<PAGE>
================================================================================
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 JUNE 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) Yes [X] No [ ], and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [X].
The number of shares outstanding of the Registrant's Common Stock as of
July 31, 2000 was 32,883,986
================================================================================
1
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
Part I. Financial Information (unaudited)........................................................................................ 3
Item 1. Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999.......................................... 3
Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2000 and 1999......... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999.......................... 5
Notes to Condensed Consolidated Financial Statements..................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................................... 20
Part II Other Information........................................................................................................ 20
Item 1. Legal Proceedings ....................................................................................................... 20
Item 2. Changes in Securities and Use of Proceeds................................................................................ 20
Item 3. Defaults Upon Senior Securities.......................................................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders...................................................................... 20
Item 5. Other Information........................................................................................................ 20
Item 6. Exhibits and Reports on Form 8-K......................................................................................... 21
Signature........................................................................................................................ 21
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CENTILLIUM COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 89,933 $ 3,202
Short-term investments 10,986 25,111
Accounts receivable - net of allowance for doubtful accounts of
$150 at December 31, 1999 and $200 at June 30, 2000 8,160 915
Inventory 2,381 1,211
Other current assets 1,221 515
----------- -----------
Total current assets 112,681 30,954
Property and equipment, net 6,500 4,531
Intangibles, net 4,160 --
Other assets 1,095 102
----------- ------------
Total assets $ 124,436 $ 35,587
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Working capital line of credit $ 2,970 $ 2,044
Accounts payable 3,129 810
Accrued payroll & related expenses 1,953 929
Accruals 5,421 296
Deferred revenue 100 122
Capital lease obligation - current portion 53 160
Current portion of long term debt 495 550
----------- -----------
Total current liabilities 14,121 4,911
----------- -----------
Long-term debt 353 549
Other liabilities 216 72
Commitments
Stockholders' equity:
Convertible preferred stock -- 15
Common stock 33 10
Additional paid in capital 206,176 80,270
Stockholder note receivable (430) (430)
Accumulated other comprehensive income (1) (25)
Deferred compensation (35,449) (16,043)
Accumulated deficit (60,583) (33,742)
----------- -----------
Total stockholders' equity 109,746 30,055
----------- -----------
Total liabilities and stockholders' equity $ 124,436 $ 35,587
=========== ============
</TABLE>
See accompanying notes.
3
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
2000 1999 2000 1999
-------- ------ ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 9,752 $ 655 $ 14,475 $ 705
Cost of revenues 5,963 -- 9,446 --
-------- -------- -------- --------
Gross profit 3,789 655 5,029 705
Operating expenses:
Research and development 12,865 3,238 18,882 5,544
Sales and marketing 4,126 440 6,899 1,140
General and administrative 4,162 732 6,924 1,228
-------- -------- -------- --------
Total operating expenses 21,153 4,410 32,705 7,912
-------- -------- -------- --------
Operating loss (17,364) (3,755) (27,676) (7,207)
Interest income 757 305 1,116 380
Interest expense (176) (45) (281) (95)
-------- -------- -------- --------
Net loss $(16,783) $ (3,495) $(26,841) $ (6,922)
======== ======== ======== ========
Basic and diluted net
loss per share
$ (0.89) $ (0.40) $ (1.87) $ (0.81)
======== ======== ======== ========
Weighted average shares of
common stock outstanding
used in computing basic and
diluted net loss per share 18,919 8,770 14,357 8,531
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
--------- ---------
<S> <C> <C>
Operating activities
Net loss $ (26,841) $ (6,922)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization expense 1,626 991
Amortization of deferred compensation 12,228 521
Amortization of warrants issued in conjunction
with debt & other 5 5
Issuance of common stock for services and other 155 28
Accrued non-cash stock compensation expense 2,341 --
Changes in operating assets and liabilities:
Accounts receivable (7,245) (389)
Inventory (1,170) --
Other current assets (706) 83
Other assets -- 2
Working capital line of credit 926 --
Accounts payable 2,319 686
Accrued payroll and related expenses 1,000 35
Deferred revenue (22) 41
Accrued liabilities 2,808 448
Other liabilities 144 10
--------- ---------
Net cash used in operating activities (12,432) (4,461)
Investing activities
Purchases of short-term investments (11,096) (1,000)
Sales and maturities of short-term investments 25,245 4,886
Purchases of property and equipment (3,595) (1,323)
Purchases of intangibles and other long-term
assets (5,153) --
--------- ---------
Net cash provided by investing activities 5,401 2,563
Financing activities
Principal payments on capital lease (110) (108)
Principal payments on long term debt (253) (246)
Proceeds from issuance of common stock, net 94,125 332
Proceeds from issuance of preferred stock, net -- 35,575
--------- ---------
Net cash provided by financing activities 93,762 35,553
Net increase in cash and cash equivalents 86,731 33,655
Cash and cash equivalents at beginning of period 3,202 2,816
--------- ---------
Cash and cash equivalents at end of period $ 89,933 $ 36,471
========= =========
</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 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 June 30,
2000, had an accumulated deficit of approximately $60,583,000 (unaudited)
including a net loss for the year ended December 31, 1999 of $19,749,000 and a
net loss for the six months ended June 30, 2000 of $26,841,000 (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 $91.6 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 accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
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".)
6
<PAGE>
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.
CUSTOMER CONCENTRATIONS
Four customers accounted for 24%, 17%, 14% and 11% of net revenues in the three
months ended June 30, 2000 and three customers accounted for 26%, 20% and 14% of
net revenues in the six months ended June 30, 2000. There are no comparable
customer concentrations in the three and six month periods ending June 1999 as
the Company was in the development stage, and only recorded minimal revenues
related to technology development.
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 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 Chief Executive Officer has been identified as the Chief Operating Decision
Maker (CODM) because he has final authority over resource allocation decisions
and performance assesment. 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>
TABLE #1
For the Three Months For the Six Months
ended June 30, ended June 30,
--------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss applicable to common stockholders.............. $ (16,783) $ (3,495) $ (26,841) $ (6,922)
============ ============ ============ ============
Basic and diluted:
Weighted average shares of common stock
outstanding....................................... 20,717 9,396 15,899 8,993
Less weighted average shares subject to
repurchase........................................ 1,798 626 1,542 462
Weighted average shares used in computing basic
and diluted, net loss per share applicable
to common stockholders............................ 18,919 8,770 14,357 8,531
============ ============ ============ ============
Basic and diluted net loss per share applicable
to common stockholders............................ $ (0.89) $ (0.40) $ (1.87) $ (0.81)
============ ============ ============ ============
</TABLE>
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 June 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 cost (first in, first out) or market. The
components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Inventories:
Work-in-process $ 850 $ 486
Finished goods 1,531 725
------------ ------------
Inventory - net $ 2,381 $ 1,211
============ ============
</TABLE>
7
<PAGE>
4. ACQUISITION
On June 29, 2000, the Company signed a definitive agreement to acquire the
employees and certain assets from Avio Digital Inc. The Company has assigned a
portion of the purchase price to identifiable assets. The excess of the purchase
price over the identifiable assets has been recorded as intangible assets in the
financial statements as of June 30, 2000.
The Company has retained a valuation specialist to assist in the purchase price
allocation and expects to receive a completed report during the third quarter of
2000. The purchase price allocation is preliminary and subject to change until
the Company's final analysis and receipt of a final report from this specialist.
5. WORKING CAPITAL LINE OF CREDIT
On June 30, 2000, the Company terminated its revolving credit agreement
("Credit Agreement") with Mitsubishi International. The Credit Agreement was
used to provide 90 day extended credit terms to finance wafer inventory
purchases. After the remaining balance of $3.0 million at June 30, 2000 is
paid, there will be no future obligations under the Credit Agreement. The
Company expects to finance future wafer inventory purchases using trade accounts
payable.
6. RECENT ACCOUNTING PRONOUCEMENTS
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED,
CONSOLIDATED INTERIM FINANCIAL STATEMENTS AND THE NOTES THERETO IN PART I, ITEM
1 OF THIS QUARTERLY REPORT AND WITH MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1999, CONTAINED IN CENTILLIUM'S REGISTRATION STATEMENT ON FORM S-1 (FILE NO.
333-30772), FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THE MATTERS
ADDRESSED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, WITH THE EXCEPTION OF THE HISTORICAL INFORMATION
PRESENTED, CONTAIN FORWARD-LOOKING STATEMENTS INVOLVING RISKS AND UNCERTAINTIES.
CENTILLIUM'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING,
WITHOUT LIMITATION, THOSE SET FORTH UNDER THE HEADING "OTHER FACTORS AFFECTING
OPERATING RESULTS, LIQUIDITY AND CAPITAL RESORUCES" FOLLOWING THIS MANAGEMENT'S
DISCUSSION AND ANALYSIS SECTION, AND ELSEWHERE IN THIS REPORT.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Net Revenues. Our net revenues increased to $9.8 million for the three months
ended June 30, 2000 compared to $655,000 for the three months ended June 30,
1999. The increase reflects increasing unit shipments as we ramped deliveries of
our initial products. Revenues for the second quarter of 1999 consisted solely
of technology development revenues. We had $150,000 of technology development
revenues for the three months ended June 30, 2000. Our major customers for the
three months ended June 30, 2000 were Lucent Technologies Inc., Copper Mountain
Networks, Inc., Creative Technology Ltd., and Medialincs Co. Ltd. Revenues to
international customers comprised 27% of our revenues for the three months ended
June 30, 2000.
Cost of Sales and Gross Profit. Cost of revenues was $6.0 million in the three
months ended June 30, 2000 resulting, in a gross margin of 38.9%. The
amortization of deferred compensation included in manufacturing spending for the
three months ended June 30, 2000 was $433,000. In the early stage of product
shipments, we incurred proportionally higher manufacturing costs, including the
amortization of deferred compensation, due to relatively low volumes.
8
<PAGE>
Research and Development Expenses. Research and development expenditures
increased 297% to $12.9 million for the three months ended June 30, 2000 as
compared to $3.2 million for the three months ended June 30, 1999. The increase
was primarily due to the addition of engineering personnel and an increase of
$3.1 million in the amortization of deferred compensation. In addition,
research and development expenditures for the three months ended June 30, 2000
include $2.4 million of non-cash stock compensation expense related to stock
grants to non-employees.
Sales and Marketing Expenses. Sales and marketing expenditures increased 838%
to $4.1 million for the three months ended June 30, 2000 as compared to $440,000
for the three months ended June 30, 1999. The increase was due to the addition
of personnel and an increase of $1.4 million in the amortization of deferred
compensation.
General and Administrative Expenses. General and administrative expenditures
increased 469% to $4.2 million for the three months ended June 30, 2000 from
$732,000 for the three months ended June 30, 1999. This increase was due to the
addition of personnel and the associated payroll and related costs, and an
increase of $2.2 million in the amortization of deferred compensation.
Additionally, general and administrative expense for the three months ended June
30, 2000 includes $100,000 of non-cash stock compensation.
Amortization of Deferred Compensation and Non-Cash Stock Compensation.
During the three months ended June 30, 2000, we recorded $9.3 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 $394,000 for the three months ended June 30, 1999 to
$7.5 million for the three months ended June 30, 2000. In addition, expenses for
the three months ended June 30, 2000 include charges of $2.5 million related to
non-cash stock compensation expenses. The following table details the
amount of deferred compensation and non-cash stock compensation included in
expenses.
<TABLE>
<CAPTION>
Expenses Excluding
Amortization of
Deferred Compensation Amortization of
and Non-Cash Stock Non-Cash Stock Deferred Total
Compensation Expense Compensation Compensation Expenses
--------------------- ------------------- --------------- -------------
<S> <C> <C> <C> <C>
For the three months ended June 30, 2000
Cost of revenues $ 5,530 $ -- $ 433 $ 5,963
Research and development 7,266 2,391 3,208 12,865
Sales and marketing 2,665 -- 1,461 4,126
General and administrative 1,677 100 2,385 4,162
------------- ------------- ------------ -------------
Total $ 17,138 $ 2,491 $ 7,487 $ 27,116
============= ============= ============ =============
For the three months ended June 30, 1999
Cost of revenues $ -- $ -- $ -- $ --
Research and development 3,095 -- 143 3,238
Sales and marketing 401 -- 39 440
General and administrative 520 -- 212 732
------------- ------------- ------------ -------------
Total $ 4,016 $ 0 $ 394 $ 4,410
============= ============= ============ =============
</TABLE>
9
<PAGE>
Interest Income. Interest income increased 148% to $757,000 in the three months
ended June 30, 2000 as compared to $305,000 for the three months ended June 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 291% to $176,000 in the three
months ended June 30, 2000 as compared to $45,000 for the three months ended
June 30, 1999. The increase was primarily due to larger outstanding balances
under our revolving line of credit with Mitsubishi Electric related to the
financing of inventory purchases.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999.
Net Revenues. Our revenues increased to $14.5 million for the six months ended
June 30, 2000 compared to $705,000 for the six months ended June 30, 1999. The
increase reflects increasing unit shipments as we ramped deliveries of our
initial products. Revenues for the second half of 1999 consisted solely of
technology development revenues. We had $150,000 of technology development
revenues for the six months ended June 30, 2000. Our major customers for the six
months ended June 30, 2000 were Lucent Technologies Inc., Sumitomo Electric and
Copper Mountain Networks. Revenues to international customers comprised 36% of
our revenues for the six months ended June 30, 2000.
Cost of Sales and Gross Profit. Cost of revenues was $9.5 million in the six
months ended June 30, 2000 resulting in a gross margin of 34.7%. The
amortization of deferred compensation included in manufacturing spending for the
six months ended June 30, 2000 was $651,000. In the early stage of product
shipments, we incurred proportionally higher manufacturing costs, including the
amortization of deferred compensation, due to relatively low volumes.
Research and Development Expenses. Research and development expenditures
increased 241% to $18.9 million for the six months ended June 30, 2000 as
compared to $5.5 million for the six months ended June 30, 1999. The increase
was primarily due to the addition of engineering personnel and an increase of
$4.9 million in the amortization of deferred compensation. In addition, research
and development expenditures for the six months ended June 30, 2000 include $2.4
million of non-cash stock compensation expense, related to stock grants to
non-employees.
Sales and Marketing Expenses. Sales and marketing expenditures increased 505%
to $6.9 million for the six months ended June 30, 2000 as compared to $1.1 for
the six months ended June 30, 1999. The increase was due to the addition of
personnel and an increase of $2.4 million in the amortization of deferred
compensation.
General and Administrative Expenses. General and administrative expenditures
increased 464% to $6.9 million for the six months ended June 30, 2000 from $1.2
million for the six months ended June 30, 1999. This increase was due to the
addition of personnel and the associated payroll and related costs, and an
increase of $3.7 million in the amortization of deferred compensation.
Additionally, general and administrative expense for the six months ended June
30, 2000 includes $225,000 for severance costs related to the termination of a
former officer and $100,000 related to non-cash stock compensation
expense.
10
<PAGE>
Amortization of Deferred Compensation. During the six months ended June 30,
2000, we recorded $31.6 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 $521,000 for the six months
ended June 30, 1999 to $12.2 million for the six months ended June 30, 2000. In
addition, expenses for the six months ended June 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.
<TABLE>
<CAPTION>
Expenses Excluding
Amortization of
Deferred Compensation Amortization of
and Non-Cash Stock Non-Cash Stock Deferred Total
Compensation Expense Compensation Compensation Expenses
--------------------- ------------------- ---------------- -------------
<S> <C> <C> <C> <C>
For the six months ended June 30, 2000
Cost of revenues $ 8,795 $ -- $ 651 $ 9,446
Research and development 11,342 2,391 5,149 18,882
Sales and marketing 4,414 -- 2,485 6,899
General and administrative 2,881 100 3,943 6,924
-------------- ------------- ------------ -------------
Total $ 27,432 $ 2,491 $ 12,228 $ 42,151
============== ============= ============ =============
For the six months ended June 30, 1999
Cost of revenues $ -- $ -- $ -- $ --
Research and development 5,329 -- 215 5,544
Sales and marketing 1,084 -- 55 1,139
General and administrative 978 -- 251 1,229
-------------- ------------- ------------ -------------
Total $ 7,391 $ -- $ 521 $ 7,912
============= ============= ============= =============
</TABLE>
Interest Income. Interest income increased 194% to $1.1 million during the six
months ended June 30, 2000 as compared to $380,000 for the six months ended June
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 196% to $281,000 during the six
months ended June 30, 2000 as compared to $95,000 for the six months ended June
30, 1999. The increase was primarily due to larger outstanding balances under
our revolving line of credit with Mitsubishi Electric 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.
11
<PAGE>
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 $91.6 million. We also
generated $3.4 million from the exercise of stock options, net of repurchases.
Net cash used for operations increased from $4.5 million for the six months
ended June 30, 1999 to $12.4 million for the six months ended June 30, 2000.
This increase was primarily due to an increase in our net loss from $6.9 million
to $26.8 million in the corresponding periods ending June 30, 1999 and 2000,
respectively.
Cash generated from investing activities increased from $2.6 million for the six
months ended June 30, 1999 to $5.4 million for the six months ended June 30,
2000. This increase was primarily due to maturities of short-term investments,
which were subsequently invested in cash and cash equivalents, offset by
purchases of property and equipment and the purchase of intangibles and other
long-term assets.
Cash generated from financing activities increased from $35.6 million for the
six months ended June 30, 1999 to $93.8 million for the six months ended June
30, 2000. This increase was primarily due to the net proceeds of $91.6 million
from our initial public offering in May 2000.
Accounts receivable were $8.2 million on June 30, 2000. Our customers are billed
at the time of shipment, typically with payment terms of thirty days. In June
of 2000, we discontinued our revolving line of credit with Mitsubishi Electric.
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.
OTHER FACTORS AFFECTING OPERATING RESULTS, LIQUIDITY AND CAPITAL RESOURCES
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934, as amended. Such statements are based upon current
expectations that involve risks and uncertainties. Any statements contained
herein that are not statements of historical fact may be deemed to be forward-
looking statements. For example, the words "believes," "anticipates," "plans,"
"expects," "intends" and similar expressions are intended to identify forward-
looking statements. Centillium's actual results and the timing of certain events
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a discrepancy include, but are not
limited to, those discussed in "Other Factors Affecting Operating Results,
Liquidity and Capital Resources" below, as well as Risk Factors included in the
Registration Statement. All forward-looking statements in this document are
based on information available to Centillium as of the date hereof and
Centillium assumes no obligation to update any such forward-looking statements.
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 still 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.
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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 $26.8 million for the
six month period ended June 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.
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 219 currently. 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 no 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 148 new employees to our total work
force, representing an increase of approximately 208%. 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 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.
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SALES OF OUR PRODUCTS ARE DEPENDENT 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.
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, ST Microelectronics, and
Texas Instruments. In addition, there have been a number of announcements by
other semiconductor companies including IBM and Intel that they intend 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.
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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 six
months ended June 30, 2000, sales to Sumitomo Electric Industries, Lucent
Technologies and Copper Mountain Networks accounted for 20%, 26% and 14%,
respectively, of our revenues. 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.
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. Sales to international customers were 36% of net
revenues for the six months ended June 30, 2000. We may be unable to
successfully overcome the difficulties associated with international operations.
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.
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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 for 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.
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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 potenial
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 pesonnel. 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 standard, 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. We could also be subject to similar claims
like the Amati Corporation claim by third parties in the future.
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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.
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.
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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.
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.
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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 June 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 $82,000 decrease in the fair value
of our available-for-sale securities as of June 30, 2000.
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 $91.6 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
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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: August 14, 2000 By: /s/ John W. Luhtala
------------------------------------
John W. Luhtala
Chief Financial Officer
(Principal Financial and Accounting Officer)
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