<PAGE>
As filed with the Securities and Exchange Commission on February 18, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
Centillium Communications, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3661 94-3263530
(State or other jurisdiction
of (Primary Standard Industrial (I.R.S. Employer
incorporation or
organization) Classification Code Number) Identification Number)
</TABLE>
47211 Lakeview Boulevard
Fremont, California 94538
(510) 771-3700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
Faraj Aalaei
Chief Executive Officer
47211 Lakeview Boulevard
Fremont, California 94538
(510) 771-3700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
<TABLE>
<S> <C>
Arthur F. Schneiderman Nora L. Gibson
Michael J. Danaher Laura M. de Petra
Stephen M. Welles Dorothy Vinski
Paul A. Okada Lora D. Blum
Micheal J. Reagan Brobeck, Phleger & Harrison LLP
Wilson Sonsini Goodrich & Rosati Spear Street Tower
Professional Corporation One Market
650 Page Mill Road San Francisco, California 94105
Palo Alto, California 94304 (415) 442-0900
(650) 493-9300
</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 of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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- -----------------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum
Title of Each Class of Securities to be Aggregate Offering Amount of
Registered Price(1) Registration Fee
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par value............ $82,000,000 $21,648
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- -----------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(o) of the Securities Act of 1933 solely for
the purpose of computing the amount of the registration fee.
----------------
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 hereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 2000
Shares
[Centillium logo]
[Centillium logo]
Centillium Communications, Inc.
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of our common stock is expected to be between
$ and $ per share. We have applied to have our common stock quoted on the
Nasdaq National Market under the symbol "CTLM."
The underwriters have an option to purchase a maximum of additional shares
to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 5.
<TABLE>
<CAPTION>
Underwriting
Discounts
Price to and Proceeds to
Public Commissions Centillium
------------ ------------ ------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Robertson Stephens
Salomon Smith Barney
The date of this prospectus is , 2000.
<PAGE>
[INSIDE FRONT COVER OF PROSPECTUS]
[Graphics]
[Caption: "Empowering Broadband Networks" with Centillium logo]
[Graphic depicting the core network, the access network and the home
network and where our voice over packet products, DSL products and home
networking products fit into the network].
<PAGE>
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 5
You Should Not Rely on Forward-
Looking Statements................. 17
Use of Proceeds..................... 18
Dividend Policy..................... 18
Capitalization...................... 19
Dilution............................ 20
Selected Consolidated Financial
Data............................... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 29
Management....................... 43
Related Party Transactions....... 51
Principal Stockholders........... 53
Description of Capital Stock..... 55
Shares Eligible for Future Sale.. 58
Underwriting..................... 60
Notice to Canadian Residents..... 62
Legal Matters.................... 63
Experts.......................... 63
Additional Information........... 63
Index To Consolidated Financial
Statements...................... F-1
</TABLE>
-----------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
"Centillium," "CopperLite," "CopperFlite" and "Optimizer" are our common law
trademarks. This prospectus also makes reference to trademarks of other
companies.
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights basic information about us and this
offering contained more fully elsewhere in this prospectus. Because it is a
summary, it does not contain all of the information that you should consider
before investing. You should read this entire prospectus carefully, including
the section entitled "Risk Factors" and the financial statements and the
related notes to those statements included in this prospectus. This prospectus
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in the forward-
looking statements as a result of factors described under the heading "Risk
Factors," "Management's Discussion and Analysis and Financial Condition and
Results of Operations" and "Business" as well as discussions elsewhere in this
prospectus.
Centillium Communications, Inc.
Centillium provides technologies that enable broadband communications to the
home and business enterprise. Our system-level products integrate our
programmable digital signal processor, our communications algorithms, our
highly integrated mixed-signal chip, our highly integrated digital chip and our
related software. We provide broadband equipment vendors with system-level
products for the DSL market and are leveraging our technology to develop
products for complementary markets which share common technologies and
customers. We have near-term plans to release products that target the voice
over packet and home networking markets. Our core technology and expertise have
enabled us to establish a viable product roadmap within these three
complementary markets.
As more consumers and businesses have begun to rely on the Internet and
communications networks, the demand for access to these networks has
accelerated. In addition, the demand for access is increasing as more and more
small businesses, self-employed individuals and corporate telecommuters are
regularly accessing the Internet and other communications networks. Many users
are also demanding the same access speeds from their home offices that they
experience at corporate locations. To meet the demand for high-speed, broadband
data transmission, network service providers have begun deploying digital
subscriber line, or DSL technology.
DSL enables data transmission speeds of 128 Kbps to 52 Mbps using the
telephone company's existing copper wire infrastructure and delivers "always
on" availability, eliminating the tedious dial-up process associated with
traditional analog modem technologies. DSL is a point-to-point technology that
connects the end user to the local phone company's central office or to an
intermediate hub. DSL equipment is deployed at each end of the copper wire and
the transmission speed depends on the length and condition of the existing wire
as well as the capabilities of the DSL equipment.
As network access providers deploy DSL services, demand is emerging for
complementary networking technologies. Two of these technologies are voice over
packet, which allows integrated transmission of voice and data, and home
networking, which enables users to share high bandwidth resources throughout
the home. As equipment manufacturers continue to develop the DSL, voice over
packet and home networking markets, they face significant challenges. Several
of these challenges include:
. constantly evolving technology and networking standards;
. size constraints;
. power constraints; and
. shorter product life-cycles.
Our products allow communications equipment vendors to meet these challenges
by providing:
. flexibility due to programmable DSP architecture;
1
<PAGE>
. high levels of semiconductor integration allowing reduced size;
. low power consumption; and
. fast time-to-market.
Our objective is to be the leading provider of system-level products for
equipment manufacturers serving the broadband communications markets. We intend
to achieve this objective by:
. targeting complementary broadband communications markets;
. strengthening and expanding our strategic relationships;
. extending our technology leadership;
. leveraging our system-level expertise; and
. pursuing strategic acquisitions.
We outsource the manufacturing of our products which allows us to focus our
resources on design, development and marketing efforts within our target
markets. We have announced design wins with 17 customers, and have shipped our
products to 13 of those customers to be used in their products. Our largest
customers, based on 1999 revenue, include Sumitomo Electric Industries, NEC,
Mitsubishi Electric and Copper Mountain Networks.
We were incorporated in February 1997. Our principal executive offices are
located at 47211 Lakeview Boulevard, Fremont, CA 94538 and our telephone number
is (510) 771-3700.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered in this offering............... shares
Common stock to be outstanding after this offering.. shares
Use of proceeds..................................... For general corporate
purposes and working
capital, including
expected operating
expenses, and potential
acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.............. CTLM
</TABLE>
The total number of outstanding shares of our common stock above is based
on:
. 10,318,841 shares of our common stock outstanding as of December 31,
1999; and
. the automatic conversion of all outstanding shares of preferred stock
upon completion of this offering into 15,450,236 additional shares of
common stock.
The total number of outstanding shares of our common stock above does not
include:
. 3,390,257 shares of common stock issuable upon the exercise of
outstanding stock options as of December 31, 1999 at a weighted average
exercise price of $1.09 per share;
. 26,750 shares of common stock issuable upon the exercise of outstanding
warrants as of December 31, 1999 at a weighted average exercise price of
$4.00 per share;
. 4,423,395 shares of common stock available for issuance under our 1997
Stock Plan following this offering; and
. 500,000 additional shares of common stock available for issuance under
our 2000 Employee Stock Purchase Plan immediately following this
offering.
Unless otherwise specifically stated, information throughout this
prospectus:
. reflects the conversion of all outstanding shares of preferred stock
into shares of common stock automatically upon completion of this
offering; and
. assumes no exercise of the underwriter's over-allotment option.
3
<PAGE>
Summary Consolidated Financial Information
<TABLE>
<CAPTION>
Period from Fiscal Year
February 21, 1997 Ending December 31,
(inception) to ---------------------
December 31, 1997 1998 1999
----------------- --------- ----------
(in thousands except per share data)
<S> <C> <C> <C>
Consolidated Statement of Operations
Data:
Total revenues....................... $ 300 $ 752 $ 3,744
Operating loss....................... $(2,102) $ (9,703) $ (19,304)
Net loss............................. $(1,937) $ (9,237) $ (18,272)
Deemed divided on Series B
convertible preferred stock......... $(2,800) $ -- $ --
------- --------- ----------
Net loss applicable to common
stockholders........................ $(4,737) $ (9,237) $ (18,272)
Historical basic and diluted net loss
per share applicable to common
stockholders........................ $ (0.59) $ (1.15) $ (2.07)
Shares used to compute basic and
diluted net loss per share
applicable to common stockholders... 8,000 8,056 8,842
Pro forma basic and diluted net loss
per share applicable to common
stockholders........................ $ (0.84)
==========
Shares used to compute pro forma
basic and diluted net loss per share
applicable to common stockholders... 21,755
==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents and short-term
investments.................................... $28,313 $28,313 $
Working capital................................. $26,043 $26,043 $
Total assets.................................... $35,587 $35,587 $
Long-term debt and capital lease obligations,
less current portion........................... $ 549 $ 549 $
Total stockholders' equity...................... $30,055 $30,055 $
</TABLE>
See note 1 of notes to consolidated financial statements for an explanation
of the determination of the number of shares used in computing per share data.
The pro forma amounts above reflect the conversion of all outstanding shares
of preferred stock into shares of common stock upon the completion of this
offering.
The pro forma as adjusted amounts above give effect to the sale of
shares of our common stock in this offering at an assumed initial public
offering price of $ per share, after deducting underwriting discounts and
commissions and estimated offering expenses.
In our discussion throughout this prospectus, references to the year ended
December 31, 1997 refer to the period from February 21, 1997 (inception)
through December 31, 1997.
4
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making a
decision to purchase our common stock. You may lose all or part of your
investment. The risks and uncertainties described below are not the only ones
facing us. Additional risks and uncertainties not presently known to us or that
we currently deem immaterial may also impair our business operations. If any of
the following risks actually occur, our business, financial condition or
results of operations could be harmed. If that happens, the trading price of
our common stock could decline. These risk factors are not intended to
represent a complete list of the general or specific risk factors that may
affect us.
Risks Relating to Our Business
Because we have a limited operating history selling products to the broadband
telecommunications market, we cannot be sure that we can successfully implement
our business strategy.
We have not had a long history of selling our products to the broadband
telecommunications market or generating significant revenues and many of our
products have only recently been introduced. Furthermore, we have limited
historical financial data that can be used in evaluating our business and our
prospects and in projecting future operating results. For example, we cannot
forecast operating expenses based on our historical results because they are
limited, and we are instead required to forecast expenses based in part on
future revenue projections. Most of our expenses are fixed in the short term
and we may not be able to quickly reduce spending if our revenue is lower than
we had projected. Therefore, net losses in a given quarter could be greater
than expected. You must consider our prospects in light of the risks, expenses
and difficulties we might encounter because we have a limited operating history
and compete in a new and rapidly evolving market. Many of these risks are
described under the sub-headings below. We may not successfully address any or
all of these risks and our business strategy may not be successful.
Because we expect to continue to incur net losses, the price of our stock may
decline and we may not be able to implement our business strategy.
We have not reported an operating profit for any year since our
incorporation and have experienced net losses of approximately $1.9 million,
$9.2 million, and $18.3 million for the years ended December 31, 1997, 1998,
and 1999, respectively. We expect to continue to incur net losses for the
foreseeable future, and these losses may be substantial. Further, we expect to
incur substantial negative cash flow in the future. Accordingly, our ability to
continue to operate our business and implement our business strategy may be
hampered and the value of our stock may decline.
Because we may not be able to achieve or sustain profitability or positive cash
flow, we may not be able to implement our business strategy.
Due to our continuing research and development, sales, marketing and
administrative expenses, we will need to generate significant revenues to
achieve profitability and positive cash flow. We cannot be sure that we will be
able to generate such revenues or achieve profitability or positive cash flow.
Even if we do achieve profitability and positive cash flow, we may not be able
to sustain or increase profitability or cash flow on a quarterly or annual
basis. Our ability to generate future revenues will depend on a number of
factors, many of which are outside our control. These factors include:
. the rate of market acceptance of high speed network access;
. the rate of market acceptance of our products and the demand for
equipment that incorporates our products;
. changes in industry technology standards applicable to our products;
. the extent and timing of new customer transactions;
. price competition in our markets;
5
<PAGE>
. personnel changes--particularly those involving engineering and
technical personnel; and
. regulatory developments.
Due to these factors, we cannot forecast with any degree of accuracy what
our revenues will be in future periods and we may not be able to achieve or
sustain profitability or positive cash flow. Our ability to continue to operate
our business and implement our business strategy may thus be hampered and the
value of our stock may decline.
We continue to rapidly and significantly expand our operations, and our failure
to manage growth could harm our business and adversely affect our results of
operations and financial condition.
We have rapidly and significantly expanded our operations, including the
number of our employees, our geographic scope and our product offerings. This
expansion is placing a significant strain on our managerial, operational and
financial resources. In this regard, Faraj Aalaei, our Chief Executive Officer,
has only recently been appointed to this position. As a result, he may not yet
be fully integrated into his new position. We expect that further significant
expansion will be required to address potential growth in our customer base and
market opportunities. Failure to manage growth effectively could harm our
business and adversely affect our operating results and financial condition. We
cannot assure you that we will be able to do any of the following, which we
believe are essential to successfully manage the anticipated growth of our
operations:
. hire, train and manage additional qualified personnel;
. effectively manage multiple relationships with our customers, suppliers
and other third parties;
. expand and upgrade our core technologies; and
. improve our existing and implement new operational, financial and
management information controls, reporting systems and procedures.
In the future, we may also experience difficulties meeting the demand for
our products. The installation and use of our products requires training. If we
are unable to provide training and support for our products, more time may be
necessary to complete the implementation process, and customer satisfaction may
be lower. In addition, our suppliers may not be able to meet increased demand
for our products. We cannot assure you that our systems, procedures or controls
will be adequate to support the anticipated growth in our operations.
Because our operating results from quarter to quarter may fluctuate, the price
of our stock may decline.
Our revenues, expenses and operating results have fluctuated in the past and
are likely to fluctuate significantly in the future on a quarterly and an
annual basis due to a number of factors, many of which are outside our control.
For example, our results of operations could be negatively affected by the
following:
. the timing and size of purchase orders from, and shipments to, our
customers;
. unexpected delays in introducing new or enhanced products, including
manufacturing delays;
. the volume and average cost of products manufactured; and
. the timing and size of expenses, including expenses of developing new
products and product improvements.
Accordingly, our revenues, expenses and results of operations could vary
significantly in the future, and you should not rely upon period-to-period
comparisons as indications of future performance. Such fluctuations may make
our stock unattractive to investors and result in a decline in the price of our
stock. In addition, it is likely that in some future quarter our operating
results will fall below the expectations of securities analysts and investors.
In this event, the trading price of our common stock may decline significantly.
6
<PAGE>
If sales forecasted for a particular period are not realized in that period,
our stock price may be adversely affected.
If we fail to realize forecasted sales for a particular period, our stock
price would likely decline and could decline significantly. The sales cycle of
our products is lengthy and typically involves a detailed initial technical
evaluation of our products by our prospective customers, followed by the
design, construction and testing of prototypes incorporating our products. Only
after these steps are complete will we receive a purchase order from a customer
for volume shipments. This process generally takes from 9 to 12 months, and may
last longer. Given this lengthy sales cycle, it is difficult to accurately
predict when sales to a particular customer will ocurr.
In addition, we may experience unexpected delays in orders from customers,
which may prevent us from realizing forecasted sales for a particular period.
Our products are typically sold to equipment manufacturers, who incorporate our
products in the products that they in turn sell to consumers or to network
service providers. As a result, any delay by our customers, or by our
customers' customers, in the manufacture or distribution of their products,
will result in a delay for orders of our products. For example, in the fourth
quarter of 1999, we expected to receive an order from a customer for a shipment
of one of our products. Due to a temporary shortage of a particular component
of the customer's product, the customer was forced to delay the manufacture of
its product, and therefore delayed placing their purchase order with us.
Because we depend on third party foundries to manufacture, assemble and test
our products, we may experience delays in receiving semiconductor devices.
We do not own or operate a semiconductor fabrication facility, rather our
semiconductor devices are generally sourced at different foundries. In
addition, we generally do not have written contracts with our foundries
guaranteeing the availability of capacity. We intend to continue to rely on
third-party foundries and other specialist suppliers for all of our
manufacturing, assembly and testing requirements. We cannot directly control
semiconductor delivery schedules, which could lead to product shortages,
quality assurance problems and increases in the costs of our products. We may
experience delays in the future and we cannot be sure that we will be able to
obtain semiconductors within the time frames and in the volumes required by us
at an affordable cost or at all. Any disruption in the availability of
semiconductors or any problems associated with the delivery, quality or cost of
the fabrication assembly and testing of our products could significantly hinder
our ability to deliver our products to our customers and may result in a
decrease in sales of products.
If the foundries we currently use are unable to provide us with
semiconductors, we may be required to seek a new manufacturer of our
semiconductors, and we cannot be certain that a new manufacturer of our
semiconductors will be available. Furthermore, switching to a new manufacturer
could require six months or more and would involve significant expense and
disruption to our business.
Because we depend on third party foundries, if there is a shortage in worldwide
foundry capacity, we may not be able to obtain sufficient manufacturing
capacity to meet our requirements.
From time to time there may be shortages in worldwide foundry capacity due
to increases in semiconductor demand or other factors. In the event of such a
shortage, we may not be able to obtain a sufficient allocation of foundry
capacity to meet our product needs. In addition, such a shortage could lengthen
our products' manufacturing cycle and cause a delay in the shipments of our
products to our customers. This could ultimately lead to a loss of sales of our
products and have a negative impact on our results of operations.
Because we may be required to enter into financial and other arrangements with
foundries in order to secure foundry capacity, our earnings or the ownership of
our stockholders may be diluted.
Allocation of a foundry's manufacturing capacity may be influenced by a
customer's size or the existence of a long-term agreement with the foundry. To
address foundry capacity constraints, other semiconductor suppliers that rely
on third-party foundries have utilized various arrangements, including equity
investments in
7
<PAGE>
or loans to independent component manufacturers, in exchange for guaranteed
production capacity, joint ventures to own and operate foundries, or take or
pay contracts that commit a company to purchase specified quantities of
components over extended periods. While we are not currently a party to any of
these arrangements, we may decide to enter into such arrangements in the
future. We cannot be sure, however, that these arrangements will be available
to us on acceptable terms or at all. Any of these arrangements could require us
to commit substantial capital. The need to commit substantial capital could
require us to obtain additional debt or equity financing, which could result in
dilution to our earnings or the ownership of our stockholders. We cannot be
sure that this additional financing, if required, would be available when
needed or, if available, could be obtained on terms acceptable to us.
Because the manufacture of our products is complex, the foundries on which we
depend may not achieve the necessary yields or product reliability that our
business requires.
The manufacture of our products is a highly complex and precise process,
requiring production in a highly controlled environment. Changes in the
manufacturing processes or the inadvertent use of defective or contaminated
materials by a foundry could adversely affect such a foundry's ability to
achieve acceptable manufacturing yields and product reliability. If the
foundries we currently use do not achieve the necessary yields or product
reliability, our customer relationships could suffer. This could ultimately
lead to a loss of sales of our products and have a negative impact on our
results of operations.
We may not be able to produce sufficient quantities of our products because we
obtain certain key components from, and depend on, certain sole source
suppliers. If we are unable to obtain these sole source components, we would
not be able to ship our products in a timely manner and our relationships with
our customers would be detrimentally affected.
We obtain certain parts, components and packaging used in the delivery of
our products from sole sources of supply. For example, we obtain certain
semiconductor wafers from Mitsubishi Electric. If we fail to obtain components
in sufficient quantities when required, and are unable to meet customer demand,
our business could be harmed, as our customers would consider purchasing
products from our competitors. We also rely on United Microeletronics
Corporation to manufacture our analog silicon wafers. Developing and
maintaining these strategic relationships with our vendors is critical for us
to be successful. If these relationships were harmed as a result of a failure
to obtain sole source components for our products, our business would be
harmed.
Any of our sole source suppliers may:
. enter into exclusive arrangements with our competitors;
. stop selling their products or components to us at commercially
reasonable prices;
. refuse to sell their products or components to us at any price; or
. may be subject to production disruptions such as earthquakes.
If we are unable to obtain sufficient quantities of sole-source components
or to develop alternative sources for components for any reason, our business
would be harmed. Furthermore, additional sole-source components may be
incorporated into our future products, thereby increasing our sole-source
supplier risks. If any of our sole-source manufacturers delay or halt
production of any of their components, our business would be harmed, and our
results of operations and financial condition would be adversely affected.
We may be subject to product returns and product liability claims resulting
from defects in our products. Product returns and product liability claims
could result in the failure to attain market acceptance of our products and
harm our business.
Our products are complex and may contain undetected defects, errors or
failures. The occurrence of any defects, errors, or failures could result in
delays in installation, product returns and other losses to us or to our
8
<PAGE>
customers or end-users. Any of these occurrences could also result in the loss
of or delay in market acceptance of our products, either of which would harm
our business, operating results and financial condition. We will likely have
limited experience with any problems that may arise with new products that we
introduce.
Although we have not experienced any product liability claims to date, the
sale and support of our products entail the risk of these claims. A successful
product liability claim brought against us could be expensive, divert the
attention of management from ordinary business activities and, correspondingly,
harm us.
Because our products are components of other equipment, if equipment
manufacturers do not incorporate our products in their equipment, we may not be
able to generate sales of our products in volume quantities.
Our products are not sold directly to the end-user, rather they are
components of other products. As a result, we rely upon equipment manufacturers
to design our products into their equipment. We further rely on this equipment
to be successful. If equipment that incorporates our products is not accepted
in the marketplace, we may not achieve sales of our products in volume
quantities, which would have a negative impact on our results of operations.
Because manufacturers of communications equipment may be reluctant to change
their sources of components, if we do not achieve design wins with such
manufacturers, we may be unable to secure sales from these customers in the
future.
Once a manufacturer of communications equipment has designed a supplier's
semiconductor into its products, the manufacturer may be reluctant to change
its source of semiconductors due to the significant costs associated with
qualifying a new supplier. Accordingly, our failure to achieve design wins with
equipment manufacturers which have chosen a competitor's semiconductor could
create barriers to future sales opportunities with these manufacturers.
A design win from a customer is not a guarantee of future sales to that
customer.
Achieving a design win with a customer does not create a binding commitment
from that customer to purchase our products. Rather, a design win is solely an
expression of interest by potential customers in purchasing our products and is
not supported by binding commitments of any nature. Accordingly, a customer can
choose at any time to discontinue using our products in their designs or
product development efforts. Even if our products are chosen to be incorporated
into a customer's products, we still may not realize significant revenues from
that customer if their products are not commercially successful. Therefore, we
cannot be sure that any design win will result in purchase orders for our
products, or that these purchase orders will not be later canceled. Our
inability to convert design wins into actual sales and any cancellation of a
purchase order could have a negative impact on our financial condition and
results of operations.
Because our customers may cancel orders, we may not be able to recoup expenses
incurred in anticipation of sales of our products.
We work closely with our customers to determine their future product needs
and receive a rolling forecast for products. We have incurred and expect to
continue to incur expenses based upon these sales forecasts. However, our
customers typically purchase our products pursuant to short-term purchase
orders that may be canceled without charge if notice is given within an agreed-
upon period (usually before 30 days prior to the schedule shipment date).
Therefore, we cannot be sure that the actual product revenues which we will
receive will be commensurate with the level of expenses that we will incur
based on forecasts we receive from our customers in any future period. As a
result, cancellations, deferrals or reductions in pending purchase orders could
have a negative impact on our financial condition and results of operations.
9
<PAGE>
Our customer base is concentrated, and the loss of one or more of our customers
could harm our business.
We sell our DSL products primarily to network equipment manufacturers. For
the year ended December 31, 1999, sales to Sumitomo Electric accounted for
34.4% of our revenues and sales to NEC accounted for 21.1% of our revenues. We
expect to continue to be dependent upon a relatively small number of large
customers in future periods, although the specific customers may vary from
period to period. If we are not successful in maintaining relationships with
key customers, and winning new customers, our business and results of
operations will suffer.
We derive a substantial amount of our revenues from international sources, and
difficulties associated with international operations could harm our business.
A substantial portion of our revenues has been derived from customers
located outside of the United States. In 1999, 81.6% of our sales were to
customers located in Asia. If we are unable to successfully overcome the
difficulties associated with international operations and maintain and expand
our international operations our business would be harmed. These difficulties
include:
. difficulties staffing and managing foreign operations;
. changes in regulatory requirements;
. licenses, tariffs and other trade barriers;
. political and economic instability;
. difficulties obtaining governmental approvals for products; and
. compliance with a wide variety of complex foreign laws and treaties.
To date, our international sales and component purchases have been
denominated solely in U.S. dollars and, accordingly, we have not been exposed
to fluctuations in non-U.S. currency exchange rates. In the future, a portion
of our international sales may be denominated in currencies other than U.S.
dollars, which would expose us to gains and losses based upon exchange rate
fluctuations. Such gains and losses may contribute to fluctuations in our
operating results.
Competition for qualified personnel in our industry is intense, and if we are
not successful in attracting and retaining these personnel, our business would
be harmed.
Our future success will depend on the ability of our management to operate
effectively, both individually and as a group. Therefore, the future success of
our business will also depend on our ability to attract and retain high-caliber
personnel. The loss of the services of any of our key personnel, the inability
to attract or retain qualified personnel in the future or delays in hiring
required personnel, particularly engineers, could harm our business.
Because competition for qualified personnel in the networking and
telecommunications industries is intense, we may not be successful in
attracting and retaining such personnel. During 1999, we added 59 new employees
to our total work force, representing an increase of approximately 105% from
December 31, 1998. We expect to add additional personnel in the near future,
including direct sales and marketing personnel. There may be only a limited
number of people with the requisite skills to serve in those positions, and it
may become increasingly difficult to hire these people. In addition, we are
actively searching for research and development engineers, who are in short
supply. Our business will be harmed if we encounter delays in hiring these
additional engineers. Furthermore, competitors and others have in the past and
may in the future attempt to recruit our employees. We do not have employment
contracts with any of our key personnel nor do we maintain key person life
insurance on our key personnel.
10
<PAGE>
The loss of the services of one or more of our executive officers or key
employees could harm our business.
Our executive officers and certain key sales, engineering and management
personnel may not remain with us in the future. These officers and key
personnel are critical to our business and its future success. If we lost the
services of one or more of our executive officers or key employees, or if one
or more of them decided to join a competitor or otherwise compete directly or
indirectly with us, this could have a significant adverse effect on our
business. None of our officers or key employees is bound by agreements for any
specific employment term or covenants not to compete.
Our future success will depend in part on our ability to protect our
proprietary rights and the technologies used in our principal products, and if
we do not enforce and protect our intellectual property, our business will be
harmed.
We rely on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality provisions and other contractual provisions to protect
our proprietary rights. However, these measures afford only limited protection.
Our failure to adequately protect our proprietary rights may adversely affect
us. Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use trade secrets
or other information that we regard as proprietary.
Our means of protecting our proprietary rights in the U.S. or abroad may not
be adequate, and competitors may independently develop similar technologies. In
addition, the laws of some foreign countries do not protect our proprietary
rights as fully as do the laws of the U.S. Issued patents may not preserve our
proprietary position. Even if they do, competitors or others may develop
technologies similar to or superior to our own.
We may become involved in litigation over proprietary rights. In the event
of an adverse result in any future litigation with third parties relating to
proprietary rights, we could be required:
. to pay substantial damages, including treble damages if we are held to
have willfully infringed;
. to halt the manufacture, use and sale of infringing products;
. to expend significant resources to develop non-infringing technology; or
. to obtain licenses to the infringing technology.
Licenses may not be available from any third party that asserts intellectual
property claims against us, on commercially reasonable terms, or at all. In
addition, litigation frequently involves substantial expenditures and can
require significant management attention, even if we ultimately prevail.
However, there can be no assurance that we would be able to successfully
resolve such disputes in the future.
From time to time, third parties, including our competitors, have asserted
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect that we will increasingly be subject to
infringement claims as the number of products and competitors in the high-speed
data access market grows and the functionality of products overlaps.
Our products and those of our customers are subject to government regulations,
and changes in current or future laws or regulations that negatively impact our
products and technologies could harm our business.
The jurisdiction of the Federal Communications Commission, or the FCC,
extends to the entire communications industry including our customers and their
products and services that incorporate our products. Future FCC regulations
affecting the broadband communications industry, our customers or our products
specifically may harm our business. For example, FCC regulatory policies that
affect the availability of data and Internet services may impede our customers'
penetration into certain markets or affect the prices that they are able to
charge. In addition, international regulatory bodies have introduced new
regulations for the
11
<PAGE>
communications industry. Delays caused by our compliance with regulatory
requirements may result in order cancellations or postponements of product
purchases by our customers, which would harm our business and adversely affect
our results of operations and financial condition.
Risks Relating to Our Industry
Sales of our products are dependent on the widespread adoption of broadband
access services. If the demand for broadband access service does not increase
as expected, we may not be able to generate substantial sales.
Sales of our products depend on the increased use and widespread adoption of
broadband access services, and digital subscriber line or DSL services in
particular, and the ability of telecommunications service providers to market
and sell broadband access services. Our business would be harmed, and our
results of operations and financial condition would be adversely affected if
the use of broadband access services does not increase as anticipated. Certain
critical factors will likely continue to affect the development of the
broadband access service market. These factors include:
. inconsistent quality and reliability of service;
. lack of availability of cost-effective, high-speed service;
. inability to integrate business applications on the Internet;
. lack of interoperability among multiple vendors' network equipment;
. congestion in service providers' networks; and
. inadequate security.
Even if these factors are adequately addressed, the market for broadband
access services to the Internet and corporate networks may fail to develop or
may develop more slowly than anticipated. If this market fails to develop or
develops more slowly than anticipated, our business would be harmed, and our
results of operations and financial condition would be adversely affected.
Even if demand for broadband access service does continue to increase as
expected, if telecommunications service providers do not deploy broadband
technologies and services in a broad and timely manner, we would be unable to
sell our products.
The success of our products depends upon the decision by telecommunications
network service providers to deploy DSL and other broadband technologies.
Moreover, if these network service providers do not increase their deployment
of broadband access services rapidly, we would be unable to sell our products
as anticipated, if at all. Factors that affect deployment include:
. the demand from end-users;
. a prolonged approval process, including laboratory tests, technical
trials, marketing trials, initial commercial deployment and full
commercial deployment;
. the development of a viable business model for DSL services, including
the capability to market, sell, install and maintain DSL services;
. cost constraints, such as installation costs and space and power
requirements at the telecommunications network service providers'
central offices;
. varying and uncertain conditions of the installed copper wire, including
size and length, electrical interference, and crossover interference
with voice and data telecommunications services;
. problems of interoperability among DSL network equipment vendors'
products;
. evolving industry standards for DSL technologies; and
. domestic and foreign government regulation.
12
<PAGE>
Because other high speed data transmission technologies may compete effectively
with DSL services, our products may not capture market share.
DSL services are competing with a variety of different broadband data
transmission technologies, including cable modems, satellite and other wireless
technologies. If any technology that is competing with DSL technology is more
reliable, faster, less expensive or has other advantages over DSL technology,
then the demand for our semiconductors may decrease, which would have a
negative impact on our operating results.
Because the markets in which we compete are highly competitive and many of our
competitors have greater resources than us, we cannot be certain that our
products will be accepted in the marketplace or capture market share.
The market for software and communications semiconductor solutions is
intensely competitive and characterized by rapid technological change, evolving
standards, short product life cycles and price erosion. We expect competition
to intensify as current competitors expand their product offerings and new
competitors enter the market. Given the highly competitive environment in which
we operate, we cannot be sure that any competitive advantages enjoyed by our
products would be sufficient to establish and sustain our products in the
market. Any increase in price or other competition could result in erosion of
our market share, to the extent we have obtained market share and would have a
negative impact on our financial condition and results of operations. We cannot
be sure that we will have the financial resources, technical expertise or
marketing and support capabilities to continue to compete successfully.
We face competition from a variety of vendors, including software and
semiconductor companies, which generally vary in size and in the scope and
breadth of products and services offered. We also face competition from
customers' or prospective customers' own internal development efforts. Many of
the companies that compete, or may compete in the future, against us have
longer operating histories, greater name recognition, larger installed customer
bases and significantly greater financial, technical and marketing resources.
These competitors may also have pre-existing relationships with our customers
or potential customers. As a result, they may be able to introduce new
technologies, respond more quickly to changing customer requirements or devote
greater resources to the development, promotion and sale of their products than
we can. Our competitors may successfully integrate the functionality of our
software and communication processors into their products and thereby render
our products obsolete. Further, in the event of a manufacturing capacity
shortage, these competitors may be able to manufacture products when we are
unable to do so.
We believe our principal competitors include or will include Alcatel
Microelectronics, Analog Devices, Conexant Systems, GlobeSpan, Lucent
Microelectronics, ST Microelectronics, and Texas Instruments. In addition,
there have been a number of announcements by other semiconductor companies
including IBM and Intel and smaller emerging companies that they intend to
enter the market segments adjacent to or addressed by our products.
Because the markets in which our customers compete are highly competitive, our
customers may not be successful and they may not continue to purchase our
products.
Many of our customers face significant competition in their markets. If our
customers are unable to successfully market and sell their products which
incorporate our products, these customers may cease to purchase our products,
which may have a negative impact on our results of operations.
Because the markets in which we compete are subject to rapid changes, our
products may become obsolete or unmarketable.
The markets for our products are characterized by rapidly changing
technology, short product life cycles, evolving industry standards, changes in
customer needs, growing competition and new product introductions. If our
product development and improvements take longer than planned, the availability
of our products would be delayed. Any such delay may render our products
obsolete or unmarketable, which would have a negative impact on our ability to
sell our products and our results of operations.
13
<PAGE>
Because of changing customer requirements and emerging industry standards, we
may not be able to achieve broad market acceptance of our products.
Our success is dependent, in part, on our ability, in a timely and cost-
effective manner, to:
. successfully develop, introduce and market new and enhanced products at
competitive prices in order to meet changing customer needs;
. respond effectively to new technological changes or new product
announcements by others;
. effectively use and offer leading technologies; and
. maintain close working relationships with our key customers.
We cannot be sure that we will be successful in these pursuits, that the
growth in demand will continue or that our products will achieve market
acceptance. Our failure to develop and introduce new products that are
compatible with industry standards and that satisfy customer requirements or
the failure of our products to achieve broad market acceptance could have a
negative impact on our ability to sell our products and our results of
operations.
Our current products are not interoperable with certain products offered by
suppliers to our customers and are subject to evolving industry standards. If
our products do not interoperate with our target customers' networks or an
industry standard that achieves market acceptance, customers may refuse to
purchase our products.
Our products do not inter-operate with the equipment of certain network
equipment vendors who supply our target customers. In some cases, these network
equipment vendors sell proprietary or non-interoperable systems to our target
customers with which our products will not function. In these cases, potential
customers who wish to purchase DSL products and who have purchased other
network equipment that does not function with our DSL products may not purchase
our products.
Also, the emergence of new industry standards, whether through adoption by
official standards committees or widespread use by our target customers, could
require us to redesign our products. If such standards become widespread and
our products do not meet these standards, our customers and potential customers
would not purchase our products. In this case, our business would be harmed,
and our financial condition and results of operations would be adversely
affected. The rapid development of new standards increases the risk that
competitors could develop products that would reduce the competitiveness of our
products or could result in greater competition and additional pricing
pressure. If we fail to develop and introduce new products or enhancements in
the face of new industry standards, our product sales would decrease, and our
business would be harmed.
Risks Relating to this Offering
Because there has been no prior market for our common stock, we cannot be sure
that our stock price will not decline after this offering.
Prior to this offering, you could not buy or sell our common stock on a
public market. The initial public offering price of our common stock will be
determined by negotiation among us and representatives of the underwriters and
may not be indicative of the price that will prevail in the open market after
this offering. In addition, the market price of our shares of common stock may
be highly volatile and could be subject to wide fluctuations. We cannot be
certain that an active trading market for our common stock will develop or be
sustained, or that the price of our stock will not decline after this offering.
14
<PAGE>
Because the Nasdaq stock market is likely to experience extreme price and
volume fluctuations, the price of our stock may decline even if our business is
doing well.
The stock markets, and in particular the Nasdaq stock market, have
experienced extreme price and volume fluctuations that have affected and
continue to affect the market prices of equity securities of many technology
companies. These fluctuations often have been unrelated or disproportionate to
the operating performance of those companies. We also expect that the market
price of our common stock will fluctuate as a result of variations in our
quarterly operating results. These fluctuations may be exaggerated if the
trading volume of our common stock is low. In addition, due to the technology-
intensive and emerging nature of our business, the market price of our common
stock may rise and fall in response to:
. announcements of technological or competitive developments;
. acquisitions or strategic alliances by us or our competitors;
. the gain or loss of a significant customer or order; and
. changes in estimates of our financial performance or changes in
recommendations by securities analysts.
Accordingly, market fluctuations, as well as general economic, political and
market conditions such as recessions, interest rate changes or international
currency fluctuations, may negatively impact the market price of our common
stock.
Because of likely fluctuations in the price of our stock we may be subject to
class action litigation, which could distract management and result in
substantial costs.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future.
Securities litigation could result in substantial costs and divert management's
attention and resources from our operations and sales of our products, which
would have a negative impact on our financial condition and results of
operations.
Because the book value per share of our stock is less than the initial offering
price, you will experience immediate dilution.
The initial public offering price is substantially higher than the current
book value per share of our outstanding common stock. As a result, investors
purchasing our common stock in this offering will incur immediate dilution of
approximately $ per share, assuming an initial public offering price of
$ per share, in the book value of our common stock from the price they pay
for our common stock. In addition, we have issued options to acquire common
stock at prices significantly below the initial public offering price. To the
extent these outstanding options are ultimately exercised, there will be
further dilution to investors in this offering. See "Dilution."
Because our principal stockholders and management may have the ability to
control stockholder votes, the premium over market price that an acquiror might
otherwise pay may be reduced and any merger or takeover may be delayed.
Immediately following the offering, our officers and directors and their
affiliates will own or control approximately % of our common stock (assuming
no purchases of shares of common stock in this offering by our officers and
directors and their affiliates). Accordingly, our officers, directors and their
affiliates, as a group, may have the ability to control the election of a
majority of the members of our board of directors and the outcome of corporate
actions requiring stockholder approval. This concentration of ownership may
have the effect of delaying, deferring or preventing a change in control of us,
or may impede a merger, consolidation, takeover or other business combination
involving us. This concentration of ownership could also adversely affect our
stock's market price or lessen any premium over market price that an acquiror
might otherwise pay.
15
<PAGE>
Provisions of our charter documents and Delaware law could prevent or delay a
change in our control and may reduce the market price of our common stock.
Certain provisions of our certificate of incorporation and bylaws in effect
upon completion of this offering and the provisions of Delaware law could have
the effect of delaying, deferring or preventing our acquisition which could
cause our share price to decline. For example, authorized but unissued shares
of preferred stock which could be used to fend off a takeover attempt, our
stockholders may not take actions by written consent, our stockholders are
limited in their ability to make proposals at stockholder meetings and our
board of directors will be divided into three classes with three year
overlapping terms. See "Description of Capital Stock."
Because we have broad discretion to use the offering proceeds, how we invest
these proceeds may not increase our operating results or market value.
As of the date of this prospectus, we have no specific plans to use the net
proceeds from this offering other than for working capital and general
corporate purposes. Accordingly, our management will have considerable
discretion in the application of the net proceeds, and may apply the net
proceeds in ways which may not increase our operating results or our market
value. See "Use of Proceeds." You will not have the opportunity, as part of
your investment decision, to assess whether the proceeds are being used
appropriately. Pending application of the proceeds, they may be placed in
investments that do not produce income or that lose value.
A substantial number of our shares of common stock are eligible for future
sale, and the sale of these shares may depress our stock price, even if our
business is doing well.
Upon completion of the offering, we will have approximately shares of
common stock outstanding and shares outstanding if we issue shares upon
exercise of the underwriters' over-allotment option. All of these shares will
be freely tradable without restriction or further registration under the
federal securities laws, except for shares purchased in this offering by or
held by our affiliates. See "Shares Eligible for Future Sale." In addition, as
of December 31, 1999 there were outstanding options and warrants to purchase
3,417,007 shares of our common stock. Furthermore, as of December 31, 1999,
stockholders beneficially owning 15,476,986 shares of common stock had been
granted registration rights with respect to these shares of stock. See
"Description of Capital Stock--Registration Rights of Certain Holders." In the
future, we may register for resale the shares underlying the outstanding
options, grant additional options or grant additional registration rights.
While our existing stockholders and option holders are generally subject to
lock-up agreements and the provisions of our bylaws restricting their ability
to sell shares of our common stock, when these restrictions expire, these
shares will be eligible for sale, in some cases without restriction. See
"Shares Eligible for Future Sale." A sale of a substantial number of shares,
particularly by our directors and officers, or the perception that this sale
could occur, could have an adverse effect on the price of our common stock.
We may need to raise additional capital in the future, and if we are unable to
secure adequate funds on terms acceptable to us, we may be unable to execute
our business plan.
If the proceeds of this offering, together with our existing cash balances
and cash flow expected from future operations, are not sufficient to meet our
liquidity needs, we will need to raise additional funds. If adequate funds are
not available on acceptable terms or at all, we may not be able to take
advantage of market opportunities, develop or enhance new products, pursue
acquisitions that would complement our existing product offerings or enhance
our technical capabilities, execute our business plan or otherwise respond to
competitive pressures or unanticipated requirements.
16
<PAGE>
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance
and involve known and unknown risks, uncertainties and other factors that may
cause our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the forward-
looking statements. These risks and other factors include those listed under
"Risk Factors" and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. In evaluating
these statements, you should specifically consider various factors, including
the risks outlined under "Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
forward-looking statements.
17
<PAGE>
USE OF PROCEEDS
We expect to receive net proceeds from the sale of the shares of common
stock of approximately $ million (approximately $ million if the
underwriters' over-allotment option is exercised in full), at an assumed
initial public offering price of $ per share, after deducting underwriting
discounts and commissions and estimated offering expenses.
We intend to use the net proceeds from this offering primarily for general
corporate purposes, including working capital, funding our operating losses,
and capital expenditures. In addition, we may use a portion of the net proceeds
to acquire complementary products, technologies or businesses; however, we
currently have no commitments or agreements and are not involved in any
negotiations with respect to any such transactions. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in interest-
bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.
18
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of December 31,
1999 on the following three bases:
. our actual capitalization derived from our financial statements as of
December 31, 1999;
. on a pro forma basis to give effect to the conversion of all shares of
preferred stock into 15,450,236 shares of common stock automatically
upon completion of this offering; and
. on an as adjusted basis to reflect the sale of shares of our common
stock at an assumed initial offering price of $ per share, after
deducting underwriting discounts and commissions and estimated offering
expenses.
You should read this table in conjunction with our Financial Statements and
the accompanying Notes, Selected Financial Data, and Management's Discussion
and Analysis included elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands except share and
per share data)
<S> <C> <C> <C>
Current portion of long-term debt and capital
lease obligations............................. $ 710 $ 710 $
-------- --------
Long-term debt and other liabilities........... 621 621
-------- --------
Stockholders' equity:
Preferred stock, $0.001 par value: none
authorized, none outstanding (actual);
10,000,000 authorized, none outstanding (pro
forma and pro forma as adjusted)(1)......... -- --
Convertible preferred stock, $0.001 par
value: 15,630,000 authorized, 15,450,236
outstanding (actual); none authorized, none
outstanding (pro forma and pro forma as
adjusted)................................... 15 --
Common stock, $0.001 par value: 32,000,000
authorized, 10,318,841 outstanding (actual);
100,000,000 authorized, 25,769,077
outstanding (pro forma); 100,000,000
authorized, outstanding (pro forma as
adjusted)(1)................................ 10 26
Additional paid-in capital..................... 72,160 72,159
Stockholder notes receivable................... (430) (430)
Accumulated other comprehensive income......... (25) (25)
Deferred compensation.......................... (9,429) (9,429)
Accumulated deficit............................ (32,246) (32,246)
-------- -------- -----
Total stockholders' equity................... 30,055 30,055
-------- -------- -----
Total capitalization....................... $ 31,386 $ 31,386 $
======== ======== =====
</TABLE>
- ---------------------
(1) Upon completion of this offering, our certificate of incorporation will be
amended to authorize 100,000,000 shares of common stock and 10,000,000
shares of undesignated preferred stock.
The data in the table above excludes:
. 3,390,257 shares of common stock issuable upon the exercise of
outstanding stock options as of December 31, 1999 at a weighted average
exercise price of $1.09 per share;
. 26,750 shares of common stock issuable upon the exercise of outstanding
warrants as of December 31, 1999 at a weighted average exercise price of
$4.00 per share;
. 4,423,395 shares of common stock available for issuance under our 1997
Stock Plan following this offering; and
. 500,000 additional shares of common stock available for issuance under
our 2000 employee stock purchase plan immediately following this
offering.
For additional information regarding these shares, see "Management--Stock
Plan," "Related Party Transactions," "Description of Capital Stock," and note 7
of the notes to financial statements.
19
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of common
stock after this offering.
Our pro forma net tangible book value as of December 31, 1999 was $30.1
million or $1.17 per share of common stock. Net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the pro forma number of 25,769,077 shares of common stock
outstanding after giving effect to the conversion of all outstanding shares of
preferred stock into common stock upon completion of this offering. Dilution in
net tangible book value per share represents the difference between the amount
per share paid by purchasers of shares of common stock in this offering and the
net tangible book value per share of common stock immediately after the
completion of this offering. After giving effect to the sale of the shares
of common stock in this offering, assuming an initial public offering price of
$ per share, and after deducting underwriting discounts and estimated
offering expenses, our pro forma net tangible book value as of December 31,
1999 would have been $ million or approximately $ per share. This
represents an immediate increase in net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to new
investors, or approximately % of the assumed initial public offering price
of $ per share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $
Pro forma net tangible book value per share at December 31, 1999
before the offering............................................... $1.17
Increase per share attributable to new investors in this offering.. $
-----
Net tangible book value per share after this offering................ $
---
Dilution per share to new investors.................................. $
===
</TABLE>
The following table shows on a pro forma basis after giving effect to this
offering, as of December 31, 1999, the number of shares of common stock
purchased from us, the total consideration paid to us, and the average price
per share paid by existing stockholders, and by the investors purchasing shares
of common stock in this offering (at an assumed initial public offering price
of $ per share before deducting the 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.... 25,769,077 % $57,056,000 % $2.21
New investors in the
offering................
Total.................. 100% 100%
=== ===
</TABLE>
The foregoing discussion and table are based on actual shares outstanding on
December 31, 1999 and assume no exercise of any stock options or warrants
outstanding as of such date. As of December 31, 1999, there were options and
warrants outstanding to purchase 3,390,257 and 26,750 shares of common stock at
a weighted average exercise price of $1.09 and $4.00 per share, respectively.
To the extent any of these options or warrants are exercised, there will be
further dilution to investors. See "Capitalization," "Management--Stock Plans,"
"Description of Capital Stock" and note 7 of notes to financial statements.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below 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 statement of operations data for the
period from February 21, 1997 (inception) to December 31, 1997 and for the
years ended December 31, 1998 and 1999 and the balance sheet data as of
December 31, 1998 and 1999 are derived from, and are qualified by reference to,
the audited consolidated financial statements and related notes appearing
elsewhere in this prospectus. The balance sheet data as of December 31, 1997
are derived from audited financial statements not appearing in this prospectus.
Historical results are not necessarily indicative of results that may be
expected for any future period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Period from Years ended
February 21, 1997 December 31,
(inception) to -----------------
December 31, 1997 1998 1999
----------------- ------- --------
(in thousands, except per share
data)
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Product.................................. $ -- $ -- $ 2,509
Technology development................... 300 752 1,235
------- ------- --------
Total revenues........................... 300 752 3,744
Cost of revenues.......................... -- -- 2,984
------- ------- --------
Gross profit.............................. 300 752 760
Operating expenses:
Research and development................. 1,844 7,884 11,608
Sales and marketing...................... 341 1,461 3,002
General and administrative............... 217 1,060 2,827
Amortization of deferred compensation.... -- 50 2,627
------- ------- --------
Total operating expenses................. 2,402 10,455 20,064
------- ------- --------
Operating loss............................ (2,102) (9,703) (19,304)
Interest income, net...................... 165 466 1,032
------- ------- --------
Net loss.................................. (1,937) (9,237) (18,272)
Deemed dividend on Series B convertible
preferred stock.......................... (2,800) -- --
------- ------- --------
Net loss applicable to common
stockholders............................. $(4,737) $(9,237) $(18,272)
======= ======= ========
Historical basic and diluted net loss per
share applicable to common stockholders.. $ (0.59) $ (1.15) $ (2.07)
======= ======= ========
Shares used to compute basic and diluted
net loss per share applicable to common
stockholders............................. 8,000 8,056 8,842
======= ======= ========
Pro forma basic and diluted net loss per
share applicable to common stockholders.. $ (0.84)
========
Shares used to compute pro forma basic and
diluted net loss per share applicable to
common stockholders...................... 21,755
========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998 1999
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents and short-term investments... $13,645 $ 7,926 $28,313
Working capital........................................ $12,537 $ 6,686 $26,043
Total assets........................................... $16,339 $12,010 $35,587
Liabilities............................................ $ 2,183 $ 2,751 $ 5,532
Total stockholders' equity............................. $14,156 $ 9,259 $30,055
</TABLE>
See note 1 of notes to consolidated financial statements for an explanation
of the determination of the weighted average common and common equivalent
shares used to compute net loss per share.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of this prospectus includes a number of forward-looking
statements that reflect our current views with respect to future events and
financial performance. We use words such as "anticipates," "believes,"
"expects," "future," and "intends," and similar expressions to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this prospectus.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from historical results or our
predictions. These risks are described in "Risk Factors" and elsewhere in this
prospectus. See "You Should Not Rely On Forward-Looking Statements."
Overview
We provide system-level products that enable broadband communications to the
home and business enterprise. Our products combine into a single solution our
programmable digital signal processor, our communications algorithms, our
highly integrated mixed-signal semiconductor, our highly integrated digital
semiconductor and related software. We currently serve the DSL market and have
near-term plans to leverage our communications technology and expertise to
serve the voice over packet and home networking markets. Our current customers
are broadband access equipment vendors who manufacture DSL equipment for use in
the phone companies' communications infrastructure or DSL modems for Internet
or other network access in a home or small business.
We were incorporated on February 21, 1997 and commenced operations on April
1, 1997. Consequently, our results of operations for and as of the year ended
December 31, 1997 include organizational activities and operations for the
period from February 21, 1997 (inception) through December 31, 1997. In our
discussion below, references to the year ended December 31, 1997 refer to the
period from February 21, 1997 (inception) through December 31, 1997. During the
period from February 1997 through June 1999 we were a development stage company
focused on developing our initial products, recruiting personnel, building our
corporate infrastructure and raising capital, and therefore had no product
revenue. In 1999, we began shipping our CopperLite CO and CopperLite CPE
families of products and recorded our first significant product revenues in the
third quarter. We emerged from the development stage at that time. During 1999,
we also increased our investment in research and development, sales and
marketing, operations and our general and administrative infrastructure.
Our revenues currently are derived from sale of our DSL products which
include the CopperLite CO, CopperLite CPE and Optimizer families of products.
To date, we have generated a substantial portion of our revenues from a limited
number of customers. Our top two customers in 1999 were Sumitomo Electric and
NEC who each accounted for 34.4% and 21.1%, respectively, of our 1999 revenues.
While we are seeking to diversify our customer base, we cannot assure you that
these efforts will be successful.
We have historically recognized a significant amount revenue for our
technology development efforts. Our technology development revenue consisted of
payments from potential future customers to develop our technologies in such a
way that also provided for their requirements. This revenue was received
primarily as an incentive for our continuing this development effort. We
believe that our technology development revenue will not be a significant
portion of our total revenue after 1999.
We have focused our initial sales and marketing efforts on Asian and North
American communications equipment manufacturers. During 1999, 81.6% of our
sales were to Asia. While we are developing our European sales organization and
are continuing to develop our North American sales organization, we expect that
the majority of our revenues will be derived from Asia for the foreseeable
future. We currently sell through our direct sales force in Japan, Singapore
and North America and through our representatives in Korea and Taiwan.
International revenues are denominated solely in U.S. dollars, which reduces
our exposure to foreign currency exchange risks.
22
<PAGE>
We recognize product revenue at the time of shipment to customers when no
significant obligations remain. Allowances are provided for estimated returns
at the time of shipment. In circumstances where we have not shipped the final
version of our product, or when a customer has delayed its acceptance of our
product, we defer recognition of the revenue associated with the given product
at the time of shipment. This deferred revenue is recognized when the final
version of the product is delivered or upon acceptance by the customer. As of
December 31, 1999, we had $122,000 in deferred revenue which was comprised
primarily of prepayments from certain customers.
It usually takes more than one year for us to realize volume shipments of
our products after we first contact a customer. We first work with customers to
achieve a design win, which may take six months or longer. Our customers then
complete the design, testing and evaluation of their systems and begin the
marketing process, a period which typically lasts an additional three to six
months or longer. As a result, a significant period of time may elapse between
our sales efforts and our realization of revenues, if any, from volume
purchases of our products by our customers. Our customers are not obligated by
long-term contracts to purchase our products and can generally cancel or
reschedule orders on short notice.
We outsource the fabrication, assembly and testing of our products.
Accordingly, a significant portion of our cost of revenues consists of payments
to our manufacturing partners. Costs of revenue also encompass our internal
manufacturing and operations functions and a portion of our information systems
and facilities costs.
Research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers,
prototype costs related to the fabrication of our silicon chips and
depreciation associated with software development tools. We expense our
research and development costs as they are incurred. Several components of our
research and development effort require significant expenditures, the timing of
which can cause significant quarterly variability in our expenses. For example,
we require a substantial number of prototypes to build and test our complex
products and therefore, incur significant prototype costs. Because our research
and development is key to our future success, we intend to significantly
increase our research and development expenditures in future periods.
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in marketing, sales, customer service
and applications engineering support functions, as well as costs associated
with promotional and other marketing expenses. We intend to expand our direct
and indirect sales operations substantially, both domestically and
internationally, in order to increase market awareness, support customer
requirements, and increase orders for our products. We expect that sales and
marketing expenses will increase over the next year as we hire additional sales
and marketing personnel, initiate additional marketing programs to support our
products and establish sales offices in additional domestic and international
locations. We intend to expand our use of independent manufacturers'
representatives. To date we have entered into agreements with only a small
number of representatives and we believe that to be successful, we must reach
agreement with additional representatives in several countries. In addition,
the complexity of our products and the applications support necessary for
successful interoperability and customer specific applications requires highly
trained customer service and support personnel. We expect to significantly
expand our customer service and support organization to meet these
requirements.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, facilities, information
services, human resources, recruiting expenses, professional fees, and other
corporate expenses. We expect general and administrative expenses to increase
as we add personnel and incur additional costs related to the growth of our
business and our operation as a public company.
In connection with the grant of certain stock options and equity
compensation to our employees, technical advisors and directors, we have
recorded deferred compensation expense of $12.1 million. Deferred compensation
represents the difference between the grant price and the deemed fair value of
our common stock options granted during these periods and is being amortized
using the graded vesting method over the vesting period of the respective stock
options. Unamortized deferred compensation is presented as a reduction of
stockholders' equity. See note 7 of notes to consolidated financial statements
for more information about the deferred compensation expense.
23
<PAGE>
We have not reported an operating profit for any year since our
incorporation and have experienced net losses of approximately $1.9 million,
$9.2 million, and $18.3 million for the years ended December 31, 1997, 1998,
and 1999, respectively. We expect to continue to incur net losses for the
foreseeable future, and these losses may be substantial. Further, we expect to
incur substantial negative cash flow in the future.
Results of Operations
The following table sets forth, for the periods presented, certain data from
our consolidated statement of operations expressed as a percentage of total
revenues.
<TABLE>
<CAPTION>
Years Ended
Period From December
February 21, 1997 31,
(Inception) to -------------
December 31, 1997 1998 1999
----------------- ------ ----
<S> <C> <C> <C>
As s Percentage of Total Revenues:
Total revenues................................ 100 % 100 % 100 %
Cost of revenues.............................. 0 0 80
---- ------ ----
Gross profit.................................. 100 100 20
Operating expenses:
Research and development.................... 615 1,048 310
Sales and marketing......................... 114 194 80
General and administrative.................. 72 141 75
Amortization of deferred compensation....... 0 7 70
---- ------ ----
Total operating expenses.................. 801 1,390 536
Operating loss................................ (701) (1,290) (516)
Interest income............................... 71 77 34
Interest expense.............................. (16) (15) (6)
---- ------ ----
Net loss...................................... (646)% (1,228)% (488)%
==== ====== ====
</TABLE>
Years Ended December 31, 1997, 1998 and 1999
Revenues
In 1997 and 1998, all of our revenue was derived from technology development
efforts and services. We received payments from potential future customers to
develop our technologies in such a way that also provided for their
requirements. This revenue was received primarily as an incentive for our
continuing this development effort. We believe we will recognize little or no
technology development revenue for the foreseeable future.
Revenues increased from $300,000 in 1997 to $752,000 in 1998 and increased
to $3.7 million in 1999. The increase in 1998 was attributable to increased
technology development revenues. The increase in 1999 was attributable to a
further increase in technology development revenue to $1.2 million and the
initial shipments of our products which generated significant revenue beginning
in the third quarter of 1999.
Cost of Revenues
The costs associated with our technology development revenues are closely
related to the costs of our ongoing research and development activities.
Generally, the incremental costs of providing any deliverables under our
technology development arrangements are not easily distinguishable from the
costs of our ongoing activities. The total incremental costs of our technology
development revenues are generally not significant. All such costs related to
technology development revenues for each of the years ended December 31, 1997,
1998 and 1999 have been included in research and development in our statements
of operations. Cost of revenues, which reflects costs of product revenues, was
$3.0 million in 1999.
24
<PAGE>
Research and Development Expenses
Research and development expenses increased from $1.8 million in 1997 to
$7.9 million in 1998 and increased to $11.6 million in 1999. The increases in
1998 and 1999 were due primarily to additions in engineering personnel,
increased usage of materials necessary to build prototypes and increases in
depreciation resulting from the additional purchases of laboratory equipment
and software development tools.
Sales and Marketing Expenses
Sales and marketing expenses increased from $341,000 in 1997 to $1.5 million
in 1998 and increased further to $3.0 million in 1999. These increases were due
primarily to the addition of personnel and an increase in marketing activity
such as customer visits and attendance at trade shows.
General and Administrative Expenses
General and administrative expenses increased from $217,000 in 1997 to $1.1
million in 1998 and increased to $2.8 million in 1999. These increases were due
primarily to the addition of personnel in the accounting, human resources,
information services and facilities functions. The increase in 1999 was also
due to our move to larger facilities in September 1999.
Amortization of Deferred Compensation
During 1998 and 1999 we recorded a total of $12.1 million of deferred stock
compensation. Amortization of deferred stock compensation increased from zero
in 1997 to $50,000 in 1998 and increased to $2.6 million in 1999. Deferred
stock compensation is being amortized using the graded vesting method. Under
this method, a majority of the total deferred amount for each option will be
amortized within the first twelve months after the grant of such option.
Interest Income
Interest income increased from $214,000 in 1997 to $582,000 in 1998 and
increased to $1.3 million in 1999. These increases were due to higher cash and
cash equivalent balances resulting from successful preferred stock financings
in 1998 and 1999.
Interest Expense
Interest expense increased from $49,000 in 1997 to $116,000 in 1998 and
increased to $242,000 in 1999. These increases were due to higher average
outstanding debt balances during 1998 and outstanding balances under our
working capital line of credit during 1999.
Deemed Dividend
In connection with Series B3 convertible preferred stock financings in July
and September 1997, we issued rights to certain stockholders, which provided
for the purchase of 2,000,000 shares of Series B1 convertible preferred stock
at $2.00 per share and 800,000 shares of Series B2 convertible preferred stock
at $2.50 per share. The rights were immediately exercisable and expired
approximately one year after their initial grant. We recorded noncash deemed
dividends of $2.8 million for 1997, representing the fair value of the rights
issued, which reduced income available to common stockholders. No such
dividends were recorded in 1998 or 1999.
Quarterly Results of Operations
Our quarterly results of operations fluctuate from period-to-period
depending on factors such as the timing of significant expenditures for
prototype development, the success of our initial sales efforts, the timing of
significant design wins and orders, and period-to-period difficulties that may
be encountered with our manufacturing subcontractors. We believe that period-
to-period comparisons of our financial results should not be relied upon to
predict future results. We may experience significant fluctuations in period-
to-period operating results.
25
<PAGE>
The following table presents certain data from our statements of operations
and such data as a percentage of revenues for the four quarters ended December
31, 1999. This data has been derived from unaudited consolidated financial
statements. In our opinion these statements include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
information when read in conjunction with our annual audited consolidated
financial statements and related notes appearing elsewhere in this prospectus.
These operating results are not necessarily indicative of results of any future
period.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
Mar 31, Jun 30, Sep 30, Dec 31,
1999 1999 1999 1999
------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Product.............................. $ 0 $ 0 $ 651 $ 1,858
Technology development............... 50 655 200 330
------- ------- ------- -------
Total revenues..................... 50 655 851 2,188
Cost of revenues....................... 0 0 1,060 1,924
------- ------- ------- -------
Gross profit........................... 50 655 (209) 264
Operating expenses:
Research and development............. 2,234 3,095 3,013 3,266
Sales and marketing.................. 684 401 671 1,246
General and administrative........... 457 520 867 983
Amortization of deferred
compensation........................ 99 281 601 1,646
------- ------- ------- -------
Total operating expenses........... 3,474 4,297 5,152 7,141
------- ------- ------- -------
Operating loss......................... (3,424) (3,642) (5,361) (6,877)
Interest income, net................... 25 260 491 256
------- ------- ------- -------
Net loss............................... $(3,399) $(3,382) $(4,870) $(6,621)
======= ======= ======= =======
As a Percentage of Total Revenues
Revenues:
Product.............................. 0% 0% 76% 85%
Technology development............... 100% 100% 24% 15%
------- ------- ------- -------
Total revenues..................... 100% 100% 100% 100%
Cost of revenues....................... 0 0 125 88
------- ------- ------- -------
Gross profit........................... 100 100 (25) 12
Operating expenses:
Research and development............. 4,468 473 354 149
Sales and marketing.................. 1,368 61 79 57
General and administrative........... 914 79 102 45
Amortization of deferred
compensation........................ 198 43 71 75
------- ------- ------- -------
Total operating expenses........... 6,948 656 605 326
Operating loss......................... (6,848) (556) (630) (314)
Interest income, net................... 50 40 58 12
------- ------- ------- -------
Net loss............................... (6,798)% (516)% (572)% (303)%
======= ======= ======= =======
</TABLE>
Technology development revenues fluctuated during the four quarters ending
December 31, 1999 based primarily on the timing of contracts from our customers
for contract engineering services and completion of milestones under the
contracts. This portion of our business will diminish in the future and we
expect that technology development revenue will not be a significant portion of
our total revenue after 1999.
We commenced product shipments and recorded our first related revenue in the
third quarter of 1999. The increase in product revenues from the third quarter
of 1999 to the fourth quarter reflects increasing unit sales
26
<PAGE>
and deliveries to additional customers. Future product revenue will vary in
part on the timing of orders from our customers.
Costs of revenues in the third and fourth quarters of 1999 reflect the early
stage of our production efforts. Because a portion of our manufacturing costs
are fixed, low initial production volumes cause high per-unit allocation of
manufacturing overhead costs. As our production volumes increase, we expect
costs of revenue to decline as a percentage of revenue.
Operating expenses increased in each of the four quarters of 1999 as we
transitioned from a development stage company to our initial production and
customer deliveries. We also expanded sales and marketing and support
infrasture. The increase in sales and marketing expenses in the quarter ended
December 31, 1999 was also due to our attendance at several trade shows.
The increase in deferred stock compensation amortization for the quarter
ended December 31, 1999 was due to the hiring of a substantial number of new
employees, and the grants of stock options to these new employees.
See "Risk Factors--Because our operating results from quarter to quarter may
fluctuate, the price of our stock may decline" for more information on the
factors affecting our quarterly results.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of approximately $55.8 million of convertible preferred stock, net of
offering costs. We also generated $829,000 from the exercise of stock options
and have secured additional financing through capital leases and secured debt.
Cash used for operations increased from $7.8 million in 1998 to $12.2
million in 1999. This increase was primarily due to an increase in our net loss
from $9.2 million in 1998 to $18.3 million in 1999.
Cash generated from financing activities increased from $4.8 million in 1998
to $35.6 million in 1999. This increase is due primarily to the sale of $35.6
million in convertible preferred stock in 1999.
Cash and cash equivalents, and short-term investments increased from $7.9
million on December 31, 1998 to $28.3 million on December 31, 1999. This
increase was due primarily to the receipt of $35.6 million from the sale of
preferred stock.
Accounts receivable were $915,000 on December 31, 1999, reflecting our first
significant product revenues. Our customers are billed at the time of shipment,
typically with payment terms of thirty days. Generally, customers have paid us
within the payment terms.
We maintain a $5.0 million revolving credit agreement with Mitsubishi
International to finance wafer inventory purchases. The credit agreement
expires on January 31, 2001, subject to automatic extensions thereafter from
year to year. As of December 31, 1999, $2.0 million was outstanding under the
agreement.
We expect to devote substantial capital resources to continue our research
and development efforts, to hire and expand our sales, support, marketing, and
product development organizations, to expand marketing programs, to establish
additional facilities worldwide and for other general corporate activities. We
currently anticipate that the net proceeds from this offering, together with
our current cash, cash equivalents, and short term investments will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months.
If the proceeds of this offering, together with our existing cash balances
and cash flow expected from future operations, are not sufficient to meet our
liquidity needs, we will need to raise additional funds. If adequate funds are
not available on acceptable terms or at all, we may not be able to take
advantage of market opportunities, develop or enhance new products, pursue
acquisitions that would complement our existing product offerings or enhance
our technical capabilities, execute our business plan or otherwise respond to
competitive pressures or unanticipated requirements.
27
<PAGE>
Year 2000 Compliance
As of February 15, 2000, we had not experienced any significant disruptions
related to Year 2000 issues, nor do we expect to experience any Year 2000-
related disruptions 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, assembly or testing
partners or our other suppliers have experienced any material Year 2000
problems. Although most Year 2000 problems should have become evident on
January 1, 2000, additional Year 2000-related problems may become evident only
after that date. For example, some software programs may have difficulty
resolving the so-called "century leap year" algorithm which will also occur
during the Year 2000. We will continue to monitor our mission 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.
We do not expect to incur any significant costs relating to Year 2000 matters.
Qualitative and Quantitative Disclosures About Market Risk
The primary objective of our investment activities is to preserve principal
while concurrently maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we may
invest in may be subject to market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate
at the then-prevailing rate and the prevailing interest rate later rises, the
current value of the principal amount of our investment will decline. To
minimize this risk in the future, we intend to maintain our portfolio of cash
equivalents and short-term investments in a variety of securities, including
commercial paper, money market funds, government and non-government debt
securities and certificates of deposit. In general, money market funds are not
subject to market risk because the interest paid on such funds fluctuates with
the prevailing interest rate. As of December 31, 1999, all of our investments
were in money market funds, or high quality commercial paper, government and
non-government debt securities and auction rate preferred stock. A hypothetical
100 basis point increase in interest rates would result in an approximate
$138,000 decrease in the fair value of our available-for-sale securities as of
December 31, 1999. See note 2 of the notes to the consolidated financial
statements.
Recent Accounting Pronouncements
In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires
entities to capitalize certain costs related to internal-use software once
certain criteria have been met. We adopted SOP 98-1 for the fiscal year ending
December 31, 1999. The adoption did not have a material impact on our financial
position or results of operations.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 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 No. 98-5 is
adopted. We adopted SOP 98-5 for the fiscal year ending December 31, 1999. The
adoption did not have a material impact on our financial position or results of
operations
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting methods for derivative financial instruments and hedging
activities related to those instruments, as well as other hedging activities.
Because we do not currently hold any derivative instruments and do not engage
in hedging activities, we expect that the adoption of SFAS No. 133 will not
have a material impact on our financial position, results of operations or cash
flows. We will be required to implement SFAS No. 133 for the year ending
December 31, 2001.
28
<PAGE>
BUSINESS
Introduction
Centillium provides technology that enables broadband communications to the
home and business enterprise. Our system-level products integrate into our
programmable digital signal processor, our communications algorithms, our
highly integrated mixed-signal chip, our highly integrated digital chip and our
related software. We currently serve the DSL market and are leveraging our core
technology and expertise to develop products for complementary markets which
share common technologies and customers. We have near-term plans to release
products that target the voice over packet and home networking markets. Our
core technology and expertise has enabled us to establish a viable long-term
product roadmap within these three complementary markets.
Industry Overview
Growing Demand for High-Speed Network Access Creating Last Mile Bottleneck
The volume of traffic transmitted over communications networks has grown
dramatically in recent years. Consumers are seeking low-cost, high-speed access
to Internet content and services that require transmission of large amounts of
data such as highly graphical Web sites, audio, video and high-speed data.
Businesses have even greater requirements for high-speed access in order to
implement electronic commerce strategies or Web-based business models, and to
provide telecommuting employees with the same capabilities they would
experience at the office.
As more consumers and businesses have begun to rely on the Internet and
communications networks, the demand for access to these networks has
accelerated. As a result, the number of devices and access lines leading into
these networks has undergone dramatic growth. International Data Corporation,
or IDC, estimates that in 1997, 15 million or 15% of United States' households
had two or more access lines and that this number will grow to 34 million, or
30% of United States' households by 2002. A significant number of these
additional access lines are being used to access the Internet and other
communications networks. According to IDC, today nearly 70 million, or 86%, of
home Internet users worldwide access the Internet via traditional analog
telephone lines. In addition, the demand for access is increasing as more and
more small businesses, self-employed individuals, and corporate telecommuters
are regularly accessing the Internet and other communications networks. IDC
estimates that there are 27 million households with at least one person doing
some business-related work from home. Many users are demanding the same access
speeds from their home offices that they experience at corporate locations.
To meet the demand for high-speed, broadband data transmission, network
service providers continue to upgrade the main transmission channels, or
backbone, of their networks with faster equipment. While this network backbone
is now capable of delivering data at very high speeds, an access bottleneck
continues to exist between the telephone companies' central offices and the end
users' homes or offices. These copper line connections between the central
office and the end user are commonly known as the last mile. The last mile
infrastructure was originally designed for low-speed analog voice traffic
rather than high-speed digital data transmission. As a result, access to the
Internet and private communications networks over the copper wire
infrastructure of the last mile has typically been limited to data transmission
rates of up to 56 Kbps using standard dial-up analog modems. At this rate,
several minutes may be required to access a media rich website, and several
hours may be required to transfer or download large files.
New Competition Driving Digital Subscriber Line Technologies as a Bottleneck
Solution
The local phone companies have continued to offer higher speed access
services based on older technologies. However, the historical pricing structure
has limited these services to larger businesses and has limited incentives for
phone companies to deploy alternative technologies. The competitive environment
started to change with the passage of the Federal Telecommunications Act of
1996 and was accelerated with the merger of AT&T and TCI. The Federal
Telecommunications Act intensified the competitive environment by
29
<PAGE>
requiring local phone companies to lease portions of their networks, including
the last mile, to other telecommunications service providers. These changes in
competitive structures coincided with the maturation of digital subscriber
line, or DSL, technology, enabling high-bandwidth data networking over the
existing last mile of copper infrastructure. As a result, a number of
companies, including Covad Communications, MCI WorldCom, NorthPoint
Communications, Rhythms NetConnections and Sprint, are now deploying high-speed
access services using DSL technologies to business and residences over the
copper infrastructure owned by the local phone companies. In addition, AT&T has
announced plans to offer broadband and interactive services, including
telephone services, on a broad scale over TCI's cable systems over the next few
years. In response to these competitive pressures, and in an effort to increase
revenues and maintain their existing customer base, local phone companies are
now also aggressively committing their resources to deploy DSL services.
DSL enables data transmission speeds of 128 Kbps to 52 Mbps using the
existing local loop copper wire infrastructure. DSL delivers "always on"
availability, eliminating the tedious dial-up process associated with
traditional analog modem technologies. DSL is a point-to-point technology that
connects the end user to the local phone company's central office or to an
intermediate hub. DSL equipment is deployed at each end of the copper wire and
the transmission speed depends on the length and condition of the existing wire
as well as the capabilities of the DSL equipment.
High Speed Access Driving Demand for New Networking Technologies
As network access providers begin to deploy high-speed data access across
the last mile to residences and businesses, opportunities for additional
networking technologies have emerged. Two of these technologies are voice over
packet, which allows integrated transmission of voice and data, and home
networking, which enables users to share high bandwidth resources throughout
the home.
Voice Over Packet
Voice over packet enables the transmission of multiple voice channels as
well as data over a single copper line previously capable of transmitting only
one voice channel. Voice over packet technology compresses voice signals into
discrete packets of data which can be more efficiently transmitted. This
technology represents a substantial opportunity for small to medium sized
businesses to significantly reduce their costs for telephone services and for
residences to easily add additional phone numbers. Voice over packet allows
network access providers to offer both data and currently more lucrative voice
services to these businesses and residences. According to Dataquest, while
North American data services revenues from annual recurring retail
subscriptions are projected to grow at a rate of 27% from 1999 to 2003 and were
estimated to be $27 billion in 1999, revenues from telecommunications services
in North America in 1999 were estimated to be $207 billion.
Voice over packet also enables voice signals to be sent over communications
networks originally designed for data transmission, in addition to over
traditional telephone networks. Voice over packet utilizes one or more of the
communications transmission protocols, such as asynchronous transfer mode or
ATM, frame relay and Internet protocol or IP, which serve as the backbone of
the numerous data transport networks. As the cost of data transmission has
continued to decrease substantially below the cost of traditional voice
transmission, the opportunity for methods of seamlessly sending voice across
the different protocol-based data networks has become economically compelling.
Home Networking
As high speed access is more fully deployed, as the price of personal
computers continues to decline and as the availability of network enabled
devices and applications increases, opportunities are emerging for vendors to
offer cost effective home networking solutions. Home networking allows multiple
users to share high bandwidth resources throughout the home. This provides
consumers with cost savings from sharing hardware, software and high speed
Internet access, allowing a broader range of home computing applications, and
increased convenience. According to Cahners In-Stat Group, the reasons
consumers cited for desiring to own a home network were:
. Internet access sharing;
30
<PAGE>
. printer sharing;
. file sharing;
. connecting laptop to work;
. home control;
. multiplayer gaming;
. distributed video; and
. remote monitoring or security.
Emerging home networking technologies include both the Home Phoneline
Networking Association or HPNA standard, which uses the existing telephone
wiring of a home, and other standards based on wireless technology. Both of
these solutions eliminate the need to add additional network wiring throughout
the home.
The Challenges for Equipment Manufactures and Network Access Providers
The commitment of equipment manufacturers and network access providers to
solve the access bottleneck and develop the broadband access market has created
a number of opportunities and challenges. As the bandwidth bottleneck eases,
allowing greater data throughput at a lower cost, there is an emerging demand
for new cost and time-saving technologies, such as voice over packet and home
networking. However, the challenges of solving the bottleneck and providing
these emerging applications remain significant. These challenges include the
following:
Constantly evolving technology and networking standards. Communications
equipment manufacturers face significant challenges to ensure that their
products interoperate with counterpart products of other manufacturers based on
the same technology. Manufacturers often work together to create
interoperability standards for products based on new technologies. However,
changes in the market landscape or improvements in a given technology can cause
changes to these standards, often requiring existing equipment to be upgraded
or replaced.
Size constraints. The size of the components and systems necessary to enable
DSL is critical for several reasons. DSL equipment must physically fit within
the local telephone company's existing infrastructrure. For example,
residential phone lines often terminate at a digital loop carrier, or DLC,
which is a fixed size box, holding equipment that aggregates a neighborhood's
phone lines onto a higher speed channel for transmission to the central office.
When a DLC is upgraded for DSL access, the physical size of the box limits the
amount of DSL equipment which can be installed without replacing the DLC. In
addition, high-speed modems for laptops and other mobile high speed access
equipment must meet ever smaller size constraints.
Power constraints. Low power consumption is critical for the addition of new
equipment within existing communications systems. Service providers' equipment
is often limited by a fixed level of available power, and any additions of
equipment must operate efficiently within those limitations. Also, consumers
desire high-speed modems which can be powered directly by their personal
computer or laptop, without the need for external power supplies. This requires
modems to function using low levels of power.
Shorter product life-cycles. The adoption of new communications technologies
is driving the need for more rapid introduction of new communications products.
In this rapidly evolving environment, communications equipment manufacturers
and their suppliers must have the flexibility to respond quickly in order to
maintain market leadership.
To meet these challenges, manufacturers of broadband voice and data
communication equipment require vendors who provide "system-level" products.
System-level products integrate components into a single product that are
typically sold separately, such as software, mixed-signal integrated circuits,
digital integrated circuits and algorithms. System-level products allow
equipment manufacturers to reduce the time it takes for their products to reach
the market and to focus their resources on adding features which differentiate
their products from those of their competitors.
31
<PAGE>
Solution
We provide system-level products that enable broadband communications to the
home and business enterprise. Our products integrate our programmable digital
signal processor, our communications algorithms, our highly integrated mixed-
signal microchip, our highly integrated digital semiconductor and our related
software. We currently serve the DSL market and are leveraging our digital
signal processor, algorithms and systems expertise to develop products for
complementary markets. We have near-term plans to release products that target
the voice over packet and home networking markets. This expertise has enabled
us to establish a viable long-term product roadmap within these three
complementary markets. Key features of our solution include:
Flexibility due to programmable DSP architecture. Our products are designed
based on our software-upgradable, proprietary digital signal processor, or DSP,
architecture. Our communications-specific DSP architecture allows for
implementation of communications algorithms in software, as opposed to hardware
that cannot be reprogrammed. As a result, our solution allows remote upgrade of
DSP algorithms, eliminating the need for costly hardware replacements and
ensuring adaptability to evolving industry standards and flexibility to meet
evolving demand for new features. The in-house expertise we built while
developing our DSP architecture enables us to quickly offer customization for
each customer's unique requirements throughout the life cycle of their
products.
High level of semiconductor integration reduces size. Through highly
integrated design, we eliminate the need for peripheral components such as
additional microprocessors and external memory, which substantially reduces the
size of our customers' end-products. For example, one of our DSL products
supports eight ports, or phone lines, with just two integrated circuits,
compared to competing products which can require from 15 to 32 integrated
circuits to service the same number of ports. This reduced size allows our
customers' DSL infrastructure products to fit within the existing
communications infrastructure. Additionally, we believe our business card-sized
DSL modem is currently the smallest product of its type commercially available.
Low power consumption. According to TeleChoice, our DSL solution offers the
lowest per port power consumption in the industry. For our DSL modem products,
low power consumption means that the modem can be powered by a desktop or
laptop computer without an external power supply. For our DSL infrastructure
products, lower power consumption allows network access providers to support a
greater number of DSL lines within equipment supported by a fixed amount of
available power. Our products also feature built-in sleep-mode power management
to ensure operational efficiency.
System-level products deliver fast time-to-market. We believe our products
offer the most complete system-level solutions available to our target
customers. Instead of obtaining integrated circuits, software and algorithms
from different vendors and integrating the components themselves, our customers
can use our solutions to deliver their products with little additional time or
use of engineering resources. This complete solution provides manufacturers
with the competitive edge they need to ensure fast time-to-market while
retaining the flexibility to differentiate their products.
Strategy
Our objective is to be the leading provider of system-level products for
equipment manufacturers serving the broadband communications markets. Key
elements of our strategy include the following:
Target complementary high-growth broadband communications markets. Our
strategy is to focus on complementary, high-growth broadband communications
markets and to develop system-level solutions for applications in those
markets. Our initial products are designed for the DSL infrastructure and
customer premises market. We are also leveraging our core technologies to
design and develop products for the voice over packet and the home networking
markets. By targeting these complementary markets, which share common
technologies and customers, we are able to more effectively utilize our
existing engineering, sales and marketing resources.
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<PAGE>
Strengthen and expand strategic relationships. We have established strategic
relationships with key equipment manufacturers, including Accelerated Networks,
Advanced Fibre Communications, Copper Mountain Networks, Creative Technologies,
Lucent Technologies, NEC and Sumitomo Electric Industries. These companies are
market and technology leaders within the broadband communications markets.
Securing design wins with these leading manufacturers provides references for
our products which helps to secure future sales with these and other
manufacturers. Collaborating with these industry leaders also helps us to
enhance our technological capabilities. We believe these strategic
relationships are essential to our continued growth and the further development
and acceptance of our technologies.
Extend technology leadership. We have invested substantial resources to
establish our technology leadership. We believe we are the first company to
deliver a DSL infrastructure product which manages multiple ports and the first
to deliver a DSL modem chipset which requires less than one watt of power. An
important element of our technical leadership is our programmable digital
signal processor, or DSP, and associated algorithms which are optimized for
high bandwidth communications applications. This core technology can be
extended through the manipulation of algorithms and software to develop
multiple communications products for complementary markets.
Leverage system-level expertise. Many of our system-level engineers have
previous experience as employees of communication equipment manufacturers and
are therefore very familiar with the requirements of, and challenges faced by,
our customers. We combine this system-level engineering expertise with our
expertise in integrated circuit, DSP, algorithm, and software design to develop
products that allow our customers to optimize time-to-market, performance, and
systems cost.
Pursue strategic acquisitions. Our strategy is to enhance our growth
capability by pursuing selective acquisitions. This strategy allows us to more
rapidly obtain complementary technologies and engineering talent and to access
key markets and customer relationships. We believe completing selective
acquisitions will be important to remain competitive as a complete solutions
provider to manufacturers of broadband communications equipment.
Products
We currently target the DSL market with our DSL infrastructure and DSL
customer premises equipment products and we are leveraging our technology
expertise by developing products for markets that are complementary to the DSL
market. We have near-term plans to release products that target the voice over
packet and home networking markets.
DSL
Each of our DSL products consists of two highly integrated semiconductor
devices which include a mixed-signal (analog and digital) semiconductor and a
digital semiconductor. The mixed-signal chip performs the functions of the
analog front end, which translates signals between analog and digital formats.
We believe our analog front end device contains the highest level of
integration in the industry, replacing the multiple components used in
competing solutions. Our digital chip, also among the most integrated designs
in the industry, incorporates our proprietary software programmable DSP, which
provides the flexibility for enhancements and upgrades. Based on this two-chip
architecture our various DSL products offer numerous capabilities and features.
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<PAGE>
DSL Infrastructure
We offer two families of DSL infrastructure products: CopperLite CO and
CopperFlite CO. These products are deployed at the local telephone company's
central office, or CO, or in a residential neighborhood within the digital loop
carrier, or DLC. Our DSL infrastructure products consist of the following:
CopperLite CO
<TABLE>
<CAPTION>
Introduction
Product Key Features Target Applications Date
<C> <S> <C> <C>
CopperLite CO G.lite 3rd quarter 1999
8 ports
Voice over PCM DSLAM
Annex A Central office switch
Very low power required (600mW/port)
Remote terminal
- ------------------------------------------------------------------------------
-----------------------
Universal G.lite MDU 3rd quarter 1999
CopperLite CO 4 ports
Voice over PCM
Annex A & C
Very low power required (600mW/port)
</TABLE>
CopperFlite CO
<TABLE>
<CAPTION>
Product Key Features Target Applications Introduction Date
<C> <S> <C> <C>
Full Rate ADSL
CopperFlite CO (G.DMT & T1.413 issue 2) 1st quarter 2000
G.lite
4 ports
Voice over PCM DSLAM
Annex A Central office switch
Very low power required (950mW/port)
Remote terminal
- --------------------------------------------------------------------------------
----------------------
Full Rate ADSL
Universal (G.DMT & T1.413 issue 2) MDU 1st half 2000
CopperFlite CO G.lite
4 ports
Voice over PCM
Annex A & C
Very low power required (950mW/port)
</TABLE>
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<PAGE>
DSL Customer Premises Equipment
We offer four families of DSL customer premises equipment, or CPE, products:
CopperLite CPE, CopperFlite CPE, Optimizer and Flite Optimizer. These products
are deployed as a modem for use with a personal computer or laptop or as a
subsystem for devices such as gateways, routers or integrated access devices,
all of which distribute network access for multiple appliances. Our DSL CPE
products consists of the following:
CopperLite CPE
<TABLE>
<CAPTION>
Introduction
Product Key Features Target Applications Date
<C> <S> <C> <C>
4th quarter
CopperLite CPE--UTOPIA G.lite Residential gateway 1998
Annex A Set-top box
- -----------------------------------------------------------------------------
---------------------
3rd quarter
Universal G.lite Bridge/router 1999
CopperLite CPE--UTOPIA Annex A & C Integrated access
device
</TABLE>
CopperFlite CPE
<TABLE>
<CAPTION>
Product Key Features Target Applications Introduction Date
<C> <S> <C> <C>
CopperFlite CPE--UTOPIA Full Rate ADSL 1st half 2000
(G.DMT & T1.413 issue 2) Residential gateway
G.lite Set-top box
Annex A Bridge/router
- -----------------------------------------------------------------------------
-----------------------
Universal Full Rate ADSL Integrated access 2nd half 2000
CopperFlite CPE--UTOPIA (G.DMT & T1.413 issue 2) device
G.lite
Annex A & C
</TABLE>
Optimizer
<TABLE>
<CAPTION>
Product Key Features Target Applications Introduction Date
<C> <S> <C> <C>
4th quarter
Optimizer--PCI G.lite 1999
Annex A
PCI, Card Bus or Mini PCI PCI card for
interfaces personal computers
and
Soft V.90 modem interface laptops
- -----------------------------------------------------------------------------
-----------------------
1st quarter
Universal G.lite 2000
Optimizer--PCI Annex A & C Mini-PCI card for
PCI, Card Bus or Mini PCI laptops
interfaces
Soft V.90 modem interface
- -------------------------------------------------------------------------------------------
3rd quarter
Optimizer--USB G.lite 1999
Annex A
Very low power required Set-top box
(USB powered) External modem
- -----------------------------------------------------------------------------
-----------------------
4th quarter
Universal G.lite 1999
Optimizer--USB Annex A & C
Very low power required
(USB powered)
</TABLE>
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<PAGE>
Flite Optimizer
<TABLE>
<CAPTION>
Introduction
Product Key Features Target Applications Date
<C> <S> <C> <C>
Flite Full Rate ADSL (G.DMT & 1st half
Optimizer--PCI T1.413 issue 2)
G.lite 2000
Annex A
PCI, Card Bus or Mini PCI card for personal
PCI interfaces
Soft V.90 modem computers and
interface laptops
- --------------------------------------------------------------------------------
-----------
Universal Full Rate ADSL (G.DMT & 2nd half
T1.413 issue 2)
Flite G.lite Mini PCI card for 2000
Optimizer--PCI laptops
Annex A & C
PCI, Card Bus or Mini
PCI interfaces
Soft V.90 modem
interface
- --------------------------------------------------------------------------------
Flite Full Rate ADSL (G.DMT & 1st half
Optimizer--USB T1.413 issue 2)
G.lite 2000
Annex A
Very low power required Set-top box
(USB powered)
- --------------------------------------------------------------------------------
-----------
Universal Full Rate ADSL (G.DMT & External modem 2nd half
T1.413 issue 2)
Flite G.lite 2000
Optimizer--USB
Annex A & C
Very low power required
(USB powered)
</TABLE>
The following are descriptions of several of the key product features which
have been listed above:
Full Rate ADSL. Asynchronous digital subscriber line, or ADSL, allows data
transmission rates of up to 8.2 Mbps from the network to a user, or downstream,
and generally at a lower rate of up to 1.0 Mbps from the user to the network,
or upstream. This tradeoff of allowing more data to flow downstream benefits
users since they typically download more data from the network than they send
upstream. Full rate is a version of ADSL which provides the highest data
transmission rate available for ADSL. Our full rate ADSL products conform to
the two most commonly used standard specifications for ADSL: G.DMT and T1.413
issue 2.
G.lite. G.lite is a version of ADSL which typically transmits data at slower
speeds than full rate ADSL, operating at speeds up to 1.5 Mbps downstream and
up to 512 Kbps upstream. G.lite's advantage over full rate ADSL is that the
technology requires no splitter at the user's premises to separate voice
signals from the data channel. The practical benefit is that no technician need
visit a user's home for installation.
Annex A and Annex C. Annex A and Annex C designate two of the three
different regional transmission standards used for all versions of ADSL. Annex
C is the ADSL standard used in Japan. Annex A is the standard used by the rest
of the world except for limited portions of Europe.
Voice over PCM. Voice over pulse code modulation, or PCM, is a technology
for delivering uncompressed voice channels over a single copper wire. Voice
over PCM does not qualify as voice over packet since the voice channel is
uncompressed. Additionally, voice over packet can accommodate substantially
more voice channels over one wire and can transmit voice over a network
originally designed to transmit data.
USB Powered. Our products consume very low levels of power which allows
power to be supplied directly from a computer's universal serial bus, rather
than from an external power source as most DSL products are powered today.
Soft V.90 Interface. The Soft V.90 interface feature enables our customers'
products to capture the capability of a traditional 56 kbps analog modem,
allowing a user to access the Internet where DSL is not available.
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<PAGE>
The following are descriptions of a number of the target applications
referred to above for our DSL products:
Integrated access device / residential gateway. An integrated access device
and a residential gateway combine multiple voice and data channels for
transmission from a home or small business to the telephone company's central
office.
Set-top box. A set-top box processes transmissions from the traditional
cable television infrastructure and delivers digital signals which can include
voice, video or Internet access.
PCI card. A peripheral component interconnect card allows additional
components, such as a modem, to be added internally to a personal or laptop
computer.
Bridge / router. A bridge or router is a device that resides between network
segments and forwards data to its appropriate destination.
DSLAM. A digital subscriber line access multiplexer aggregates the data
traffic from a substantial number of home telephone lines for transmission
through a data network.
Central office switch. A central office switch is a large computer that
enables telephone subscribers to dial and make a connection with any other
subscriber in the telephone network.
Remote terminal. A remote terminal is a generic name for telecommunications
equipment that is located outside of the central office. Remote terminals are
typically connected to the central office by fiber optic links.
MDU. A multi-dwelling unit, or MDU, aggregates multiple subscriber lines in
an apartment complex or hotel, allowing multiple subscribers to access high
speed Internet services.
Voice Over Packet
We have near-term plans to offer products which enable voice transmissions
over packet data technologies. Voice over packet allows multiple telephone
channels to be compressed and transmitted simultaneously with data over a
single copper line which previously carried only one telephone channel. It also
allows voice transmissions to be delivered over networks originally designed to
deliver only data. Today's data networks are based on efficient, cost effective
transmission methodologies. Applying technology which allows the transmission
of voice over the more efficient data networks could potentially reduce the
cost of voice transmissions. These data networks use one of several packet
transmission protocols which are methods for organizing and addressing data for
transmission over the network. Our first product will allow voice transmissions
over a data network using the asynchronous transfer mode, or ATM, protocol.
Later products will allow voice transmission over a data network using
alternative protocols, such as Frame Relay or Internet Protocol.
<TABLE>
<CAPTION>
Introduction
Product Key Features Target Applications Date
<C> <S> <C> <C>
Siren CO--VoATM Voice over ATM Digital loop carrier 2nd half 2000
- -------------------------------------------------------------------
----------------------
Siren CO--VoX Voice over ATM Residential gateway 1st half 2001
Voice over Frame Relay Edge switch
Voice over Internet
Protocol Router
Multiservice Platform
DSLAM
- -----------------------------------------------------------------------------------------
Siren CPE Voice over ATM Integrated Access Device 2nd half 2000
Private Branch Exchange
Remote Access Server
Residential Gateway
</TABLE>
37
<PAGE>
The following are descriptions of several of the target applications for our
voice over packet products:
Edge switch. An edge switch manages the processing and delivery of data
between two different types of networks.
Router. A router is a device that resides between network segments and
forwards data to its appropriate destination.
Multi-service platform. Multi-service platform refers to communications
infrastructure equipment which aggregates or processes information for multiple
media applications. For example, a digital loop carrier which accommodates both
voice and DSL communications, could be considered a multi-service platform.
Private branch exchange. A private branch exchange is a computer server
which manages telephone calls typically in a medium to large size business.
Remote access server. A remote access server is a general term for a
computer that makes its data available to other computers through a network
connection.
Home Networking
We have near-term plans to offer products for the home networking market.
Home networking allows multiple users to share high bandwidth resources
throughout the home. This provides consumers with cost savings from sharing
hardware, software and high speed Internet access and allows a broader range of
home computing applications as well as increased convenience. Emerging home
networking technologies include the Home Phoneline Networking Association or
HPNA standard, which uses the existing telephone wiring of a home, and other
standards based on wireless technology. These solutions eliminate the need to
add additional network wiring throughout the home.
<TABLE>
<CAPTION>
Introduction
Product Key Features Target Applications Date
<C> <S> <C> <C>
HPNA--PCI Compliance with the HPNA standard PCI card for personal 2nd half 2000
PCI or Mini-PCI interfaces computers and laptops
Mini-PCI card for notebook
</TABLE>
Technology
Our primary competitive advantage is found in our technology expertise in
several key areas. These areas of expertise include our system-level knowledge,
our programmable DSP core, our signal processing algorithms, our digital chip
design capability, our mixed-signal chip design capability and our system-level
software. Together, these capabilities have enabled us to provide system-level
communications products which have:
. flexibility due to programmability;
. low power consumption; and
. small size.
System-level knowledge. Most of our system-level engineers have previous
experience as employees of communication equipment manufacturers and are
therefore very familiar with the requirements of and challenges faced by our
customers. We combine this system-level engineering expertise with our
expertise in integrated circuit, DSP, algorithm, and software design to develop
products that allow our customers to optimize time-to-market, performance, and
systems cost.
Software programmable DSP core. A cornerstone of our technology is our
internally developed, software programmable DSP core. A digital signal
processor, as it relates to communications applications, encodes
38
<PAGE>
digital data for transmission over bandwidth limited media such as copper
telephone lines, and recovers the encoded data at the receiving end. Our DSP is
optimized for communications applications and provides high processing
bandwidth with low power requirements. This DSP can be programmed for several
different applications such as DSL, voice over packet and home networking. We
currently use this core technology in every product line that is being
developed within our company. This DSP technology gives us the advantage of
field programmability and upgradability of devices for future standards.
Signal processing algorithms. A key component of our continued success is
the expertise that we have developed in the areas of communications algorithms.
Communications algorithms are the processes and techniques used to transform a
digital data stream into a specially-conditioned analog signal suitable for
transmission across copper telephone wires. Our signal processing engineers,
many of whom are PhDs, have a thorough understanding of and practical
experience in the process of transmitting and receiving a digital data stream
in analog form. We also have significant experience developing algorithms which
enable voice compression, echo cancellation and telephony signal processing.
This expertise has allowed our engineers to design highly efficient algorithms
which enable us to produce high performance, reprogrammable and low power
consuming products.
Digital chip design. We have digital chip design experts with many years of
experience in the area of high complexity and high speed digital chip
development. We perform both the logic design and the physical layout design
for our products. All of our chips are designed and manufactured using the
latest development tools and silicon process technologies. This design
expertise has enabled us to develop our high performance, low power consuming
digital chips.
Mixed-signal chip design. Our team of analog engineers has developed
numerous analog circuits for the communications industry and has substantial
experience in signal conversion techniques. This experience has enabled us to
develop our mixed-signal chip. This mixed-signal chip performs the functions of
the analog front end, which translates signals between analog and digital
formats. We believe our analog front end device contains the highest level of
integration in the industry, replacing the multiple components used in
competing DSL solutions and also supporting multiple telephone lines for DSL
infrastructure products.
System software. Our software engineers have expertise in developing code
that addresses the needs of network equipment manufacturers and service
providers. Our knowledge of network operation and architectures allows us to
write software that ensures that our products are interoperable with
communications equipment vendors' products. In addition, our understanding of
various operating systems and personal computer environments allows us to
create software that provides for simple installation and operation.
39
<PAGE>
Customers
We sell our products to broadband access equipment vendors. We have either
shipped products in significant volumes to or secured a design win with the
companies listed below. We count a design win after a company has purchased one
of our reference designs, sampled our products, and informed us of its
intention to purchase our product for use in one of their products.
<TABLE>
<S> <C> <C>
Market Sectors Company
DSL Infrastructure Accelerated Networks* NEC
Advanced Fibre Communications MediaLink Communications
Copper Mountain Networks Mitsubishi Electric
Interspeed* Promatory Communications
LG Information and Sumitomo Electric Industries
Communications
Lucent Technologies Sungmi Telecom Electronics
- ---------------------------------------------------------------------------------------
DSL Customer Askey Computer GVC*
Premises Equipment Aztech Systems* NEC
CIS Technology Sumitomo Electric Industries
Creative Technologies
</TABLE>
Companies designated by an asterisk (*) are customers with whom we have a
design win, but to whom we have not yet shipped products for production of
their products.
For the year ended December 31, 1999, Sumitomo Electric Industries and NEC
were our largest customers and accounted for 34.4% and 21.1%, respectively, of
our total revenue.
Sales and Marketing
Our sales and marketing strategy is to achieve design wins with technology
leaders in each of our targeted broadband communications markets by, among
other things, providing superior application and engineering support. We
believe that providing comprehensive product service and support is critical to
shortening our customers' design cycles and maintaining a competitive position
in our targeted markets. We market and sell our products through our direct
sales force and through our independent manufacturers' representatives. Our
sales managers are dedicated to principal customers to promote close
cooperation and communication. Representatives support the sales managers by
providing leads, nurturing customer relationships, closing design wins and
securing customer orders.
We manage a number of marketing programs designed to communicate our
capabilities and benefits to broadband access equipment manufacturers. Our Web
site is an important marketing tool where a wide range of information is
available including product information, white papers, application notes, press
releases, and contributed articles. In addition, we participate in industry
trade shows, technical conferences and technology seminars, conduct press tours
and publish technical articles in industry journals.
Research and Development
We have assembled a core team of experienced engineers and technologists,
many of whom are leaders in their particular field or discipline. As of January
31, 2000, we had 74 research and development employees. These employees are
involved in advancing our core technologies, as well as applying these core
technologies to product development activities in our targeted markets.
We believe that the achievement of higher levels of integration,
functionality and performance and the introduction of new products in our
target markets is essential to our growth. As a result, we plan to increase
research and development staffing levels in 2000 and 2001. Research and
development expense for 1998 and 1999 was approximately $7.9 million and $11.6
million respectively.
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<PAGE>
Operations and Manufacturing
We outsource the fabrication, assembly and testing of our semiconductor
devices. This fabless model allows us to focus our resources on the design,
development and marketing of our products. We manage the production of our
chips through our operations and manufacturing services group which is
comprised of six functions. These functions include technology engineering,
analog test engineering, digital test engineering, quality and reliability,
manufacturing and information systems and facilities.
We source our semiconductor fabrication from three of the world's largest
foundries: Mitsubishi Electric, United Microelectronics Corporation and Taiwan
Semiconductor Manufacturing Corporation. Our manufacturing strategy is to
qualify and utilize multiple facilities within a given foundry partner for the
fabrication of a given semiconductor device. This second source strategy seeks
to ensure production and performance consistency which is critical for our
products while maintaining multiple channels of supply.
The primary vendor for the assembly and testing of our products is ST
Assembly Test Services. We have qualified and utilized other vendors as a
second source for the packaging and testing of our products. Amkor/Anam Group
and Siliconware Precision Industries Company, Limited provide additional
assembly services and additional testing services are provided by Digital
Testing Services and Advanced Semiconductor Engineering.
Competition
Although we produce system-level products, we primarily compete with vendors
of semiconductor devices for the DSL market. We believe that the principal
factors of competition for semiconductor vendors to these markets are product
capabilities, level of integration, performance and reliability, power
consumption, price, time-to-market, system cost, intellectual property,
customer support and reputation. We believe we compete favorably with respect
to each of these factors.
We compete with a number of major domestic and international suppliers of
semiconductors for both DSL central office and customer premises equipment and
with suppliers of semiconductors for equipment enabling voice over packet. Our
principal competitors that supply semiconductors for the DSL market include
Alcatel Microelectronics, Analog Devices, Conexant Systems, GlobeSpan, Lucent
Microelectronics, ST Microelectronics and Texas Instruments.
Many of our competitors operate their own fabrication facilities and have
longer operating histories and presence in key markets, greater name
recognition, access to larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and
other resources than us. As a result, our competitors may be able to adapt more
quickly to new or emerging technologies and changes in customer requirements or
devote greater resources to the promotion and sale of their products than us.
Current and potential competitors have established or may establish financial
or strategic relationships among themselves or with existing or potential
customers, resellers or other third parties. Accordingly, it is possible that
new competitors or alliances among competitors could emerge and rapidly acquire
significant market share. In addition, our competitors may in the future
develop technologies that more effectively address the transmission of digital
information through existing analog infrastructures at a lower cost. We cannot
assure you that we will be able to compete successfully against current or
potential competitors, or that competition will not have a material adverse
effect on our business, financial condition and results of operations.
Intellectual Property
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property law, nondisclosure agreements and other protective
measures to protect our proprietary rights. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect
our trade secrets and know-how. To date, we have been granted two U.S. patents
and have an additional 12 U.S. patent applications pending and one additional
international patent application pending.
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Although we employ a variety of intellectual property in the development and
manufacturing of our products, we believe that none of such intellectual
property is individually critical to our current operations. However, taken as
a whole, we believe our intellectual property rights are significant and that
the loss of all or a substantial portion of such rights could have a material
adverse effect on our results of operations. There can be no assurance that our
intellectual property protection measures will be sufficient to prevent
misappropriation of our technology. In addition, the laws of many foreign
countries do not protect our intellectual properties to the same extent as the
laws of the United States. From time to time, we may desire or be required to
renew or to obtain licenses from others in order to further develop and market
commercially viable products effectively. There can be no assurance that any
necessary licenses will be available on reasonable terms.
In December 1999 we entered into a license agreement with MIPS Technologies
to use their core processor. None of our products currently shipping use the
MIPS core processor, however we plan to use the MIPS core processor in several
of our future products.
Employees
As of January 31, 2000, we had a total of 127 employees, of whom 79 are
engineers. Twenty-three of our employees have advanced degrees including 11
PhDs. None of our employees is represented by a labor union. We have not
experienced any work stoppages, and we consider our relations with our
employees to be good. Our future performance depends in significant part upon
the continued service of our key personnel, none of whom is bound by an
employment agreement requiring service for any definite period of time. Our
future success also depends on our continued ability to attract, integrate,
retain and motivate highly qualified sales, technical and managerial personnel.
Competition for such qualified personnel is intense. See "Risk Factors--
Competition for qualified personnel in our industry is intense, and if we are
not successful in attracting these personnel, our business would be harmed."
Facilities
Our principal executive and corporate offices are located in Fremont,
California, in approximately 40,000 square feet of leased office space under a
lease that expires in April 2004. In addition, under this lease we have the
option to lease an additional 17,500 square feet. We also have an option to
extend the term of this lease for an additional 5 years, through April 2009. We
believe our space is adequate for our current operations and that additional
leased space can be obtained on commercially reasonable terms if needed.
Legal Proceedings
We are not currently a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to our
executive officers and directors as of February 15, 2000.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Faraj Aalaei........................ 38 Chief Executive Officer and Director
Shahin Hedayat...................... 39 President and Director
Vice President and Chief Financial
John W. Luhtala..................... 57 Officer
Surendra B. Mandava................. 42 Vice President, Engineering
Jon S. Sherburne.................... 49 Vice President, Worldwide Sales
William F. Mackenzie................ 33 Vice President, Operations
Kamran Elahian(1)................... 45 Director and Chairman of the Board
Irwin Federman(1)................... 64 Director
Robert C. Hawk(2)................... 60 Director
Lip-Bu Tan(2)....................... 40 Director
</TABLE>
- ---------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Faraj Aalaei is our Chief Executive Officer and one of our co-founders. Mr.
Aalaei served as our Vice President, Marketing and Business Development, from
our inception in February 1997 until January 2000, when he was named Chief
Executive Officer. Prior to helping found our company, Mr. Aalaei was the
Director of Access Products at Fujitsu Network Communications, Inc., a designer
and manufacturer of fiber-optic transmission and broadband switching platforms,
from October 1993 to March 1997. Mr. Aalaei also designed advanced
telecommunications products at AT&T Bell Laboratories, a telecommunications
company, from May 1985 to October 1993. Mr. Aalaei received a B.S. in
Electrical Engineering from Wentworth Institute of Technology, an M.S. in
Electrical Engineering from the University of Massachusetts and an M.B.A. from
the University of New Hampshire.
Shahin Hedayat is our President and one of our co-founders. Mr. Hedayat
served as our Vice President, Engineering, Chief Technical Officer and a
Director from our inception in February 1997 until January 2000, when he was
named President. Mr. Hedayat has more than 15 years experience in the
semiconductor industry. From September 1985 to February 1997, Mr. Hedayat held
various positions at Cirrus Logic, including Vice President of Engineering for
Computer Telephony products. He was the architect of V.32bis and V.34 products,
which achieved multi-million unit shipments. Mr. Hedayat holds six U.S.
patents. Mr. Hedayat holds a B.S. and an M.S. in Electrical Engineering from
the University of Michigan at Ann Arbor.
John W. Luhtala joined us as Vice President and Chief Financial Officer in
December 1999. Prior to joining Centillium, Mr. Luhtala was Senior Vice
President of Operations and Chief Financial Officer at Santa Cruz Operations
(SCO), a $223-million supplier of UNIX operating systems. Prior to SCO, Mr.
Luhtala was Chief Financial Officer and Vice President of Mergers,
Acquisitions, and Joint Ventures for SyQuest Technology, a $300-million
manufacturer of removable cartridge disk drives. Before SyQuest, Mr. Luhtala
spent nine years with Amdahl Corporation in various financial management
positions, including International Treasury Manager, Director of Finance for
Amdahl France, Assistant Controller, and Director of Finance for Compatible
Systems. Prior to Amdahl, Mr. Luhtala held various international and domestic
management positions with Sensormatic Electronics, US Leasing International,
and Richardson-Vicks. Mr. Luhtala holds a B.A. from Bradley University, a J.D.
from New York University and an M.B.A. from Stanford University.
Surendra B. Mandava is one of our co-founders, and has served as our Vice
President, Engineering, since December 1999. He had served as our Director of
Design Engineering since we commenced operations in February 1997. From
November 1992 to February 1997, Mr. Mandava held various positions at Cirrus
Logic,
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<PAGE>
including Manager, Integrated Circuit Design. Mr. Mandava holds a M.S. in
Electrical Engineering from the Indian Institute of Technology and a B.S. in
Electronics & Communications from the Regional Engineering College in Trichy,
India.
Jon S. Sherburne has served as our Vice President for Worldwide Sales since
September 1999. Prior to joining Centillium, Mr. Sherburne was Vice President
of Worldwide Sales at Maker Communications, Inc. Jon Sherburne joins Centillium
after spending the last two years with Maker Communications, a manufacturer of
semiconductor ICs for communications equipment. Prior to Maker, Mr. Sherburne
spent nine years with VLSI Technology in various positions, including Director
of Apple Worldwide Sales, Vice President of North American Computer and
Government Sales and Technology Centers, and Vice President of Western U.S.
Sales and Technology Centers. Prior to VLSI, Sherburne held various management
and engineering positions at Advanced Micro Devices and Texas Instruments.
William F. Mackenzie has served as our Vice President, Operations and
Manufacturing Services since May 1998. Mr. Mackenzie was Corporate Director of
Customer Quality and Reliability Systems at LSI Logic from March 1996 to May
1998 and worked at LSI Canada as Director of Operations from August 1990 to
March 1996. Mr. Mackenzie also served as Manager of Process Engineering,
Motorola Semiconductors, Inc. in Scotland. Mr. Mackenzie holds a B.Sc. (Hon.)
in Applied Physics from the University of Strathclyde in Scotland.
Kamran Elahian is one of our co-founders and has served as our Chairman of
the Board since our inception in February 1997. Mr. Elahian has co-founded
several Silicon Valley companies since 1981, including CAE Systems, Inc., a
computer-aided engineering software company, Cirrus Logic Inc., a semiconductor
company, and Momenta Corporation, a pen-based computer company. In addition to
his duties as Chairman of the Company, Mr. Elahian is the Chairman of NeoMagic
Corporation, a semiconductor company, Chairman of PlanetWeb, Inc., an Internet
software company, and Chairman of Schools Online, a not for profit company. Mr.
Elahian holds a B.S. in Computer Science, a B.S. in Mathematics and an M.E. in
Computer Graphics from the University of Utah.
Irwin Federman has served on our Board of Directors since May 1998. Mr.
Federman has been a general partner of U.S. Venture Partners, a venture capital
firm, since April 1990. Mr. Federman serves on the boards of directors of
SanDisk Corporation, a solid-state storage system company, Komag, Inc., a
storage media manufacturer, MMC Networks, Inc., a network system component
company, Netro Corporation, a wireless communication equipment company,
CheckPoint Software Technologies, Ltd., a network security software company,
QuickLogic Corporation, a semiconductor company, and several privately-held
companies. He holds a B.S. in Economics from Brooklyn College and an honorary
Doctorate of Engineering Science from Santa Clara University.
Robert C. Hawk has served on our Board of Directors since November 1997. Mr.
Hawk is President of Hawk Communications, Inc., a telecommunications company,
and recently retired as President and Chief Executive Officer of U.S. West
Multimedia Communications, Inc., where he headed the cable, data and telephone
communications business from 1985 to 1996. Previously, he was President of the
Carrier Division of U.S. West. Mr. Hawk also served as Vice President of
Marketing and Strategic Planning for CXC Corporation, and as a director of
Advanced Systems Development for AT&T/American Bell, a telecommunications
company. Mr. Hawk currently serves on the boards of Xylan Corporation, PairGain
Technologies, Inc., Premisys Communications, Concord Communications, and
Radcom, Inc. Mr. Hawk holds a B.A. in Business Administration from the
University of Iowa and an M.B.A. from the University of San Francisco.
Lip-Bu Tan has served on our Board of Directors since April 1997. Since
1984, Mr. Tan has been a General Partner of the Walden Group and Chairman of
Walden International Investment Group. Mr. Tan is currently a director of
Creative Technologies Ltd., MediaRing.com, Inc., Integrated Silicon Solutions,
Inc., and several privately-held companies. Mr. Tan holds a B.S. in Physics
from Nanyang University, Singapore, an M.S. in Nuclear Engineering from the
Massachusetts Institute of Technology and an M.B.A. from the University of San
Francisco.
44
<PAGE>
Board of Directors
Our board of directors currently consists of six members. Each director
holds office until his or her term expires or until his or her successor is
duly elected and qualified. Upon completion of this offering, our amended and
restated certificate of incorporation and bylaws will provide for a classified
board of directors. In accordance with the terms of our certificate, our board
of directors will be divided into three classes whose terms will expire at
different times. The three classes will be comprised of the following
directors:
. Class I consists of Robert C. Hawk and Irwin Federman, who will serve
until the annual meeting of stockholders to be held in 2001;
. Class II consists of Kamran Elahian and Lip-Bu Tan, who will serve until
the annual meeting of stockholders to be held in 2002; and
. Class III consists of Faraj Aalaei and Shahin Hedayat, who will serve
until the annual meeting of stockholders to be held in 2003.
At each annual meeting of stockholders beginning with the 2001 annual
meeting, 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 and until their successors have been duly
elected and qualified. 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 an equal number of directors.
Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Irwin Federman and Kamran Elahian. The audit
committee reviews our internal accounting procedures, consults with and reviews
the services provided by our independent accountants and makes recommendations
to the board of directors regarding the selection of independent accountants.
The compensation committee consists of Lip-Bu Tan and Robert Hawk. The
compensation committee reviews and recommends to the board of directors the
salaries, incentive compensation and benefits of our officers and employees and
administers our stock plans and employee benefit plans.
Compensation Committee Interlocks and Insider Participation
Our board of directors established the compensation committee in April 1999.
Prior to establishing the compensation committee, our board of directors as a
whole performed the functions delegated to the compensation committee. No
member of our compensation committee has served as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee. Since the formation of the compensation committee, none
of its members has been our officer or employee.
Director Compensation
Effective upon the closing of this offering, our non-employee directors will
be eligible to receive grants of options to purchase our common stock pursuant
to a fixed formula under our 1997 Stock Plan, as amended. Upon the closing of
this offering, each current non-employee director will automatically receive an
option to purchase 20,000 shares of our common stock. Each individual that
becomes a non-employee director following this offering will be granted an
option to purchase 20,000 shares of our common stock on the date that such
person becomes a director. The shares subject to each of these options will
vest and become fully exercisable in equal annual installments over a four year
period following the date of grant. Additionally, beginning at our annual
meeting of stockholders to be held in 2001 and at each successive annual
stockholder meeting, each non-employee director who has previously served at
least six consecutive months prior thereto will receive an option to purchase
5,000 shares of our common stock. The shares subject to each of these options
will fully vest and become fully exercisable on the first anniversary of the
date of grant.
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<PAGE>
following the date of grant. The exercise price per share for all options
automatically granted to directors under our 1997 Stock Plan, as amended, will
be equal to the market price of our common stock on the date of grant and will
have a ten year term, but will generally terminate within a specified time
following the date the option holder ceases to be a director or consultant.
Employee directors are eligible to participate in our 2000 Employee Stock
Purchase Plan and to receive discretionary grants under our 1997 Stock Plan, as
amended.
Executive Compensation
Summary Compensation Table
The following table sets forth information regarding compensation for the
fiscal year ended December 31, 1999 that we paid for services rendered by our
current Chief Executive Officer, our other executive officers who earned more
than $100,000 during 1999 and our former Chief Executive Officer.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
---------------- ------------
Securities
Underlying
Name and Principal Position Salary Bonus Options
- --------------------------- -------- ------- ------------
<S> <C> <C> <C>
Faraj Aalaei(1)................................... $144,139 $20,000 --
Chief Executive Officer
Shahin Hedayat.................................... $145,022 -- --
President
William F. Mackenzie.............................. $148,822 -- 30,000
Vice President, Operations
Surendra B. Mandava............................... $127,771 -- --
Vice President, Engineering
Travis White(2)................................... $275,000 -- --
Former Chief Executive Officer
</TABLE>
- ---------------------
(1) Mr. Aalaei became our Chief Executive Officer in January 2000. All
information in this table relates to compensation paid to Mr. Aalaei during
1999 for his services as Vice President, Marketing and Business
Development.
(2) Mr. White was our Chief Executive Officer from April 1998 through January
2000. All information in this table relates to compensation paid to Mr.
White during 1999 for his services as Chief Executive Officer.
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<PAGE>
Option Grants in 1999
During 1999 we granted options to purchase an aggregate of 2,106,600 shares
of our common stock to our employees, directors and consultants. All options
were granted under our 1997 Stock Plan at exercise prices equal to the fair
market value of our common stock on the date of grant, as determined in good
faith by our board of directors.
Of the executive officers named in the table above, only Mr. Mackenzie
received a grant of options during 1999. The following table sets forth
information relating to Mr. Mackenzie's grant, including the potential
realizable value of the grant at the end of the option term assuming that the
fair market value of our common stock appreciates at assumed rates of 5% and
10% over the option term. The assumed 5% and 10% rates of stock price
appreciation are provided in accordance with rules of the SEC and do not
represent our estimate or projection of our future common stock price.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of
Securities Options Stock Appreciation
Underlying Granted to Exercise for Option Term
Option Employees Price Expiration ---------------------
Name Grant During 1999 Per Share Date 5% 10%
- ---- ---------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William F. Mackenzie.... 30,000 1.4% $1.60 8/12/09 $30,187 $76,500
</TABLE>
Aggregate Option Exercises in 1999 and Option Values at December 31, 1999
The following table sets forth information concerning stock options held by
the executive officers named in the summary compensation table above at
December 31, 1999. The value of unexercised in-the-money options is based on a
value of $3.00 per share, the fair market value of our common stock at December
31, 1999, as determined by our board, less the per share exercise price. All
options were granted under our 1997 Stock Plan.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options at
at December 31, 1999 December 31, 1999
Shares Acquired Value ------------------------------------ -------------------------
On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
--------------- -------- ----------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William F. Mackenzie.... 65,625 -- 117,500 -- $ 305,500 --
21,875
Travis White............ 150,000 -- 506,757 -- $1,317,569 --
125,000
</TABLE>
The shares acquired by Messrs. Mackenzie and White during 1999 upon exercise
of options are subject to repurchase options by us which lapse as the shares
vest. There was no value realized by Messrs. Mackenzie or White upon exercise
of these options because the fair market value on the date of exercise had not
changed from the fair market value on the date of grant, as determined by our
board.
All options issued under our 1997 Stock Plan to our executive officers are
immediately exercisable upon grant, although the shares issued upon exercise
are subject to our right to repurchase them, which right lapses over time as
the shares vest. Therefore, all options held by Messrs. Mackenzie and White as
of December 31, 1999 were exercisable, subject to our repurchase option.
Benefit Plans
1997 Stock Plan
Our 1997 Stock Plan was adopted by the board of directors and our
stockholders in March 1997. In July 1997, the 1997 Stock Plan was amended to
increase the number of shares of common stock available for issuance under the
plan from 1,000,000 to 2,000,000. In March 1998, the 1997 Stock Plan was
amended to further increase the number of shares of common stock available for
issuance under the plan to 2,930,257. In
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<PAGE>
May 1998, the 1997 Stock Plan was amended to further increase the number of
shares of common stock available for issuance under the plan to 5,430,257. The
1997 Stock Plan was further amended in December 1999 to increase the number of
shares available for issuance under the plan to 6,930,257 shares.
As of December 31, 1999, options to purchase an aggregate of 3,390,257
shares were outstanding, 2,190,098 shares of common stock had been purchased
pursuant to exercises of stock options and stock purchase rights and 1,353,652
shares were available for future grant.
In February 2000, our board of directors amended and restated the 1997 Stock
Plan to:
. Increase the number of shares of common stock available for issuance
under the plan to 10,000,000;
. Provide for the number of shares available for issuance under the plan
to be increased annually, on the first day of our fiscal year beginning
2001, by an additional amount equal to the lesser of 3.0 million shares,
5.0% of the number outstanding shares of common stock on the date of the
annual increase, or a lesser amount determined by our board of
directors; and
. Provide for the automatic grants of stock options to non-employee
directors. See "Management-- Board of Directors--Director Compensation."
We expect to our stockholders to approve these amendments in March 2000.
Our 1997 Stock Plan provides for the grant of incentive stock options (as
defined in Section 422 of the Internal Revenue Code) to employees and
nonstatutory stock options and stock purchase rights to employees, directors
and consultants. This plan may be administered by the board of directors or a
committee appointed by the board. The committee may make final and binding
determinations regarding the terms and conditions of the awards granted,
including the exercise price, the number of shares subject to the award and the
exercisability thereof, forms of agreement for use under the plan and
interpretation of plan terms.
The committee determines the exercise price of options granted under the
1997 Stock Plan, but with respect to non statutory stock options intended to
qualify as "performance based compensation" within the meaning of 162(m) of the
Internal Revenue Code, and all incentive stock options the exercise price must
at least equal the fair market value of our common stock on the date of grant.
However, for any employee holding more than 10% of the voting power of all
classes of our stock, the exercise price will be no less than 110% of the fair
market value. The committee determines the term of options granted under the
1997 Stock Plan, except the term of incentive stock options may not exceed ten
years
An optionee whose relationship with us or any related corporation ceases for
any reason, other than death or total and permanent disability, may generally
exercise options in the three-month period following such cessation, unless
such options terminate or expire sooner. The three-month period is generally
extended to twelve months for terminations due to death or total and permanent
disability. In the event of our merger with or into another corporation or the
sale of substantially all of our assets, the successor company may either
assume or substitute outstanding options or stock purchase rights. If any
options stock purchase rights are not assumed or substituted, the committee
will provide notice to each optionee that he or she has the right to exercise
the option, or stock purchase right as to all shares subject to the option or
stock purchase right for a period of 15 days from the date of such notice. The
1997 Stock Plan will terminate in 2010, unless sooner terminated by the board
of directors.
The price to be paid for the shares granted pursuant to stock purchase is
determined by the committee. We are generally granted a repurchase option
exercisable on the voluntary or involuntary termination of the purchaser's
employment with us for any reason, including death or disability. The
repurchase price shall be the original purchase price paid by the purchaser.
The repurchase option shall lapse at a rate determined by the committee. Once
the stock purchase right has been exercised, the purchaser shall have the
rights equivalent to those of a stockholder.
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<PAGE>
Automatic option grants to non-employee directors. The 1997 Stock Plan
generally provides for an automatic initial grant of an option to purchase
20,000 shares of our common stock to each person who first becomes a non-
employee director on or after the effective date of this offering. After the
initial grant, each non-employee director will automatically be granted
subsequent options to purchase 5,000 shares of our common stock each year on
the date of our annual stockholder's meeting, if on such date he or she has
served on our board of directors for at least six months. Each initial option
grant and each subsequent option grant shall have a term of 10 years. Each
initial option grant will fully vest in equal annual installments over the four
year period from the grant date, and each subsequent option grant will fully
vest on the first anniversary of the grant date. The exercise price of all
options will be 100% of the fair market value per share of our common stock on
the date of grant.
2000 Employee Stock Purchase Plan
Our board of directors adopted our 2000 Employee Stock Purchase Plan in
February 2000. This plan provides our employees with an opportunity to purchase
our common stock through accumulated payroll deductions. A total of 500,000
shares of common stock has been reserved for issuance under the purchase plan.
In addition, the purchase plan provides for annual increases in the number of
shares available for issuance under the purchase plan on the first day of each
fiscal year, beginning in 2001, equal to the lesser of 1% of the outstanding
shares of common stock on the first day of the fiscal year or 400,000 shares or
such lesser amount as may be determined by the board. The board of directors or
a committee appointed by the board administers the purchase plan. The board or
its committee has full and exclusive authority to interpret the terms of the
purchase plan and determine eligibility.
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 an employee:
. immediately after grant owns stock possessing five percent 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 which exceeds $25,000 worth of stock for each
calendar year.
Our purchase plan is intended to qualify under Section 423 of the Internal
Revenue Code and contains consecutive six month offering periods. The offering
periods generally start on the first trading day on or after May 1 and November
1 of each year, except for the first such offering period which commences on
the first trading day on or after the effective date of this offering and ends
on the last trading day on or after October 31, 2000.
The purchase plan permits participants to purchase common stock through
payroll deductions of up to 10.0% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions but excludes payments for overtime, shift premium payments,
incentive compensation, incentive payments, bonuses and other compensation. The
maximum number of shares a participant may purchase during a single offering
period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the purchase plan is generally 85% of the lower of the fair
market value of the common stock (i) at the beginning of the offering period or
(ii) at the end of the offering period. Participants may end their
participation at any time during an offering period, and they will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with us.
A participant may not transfer rights granted under the purchase plan other
than by will, the laws of descent and distribution or as otherwise provided
under the purchase plan.
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<PAGE>
The purchase plan provides that, if we merge with or into another
corporation or sell substantially all of our assets, the successor corporation
will assume or substitute for each outstanding purchase right. If the successor
corporation refuses to assume or substitute for the outstanding purchase
rights, the offering period then in progress will be shortened, and a new
exercise date will be set.
The purchase plan will terminate in 2010. However, the board of directors
has the authority to amend or terminate the purchase plan, except that, subject
to some exceptions described in the purchase plan, no such action may adversely
affect any outstanding rights to purchase stock under the purchase plan.
401(k) Plan
In March 1997, we adopted a 401(k) Profit Sharing Plan and Trust covering
our eligible employees. The 401(k) Profit Sharing Plan and Trust excludes
nonresident alien employees. The 401(k) Profit Sharing Plan and Trust is
intended to qualify under Section 401(k) of the Internal Revenue Code, so that
contributions to the 401(k) Profit Sharing Plan and Trust by employees or by us
and the investment earnings thereon are not taxable to the employees until
withdrawn. If our 401(k) Profit Sharing Plan and Trust qualifies under Section
401(k) of the United States tax code, our contributions will be deductible by
us when made. Our employees may elect to reduce their current compensation by
up to the statutorily prescribed annual limit of $10,500 in 2000 and to have
those funds contributed to the 401(k) Profit Sharing Plan and Trust. The 401(k)
Profit Sharing Plan and Trust permits us, but does not require us, to make
additional matching contributions on behalf of all participants. To date, we
have not made any contributions to the 401(k) Profit Sharing Plan and Trust.
Limitations on Liability and Indemnification
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 the following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by 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 officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification. We have entered
into agreements to indemnify our directors, executive officers and controller,
in addition to indemnification provided for in our bylaws. These agreements,
among other things, provide for indemnification of our directors and executive
officers for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by or in our rights, arising out of such person's services
as a director or executive officer to us, any of our subsidiaries or any other
company or enterprise to which the person provides services at our request. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
50
<PAGE>
RELATED PARTY TRANSACTIONS
Sales of Stock
Since our inception in February 1997, we have issued and sold shares of our
capital stock in private placement transactions as follows:
. 8,000,000 shares of restricted common stock at a price of $0.001 per
share in February 1997;
. 1,680,000 shares of Series A preferred stock at a price of $0.50 per
share in April 1997;
. 500,000 shares of Series B1 preferred stock at a price of $2.00 per
share in September 1997;
. 1,500,000 shares of Series B1 preferred stock at a price at $2.00 per
share in June 1998;
. 800,000 shares of Series B2 preferred stock at a price of $2.50 per
share;
. 972,250 shares of Series B3 preferred stock at $4.00 per share in July
1997;
. 1,151,482 shares of Series B3 at a price of $4.00 per share in September
1997;
. 1,127,000 shares of Series B3 preferred stock at a purchase price of
$4.00 per share in October 1997;
. 108,750 shares of Series B3 preferred stock at a price of $4.00 per
share in April 1998;
. 7,610,754 shares of Series C preferred stock at a price of $5.00 per
share in April 1999;
All shares of preferred stock will convert into common stock on a 1-for-1
basis on the closing of this offering. The following table summarizes the
shares of capital stock purchased by executive officers, directors and 5%
stockholders in these private placement transactions, although this table does
not necessarily reflect currently outstanding amounts:
<TABLE>
<CAPTION>
Series A Series B1 Series B2 Series B3 Series C
Common Preferred Preferred Preferred Preferred Preferred
Name of Purchaser Stock Stock Stock Stock Stock Stock
----------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kamran Elahian.......... 1,573,187 -- -- -- -- --
Shahin Hedayat.......... 2,510,493 -- -- -- -- --
Faraj Aalaei............ 1,305,440 -- -- -- -- --
Surendra B. Mandava..... 1,305,440 -- -- -- -- --
Anthony O'Toole......... 1,305,440 -- -- -- -- --
Robert C. Hawk.......... -- -- -- -- -- 15,000
Entities affiliated with
Walden International
Investment Group....... -- 500,000 1,000,000 -- 325,000 550,000
Entities affiliated with
U.S. Venture Partners.. -- 500,000 1,000,000 -- 250,000 550,000
Entities affiliated with
Vertex Management...... -- -- -- 800,000 500,000 380,000
GM Investment Management
Corp................... -- -- -- -- -- 1,600,000
</TABLE>
Affiliated Relationships
Mr. Tan, a member of our board of directors, is affiliated with Walden
International Investment Group. Mr. Federman, a member of our board of
directors, is affiliated with U.S. Venture Partners. Mr. Lee, a member of our
board of directors, is affiliated with Vertex Management.
51
<PAGE>
Grants of Options
From our inception in February 1997 through December 31, 1999, we have
granted options to purchase our common stock to our directors and executive
officers as follows:
<TABLE>
<CAPTION>
Exercise
Date of Number of Price
Name Grant Options Per Share
---- -------- --------- ---------
<S> <C> <C> <C>
Robert C. Hawk.................................. 11/24/97 49,500 $0.40
William F. Mackenzie............................ 6/16/98 175,000 $0.40
8/12/99 30,000 $1.60
Jon Sherburne................................... 10/13/99 215,000 $2.00
John W. Luhtala................................. 12/9/99 175,000 $3.00
</TABLE>
Offers of Employment
John W. Luhtala, our Chief Financial Officer, is party to an offer letter
with us dated November 30, 1999. Under the terms of the offer letter, in the
event that we experience a change in control, following which Mr. Luhtala's
employment is terminated or his duties significantly reduced, the vesting of
Mr. Luhtala's stock options will be accelerated by one year.
Jon S. Sherburne, our Vice President for Worldwide Sales, is party to an
offer letter with us dated August 17, 1999. Under the terms of the offer
letter, in the event we experience a change in control, following which Mr.
Sherburne's employment is terminated or his duties significantly reduced, the
vesting of Mr. Sherburne's stock options will be accelerated by one year.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors
and executive officers. Such indemnification agreements will require us to
indemnify our directors and executive officers to the fullest extent permitted
by Delaware law.
Agreement with Former Chief Executive Officer
Travis White, our former Chief Executive Officer, resigned from our company
in January 2000. In connection with the termination of Mr. White's employment
relationship with us, we entered into an Agreement and Mutual Release with Mr.
White on February 2, 2000. Under the terms of the agreement, in exchange for a
release by Mr. White of all potential claims against us, we have agreed to pay
Mr. White a total of $225,000 over the next year. In addition, we agreed to
accelerate the vesting of 295,693 of Mr. White's 506,757 stock options which
were unvested at the time of the termination of his employment. The remaining
211,064 unvested stock options held by Mr. White were canceled.
Future Agreements
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us
and our officers, directors, principal shareholders and their affiliates will
be approved by a majority of the board of directors, including a majority of
the independent, disinterested outside directors on the board of directors, and
will be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of December 31, 1999 and as
adjusted to reflect the sale of common stock offered hereby by the following:
. each stockholder known by us to own beneficially more than 5% of our
common stock;
. each of our executive officers named in the compensation table above;
. each of our directors; and
. all directors and executive officers as a group.
As of December 31, 1999, there were 25,769,077 shares of our common stock
outstanding, assuming that all outstanding preferred stock has been converted
into common stock. Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed below, on the information
furnished by such owners, have sole voting power and investment power with
respect to such shares. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percent ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after
December 31, 1999 are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percent ownership of any other person.
Unless otherwise indicated in the footnotes below, the persons and entities
named in the table have sole voting and investment power with respect to all
shares beneficially owned, subject to community property laws where applicable.
The address for those individuals for which an address is not otherwise
indicated is Centillium Communications, Inc., 47211 Lakeview Boulevard,
Fremont, CA 94538.
<TABLE>
<CAPTION>
Percentage of Shares
Shares Beneficially Beneficially Owned Percentage of Shares
Name or Group of Owned Prior Prior to the Beneficially Owned
Beneficial Owners to the Offering Offering After the Offering
----------------- ------------------- -------------------- --------------------
<S> <C> <C> <C>
5% Stockholders
Entities affiliated with
Walden Ventures(1)..... 2,375,000 9.2%
750 Battery Street #700
San Francisco, CA 94111
Entities affiliated with
U.S. Venture
Partners(2)............ 2,300,000 8.9%
2180 Sand Hill Road
Menlo Park, CA 04025
Entities affiliated with
Vertex Management(3)... 1,680,000 6.5%
Three Lagoon Drive,
Suite 220
Redwood City, CA 94065
The Chase Manhattan
Bank, as Trustee for
the First Plaza Group
Trust.................. 1,600,000 6.2%
767 Fifth Avenue
New York, NY 10153
Anthony O'Toole(4)...... 1,305,440 5.1%
Directors and Executive
Officers
Shahin Hedayat.......... 2,510,493 9.7%
Kamran Elahian.......... 1,573,187 6.1%
Faraj Aalaei............ 1,305,440 5.1%
Surendra B. Mandava..... 1,305,440 5.1%
Jon Sherburne(5)........ 215,000 0.8%
William F.
Mackenzie(6)........... 205,000 0.8%
John W. Luhtala(7)...... 175,000 0.7%
Robert C. Hawk(8)....... 64,500 0.3%
All directors and
executive officers as a
group (8 persons)...... 7,354,060 28.4%
</TABLE>
53
<PAGE>
- ---------------------
(1) Consists of 1,115,910 shares held by Pacven Walden Ventures III, L.P.,
675,000 shares held by Seed Ventures II, Ltd., 212,727 shares held by Asian
Ventures Capital Investment Corporation, 196,363 shares held by TWG
Investment LDC, 135,000 shares held by O,W&W Investments Ltd., and 40,000
shares held by OCBC, Wearnes & Walden Investments (Singapore) Ltd.
(2) Consists of 2,070,000 shares held by U.S. Ventures V, L.P., 115,000 shares
held by USVP V International, L.P., 62,900 shares held by 2180 Associates
Fund V, L.P., and 52,100 shares held by USVP V Entrepreneur Partners L.P.
(3) Consists of 650,000 shares held by Vertex Technology Fund Pte. Ltd, 650,000
shares held by Vertex Asia Limited, and 380,000 shares held by Vertex
Technology Fund II Limited.
(4) Mr. O'Toole is one of our co-founders, and is also currently one of our
employees.
(5) Consists of shares received on early exercise of stock options. These
shares are subject to a repurchase option by us which lapses as the shares
vest.
(6) Consists of 87,500 shares received on early exercise of stock options,
which shares are subject to a repurchase option by us which lapses as the
shares vest, and an additional 117,500 shares subject to options that are
immediately exercisable subject to a repurchase option by us which lapses
as the shares vest.
(7) Consists of shares subject to options that are immediately exercisable
subject to a repurchase option by us which lapses as the shares vest.
(8) Consists of 49,500 shares received on early exercise of stock options,
which shares are subject to a repurchase option by us which lapses as the
shares vest, and 15,000 shares of Series C preferred stock.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our certificate of incorporation that becomes effective upon the closing of
this offering authorizes the issuance of up to 100,000,000 shares of common
stock, $0.001 par value, and authorizes the issuance of 10,000,000 shares of
undesignated preferred stock, $0.001 par value. From time to time, our board of
directors may establish the rights and preferences of the preferred stock. As
of December 31, 1999, 10,318,841 shares of common stock were issued and
outstanding and held by 135 stockholders, and 15,450,236 shares of preferred
stock were issued and outstanding and held by 164 stockholders. Upon the
closing of this offering, all outstanding shares of preferred stock will
convert into an aggregate of 15,450,236 shares of common stock. The following
description of our capital stock is, by necessity, not complete. We encourage
you to refer to our certificate of incorporation and bylaws, which are included
as exhibits to the registration statement of which this prospectus forms a
part, and applicable provisions of Delaware law for a more complete
description.
Common Stock
Each holder of common stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that may be applicable to any outstanding
preferred stock, holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared time to time by the board of directors
out of funds legally available for that purpose. See "Dividend Policy." In the
event of our liquidation, dissolution or winding up, the holders of common
stock are entitled to share in our assets remaining after the payment of
liabilities and the satisfaction of any liquidation preference granted to the
holders of any outstanding shares of preferred stock. Holders of common stock
have no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable. The
rights, preferences and privileges of the holders of common stock are subject
to, and may be adversely affected by the rights of the holders of shares of any
series of preferred stock that we may designate in the future.
Preferred Stock
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may
be greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; or
. delaying or preventing a change in control of our company without
further action by the stockholders.
Upon the closing of this offering, no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.
Registration Rights of Certain Holders
After this offering, holders of shares of common stock and shares of common
stock issuable upon exercise of outstanding warrants (the "registrable
securities") or their transferees are entitled to certain rights with respect
to the registration of such shares under the Securities Act. These rights are
provided under the terms of an agreement between us and the holders of the
registrable securities. Beginning 180 days following the date of
55
<PAGE>
this prospectus, holders of at least 20% of the registrable securities may
require on no more than two occasions, that we use our best efforts to register
the registrable securities for public resale. We are obligated to register
these shares only if the outstanding registrable securities have an anticipated
public offering price of at least $25,000,000. Also, holders of registrable
securities may require, no more than once during any six-month period, that we
register their shares for public resale on Form S-3 or similar short-form
registration if the value of the securities to be registered is at least
$2,000,000. Furthermore, in the event we elect to register any of our shares of
common stock for purposes of effecting any public offering, the holders of
registrable securities are entitled to include their shares of common stock in
that registration, but we may reduce the number of shares proposed to be
registered in view of market conditions. These registration rights have been
waived with respect to this offering. We will bear all expenses in connection
with any registration, other than underwriting discounts and commissions. All
registration rights will terminate five years following the consummation of
this offering, or with respect to each holder of registrable securities, at
such time as the holder is entitled to sell all of then held shares in any 90-
day period under Rule 144 of the Securities Act.
Certain Charter and Bylaw Provisions and Delaware Law
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the following more difficult:
. our acquisition by a tender offer;
. our acquisition by a proxy contest; or
. the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of us to
first negotiate with our board. We believe that the benefits of increased
protection of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure outweighs the
disadvantages of discouraging such proposals because negotiation of such
proposals could result in an improvement of their terms.
Classified Board
Our board of directors is divided into three classes. The directors in each
class will serve for a three-year term, with our stockholders electing one
class each year. This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us, because it generally makes it more difficult for
stockholders to replace a majority of the directors.
Restrictions on Persons Able to Call Stockholder Meetings
Under our bylaws, only the board of directors, the chairman of the board and
the president may call special meetings of stockholders.
Advance Notification of Stockholder Nominations and Proposals Required
Our bylaws establish advance notice procedures for stockholder proposals and
the nomination of candidates for election as directors, other than nominations
made by or at the direction of the board of directors or a committee of the
board.
Delaware Anti-takeover Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested
56
<PAGE>
stockholder, unless the business combination or the transaction in which the
person became an interested stockholder is approved in a prescribed manner.
Generally, a business combination includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an interested stockholder is a person who, together
with its 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 voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Stockholder Action By Written Consent Eliminated
Our certificate of incorporation eliminates the right of stockholders to act
by written consent without a meeting.
Undesignated Preferred Stock
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change our control.
These and other provisions may have the effect of deferring hostile takeovers
or delaying changes in our control or management.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is .
Nasdaq Stock Market National Market Listing
We have applied to have our common stock quoted on The Nasdaq Stock Market's
National Market under the symbol "CTLM."
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our stock.
Future sales of substantial amounts of our common stock in the public market
following this offering or the possibility of such sales occurring could
adversely affect market prices for our common stock or could impair our ability
to raise capital through an offering of equity securities. Furthermore, since
no shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale as described below, sales of
substantial amounts of our common stock in the public after these restrictions
lapse could adversely affect the prevailing market price and our ability to
raise equity capital in the future.
Upon completion of this offering, we will have shares of common stock
outstanding (assuming conversion of all of the currently outstanding shares of
preferred stock) based on shares outstanding as of and assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options. Of these shares, all of the shares sold in this offering
will be freely transferable without restriction under the Securities Act,
unless these shares are purchased by "affiliates" as that term is used under
the Securities Act and the Regulations promulgated thereunder.
Of these shares, the remaining shares as of , which were sold by
us in reliance on exemptions from the registration requirements of the
Securities Act, are restricted securities within the meaning of Rule 144 under
the Securities Act and become eligible for sale in the public market as
follows:
. no shares will be eligible for immediate sale on the date the
registration statement of which this prospectus is a part is declared
effective;
. no shares will be eligible for sale prior to 180 days from the date the
registration statement of which this prospectus is a part is declared
effective; and
. beginning 181 days after the effective date, shares will become
eligible for sale, subject to the provisions of Rules 144 or 701, upon
the expiration of agreements not to sell such shares entered into
between the underwriters and such stockholders.
Beginning 180 days after the date of this prospectus, approximately
additional shares subject to vested options as of the date of completion of
this offering will be available for sale subject to compliance with Rule 701
and upon the expiration of agreements not to sell such shares entered into
between the underwriters and such stockholders. Any shares subject to lock-up
agreements may be released at any time without notice by the underwriters.
In general, under Rule 144 as currently in effect, a person (or group of
persons whose shares are aggregated), including an affiliate, who has
beneficially owned restricted shares for at least one year is entitled to sell,
within any three-month period commencing 90 days after the date of completion
of this offering, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of common stock (approximately shares
immediately after this offering), or the average weekly trading volume in the
common stock during the four calendar weeks preceding such sale, subject to the
filing of a Form 144 with respect to such sale and certain other limitations
and restrictions. In addition, 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 such shares without regard to the requirements described
above.
Any of our employees, officers or directors of or consultant who purchased
his or her shares prior to the date of completion of this offering or who holds
vested options as of that date pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701, which
permits non-affiliates to sell their Rule 701 shares without having to comply
with the public-information, holding-period, volume-limitation or notice
provisions of Rule 144 and permits affiliates to sell their Rule 701 shares
without having to comply with Rule 144's holding-period restrictions, in each
case commencing 90 days after the date
58
<PAGE>
of completion of this offering.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof.
Our officers, directors and stockholders have agreed that they will not
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, enter into a
transaction which would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of our common stock, whether any such aforementioned
transaction is to be settled by delivery of our common stock or such other
securities, in cash or otherwise, or publicly disclose the intention to make
any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
As soon as practicable after the effective date of the registration
statement of which this prospectus is a part, we intend to file a registration
statement on Form S-8 under the Securities Act to register shares of common
stock issuable under our 1997 Stock Plan and our 2000 Employee Stock Purchase
Plan, thus permitting the resale of such shares by non-affiliates in the public
market without restriction under the Securities Act. Such registration
statement will become effective immediately upon filing.
Prior to this offering, there has been no public market for our common
stock, and any sale of substantial amounts in the open market may adversely
affect the market price of our common stock offered hereby.
59
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000 we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, FleetBoston Robertson
Stephens Inc. and Salomon Smith Barney Inc. are acting as representatives, the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ------
<S> <C>
Credit Suisse First Boston Corporation................................
FleetBoston Robertson Stephens Inc. ..................................
Salomon Smith Barney Inc. ............................................
-----
Total.............................................................
=====
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer part of the shares of common stock
initially at the public offering price set forth on the cover page of this
prospectus and to selling group members at that price less a concession of $
per share. The underwriters and selling group members may allow a discount of
$ per share. After the initial offering of the shares of common stock, the
offering price and concession and discount to brokers, dealers may be changed
by the representatives.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------- -------------------
Without With Without With
Over- Over- Over- Over-
allotment allotment allotment allotment
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us........... $ $ $ $
Expenses payable by us............ $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We and our executive officers, directors and certain other of our security
holders have agreed not to offer, sell, contract to sell, announce an intention
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Securities and Exchange Commission a registration statement under the
Securities Act relating to, any shares of common stock or securities
convertible into or exchangeable or exercisable for any common stock without
the prior written consent of Credit Suisse First Boston Corporation for a
period of 180 days after the date of this prospectus.
60
<PAGE>
The underwriters have reserved for sale, at the initial public offering
price up to shares of the common stock for employees, directors and certain
other persons associated with us who have expressed an interest in purchasing
common stock in this offering. The number of shares available for sale to the
general public in this offering will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the
other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We have applied the shares of common stock quoted on The Nasdaq Stock
Market's National Market under the symbol "CTLM."
We and the underwriters have agreed to indemnify each other against
liabilities, including liabilities under the Securities Act.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include: the information in this
prospectus and otherwise available to the underwriters; the history and the
prospects for the industry in which we will compete; the ability of our
management; the prospects for our future earnings; the present state of our
development and our current financial condition; the general condition of the
securities markets at the time of this offering; and the recent market prices
of, and the demand for, publicly traded common stock of generally comparable
companies.
We cannot be sure that the initial public offering price will correspond to
the price at which the common stock will trade in the public market following
this offering or that on an active trading market for the common stock will
develop and continue after this offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Exchange Act.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
61
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws, (ii) where
required by law, that the purchaser is purchasing as principal and not as
agent, and (iii) the purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or these persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
62
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by Brobeck,
Phleger & Harrison LLP, San Francisco, California. As of the date of this
prospectus, WS Investment Company 97A, an investment partnership composed of
certain current and former members of and persons associated with Wilson
Sonsini Goodrich & Rosati, Professional Corporation beneficially owns 40,500
shares of preferred stock, and Arthur F. Schneiderman, a current member of
Wilson Sonsini Goodrich & Rosati, Professional Corporation owns 109,500 shares
of preferred stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1998 and 1999, and for the
period from February 21, 1997 (inception) through December 31, 1997, and for
the years ended December 31, 1998 and 1999. 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 their authority as
experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.,
a registration statement on Form S-1 under the Securities Act with respect to
the shares of common stock offered hereby. This prospectus does not contain all
the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of the contract or
other document filed as an exhibit to the registration statement, each
statement being qualified in all respects by this reference. A copy of the
registration statement may be inspected by anyone without charge at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of all or any portion of the
registration statement may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
prescribed fees. The Commission maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
63
<PAGE>
CENTILLIUM COMMUNICATIONS, 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........................... F-5
Consolidated Statements of Cash Flows..................................... F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Centillium Communications, Inc.
We have audited the accompanying consolidated balance sheets of Centillium
Communications, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the period from February 21, 1997 (inception) to December 31, 1997 and for
the years ended December 31, 1998 and 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 financial position of Centillium
Communications, Inc. at December 31, 1998 and 1999, and the results of its
operations and its cash flows for the period from February 21, 1997
(inception) to December 31, 1997 and for the years ended December 31, 1998 and
1999, in conformity with accounting principles generally accepted in the
United States.
Ernst & Young LLP
San Jose, California
February 9, 2000
F-2
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
------------------ December 31,
1998 1999 1999
-------- -------- -------------
(Unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 2,816 $ 3,202
Short-term investments....................... 5,110 25,111
Accounts receivable, net of allowance for
doubtful
accounts of $150 in 1999.................... -- 915
Inventories.................................. -- 1,211
Other current assets......................... 257 515
-------- --------
Total current assets....................... 8,183 30,954
Property and equipment, net.................... 3,784 4,531
Other assets................................... 43 102
-------- --------
Total assets............................. $ 12,010 $ 35,587
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities:
Working capital line of credit............... $ -- $ 2,044
Accounts payable............................. 128 810
Accrued payroll and related expenses......... 388 900
Accrued liabilities.......................... 171 325
Deferred revenue............................. 75 122
Capital lease obligations--current portion... 209 160
Current portion of long-term debt............ 526 550
-------- --------
Total current liabilities................ 1,497 4,911
Capital lease obligations--long-term portion... 169 --
Long-term debt................................. 1,066 549
Other liabilities.............................. 19 72
Commitments
Stockholders' equity:
Preferred Stock, $0.001 par value:
Authorized shares--None actual and 10,000,000
pro forma
Issued and outstanding shares--None actual and
pro forma -- -- $ --
Convertible preferred stock, $0.001 par value:
Authorized shares 15,630,000 actual and none
pro forma
Issued and outstanding shares 7,839,482 in
1998,
15,450,236 in 1999, and none pro forma
(aggregate liquidation preference of $58,332
at December 31, 1999)....................... 8 15 --
Common stock, $0.001 par value:
Authorized shares 32,000,000 actual and
100,000,000 pro forma
Issued and outstanding shares 8,505,600 in
1998, 10,318,841 in 1999, and 25,769,077 pro
forma....................................... 9 10 26
Additional paid-in capital..................... 23,540 72,160 72,159
Stockholder notes receivable................... -- (430) (430)
Accumulated other comprehensive income......... -- (25) (25)
Deferred compensation.......................... (324) (9,429) (9,429)
Accumulated deficit............................ (13,974) (32,246) (32,246)
-------- -------- --------
Total stockholders' equity............... 9,259 30,055 $ 30,055
-------- -------- ========
Total liabilities and stockholders'
equity.................................. $ 12,010 $ 35,587
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
Centillium Communications, Inc.
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Period From
February 21, Years Ended
1997 (Inception) December 31,
to December 31, -----------------
1997 1998 1999
---------------- ------- --------
<S> <C> <C> <C>
Product revenues........................... $ $ -- $ 2,509
Technology development revenues............ 300 752 1,235
------- ------- --------
Total revenues......................... 300 752 3,744
Cost of revenues........................... -- -- 2,984
------- ------- --------
Gross profit............................... 300 752 760
Operating expenses:
Research and development................. 1,844 7,884 11,608
Sales and marketing...................... 341 1,461 3,002
General and administrative............... 217 1,060 2,827
Amortization of deferred compensation.... -- 50 2,627
------- ------- --------
Total operating expenses............... 2,402 10,455 20,064
------- ------- --------
Operating loss............................. (2,102) (9,703) (19,304)
Interest income............................ 214 582 1,274
Interest expense........................... (49) (116) (242)
------- ------- --------
Net loss................................... (1,937) (9,237) (18,272)
Deemed dividend on Series B convertible
preferred stock........................... (2,800) -- --
------- ------- --------
Net loss applicable to common
stockholders.............................. $(4,737) $(9,237) $(18,272)
======= ======= ========
Historical basic and diluted net loss per
share applicable to common stockholders... $ (0.59) $ (1.15) $ (2.07)
======= ======= ========
Shares used to compute basic and diluted
net loss per share applicable to common
stockholders.............................. 8,000 8,056 8,842
======= ======= ========
Pro forma basic and diluted net loss per
share applicable to common stockholders... $ (0.84)
========
Shares used to compute pro forma basic and
diluted net loss per share applicable to
common stockholders....................... 21,755
========
</TABLE>
F-4
<PAGE>
Centillium Communications, Inc.
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Convertible Accumulated
Preferred Stock Common Stock Additional Stockholders' Other Total
---------------- ---------------- Paid-In Deferred Notes Accumulated Comprehensive Stockholders'
Shares Amount Shares Amount Capital Compensation Receivable Deficit Income Equity
--------- ------ --------- ------ ---------- ------------ ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash proceeds
from issuance
of common
stock.......... -- $ -- 8,000,000 $ 8 $ -- $ -- $ -- $ -- $ -- $ 8
Cash proceeds
from issuance
of Series A
convertible
preferred
stock, net of
issuance
costs.......... 1,680,000 2 -- -- 817 -- -- -- -- 819
Issuance of
warrants to
purchase Series
B3 convertible
preferred
stock.......... -- -- -- -- 24 -- -- -- -- 24
Issuance of
Series B3
convertible
preferred stock
and associated
rights for cash
and
stockholders
note
receivable, net
of issuance
costs.......... 3,250,732 3 -- -- 12,977 -- (728) -- -- 12,252
Noncash deemed
dividends to
Series B1 and
B2
stockholders... -- -- -- -- 2,800 -- -- (2,800) -- --
Cash proceeds
from exercise
of right to
purchase Series
B2 convertible
preferred
stock, net of
issuance
costs.......... 800,000 1 -- -- 1,993 -- -- -- -- 1,994
Cash proceeds
from exercise
of right to
purchase Series
B1 convertible
preferred
stock, net of
issuance
costs.......... 500,000 1 -- -- 995 -- -- -- -- 996
Exercise of
option to
purchase common
stock for
stockholders'
note
receivable..... -- -- 45,000 -- 18 -- (18) -- -- --
Noncash issuance
of common stock
for services
and other...... -- -- 5,000 -- -- -- -- -- -- --
Net loss and
comprehensive
net loss....... -- -- -- -- -- -- (1,937) -- (1,937)
--------- ---- --------- --- ------- ----- ----- ------- ---- -------
Balance at
December 31,
1997............ 6,230,732 7 8,050,000 8 19,624 -- (746) (4,737) -- 14,156
Cash proceeds
from payments
on
stockholders'
notes
receivable..... -- -- -- -- -- -- 746 -- -- 746
Noncash issuance
of common stock
for services
and other...... -- -- 29,850 -- 15 -- -- -- -- 15
Cash proceeds
from issuance
of Series B3
convertible
preferred
stock, net of
issuance
costs.......... 108,750 -- -- -- 434 -- -- -- -- 434
</TABLE>
F-5
<PAGE>
Centillium Communications, Inc.
Consolidated Statements of Stockholders' Equity--Continued
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Convertible Accumulated
Preferred Stock Common Stock Additional Stockholders' Other
----------------- ------------------ Paid-In Deferred Notes Accumulated Comprehensive
Shares Amount Shares Amount Capital Compensation Receivable Deficit Income
---------- ------ ---------- ------ ---------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
warrants to
purchase Series
B3 convertible
preferred
stock........... -- -- -- -- 11 -- -- -- --
Cash proceeds
from exercise of
rights to
purchase Series
B1 convertible
preferred stock,
net of issuance
costs........... 1,500,000 1 -- -- 2,998 -- -- -- --
Exercise of
options to
purchase common
stock for cash.. -- -- 425,750 1 84 -- -- -- --
Deferred
compensation
related to stock
option grants... -- -- -- -- 374 (374) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 50 -- -- --
Net loss and
comprehensive
net loss........ -- -- -- -- -- -- (9,237) --
---------- --- ---------- --- ------- ------- ----- -------- ----
Balance at
December 31,
1998............. 7,839,482 8 8,505,600 9 23,540 (324) -- (13,974) --
Noncash issuance
of common stock
for services and
other........... -- 97,643 -- 173 -- -- -- --
Cash proceeds
from issuance of
Series C
convertible
preferred stock,
net of issuance
costs........... 7,610,754 7 -- -- 35,568 -- -- -- --
Exercise of
options to
purchase common
stock for cash.. -- -- 1,719,348 1 1,149 -- (430) -- --
Repurchase of
unvested
shares.......... -- -- (3,750) -- (2) -- -- -- --
Deferred
compensation
related to stock
option grants... -- -- -- -- 11,732 (11,732) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 2,627 -- -- --
Net loss........ -- -- -- -- -- -- -- (18,272) --
Unrealized loss
on available
for-sale
investments..... -- -- -- -- -- -- -- -- (25)
Total
comprehensive
net loss........ -- -- -- -- -- -- -- -- --
---------- --- ---------- --- ------- ------- ----- -------- ----
Balance at
December 31,
1999............. 15,450,236 $15 10,318,841 $10 $72,160 $(9,429) $(430) $(32,246) $(25)
========== === ========== === ======= ======= ===== ======== ====
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Issuance of
warrants to
purchase Series
B3 convertible
preferred
stock........... 11
Cash proceeds
from exercise of
rights to
purchase Series
B1 convertible
preferred stock,
net of issuance
costs........... 2,999
Exercise of
options to
purchase common
stock for cash.. 85
Deferred
compensation
related to stock
option grants... --
Amortization of
deferred
compensation.... 50
Net loss and
comprehensive
net loss........ (9,237)
-------------
Balance at
December 31,
1998............. 9,259
Noncash issuance
of common stock
for services and
other........... 173
Cash proceeds
from issuance of
Series C
convertible
preferred stock,
net of issuance
costs........... 35,575
Exercise of
options to
purchase common
stock for cash.. 720
Repurchase of
unvested
shares.......... (2)
Deferred
compensation
related to stock
option grants... --
Amortization of
deferred
compensation.... 2,627
Net loss........ (18,272)
Unrealized loss
on available
for-sale
investments..... (25)
-------------
Total
comprehensive
net loss........ (18,297)
-------------
Balance at
December 31,
1999............. $30,055
=============
</TABLE>
F-6
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Period From Years Ended
February 21, 1997 December 31,
(Inception) to -----------------
December 31, 1997 1998 1999
----------------- ------- --------
<S> <C> <C> <C>
Operating activities
Net loss................................. $(1,937) $(9,237) $(18,272)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization expense.. 83 1,231 2,258
Amortization of deferred compensation.. -- 50 2,627
Amortization of warrants issued in
conjunction with debt and other....... 6 6 10
Issuance of common stock for services
and other............................. -- 15 173
Changes in operating assets and
liabilities:
Accounts receivable.................. -- -- (915)
Inventories ......................... -- -- (1,211)
Other current assets................. (352) 95 (258)
Other assets......................... (136) 93 (59)
Working capital line of credit....... -- -- 2,044
Accounts payable..................... 610 (482) 682
Accrued payroll and related
expenses............................ 187 201 512
Deferred revenue..................... -- 75 47
Accrued liabilities.................. 62 109 154
Other liabilities.................... -- 19 53
------- ------- --------
Net cash used in operating activities.... (1,477) (7,825) (12,155)
Investing activities
Purchases of short-term investments...... (4,013) (8,837) (27,626)
Sales and maturities of short-term
investments............................. -- 7,740 7,600
Purchases of property and equipment...... (1,732) (2,721) (3,005)
------- ------- --------
Net cash used in investing activities.... (5,745) (3,818) (23,031)
Financing activities
Principal payments on capital leases..... (55) (203) (223)
Proceeds from borrowings under long-term
debt obligations........................ -- 1,000 --
Principal payments on long-term debt
obligations............................. -- (234) (498)
Proceeds from issuance of common stock,
net of repurchases...................... 8 85 718
Proceeds from stockholders note
receivable.............................. -- 746 --
Proceeds from issuance of note payable... 840 -- --
Proceeds from issuance of preferred
stock................................... 16,061 3,433 35,575
------- ------- --------
Net cash provided by financing
activities.............................. 16,854 4,827 35,572
------- ------- --------
Net increase (decrease) in cash and cash
equivalents............................. 9,632 (6,816) 386
Cash and cash equivalents at beginning of
period.................................. -- 9,632 2,816
------- ------- --------
Cash and cash equivalents at end of
period.................................. $ 9,632 $ 2,816 $ 3,202
======= ======= ========
Supplemental disclosures of cash flow
information
Cash paid for interest................... $ 19 $ 111 $ 244
Supplemental disclosures of non-cash
transactions
Issuance of warrants in conjunction with
debt and other.......................... $ 24 $ 11 $ --
Property and equipment acquired under
capital lease........................... $ 557 $ 88 $ --
Noncash deemed dividends to Series B
stockholders............................ $ 2,800 $ -- $ --
Issuance of common stock for note
receivable.............................. $ 746 $ -- $ 430
Deferred compensation related to stock
option grants............................ $ -- $ 374 $ 11,732
</TABLE>
See accompanying notes.
F-7
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations
Centillium Communications, Inc. (Centillium or the Company) was incorporated
in California on February 21, 1997 for the purpose of developing, producing,
and marketing semiconductor devices for equipment manufacturers serving the
broadband communications markets. The Company has focused initially on
developing products designed for the digital subscriber line (DSL) central
office and customer premises market. In December 1999, the Company
reincorporated in Delaware. Share amounts in the accompanying financial
statements have been restated to retroactively reflect the impact of the
reincorporation.
During the period from February 1997 through June 1999, Centillium was a
development stage company. Operating activities during this period were related
primarily to the design and development of our initial products, building our
corporate infrastructure, establishing relationships with customers and
suppliers, and raising capital. The Company began significant customer
shipments in the third quarter of 1999 and exited the development stage at that
time.
Centillium has incurred significant losses since inception and, as of
December 31, 1999, had an accumulated deficit of approximately $32,246,000
including a net loss for the year ended December 31, 1999 of $18,272,000.
Principles of Consolidation
The consolidated financial statements include all the accounts of the
Company and those of its wholly-owned subsidiary. All significant intercompany
accounts and transaction have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenues related to product sales are generally recognized when the products
are shipped to the customer, title has transferred and no significant
obligations remain. In circumstances where the customer has delayed its
acceptance of our product, we defer recognition of the revenue until
acceptance. A provision is made for estimated product returns as shipments are
made. The Company has also performed research and product development work
under best efforts technology development agreements. Revenues under technology
development agreements are recognized when applicable contractual milestones
have been met, including deliverables, and in any case, does not exceed of the
amount that would be recognized using the percentage-of-completion method. Due
to technological risk factors, the costs of these development agreements are
expensed as incurred and were included in research and development expenses in
the accompanying statements of operations.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist principally of cash, cash equivalents,
short-term investments, and accounts receivable. The Company places its short-
term investments in high-credit quality financial institutions. The Company is
exposed to credit risk in the event of default by these institutions to the
extent of the amount recorded on the balance sheet. Accounts receivable are
billed in U. S. currency derived from revenues earned from customers primarily
located in Japan and the United States. The Company performs ongoing credit
evaluations of its customers' financial condition and generally does not
require collateral, but obtains letters of credit or prepayments as deemed
necessary. The Company maintains reserves for potential credit losses, and
historically, such losses have been immaterial.
F-8
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Customer Concentrations
The Company's customers, which account for more than 10% of revenues in each
respective year are as follows:
<TABLE>
<CAPTION>
Period From
February 21,
1997
(Inception) Years Ended
Through December 31,
December 31, ---------------
1997 1998 1999
------------ ------ ------
<S> <C> <C> <C>
Mitsubishi Electric......................... 50% 60% *
NEC......................................... -- 10% 21%
Sumitomo Electric........................... 50% 13% 34%
Sungmi Telecom Electronics.................. -- 15% *
</TABLE>
- ---------------------
* Represents less than 10% of revenues.
Cash Equivalents and Short-Term Investments
The Company invests its excess cash in money market accounts and debt
instruments and considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are recorded at cost, which approximates fair value.
Investments with an original maturity at the time of purchase of over three
months are classified as short-term investments. Under the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," management
classifies investments as available-for-sale at the time of purchase and
periodically reevaluates such designation. At December 31, 1998 and 1999, all
of the Company's investments in debt securities were classified as available-
for-sale with changes in market value recorded as unrealized gains and losses
in accumulated other comprehensive income until their disposition. Realized
gains and losses and declines in value judged to be other than temporary on
available-for-sale securities are included in interest income. The cost of
securities sold is based on the specific-identification method.
Inventories
Inventory is stated at the lower of cost (first in, first out) or market.
The components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
----- -------
<S> <C> <C>
Inventories:
Work-in-process........................................... $ -- $ 486
Finished goods............................................ -- 725
----- -------
$ -- $1,211
===== =======
</TABLE>
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Property and equipment are depreciated for financial reporting purposes using
the straight-line method over the assets' estimated useful lives of three
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.
F-9
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Equipment and software..................................... $ 4,882 $ 7,567
Furniture and fixtures..................................... 165 352
Leasehold improvements..................................... 51 184
------- -------
5,098 8,103
Accumulated depreciation and amortization.................. (1,314) (3,572)
------- -------
Property and equipment, net................................ $ 3,784 $ 4,531
======= =======
</TABLE>
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
not significant for the period from February 21, 1997 (inception) to December
31, 1997 or for the years ended December 31, 1998 and 1999.
Comprehensive Net Loss
During the year ended December 31, 1998, the Company adopted the Financial
Accounting Standard Board's Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. The Company's comprehensive
net loss was the same as its net loss for the period from February 21, 1997
(inception) to December 31, 1997 and for the year ended December 31, 1998.
Comprehensive loss for the year ended December 31, 1999 includes the net
unrealized loss on available-for-sale investments.
Net Loss Per Share
Basic and diluted net loss per common share is presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS
128), for all periods presented. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 98, common stock and convertible
preferred stock issued or granted for nominal consideration prior to the
anticipated effective date of the Company's initial public offering must be
included in the calculation of basic and diluted net loss per common share as
if they had been outstanding for all periods presented.
In accordance with FAS 128, basic and diluted net loss per share have been
computed using the weighted average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Pro forma
basic and diluted net loss per share, as presented in the statements of
operations, have been computed as described above and also gives effect, under
Securities and Exchange Commission guidance, to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance.
F-10
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the computation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Period From
February 21, 1997 Years Ended
(Inception) December 31,
Through -----------------
December 31, 1997 1998 1999
----------------- ------- --------
<S> <C> <C> <C>
Net loss applicable to common
stockholders............................. $(4,737) $(9,237) $(18,272)
======= ======= ========
Basic and diluted:
Weighted average shares of common stock
outstanding............................ 8,001 8,205 9,363
Less weighted average shares subject to
repurchase............................. 1 149 521
------- ------- --------
Weighted average shares used in
computing basic and diluted, net loss
per share applicable to common
stockholders........................... 8,000 8,056 8,842
======= ======= ========
Basic and diluted net loss per share
applicable to common stockholders........ $ (0.59) $ (1.15) $ (2.07)
======= ======= ========
Pro forma:
Shares used above....................... 8,842
Pro forma adjustment to reflect weighted
average effect of the assumed
conversion of convertible preferred
stock.................................. 12,913
--------
Shares used in computing pro forma basic
and diluted, net loss per share
applicable to common stockholders...... 21,755
========
Pro forma basic and diluted net loss per
share applicable to common
stockholders........................... $ (0.84)
========
</TABLE>
The Company has excluded all outstanding warrants, stock options, and shares
subject to repurchase by the Company from the calculation of basic and diluted
net loss per share because these securities are antidilutive for all periods
presented. Options and warrants to purchase 1,774,000, 3,385,007, and
3,417,007 shares of common stock have been excluded for the period from
February 21, 1997 (inception) through December 31, 1997 and for the years ended
December 31, 1998 and 1999, respectively.
Business Segment Information
Effective January 1, 1998, the Company 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 14). FAS 131 establishes standards for the way that public
business enterprises report on information about operating segments in annual
financial statements and interim financial reports. FAS 131 also establishes
standards for related disclosures about products and services, geographic
areas, and major customers.
Unaudited Pro Forma Stockholders' Equity
If the offering contemplated by the Company is consummated, each share of
convertible preferred stock outstanding will automatically be converted into
one share of common stock. Unaudited pro forma stockholders' equity at December
31, 1999, is adjusted for the assumed conversion of convertible preferred stock
based on the shares of convertible preferred stock outstanding at December 31,
1999 disclosed on the balance sheet, and the restatement of our certificate of
incorporation to reflect 100,000,000 authorized shares of common stock and
10,000,000 authorized shares of undesignated preferred stock.
F-11
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited basic and diluted pro forma net loss per share, as presented in
the consolidated statements of operations, has been computed using the weighted
average number of common shares outstanding, adjusted to include the pro forma
effects of the conversion of the preferred stock to common stock as if such
conversion had occurred on January 1, 1999 for the year ended December 31,
1999, or at the date of original issuance, if later.
New Accounting Pronouncements
In March 1998, the AICPA issued Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP
98-1). SOP 98-1 requires entities to capitalize certain costs related to
internal-use software once certain criteria have been met. SOP 98-1 is
effective for years beginning after December 15, 1998. The Company adopted SOP
98-1 for the fiscal year ending December 31, 1999. The adoption of SOP 98-1 did
not have a material impact on the Company's financial position or results of
operations.
In April 1998, the AICPA issued Statement of Position No. 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 costs that were capitalized in the past must be written
off when SOP 98-5 is adopted. The Company implemented SOP 98-5 on January 1,
1999. The adoption of SOP 98-5 did not have a material impact on its financial
position or results of operations.
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 establishes accounting methods for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. The Company will be required
to implement FAS 133 for the fiscal year ending December 31, 2001. Because the
Company does not currently hold any derivative instruments and does not engage
in hedging activities, the Company does not expect that the adoption of FAS 133
will have a material impact on its financial position or results of operations.
Reclassifications
Certain prior year balances have been reclassified to conform to current
year presentation.
F-12
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Cash Equivalents and Short-Term Investments
All debt securities held by the Company as of December 31, 1998 and 1999,
mature within one year. The estimated fair market values of cash equivalents
and short-term investments are based on quoted market prices. Cash equivalents
and short-term investments as of December 31, 1998 and 1999 were as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gain Loss Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Cash equivalents:
Money market funds................ $ 1,312 $ -- $ -- $ 1,312
Corporate debt securities......... 500 -- -- 500
------- ----- ----- -------
1,812 -- -- 1,812
------- ----- ----- -------
Short-term investments:
Corporate debt securities......... 2,910 -- -- 2,910
Obligations of U.S. government and
affiliated agencies.............. 1,000 -- -- 1,000
Auction rate preferred stock and
other............................ 1,200 -- -- 1,200
------- ----- ----- -------
5,110 -- -- 5,110
------- ----- ----- -------
Total cash equivalents and
short-term investments......... $ 6,922 $ -- $ -- $ 6,922
======= ===== ===== =======
<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................ $ 970 $ -- $ -- $ 970
------- ----- ----- -------
Short-term investments:
Commercial paper.................. 7,945 -- (4) 7,941
Corporate debt securities......... 10,997 -- (11) 10,986
Obligations of U.S. government and
affiliated agencies.............. 5,994 -- (10) 5,984
Auction rate preferred stock and
other............................ 200 -- -- 200
------- ----- ----- -------
25,136 -- (25) 25,111
------- ----- ----- -------
Total cash equivalents and
short-term investments......... $26,106 $ -- $ (25) $26,081
======= ===== ===== =======
</TABLE>
F-13
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Realized gains and losses are included in interest income and interest
expense, respectively, and were not significant for the period from February
21, 1997 (inception) to December 31, 1997 or for the years ended December 31,
1998 and 1999.
3. Working Capital Line of Credit
The Company maintains a revolving credit agreement ("Credit Agreement") with
Mitsubishi International. The Credit Agreement is used to provide 90 day
extended credit terms to finance wafer inventory purchases. Borrowings of up to
$5,000,000 under the Credit Agreement are permitted. The interest rate under
the Agreement was based on the lender's internal interest rate, which was
required to be at least 1.00% below the prime rate on the date of invoice
(7.25% at December 31, 1999), generally thirty days after receipt of the
wafers. The Company also pays a commission of 2.00% on all purchases. The
Credit Agreement expires on January 31, 2001, subject to automatic extensions
thereafter from year to year unless either party gives a termination notice.
Under the terms of the Credit Agreement, Mitsubishi International maintains a
security interest in all inventory, cash and investments, and accounts and
notes receivable of the Company. The Credit Agreement contains standard events
of default which if triggered can permit Mitsubishi International to declare
all amounts outstanding under the Credit Agreement immediately due and payable.
Such events of default include failure to comply with the terms of the Credit
Agreement, bankruptcy and default and acceleration of any other indebtedness of
the Company. As of December 31, 1999, $2,044,000 was outstanding under the
agreement.
4. Deferred Revenue
During the year ended December 31, 1998, the Company entered into a
technology development agreement with a strategic partner that called for the
Company to receive cash payments from the strategic partner as the Company
reached certain milestones as defined under the technology development
agreement. At December 31, 1998 the Company recorded $75,000 of deferred
revenue related to milestones under the agreement that were pending acceptance
by the customer. Final acceptance of all milestones was received in 1999.
At December 31, 1999, the Company recorded $122,000 in deferred revenue
which related to advance payments for unfilled orders.
5. Long-Term Debt Obligations
In April 1998, the Company entered into an agreement with a bank and a
financial institution, which allows the Company to make multiple draws up to
$1,000,000 for the purchase of equipment. The facility bears interest at the
U.S. Treasury note yield plus 2.50% per annum (7.30% at December 31, 1999).
Draws under the facility are payable via principal and interest payments made
ratably over a forty-two month period from the initial draw date. The Company
had approximately $962,000 and $706,000 outstanding against the equipment
facility as of December 31, 1998 and 1999, respectively, and no remaining
amount was available. At the end of the equipment facility's term, the Company
is obligated to make an additional payment of total facility draws multiplied
by 15% ($150,000 as of December 31, 1998 and 1999). The Company is recording
the additional payment as interest expense over the life of the related long-
term obligation. The Company has accrued approximately $4,000 and $46,000
relating to this additional payment as of December 31, 1998 and 1999,
respectively.
In conjunction with the equipment facility described above, the Company
issued a warrant to the bank and to the financial institution to purchase 1,800
and 9,450 shares, respectively, of the Company's Series B3 convertible
preferred stock at an exercise price of $4.00 per share. The warrant is
immediately exercisable and
F-14
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
will expire at the later of 10 years after the date of grant or five years
after the closing of the Company's initial public offering. The fair value is
not material for reporting purposes.
In September 1997, the Company negotiated a $1,000,000 term loan with a bank
to finance equipment purchases. The term loan bears interest at the bank's
prime rate plus 0.25% per annum (8.75% at December 31, 1999). The note is
payable via monthly interest payments until April 1998 at which time the
Company began making thirty-six equal monthly payments of principal and
interest. As of December 31, 1998 and 1999, the Company had approximately
$626,000 and $347,000 outstanding against the term loan, respectively.
In conjunction with the term loan described above, the Company issued a
warrant for the purchase of 5,000 shares of the Company's Series B3 convertible
preferred stock at an exercise price of $4.00 per share. The warrant is
immediately exercisable and will expire after September 25, 2002. The fair
value is not material for reporting purposes.
Outstanding borrowings under the long-term debt obligations are secured by
all of the Company's assets. The long-term debt obligations contain affirmative
and negative covenants and will, among other things, limit the Company's
ability to incur additional debt, pay cash dividends, or purchase or sell
certain assets. The obligations also require the Company to restrict certain
acquisitions, mergers, consolidations, or similar transactions.
Maturities under the Company's long-term debt obligations at December 31,
1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000.................................................................. $550
2001.................................................................. $409
2002.................................................................. $140
</TABLE>
6. Commitments
The Company leases its primary facility under an operating lease that
expires in April 2004. Additionally, the Company leases certain software under
an operating lease that expires in September 2001. Rental expense was
approximately $57,000 for the period from February 21, 1997 (inception) to
December 31, 1997 and $341,000 and $642,000 for the years ended December 31,
1998 and 1999.
The Company leases certain equipment under a non-cancelable capital lease
agreement. Equipment under the agreement that was included in property and
equipment was approximately $644,000 and $636,000 at December 31, 1998 and
1999, respectively. The related accumulated amortization was approximately
$227,000 and $440,000 at December 31, 1998 and 1999, respectively. Amortization
expense related to assets under capital lease is included with depreciation
expense. In addition, the related equipment secures the capital lease, and the
Company is required to maintain liability and property damage insurance.
In July 1997, the Company issued a warrant in conjunction with the capital
lease agreement mentioned above. The warrant is immediately exercisable and
allows the holder to purchase 10,500 shares of the Company's Series B3
convertible preferred stock at an exercise price of $4.00 per share. The
warrant expires after June 30, 2004. The fair value assigned to the warrant is
not material for financial reporting purposes.
F-15
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under the Company's operating leases and
capital lease at December 31, 1999 are approximately as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Lease Lease
--------- -------
<S> <C> <C>
2000....................................................... $1,079 $165
2001....................................................... 1,236 --
2002....................................................... 960 --
2003....................................................... 1,008 --
2004....................................................... 437 --
------ ----
Total minimum payments..................................... $4,720 165
======
Less amount representing interest.......................... (5)
----
Total principal balance of capital lease obligation........ $160
====
</TABLE>
The Company does not own or operate a fabrication facility and substantially
all of its wafer requirements are currently supplied by foundries located in
Asia. The Company's purchase obligations to these foundries are based on wafer
supply agreements or noncancelable purchase orders. As of December 31, 1999,
the Company's noncancelable purchase obligation is $706,000.
7. Stockholders' Equity
Convertible Preferred Stock
Series A, B1, B2, B3, and C convertible preferred stockholders generally
have the same voting rights as common stockholders and will generally vote with
common stockholders as a single class except when electing members of the
Company's Board of Directors.
When electing directors, the holders of shares of Series B convertible
preferred stock, voting as a class, are entitled to elect two directors; the
holders of common stock, voting as a class, shall be entitled to elect
two directors; and the holders of all classes of capital stock, voting as a
single class (on an as-converted to common stock basis), shall be entitled to
elect any remaining directors.
In the event of any voluntary or involuntary liquidation of the Company,
Series A, B1, B2, B3, and C stockholders are entitled to a per share
liquidation preference of $0.50, $2.00, $2.50, $4.00, and $5.00, respectively,
plus accrued dividends, if any.
The holders of Series A, B1, B2, B3, and C convertible preferred shares are
entitled to noncumulative cash dividends of $0.04, $0.16, $0.20, $0.32, and
$0.40 per share, respectively, when and if declared by the Board of Directors.
No cash dividends have been declared through December 31, 1999. The following
is a summary of outstanding convertible preferred shares at December 31, 1999
(excludes outstanding Series B3 convertible preferred stock warrants):
<TABLE>
<CAPTION>
Convertible Preferred Shares
-----------------------------
Authorized Outstanding
-------------- --------------
<S> <C> <C>
Series A....................................... 1,680,000 1,680,000
Series B1...................................... 2,000,000 2,000,000
Series B2...................................... 800,000 800,000
Series B3...................................... 3,500,000 3,359,482
Series C....................................... 7,650,000 7,610,754
-------------- --------------
15,630,000 15,450,236
============== ==============
</TABLE>
F-16
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Each convertible preferred share is convertible at the option of the holder
into one share of common stock, subject to adjustments for future dilution. The
convertible preferred shares automatically convert into common stock at the
then applicable conversion rate upon the earlier of (a) the underwritten public
offering of the Company's common stock at an offering price of at least $8.00
per share of common stock with gross proceeds not less than $25,000,000 or (b)
the date on which the Company obtains the consent of at least two-thirds of the
then outstanding shares of Series A, B1, B2, B3, and C stockholders. The
Company has fully reserved shares of common stock for issuance upon the
conversion of Series A, B1, B2, B3, and C convertible preferred stock.
Convertible Preferred Stock Rights
In connection with Series B3 convertible preferred stock financings in July
and September 1997, the Company issued rights to certain stockholders which
provided for the purchase of 2,000,000 shares of Series B1 convertible
preferred stock at $2.00 per share and 800,000 shares of Series B2 convertible
preferred stock at $2.50 per share. The rights were immediately exercisable and
expired approximately one year after their initial grant. The Company recorded
noncash deemed dividends of $2,800,000 for the period from February 21, 1997
(inception) to December 31, 1997, representing the fair value of the rights
issued.
Common Stock Reserved
Common stock reserved is as follows at December 31, 1999:
<TABLE>
<S> <C>
Common stock options............................................ 3,390,257
Series B3 convertible preferred stock warrants.................. 26,750
Convertible preferred stock..................................... 15,450,236
----------
18,867,243
==========
</TABLE>
In March 1997, the Board of Directors approved a stock option plan that
authorized the grant of options to purchase up to 2,000,000 shares of the
Company's common stock. During the years ended December 31, 1998 and 1999
respectively, the Company's Board of Directors authorized an additional
3,430,257 shares and 1,500,000 shares of the Company's common stock for the
stock option plan. The plan is administered by the Board of Directors and
provides for incentive stock options or nonqualified stock options to be issued
to employees, directors, and consultants of the Company. Prices for incentive
stock options may not be less than the fair value of the common stock at the
date of grant. Prices for nonqualified stock options may not be less than 85%
of the fair value of the common stock at the date of grant. Options are
immediately exercisable and generally vest over a period of four years from the
date of grant. Any unvested stock issued is subject to repurchase by the
Company at the original issuance price upon termination of the option holder's
employment. Unexercised options expire ten years after the date of grant.
Deferred Compensation
During the years ended December 31, 1998 and 1999, the Company recorded
deferred compensation of approximately $374,000 and $11,732,000, respectively.
This deferred compensation represents the difference between the grant price
and the deemed fair value for financial statement reporting purposes of the
Company's common stock options granted during these periods. Deferred
compensation is being amortized using the graded vesting method, in accordance
with FASB Interpretation No. 28, over the vesting period of each respective
option, generally four years.
F-17
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of additional information with respect to the
stock option plan:
<TABLE>
<CAPTION>
Options Outstanding and
Exercisable
----------------------------
Options Number Weighted
Available of Average Exercise
for Grant Shares Price
---------- ---------- ----------------
<S> <C> <C> <C>
Options authorized................... 2,000,0000 -- $ --
Options granted...................... (1,803,500) 1,803,500 $0.25
Options exercised.................... -- (45,000) $0.40
---------- ---------- -----
Balance at December 31, 1997......... 196,500 1,758,500 $0.25
Options authorized................... 3,430,257 -- $ --
Options granted...................... (2,166,757) 2,166,757 $0.40
Options exercised.................... -- (425,750) $0.19
Options canceled..................... 141,250 (141,250) $0.35
---------- ---------- -----
Balance at December 31, 1998......... 1,601,250 3,358,257 $0.35
Options authorized................... 1,500,000 -- $ --
Options granted...................... (2,106,600) 2,106,600 $1.80
Options exercised.................... -- (1,719,348) $0.67
Options available due to repurchase
of unvested shares.................. 3,750 -- $0.40
Options canceled..................... 355,252 (355,252) $0.30
---------- ---------- -----
Balance at December 31, 1999......... 1,353,652 3,390,257 $1.09
========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
-----------------------------------------
Number Weighted
Range of of Average Weighted Average
Exercise Prices Shares Exercise Price Contractual Life
--------------- --------- -------------- ----------------
<S> <C> <C> <C>
$0.05-$0.60........................ 1,990,407 $0.36 8.22
$1.00-$1.60........................ 639,250 $1.49 9.48
$1.80-$3.00........................ 760,600 $2.66 9.78
---------
3,390,257 $1.09 8.81
=========
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and
related interpretations in accounting for its employee stock options because,
as discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (FAS 123), requires use of option valuation models that
were not developed for use in valuing employee stock options. 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.
The option valuation models used to fair value options 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, option 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.
F-18
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma information regarding net loss is required by FAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options granted during the period from February 21, 1997
(inception) to December 31, 1997 and the years ended December 31, 1998 and 1999
under the fair value method of FAS 123. The fair value for these options was
estimated at the date of grant using the minimum value method with the
following weighted average assumptions: weighted average risk-free interest
rates of 6.02%, 5.14%, and 5.50% for the period from February 21, 1997
(inception) to December 31, 1997 and the years ended December 31, 1998 and
1999, respectively; no dividend yields or volatility factors of the expected
market price of the Company's common stock; a weighted average expected life of
the option of five years for the period from February 21, 1997 (inception) to
December 31, 1997 and for the year ended December 31, 1998; and a weighted
average expected life of the option of four years for the year ended December
31, 1999.
For purposes of FAS 123 pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. Had
compensation expense for the Company's stock option plan been determined on the
fair value at the grant dates for awards under the plan consistent with the
method of FAS 123, the Company's net loss would have been increased to the
following approximate FAS 123 pro forma amounts:
<TABLE>
<CAPTION>
Period From Years Ended
February 21, 1997 December 31,
(Inception) to -----------------
January 31, 1997 1998 1999
----------------- ------- --------
<S> <C> <C> <C>
FAS 123 Pro forma net loss applicable to
common stockholders...................... $(4,747) $(9,396) $(18,598)
FAS 123 Pro forma basic and diluted net
loss per share applicable to
common shareholders...................... $ (0.59) $ (1.17) $ (2.10)
</TABLE>
The options' weighted average grant date fair value, which is the value
assigned to the options under FAS 123, was approximately $0.05 for the period
from February 21, 1997 (inception) to December 31, 1997 and $0.24 and $0.36 for
the years ended December 31, 1998 and 1999, respectively.
The pro forma impact of options on the net losses for the period from
February 21, 1997 (inception) to December 31, 1997 and the years ended December
31, 1998 and 1999 is not representative of the effects on net income (loss) for
future years, as future years will include the effects of options vesting as
well as the impact of multiple years of stock option grants. The full effect of
FAS 123 will not be fully reflected until fiscal 2001.
Stockholders' Notes Receivable
In November 1999, the Company issued common stock to an employee in return
for a full recourse note receivable for $430,000. The note bears interest at
6.00% per annum and is payable upon an initial public offering by the Company
or termination of the employee.
8. Income Taxes
Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for the period from February
21, 1997 (inception) to December 31, 1997 and for the years ended December 31,
1998 and 1999.
As of December 31, 1999, the Company has $23,000,000 of net operating loss
carryforwards for federal and state purposes. The Company also has federal and
state research and development tax credit carryforwards of approximately
$900,000 and $600,000, respectively. The net operating losses and credit carry
forwards will expire at various dates beginning in the years 2005 through 2019,
if not utilized.
F-19
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Utilization of the net operating losses 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 losses and tax
credit carry forwards before full utilization.
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred taxes consist of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Deferred tax liabilities:
Other............................................. $ (217) $ (182) $ (197)
Deferred tax assets:
Net operating losses.............................. 950 4,310 9,100
Tax credit carryforwards.......................... 240 950 1,296
Reserves and accruals............................. 37 142 1,797
------- ------- --------
Total deferred tax assets.......................... 1,227 5,402 12,193
Valuation allowance............................... (1,010) (5,220) (11,996)
------- ------- --------
Net deferred tax assets............................ 217 182 197
Net deferred taxes................................. $ -- $ -- $ --
======= ======= ========
</TABLE>
The valuation allowance increased by approximately $4,210,000 and $6,776,000
for the years ended December 31, 1998 and 1999, respectively.
9. Business Segment Information
The Company operates in one business segment, the sale of products for the
DSL market, which it sells primarily to original equipment manufacturers and
companies in the communications industries.
The Chief Executive Officer has been identified as the Chief Operating
Decision Maker (CODM) because he has final authority over resource allocation
decisions and performance assessment. The CODM does not receive discrete
financial information about the individual components.
The Company's customers, who account for more than 10% of revenues in each
respective year, are as follows:
<TABLE>
<CAPTION>
Period From
February 21,
1997
(Inception)
Through Years Ended
December 31, December 31,
------------ ---------------
1997 1998 1999
------------ ------ ------
<S> <C> <C> <C>
Mitsubishi Electric........................... 50% 60% *
NEC........................................... -- 10% 21%
Sumitomo Electric............................. 50% 13% 34%
Sungmi Telecom Electronics.................... -- 15% *
</TABLE>
- ---------------------
* Represents less than 10% of revenues.
F-20
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenues by geographic region were as follows (in thousands):
<TABLE>
<CAPTION>
Period From
February 21,
1997 Years Ended
(Inception) to December 31,
December 31, -------------
1997 1998 1999
-------------- -------------
<S> <C> <C> <C>
Revenues:
United States................................... $ -- $ -- $ 686
Asia............................................ 300 752 3,055
Other........................................... -- -- 3
---- ----- -------
Total........................................... $300 $ 752 $ 3,744
==== ===== =======
</TABLE>
10. 401(k) Profit Sharing Plan and Trust
The Company has adopted a 401(k) Profit Sharing Plan and Trust that allows
eligible employees to make contributions subject to certain limitations. The
Company may make discretionary contributions based on profitability as
determined by the Board of Directors. There was no amount contributed by the
Company to the plan and for the period from February 21, 1997 (inception) to
December 31, 1997 and the years ended December 31, 1998 and 1999.
11. Related Party Transactions
During the period from February 21, 1997 (inception) to December 31, 1997,
the Company recognized revenue of $300,000 in connection with two separate
technology development agreements with two separate Series B3 convertible
preferred stockholders. There were no amounts due or due from the Series B3
convertible preferred shareholders at December 31, 1997. During the year ended
December 31, 1998 and 1999, the Series B3 convertible preferred stockholders'
ownership interests were diluted as a result of subsequent Company financings
and are no longer considered related parties.
12. Subsequent Events
Initial Public Offering
In February 2000, the 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 100,000,000 shares of common stock and 10,000,000 shares of preferred
stock.
1997 Stock Plan
In February 2000, the Board of Directors approved an increase in the number
of shares reserved for issuance under the 1997 Stock Plan by 3,069,743 shares.
In addition, the Board of Directors approved an automatic increase in the
number of shares reserved under the Plan on the first day of the Company's
fiscal year beginning on January 1, 2001 equal to the lesser of 3 million
shares or 5% of the Company's outstanding common stock on the date of the
annual increase, or a lesser number of shares determined by the Board of
Directors. The changes to the plan are subject to stockholder approval.
F-21
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2000 Employee Stock Purchase Plan
In February 2000, the Board of Directors approved the 2000 Employee Stock
Purchase Plan (the Purchase Plan). A total of 500,000 shares of common stock
has been reserved for issuance under the Purchase Plan. In addition, the
Purchase Plan provides for automatic annual increases on the first day of each
of the Company's fiscal years beginning on January 1, 2001 equal to the lesser
of 400,000 shares or 1% of the Company's outstanding common stock on the date
of the annual increase, or a lesser number of shares determined by the Board of
Directors. The plan is subject to stockholder approval.
Officer Resignation
The Company's former Chief Executive Officer resigned from his position as
Chief Executive Officer in January 2000. In connection with his resignation,
the Company entered into an Agreement and Mutual Release on February 2, 2000.
Under the terms of the agreement, his employment will terminate on March 31,
2000. As of such termination date, approximately 211,000 options will
accelerate and be fully vested in accordance with his original employment
agreement. Additionally, the Company will pay severance totalling $225,000.
F-22
<PAGE>
[Caption: "Empowering Broadband Networks" with Centillium logo]
<PAGE>
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 Centillium Communications,
Inc. in connection with the sale of common stock being registered. All amounts
are estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 21,648
NASD filing fee.................................................. 8,700
Nasdaq National Market listing fee............................... *
Printing and engraving costs..................................... *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses....................................... 3,000
Transfer Agent and Registrar fees................................ *
Miscellaneous expenses........................................... *
----------
Total.......................................................... $1,250,000
==========
</TABLE>
- --------------------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article 13 of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article 12 of the Registrant's Amended and Restated Bylaws provides for the
indemnification of officers, directors and third parties acting on behalf of
the Registrant if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to the best interest of the Registrant, and,
with respect to any criminal action or proceeding, the indemnified party had
no reason to believe his or her conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for
in the Registrant's Amended and Restated Bylaws, and intends to enter into
indemnification agreements with any new directors and executive officers in
the future.
Item 15. Recent Sales of Unregistered Securities
Since inception, we have issued unregistered securities to a limited number
of persons as described below:
. In April 1997 we sold 1,680,000 shares of Series A preferred stock in a
private placement at a purchase price of $0.50 per share;
\1\In July 1997 we sold 800,000 shares of Series B2 preferred stock in a
private placement at a purchase price of $2.50 per share, and 972,250
shares of Series B3 preferred stock at $4.00 per share;
. In September 1997 we sold 500,000 shares of Series B1 preferred stock in
a private placement at a purchase price of $2.00 per share, and
1,151,482 shares of Series B3 at $4.00 per share;
. In October 1997 we sold 1,127,000 shares of Series B3 preferred stock in
a private placement at a purchase price of $4.00 per share;
. In April 1998 we sold 108,750 shares of Series B3 preferred stock in a
private placement at a purchase price of $4.00 per share;
II-1
<PAGE>
. In June 1998 we issued 1,500,000 shares of Series B1 preferred stock in
a private placement at a purchase price at $2.00 per share;
. In April 1999 we sold 7,610,754 shares of Series C preferred stock in a
private placement at a purchase price of $5.00 per share;
. In May 1997 we issued a warrant to Lighthouse Capital Partners II, L.P.
for 10,500 shares of Series B3 preferred stock at an exercise price of
$4.00 per share;
. In September 1997 we issued a warrant to Silicon Valley Bank for 5,000
shares of Series B3 preferred stock at an exercise price of $4.00 per
share;
. In April 1998 we issued a warrant to MMC/GATX Partnership No. 1 for
9,450 shares of Series B3 preferred stock at an exercise price of $4.00
per share; and
. In April 1998 we issued a warrant to Silicon Valley Bank for 1,800
shares of Series B3 preferred stock at an exercise price of $4.00 per
share.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of prospectus included herein. The sales of the above
securities were deemed to be exempt from registration in reliance on Rule 701
promulgated under Section 3(b) under the Securities Act as transactions
pursuant to a compensatory benefit plan or a written contract relating to
compensation, or in reliance on Section 4(2) of the Securities Act or
Regulation D promulgated thereunder as transactions by an issuer not involving
any public offering. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other
instruments issued in such transactions. All recipients either received
adequate information about Centillium or had access, through employment or
other relationships, to such information.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1* Underwriting Agreement
3.1(a) Certificate of Incorporation of the registrant, as currently in
effect
3.1(b)* Amended and Restated Certificate of Incorporation of the registrant
to be filed upon completion of the offering
4.1* Specimen certificate of common stock
4.2(a) Bylaws of the registrant as currently in effect
4.2(b)* Bylaws of the registrant as in effect upon completion of the offering
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1* Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2* 1997 Stock Plan and form of agreements thereunder
10.3* 2000 Employee Stock Purchase Plan
10.4 Second Amended and Restated Investors' Rights Agreement dated as of
April 30, 1999 between the Registrant and the stockholders named
therein.
10.5* Lease, dated August 16, 1999, between the Registrant and Renco
Investment Company
10.6* Trade Financing Agreement, dated February 1, 1999, between the
Registrant and Mitsubishi International Corporation, and amendment
dated November , 1999.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10.7* Cooperation Agreement, dated March 2, 1998, between the Registrant and
Sungmi Telecom Electronics Co., Ltd.
10.8* Cooperation Agreement, dated November 30, 1997, between the Registrant
and Askey Computer Corporation
10.9* Cooperation Agreement, dated October 15, 1997, between the Registrant
and Sumitomo Electric Industries, Ltd.
10.10* Addendum to Cooperation Agreement, dated April 20, 1999, between the
Registrant and Sumitomo Electric Industries, Ltd.
10.11* Cooperation Agreement, dated April 3, 1998, between the Registrant and
NEC Corporation
10.12* Addendum to Cooperation Agreement, dated February 23, 1999, between
the Registrant and NEC Corporation
10.13* Co-Development Agreement, dated October 15, 1997, between the
Registrant and Mitsubishi Electric Corporation
10.14* Addendum to Co-Development Agreement, dated June 21, 1999, between the
Registrant and Mitsubishi Electric Corporation
10.15* Cooperation Agreement, dated August 25, 1997, between the Registrant
and Mitsubishi Electric Corporation
10.16* Wafer Supply Agreement, dated April 22, 1998, between the Registrant
and Mitsubishi Electronics.
10.17 Agreement and Mutual Release dated February 2, 2000 between the
Registrant and A. Travis White.
10.18 Offer letter between the Registrant and John W. Luhtala dated November
30, 1999.
10.19 Offer letter between the Registrant and Jon S. Sherburne dated August
17, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Counsel (see Exhibit 5.1)
24.1 Power of Attorney (see page II-5)
27.1 Financial Data Schedules
</TABLE>
- ---------------------
* To be filed by amendment
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
Schedule Page
-------- ----
<C> <S>
Schedule II--Valuation and Qualifying Accounts
</TABLE>
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 Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities 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
II-3
<PAGE>
Securities Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by a 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
Securities 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 Securities 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 Securities 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 Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fremont,
State of California, on the 18th day of February, 2000.
CENTILLIUM COMMUNICATIONS, INC.
/s/ Faraj Aalaei
By: _________________________________
Faraj Aalaei, Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Faraj Aalei and John W. Luhtala and
each of them, his attorneys-in-fact, each with the power of substitution, for
him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as
amended, and all post-effective amendments thereto, and to file the same, with
all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that such attorneys-in-fact and
agents or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<C> <S> <C>
/s/ Faraj Aalaei Chief Executive February 18, 2000
______________________________________ Officer and
Faraj Aalaei Director (Principal
Executive Officer)
/s/ John W. Luhtala Vice President and February 18, 2000
______________________________________ Chief Financial
John W. Luhtala Officer (Principal
Financial and
Accounting Officer)
/s/ Shahin Hedayat President and February 18, 2000
______________________________________ Director
Shahin Hedayat
/s/ Kamran Elahian Director February 18, 2000
______________________________________
Kamran Elahian
/s/ Irwin Federman Director February 18, 2000
______________________________________
Irwin Federman
/s/ Robert C. Hawk Director February 18, 2000
______________________________________
Robert C. Hawk
/s/ Lip-Bu Tan Director February 18, 2000
______________________________________
Lip-Bu Tan
</TABLE>
II-5
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Deductions Balance at
of Period Expenses Write-Offs End of Period
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Period from February 21, 1997
(Inception) to
December 31, 1997............. $ -- $ -- $ -- $ --
Year ended December 31, 1998... $ -- $ -- $ -- $ --
Year ended December 31, 1999... $ -- $ 150 $ -- $ 150
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1* Underwriting Agreement
3.1(a) Certificate of Incorporation of the Registrant, as currently in
effect
3.1(b)* Amended and Restated Certificate of Incorporation of the Registrant
to be filed upon completion of the offering
4.1* Specimen certificate of common stock
4.2(a) Bylaws of the Registrant as currently in effect
4.2(b)* Bylaws of the Registrant as in effect upon completion of the offering
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1* Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2* 1997 Stock Plan and form of agreements thereunder
10.3* 2000 Employee Stock Purchase Plan
10.4 Second Amended and Restated Investors' Rights Agreement dated as of
April 30, 1999 between the Registrant and the stockholders named
therein.
10.5* Lease, dated August 16, 1999, between the Registrant and Renco
Investment Company
10.6* Trade Financing Agreement, dated February 1, 1999, between the
Registrant and Mitsubishi International Corporation, and amendment
dated November , 1999.
10.7* Cooperation Agreement, dated March 2, 1998, between the Registrant
and Sungmi Telecom Electronics Co., Ltd.
10.8* Cooperation Agreement, dated November 30, 1997, between the
Registrant and Askey Computer Corporation
10.9* Cooperation Agreement, dated October 15, 1997, between the Registrant
and Sumitomo Electric Industries, Ltd.
10.10* Addendum to Cooperation Agreement, dated April 20, 1999, between the
Registrant and Sumitomo Electric Industries, Ltd.
10.11* Cooperation Agreement, dated April 3, 1998, between the Registrant
and NEC Corporation
10.12* Addendum to Cooperation Agreement, dated February 23, 1999, between
the Registrant and NEC Corporation
10.13* Co-Development Agreement, dated October 15, 1997, between the
Registrant and Mitsubishi Electric Corporation
10.14* Addendum to Co-Development Agreement, dated June 21, 1999, between
the Registrant and Mitsubishi Electric Corporation
10.15* Cooperation Agreement, dated August 25, 1997, between the Registrant
and Mitsubishi Electric Corporation
10.16* Wafer Supply Agreement, dated April 22, 1998, between the Registrant
and Mitsubishi Electronics.
10.17 Agreement and Mutual Release dated February 2, 2000 between the
Registrant and A. Travis White.
10.18 Offer letter between the Registrant and John W. Luhtala dated
November 30, 1999.
10.19 Offer letter between the Registrant and Jon S. Sherburne dated August
17, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Counsel (see Exhibit 5.1)
24.1 Power of Attorney (see page II-5)
27.1 Financial Data Schedules
</TABLE>
- -------------------
* To be filed by amendment
<PAGE>
EXHIBIT 3.1(a)
CENTILLIUM COMMUNICATIONS, INC.
CERTIFICATE OF INCORPORATION
ARTICLE I NAME.
----
The name of the corporation is Centillium Communications, Inc. (hereinafter
referred to as the "Corporation").
ARTICLE II REGISTERED OFFICE AND PRINCIPAL OFFICE.
--------------------------------------
The address of the corporation's registered office in the State of Delaware
is 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801.
ARTICLE III AGENT FOR SERVICE OF PROCESS
----------------------------
The registered agent for service of process and the incorporator of the
corporation is The Corporation Trust Company. The registered agent is located
at the address found in Article II above.
ARTICLE IV PURPOSE.
-------
The nature of the business and purposes to be conducted by the Corporation
is to engage in any lawful act or activity for which a corporation may be
organized under the General Corporation Law of the State of Delaware.
ARTICLE V DURATION.
--------
The Corporation shall have perpetual existence.
ARTICLE VI CAPITAL STOCK
-------------
The Corporation is authorized to issue two classes of shares to be
designated, respectively, Common Stock, par value $0.001, and Preferred Stock.
The total number of shares of Common Stock the Corporation shall have authority
to issue is 32,000,000. The total number of shares of Preferred Stock the
Corporation shall have authority to issue is 15,530,000. The Corporation is
authorized to issue five series of Preferred Stock to be designated,
respectively, Series A Preferred Stock, Series B1 Preferred Stock, Series B2
Preferred Stock, Series B3 Preferred Stock and Series C Preferred Stock. The
total number of shares of Series A Preferred Stock the Corporation shall have
the authority to issue is 1,680,000. The total number of shares of Series B1
Preferred Stock the Corporation shall have the authority to issue is 2,000,000
shares. The total number of shares of Series B2 Preferred Stock the Corporation
shall have the authority to issue is 800,000 shares. The total number of shares
of Series B3 Preferred Stock the Corporation shall have the authority to issue
is 3,500,000 shares. The total number of shares of Series C Preferred Stock the
Corporation shall have the authority to issue is 7,550,000 shares. The rights,
preferences, privileges and restrictions
<PAGE>
granted to or imposed on the Series A Preferred Stock (the "Series A Preferred
Stock"), the Series B1 Preferred Stock, the Series B2 Preferred Stock and the
Series B3 Preferred Stock (collectively, the "Series B Preferred Stock") and the
Series C Preferred Stock (the "Series C Preferred Stock," and, together with the
Series A Preferred Stock and the Series B Stock, the "Preferred" or the
"Preferred Stock") are as set forth below.
A. Dividends. The holders of the Preferred shall be entitled to receive,
---------
when and as declared by the Board of Directors, out of any assets at the time
legally available therefor, dividends at the rate of eight percent (8.0%) of the
applicable Original Issue Price per share per annum, adjusted for any stock
dividends, stock split or recapitalization with respect to such shares, payable
in preference and priority to any payment of any dividend on Common Stock of the
Corporation or, if greater (as determined on a per annum basis and an as
converted basis for the Series A Preferred Stock, Series B1 Preferred Stock,
Series B2 Preferred Stock, Series B3 Preferred Stock and Series C Preferred
Stock), an amount equal to that paid on any other outstanding shares of this
Corporation, payable when, as and if declared by the Board of Directors. No
dividends or other distributions shall be made with respect to the Common Stock,
other than dividends payable solely in Common Stock, until all declared
dividends on the Preferred have been paid or set apart. Such dividends shall not
be cumulative and no right to such dividends shall accrue to holders of
Preferred unless declared by the Board of Directors. The "Original Issue Price"
shall be $0.50 in the case of Series A Preferred Stock, $2.00 in the case of
Series B1 Preferred Stock, $2.50 in the case of Series B2 Preferred Stock, $4.00
in the case of Series B3 Preferred Stock and $5.00 in the case of Series C
Preferred Stock.
B. Liquidation Preference. In the event of any liquidation, dissolution,
----------------------
or winding up of the Corporation, either voluntary or involuntary, distributions
to the shareholders of the Corporation shall be made in the following manner:
1. The holders of the Preferred shall be entitled to receive, prior
and in preference to any distribution of any of the assets or surplus funds of
the Corporation to the holders of the Common Stock by reason of their ownership
of such stock, an amount equal to the applicable Original Issue Price for each
share of Preferred then held by them, adjusted for any combinations,
consolidations, or stock distributions or dividends with respect to such shares
and, in addition, an amount equal to all declared but unpaid dividends on the
Preferred. If the assets and funds thus available for distribution among the
holders of the Preferred shall be insufficient to permit the payment to such
holders of the full aforesaid preferential amount, then the entire amount of the
assets and funds of the Corporation so available shall be distributed among the
holders of the Preferred in proportion to the preferential amount each such
holder is otherwise entitled to receive. After payment has been made to the
holders of the Preferred of the full amount to which they shall be entitled as
aforesaid, any remaining assets shall be distributed ratably to the holders of
the Corporation's stock, each share of Preferred Stock being treated for such
purpose as the number of shares of Common Stock into which it could then be
converted.
2. For purposes of this Article VI, Section B, a merger or
consolidation of the Corporation with or into any other corporation or
corporations, or the merger of any other corporation or corporations into the
Corporation, in which consolidation or merger the shareholders of the
Corporation receive distributions in cash or securities of another corporation
or corporations as a result of such consolidation or merger, or a sale of all or
substantially all of the assets of the
-2-
<PAGE>
Corporation, or any other corporate reorganization or transaction or series of
related transactions in which in excess of 50% of the Corporation's voting power
is transferred shall be treated as a liquidation, dissolution or winding up of
the Corporation.
C. Voting Rights.
-------------
1. Vote Other than for Directors. Except as otherwise required by law
-----------------------------
and as provided in Article VI, Section C.2 below with respect to the election of
directors, the holders of the Preferred and the holders of Common Stock shall be
entitled to notice of any shareholders' meeting and to vote as a single class
upon any matter submitted to the shareholders for a vote, as follows: (i) each
holder of Preferred Stock shall have one vote for each full share of Common
Stock into which its respective shares of Preferred would be convertible on the
record date for the vote and (ii) the holders of Common Stock have one vote per
share of Common Stock.
2. Voting for Directors. The holders of shares of Series B Preferred
--------------------
Stock, voting as a class, shall be entitled to elect two (2) directors, the
holders of Common Stock, voting as a class, shall be entitled to elect two (2)
directors and the holders of all classes of capital stock, voting as a single
class (on an as-converted to Common Stock basis), shall be entitled to elect any
remaining directors. Any vacancy in the Board of Directors occurring because of
the death, resignation or removal of a director elected by the holders of the
Series B Preferred Stock voting as a class shall be filled by the vote or
written consent of the holders of a majority of the outstanding shares of the
Series B Preferred Stock or, in the absence of action by such holders, by action
of the remaining directors then in office and elected by the holders of Series B
Preferred Stock. Any vacancy occurring because of the death, resignation or
removal of a director elected by the vote of the holders of the Common Stock
shall be filled by the vote or written consent of the holders of Common Stock
or, in the absence of action by such holders of Common Stock, by action of the
remaining directors then in office. Any vacancy occurring because of the death,
resignation or removal of any other director shall be filled by the vote or
written consent of the holders of all classes of capital stock of the Company,
voting as a single class (on an as-converted to Common Stock basis) or, in the
absence of action by such holders of capital stock, by action of the remaining
directors then in office. A director may be removed from the Board of Directors
with or without cause by the vote or consent of the holders of the outstanding
class with voting power entitled to elect him in accordance with the General
Corporation Law of the State of Delaware.
D. Conversion. The holders of the Preferred have conversion rights as
----------
follows (the "Conversion Rights"):
1. Right to Convert. Each share of Preferred shall be convertible, at
----------------
the option of the holder thereof, at any time after the date of issuance of such
share at the office of the Corporation or any transfer agent for the Preferred,
into such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing the applicable Original Issue Price by the applicable
Conversion Price, determined as hereinafter provided, in effect at the time of
the conversion. The "Conversion Price" shall initially be, as applicable, $0.50
in the case of Series A Preferred Stock, $2.00 in the case of Series B1
Preferred Stock, $2.50 in the case of Series B2 Preferred Stock, $4.00 in the
case of Series B3 Preferred Stock and $5.00 in the case of Series C
-3-
<PAGE>
Preferred Stock. Such initial Conversion Prices shall be subject to adjustment
as hereinafter provided.
2. Automatic Conversion. Each share of Preferred shall be converted
--------------------
into shares of Common Stock at the applicable and then effective Conversion
Price automatically (a) upon the closing of a firm commitment underwritten
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of Common Stock
for the account of the Corporation to the public at an offering price of at
least $8.00 per share of Common Stock (as adjusted for any stock dividends,
stock split or recapitalization with respect to such shares), with gross
proceeds to the Corporation not less than $25 million or (b) the affirmative
vote or written consent of holders of at least two-thirds of the then
outstanding shares of Preferred Stock, including holders of at least a majority
of the Series C Preferred Stock. In the event of the automatic conversion of the
Preferred upon a public offering as aforesaid, the person(s) entitled to receive
the Common Stock issuable upon such conversion of Preferred shall not be deemed
to have converted such Preferred until immediately prior to the closing of such
sale of securities. Upon any conversion of any Preferred, the Corporation shall
promptly pay in cash all declared and unpaid dividends on the shares of
Preferred being converted, to and including the time of conversion.
3. Mechanics of Conversion. No fractional shares of Common Stock
-----------------------
shall be issued upon conversion of Preferred. In lieu of any fractional shares
to which the holder would otherwise be entitled, the Corporation shall pay cash
equal to such fraction multiplied by the then effective Conversion Price. Before
any holder of Preferred shall be entitled to convert the same into shares of
Common Stock and to receive certificates therefor, such holder shall surrender
the certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for the Preferred, and shall give written
notice to the Corporation at such office that such holder elects to convert the
same; provided, however, that in the event of an automatic conversion pursuant
to Article VI, Section D.2, the outstanding shares of Preferred shall be
converted automatically without any further action by the holders of such shares
and whether or not the certificates representing such shares are surrendered to
the Corporation or its transfer agent, and provided further that the Corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such automatic conversion unless the certificates evidencing
such shares of Preferred are either delivered to the Corporation or its transfer
agent as provided above, or the holder notifies the Corporation or its transfer
agent that such certificates have been lost, stolen or destroyed and executes an
agreement satisfactory to the Corporation to indemnify the Corporation from any
loss incurred by it in connection with such certificates. The Corporation shall,
as soon as practicable after such delivery, or such agreement and
indemnification in the case of a lost certificate, issue and deliver at such
office to such holder of Preferred, a certificate or certificates for the number
of shares of Common Stock to which he shall be entitled as aforesaid and a check
payable to the holder in the amount of any cash amounts payable as the result of
a conversion into fractional shares of Common Stock. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Preferred to be converted, or in the case of
automatic conversion on the date of closing of the offering, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date.
-4-
<PAGE>
4. Adjustments to Conversion Price for Diluting Issues.
---------------------------------------------------
(1) Special Definitions. For purposes of this Article VI,
-------------------
Section D.4, the following definitions shall apply:
(a) "Option" shall mean rights, options or warrants to
------
subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(b) The "Original Issue Date" shall mean the date
-------------------
immediately prior to the date on which the first share of Series C Preferred
Stock was issued.
(c) "Convertible Securities" shall mean any evidences of
----------------------
indebtedness, shares or other securities convertible into or exchangeable for
Common Stock.
(d) "Additional Shares of Common Stock" shall mean, with
---------------------------------
respect to each series of Preferred Stock, all shares of Common Stock issued
(or, pursuant to Article VI, Section D.4(3) deemed to be issued) by the
Corporation after the Original Issue Date, other than shares of Common Stock
issued or issuable:
(i) upon conversion of shares of Preferred Stock;
(ii) as a dividend or distribution on Preferred Stock
or any event for which adjustment is made pursuant to Article VI,
Section D.4(6) hereof;
(iii) pursuant to equipment lease financing
transactions approved by the Board of Directors; or
(iv) to directors and employees of, and consultants
to, the Corporation pursuant to stock purchase or stock option plans,
stock bonuses or awards warrants, contracts, or other arrangements
that are approved by the Board of Directors (including approval by a
majority of the outside directors).
(2) No Adjustment of Conversion Price. No adjustment in the
---------------------------------
number of shares of Common Stock into which the Preferred Stock is convertible
shall be made, by adjustment in the applicable Conversion Prices of such
Preferred Stock in respect of the issuance of Additional Shares of Common Stock
or otherwise, unless the consideration per share for an Additional Share of
Common Stock issued or deemed to be issued by the Corporation is less than the
applicable Conversion Price of such series of Preferred Stock in effect on the
date of, and immediately prior to, the issue of such Additional Shares of Common
Stock.
(3) Deemed Issuances of Additional Shares of Common Stock.
-----------------------------------------------------
(a) Options and Convertible Securities. In the event the
----------------------------------
Corporation at any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions
contained
-5-
<PAGE>
therein for a subsequent adjustment of such number) of Common Stock issuable
upon the exercise of such Options or, in the case of Convertible Securities and
Options therefor, the conversion or exchange of such Convertible Securities,
shall be deemed to be Additional Shares of Common Stock with respect to each
series of Preferred Stock, as applicable, issued as of the time of such issue
or, in the case such a record date shall have been fixed, as of the close of
business on such record date, provided that Additional Shares of Common Stock
shall not be deemed to have been issued with respect to an adjustment of the
Conversion Price for any series of Preferred Stock unless the consideration per
share (determined pursuant to Article VI, Section D.4(5) hereof) of such
Additional Shares of Common Stock would be less than the applicable Conversion
Price of such series of Preferred Stock in effect on the date of and immediately
prior to such issue, or such record date, as the case may be, provided, however,
that in any such case in which Additional Shares of Common Stock are deemed to
be issued:
(i) no further adjustment in the applicable
Conversion Prices shall be made upon the subsequent issue of
Convertible Securities or shares of Common Stock upon the exercise of
such Options or conversion or exchange of such Convertible Securities;
(ii) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any
increase or decrease in the consideration payable to the Corporation,
or decrease or increase in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof, the
applicable Conversion Prices computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and
any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such
increase or decrease insofar as it affects such Options or the rights
of conversion or exchange under such Convertible Securities;
(iii) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities
which shall not have been exercised, the applicable Conversion Prices
computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto) and any subsequent adjustments based
thereon shall, upon such expiration, be recomputed as if:
1. in the case of Convertible Securities or
Options for Common Stock only the Additional Shares of Common Stock
issued where the shares of Common Stock, if any, actually issued upon
the exercise of such Options or the conversion or exchange of such
Convertible Securities and the consideration received therefor was the
consideration actually received by the Corporation for the issue of
such exercised Options plus the consideration actually received by the
Corporation upon such exercise or for the issue of all such
Convertible Securities which were actually converted or exchanged,
plus the additional consideration, if any, actually received by the
Corporation upon such conversion or exchange, and
2. in the case of Options for Convertible
Securities only the Convertible Securities, if any, actually issued
upon the exercise thereof were
-6-
<PAGE>
issued at the time of issue of such Options, and the consideration
received by the Corporation for the Additional Shares of Common Stock
deemed to have been then issued was the consideration actually
received by the Corporation for the issue of such exercised Options,
plus the consideration deemed to have been received by the Corporation
(determined pursuant to Article VI, Section D.4(5)) upon the issue of
the Convertible Securities with respect to which such Options were
actually exercised;
(iv) no readjustment pursuant to clause (ii) or (iii)
above shall have the effect of increasing the applicable Conversion
Prices to an amount which exceeds the lower of (i) the applicable
Conversion Prices on the original adjustment date, or (ii) the
applicable Conversion Prices that would have resulted from any
issuance of Additional Shares of Common Stock between the original
adjustment date and such readjustment date;
(v) in the case of any Options which expire by their
terms not more than 30 days after the date of issue thereof, no
adjustment of the applicable Conversion Prices shall be made until the
expiration or exercise of all such Options issued on the same date,
whereupon such adjustment shall be made in the same manner provided in
clause (iii) above; and
(vi) if such record date shall have been fixed and
such Options or Convertible Securities are not issued on the date
fixed therefor, the adjustment previously made in the applicable
Conversion Prices which became effective on such record date shall be
canceled as of the close of business on such record date, and
thereafter the applicable Conversion Prices shall be adjusted pursuant
to this Article VI, Section D.4(3) as of the actual date of their
issuance.
(b) Stock Dividends, Stock Distributions and Subdivisions.
-----------------------------------------------------
With respect to each series of Preferred Stock, in the event the Corporation at
any time or from time to time after the Original Issue Date shall declare or pay
any dividend or make any other distribution on the Common Stock payable in
Common Stock, or effect a subdivision of the outstanding shares of Common Stock
(by reclassification or otherwise than by payment of a dividend in Common
Stock), then and in any such event, Additional Shares of Common Stock shall be
deemed to have been issued with respect to such series of Preferred Stock:
(i) in the case of any such dividend or
distribution, immediately after the close of business on the record
date for the determination of holders of any class of securities
entitled to receive such dividend or distribution, or
(ii) in the case of any such subdivision, at the
close of business on the date immediately prior to the date upon which
such corporate action becomes effective.
If such record date shall have been fixed and such dividend shall not have
been paid on the date fixed therefor, the adjustment previously made in the
applicable Conversion Prices which became effective on such record date shall be
canceled as of the close of business on such record
-7-
<PAGE>
date, and thereafter the applicable Conversion Prices shall be adjusted pursuant
to this subsection D.4(3) as of the time of actual payment of such dividend.
(4) Adjustment of Conversion Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Common Stock. In the event the Corporation shall issue Additional
- ----------------------
Shares of Common Stock with respect to a series of Preferred Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Article VI,
Section D.4(3), but excluding Additional Shares of Common Stock issued pursuant
to Article VI, Section D.4(3)(b), which event is dealt with in Article VI,
Section D.4(6) hereof), without consideration or for a consideration per share
less than the applicable Conversion Price(s) in effect on the date of and
immediately prior to such issue, then and in such event, the Conversion Price of
such series of Preferred Stock shall be reduced, concurrently with such issue,
to a price (calculated to the nearest cent) determined by multiplying the
applicable Conversion Price by a fraction (x) the numerator of which shall be
(1) the number of shares of Common Stock outstanding immediately prior to such
issue, plus (2) the number of shares of Common Stock which the aggregate
consideration received by the Corporation for the total number of Additional
Shares of Common Stock so issued would purchase at that applicable Conversion
Price, and (y) the denominator of which shall be (1) the number of shares of
Common Stock outstanding immediately prior to such issue plus (2) the number of
such Additional Shares of Common Stock so issued, provided that for the purposes
of this Article VI, Section D.4(4), all shares of Common Stock issuable upon
exercise, conversion or exchange of outstanding Options or Convertible
Securities, as the case may be, shall be deemed to be outstanding, and
immediately after any Additional Shares of Common Stock are deemed issued
pursuant to Article VI, Section D.4(3) above, such Additional Shares of Common
Stock shall be deemed to be outstanding, and provided further that the
applicable Conversion Price shall not be so reduced at such time if the amount
of such reduction would be an amount less than $0.01, but any such amount shall
be carried forward and reduction with respect thereto made at the time of and
together with any subsequent reduction which, together with such amount and any
other amount or amounts so carried forward, shall aggregate $0.01 or more.
(5) Determination of Consideration. For purposes of this
------------------------------
Article VI, Section D.4, the consideration received by the Corporation for the
issue of any Additional Shares of Common Stock shall be computed as follows:
(a) Cash and Property. Such consideration shall:
-----------------
(i) insofar as it consists of cash, be computed at
the aggregate amount of cash received by the Corporation excluding
amounts paid or payable for accrued interest or accrued dividends;
(ii) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue,
as determined in good faith by the Board of Directors; and
(iii) in the event Additional Shares of Common Stock
are issued together with other shares or securities or other assets of
the Corporation for consideration which covers both, be the proportion
of such consideration so received,
-8-
<PAGE>
computed as provided in clauses (i) and (ii) above, as determined in
good faith by the Board of Directors.
(b) Options and Convertible Securities. The consideration
----------------------------------
per share received by the Corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to Article VI, Section D.4(3)(a), relating
to Options and Convertible Securities, shall be determined by dividing
(i) the total amount, if any, received or receivable
by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a
subsequent adjustment of such consideration) payable to the
Corporation upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible
Securities, by
(ii) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or the conversion
or exchange of such Convertible Securities.
(6) Adjustments for Subdivisions, Combinations or Consolidation
-----------------------------------------------------------
of Common Stock. In the event the outstanding shares of Common Stock shall be
- ---------------
subdivided (by stock split, or otherwise), into a greater number of shares of
Common Stock, the applicable Conversion Price for each series of Preferred Stock
then in effect shall, concurrently with the effectiveness of such subdivision,
be proportionately decreased. In the event the outstanding shares of Common
Stock shall be combined or consolidated, by reclassification or otherwise, into
a lesser number of shares of Common Stock, the applicable Conversion Price for
each series of Preferred Stock then in effect shall, concurrently with the
effectiveness of such combination or consolidation, be proportionately
increased.
(7) Adjustments for Other Distributions. In the event the
-----------------------------------
Corporation at any time or from time to time makes, or fixes a record date for
the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this Article VI, Section
D.4, then and in each such event provision shall be made so that the holders of
Preferred Stock shall receive upon conversion thereof, in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Corporation which they would have received had their Preferred Stock been
converted into Common Stock on the date of such event and had they thereafter,
during the period from the date of such event to and including the date of
conversion, retained such securities receivable by them as aforesaid during such
period, subject to all other adjustments called for during such period under
this Article VI, Section D.4 with respect to the rights of the holders of the
Preferred Stock.
-9-
<PAGE>
(8) Adjustments for Reclassification, Exchange and Substitution.
-----------------------------------------------------------
If the Common Stock issuable upon conversion of the Preferred Stock shall be
changed into the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for
above), the Conversion Prices then in effect shall, concurrently with the
effectiveness of such reorganization or reclassification, be proportionately
adjusted such that the Preferred Stock shall be convertible into, in lieu of the
number of shares of Common Stock which the holders would otherwise have been
entitled to receive, a number of shares of such other class or classes of stock
equivalent to the number of shares of Common Stock that would have been subject
to receipt by the holders upon conversion of the Preferred Stock immediately
before that change.
(9) Reorganization, Mergers, Consolidations, or Sales of Assets.
-----------------------------------------------------------
Subject to Article VI, Section B hereof, if at any time or from time to time
there shall be a capital reorganization of the Common Stock (other than a
subdivision, combination, reclassification, or exchange of shares provided for
elsewhere in this Article VI, Section D) or a merger or consolidation of this
Corporation with or into another corporation, or the sale of all or
substantially all of this Corporation's properties and assets to any other
person, then, as a part of such reorganization, merger, consolidation, or sale,
provision shall be made so that the holders of the Preferred Stock shall
thereafter be entitled to receive upon conversion of the Preferred Stock held by
them, the number of shares of stock or other securities or property of this
Corporation, or of the successor corporation resulting from such merger or
consolidation or sale, to which a holder of Common Stock deliverable upon
conversion would have been entitled up on such capital reorganization, merger,
consolidation, or sale. In any such case, appropriate adjustment shall be made
in the application of the provisions of this Article VI, Section D with respect
to the rights of the holders of the Preferred Stock after the reorganization,
merger, consolidation, or sale to the end that the provisions of this Article
VI, Section D (including adjustment of the applicable Conversion Prices then in
effect and the number of shares purchasable upon conversion of the Preferred
Stock) shall be applicable after that event as nearly equivalent as may be
practicable.
5. No Impairment. Except in accordance with Article VI, Section E
-------------
below, this Corporation will not by amendment of its Articles of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation but will at all times in good faith
assist in the carrying out of all the provisions of this Article VI, Section D
and in the taking of all such action as may be necessary or appropriate in order
to protect the applicable Conversion Rights of the holders of the Preferred
against impairment.
6. Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the applicable Conversion Price pursuant to this
Article VI, Section D, the Corporation at its expense shall promptly compute
such adjustment or readjustment in accordance with the terms hereof and furnish
to each holder of Preferred a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Preferred, furnish or cause to be furnished to such holder
a like certificate setting forth (i) such adjustments and readjustments, (ii)
the applicable Conversion Price at the time in effect, and (iii) the
-10-
<PAGE>
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of Preferred.
E. Protective Provisions. In addition to any other rights provided by
---------------------
law, this Corporation shall not, without first obtaining the affirmative vote or
written consent of the holders of not less than a majority of the outstanding
shares of Preferred Stock:
1. amend or repeal any provision of, or add any provision to, this
Corporation's Articles of Incorporation if such action would materially and
adversely alter or change the rights, preferences, privileges or powers of, or
the restrictions provided for the benefit of, the Preferred Stock;
2. authorize or issue shares of any class or series of stock having
any preference, priority or pari passu rights as to dividends or assets equal or
superior to any such preference or priority of the Preferred;
3. increase the number of authorized shares of Common Stock or
Preferred Stock;
4. reclassify any shares of Common Stock or any other shares of this
Corporation into shares having any preference, priority or pari passu rights as
to dividends or assets equal or superior to any such preference or priority of
the Preferred Stock;
5. enter into a Business Combination. As used herein, a Business
Combination shall mean (i) the sale, lease or exchange (for cash, shares of
stock, securities or other consideration) of all or substantially all the
property and assets of the Corporation in any transaction or series of
transactions, (ii) the merger or consolidation of the Corporation into or with
any other Corporation or the merger or consolidation of any other Corporation
into or with the Corporation (except for a merger or consolidation in which the
holders of 100% of the voting capital stock of the Corporation as constituted
immediately prior to such merger or consolidation will, immediately after such
transaction by virtue of securities issued as consideration for the transaction,
hold more than 50% of the voting rights of the surviving entity) and (iii) any
other reorganization or transaction or series of related transactions in which
the holders of 100% of the voting power of the Corporation immediately prior to
such reorganization or transaction have less than 50% of the voting power of the
Corporation immediately after such reorganization or transaction;
6. declare or pay any dividend or make any other distribution on
Common Stock or Preferred Stock; or
7. redeem, purchase or acquire any shares of Common Stock other than
repurchases of stock at cost pursuant to the exercise of a right of repurchase
from a director, employee or consultant of the Corporation.
In addition, the Corporation shall not take any action which adversely
affects the rights, preferences and privileges of the Series C Preferred Stock
without the consent of the holders of at least a majority of the Series C
Preferred Stock.
-11-
<PAGE>
F. Notices of Record Dates. In the event that the Corporation shall
-----------------------
propose at any time:
1. to declare any dividend or distribution upon its Common Stock,
whether in cash, property, stock or other securities, whether or not a regular
cash dividend and whether or not out of earnings or earned surplus;
2. to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or series or
other rights;
3. to effect any reclassification or recapitalization of its Common
Stock outstanding involving a change in the Common Stock; or
4. to merge or consolidate with or into any other corporation, or
sell, lease or convey all or substantially all of its property or business, or
to liquidate, dissolve or wind up;
then, in connection with each such event, the Corporation shall send to each
holder of Preferred Stock:
(1) at least ten (10) days' prior written notice of the date on
which a record shall be taken for such dividend, distribution or subscription
rights (and specifying the date on which the holders of Common Stock shall be
entitled thereto) or for determining rights to vote in respect of the matters
referred to in clauses (3) and (4) above; and
(2) in the case of the matters referred to in clauses (3) and
(4) above, at least ten (10) days' prior written notice of the date when the
same shall take place (and specifying the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event).
Each such written notice shall be delivered personally or given by first class
mail, postage prepaid, addressed to the holders of Preferred Stock at the
address for each such holder as shown on the books of the Corporation. Any
notice required by the provisions herein to be given to the holder of shares of
Preferred Stock shall be deemed given if deposited in the Unites States mail,
postage prepaid, and addressed to each holder of record at such holder's address
appearing on the Corporation's books.
G. Reservation of Stock Issuable Upon Conversion. The Corporation shall
---------------------------------------------
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Preferred Stock. If at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of all then outstanding shares of Preferred Stock, the Company will
take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
-12-
<PAGE>
ARTICLE VII INCORPORATOR
------------
The name and mailing address of the incorporator are as follows:
Stephen Kim
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Subject to the provisions of the General Corporation Law of the State of
Delaware, the number of Directors of the Corporation shall be determined as
provided by the Bylaws.
ARTICLE VIII LIMITATION OF LIABILITY AND INDEMNIFICATION
-------------------------------------------
1. To the fullest extent permitted by the General Corporation Law of
Delaware as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
2. The Corporation may indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, or investigative, by reason of the fact that he, his
testator or intestate is or was a director, officer, employee, or agent of the
Corporation or any predecessor of the Corporation or serves or served at any
other enterprise as a director, officer, employee or agent at the request of the
corporation or any predecessor to the Corporation.
3. Neither any amendment nor repeal of this Article VIII, nor the
adoption of any provision of the Corporation's Certificate of Incorporation
inconsistent with this Article VIII, shall eliminate or reduce the effect of
this Article VIII, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article VIII, would accrue
or arise, prior to such amendment, repeal, or adoption of an inconsistent
provision.
IN WITNESS WHEREOF, Centillium Communications, Inc. has caused this
Certificate of Incorporation to be executed, its corporate seal affixed, and the
foregoing to be attested, all by duly authorized officers on the 15th day of
November, 1999.
/s/ Stephen E. Kim,
____________________________________________
Stephen E. Kim,
Incorporator
-13-
<PAGE>
EXHIBIT 4.2(a)
BYLAWS
OF
CENTILLIUM COMMUNICATIONS, INC.
(a Delaware Corporation)
<PAGE>
BYLAWS OF
CENTILLIUM COMMUNICATIONS, INC.
(a Delaware Corporation)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE I................................................................. 1
1.1 REGISTERED OFFICE................................................ 1
1.2 OTHER OFFICES.................................................... 1
ARTICLE II................................................................ 1
2.1 PLACE OF MEETINGS............................................... 1
2.2 ANNUAL MEETING.................................................. 1
2.3 SPECIAL MEETING................................................. 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS................................ 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS. 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.................... 3
2.7 QUORUM.......................................................... 4
2.8 ADJOURNED MEETING; NOTICE....................................... 4
2.9 VOTING.......................................................... 4
2.10 WAIVER OF NOTICE................................................ 5
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING...................... 5
2.12 PROXIES......................................................... 5
2.13 ORGANIZATION.................................................... 5
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE........................... 6
ARTICLE III............................................................... 6
3.1 POWERS.......................................................... 6
3.2 NUMBER OF DIRECTORS............................................. 6
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS........................ 6
3.4 RESIGNATION AND VACANCIES....................................... 7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE........................ 7
3.6 REGULAR MEETINGS................................................ 7
3.7 SPECIAL MEETINGS; NOTICE........................................ 7
3.8 QUORUM.......................................................... 8
3.9 WAIVER OF NOTICE................................................ 8
3.10 ADJOURNMENT..................................................... 8
3.11 NOTICE OF ADJOURNMENT........................................... 8
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............... 8
3.13 FEES AND COMPENSATION OF DIRECTORS.............................. 9
</TABLE>
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.14 APPROVAL OF LOANS TO OFFICERS............................. 9
ARTICLE IV............................................................ 9
4.1 COMMITTEES OF DIRECTORS................................... 9
4.2 MEETINGS AND ACTION OF COMMITTEES......................... 10
4.3 COMMITTEE MINUTES......................................... 10
ARTICLE V............................................................. 10
5.1 OFFICERS.................................................. 10
5.2 ELECTION OF OFFICERS...................................... 11
5.3 SUBORDINATE OFFICERS...................................... 11
5.4 REMOVAL AND RESIGNATION OF OFFICERS....................... 11
5.5 VACANCIES IN OFFICES...................................... 11
5.6 CHAIRMAN OF THE BOARD..................................... 11
5.7 PRESIDENT................................................. 11
5.8 VICE PRESIDENTS........................................... 12
5.9 SECRETARY................................................. 12
5.10 CHIEF FINANCIAL OFFICER................................... 12
ARTICLE VI............................................................ 13
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS................. 13
6.2 INDEMNIFICATION OF OTHERS................................. 14
6.3 INSURANCE................................................. 14
ARTICLE VII........................................................... 14
7.1 MAINTENANCE AND INSPECTION OF RECORDS..................... 14
7.2 INSPECTION BY DIRECTORS................................... 15
7.3 ANNUAL STATEMENT TO STOCKHOLDERS.......................... 15
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS............ 15
7.5 CERTIFICATION AND INSPECTION OF BYLAWS.................... 15
ARTICLE VIII.......................................................... 15
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING..... 15
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS................. 16
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED........ 16
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES.......... 16
8.5 SPECIAL DESIGNATION ON CERTIFICATES....................... 17
8.6 LOST CERTIFICATES......................................... 17
8.7 TRANSFER AGENTS AND REGISTRARS............................ 17
8.8 CONSTRUCTION; DEFINITIONS................................. 17
ARTICLE IX............................................................ 18
</TABLE>
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<PAGE>
EXHIBIT C
BYLAWS
------
OF
--
CENTILLIUM COMMUNICATIONS, INC.
-------------------------------
(a Delaware Corporation)
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be fixed in the certificate
of incorporation of the corporation.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the third
Tuesday of May in each year at 10:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting, directors shall be elected, and
any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, by the president, or by one
or more stockholders holding shares in the aggregate entitled to cast not less
than fifty percent (50%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of shareholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings of stockholders shall be sent or otherwise given in
accordance with Section 2.6 of these bylaws not less than ten (10) nor more than
sixty (60) days before the date of the meeting. The notice shall specify the
place, date and hour of the meeting and (i) in the case of a special meeting,
the purpose or purposes for which the meeting is called (no business other than
that specified in the notice may be transacted) or (ii) in the case of the
annual meeting, those matters which the board of directors, at the time of
giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
---------------------------------------------------------------
Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,
(a) nominations for the election of directors, and
(b) business proposed to be brought before any stockholder meeting
may be made by the board of directors or proxy committee appointed by the board
of directors or by any stockholder entitled to vote in the election of directors
generally if such nomination or business proposed is otherwise proper business
before such meeting. However, any such stockholder may nominate one or more
persons for election as directors at a meeting or propose business to be
-2-
<PAGE>
brought before a meeting, or both, only if such stockholder has given timely
notice to the secretary of the corporation in proper written form of their
intent to make such nomination or nominations or to propose such business. To be
timely, such stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not less than one hundred
twenty (120) calendar days in advance of the date of the corporation's proxy
statement released to stockholders in connection with the previous year's annual
meeting of stockholders; provided, however, that in the event that no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than thirty (30) days from the date contemplated at the time of
the previous year's proxy statement, notice by the stockholder to be timely must
be so received a reasonable time before the solicitation is made. To be in
proper form, a stockholder's notice to the secretary shall set forth:
(i) the name and address of the stockholder who
intends to make the nominations or propose the business and, as the case may be,
of the person or persons to be nominated or of the business to be proposed;
(ii) a representation that the stockholder is a
holder of record of stock of the corporation entitled to vote at such meeting
and, if applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice;
(iii) if applicable, a description of all arrangements
or understandings between the stockholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder;
(iv) such other information regarding each nominee or
each matter of business to be proposed by such stockholder as would be required
to be included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or intended
to be nominated, or the matter been proposed, or intended to be proposed by the
board of directors; and
(v) if applicable, the consent of each nominee to
serve as director of the corporation if so elected.
The chairman of the meeting shall refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. Notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication.
-3-
<PAGE>
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
------
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting in accordance
with Section 2.7 of these bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the certificate of incorporation or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.
If a quorum be initially present, the stockholders may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.
2.8 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time and place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation or
these bylaws, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder with respect to any matter submitted to a
vote of the stockholders and stockholders shall not be entitled to cumulate
their votes in the election of directors.
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<PAGE>
2.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
------------------------------------------
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.
If the board of directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
The record date for any other purpose shall be as provided in Section 8.1
of these bylaws.
2.12 PROXIES
-------
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.
2.13 ORGANIZATION
------------
-5-
<PAGE>
The president, or in the absence of the president, the chairman of the
board, or, in the absence of the president and the chairman of the board, one of
the corporation's vice presidents, shall call the meeting of the stockholders to
order, and shall act as chairman of the meeting. In the absence of the
president, the chairman of the board, and all of the vice presidents, the
stockholders shall appoint a chairman for such meeting. The chairman of any
meeting of stockholders shall determine the order of business and the procedures
at the meeting, including such matters as the regulation of the manner of voting
and the conduct of business. The secretary of the corporation shall act as
secretary of all meetings of the stockholders, but in the absence of the
secretary at any meeting of the stockholders, the chairman of the meeting may
appoint any person to act as secretary of the meeting.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation and these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The board of directors shall consist of no less than five and no more than
seven members. The board of directors may increase or decrease the number of
directors constituting the board of directors upon the approval of a majority of
the directors then in office. The number of directors so determined shall be
the authorized number of directors of the corporation. No reduction of the
authorized number of directors shall have the effect of removing any director
before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
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<PAGE>
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy, shall hold office until the expiration of the term for which elected
and until a successor has been elected and qualified.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
All vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; provided, that whenever the holders of any class or classes of stock
or series thereof are entitled to elect one or more directors by the provisions
of the certificate of incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors. If any regular
meeting day shall fall on a legal holiday, then the meeting shall be held next
succeeding full business day.
3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at
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<PAGE>
that director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone or telegram, it shall be delivered
personally or by telephone or to the telegraph company at least forty-eight (48)
hours before the time of the holding of the meeting. Any oral notice given
personally or by telephone may be communicated either to the director or to a
person at the office of the director who the person giving the notice has reason
to believe will promptly communicate it to the director. The notice need not
specify the purpose or the place of the meeting, if the meeting is to be held at
the principal executive office of the corporation.
3.8 QUORUM
------
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.10
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
certificate of incorporation and other applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
----------------
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
3.10 ADJOURNMENT
-----------
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
---------------------
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
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<PAGE>
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have and may exercise all
the powers and authority of the board, but no such committee shall have the
power of authority to:
(a) amend the certificate of incorporation (except that a committee may,
to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the board of directors as provided in
Section 151(a) of the General Corporation Law of Delaware, fix the designations
and any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the corporation or the
conversion into, or the
-9-
<PAGE>
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation);
(b) adopt an agreement of merger or consolidation under Sections 251 or
252 of the General Corporation Law of Delaware;
(c) recommend to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets;
(d) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution; or
(e) amend the bylaws of the corporation; and, unless the board resolution
establishing the committee, the bylaws or the certificate of incorporation
expressly so provide, no such committee shall have the power or authority to
declare a dividend, to authorize the issuance of stock, or to adopt a
certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
4.3 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and
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<PAGE>
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these bylaws. Any number of offices may be held by the same
person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
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direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He
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<PAGE>
shall disburse the funds of the corporation as may be ordered by the board of
directors, shall render to the president and directors, whenever they request
it, an account of all of his transactions as chief financial officer and of the
financial condition of the corporation, and shall have such other powers and
perform such other duties as may be prescribed by the board of directors or
these bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
--------------------------------------------------
AND OTHER AGENTS
----------------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware as the same now exists or may hereafter
be amended, indemnify any person against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit,
or proceeding in which such person was or is a party or is threatened to be made
a party by reason of the fact that such person is or was a director or officer
of the corporation. For purposes of this Section 6.1, a "director" or "officer"
of the corporation shall mean any person (i) who is or was a director or officer
of the corporation, (ii) who is or was serving at the request of the corporation
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
Board of Directors of the corporation.
The corporation shall pay the expenses (including attorney's fees) incurred
by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding referred to in this
Section 6.1 in advance of its final disposition; provided, however, that payment
of expenses incurred by a director or officer of the corporation in advance of
the final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by the director or officer to repay all amounts
advanced if it should ultimately be determined that the director of officer is
not entitled to be indemnified under this Section 6.1 or otherwise.
The rights conferred on any person by this Article shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the corporation's Certificate of Incorporation, these
bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.
Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
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<PAGE>
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit, or
proceeding, in which such person was or is a party or is threatened to be made a
party by reason of the fact that such person is or was an employee or agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) shall mean any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
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<PAGE>
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine (and to make copies of) the
corporation's stock ledger, a list of its stockholders and its other books and
records for a purpose reasonably related to his or her position as a director.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, if any, the president, any vice president, the
chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation. The authority herein granted may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
7.5 CERTIFICATION AND INSPECTION OF BYLAWS
--------------------------------------
The original or a copy of these bylaws, as amended or otherwise altered to
date, certified by the secretary, shall be kept at the corporation's principal
executive office and shall be open to inspection by the stockholders of the
corporation, at all reasonable times during office hours.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-----------------------------------------------------
For purposes of determining the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) days before any such action. In that case, only
stockholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the General Corporation Law of Delaware.
If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution.
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<PAGE>
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
-----------------------------------------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
--------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
------------------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the board
of directors, every holder of stock represented by certificates and, upon
request, every holder of uncertificated shares, shall be entitled to have a
certificate signed by, or in the name of the corporation by, the chairman or
vice-chairman of the board of directors, or the president or vice-president, and
by the treasurer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.
Certificates for shares shall be of such form and device as the board of
directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of shares
for which it is issued; a summary statement or reference to the powers,
designations, preferences or other special rights of such stock and the
qualifications, limitations or restrictions of such preferences and/or rights,
if any; a statement or summary of liens, if any; a conspicuous notice of
restrictions upon transfer or registration of transfer, if any; a statement as
to any applicable voting trust agreement; if the shares be assessable, or, if
assessments are collectible by personal action, a plain statement of such facts.
Upon surrender to the secretary or transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer,
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<PAGE>
it shall be the duty of the corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon its
books.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.6 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 TRANSFER AGENTS AND REGISTRARS
------------------------------
The board of directors may appoint one or more transfer agents or transfer
clerks, and one or more registrars, each of which shall be an incorporated bank
or trust company -- either domestic or foreign, who shall be appointed at such
times and places as the requirements of the corporation may necessitate and the
board of directors may designate.
8.8 CONSTRUCTION; DEFINITIONS
-------------------------
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<PAGE>
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
ARTICLE IX
AMENDMENTS
----------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote or by the board of directors of
the corporation. The fact that such power has been so conferred upon the
directors shall not divest the stockholders of the power, nor limit their power
to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.
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<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
CENTILLIUM COMMUNICATIONS, INC.
-------------------------------
Adoption by Incorporator
------------------------
The undersigned person appointed in the Certificate of Incorporation to act
as the Incorporator of Centillium Communications, Inc. hereby adopts the
foregoing bylaws, comprising nineteen (19) pages, as the Bylaws of the
corporation.
Executed this _____th day of November, 1999.
/s/ Stephen Kim
____________________________________________
Stephen Kim, Incorporator
Certificate by Secretary of Adoption by Incorporator
----------------------------------------------------
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Centillium Communications, Inc. and that the foregoing
Bylaws, comprising nineteen (19) pages, were adopted as the Bylaws of the
corporation on November __, 1999 by the person appointed in the Certificate of
Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this _____th day of November, 1999.
/s/ Stephen Kim
____________________________________________
Stephen Kim, Secretary
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<PAGE>
EXHIBIT 10.4
CENTILLIUM TECHNOLOGY CORPORATION
SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
This SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the
"Agreement") is made as of this 30th day of April 1999, by and among Centillium
Technology Corporation, a California corporation (the "Company"), a majority of
the holders of Series A Preferred Stock and a majority of the holders of Series
B Preferred Stock of the Company (the "Existing Majority Holders") on behalf of
all the holders of Series A Preferred Stock and Series B Preferred Stock (the
"Existing Preferred Holders"), the purchasers of shares of Series C Preferred
Stock (the "Series C Preferred") of the Company (the "Series C Purchasers") and
the founders of the Company identified on Exhibit A hereto (the "Founders"; the
---------
Founders, the Existing Preferred Holders and the Series C Purchasers,
collectively, the "Stockholders"). Each of the Stockholders are identified by
name and ownership of shares of the Company's capital stock on Exhibit B hereto.
---------
R E C I T A L S
---------------
A. The Company proposes to enter into a Series C Preferred Stock Purchase
Agreement to be dated the date hereof (the "Series C Purchase Agreement") with
the Series C Purchasers pursuant to which the Company shall sell in the
aggregate 7,535,400 shares of its Series C Preferred to the Series C Purchasers
in one or more closings.
B. The Company and certain of the Stockholders are parties to that certain
First Amended and Restated Investor Rights Agreement dated as of July 31, 1997
(the "Prior Agreement").
C. The Prior Agreement between the Company and certain Stockholders sets
forth all the investor rights of the Stockholders.
D. Pursuant to Section 10 of the Prior Agreement, the Prior Agreement may
be amended with the written consent of the Company and the Existing Majority
Holders.
E. In order to induce the Series C Purchasers to enter into the Series C
Purchase Agreement, the Company and the Existing Majority Holders have agreed to
amend and fully restate the Prior Agreement and execute this Agreement.
NOW, THEREFORE, the parties hereto agree that (i) the Prior Agreement and
all other agreements, written or oral, to register Company securities are
terminated and of no further force and effect, and (ii) the Company and the
Stockholders accept and agree to the termination of all prior investor rights
and accept and agree to be bound by the terms of this Agreement. In
consideration of the mutual promises and covenants hereinafter set forth, all
parties hereto agree as follows:
<PAGE>
1. Certain Definitions. All capitalized terms used and not otherwise
-------------------
defined herein shall have the meanings given them in the Series C Purchase
Agreement. As used in this Agreement, the following terms shall have the
following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Securities Act.
"Company Registration Statement" shall have the meaning set forth in
------------------------------
Section 5.1(a)(ii)(C).
"Conversion Stock" means the Common Stock issued or issuable pursuant
----------------
to conversion of the Preferred Stock.
"Holder" shall mean (i) any of the Preferred Stockholders holding
------
Registrable Securities, and (ii) any person holding Registrable Securities to
whom the rights under this Agreement have been transferred in accordance with
Section 5.9 hereof.
"Initiating Holders" shall mean any Holders who in the aggregate hold
------------------
not less than twenty percent (20%) of the Registrable Securities.
"Preferred Stock" shall mean the Series A Preferred Stock, the Series
---------------
B Preferred Stock and the Series C Preferred.
"Preferred Stockholders" shall mean those Stockholders holding
----------------------
Preferred Stock.
"Qualified Offering" shall have the meaning set forth in Section 7(e)
------------------
hereof.
"Registrable Securities" means the Conversion Stock and any Common
----------------------
Stock of the Company issued or issuable in respect of the Conversion Stock upon
any stock split, stock dividend, recapitalization, or similar event, or any
Common Stock otherwise issuable with respect to the Conversion Stock; provided,
however, that shares of Conversion Stock or other securities shall only be
treated as Registrable Securities if and so long as they have not been sold to
or through a broker or dealer or underwriter in a public distribution or a
public securities transaction.
The terms "register," "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses, except as stated in
---------------------
Section 5.4 hereof, incurred by the Company in complying with Sections 5.1, 5.2
and 5.3 hereof, including, without limitation, all registration, qualification
and filing fees, printing expenses, escrow fees, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and the expense of any
special audits incident to or required by any such registration (but excluding
(i) the compensation of regular employees of the Company which shall be paid in
any event by the
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<PAGE>
Company and (ii) underwriting discounts and commissions) and fees and
expenses of one counsel for all Holders as appointed by the Holders and
reasonably acceptable to the Company.
"Restricted Securities" shall mean the securities of the Company
---------------------
required to bear the legend set forth in Section 3 hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
--------------
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and stock transfer taxes applicable to the securities registered by
the Holders and, except as set forth under "Registration Expenses", all
reasonable fees and disbursements of counsel for any Holder.
2. Restrictions on Transferability. The Conversion Stock and any other
-------------------------------
securities issued in respect of the Conversion Stock upon any stock split, stock
dividend, recapitalization, merger, consolidation or similar event, shall not be
sold, assigned, transferred or pledged except upon the conditions specified in
this Agreement, which conditions are intended to ensure compliance with the
provisions of the Securities Act. Each Holder will cause any proposed purchaser,
assignee, transferee, or pledgee of any such shares held by the Holder to agree
to take and hold such securities subject to the provisions and upon the
conditions specified in this Agreement.
3. Restrictive Legend. Each certificate representing (i) the Conversion
------------------
Stock and (ii) any other securities issued in respect of the Conversion Stock
upon any stock split, stock dividend, recapitalization, merger, consolidation or
similar event, shall (unless otherwise permitted by the provisions of Section 4
below) be stamped or otherwise imprinted with a legend in substantially the
following form (in addition to any legend required under applicable state
securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED
FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE
OR DISTRIBUTION THEREOF. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE COMPANY RECEIVES AN
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE
OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SAID ACT. COPIES OF THE AGREEMENTS COVERING THE
PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE
OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF
THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL
EXECUTIVE OFFICES OF THE COMPANY.
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<PAGE>
Each Holder consents to the Company's making a notation on its records
and giving instructions to any transfer agent for the Conversion Stock in order
to implement the restrictions on transfer established in this Agreement.
4. Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 4. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities (other than (i) a
transfer not involving a change in beneficial ownership, (ii) in transactions
involving the distribution without consideration of Restricted Securities by a
Preferred Stockholder to any of its partners or members, or retired partners or
members, or to the estate of any of its partners or members or retired partners
or members (iii) any transfer to any affiliate controlled by or under common
control with any Preferred Stockholder or (iv) in transactions in compliance
with Rule 144), unless there is in effect a registration statement under the
Securities Act covering the proposed transfer, the holder thereof shall give
written notice to the Company of such holder's intention to effect such
transfer, sale, assignment or pledge. Each such notice shall describe the manner
and circumstances of the proposed transfer, sale, assignment or pledge in
sufficient detail, and shall be accompanied, at such holder's expense by either
(i) an unqualified written opinion of legal counsel who shall be, and whose
legal opinion shall be, reasonably satisfactory to the Company addressed to the
Company, to the effect that the proposed transfer of the Restricted Securities
may be effected without registration under the Securities Act, or (ii) a "no
action" letter from the Commission to the effect that the transfer of such
securities without registration will not result in a recommendation by the staff
of the Commission that action be taken with respect thereto, whereupon the
holder of such Restricted Securities shall be entitled to transfer such
Restricted Securities in accordance with the terms of the notice delivered by
the holder to the Company. It is agreed that the Company will not request an
opinion of counsel for the holder for transactions made in reliance on Rule 144
under the Securities Act except in unusual circumstances, the existence of which
shall be promptly determined in good faith by the Board of Directors of the
Company. Each certificate evidencing the Restricted Securities transferred as
above provided shall bear, except if such transfer is made pursuant to Rule 144,
the appropriate restrictive legend set forth in Section 3 above, except that
such certificate shall not bear such restrictive legend if in the opinion of
counsel for such holder (if required above) and the Company such legend is not
required in order to establish compliance with any provision of the Securities
Act.
5. Registration.
------------
5.1 Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive
------------------------
from Initiating Holders a written request that the Company effect any
registration, qualification or compliance with respect to at least twenty
percent (20%) of the Registrable Securities, or any lesser number of shares
of Registrable Securities if the anticipated aggregate offering price, net
of underwriting discounts and commissions would exceed $25 million, the
Company will:
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(i) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect
such registration, qualification or compliance (including, without limitation,
appropriate qualification under applicable blue sky or other state securities
laws and appropriate compliance with applicable regulations issued under the
Securities Act and any other governmental requirements or regulations) as may be
so requested and as would permit or facilitate the sale and distribution of all
or such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within fifteen (15) days after receipt of such written notice
from the Company;
Provided, however, that the Company shall not be obligated to take any action to
effect any such registration, qualification or compliance pursuant to this
Section 5.1:
(A) In any particular jurisdiction in which the
Company would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(B) Prior to twelve (12) months after the effective
date of the Company's first registered public offering of its stock, or prior to
April 1, 2000, whichever is earlier;
(C) Following notice to the Holders by the Company,
during the period starting with the date sixty (60) days prior to the Company's
estimated date of filing of, and ending on the date six (6) months immediately
following the effective date of, any registration statement pertaining to
securities of the Company ("Company Registration Statement") (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan), provided that the Company is actively employing in good
faith all reasonable efforts to cause such registration statement to become
effective; and provided further that if the Company shall not have filed the
Company Registration Statement within 60 days of the notice to the Holders, the
Company shall use its best efforts thereafter to effect the registration
requested pursuant to Section 5.1(a) as soon as practicable;
(D) After the Company has effected two such
registrations pursuant to this subparagraph 5.1(a), and such registrations have
been declared or ordered effective and each has remained effective until the
earlier to occur of 90 days or the sale of all of the securities offered
pursuant to such registration;
(E) If the Company shall furnish to such Initiating
Holders a certificate signed by the Chief Executive Officer of the Company
stating that in the good faith judgment of the Board of Directors it would be
seriously detrimental to the Company or its stockholders for a registration
statement to be filed in the near future, then the Company's obligation to use
its best efforts to register, qualify or comply under this Section 5.1 shall be
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deferred for a period not to exceed ninety (90) days from the date of receipt of
written request from the Initiating Holders, provided that the Company may not
exercise this deferral right more than once per twelve (12) month period; and
provided further that the Company shall not be entitled to exercise this
deferral right if the Company had exercised the deferral right in Section
5.1(a)(ii)(C) in the previous 12 months.
Subject to the foregoing clauses (A) through (E), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Holders.
(b) Underwriting. If the Initiating Holders intend to distribute the
------------
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
Section 5.1(a), and the Company shall include such information in the written
notice given pursuant to Section 5.1(a)(i). The managing underwriter will be
selected by a majority in interest of the Initiating Holders, provided that such
managing underwriter is reasonably acceptable to the Company. In such event, the
right of any Holder to include his Registrable Securities in such registration
shall be conditioned upon such Holder's participation in such underwriting and
the inclusion of such Holder's Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority in interest of the Initiating
Holders and such Holder) to the extent provided herein.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter. Notwithstanding any other
provision of this Section 5.1, if the managing underwriter advises the
Initiating Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten, then the Company shall so advise all
Holders of Registrable Securities, and the number of shares of Registrable
Securities that may be included in the registration and underwriting shall be
allocated among all Holders in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities held by such Holders at the time of
filing the registration statement. Neither the Company nor any other holders of
Company securities may participate in the proposed offering if any Holders have
been cut back pursuant to this Section 5.1(b). No Registrable Securities
excluded from the underwriting by reason of the underwriter's marketing
limitation shall be included in such registration. To facilitate the allocation
of shares in accordance with the above provisions, the Company or the
underwriters may round the number of shares allocated to any Holder to the
nearest 100 shares.
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Initiating Holders. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration, and such Registrable Securities shall continue to
be subject to the terms of this Agreement including Section 6 hereof.
5.2 Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to time
----------------------
the Company shall determine to register any of its equity securities, either for
its own account or the
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<PAGE>
account of a security holder or holders, other than (i) a registration relating
solely to employee benefit plans, (ii) a registration relating solely to a Rule
145 transaction, or (iii) a registration in which the only equity security being
registered is Common Stock issuable upon conversion of convertible debt
securities which are also being registered, the Company will:
(i) promptly give to each Holder and Founder written notice
thereof; and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within twenty (20) days after receipt of such written notice
from the Company, by any Holder or Founder.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders and the Founders as a part of the written
notice given pursuant to Section 5.2(a)(i). In such event the right of any
Holder and any Founder to registration pursuant to this Section 5.2 shall be
conditioned upon such Holder's or Founder's participation in such underwriting,
and the inclusion of Registrable Securities in the underwriting shall be limited
to the extent provided herein.
All Holders and Founders proposing to distribute their securities through
such underwriting shall (together with the Company and the other holders
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 5.2, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may exclude some or all of the Registrable Securities, or securities
of other holders of registration rights other than persons exercising demand
registration rights, from such registration, except that other than with respect
to the Company's initial public offering, the Holders will be entitled to
include, on a pro rata basis, Registrable Securities in an aggregate amount
equal to at least thirty percent (30%) of the offering. The Company shall
advise all Holders, Founders and other holders distributing their securities
through such underwriting of any limits imposed on their participation in the
underwriting as provided in this Section 5.2(b). The number of shares of
Registrable Securities, or securities of other holders of registration rights
other than persons exercising demand registration rights, that may be included
in the registration and underwriting in accordance with this Section 5.2(b)
shall be allocated among all the Holders, Founders and such other holders of
securities not exercising demand registration rights shall be allocated in the
following priority: first to Holders of Registrable Securities up to seventy
percent (70%) of the total number of shares to be included in the secondary
portion of the offering (and pro rata among such holders on the basis of all
Registrable Securities then held by such holders) provided that such amount is
not less than 30% of the offering; second, to Founders, to the extent of ten
percent (10%) of the total number of shares to be included in the secondary
portion of the offering (and pro rata among the Founders on the basis of all
Common Stock then held by the Founders); and third among all other shareholders
of the Company in proportion, as nearly as
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<PAGE>
practicable, to the respective amounts of securities which they had requested to
be included in such registration at the time of filing of the registration
statement. To facilitate the allocation of shares in accordance with the above
provisions, the Company may round the number of shares allocated to any Holder,
Founder or other holder to the nearest 100 shares.
If any Holder, Founder or other holder disapproves of the terms of any such
underwriting, he or she may elect to withdraw therefrom by written notice to the
Company and the managing underwriter. Any securities excluded or withdrawn from
such underwriting shall be withdrawn from such registration, and shall continue
to be subject to the terms of this Agreement including Section 6 hereof.
(c) No shareholder of the Company shall be granted any rights
superior to those granted to the Preferred Stockholders pursuant to this Section
5.2 without the prior consent of more than 50% of (i) the then outstanding
shares of Preferred Stock plus (ii) if some or all of the Preferred has been
converted into Common Stock, the Conversion Stock issued pursuant to such
conversion.
(d) Right to Terminate Registration. The Company shall have the
-------------------------------
right to terminate or withdraw any registration initiated by it under this
Section 5.2 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration.
5.3 Registration on Form S-3.
------------------------
(a) If any Holder or Holders of at least 5% of the then
outstanding Registrable Securities request that the Company file a registration
statement on Form S-3 (or any successor form to Form S-3) for a public offering
of all or some of the shares of the Registrable Securities held by such Holder
or Holders the reasonably anticipated aggregate price to the public of which,
net of underwriting discounts and commissions, would exceed two million dollars
($2,000,000), and the Company is a registrant entitled to use Form S-3 to
register the Registrable Securities for such an offering, the Company shall use
its best efforts to cause such Registrable Securities to be registered for the
offering on such form and to cause such Registrable Securities to be qualified
in such jurisdictions as such Holder or Holders may reasonably request. The
Company shall inform other Holders of the proposed registration and offer them
the opportunity to participate. In the event the registration is proposed to be
part of a firm commitment underwritten public offering, the substantive
provisions of Section 5.1(b) shall be applicable to each such registration
initiated under this Section 5.3. The Company may include other shares of Common
Stock in any of the registrations provided for in this Section 5.3, provided
that such inclusion will not interfere with the marketing (including the price
to the public) of the Registrable Securities to be registered by the Holders.
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action pursuant to this Section 5.3:
(i) in any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration,
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<PAGE>
qualification or compliance unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act;
(ii) during the period starting with the date sixty (60)
days prior to the Company's estimated date of filing of, and ending on the date
six (6) months immediately following, the effective date of any Company
Registration Statement (other than a registration of securities in a Rule 145
transaction or with respect to an employee benefit plan), provided that the
Company is actively employing in good faith all reasonable efforts to cause such
registration statement to become effective; and provided further that if the
Company shall not have filed the Company Registration Statement within 60 days
after the notice to the Holders, the Company shall use its best efforts to
effect the registration requested pursuant to Section 5.3(a) as soon as
practicable; or
(iii) if the Company shall furnish to such Holder or
Holders a certificate signed by the Chief Executive Officer of the Company
stating that in the good faith judgment of the Board of Directors it would be
seriously detrimental to the Company or its shareholders for registration
statements to be filed in the near future, then the Company's obligation to use
its best efforts to file a registration statement shall be deferred for a period
not to exceed sixty (60) days from the receipt of the request to file such
registration statement by such Holder or Holders, provided that the Company may
not exercise this deferral right more than once per twelve (12) month period and
provided further that the Company shall not be entitled to exercise this
deferral right if the Company had exercised the deferral right in Section
5.3(b)(ii) in the previous 12 months.
5.4 Expenses of Registration. Registration Expenses incurred in
------------------------
connection with (i) up to two requested registrations pursuant to Section 5.1,
(ii) all company registrations pursuant to Section 5.2, and (iii) all Form S-3
registrations pursuant to Section 5.3 shall be borne by the Company. Selling
Expenses shall be borne by the selling shareholders incurring such expenses.
5.5 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense, the Company will:
(a) Prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least ninety (90)
days or until the distribution described in the registration statement has been
completed, whichever first occurs; provided, however, that (i) such 90-day
period shall be extended for a period of time equal to the period the Holder
refrains from selling any securities included in such registration at the
request of an underwriter of Common Stock (or other securities) of the Company;
and (i) in the case of any registration of Registrable Securities on Form S-3
which are intended to be offered on a continuous or delayed basis, such 90-day
period shall be extended, if necessary, to keep the registration statement
effective until all such Registrable Securities are sold, provided that Rule
415, or any successor
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<PAGE>
rule under the Act, permits an offering on a continuous or delayed basis, and
provided further that applicable rules under the Act governing the obligation to
file a post-effective amendment permit, in lieu of filing a post-effective
amendment which (I) includes any prospectus required by Section 10(a)(3) of the
Act or (II) reflects facts or events representing a material or fundamental
change in the information set forth in the registration statement, the
incorporation by reference of information required to be included in (I) and
(II) above to be contained in periodic reports filed pursuant to Section 13 or
15 (d) of the 1934 Act in the registration statement.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) Furnish to the Holders participating in such registration
and to the underwriters of the securities being registered such reasonable
number of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents (including amendments or supplements
thereto) as such Holders or underwriters may reasonably request in order to
facilitate the public offering of such securities.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders;
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdiction, unless the Company is
already subject to service in such jurisdiction.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing and as
promptly as practicable amend or supplement the prospectus to correct such
misstatement or omission.
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed.
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<PAGE>
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
(i) Furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Section 5.5, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Section 5.5, if such securities are being
sold through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities.
(j) In the event of any underwritten public offering, cooperate with
the Holders requesting registration pursuant to this Section, the underwriters
participating in the offering and their counsel in any due diligence
investigation reasonably requested by the Holders or the underwriters in
connection therewith, and participate, to the extent reasonably requested by the
managing underwriter for the offering or the Holders, in efforts to sell the
Registrable Securities under the offering (including without limitation,
participating in "roadshow" meetings with prospective investors) that would be
customary for underwritten primary offerings of a comparable amount of equity
securities by the Company.
5.6 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of such Holder's
officers, directors, members, partners, legal counsel and agent, and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
with respect to which registration, qualification or compliance has been
effected pursuant to this Agreement, and each underwriter, if any, and each
person who controls any underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or any violation by the
Company of the Securities Act of 1933, the Securities Exchange Act of 1934,
state securities law or any rule or regulation promulgated under such laws
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse each such Holder,
each of such Holder's officers and directors, and
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<PAGE>
members, partners, legal counsel, agents and each person controlling such
Holder, each such underwriter and each person who controls any such underwriter,
for any legal and any other expenses reasonably incurred, as such expenses are
incurred, in connection with investigating, preparing or defending of any such
claim, loss, damage, liability or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder, controlling person or underwriter and stated to be
specifically for use therein; provided, however, that the foregoing indemnity
agreement is subject to the condition that, insofar as it relates to any such
untrue statement, alleged untrue statement, omission or alleged omission made in
a preliminary prospectus on file with the Commission at the time the
registration statement becomes effective or the amended prospectus filed with
the Commission pursuant to Rule 424(b) (the "Final Prospectus"), such indemnity
agreement shall not inure to the benefit of any underwriter or any Holder, if
there is no underwriter, if a copy of the Final Prospectus was not furnished to
the person asserting the loss, liability, claim or damage at or prior to the
time such action is required by the Securities Act, and if the Final Prospectus
would have cured the defect giving rise to the loss, liability, claim or damage.
(b) Each Holder severally, and not jointly will, if Registrable
Securities held by such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a registration statement, each person who
controls the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of such Holder's officers and
directors and each person controlling such Holder within the meaning of Section
15 of the Securities Act, against all claims, losses, damages and liabilities
(or actions in respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any such
registration statement, prospectus, offering circular or other document, or any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse the Company, such Holders, such directors, officers, persons,
underwriters or control persons for any legal or any other expenses reasonably
incurred, as such expenses are incurred, in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein.
Notwithstanding the foregoing, the liability of each Holder under this
subsection 5.6(b) shall be limited in an amount equal to the net proceeds
received from the sale of the shares sold by such Holder.
(c) Each party entitled to indemnification under this Section 5.6
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any
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<PAGE>
claim as to which indemnity may be sought, and shall permit the Indemnifying
Party to assume the defense of any such claim or any litigation resulting
therefrom, provided that counsel for the Indemnifying Party, who shall conduct
the defense of such claim or litigation, shall be approved by the Indemnified
Party (whose approval shall not unreasonably be withheld), and the Indemnified
Party may participate in such defense at such party's expense, and provided
further that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Agreement unless the failure to give such notice is materially prejudicial to an
Indemnifying Party's ability to defend such action and provided further, that
the Indemnifying Party shall not assume the defense for matters as to which
there is a conflict of interest or separate and different defenses. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation or which
includes an admission of fault on behalf of the Indemnified Party.
(d) If the indemnification provided for in this Section 5.6 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall to the extent permitted by applicable law contribute to
the amount paid or payable by such indemnified party as a result of such loss,
liability, claim, damage, or expense in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the statements or omissions
that resulted in such loss, liability, claim, damage, or expense as well as any
other relevant equitable considerations. The relative fault of the indemnifying
party and of the indemnified party shall be determined by a court of law by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission to state a material fact relates to the
information supplied by the indemnifying party or by the indemnified party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. Notwithstanding the foregoing,
the amount to be contributed by any Holder under this Section 5.6(d) shall be
limited to an amount equal to the net proceeds received from the sale of the
shares sold by such Holder.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.
(f) The obligations of the Company and the Holders under this Section
5.6 shall survive completion of any offering of Registrable Securities in a
registration statement and the termination of this Agreement. No Indemnifying
Party shall, except with the consent of each Indemnified Party, consent to entry
of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to each
Indemnified Party of a release from all liability in respect to such claim or
litigation;
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<PAGE>
provided, that no Indemnified Party shall consent to entry of any judgment or
enter into any settlement without the consent of Indemnifying Party. No person
guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation.
5.7 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Agreement.
5.8 Rule 144 Reporting. With a view to making available the benefits
------------------
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to use all reasonable efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
after the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Securities Exchange Act of 1934, as
amended;
(b) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Securities Exchange Act of 1934, as amended (at any time after it has become
subject to such reporting requirements); and
(c) So long as the Holder owns any Restricted Securities to
furnish to the Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 (at any
time after ninety (90) days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Securities Exchange Act of 1934, as
amended (at any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents of the Company and other
information in the possession of or reasonably obtainable by the Company as the
Holder may reasonably request in availing itself of any rule or regulation of
the Commission allowing the Holder to sell any such securities without
registration.
5.9 Transfer of Registration Rights. The rights to cause the Company
-------------------------------
to register securities granted to the Holders under Sections 5.1, 5.2 and 5.3
may be assigned to a transferee or assignee in connection with (a) any transfer
or assignment of 100,000 (as adjusted for stock splits, stock dividends,
recapitalizations and the like) or more shares of Registrable Securities by the
Holder to one or more persons in a single transaction or series of related
transactions, provided that (i) the Company is given notice thereof and the
transferee covenants to be bound by the provisions of this Agreement and (ii)
such transfer may otherwise be affected in accordance with applicable securities
laws or (b) any transfer or assignment of Registrable Securities by the Holder
to partners, members or affiliates of such Holder.
-14-
<PAGE>
5.10 Termination of Registration Rights. The rights granted pursuant
----------------------------------
to Sections 5.1, 5.2 and 5.3 of this Agreement shall terminate at the earlier of
(i) five (5) years after the date of the closing of the Company's initial public
offering, or (ii) with respect to a Holder, at such time as the Holder is able
to sell all of such Holder's shares pursuant to Rule 144 promulgated under the
Securities Act, during any three (3) month period provided that the Company is
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended.
5.11 Subsequent Registration Rights. From and after the date of this
------------------------------
Agreement, the Company shall not grant any registration rights to subsequent
purchasers of the Company's equity securities that are, in the good faith
judgment of the Company's Board of Directors, superior to the registration
rights granted to the Preferred Stockholders hereunder without the prior written
consent of the holders of at least 51% of the Registrable Securities.
6. Standoff Agreement. In connection with the initial public
------------------
offering of the Company's securities, each Holder agrees, upon request of the
Company or the underwriters managing any underwritten offering of the Company's
securities, not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any securities of the Company (other than
those included in the registration) without the prior written consent of the
Company or such underwriters, as the case may be, for such period of time (not
to exceed one hundred eighty (180) days) from the effective date of such
registration as may be requested by the underwriters, provided that the officers
and directors of the Company who own stock or options of the Company and holders
at least 1% of the Company's capital stock also agree to such restrictions;
provided, further, that the Company and its underwriters will not release any
party from such restrictions without (i) providing the Holders at least five
days' prior written notice and (ii) simultaneously releasing the Holders to the
same extent from any lock-up letter or similar agreement to which they are a
party; and provided, further, that such restrictions shall not apply to
securities of the Company purchased in the initial public offering or purchased
in the open market following the initial public offering. The Holders agree
that the Company may instruct its transfer agent to place stop-transfer
notations in its records to enforce the provisions of this Section 6.
Notwithstanding anything herein to the contrary, this agreement shall
not restrict Goldman, Sachs & Co. and its affiliates from engaging in any
brokerage, investment advisory, financial advisory, anti-raid advisory, merger
advisory, financing, asset management, trading, market making, arbitrage and
other similar activities conducted in the ordinary course of its or its
affiliates' business.
7. Right of First Refusal.
----------------------
(a) New Issuances. Subject to all of the provisions of this
-------------
Section 7, the Company hereby grants to all Stockholders holding (together with
their affiliates) at least 200,000 shares of Preferred Stock or Common Stock
issued upon conversion of the Preferred Stock (as adjusted for any subsequent
stock dividends, stock split, mergers, consolidations or recapitalizations) (the
"First Refusal Rightsholder"), the right of first refusal (the "Right of
-15-
<PAGE>
First Refusal") to purchase on a pro rata basis "New Securities" (as defined in
this Section 7) that the Company may, from time to time, propose to sell and
issue. Such pro rata share, for purposes of this right of first refusal, is the
ratio (X) the number of shares of capital stock of the Company then owned by
such First Refusal Rightsholder (on an as converted basis) to (Y) the total
number of shares of capital stock of the Company then outstanding (on an as
converted basis).
(b) "New Securities" shall mean any Common Stock and Preferred
--------------
Stock of the Company whether or not authorized on the date hereof, and rights,
options, or warrants to purchase Common Stock or Preferred Stock and securities
of any type whatsoever that are, or may become, convertible into Common Stock or
Preferred Stock; provided, however, that "New Securities" does not include the
following:
(i) shares of Series C Preferred issued pursuant to
the Series C Purchase Agreement;
(ii) shares of Common Stock issuable upon conversion
of Preferred Stock;
(iii) securities of the Company issued pursuant to
the acquisition of a business by the Company by merger, purchase of assets, or
other acquisition or reorganization approved by the Board of Directors;
(iv) securities of the Company issued in connection
with arm's length transactions approved by the Board of Directors with respect
to equipment lease or bank financings; or
(v) shares of Common Stock, or options to purchase
shares of Common Stock, issued or granted to officers, directors, employees and
consultants of the Company pursuant to stock plans and option plans or other
arrangements approved by the Board of Directors (including a majority of outside
directors); and
(vi) shares of Common Stock or Preferred Stock
issued in connection with any stock split, stock dividend, or recapitalization
by the Company.
(c) Notice. In the event that the Company proposes to undertake an
------
issuance of New Securities, it shall give each First Refusal Rightsholder
written notice of its intention, describing the type of New Securities, the
price, and the general terms upon which the Company proposes to issue the same.
Each First Refusal Rightsholder shall have twenty (20) business days after
receipt of such notice to agree to purchase its pro rata share of such New
Securities at the price and upon the terms specified in the notice by giving
written notice to the Company and stating therein the quantity of New Securities
to be purchased. If any First Refusal Rightsholder fails to agree to purchase
its full pro rata share within such twenty (20) business day period, the Company
will give the First Refusal Rightsholders who did so agree (the "Electing
Purchasers") notice of the number of shares which were not subscribed for. Such
notice may be by telephone if followed by written confirmation within two days.
The Electing Purchasers shall have
-16-
<PAGE>
have ten (10) business days from the date of such notice to agree to purchase
pro rata all of the New Securities not purchased by such non-purchasing
purchasers.
(d) Sale of New Securities. In the event that the First Refusal
----------------------
Rightsholders fail to exercise in full the right of first refusal within the
twenty (20) business plus ten (10) business day period specified above, the
Company shall have one hundred twenty (120) days thereafter to sell (or enter
into an agreement pursuant to which the sale of New Securities covered thereby
shall be closed, if at all, within sixty (60) days from the date of said
agreement) the New Securities respecting which the rights of the purchasers were
not exercised at a price and upon terms no more favorable to the purchasers
thereof than specified in the Company's notice. In the event the Company has
not sold the New Securities within such one hundred twenty (120) day period (or
sold and issued New Securities in accordance with the foregoing within sixty
(60) days from the date of such agreement) the Company shall not thereafter
issue or sell any New Securities, without first offering such New Securities to
the purchasers in the manner provided above.
(e) Termination. The Right of First Refusal granted under this
-----------
Section 7 shall expire immediately prior to the completion by the Company of an
initial public offering if the anticipated aggregate offering price thereof, net
of underwriting discounts and commissions, would exceed $25 million at a public
offering price of not less than $8.00 per share (as adjusted for any subsequent
stock dividend, stock split or recapitalization) (the "Qualified Offering").
This Right of First Refusal shall terminate as to any First Refusal Rightsholder
at such time as such First Refusal Rightsholder ceases to own any Preferred
Stock or Common Stock issuable upon conversion of the Preferred Stock. This
Right of First Refusal shall terminate as to any transferee or assignee of a
First Refusal Rights holder at such time as such transferee or assigneee ceases
to own any Preferred Stock or Common Stock issuable upon conversion of the
Preferred Stock.
(f) Assignment of Right of First Refusal. This Right of First Refusal
------------------------------------
may be assigned to a transferee or assignee that is an affiliate of a First
Refusal Rightsholder or in connection with the transfer or assignment of at
least 200,000 of the Stockholder's shares of Preferred Stock or Common Stock
issued upon conversion of the Preferred Stock (as adjusted for any subsequent
stock dividend, stock splits or recapitalization); provided that the Company is
given notice thereof and the transferee covenants to be bound by the provisions
of this Agreement.
8. First Refusal and Co-Sale Rights on Certain Stock: In the event
-------------------------------------------------
that any Founder receives a bona fide offer from any person to purchase any of
such Founder's Common Stock (the "Founder's Shares"), then such Founder (the
"Selling Founder") shall first give the Preferred Stockholders (the
"Rightholders") notice of his intention to sell Founders Shares, describing the
amount of Founder's Shares proposed to be transferred, the identity of the
proposed transferee, and the price and terms upon which he proposes to make such
transfer (the "Transfer Notice").
-17-
<PAGE>
8.1 First Refusal. Each Rightholder shall have the right to purchase, at
-------------
the price and on the terms set forth in the Transfer Notice, such person's pro
rata share (based on the number of shares of the Company (on an as-converted to
Common Stock basis) held by the Rightholder at the date of the Transfer Notice
divided by the total number of shares of the Company (on an as-converted to
Common Stock basis) then outstanding) of the Founder's Shares proposed to be
transferred by tendering to the Selling Founder, within fifteen (15) days of
delivery of the Transfer Notice the purchase price therefore as set forth in the
Transfer Notice and complying with the other terms of the offer set forth in the
Transfer Notice. Any Rightholder who exercises any rights under this Section 8.1
with respect to a transaction shall be deemed to have declined to exercise its
rights under Section 8.2 with respect to that transaction.
8.2 Co-Sale. Within fifteen (15) days after delivery of the Transfer
-------
Notice, each Rightholder may elect to sell up to such person's pro rata share of
the shares to be purchased by the transferee described in the Transfer Notice by
giving written notice thereof to the Selling Founder and tendering to the
Secretary of the Company a certificate representing the shares to be sold,
properly endorsed for transfer, with written instructions to transfer the shares
to the transferee described in the Transfer Notice upon receipt of payment for
such shares from such transferee for the benefit of such Rightholder. The
Selling Founder shall thereupon notify the transferee of the co-sale
arrangements hereunder, and instruct the transferee to deliver payment for the
shares to be purchased from the Rightholders to the Secretary of the Company,
who shall transmit such payment to the Rightholders. For the purpose of the co-
sale right set forth in this Section 8.2, the pro rata share of a Rightholder
shall be determined based on the number of shares of Common Stock issued or
issuable upon conversion of the Preferred Stock held by each Rightholder divided
by the sum of (A) the total number of shares of Common Stock issued or issuable
upon conversion of the Preferred Stock held by all Rightholders exercising the
Co-Sale Right pursuant to this Section 8.2 plus (B) the number of shares of
Common Stock held by the Founder at the date of the Transfer Notice (assuming
conversion of all convertible securities and exercise of all vested options and
warrants held by such Founder). Any Rightholder who exercises any rights under
this Section 8.2 with respect to a transaction shall be deemed to have declined
to exercise its rights under Section 8.1 with respect to that transaction.
8.3 Failure to Exercise Right. In the event that some or all of the
-------------------------
Founder's Shares proposed to be transferred are not purchased by the
Rightholders as allowed by Section 8.1, and to the extent the Rightholders
decline to exercise the co-sale right as allowed by Section 8.2, the Selling
Founder may, within ninety (90) days after the date on which Rightholders' first
refusal and co-sale rights lapsed, transfer some or all of the Founder's Shares
which were the subject of the Transfer Notice at a price and on terms no more
favorable to the transferee(s) than specified in the Transfer Notice. Founder's
Shares transferred in accordance with the provisions of this Section 8 shall no
longer be subject to the restrictions on Founder's Shares forth in this Section
8. After the expiration of said ninety (90) day period, the Selling Founder
shall not transfer any of his Founder's Shares without first offering such
securities to the Rightholders in the manner provided above in Sections 8.1 and
8.2.
8.4 Permitted Transfers. Any transfer of Founder's Shares without
-------------------
consideration to a family member of the Founder or a trust or custodian for the
benefit of the
-18-
<PAGE>
Founder or a family member of the Founder and transfers pursuant to a pledge to
secure a bank loan shall not be subject to the provisions of this Section 8,
provided that the transferee agrees in writing to be bound by the provisions of
this Section 8 with respect to any subsequent transfer of such shares; provided
further that Founder may transfer up to an aggregate of fifteen percent (15%) of
that Founder's Shares without complying with the right of first refusal and co-
sale provisions under this Section 8.
8.5 Assignment. The rights of first refusal and co-sale granted under this
----------
Section 8 may be assigned to a transferee or assignee that is an affiliate of a
Holder or in connection with any transfer or assignment of at least 100,000
shares of Registrable Securities (as adjusted for any subsequent stock
dividends, stock splits or recapitalizations) provided that: (i) such transfer
may otherwise be effected in accordance with applicable securities laws; and
(ii) such assignees or transferees are constituent members, partners or
shareholders of, or retired members or partners of, a Holder which is a limited
liability company, partnership or corporation and such members, partners or
shareholders agree to act collectively through a single representative.
8.6 Termination. The rights of the Rightholders pursuant to this Section 8
-----------
shall terminate and be of no further force or effect upon earlier of (i) April
2, 2002, (ii) the closing of the Company's Qualified Offering and (iii) the
acquisition of the Company by any other entity in a transaction in which the
holders of the Company's outstanding stock immediately preceding such
transaction hold less than a majority of the outstanding stock of the surviving
entity on an as-converted to Common Stock basis.
9. Information, Inspection, and Management Rights.
----------------------------------------------
9.1 Rights.
------
(a) So long as a Stockholder, together with its affiliates, partners
or members of such Stockholder (collectively, a "Stockholder Group") holds
shares of Preferred Stock or Conversion Stock, the Company shall deliver to such
Stockholder within ninety (90) days of the end of each fiscal year the audited
consolidated financial statements, including a balance sheet and statements of
cash flow and shareholders' equity, for the Company and a capitalization table
in reasonable detail for such fiscal year and its consolidated subsidiaries for
such year, prepared in accordance with generally accepted accounting principles,
and the unaudited quarterly financial statements of the Company; provided that
the Company may exclude a Stockholder from the distribution of such information
if the Board of Directors determines in good faith upon advice of counsel that
such exclusion is reasonably necessary to preserve attorney-client privilege or
to protect a trade secret or other similar confidential information.
(b) So long as a Stockholder together with its Stockholder Group
holds at least 600,000 shares of Preferred Stock or Conversion Stock, the
Company will deliver to that Stockholder (i) as soon as practicable, but in any
event within forty-five (45) days after the end of each quarter of each fiscal
year of the Company, an unaudited income statement, balance sheet and comparison
to budget for and as of the end of such quarter, in reasonable detail, (ii)
within
-19-
<PAGE>
thirty (30) days of the end of each month, an unaudited income statement,
balance sheet and comparison to budget for and as of the end of such month, in
reasonable detail, (iii) as soon as practicable, but in any event thirty (30)
days prior to the end of each fiscal year, a budget and business plan for the
next fiscal year, prepared on a monthly basis, including balance sheets and, as
soon as prepared, any other budgets or revised budgets prepared by the Company.
In addition, the Company shall provide such other information relating to the
financial condition, business, prospects or corporate affairs of the Company as
the Stockholder may from time to time reasonably request; provided that the
Company may exclude a Stockholder from the distribution of such information if
the Board of Directors determines in good faith upon advice of counsel that such
exclusion is reasonably necessary to preserve attorney-client privilege, or to
protect a trade secret or similar confidential information.
(c) So long as a Stockholder together with its Stockholder Group
holds at least 500,000 shares of Preferred Stock or Conversion Stock, such
Stockholder or its representative shall have the right to: (i) consult with and
advise management of the Company on significant business issues, including
management's proposed annual operating plans, (ii) meet with management of the
Company regularly during each year at the Company's facilities at mutually
agreeable times for such consultation and advice and to review progress in
achieving said plans, (iii) examine the books and records of the Company and
inspect its facilities and request information at reasonable times and intervals
concerning the general status of the Company's financial condition and
operations; provided that the Company may exclude a Stockholder from the
distribution of such information if the Board of Directors determines in good
faith upon advice of counsel that such exclusion is reasonably necessary to
preserve attorney-client privilege, or to protect trade secret or other similar
confidential information.
For the purposes of this Section 9, "Stockholder" shall mean any
Stockholder together with any affiliate of such Stockholder.
9.2 Board Visitation Rights. The Company shall give notice to and
-----------------------
invite a representative from each of Integral Capital Partners IV, L.P.
("Integral") and General Electric Capital Corporation ("GECC") to attend all
meetings of its Board of Directors and Board committee meetings in a non-voting
advisory capacity. Each of Integral's and GECC's representatives shall receive
copies of all notices, minutes, consents and other materials that the Company
provides to the directors of the Company at the same time as such materials are
provided to the directors; provided that the Company may exclude Integral and/or
GECC from the distribution of such information if the Board of Directors
determines in good faith upon advice of counsel that such exclusion is
reasonably necessary to preserve attorney-client privilege between the Company
and its counsel or would result in disclosure of trade secrets to such
representative. Integral's and GECC's visitation rights will terminate upon the
closing of the Company's Qualified Offering or upon the sale of the Company.
9.3 Assignment of Information and Inspection Rights. The rights
-----------------------------------------------
granted pursuant to Section 9.1 may be assigned or otherwise conveyed by any
Stockholder to an affiliate of such Stockholder and may not be assigned or
otherwise conveyed to any other person only
-20-
<PAGE>
with the prior written consent of the Company, which consent shall not be
unreasonably withheld.
9.4 Confidentiality. Each Stockholder agrees, and any representative
---------------
of such Stockholder will agree, to hold in confidence and trust and not use or
disclose any confidential information provided to or learned by it in connection
with the rights granted in Sections 9.1 and 9.3 other than in connection with
the investment in the Company.
9.5 Termination of Covenants. The obligations of the Company set
------------------------
forth in Sections 9.1 and 9.3 shall terminate and be of no further force or
effect upon the earlier of (i) the closing of an underwritten public offering
pursuant to an effective registration statement under the Securities Act, or
(ii) at such time as the Company is required to file reports pursuant to Section
13 of the Securities Exchange Act of 1934, as amended. The confidentiality
provisions set forth in Section 9.4 shall survive any such termination.
Notwithstanding the foregoing, any Stockholder may disclose any such
confidential information to the extent required by any applicable law,
regulation, or court or governmental order provided that such Stockholder shall
give the Company prior written notice thereof.
10. Amendment. Any provision of this Agreement may be amended or the
---------
observance thereof may be waived (either generally or in a particular instance
and either retroactively or prospectively), only with the written consent of the
Company and the holders of not less than a majority of the Registrable
Securities then outstanding, provided that Section 9.2 of this Agreement may
only be amended with the written consent of Integral and/or GECC, as applicable
and if an amendment by its terms affects the rights of a subset, series or class
of securities differently than other securities, such amendment must be approved
by written consent of not less than a majority of the holders of that subset,
class or series of securities. Any amendment or waiver effected in accordance
with this Section 10 shall be binding upon each Preferred Stockholder and each
Holder of Registrable Securities at the time outstanding (including securities
into which such securities are convertible), each future holder of all such
securities, and the Company. Any amendment to Section 8 of this Agreement that,
in the good faith judgment of the Board of Directors, adversely affects the
Founders must be approved by a majority of the Founders.
11. Rescission of Investor Rights Agreement. The First Amended and
---------------------------------------
Restated Investor Rights Agreement by and among the Company, the Founders and
the other parties named therein dated as of July 31, 1997 is hereby terminated
and shall be null and void. The parties hereto acknowledge that the preemptive
rights contained in the Prior Agreement have been satisfied or otherwise waived.
12. Governing Law. This Agreement and the legal relations between
-------------
the parties arising hereunder shall be governed by and interpreted in accordance
with the laws of the State of California, without respect to rules concerning
the conflict of laws which would otherwise require application of the
substantive law of another jurisdiction. The parties hereto agree to submit to
the jurisdiction of the federal and state courts of the State of California
matters with respect to the breach or interpretation of this Agreement or the
enforcement of any and all rights,
-21-
<PAGE>
duties, liabilities, obligations, powers, and other relations between the
parties arising under this Agreement.
13. Entire Agreement. This Agreement, together with all Exhibits hereto,
----------------
constitute the full and entire understanding and agreement between the parties
regarding the matters set forth herein. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding upon
the successors, assigns, heirs, executors and administrators of the parties
hereto.
14. Notices. All notices and other communications required or permitted
-------
hereunder shall be in writing and shall be deemed effectively given upon
personal delivery to the party to be notified or three (3) days after deposit
with the United States mail, by registered or certified mail, postage prepaid,
addressed (a) if to a Preferred Stockholder, at such Preferred Stockholder's
address as set forth on the Schedule of Preferred Stockholders attached hereto,
or at such other address as such Preferred Stockholder shall have furnished to
the Company in writing in accordance with this Section 14, (b) if to any other
holder of Conversion Stock, at such address as such holder shall have furnished
the Company in writing in accordance with this Section 14, or, until any such
holder so furnishes an address to the Company, then to and at the address of the
last holder thereof who has so furnished an address to the Company, or (c) if to
the Company, at its principal office.
15. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
16. Aggregation of Securities. All shares of Preferred Stock or Common
-------------------------
Stock issued upon conversion of the Preferred Stock (as adjusted for any
subsequent stock dividends, stock splits or recapitalizations) held by
affiliates or partners or members of such Holder, shall be aggregated for the
purpose of determining the availability of any right under this Agreement.
[Remainder of page intentionally left blank]
-22-
<PAGE>
The foregoing agreement is hereby executed as of the date first above
written.
"COMPANY"
CENTILLIUM TECHNOLOGY CORPORATION
By: /s/ A. Travis White, President
_______________________________________
A. Travis White, President
"FOUNDERS"
KAMRAN ELAHIAN
/s/ KAMRAN ELAHIAN
___________________________________________
SHAHIN HEDAYAT
/s/ SHAHIN HEDAYAT
___________________________________________
ANTHONY O'TOOLE
/s/ ANTHONY O'TOOLE
___________________________________________
SURENDRA BABU MADAVA
/s/ SURENDRA BABU MADAVA
___________________________________________
FARAJ AALAEI
/s/ FARAJ AALAEI
___________________________________________
[Signature page to the Series C Investor Rights Agreement]
<PAGE>
"EXISTING MAJORITY HOLDERS"
VERTEX ASIA LIMITED
By: /s/ VERTEX ASIA LIMITED
_________________________________________
Name:
Title:
VERTEX INVESTMENT II LIMITED
By: /s/ VERTEX INVESTMENT II LIMITED
_________________________________________
Name:
Title:
PACVEN WALDEN VENTURES III, L.P.
By: /s/ PACVEN WALDEN VENTURES III, L.P.
_________________________________________
Name:
Title:
ASIAN VENTURES CAPITAL INVESTMENT CORPORATION
By: /s/ ASIAN VENTURES CAPITAL INVESTMENT
CORPORATION
_________________________________________
Name:
Title:
TWG INVESTMENT LDC
By: /s/ TWG INVESTMENT LDC
_________________________________________
Name:
Title:
OW&W INVESTMENTS LTD.
By: /s/ OW&W INVESTMENTS LTD.
_________________________________________
Name:
Title:
[Signature page to the Series C Investor Rights Agreement]
<PAGE>
"EXISTING MAJORITY HOLDERS"
MITSUBISHI INTERNATIONAL CORPORATION
By: /s/ MITSUBISHI INTERNATIONAL CORPORATION
_________________________________________
Name:
Title:
MITSUBISHI ELECTRONICS AMERICA, INC.
By: /s/ MITSUBISHI ELECTRONICS AMERICA, INC.
_________________________________________
Name:
Title:
U.S. VENTURE PARTNERS V, L.P.
By: /s/ U.S. VENTURE PARTNERS V, L.P.
_________________________________________
Name:
Title:
U.S. V INTERNATIONAL, L.P.
By: /s/ U.S. V INTERNATIONAL, L.P.
_________________________________________
Name:
Title:
USVP ENTREPRENEUR PARTNERS V, L.P.
By: /s/ USVP ENTREPRENEUR PARTNERS V, L.P.
_________________________________________
Name:
Title:
2180 ASSOCIATES FUND V, L.P.
By: /s/ 2180 ASSOCIATES FUND V, L.P.
_________________________________________
Name:
Title:
[Signature page to the Series C Investor Rights Agreement]
<PAGE>
"SERIES C PURCHASERS"
____________________________________________
Name of Purchaser
By:_________________________________________
Name:
Title:
[Signature page to the Series C Investor Rights Agreement]
<PAGE>
EXHIBIT A
FOUNDERS
Kamran Elahian
Shahin Hedayat
Anthony O'Toole
Surendra Babu Madaua
Faraj Aalaei
<PAGE>
EXHIBIT B
STOCKHOLDERS
The following table lists the number of shares of capital stock of the
Company subject to the provisions of this Agreement as of the date hereof.
<TABLE>
<CAPTION>
Series A Series B1 Series B2 Series B3 Series C
Name Common Stock Preferred Preferred Preferred Preferred Preferred
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kamran Elahian 1,573,187 -- -- -- -- --
Shahin Hedayat 2,510,493 -- -- -- -- --
Anthony O'Toole 1,305,440 -- -- -- -- --
Surendra Babu Mandava 1,305,440 -- -- -- -- --
Faraj Aalaei 1,305,440 -- -- -- -- --
U.S. Venture Partners V, L.P. -- 450,000 -- -- 225,000 495,000
USVP V International, L.P. -- 25,000 -- -- 12,500 27,500
2180 Associates Fund V, L.P. -- 14,000 -- -- 5,500 15,400
USVP V Entrepreneur Partners L.P. -- 11,000 -- -- 7,000 12,100
F & W Investments 1996-II -- 45,000 -- -- -- --
WS Investment Company 97A -- 40,500 -- -- -- --
Trustee, WSGR Retirement Plan
For Arthur Schneiderman -- 105,000 -- -- -- --
Arthur F. Schneiderman -- 4,500 -- -- -- --
Jeff Scheiderman -- 4,000 -- -- -- --
Jonathan Scheiderman -- 4,000 -- -- -- --
Jason Scheiderman -- 4,000 -- -- -- --
Julie Scheiderman -- 4,000 -- -- -- --
Jennifer Swinmurn -- 4,000 -- -- -- --
James Lally -- 20,000 -- -- -- --
Prakash Agarwal -- 40,000 -- -- -- --
Clement Leung -- 40,000 -- -- -- --
Deepraj S. Puar -- 20,000 -- -- -- --
Ron Jankov -- 20,000 -- -- -- --
Leonard A. Lehmann -- 20,000 -- -- -- --
Mohammad R. Dastmalchi -- 20,000 -- -- -- --
Sera Reddy -- 20,000 -- -- -- --
Ashok K. Chandra -- 20,000 -- -- -- --
Hamid Nakhai -- 20,000 -- -- -- --
Irv Kovalik -- 40,000 -- -- -- --
R. Randall Scott -- 50,000 -- -- -- --
Baldev Krishan -- 20,000 -- -- -- --
Lila Varian Van Linge -- 15,000 -- -- -- --
Noriyuki Ebara -- 40,000 -- -- -- --
Clark L. Gerhardt -- 10,000 -- -- -- --
Stuart L. Klein as separate property -- 20,000 -- -- -- --
Tak Yamamoto -- 20,000 -- -- -- --
Daniel L. Klesken -- 10,000 -- -- -- --
Vertex Asia Ltd. -- -- -- 400,000 250,000 --
Vertex Investment II Ltd. -- -- -- 400,000 250,000 380,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Series A Series B1 Series B2 Series B3 Series C
Name Common Stock Preferred Preferred Preferred Preferred Preferred
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Korea Technology Banking Corporation -- -- -- -- 175,000 80,000
Fred Azad -- -- -- -- 3,000 --
Jim Betz -- -- -- -- 2,500 --
Ibrahim Korgav -- -- -- -- 6,250 --
Pamela Najera -- -- -- -- 2,500 --
Richard D. Stubblefield, Jr. -- -- -- -- 6,250 --
Gwill E. York -- -- -- -- 6,250 --
Stuart Klein -- -- -- -- 3,750 --
Leonard Lehmann -- -- -- -- 11,250 --
Mark Singer -- -- -- -- 2,500 --
Sonny Gulati -- -- -- -- 3,000 --
Mitsubishi International Corporation -- -- -- -- 167,500 --
Mitsubishi Electronics America, Inc. -- -- -- -- 500,000 --
MC Silicon Valley, Inc. -- -- -- -- 82,500 --
Bayview Investors Limited -- -- -- -- 48,232 --
Hajime Yamazaki -- -- -- -- 3,000 --
Mitsuo Kurobe -- -- -- -- 14,000 --
Nalin Advani -- -- -- -- 7,500 --
Susumu Tanaka -- -- -- -- 2,500 --
Karin Bootsma -- -- -- -- 1,250 --
Seed Ventures II, Ltd. -- -- 75,000 -- -- 50,000
Asian Ventures Capital Investment Corp. -- -- 80,364 -- 47,273 --
TWG Investment LDC -- -- 74,181 -- 43,637 --
OCBC, Wearnes & Walden Investments
(Singapore) Ltd. -- -- -- -- -- 40,000
Pacven Walden Ventures III, L.P. -- -- 270,455 -- 159,090 400,000
O W & W Investments Ltd. -- -- -- -- 75,000 60,000
InveStar Burgeon Venture Capital, Inc. -- -- -- -- 62,500 --
InveStar Semiconductor Development
Fund, Inc. -- -- -- -- 187,500 --
InveStar Dayspring Venture Capital Inc. -- -- -- -- 125,000 --
Stephen Li -- -- -- -- 50,000 --
Sumitomo Electric Industries -- -- -- -- 500,000 --
Mr. Satoru Yano -- -- -- -- 5,000 --
Dr. Yukio Mizuno -- -- -- -- 2,500 --
Tak Yamamoto -- -- -- -- 2,500 --
Current Ventures Group, Ltd. -- -- -- -- 62,500 --
Tom Rahimi -- -- -- -- 2,500 --
ZyXEL Communications, Inc. -- -- -- -- 62,500 --
Dynalink International Corporation -- -- -- -- 62,500 --
Reza Hedayat -- -- -- -- 2,000 --
Eugene J. Norrett, Jr. -- -- -- -- 6,250 --
GVC Group -- -- -- -- 100,000 --
Ken Murray -- -- -- -- 2,500 --
Brad Peery Capital -- -- -- -- -- 5,000
Brad Peery Capital, L.P. -- -- -- -- -- 67,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Series A Series B1 Series B2 Series B3 Series C
Name Common Stock Preferred Preferred Preferred Preferred Preferred
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brad Peery Capital International -- -- -- -- -- 28,000
Brad Peery Capital Ventures, L.P. -- -- -- -- -- 20,000
Creative Technology -- -- -- -- -- 400,000
GE Capital Equity Investments, Inc. -- -- -- -- -- 1,000,000
The Chase Manhattan Bank, as Trustee
for the First Plaza Group Trust by
the Chase Manhattan Bank -- -- -- -- -- 1,600,000
The Goldman Sachs Group, L.P. -- -- -- -- -- 500,000
Stone Street Fund 1999, L.P. -- -- -- -- -- 75,760
Bridge Street Fund 1999, L.P. -- -- -- -- -- 24,240
Integral Capital Partners IV, L.P. -- -- -- -- -- 995,442
Integral Capital Partners IV MS
Side Fund, L.P. -- -- -- -- -- 5,449
J&W Seligman & Co. (Seligman
Communications and Information
Fund, Inc.) -- -- -- -- -- 400,000
Lehman Brothers VC Partners L.P. -- -- -- -- -- 200,000
LB I Group, Inc. -- -- -- -- -- 75,354
Velocity Technology and
Communications Fund Trust C -- -- -- -- -- 400,000
Smart Technology Ventures II, LLC -- -- -- -- -- 100,000
Brad Van Linge, Co-Trustee The Van
Linge Family Trust -- -- -- -- -- 10,000
Farahnaz Maniei & Reza Sisaktii -- -- -- -- -- 20,000
Stan Leopard -- -- -- -- -- 10,000
Bobby Greenberg -- -- -- -- -- 20,000
Nobuo Nakamura -- -- -- -- -- 10,000
Terrell White -- -- -- -- -- 20,000
Donald Neuschwander -- -- -- -- -- 10,000
Michael Inkster -- -- -- -- -- 5,000
Mikio Sasaki -- -- -- -- -- 200
Tetsuro Masuda -- -- -- -- -- 200
Current Ventures Group, Ltd -- -- -- -- -- 10,000
Robert Hawk -- -- -- -- -- 20,000
</TABLE>
<PAGE>
EXHIBIT 10.17
AGREEMENT AND MUTUAL RELEASE
----------------------------
This Agreement and Mutual Release ("Agreement") is made by and between
Centillium Communications, Inc. (formerly Centillium Technology Corporation)
(the "Company"), and Albert Travis White ("Employee").
WHEREAS, Employee was employed by the Company; and
WHEREAS, the Company and Employee have entered into an Employment
Agreement dated as of April 1, 1998 (the "Employment Agreement") a copy of which
is attached hereto as Exhibit A and a Confidentiality and Inventions Agreement
(the "Confidentiality Agreement"); and
WHEREAS, the Company and Employee have mutually agreed to terminate
the employment relationship and to release each other from any claims arising
from or related to the employment relationship;
NOW THEREFORE, in consideration of the mutual promises made herein,
the Company and Employee (collectively referred to as "the Parties") hereby
agree as follows:
(a) Resignation. Employee resigns from his position as an
-----------
employee effective March 31, 2000 and as a director and officer of the Company,
including his position of Chief Executive Officer and President and all officer
and director positions of any subsidiaries of the Company effective January 21,
2000.
(b) Consideration. The Company agrees to pay Employee a total of
-------------
Two hundred twenty-five thousand dollars ($225,000), less applicable
withholding, in equal monthly installments over the twelve-month period
commencing April 1, 2000 and ending March 31, 2001. Such payments shall be made
consistent with current policies of the Company with respect to the payment of
salary, i.e. bi-weekly basis. Except as otherwise specified in this Agreement,
Employee will not be entitled to accrual of any employee benefits, including,
but not limited to, vacation benefits or bonuses after March 31, 2000. The
Company's obligation to make such payments shall cease should Employee be in
breach of his obligations under Sections 12, 13 or 14 of the Employment
Agreement.
(c) Vesting of Stock. Employee was granted options to purchase
----------------
844,257 shares of Common Stock. Employee purchased 337,500 shares of Common
Stock pursuant to the exercise of certain of those options granted to Employee.
The repurchase rights have lapsed with respect to said shares. Of the remaining
506,757 shares subject to the initial option grant, options to purchase 295,693
shares shall be deemed vested pursuant to the Employment Agreement and in any
event on or before March 31, 2000 and shall be exercisable in accordance with
the terms of the option grant. The remaining unvested and unexercised options
to purchase 211,064 shares of Common Stock are hereby cancelled and terminated.
<PAGE>
(d) Benefits. Employee shall be entitled to continued health care
--------
coverage under the Company's health insurance programs until the earlier to
occur of (i) March 31, 2001, or (ii) the first date that Employee becomes
covered under another employer's health benefit program that provides
substantially the same level of benefits. If coverage for pre-existing medical
conditions is not available, clause (ii) shall not apply. Employee shall have
the right to convert his health insurance benefits to individual coverage
pursuant to COBRA after the initial twelve (12) month period. The coverage
provided Employee under this Paragraph 4 will be in lieu of any other continued
health care coverage to which Employee would otherwise be entitled pursuant to
the requirements of Internal Revenue Code section 4980B by reason of Employee's
termination of employment, and Employee shall not be entitled to any further
health care coverage under Internal Revenue Code section 4980B following the
coverage period in effect under this Paragraph 4.
(e) Additional Matters of Consideration. As of the effective date of
-----------------------------------
this Agreement:
Irrespective of this Agreement, Employee shall be entitled to:
(i) all accrued but unused paid time off; and
(ii) reimbursement of expense receipts not yet submitted, provided
such receipts are reimbursable pursuant to the Company's expense reimbursement
policy.
(f) Confidential Information. Employee shall continue to maintain the
------------------------
confidentiality of all confidential and proprietary information of the Company
and shall continue to comply with the terms and conditions of the
Confidentiality Agreement between Employee and the Company. Employee shall
return all Company property of an attorney/client privileged nature and all of
the Company's confidential and proprietary information in his possession to the
Company as soon as practicable after the effective date of this Agreement.
(g) Payment of Salary. The Parties acknowledge and agree that:
-----------------
(i) Except as otherwise provided herein, as of March 31, 2000,
all salary, and accrued vacation, and any and all other benefits, commissions or
other such sums due Employee will be paid to Employee.
(ii) In light of the payment by the Company of all wages due, or
to become due to Employee, that California Labor Code section 206.5 is not
applicable to the Parties here. Said section provides in pertinent part:
No employer shall require the execution of any release of any claim or
right on account of wages due, or to become due, or made as an advance on wages
to be earned, unless payment of such wages has been made.
(h) Release of Claims. Employee agrees that the foregoing
-----------------
consideration represents settlement in full of all outstanding obligations owed
to Employee by the Company.
-2-
<PAGE>
Employee and the Company, on behalf of themselves, and their respective heirs,
family members, executors, officers, directors, employees, investors,
shareholders, administrators, affiliates, divisions, subsidiaries, predecessor
and successor corporations, agents and assigns, hereby fully and forever release
each other and their respective heirs, family members, executors, officers,
directors, employees, investors, shareholders, administrators, or any other
person, affiliates, divisions, subsidiaries, predecessor and successor
corporations, agents and assigns, of and from any claim, duty, obligation or
cause of action relating to any matters of any kind, whether presently known or
unknown, suspected or unsuspected, that any of them may possess arising from any
omissions, acts or facts that have occurred up until and including the effective
date of this Agreement including, without limitation,
(i) any and all claims relating to or arising from Employee's
employment relationship with the Company and the termination of that
relationship;
(ii) any and all claims relating to, or arising from, Employee's
right to purchase, or actual purchase of shares of stock of the Company as an
employee of Company, except to the extent of the application of Section 11(b)(1)
of the Employment Agreement including, without limitation, any claims for fraud,
misrepresentation, breach of fiduciary duty, breach of duty under applicable
state corporate law, and securities fraud under any state or federal law;
(iii) any and all claims for wrongful discharge of employment;
termination in violation of public policy; discrimination, breach of contract,
both express and implied; breach of a covenant of good faith and fair dealing,
both express and implied; promissory estoppel; negligent or intentional
infliction of emotional distress; negligent or intentional misrepresentation;
negligent or intentional interference with contract or prospective economic
advantage; unfair business practices; defamation; libel; slander; negligence;
personal injury; assault; battery; invasion of privacy; false imprisonment; and
conversion;
(iv) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment
Act of 1967, as amended ("ADEA"), the Americans with Disabilities Act of 1990,
the Fair Labor Standards Act, the Employee Retirement Income Security Act of
1974, the Worker Adjustment Retraining Notification Act, the Older Workers
Benefit Protection Act, the California Fair Employment and Housing Act and
California Labor Code Sections 201, et seq. and Section 970, et. seg.;
(v) any and all claims arising out of any other laws and
regulations relating to employment or employment discrimination;
(vi) any and all claims for violation of the Federal, or any
state, constitution;
(vii) any and all claims for attorneys' fees and costs; and
-3-
<PAGE>
(viii) any and all claims for any acts by either occurring at any
time prior to the execution of this Agreement.
The Company and Employee agree that the release set forth in this section
shall be and remain in effect in all respects as a complete general release as
to the matters released, provided the other obligations herein are satisfied.
(i) Press Release. In the event the Company intends to issue a
-------------
press release with respect to Employee's departure or the hiring of a
replacement, that includes a reference to Employee, Employee shall be provided
the opportunity to review the proposed press release and offer comments.
(j) Confidentiality. The Parties hereto each agree to use their best
---------------
efforts to maintain in confidence the existence of this Agreement, the contents
and terms of this Agreement, and the consideration for this Agreement
(hereinafter collectively referred to as "Settlement Information"). Each Party
hereto agrees to take every precaution to prevent disclosure of any Settlement
Information to third parties, and each agrees that there will be no publicity,
directly or indirectly, concerning any Settlement Information. The Parties
hereto agree to take every precaution to disclose Settlement Information only to
those employees, officers, directors, attorneys, accountants, governmental
entities, and family members who have a reasonable need to know of such
Settlement Information.
(k) Disparagement. Each party agrees to refrain from any
-------------
disparagement, defamation, libel or slander of the other, or tortious
interference with the contracts and relationships of the other.
(l) Tax Consequences. The Company makes no representations or
----------------
warranties with respect to the tax consequences of the payment of any sums to
Employee under the terms of this Agreement. Employee agrees and understands
that he is responsible for payment, if any, of local, state and/or federal taxes
on the sums paid hereunder by the Company and any penalties or assessments
thereon. Employee further agrees to indemnify and hold the Company harmless
from any claims, demands, deficiencies, penalties, assessments, executions,
judgments, or recoveries by any government agency against the Company for any
amounts claimed due on account of Employee's failure to pay federal or state
taxes or damages sustained by the Company by reason of any such claims,
including reasonable attorneys' fees.
(m) No Admission of Liability. The Parties understand and acknowledge
-------------------------
that this Agreement constitutes a compromise and settlement of disputed claims.
No action taken by the Parties hereto, or either of them, either previously or
in connection with this Agreement shall be deemed or construed to be (a) an
admission of the truth or falsity of any claims heretofore made or (b) an
acknowledgment or admission by either party of any fault or liability whatsoever
to the other party or to any third party.
(n) Costs. The Parties shall each bear their own costs, expert fees,
-----
attorneys' fees and other fees incurred in connection with this Agreement.
-4-
<PAGE>
(o) Authority. The Company represents and warrants that the
---------
undersigned has the authority to act on behalf of the Company and to bind the
Company and all who may claim through it to the terms and conditions of this
Agreement. Employee represents and warrants that he has the capacity to act on
his own behalf and on behalf of all who might claim through him to bind them to
the terms and conditions of this Agreement. Each Party warrants and represents
that there are no liens or claims of lien or assignments in law or equity or
otherwise of or against any of the claims or causes of action released herein.
(p) No Representations. Each party represents that it has had the
------------------
opportunity to consult with an attorney, and has carefully read and understands
the scope and effect of the provisions of this Agreement. Neither party has
relied upon any representations or statements made by the other party hereto
which are not specifically set forth in this Agreement.
(q) Severability. In the event that any provision hereof becomes or
------------
is declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
(r) Entire Agreement. This Agreement represents the entire agreement
----------------
and understanding between the Company and Employee concerning Employee's
separation from the Company, and supersedes and replaces any and all prior
agreements and understandings concerning Employee's relationship with the
Company and her compensation by the Company.
(s) No Oral Modification. This Agreement may only be amended in
--------------------
writing signed by Employee and the Chairman of the Company.
(t) Governing Law. This Agreement shall be governed by the laws of
-------------
the State of California.
(u) Effective Date. This Agreement is effective as of the date of
--------------
this Agreement.
(v) Counterparts. This Agreement may be executed in counterparts, and
------------
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
(w) Voluntary Execution of Agreement. This Agreement is executed
--------------------------------
voluntarily and without any duress or undue influence on the part or behalf of
the Parties hereto, with the full intent of releasing all claims. The Parties
acknowledge that:
(i) They have read this Agreement;
(ii) They have been represented in the preparation, negotiation,
and execution of this Agreement by legal counsel of their own choice or that
they have voluntarily declined to seek such counsel;
-5-
<PAGE>
(iii) They understand the terms and consequences of this
Agreement and of the releases it contains;
(iv) They are fully aware of the legal and binding effect of
this Agreement.
(x) Return of Company Property. Employee represents and warrants that
--------------------------
he has returned to the Company all Company property and that as of the date of
this Agreement, Employee is not in possession of any Company property of
whatever nature.
(y) Employment Agreement. Except as otherwise provided herein, and
--------------------
the application, if appropriate, of Section 11(b)(i) of the Employment
Agreement, the Employment Agreement is deemed terminated.
IN WITNESS WHEREOF, the Parties have executed this Agreement on the
respective dates set forth below.
Centillium Communications, Inc.
Dated: February 1, 2000 /s/ Faraj Aalaei
_________________ ______________________________
By: Faraj Aalaei
Title: Cheif Executive Officer
Albert Travis White, an individual
Dated: February 2, 2000 /s/ Albert Travis White
_________________ _____________________________
Albert Travis White
-6-
<PAGE>
EXHIBIT 10.18
[LOGO APPEARS HERE]
Centillium technology Corporation
"Expanding Communication Bandwidth"
November 30, 1999
Mr. John W. Luhtala
224 Monterey Street
Santa Cruz, CA 95060
Dear John:
On Behalf of Centillium Communications, Inc., (the "Company"), I am pleased to
offer you the position of Vice President and Chief Financial Officer. You will
be reporting to A. Travis White, President and CEO of the Company.
You will be paid a salary of $154,000 (One hundred fifty four thousand dollars)
annually. Your base salary will be payable in accordance with the Company's
standard payroll policies (subject to normal required withholding). A sign-on
bonus will be granted in the amount of $25,000 gross, payable after thirty days
of employment. If you voluntarily leave the organization before one year of
continuous service, you will be required to pay back this bonus, in full. You
will accrue 3.69 hours vacation/ personal time per pay period, totaling twelve
days paid vacation annually. Your salary will be paid on a bi-weekly basis. All
company benefits begin on the 1/st/ day of the following month from your
employment date.
It will be recommended to the Centillium Communications, Inc. Board of Directors
that you be eligible to participate in the Centillium Communications, Inc. Stock
Option Program. Subject to this approval, you will be granted an option to
purchase 175,000 (One hundred seventy five thousand) shares of the Company's
Common Stock at an exercise price equal to the fair market value of the Company
Common Stock on the date of grant as determined by the Centillium
Communications, Inc. Board of Directors.
If Centillium Communications is acquired, merged, or significant change of
control occurs which impacts your job responsibilities is one of the following
ways, you and the company agree that your stock options would be accelerated by
one full year.
. Job elimination or if you are asked to leave the organization
. Job responsibilities were significantly reduced, changed or altered
. Forced to move to an unacceptable location
This acceleration of the vesting provision will be contained in your stock
option agreement.
Under rule 83(b) you will be eligible to exercise unvested options. This enables
you to recognize long term capital gains or losses and begins the process of the
one-year holding period. You should note that under certain circumstances, you
might be required to recognize income for income tax purposes upon exercising
options. Please consult your tax advisor, prior to exercising vested and
unvested options. Should you terminate your relationship with Centillium
<PAGE>
John Luhtala
Page Two
Communications, the Company has the irrevocable, exclusive option for a period
of ninety (90) days from such date, to repurchase up to that number of shares
which are unvested, at the original purchase price per share.
Your offer is contingent upon your agreement that you will not, during and after
your employment with Centillium Communications, Inc., improper use or disclose
proprietary information or trade secrets of any former or concurrent employer or
other person or entity, and that you will not bring onto the premises of
Centillium Communications, Inc., any unpublished document or proprietary
information belonging to any such employer, person, or entity, unless consented
to in writing by such employer, person, or entity.
Your acceptance of this offer represents the sole agreement between you and
Centillium Communications, Inc., no prior promises, representations or
understandings relative to any terms or conditions of your employment are to be
considered as part of this agreement unless expressed in writing in this letter.
Centillium Communications is an "at-will" employer which means that this
employment relationship may be terminated at any time, with or without good
cause or for any or no cause, at the option either of the Company or employee,
with or without notice.
This offer is contingent upon reference checks and is valid for four days from
the date of this letter, unless any other arrangements are made. Please indicate
your acceptance and start date by signing and returning the enclosed copy of
this letter.
Sincerely,
/s/ Travis White
A. Travis White
President and CEO
The foregoing terms and conditions are hereby
accepted:
Start Date: 12/8/99
-----------------------
Signed: /s/ John Luhtala
---------------------------
John Luhtala
Date: 11/30/99
----------------------------
<PAGE>
EXHIBIT 10.19
[LOGO]
Centillium Technology Corporation
"Expanding Communication Bandwidth"
Revised Offer Letter of August 5, 1999
- --------------------------------------
August 17, 1999
Mr. Jon Sherburne
12443 De Sanka Avenue
Saratoga, CA 95070
Dear Jon:
On behalf of Centillium Technology Corporation, (the "Company"), I am pleased to
offer you the position of Vice President Sales. You will be reporting A. Travis
White, President and CEO of the Company:
The following components make up your salary structure during fiscal year 1999:
. Base salary: $140,000.00
. Commission: $40,000.00, paid quarterly based on achieving 100%
of plan. Commission will be capped at 25% over plan.
. MBO's (5): $20,000.00, paid annually.
. Sign on Bonus: $10,000.00, will be paid after thirty days of
employment. If you leave the organization before one year of
continuous service, you will be required to pay back the bonus, in
full.
Your base salary will be payable in accordance with the Company's standard
payroll policies (subject to normal required withholding). You will accrue 3.69
hours vacation/personal time per pay period, totaling twelve days paid vacation
annually. Your salary will be paid on a bi-weekly basis. All company benefits
begin on the 1/st/ day of the following month from your employment date.
It will be recommended to the Centillium Technology Corporation Board of
Directors that you be eligible to participate in the Centillium Technology
Corporation Stock Option Program. Subject to this approval, you will be granted
an option to purchase 215,000 (Two hundred fifteen thousand) shares of the
company's Common Stock at an exercise price equal to the fair market value of
the Company Common Stock on the date of grant as determined by the Centillium
Technology Corporation Board of Directors.
Based on performance in relation to production from two specific accounts, I
will recommend to the Board of Directors that you be granted an additional
10,000 (Ten thousand) shares of stock at or within one year from your date of
employment. All shares will be subject to the standard four-year vesting
schedule with the one-year cliff, per our stock option agreement.
If Centillium Technology is acquired, merged, or a significant change of control
occurs which impacts your job responsibilities in one of the following ways, you
and the Company agree that your stock options would be accelerated by one full
year.
. Job elimination or if you are asked to leave the organization
. Job responsibilities were significantly reduced, changed or altered
. Forced to move to an unacceptable location
This acceleration of the vesting provision will be contained in your stock
option agreement.
<PAGE>
Under rule 83(b) you will be eligible to exercise unvested options. This
enables you to recognize long term capital gains or losses and begins the
process of the one-year holding period. You should note that under certain
circumstances, you might be required to recognize the income tax purposes upon
exercising options. Please consult your tax advisor, prior to exercising vested
and unvested options. Should you terminate your relationship with Centillium
Technology, the Company has the irrevocable, exclusive option for a period of
ninety (90) days from such date, to repurchase up to that number of shares which
are unvested, at the original purchase price per share.
Centillium Technology agrees to loan you the money to exercise your unvested
stock options (Rule 83b), after the Board of Director's has approved your stock
option grant. The loan shall bear an interest rate of six percent (6%),
compounded annually. In connection with exercising any unvested options, you
will be required to execute and deliver Centillium's standard early exercise
agreements. The conditions regarding the repayment of the loan are as follows.
. When Centillium Technology goes public or if you are to leave the
company, the loan will be repaid in full and any accrued interest
thereon.
. Prior to selling any shares, you will be responsible for paying the
applicable portion of the loan and any accrued interest thereon.
Your offer is contingent upon your agreement that you will not, during and after
your employment with Centillium Technology Corporation, improperly use or
disclose proprietary information or trade secrets of any former or concurrent
employer or other person or entity, and that you will not bring onto the
premises of Centillium Technology Corporation, any unpublished document or
proprietary information belonging to any such employer, person, or entity,
unless consented to in writing by such employer, person, or entity.
Your acceptance of this offer represents the sole agreement between you and
Centillium Technology Corporation, no prior promises, representations or
understandings relative to any terms or conditions of your employment are to be
considered as part of this agreement unless expressed in writing in this letter.
Centillium Technology is an "at will": employer which means that this employment
relationship may be terminated at any time, with or without good cause or for
any or no cause, at the option either of the Company or employee, with or
without notice.
This offer is valid for four days from the date of this letter, unless any other
arrangements are made. Please indicate your acceptance and start date by
signing and returning the enclosed copy of this letter.
Sincerely,
/s/ A. Travis White
A. Travis White
President and CEO
The foregoing terms and conditions are hereby accepted:
Start Date: September 13, 1999
-----------------------------------
Signed: /s/ Jon Sherburne
---------------------------------------
Jon Sherburne
Date: 8/18/99
-----------------------------------------
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 9, 2000, in the Registration Statement
(Form S-1) and related Prospectus of Centillium Communications, Inc. dated
February 18, 2000 for the registration of shares of its common stock.
Our audits also included the financial statement schedule listed in Item
16(b) of the 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,
present fairly in all material respects the information set forth therein.
Ernst & Young LLP
San Jose, California
February 18, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,202
<SECURITIES> 25,111
<RECEIVABLES> 1,065
<ALLOWANCES> (150)
<INVENTORY> 1,211
<CURRENT-ASSETS> 30,954
<PP&E> 8,103
<DEPRECIATION> (3,572)
<TOTAL-ASSETS> 35,587
<CURRENT-LIABILITIES> 4,911
<BONDS> 0
0
15
<COMMON> 10
<OTHER-SE> 30,030
<TOTAL-LIABILITY-AND-EQUITY> 35,587
<SALES> 2,509
<TOTAL-REVENUES> 3,744
<CGS> 2,984
<TOTAL-COSTS> 20,064
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 242
<INCOME-PRETAX> (18,272)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,272)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,272)
<EPS-BASIC> (2.07)
<EPS-DILUTED> (2.07)
</TABLE>
