<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 000-30649
----------------
Centillium Communications, Inc.
(Exact name of registrant as specified in its charter)
----------------
Delaware 94-3263530
(State of incorporation) (IRS Employer Identification No.)
47211 Lakeview Boulevard, Fremont, California 94538
(Address of principal executive offices, including ZIP code)
(510) 771-3700
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares outstanding of the Registrant's Common Stock as of
October 31, 2000 was 32,870,530
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<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<S> <C> <C>
Part I. Financial Information (unaudited)................................................. 3
Item 1. Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999........ 3
Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30, 2000 and 1999................................................. 4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000
and 1999.......................................................................... 5
Notes to Consolidated Financial Statements........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 20
Part II. Other Information................................................................. 21
Item 1. Legal Proceedings................................................................. 21
Item 2. Changes in Securities and Use of Proceeds......................................... 21
Item 3. Defaults Upon Senior Securities................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders............................... 21
Item 5. Other Information................................................................. 21
Item 6. Exhibits and Reports on Form 8-K.................................................. 21
Signature..................................................................................... 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
September 30, December 31,
2000 1999
---- ----
(unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 74,093 $ 3,202
Short-term investments................................................ 17,982 25,111
Accounts receivable--net of allowance for doubtful accounts of $150 at
December 31, 1999 and $200 at September 30, 2000.................... 15,065 915
Inventory............................................................. 6,014 1,211
Other current assets.................................................. 1,309 515
-------- --------
Total current assets............................................... 114,463 30,954
Property and equipment, net........................................... 7,279 4,531
Intangibles, net...................................................... 3,751 --
Other assets.......................................................... 1,091 102
-------- --------
Total assets....................................................... $126,584 $ 35,587
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Working capital line of credit........................................ $ -- $ 2,044
Accounts payable...................................................... 11,208 810
Accrued payroll & related expenses.................................... 2,351 929
Accrued liabilities................................................... 5,467 296
Deferred revenue...................................................... 200 122
Capital lease obligations--current portion............................ 5 160
Current portion of long-term debt..................................... 431 550
-------- --------
Total current liabilities.......................................... 19,662 4,911
-------- --------
Long-term debt.......................................................... 288 549
Other liabilities....................................................... 288 72
Commitments
Stockholders' equity:
Convertible preferred stock........................................... -- 15
Common stock.......................................................... 33 10
Additional paid in capital............................................ 206,085 80,270
Stockholder note receivable........................................... (430) (430)
Accumulated other comprehensive income................................ 20 (25)
Deferred compensation................................................. (27,847) (16,043)
Accumulated deficit................................................... (71,515) (33,742)
-------- --------
Total stockholders' equity......................................... 106,346 30,055
-------- --------
Total liabilities and stockholders' equity......................... $126,584 $ 35,587
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------- ---------------------
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Product revenues.................................................... $ 17,658 $ 651 $ 31,983 $ 651
Technology development revenues...................................... -- 200 150 905
-------- ------- -------- --------
Total revenues..................................................... 17,658 851 32,133 $ 1,556
Cost of revenues..................................................... 10,057 1,108 19,503 1,108
-------- ------- -------- --------
Gross profit......................................................... 7,601 (257) 12,630 448
Operating expenses:
Research and development........................................... 11,268 3,501 30,150 9,045
Sales and marketing................................................ 4,405 770 11,304 1,910
General and administrative......................................... 3,938 1,148 10,862 2,376
Amortization of goodwill and other acquistion related intangibles.. 414 -- 414 --
-------- ------- -------- --------
Total operating expenses........................................ 20,025 5,419 52,730 13,331
Operating loss....................................................... (12,424) (5,676) (40,100) (12,883)
Interest income...................................................... 1,522 533 2,638 913
Interest expense..................................................... (30) (42) (311) (137)
-------- ------- -------- --------
Net loss............................................................. $(10,932) $(5,185) $(37,773) $(12,107)
======== ======= ======== ========
Basic and diluted net loss per share................................. $(.35) $(.58) $(1.89) $(1.39)
======== ======= ======== ========
Weighted average shares of common stock outstanding used in
computing basic and diluted net loss per share...................... 31,334 8,985 20,023 8,684
======== ======= ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
2000 1999
----------- ----------
<S> <C> <C>
Operating activities
Net loss....................................................................... $(37,773) $(12,107)
Adjustments to reconcile net loss to net cash used by operating activities:
Amortization of deferred compensation........................................ 19,352 1,437
Depreciation and amortization expense........................................ 2,657 1,562
Amortization of goodwill and other acquisition related intagibles............ 414 --
Accrued non-cash stock compensation expense.................................. 1,809 --
Issuance of common stock for services and other.............................. 687 92
Amortization of warrants issued in conjunction with debt & other............. 6 7
Changes in operating assets and liabilities:
Accounts receivable....................................................... (14,150) (575)
Inventory................................................................. (4,803) (220)
Other current assets...................................................... (794) 48
Other assets.............................................................. -- (98)
Working capital line of credit............................................ (2,044) 760
Accounts payable.......................................................... 10,398 488
Accrued payroll and related expenses...................................... 1,398 69
Deferred revenue.......................................................... 78 463
Accrued liabilities....................................................... 3,386 208
Other liabilities......................................................... 216 (19)
-------- --------
Net cash used in operating activities.................................. (19,163) (7,885)
Investing activities
Purchases of short-term investments.......................................... (23,071) (5,982)
Sales and maturities of short-term investments............................... 30,245 6,086
Purchases of property and equipment.......................................... (5,393) (2,014)
Purchases of intangibles and other long-term assets.......................... (5,166) --
-------- --------
Net cash used in investing activities.................................. (3,385) (1,910)
Financing activities
Principal payments on capital lease obligations.............................. (158) (170)
Principal payments on long term debt......................................... (383) (372)
Proceeds from issuance of common stock, net.................................. 93,980 390
Proceeds from issuance of preferred stock, net............................... -- 35,563
-------- --------
Net cash provided by financing activities...................................... 93,439 35,411
Net increase in cash and cash equivalents...................................... 70,891 25,616
Cash and cash equivalents at beginning of period............................... 3,202 2,816
-------- --------
Cash and cash equivalents at end of period..................................... $ 74,093 $ 28,432
======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of Operations
Centillium Communications, Inc. (Centillium or the Company) was
incorporated in California on February 21, 1997 as Centillium Technology Inc.
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 and changed its name to Centillium
Communications, Inc. 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 September 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
September 30, 2000, had an accumulated deficit of approximately $71,515,000
(unaudited) including a net loss for the year ended December 31, 1999 of
$19,749,000 and a net loss for the nine months ended September 30, 2000 of
$37,773,000 (unaudited).
On May 24, 2000, Centillium Communications, Inc. completed its initial
public offering of 4.6 million shares of common stock at $19.00 per share. Net
proceeds to the company as a result of the offering, plus the proceeds for a
simultaneous private placement of 600,000 shares, were approximately $91.5
million and will be used for general working capital purposes. Upon closing, all
outstanding shares of preferred stock were converted into shares of common stock
on a one for one basis.
Unaudited Interim Financial Statement
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three and nine month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto for the year ended December 31, 1999, included in the
Company's Registration Statement on Form S-1 (File No. 333-30772), filed with
the Securities and Exchange Commission on May 24, 2000 (the "Registration
Statement").
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.
6
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Customer Concentrations
Three customers accounted for 34%, 18% and 14% of product revenues in the
three months ended September 30, 2000 and four customers accounted for 30%, 15%
12% and 12% of product revenues in the nine months ended September 30, 2000.
Four customers accounted for 23%, 19%, 11% and 11% of product revenues in the
three months ended September 30, 1999. There are no comparable customer
concentrations in the nine month period ending September 1999 as the Company
exited the development stage in the third quarter of 1999.
Reclassifications
Certain prior year balances have been reclassified to conform to current
year presentation.
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.
Business Segment Information
The Company currently 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 communication industries. The Company also is
developing products for the emerging voice over data networks and home
networking markets. The Company expects to release products for voice over data
networks in the fourth quarter of year 2000 and expects to release home
networking products in the second half of year 2001.
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.
Net Loss Per Share
Basic and diluted net loss per common share is presented in conformity with
the Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(FAS 128), 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. The following table presents the computation of basic and diluted
net loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
For the Three
Months Ended For the Nine Months
September 30, Ended September 30,
----------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss applicable to common stockholders.................... $(10,932) $(5,185) $(37,773) $(12,107)
======== ======= ======== ========
Basic and diluted:
Weighted average shares of common stock outstanding......... 32,904 9,531 21,562 9,173
Less weighted average shares subject to repurchase.......... 1,570 546 1,539 489
Weighted average shares used in computing basic and diluted,
net loss per share applicable to common stockholders...... 31,334 8,985 20,023 8,684
======== ======= ======== ========
Basic and diluted net loss per share applicable to common
stockholders................................................. $ (.35) $ (.58) $ (1.89) $ (1.39)
======== ======= ======== ========
</TABLE>
7
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. 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.
As of September 30, 2000 and December 31, 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.
3. 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>
September 30, December 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Inventories:
Work-in-process....................................... $4,101 $ 486
Finished goods........................................ 1,913 725
------ ------
Inventory--net........................................... $6,014 $1,211
====== ======
</TABLE>
4. Acquisition
On June 29, 2000, the Company acquired, for cash consideration, certain
assets from Avio Digital Inc. and entered into employment agreements with key
employees of Avio Digital Inc. The transaction was accounted for as a purchase
and accordingly, the accompanying financial statements include the acquired
account balances and activities of Avio Digital subsequent to the acquisition
date. The purchase price has been allocated to fixed assets, software tools, and
the assembled workforce and is being amortized over the estimated useful lives.
The excess purchase price over the identifiable net assets was assigned to
goodwill and is being amortized over three years.
5. Working Capital Line of Credit
On June 30, 2000, the Company terminated its revolving credit agreement
("Credit Agreement") with Mitsubishi International Corporation. The Credit
Agreement was used to provide 90 day extended credit terms to finance wafer
inventory purchases. The remaining balance of $3.0 million at June 30, 2000 was
paid during the third quarter of 2000 and there are no future obligations under
the Credit Agreement. The Company is financing wafer inventory purchases using
trade accounts payable.
8
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended,
which is required to be adopted in years beginning after June 15, 2000. Because
of the Company's minimal use of derivatives, management does not anticipate that
the adoption of the new Statement will have a significant effect on earnings or
the financial position of the Company.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101. "Revenue Recognition in Financial
Statements" ("SAB 101"). The SAB summarizes certain of the Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 101 provides that if registrants have not applied the
accounting therein they should implement the SAB and report a change in
accounting principle. SAB 101, as subsequently amended, will be effective for
the Company no later than the fourth quarter of 2000. The Company does not
believe that adoption of SAB 101 will have a material impact on its financial
condition or results of operations.
7. Subsequent Event
On October 5, 2000, the Company announced that it signed a definitive
agreement to acquire privately held vEngines, Inc. ("vEngines"), a developer of
high-density voice processing semiconductor products which bridge circuit
switched voice and data networks. vEngines technology compresses voice traffic,
converting it into digital packets, which can then travel on data networks. The
Company anticipates issuing approximately 814,000 shares and reserving
approximately 58,000 shares for issuance on exercise of employee stock options
in connection with this acquisition, based on the closing stock price on
November 10, 2000. The total number of shares and options to be issued under
this agreement are subject to adjustment and limitation based on a number of
factors, including the average closing price of the Company's stock and the
business activities of vEngines prior to the closing. The merger transaction is
expected to close by December 31, 2000 and will be accounted for under the
purchase method of accounting. The boards of directors of both companies have
approved the merger, which awaits the satisfaction of regulatory requirements
and other customary closing conditions.
The Company has retained a valuation specialist to assist in the purchase
price allocation and expects to receive a completed report within three months
following the closing of the transaction. The final purchase price allocation
will be based on the analysis and final report from this specialist.
8. Contingent Matters
The semiconductor and telecommunications industries are characterized by
substantial litigation regarding patent and other intellectual property rights.
The Company is party to inquiries or claims in connection with these rights.
Although the ultimate outcome of these matters is not presently determinable,
management believes that the resolution of these matters will not have a
material adverse effect on the Company's financial position and results of
operations. However, depending on the amount and timing of an unfavorable
resolution of these contingent matters, it is possible that the Company's future
results of operation or cash flows could be materially affected in a particular
quarter.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our consolidated financial statements and the related notes thereto included in
this report on Form 10-Q. Our discussion contains forward-looking statements
based upon current expectations that involve risks and uncertainties, such as
our plans, objectives, expectations and intentions. Our actual results and the
timing of events could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth under the section "FACTORS THAT MAY AFFECT FUTURE RESULTS" below.
Results of Operations for the Three Months Ended September 30, 2000 and 1999
Net Revenues. Our net revenues increased to $17.7 million for the three
months ended September 30, 2000 compared to $851,000 for the three months ended
September 30, 1999. The increase reflects increasing unit shipments as our
products gain market acceptance. Our major customers for the three months ended
September 30, 2000 were Lucent Technologies Inc., Nortel Networks Corporation,
Copper Mountain Networks, Inc., Medialincs Co. Ltd. and Sumitomo Electric
Industries, Ltd. who represented 34%, 18%, 14%, 8% and 7% of revenues,
respectively. Revenues to international customers comprised 19% of our revenues
for the three months ended September 30, 2000.
Cost of Sales and Gross Profit. Cost of revenues was $10.1 million in the
three months ended September 30, 2000 resulting, in a gross margin of $7.6
million or 43.0%. This compares to a negative gross margin of $257,000 for the
three months ended September 30, 1999. The amortization of deferred
compensation included in cost of goods sold for the three months ended September
30, 2000 was $413,000. The increase in gross margin was attributable to
increased unit volume of shipments, whereby fixed costs were absorbed over more
units, resulting in proportionally lower per unit fixed manufacturing costs.
Research and Development Expenses. Research and development expenditures
increased 222% to $11.3 million for the three months ended September 30, 2000 as
compared to $3.5 million for the three months ended September 30, 1999. The
increase was primarily due to the addition of engineering personnel and an
increase of $2.5 million in the amortization of deferred compensation.
Sales and Marketing Expenses. Sales and marketing expenditures increased
472% to $4.4 million for the three months ended September 30, 2000 as compared
to $770,000 for the three months ended September 30, 1999. The increase was due
to the addition of personnel and an increase of $1.3 million in the amortization
of deferred compensation.
General and Administrative Expenses. General and administrative
expenditures increased 243% to $3.9 million for the three months ended September
30, 2000 from $1.1 million for the three months ended September 30, 1999. This
increase was due to the addition of personnel and the associated payroll and
related costs, and an increase of $2.0 million in the amortization of deferred
compensation.
10
<PAGE>
Amortization of Deferred Compensation. Amortization of deferred
compensation increased from $916,000 for the three months ended September 30,
1999 to $7.1 million for the three months ended September 30, 2000. The
following table details the amount of deferred compensation included in
expenses (in 000's).
<TABLE>
<CAPTION>
Expenses Excluding
Amortization of
Deferred Compensation Non-Cash Amortization
and Non-Cash Stock Stock of Deferred Total
Compensation Expense Compensation Compensation Expenses
--------------------- ------------ ------------ --------
For the three months ended September 30, 2000
<S> <C> <C> <C> <C>
Cost of revenues........................... $ 9,644 $ -- $ 413 $10,057
Research and development................... 8,262 -- 3,006 11,268
Sales and marketing........................ 2,975 -- 1,430 4,405
General and administrative................. 1,663 -- 2,275 3,938
------- ------------ ------- -------
Total................................... $22,544 $ -- $7,124 $29,668
======= ============ ======= =======
For the three months ended September 30, 1999
Cost of revenues........................... $ 1,060 $ -- $ 48 $ 1,108
Research and development................... 3,013 -- 488 3,501
Sales and marketing........................ 671 -- 99 770
General and administrative................. 867 -- 281 1,148
------- ------------ ------- -------
Total................................... $ 5,611 $ -- $ 916 $ 6,527
======= ============ ======= =======
</TABLE>
Interest Income. Interest income increased 186% to $1,522,000 in the three
months ended September 30, 2000 as compared to $533,000 for the three months
ended September 30 1999. The increase was primarily due to larger cash balances
resulting from our initial public offering in May 2000.
Interest Expense. Interest expense decreased 29% to $30,000 in the three
months ended September 30, 2000 as compared to $42,000 for the three months
ended September 30, 1999. The decrease was primarily due to the termination of
the revolving credit agreement ("Credit Agreement") with Mitsubishi
International Corporation.
Results of Operations for the Nine Months Ended September 30, 2000 and 1999.
Net Revenues. Our revenues increased to $32.1 million for the nine months
ended September 30, 2000 compared to $1.6 million for the nine months ended
September 30, 1999. The increase reflects increasing unit shipments as our
products gain market acceptance. Our major customers for the nine months ended
September 30, 2000 were Lucent Technologies Inc., Copper Mountain Networks,
Inc., Sumitomo Electric Industries, Ltd., Nortel Networks Corporation and
Creative Technolgies, Co. Ltd. who represented 30%, 15%, 12%, 12% and 5% of
revenues, respectively. Revenues to international customers comprised 27% of
our revenues for the nine months ended September 30, 2000.
Cost of Sales and Gross Profit. Cost of revenues was $19.5 million in the
nine months ended September 30, 2000, resulting in a gross margin of $12.6
million or 39.3%. This compares to a gross margin of $448,000, or 28.8%, for the
nine months ended September 30, 1999. The amortization of deferred compensation
included in manufacturing spending for the nine months ended September 30, 2000
was $1.1 million. The increase in gross margin was attributable to the increased
unit volume of shipments, whereby fixed costs were absorbed over more units,
resulting in proportionally lower per unit fixed manufacturing costs.
Research and Development Expenses. Research and development expenditures
increased 233% to $30.2 million for the nine months ended September 30, 2000 as
compared to $9.0 million for the nine months ended September 30, 1999. The
increase was primarily due to the addition of engineering personnel and an
increase of $7.5 million in the amortization of deferred compensation. In
addition, research and development expenditures for the nine months ended
September 30, 2000 include $2.4 million of non-cash stock compensation expense.
Sales and Marketing Expenses. Sales and marketing expenditures increased
492% to $11.3 million for the nine months ended September 30, 2000 as compared
to $1.9 million for the nine months ended September 30, 1999. The increase was
due to the addition of personnel and an increase of $3.8 million in the
amortization of deferred compensation.
General and Administrative Expenses. General and administrative
expenditures increased 357% to $10.9 million for the nine months ended September
30, 2000 from $2.4 million for the nine months ended September 30, 1999. This
increase was due to the addition of personnel and the associated payroll and
related costs, and an increase of $5.7 million in the amortization of deferred
compensation. Additionally, general and administrative expense for the nine
months ended September 30, 2000 includes
11
<PAGE>
$225,000 for severance costs related to the termination of a former officer and
$100,000 related to non-cash stock compensation expense.
Amortization of Deferred Compensation and Non-Cash Stock Compensation.
During the nine months ended September 30, 2000, we recorded $31.2 million of
deferred stock compensation in connection with option grants made to a
significant number of new and existing employees. Amortization of deferred
compensation increased from $1.4 million for the nine months ended September 30,
1999 to $19.4 million for the nine months ended September 30, 2000. In addition,
expenses for the nine months ended September 30, 2000 include charges of $2.5
million related to non-cash stock compensation expense. The following table
details the amount of deferred compensation and non-cash stock compensation
included in expenses (in 000's).
<TABLE>
<CAPTION>
Expenses Excluding
Amortization of
Deferred Compensation Non-Cash Amortization
and Non-Cash Stock Stock of Deferred Total
Compensation Expense Compensation Compensation Expenses
--------------------- ------------ ------------ --------
For the nine months ended September 30, 2000
<S> <C> <C> <C> <C>
Cost of revenues........................... $18,439 $ -- $ 1,064 $19,503
Research and development................... 19,602 2,391 8,157 30,150
Sales and marketing........................ 7,389 -- 3,915 11,304
General and administrative................. 4,546 100 6,216 10,862
------- ------- ------- -------
Total................................... $49,976 $2,491 $19,352 $71,819
======= ======= ======= =======
For the nine months ended September 30, 1999
Cost of revenues........................... $ 1,055 $ -- $ 53 $ 1,108
Research and development................... 8,347 -- 698 9,045
Sales and marketing........................ 1,756 -- 154 1,910
General and administrative................. 1,844 -- 532 2,376
------- ------- ------- -------
Total................................... $13,002 $ -- $ 1,437 $14,439
======= ======= ======= =======
</TABLE>
Interest Income. Interest income increased 194% to $2.6 million during the
nine months ended September 30, 2000 as compared to $913,000 for the nine months
ended September 30 1999. The increase was primarily due to larger cash balances
resulting from our initial public offering in May 2000.
Interest Expense. Interest expense increased 127% to $311,000 during the
nine months ended September 30, 2000 as compared to $137,000 for the nine months
ended September 30, 1999. The increase was primarily due to larger outstanding
balances during the first half of 2000 under our revolving line of credit with
Mitsubishi International Corporation related to the financing of inventory
purchases.
Management expects to increase operating, research and development, sales
and marketing, and general and administrative expenditures in the future to hire
and expand our sales, support, marketing, and product development organizations,
to expand marketing programs and to establish additional facilities worldwide.
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, and through our initial public offering on May 24, 2000. Net
proceeds to the company as a result of the offering, plus the proceeds for a
simultaneous private placement of 600,000 shares, were approximately $91.5
million. We also generated $3.4 million from the exercise of stock options, net
of repurchases.
Net cash used for operations was $19.2 million for the nine months ended
September 30, 2000. This was primarily due to an increase in our net loss from
$12.1 million to $37.8 million in the corresponding periods ending September 30,
1999 and 2000, respectively.
Net cash used in investing activities was $3.4 million for the nine months
ended September 30, 2000 and related to purchases of short-term investments,
property and equipment, intangibles and other long-term assets offset by sales
of short-term investments.
Cash generated from financing activities was $93.4 million for the nine
months ended September 30, 2000 and was related primarily to the net proceeds of
$91.5 million from our initial public offering in May 2000.
Accounts receivable were $15.1 million on September 30, 2000. Our customers
are billed at the time of shipment, typically with payment terms of thirty days.
In September of 2000, we discontinued our revolving line of credit with
Mitsubishi International Corporation.
12
<PAGE>
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 to fund other general corporate activities.
We currently anticipate that the net proceeds from our initial public 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the risks described below and all of the
information contained in this Form 10-Q. If any of the following risks actually
occur, our business, financial condition and results of operations could be
harmed, the trading price of our common stock could decline, and you may lose
all or part of your investment in our common stock.
WE COMMENCED OPERATIONS IN APRIL 1997, AND OUR LIMITED OPERATING HISTORY SELLING
PRODUCTS TO THE BROADBAND COMMUNICATIONS MARKET MAKES IT DIFFICULT TO EVALUATE
OUR BUSINESS AND FUTURE PROSPECTS.
We commenced operations in April 1997 and did not begin to generate revenue
from shipment of products until the third quarter of 1999. We are in the early
stages of our development, which makes it difficult to evaluate our future
prospects and increases the risk that we will be unable to build a sustainable
business. You must consider our prospects in light of the risks and difficulties
we will encounter as an early stage company competing 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.
WE HAVE A HISTORY OF LOSSES, WE EXPECT FUTURE LOSSES, AND WE MAY NOT ACHIEVE OR
MAINTAIN PROFITABILITY.
We have not reported an operating profit for any year since our
incorporation and have experienced net losses of approximately $1.9 million,
$9.3 million, and $19.7 million for the years ended December 31, 1997, 1998, and
1999, respectively. Additionally, we experienced a net loss of $37.8 million for
the nine month period ended September 30, 2000. We expect to continue to incur
net losses for the foreseeable future, and these losses may be substantial.
Unless we are able to generate significant revenues from future sales of our
products, we will not be able to build a sustainable business.
13
<PAGE>
WE CONTINUE TO RAPIDLY EXPAND OUR OPERATIONS, AND OUR FAILURE TO MANAGE OUR
GROWTH COULD HARM OUR BUSINESS.
We have rapidly and significantly expanded our operations, including
increasing the number of our employees from 71 in June 1999 to 235 as of
September 30, 2000. This expansion is placing a significant strain on our
managerial, operational and financial resources.
OUR EXECUTIVE OFFICERS AND KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND THESE
OFFICERS AND PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
We depend upon the continuing contributions of our key management, sales,
customer support and product development personnel. The loss of such personnel
could seriously harm us. In addition, we have not obtained key-man life
insurance on any of our executive officers or key employees.
COMPETITION FOR QUALIFIED PERSONNEL IN THE SEMICONDUCTOR AND TELECOMMUNICATIONS
INDUSTRIES IS INTENSE, AND IF WE ARE NOT SUCCESSFUL IN ATTRACTING AND RETAINING
THESE PERSONNEL, WE WILL NOT BE ABLE TO EXECUTE OUR BUSINESS PLAN.
Competition for qualified personnel in the semiconductor and
telecommunications industries is intense, and we may not be successful in
attracting and retaining personnel. Since June of 1999, we added 164 new
employees to our total work force, representing an increase of approximately
231%. We expect to add additional personnel in the near future, including
additional engineers, 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 DEPEND ON THIRD PARTY FOUNDRIES TO MANUFACTURE, ASSEMBLE AND TEST OUR
PRODUCTS AND WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT CAPACITY TO SUPPORT OUR
BUSINESS.
We do not own or operate a semiconductor fabrication facility. We rely on
Mitsubishi Electric, United Microelectronics Corporation and Taiwan
Semiconductor Corporation to manufacture our products. In addition, we generally
do not have contracts with these foundries guaranteeing the availability of
capacity. 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
would result in a decrease in sales of our products.
WE DEPEND ON SOLE SOURCE SUPPLIERS FOR SEVERAL KEY COMPONENTS OF OUR PRODUCTS.
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 Microelectronics
Corporation to manufacture our analog silicon wafers. Developing and maintaining
these strategic relationships with our vendors is critical for us to be
successful. 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.
14
<PAGE>
SALES OF OUR PRODUCTS DEPEND ON THE WIDESPREAD ADOPTION OF BROADBAND ACCESS
SERVICES, ESPECIALLY DSL. 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 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;
-- lack of interoperability among multiple vendors' network equipment;
-- congestion in service providers' networks; and
-- inadequate security.
RAPID CHANGES IN THE MARKET FOR DSL CHIP SETS MAY RENDER OUR CHIP SETS OBSOLETE
OR UNMARKETABLE.
The market for chip sets for DSL products is characterized by:
-- intense competition;
-- rapid technological change;
-- frequent new product introductions by our competitors;
-- changes in customer demands; and
-- evolving industry standards.
Any of these factors could make our products obsolete or unmarketable. To
compete, we must innovate and introduce new products. If we fail to successfully
introduce new products on a timely and cost-effective basis that meet customer
requirements and are compatible with evolving industry standards, then our
business, financial condition and results of operation will be seriously harmed.
BECAUSE OTHER BROADBAND 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 DSL products may decrease.
15
<PAGE>
OUR MARKETS ARE HIGHLY COMPETITIVE AND MANY OF OUR COMPETITORS ARE ESTABLISHED
AND HAVE GREATER RESOURCES THAN WE HAVE.
The market for software and communications semiconductor solutions is
intensely competitive. Given our early stage of development, there is a
substantial risk that we will not have the financial resources, technical
expertise or marketing and support capabilities to compete successfully. We
believe our principal competitors include, or will include, Alcatel
Microelectronics, Analog Devices, Conexant Systems, GlobeSpan, Lucent
Microelectronics, and Texas Instruments. In addition, a number of other
semiconductor companies, including IBM and Intel, have announced their intent to
enter the market segments adjacent to or addressed by our products. These
competitors have longer operating histories, greater name recognition, larger
installed customer bases and significantly greater financial, technical and
marketing resources than we have. 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. Further, in the event of a manufacturing capacity shortage, these
competitors may be able to manufacture products when we are unable to do so.
BECAUSE OUR PRODUCTS ARE COMPONENTS OF OTHER EQUIPMENT, IF BROADBAND 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 are 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.
WE DEPEND ON A FEW CUSTOMERS AND IF WE LOSE ANY OF THEM OUR SALES AND OPERATIONS
WILL SUFFER.
We sell our DSL products primarily to network equipment manufacturers. For
the year ended December 31, 1999, sales to Sumitomo Electric accounted for 34%
of our revenues and sales to NEC accounted for 21% of our revenues. For the nine
months ended September 30, 2000 sales to Lucent Technologies Inc., Copper
Mountain Networks, Inc., Sumitomo Electric Industries, Ltd. and Nortel Networks
Corporation represented 30%, 15%, 12% and 12% of our revenues, respectively. We
do not have formal long-term agreements with these customers, but rather sell
our products to them on an order-by-order basis. 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.
16
<PAGE>
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 have been derived from customers
located outside of the United States. Sales to international customers were 27%
of net revenues for the nine months ended September 30, 2000. We may be unable
to successfully overcome the difficulties associated with international
operations. These difficulties include:
-- staffing and managing foreign operations;
-- changes in regulatory requirements;
-- licenses, tariffs and other trade barriers;
-- political and economic instability;
-- obtaining governmental approvals for products; and
-- complying with a wide variety of complex foreign laws and treaties.
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.
BECAUSE THE SALES CYCLE FOR OUR PRODUCTS TYPICALLY LASTS UP TO ONE YEAR, AND MAY
BE SUBJECT TO DELAYS, IT IS DIFFICULT TO FORECAST SALES FOR ANY GIVEN PERIOD.
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 occur. 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 in obtaining orders of
our products.
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.
Our officers and directors and their affiliates will own or control
approximately 24% of our common stock. Accordingly, our officers and 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
acquirer might otherwise pay.
17
<PAGE>
THE LARGE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE COULD CAUSE OUR STOCK PRICE
TO DECLINE.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, the market price of our
common stock could fall. These sales also might make it more difficult for us to
sell equity or equity securities in the future at a time and price that we deem
appropriate. In addition, upon the expiration of lock-up agreements on November
20, 2000, the 181st day after completion of our initial public offering,
25,512,353 of shares of common stock held by existing stockholders will be
freely tradable. Credit Suisse First Boston Corporation may, at its discretion
and without notice, release existing stockholders from these lock-up agreements.
These releases could involve the release of a specified percentage of all shares
subject to lock-up agreements or the release of an individual's shares for
liquidity concerns that apply only to that individual. Other conditions that
could lead to a lock-up release include an increase in our share price and
market demand for shares of our common stock.
THIRD-PARTY CLAIMS REGARDING INTELLECTUAL PROPERTY MATTERS COULD CAUSE US TO
STOP SELLING OUR PRODUCTS OR PAY MONETARY DAMAGES.
There is a significant risk that third parties, including current and
potential competitors, will claim that our products, or our customers' products,
infringe on their intellectual property rights. The owners of these intellectual
property rights may bring infringement claims against us. Any such litigation,
whether or not determined in our favor or settled by us, would be costly and
divert the attention of our management and technical personnel. Inquiries with
respect to the coverage of our intellectual property could develop into
litigation. In the event of an adverse ruling for an intellectual property
infringement claim, we could be required to obtain a license or pay substantial
damages or have the sale of our products stopped by an injunction. In addition,
if a customer of our chip sets cannot acquire a required license on commercially
reasonable terms, that customer may choose not to use our chip sets. We have
obligations to indemnify our customers under some circumstance for infringement
of third-party intellectual property rights. From time to time we receive
letters from customers inquiring as to scope of these indemnity rights. If any
claims from third-parties required us to indemnify customers under our
agreements, the costs could be substantial and our business could be harmed.
WE MAY BE REQUIRED TO OBTAIN LICENSES ON ADVERSE TERMS TO SELL INDUSTRY STANDARD
COMPLIANT CHIP SETS.
We have received correspondence, including a proposed licensing agreement,
from Amati Corporation (which was acquired by Texas Instruments) stating that
they believe that they own a number of patents that are required to be compliant
with the American National Standards Institute (ANSI) standard specifications
T1.413 and ITU-T recommended G.991.1/2. These industry standard are based on the
DMT line code. We have introduced products that we believe are compliant with
this industry standards, and we may be required to obtain a license to these
Amati Corporation patents. We are currently evaluating the patents and proposed
licensing terms. If these patents are valid and essential to the implementation
of products that are compliant with this industry standard, then Amati
Corporation may be required to offer us a license on commercially reasonable,
non-discriminatory terms. Because there are currently no established terms for
such a license, we may be unable to agree with Amati Corporation on acceptable
license terms. If these patents are valid, but not essential to the
implementation of products that are compliant with this industry standard, and
they apply to our products and we do not modify our products so they become non-
infringing, then Amati Corporation would not be obligated to offer us a license
on reasonable terms or at all. If we are not able to agree on license terms and
as a result fail to obtain a required license, then we could be sued and
potentially be liable for substantial monetary damages or have the sale of our
products stopped by an injunction.
In addition, in October 2000, we have received correspondence from
Alcatel requesting to discuss the potential for a non-exclusive license from
Alcatel permitting us to utilize technology covered by Alcatel patents. We
expect to review this request with Alcatel in the fourth quarter of year 2000
and may be required to obtain licenses from Alcatel. It is the opinion of
management that the ultimate resolution of this contingency will not have a
material adverse effect on the financial condition of the Company.
The Company could be subject to similar claims, like the Amati Corporation
and Alcatel claims, in the future.
IF WE DELIVER PRODUCTS WITH DEFECTS, OUR CREDIBILITY WILL BE HARMED, AND THE
SALES AND MARKET ACCEPTANCE OF OUR PRODUCTS WILL DECREASE.
Our products are complex and have contained errors, defects and bugs when
introduced. If we deliver products with errors, defects or bugs, our credibility
and the market acceptance and sales of our products could be harmed. Further, if
our products contain errors, defects and bugs, then we may be required to expend
significant capital and resources to alleviate such problems. Defects could also
lead to product liability as a result of product liability lawsuits against us
or against our customers. We have agreed to indemnify our customers in some
circumstances against liability from defects in our products. A successful
product liability claim could seriously harm our business, financial condition
and results of operations.
18
<PAGE>
WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MIGHT NOT BE AVAILABLE OR WHICH,
IF AVAILABLE, COULD BE ON TERMS ADVERSE TO OUR COMMON STOCKHOLDERS.
We expect the net proceeds from our recent public offering, our current
cash and cash equivalents and cash from commercial borrowing availability under
credit facilities will meet our working capital and capital expenditure needs
for at least one year. After that, we may need to raise additional funds, and we
cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all. We may also require additional capital for the
acquisition of businesses, products and technologies that are complementary to
ours. Further, if we issue equity securities, the ownership percentage of our
stockholders would be reduced, and the new equity securities may have rights,
preferences or privileges senior to those existing holders of our common stock.
If we cannot raise needed funds on acceptable terms, we may not be able to
develop or enhance our products, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, which could
seriously harm our business, operating results and financial condition.
OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE.
The market price of our common stock has been extremely volatile and will
likely continue to fluctuate significantly in response to the following factors,
some of which are beyond our control:
-- variations in our quarterly operating results;
-- changes in financial estimates of our revenues and operating results
by securities analysts;
-- changes in market valuations of integrated circuit companies;
-- announcements by us of significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments;
-- loss or decrease in sales to a major customer or failure to complete
significant transactions;
-- loss or reduction in manufacturing capacity from one or more of our
key suppliers;
-- additions or departures of key personnel;
-- future sales of our common stock;
-- stock market price and volume fluctuations attributable to
inconsistent or low trading volume levels of our stock;
-- commencement of or involvement in litigation; and
-- announcements by us or our competitors of key design wins and
product introductions.
19
<PAGE>
WE MAY MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND ACQUISITIONS INVOLVE
NUMEROUS RISKS.
Our business is highly competitive, and as such, our growth is dependent
upon market growth, our ability to enhance our existing products and our ability
to introduce new products on a timely basis. One of the ways we have addressed
and may continue to address the need to develop new products is through
acquisitions of other companies. Acquisitions involve numerous risks, including
the following:
-- difficulties in integration of the operations, technologies, and
products of the acquired companies;
-- the risk of diverting management's attention from normal daily
operations of the business;
-- potential difficulties in completing projects associated with
purchased in-process research and development;
-- risks of entering markets in which we have no or limited direct
prior experience and where competitors in such markets have stronger
market positions; and
-- the potential loss of key employees of the acquired company.
Mergers and acquisitions of high-technology companies are inherently risky,
and no assurance can be given that our previous or future acquisitions will be
successful and will not materially adversely affect our business, operating
results or financial condition.
We must also maintain our ability to manage such growth effectively.
Failure to manage growth effectively and successfully integrate acquisitions we
made could harm our business and operating results.
ITEM 3. 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 September 30, 2000, 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 $190,000 decrease in the fair
value of our available-for-sale securities as of September 30, 2000.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
none
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 30, 2000, we completed an initial public offering of shares of our
common stock, $0.001 par value. The managing underwriters in the offering were
Credit Suisse First Boston, Robertson Stephens and Salomon Smith Barney. The
shares of common stock sold in the offering were registered under the Securities
Act of 1933, as amended, on a Registration Statement on Form S-1 (No. 333-
30772). The Securities and Exchange Commission declared the Registration
Statement effective on May 23, 2000.
In our initial public offering, we had sold all of the 4,600,000 shares of
common stock registered under the Registration Statement, including 600,0000
shares sold pursuant to the exercise of the underwriters' over-allotment option.
Concurrent with the initial public offering, an additional 600,000 shares were
sold in a private placement. The securities were sold at $19.00 per share
resulting in net proceeds to the company of $91.5 million, after deducting
underwriting fees, commissions and other offering expenses. Upon closing, all
outstanding shares of preferred stock were converted into shares of common stock
on a one for one basis.
Proceeds from our initial public offering have been used for general
corporate purposes, including working capital and the acquisition of certain
assets from Avio Digital, Inc. The remaining net proceeds have been invested in
cash, cash equivalents and short-term investments. The use of the proceeds from
the offering does not represent a material change in the use of proceeds
described in the prospectus.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
21
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTILLIUM COMMUNICATIONS, INC.
Date: November 14, 2000
By: /s/ John W. Luhtala
-------------------
John W. Luhtala
Chief Financial Officer
(Principal Financial and Accounting
Officer)
22
