
</TABLE>
In addition, the following table summarizes information about stock options
that were outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------- OPTIONS EXERCISABLE
WEIGHTED --------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES LIFE PRICE OF SHARES PRICE
--------------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.92 3,150,000 8.37 $0.92 2,346,664 $0.92
$1.50 1,813,373 9.80 $1.50 235,490 $1.50
$3.50 268,000 9.99 $3.50 -- $3.50
--------- ---------
Total 5,231,373 8.93 $1.25 2,582,154 $0.97
========= =========
</TABLE>
In 1998, the Company granted approximately 1,070,000 stock options to
nonemployees at exercise prices of $0.92 per share in exchange for services. The
Company recorded charges to cost of sales and general and administrative expense
in 1998 of $60,000 and $150,000, respectively, representing the fair value of
vested stock options granted to nonemployees in 1998. In 1999, the Company
granted approximately 102,000 stock options to nonemployees at exercise prices
of $1.50 per share in exchange for services. The Company recorded charges to
cost of sales, sales and marketing and general and administrative expense in
1999 of $93,000, $23,000, and $474,000, respectively, representing the fair
value of vested stock options granted to nonemployees in 1998 and 1999. All of
these options were outstanding at December 31, 1999. Approximately 9,365 of
these options were unvested at December 31, 1999. For the three months ended
March 31, 2000, the Company recorded charges to sales
F-21
<PAGE> 92
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
and marketing expense of $63,000 representing the fair value of stock options
granted to a nonemployee which vested during the period. All of these options
were vested at March 31, 2000.
Stock-Based Compensation
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock-based awards to employees and directors. Under APB Opinion
No. 25, when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income (loss) and net income (loss) per
share is required under FAS 123 and is calculated as if the Company had
accounted for its employee stock options granted during the years ended December
31, 1998 and 1999 under the fair value method of FAS 123. The fair value for
employee and director stock options granted was estimated at the date of grant
using a minimum value option pricing model with the following weighted-average
assumptions: risk-free interest rates of 5.66% and 6.45% for 1998 and 1999,
respectively; no dividend yield; and a weighted average expected life of the
option of 5.5 years.
As discussed above, the valuation models used under FAS 123 were developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, valuation models require
the input of highly subjective assumptions, including the expected life of the
option. Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation cost for the Company's stock-based compensation plan been
determined consistent with fair value method of FAS 123, the Company's net
income (loss) applicable to common stockholders and net income (loss) per share
applicable to common stockholders would have been adjusted to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1999
-------- ---------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net income (loss) applicable to common stockholders:
As reported............................................. $ 279 $(2,802)
Pro forma............................................... $ (172) $(2,828)
Basic and diluted net income (loss) per share attributable
to holders of Common Stock:
As reported............................................. $ 0.02 $ (0.19)
Pro forma............................................... $(0.01) $ (0.19)
</TABLE>
The effects on pro forma disclosures of applying FAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because FAS 123 is
F-22
<PAGE> 93
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
applicable only to options granted subsequent to December 31, 1997 the pro forma
effect will not be fully reflected until 2002.
The options' weighted average grant date fair value, which is the value
assigned to the options under FAS 123, was $0.25 and $1.36 for options granted
during 1998 and 1999, respectively.
Deferred Stock Compensation
In connection with the grant of stock options to employees for the year
ended December 31, 1999 and the three month period ended March 31, 2000, the
Company recorded deferred stock compensation within stockholders' equity of
approximately $4,543,000 and $681,000, respectively, representing the difference
between the deemed fair value of the Common Stock for financial statement
presentation purposes and the option exercise price of these options at the date
of grant. During the year ended December 31, 1999 and the three months ended
March 31, 2000 we amortized $288,000 and $306,000 respectively, of this deferred
stock compensation. We will amortize the remaining deferred stock compensation
using the straight-line method, over the vesting period of the related options,
generally four years.
6. EMPLOYEE BENEFIT PLANS
In January of 1997, the Company adopted a profit sharing plan that allows
for discretionary contributions to the plan at the discretion of the Board of
Directors out of the current or accumulated profits of the Company. The Company
contribution is limited to 15% of eligible participants annual compensation,
subject to certain adjustments. Contributions made by the Company were
approximately $91,000, $121,000 and $127,000 in 1997, 1998 and 1999,
respectively.
In October of 1999, the Company adopted a 401(k) and profit sharing plan
(the Plan) that allows eligible employees to contribute up to 15% of their
salary, subject to annual limits. Under the Plan, eligible employees may defer a
portion of their pretax salaries but not more than statutory limits. The Company
shall make matching nondiscretionary contributions to the Plan of up to $2,500
per year for each plan participant. In addition, the Company may make
discretionary contributions to the Plan as determined by the Board of Directors.
Contributions to the Plan during the year ended December 31, 1999, were
approximately $51,000.
7. INCOME TAXES
The Company elected to be taxed as an S-corporation under the Internal
Revenue Code through October 4, 1999. Consequently, the stockholders were taxed
on their proportionate share of our taxable income and no provision for federal
income taxes has been provided in the statements of operations for the years
ended December 31, 1997 and 1998 and for the period beginning January 1, 1999
through October 4, 1999. The Company's S-corporation status was revoked in
October 1999.
F-23
<PAGE> 94
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Our provision for income taxes for the years ended December 31, 1997, 1998,
and 1999 is summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
State..................................................... $50 $10 $48
--- --- ---
$50 $10 $48
=== === ===
</TABLE>
A reconciliation of taxes computed at the federal statutory income tax rate
to provision (benefit) for (from) income taxes follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision (benefit) computed at federal statutory
rate................................................. $ 393 $ 98 $ (850)
S-corporation earnings taxes at the stockholder
level................................................ (393) (98) (351)
State tax.............................................. 50 10 48
Valuation allowance.................................... -- -- 1,097
Amortization of deferred stock compensation............ -- -- 95
Other.................................................. -- -- 9
----- ---- ------
$ 50 $ 10 $ 48
===== ==== ======
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the value of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities as of December 31, 1999 consist of
the following (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 534
Accruals and reserves.................................. 662
Deferred margin on distributor inventory............... 1,303
Compensation expense related to stock options.......... 266
Other.................................................. 19
-------
Total deferred tax assets........................... 2,784
Valuation allowance...................................... (2,719)
-------
Gross deferred tax assets................................ 65
Deferred tax liability:
Tax over book depreciation............................. (65)
-------
Net deferred tax assets (liabilities).................... $ --
=======
</TABLE>
Realization of the Company's deferred tax assets is dependent on the
Company's ability to generate sufficient future taxable income, the timing and
amount of which the Company has concluded cannot be determined with certainty at
this time. Based on the Company's uncertainty as to its ability to project
sufficient future taxable income, the Company has concluded that it is more
likely that the deferred tax assets will not be realized. Accordingly, in 1999,
the Company recorded a valuation allowance for the net deferred tax assets of
$2,719,000 to reflect these uncertainties.
F-24
<PAGE> 95
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
As of December 31, 1999, the Company had net operating loss carryforwards
for federal and state tax purposes of approximately $1,450,000 and $703,000,
respectively. The federal and state net operating loss carryforwards will expire
in 2019 and 2004, respectively, if not utilized.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net operating loss
carryforwards before utilization.
8. RELATED PARTY TRANSACTIONS
The Company purchases assembly services from a packaging subcontractor and
supplier of contract manufacturing services located in the Philippines (the
Supplier). The Supplier's principle stockholder is a cousin of the Company's
chairman of the board.
The Company granted 600,000 and 66,540 stock options with exercise prices
of $0.92 and $1.50 in 1998 and 1999, respectively to two employees of the
Supplier. In connection with the option grants, the Company recorded $150,000
and $93,000 of compensation expense in 1998 and 1999, respectively in accordance
with EITF 96-18.
Purchases from the Supplier totaled $1,902,000 $1,056,000 and $1,235,000
for the years ended December 31, 1997, 1998 and 1999, respectively.
9. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company operates in one business segment, the sale of radio frequency
semiconductor components for communications network infrastructures. The Company
sells its radio frequency semiconductor components to original equipment
manufacturers in the wireless and wireline infrastructure market through
distributors, worldwide outside sales representatives, through a private label
manufacturing partnership, and acting as a contract manufacturer. The chief
executive officer has been identified as the chief operating decision maker
(CODM) because he has the final authority over resource allocation decisions and
performance assessment.
All of the Company's net revenues are generated in the United States. The
Company's long-lived assets reside in the following geographic areas (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Long-lived assets:
United States....................................... $3,661
Canada.............................................. 837
------
$4,498
======
</TABLE>
Three of the Company's customers, Minicircuits Laboratories, Richardson
Electronics Laboratories and Pulsar Microwave accounted for 49%, 19% and 11% of
net revenues, respectively, for the year ended December 31, 1997. Minicircuits
Laboratories, Richardson Electronics Laboratories and Avnet Electronics
accounted for 36%, 40%, and 11% of net revenues, respectively, for the year
ended December 31, 1998. Minicircuits Laboratories,
F-25
<PAGE> 96
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Richardson Electronics Laboratories and Avnet Electronics accounted for 41%,
38%, and 13% of net revenues, respectively, for the year ended December 31,
1999. Minicircuits Laboratories, Richardson Electronics Laboratories and Avnet
Electronics accounted for 37%, 39% and 10% of net revenues, respectively, for
the three months ended March 31, 1999. Minicircuits Laboratories, Richardson
Electronics Laboratories and Avnet Electronics accounted for 31%, 39% and 24% of
net revenues, respectively, for the three months ended March 31, 2000. No other
customer accounted for more than 10% of net revenues during these periods.
10. SPECIAL CHARGES
In the fourth quarter of 1999, the Company's Board of Directors paid a cash
dividend to holders of Common Stock in an aggregate amount of $4,000,000. The
Company also agreed to pay a non-recurring bonus totalling $2,990,000 to its
stockholders who were also employees and officers of the Company. The bonus was
paid in recognition of the stockholders active involvement, leadership and
contributions to the rapid development of the Company through the end of 1999.
The total amount of the bonus was determined based upon these activities of the
stockholders in their capacity as employees and was approved by the Company's
Board of Directors. The bonus, which was also intended to assist the
stockholders cover any federal or state taxes associated with the payment of the
dividend, was paid in December 1999. The Company recorded the $2,990,000 as
special charges in the statement of operations as this amount represents a
nonrecurring transaction that the Company does not consider to be reflective of
its ongoing operations.
11. SUBSEQUENT EVENTS
Initial Public Offering
In February 2000, the Company's Board of Directors approved the filing of a
Registration Statement with the Securities and Exchange Commission permitting
the Company to sell Common Stock to the public. Upon completion of the initial
public offering, the Company's Certificate of Incorporation will be amended to
authorize 200,000,000 shares of Common Stock and 5,000,000 shares of Preferred
Stock.
1998 Stock Plan
In February 2000, the Company's Board of Directors approved an increase in
the number of shares reserved under the 1998 Stock Plan by 1,200,000 shares. In
addition, the Board approved automatic increases on the first day of each of the
Company's fiscal years beginning January 1, 2001, equal to the lesser of
1,500,000 shares, 3% of the outstanding shares on such date, or a lesser amount
determined by the Board of Directors. The shares may be authorized, but
unissued, or reacquired Common Stock. The changes to the 1998 Stock Plan are
subject to stockholder approval.
2000 Employee Stock Purchase Plan
In February 2000, the Company's Board of Directors approved the 2000
Employee Stock Purchase Plan (the Purchase Plan). A total of 300,000 shares of
Common Stock has been reserved for issuance under the Purchase Plan, as well as
an automatic annual increase on the first day of each of the Company's fiscal
years beginning January 1, 2001 equal to the lesser of
F-26
<PAGE> 97
STANFORD MICRODEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
350,000 shares, 1% of the outstanding Common Stock on that date, or a lesser
amount as determined by the Board. The Purchase Plan is subject to stockholder
approval.
Litigation
On March 17, 2000, Stanford University filed a complaint against the
Company alleging trademark infringement, false designation of origin, dilution
and unfair competition. The complaint seeks injunctive relief as well as
compensatory, exemplary and punitive damages, costs and attorneys' fees. A
hearing pertaining to the request for preliminary injunction is scheduled for
May 8, 2000. Although the Company is unable to predict the outcome of the
litigation at this time, management believes the Company has meritorious
defenses and intends to defend the litigation vigorously.
F-27
<PAGE> 98
EDGAR DESCRIPTION OF GRAPH ON PAGE 32:
[Graph entitled "Simplified RF Subsystem" consisting of three rectangles in one
row under the header "Receiver" located over a second row of two rectangles and
three triangles under the header "Transmitter". The three rectangles in the top
row contain the words "Low Noise Amplifier", "Downconverter" and "Demodulator"
inside. The first triangle in the bottom row is above the words "Power
Amplifier". To its right is a second triangle with the word "Driver" beneath it.
To its right is a third triangle with the word "Pre-Driver" beneath it. To its
right is the first rectangle with the word "Upconverter" inside. To its right is
the second triangle with the word "Modulator" inside. A line runs from the
farthest right rectangle in the bottom row through the items in the bottom row,
up on the left side through a square with the word "Switch" to its right, and
through the rectangles on the top row. A line with a circle at top and crescents
of increasing side appearing to the left of the circle extends from the square
with the word "Switch" next to it and is topped with the word "Antenna". To the
right of the two rows of triangles and rectangles are the words "Data Signal
Input/Output". Above these words is a curving line and an arrow pointing in
towards the bottom row. Below the words "Signal Input/Output" is a curving line
and an arrow pointing away from the top row.]
EDGAR DESCRIPTION OF GRAPH ON PAGE 36:
[Diagram consisting of four rows of bubbles and rectangles connected by lines.
The first row consists of four bubbles with the words "Wafer Fabrication" to the
left. Inside the first bubble are the words "GaAs Fab". Inside the second bubble
are the words "InGaP Fab". Inside the third bubble are the words "SiGe Fab".
Inside the fourth bubble are the words "LDMOS Fab". The second row consists of
one rectangle with the words "Wafer Inspection" to the left. Inside the
rectangle are the words "Stanford Microdevices Wafer Qualification". The third
row consists of five bubbles with the words "Semiconductor Packaging" to the
left. Inside the first bubble are the words "Packager-Malaysia". Inside the
second bubble are the words "Packager-Thailand". Inside the third bubble are the
words "Packager-Philippines". Inside the fourth bubble are the words
"Packager-Philippines". Inside the fifth bubble are the words "Packager-Taiwan".
The fourth row consists of one rectangle with the words "Final Testing and
Quality Assurance to the left. Inside the rectangle are the words "Stanford
Microdevices RF Test, Tape and Reel, and Quality Assurance". ]
EDGAR DESCRIPTION OF INSIDE FRONT COVER ARTWORK:
[Graphic of human hand holding a globe of the world. Underneath this graphic are
the words "Helping the world stay in touch." Underneath these words is the
following text: "Stanford Microdevices is a leading designer and supplier of
high performance RF components for communications equipment manufacturers. We
design our products to meet the rapidly evolving performance requirements of:
Mobile wireless applications such as cellular and mobile data networks.
Broadband wireline applications such as high-speed transmission of
voice, data and video.
Fixed wireless applications such as local and wide area site-to-site data
networks.
Our innovative RF products help businesses and people connect for any time, any
where communications." Underneath this text is the logo of Stanford
Microdevices.]
EDGAR DESCRIPTION OF GATEFOLD ARTWORK:
[Graphic containing the heading at the top of the page "Delivering RF
Innovation". Beneath this heading is a diagram consisting of three subdiagrams
arranged from left to right.
The diagram on the left is entitled "Mobile Wireless" and consists of two
squares attached by a horizontal line with dots on each end, with a third larger
square attached to this line with another vertical line with dots. Each square
contains a photograph. The larger square on top has an arrow pointing to it from
the left.
The diagram in the middle is connected to the diagram on the left by a
horizontal line with curves in it and is entitled "Broadband Wireline". This
diagram consists of two squares attached by a horizontal line with dots on each
end, with a third larger square attached to this line with another vertical line
with dots. Each square contains a photograph.
The diagram to the right is connected to the diagram in the middle by a
horizontal line with two parallel vertical lines in the middle of it and is
entitled "Fixed Wireless". This diagram consists of two squares attached by a
horizontal line with dots on each end, with a third larger square attached to
this line with another vertical line with dots. Each square contains a
photograph.]
EDGAR DESCRIPTION OF INSIDE FRONT COVER ARTWORK:
[Stanford Microdevices logo and URL address]
<PAGE> 99
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF
COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF OUR COMMON STOCK.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 4
Forward-Looking Statements........... 15
Use of Proceeds...................... 16
Dividend Policy...................... 16
Capitalization....................... 17
Dilution............................. 18
Selected Consolidated Financial
Data............................... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
Business............................. 35
Management........................... 47
Certain Transactions................. 58
Principal Stockholders............... 59
Description of Capital Stock......... 61
Shares Eligible for Future Sale...... 64
Underwriting......................... 66
Legal Matters........................ 68
Experts.............................. 68
Where You Can Find Additional
Information........................ 68
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
THAT BUY, SELL OR TRADE IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN
THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. DEALERS ARE ALSO
OBLIGATED TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
LOGO
4,000,000 SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
BANC OF AMERICA SECURITIES LLC
CIBC WORLD MARKETS
ROBERTSON STEPHENS
PROSPECTUS
, 2000
<PAGE> 100
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of common stock being registered. All amounts are estimates except
the registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC Registration Fee........................................ $ 17,002
NASD Fee.................................................... 6,940
Nasdaq National Market Listing Fee.......................... 95,000
Legal Fees and Expenses..................................... 500,000
Accounting Fees and Expenses................................ 600,000
Printing Expenses........................................... 250,000
Transfer Agent Fees......................................... 15,000
Miscellaneous............................................... 116,058
----------
Total............................................. $1,600,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors for monetary damages for breach of their
fiduciary duty as a director to the fullest extent permitted under Delaware law.
In addition, as permitted by Section 145 of the Delaware General Corporation
Law, the Bylaws of the Registrant provide that: (1) the Registrant is required
to indemnify its directors and executive officers and persons serving in these
capacities in other business enterprises (including, for example, subsidiaries
of the Registrant) at the Registrant's request, to the fullest extent permitted
by Delaware law, including in those circumstances in which indemnification would
otherwise be discretionary; (2) the Registrant may, in its discretion, indemnify
its employees and agents in those circumstances where indemnification is not
required by law; (3) the rights conferred in the Bylaws are not exclusive, and
the Registrant is authorized to enter into indemnification agreements with its
directors, executive officers and employees; and (4) the Registrant may not
retroactively amend the Bylaw provisions in a way that is adverse to the
directors, executive officers and employees who benefit from these protections.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers that provide the maximum indemnity
allowed to directors and executive officers by Section 145 of the Delaware
General Corporation Law and the Bylaws, as well as certain additional procedural
protections. In addition, these indemnity agreements provide that parties to the
indemnification agreements will be indemnified to the fullest possible extent
not prohibited by law against any and all expenses (including any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under the Indemnification Agreement),
judgments, fines, penalties and amounts paid in settlement (if such settlement
is approved in advance by the Registrant, which approval shall not be
unreasonably withheld), actually and reasonably incurred in relation to the
Indemnitee's position as a director, officer, employee, agent or fiduciary of
the Registrant, or any subsidiary of the Registrant, or in relation to the
Indemnitee's service at the request of the Registrant as a
II-1
<PAGE> 101
director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust or other enterprise or in relation to
Indemnitee's action or inaction while serving in such a capacity. Stanford
Microdevices will not be obligated pursuant to the indemnity agreements to
indemnify or advance expenses to an indemnified party with respect to
proceedings or claims initiated by the indemnified party and not by way of
defense, counterclaim or crossclaim, except with respect to proceedings
specifically authorized by the Registrants' Board of Directors or brought to
enforce a right to indemnification under the indemnity agreement, the
Registrants' Bylaws or any statute or law. Under the agreements, the Registrant
is not obligated to indemnify the indemnified party (1) for any expenses
incurred by the indemnified party with respect to any proceeding instituted by
the indemnified party to enforce or interpret the agreement, if a court of
competent jurisdiction determines that each of the material assertions made by
the indemnified party in such proceeding was not made in good faith or was
frivolous; (2) for any amounts paid in settlement of a proceeding unless the
Registrant consents to such settlement; (3) with respect to any proceeding
brought by the Registrant against the indemnified party for willful misconduct,
unless a court determines that each of such claims was not made in good faith or
was frivolous; (4) on account of any suit in which judgment is rendered against
the indemnified party for an accounting of profits made from the purchase or
sale by the indemnified party of securities of the Registrant pursuant to the
provisions of sec. 16(b) of the Securities Exchange Act of 1934 and related
laws; (5) on account of the indemnified party's conduct which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest, or to
constitute willful misconduct or a knowing violation of the law; (6) an account
of any conduct from which the indemnified party derived an improper personal
benefit; (7) on account of conduct the indemnified party believed to be contrary
to the best interests of the Registrant or its stockholders; (8) on account of
conduct that constituted a breach of the indemnified party's duty of loyalty to
the Registrant or its stockholders; or (9) if a final decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.
The indemnification provision in the Certificate of Incorporation, Bylaws
and the indemnification agreements entered into between the Registrant and its
directors and executive officers, may be sufficiently broad to permit
indemnification of the Registrant's officers and directors for liabilities
arising under the 1933 Act.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- -------
<S> <C>
Form of Underwriting Agreement.............................. 1.1
Restated Certificate of Incorporation of Registrant as
currently in effect....................................... 3.1
Form of Restated Certificate of Incorporation of Registrant
to be filed upon closing of the offering.................. 3.2
Bylaws of Registrant, as amended, as currently in effect.... 3.3
Form of Indemnification Agreement to be entered into by the
Registrant with each of its directors and executive
officers.................................................. 10.1
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has issued and sold the
following securities:
(a) During the past three years, the Registrant sold an aggregate of
260,343 shares of unregistered common stock to directors, officers,
employees, former employees and consultants at an exercise price of $0.92
per share. These shares were sold pursuant to the exercise of options
granted by the Board of Directors. As to each director, officer, employee
and consultant of the Registrant who was issued these securities, the
Registrant
II-2
<PAGE> 102
relied upon Rule 701 of the Securities Act of 1933, as amended (the
"Securities Act"). Each such person was granted such options pursuant to a
written contract between such person and the Registrant. In addition, the
Registrant met the conditions imposed under Rule 701(b).
(b) On October 5, 1999, the Registrant sold 5,647,839 shares of
unregistered Series A Preferred Stock and issued warrants to purchase
1,100,000 shares of Common Stock to two venture capital companies for
aggregate cash consideration of $3.01 per share, for proceeds of
$16,999,995.39. The Registrant relied upon Section 4(2) of the Securities
Act in connection with the sale of these shares.
Appropriate legends were affixed to the share certificates issued in the
transactions described above. All recipients had adequate access, through their
relationships with the Registrant, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Restated Certificate of Incorporation of Registrant as
currently in effect.
3.2** Form of Restated Certificate of Incorporation of Registrant
to be filed upon the closing of the offering.
3.3** Bylaws of Registrant, as amended, as currently in effect.
4.1** Form of Registrant's Common Stock Certificate.
4.2** Investors' Rights Agreement, dated as of October 5, 1999,
among the Registrant and the parties named therein.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement to be entered into by
Registrant with each of its directors and executive
officers.
10.2** Change of Control Severance Agreement dated November 23,
1998 between Registrant and Guy Krevet.
10.3** Change of Control Severance Agreement dated December 1, 1998
between Registrant and Gerald Quinnell.
10.4** Offer Letter dated October 22, 1999 between Registrant and
Thomas Scannell.
10.5** Offer Letter dated November 1, 1999 between Registrant and
Gary Gianatasio.
10.6** Agreement dated December 1, 1999 among Registrant, John and
Susan Ocampo, and certain stockholders.
10.7+** Services Sale Agreement between Registrant and TRW, Inc.
dated August 19, 1998, as amended.
10.8+** Foundry Agreement between Registrant and Temic Semiconductor
dated September 1, 1999.
10.9+** Volume Purchase Agreement between Registrant and Nortel
Networks dated September 1, 1999.
10.10+** Supply Agreement between Registrant and Spectrian, Inc.
dated October 7, 1999.
10.11** Amended and Restated 1998 Stock Plan and related agreements.
10.12** 2000 Employee Stock Purchase Plan and related agreements.
10.13** Sublease between Registrant and Telesensory dated September
5, 1997.
10.14** Lease between Registrant and Arden Realty dated July 30,
1999.
10.15** Lease for between Registrant and Aetna Life Insurance
Company dated May 26, 1998.
10.16** Sublease between Registrant and Family and Child Guidance
Centers dated November 22, 1999.
</TABLE>
II-3
<PAGE> 103
<TABLE>
<CAPTION>
<C> <S>
10.17** Lease between Registrant and Elk Property Management Limited
dated November 19, 1999.
10.18** Lease Agreement between Registrant and Aetna Life Insurance
Company dated January 14, 2000.
11.1 Statement of computation of net income per share and pro
forma net income per share (see Note 5 of Notes to Financial
Statements).
21.1** Subsidiaries of the Registrant.
23.1** Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2 Consent of Ernst & Young, LLP, Independent Auditors.
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- -------------------------
** Previously filed.
+ Confidential treatment has been requested for portions of these exhibits.
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions referenced in Item 14 of this Registration Statement
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE> 104
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Sunnyvale, State of California, on this 2nd day of May, 2000.
STANFORD MICRODEVICES, INC.
By: /s/ THOMAS SCANNELL
------------------------------------
Thomas Scannell
Vice President of Finance
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
* Chairman of the Board and May 2, 2000
- -------------------------------------------------------- Chief Technology Officer
John Ocampo
* President, Chief Executive May 2, 2000
- -------------------------------------------------------- Officer and Director
Robert Van Buskirk (Principal Executive Officer)
/s/ THOMAS SCANNELL Vice President of Finance and May 2, 2000
- -------------------------------------------------------- Chief Financial Officer
Thomas Scannell (Principal Financial and
Accounting Officer)
* Director May 2, 2000
- --------------------------------------------------------
John C. Bumgarner, Jr.
* Director May 2, 2000
- --------------------------------------------------------
Peter Chung
* Director May 2, 2000
- --------------------------------------------------------
Casimir Skrzypczak
*By /s/ THOMAS SCANNELL
---------------------------------------------------
Attorney-in-fact
</TABLE>
II-5
<PAGE> 105
SCHEDULE II
STANFORD MICRODEVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
ADDITIONS-
BALANCE AT CHARGED BALANCE AT
YEAR ENDED BEGINNING OF TO COSTS DEDUCTIONS- END OF
DECEMBER 31, PERIOD AND EXPENSES WRITE-OFFS PERIOD
- ------------------------------------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
1997................................. $ -- $91,000 $ -- $ 91,000
1998................................. 91,000 25,000 -- 116,000
1999................................. 116,000 -- 16,000 100,000
</TABLE>
S-1
<PAGE> 106
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Restated Certificate of Incorporation of Registrant as
currently in effect.
3.2** Form of Restated Certificate of Incorporation of Registrant
to be filed upon the closing of the offering.
3.3** Bylaws of Registrant, as amended, as currently in effect.
4.1** Form of Registrant's Common Stock Certificate.
4.2** Investors' Rights Agreement, dated as of October 5, 1999,
among the Registrant and the parties named therein.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement to be entered into by
Registrant with each of its directors and executive
officers.
10.2** Change of Control Severance Agreement dated November 23,
1998 between Registrant and Guy Krevet.
10.3** Change of Control Severance Agreement dated December 1, 1998
between Registrant and Gerald Quinnell.
10.4** Offer Letter dated October 22, 1999 between Registrant and
Thomas Scannell.
10.5** Offer Letter dated November 1, 1999 between Registrant and
Gary Gianatasio.
10.6** Agreement dated December 1, 1999 among Registrant, John and
Susan Ocampo, and certain stockholders.
10.7+** Services Sale Agreement between Registrant and TRW, Inc.
dated August 19, 1998, as amended.
10.8+** Foundry Agreement between Registrant and Temic Semiconductor
dated September 1, 1999.
10.9+** Volume Purchase Agreement between Registrant and Nortel
Networks dated September 1, 1999.
10.10+** Supply Agreement between Registrant and Spectrian, Inc.
dated October 7, 1999.
10.11** Amended and Restated 1998 Stock Plan and related agreements.
10.12** 2000 Employee Stock Purchase Plan and related agreements.
10.13** Sublease between Registrant and Telesensory dated September
5, 1997.
10.14** Lease between Registrant and Arden Realty dated July 30,
1999.
10.15** Lease for between Registrant and Aetna Life Insurance
Company dated May 26, 1998.
10.16** Sublease between Registrant and Family and Child Guidance
Centers dated November 22, 1999.
10.17** Lease between Registrant and Elk Property Management Limited
dated November 19, 1999.
10.18** Lease Agreement between Registrant and Aetna Life Insurance
Company dated January 14, 2000.
11.1 Statement of computation of net income per share and pro
forma net income per share (see Note 5 of Notes to Financial
Statements).
21.1** Subsidiaries of the Registrant.
23.1** Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LP Independent Auditors.
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- -------------------------
** Previously filed.
+ Confidential treatment has been requested for portions of these exhibits.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
February 16, 2000 (except for the fourth paragraph of Note 11, as to which the
date is April 10, 2000) in Amendment No. 2 to the Registration Statement (Form
S-1 No. 333-31382) and related Prospectus of Stanford Microdevices, Inc.
Our audits also included the financial statement schedule of Stanford
Microdevices, Inc. for each of the three years in the period ended December 31,
1999 listed in Item 16(b) of this Registration Statement. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
May 1, 2000
