<PAGE>
As filed with the Securities and Exchange Commission on May 1, 2000
Registration No. 333-30772
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
Amendment No. 2 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
Centillium Communications, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3661 94-3263530
(State or other jurisdiction
of (Primary Standard Industrial (I.R.S. Employer
incorporation or
organization) Classification Code Number) Identification Number)
</TABLE>
47211 Lakeview Boulevard
Fremont, California 94538
(510) 771-3700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
Faraj Aalaei
Chief Executive Officer
47211 Lakeview Boulevard
Fremont, California 94538
(510) 771-3700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
<TABLE>
<S> <C>
Arthur F. Schneiderman Shane M. Byrne
Michael J. Danaher Matthew R. Gemello
Stephen M. Welles Dorothy Vinski
Paul A. Okada Lora D. Blum
Micheal J. Reagan Brobeck, Phleger & Harrison LLP
Wilson Sonsini Goodrich & Rosati Spear Street Tower
Professional Corporation One Market
650 Page Mill Road San Francisco, California 94105
Palo Alto, California 94304 (415) 442-0900
(650) 493-9300
</TABLE>
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Maximum
Title of Each Class of Securities Amount Offering Price Proposed Maximum Amount of
to be Registered to be Registered Per Share Aggregate Offering Price(1) Registration Fee(2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value.. 4,600,000 $20.00 $92,000,000 $24,840
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- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(a) of the Securities Act of 1933 solely for
the purpose of computing the amount of the registration fee.
(2) $29,146 of the Registration Fee was previously paid.
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall hereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to such Section 8(a),
may determine.
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- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 1, 2000
4,000,000 Shares
[Centillium logo]
Centillium Communications, Inc.
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of our common stock is expected to be between
$18.00 and $20.00 per share. We have applied to list our common stock on The
Nasdaq Stock Market's National Market under the symbol "CTLM."
The underwriters have an option to purchase a maximum of 600,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 4.
<TABLE>
<CAPTION>
Underwriting
Discounts
Price to and Proceeds to
Public Commissions Centillium
------------ ------------ ------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Robertson Stephens
Salomon Smith Barney
The date of this prospectus is , 2000.
<PAGE>
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 4
You Should Not Rely on Forward-
Looking Statements................. 10
Use of Proceeds..................... 10
Dividend Policy..................... 10
Capitalization...................... 11
Dilution............................ 12
Selected Consolidated Financial
Data............................... 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 14
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 24
Management....................... 36
Related Party Transactions....... 44
Principal Stockholders........... 46
Description of Capital Stock..... 48
Shares Eligible for Future Sale.. 51
Underwriting..................... 53
Notice to Canadian Residents..... 55
Legal Matters.................... 56
Experts.......................... 56
Additional Information........... 56
Index To Consolidated Financial
Statements...................... F-1
</TABLE>
-----------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights basic information about us and this
offering contained more fully elsewhere in this prospectus. You should read
this entire prospectus carefully, including the section entitled "Risk Factors"
and the financial statements and the related notes to those statements included
in this prospectus. This prospectus contains forward-looking statements that
involve risks and uncertainties.
Centillium Communications, Inc.
Centillium delivers products that enable broadband communications to the
home and business. We currently sell DSL products and we are leveraging our DSL
technology and expertise to develop products for the emerging voice over data
networks and home networking markets.
Digital subscriber line or DSL technology provides high-speed data
transmission using the local telephone company's existing copper wire
infrastructure. DSL equipment is installed at both ends of the copper wire--at
the telephone company's central office facility and at the end-user's home or
business. Each of our DSL products consists of a set of two semiconductors and
related software that form the core of the DSL equipment used at each end of
the copper wire.
As telephone companies and other network access providers have begun to
deploy DSL services, demand is emerging for complementary technologies such as
voice over data networks and home networking. Voice over data networks
technology enables the transmission of voice conversations over communications
networks originally designed for data transmission only. Voice over data
networks technology also enables the transmission of multiple voice channels as
well as data over a single copper line previously capable of transmitting only
one voice channel. Home networking enables users to share information
technology resources throughout the home. Broadband equipment manufacturers
that seek to serve the DSL, voice over data networks and home networking
markets must develop solutions to meet constantly evolving technology and
networking standards, size and power constraints, and short product life-
cycles. We believe that our products help equipment manufacturers compete in
these markets by providing flexibility due to our programmable architecture,
efficient design, low power consumption and fast time to market.
We outsource the manufacturing of our products, which allows us to focus our
resources on design, development and marketing efforts within our target
markets. To date, we have shipped our products to 13 customers. Our largest
customers, based on revenue earned in the three months ended March 31, 2000,
are Sumitomo Electric Industries, Lucent Technologies, Copper Mountain
Networks, and NEC, which represented 39.1%, 26.9%, 12.3% and 7.5% of our
revenues for such period, respectively.
We were incorporated in February 1997. We have a limited operating history
and we have not reported an operating profit for any year since our
incorporation. We expect to continue to incur net losses for the foreseeable
future.
Our principal executive offices are located at 47211 Lakeview Boulevard,
Fremont, CA 94538 and our telephone number is (510) 771-3700.
----------------
Centillium, CopperLite, CopperFlite and Optimizer are our common law
trademarks. This prospectus also makes reference to trademarks of other
companies.
1
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered in this offering............. 4,000,000 shares
Common stock offered in the private placement..... 700,000 shares to three
investors as follows:
500,000 to Creative
Technology Ltd., 100,000 to
NEC and 100,000 to the
Sterling Group.
Common stock to be outstanding after this offering
and the private placement........................ 32,137,747 shares
Use of proceeds................................... For general corporate
purposes and working
capital, including expected
operating expenses. See
"Use of Proceeds."
Nasdaq National Market symbol..................... CTLM
</TABLE>
The total number of outstanding shares of our common stock above is based
on:
. 11,987,511 shares of our common stock outstanding as of March 31, 2000;
and
. the automatic conversion of all outstanding shares of preferred stock
upon completion of this offering into 15,450,236 additional shares of
common stock.
The total number of outstanding shares of our common stock above does not
include:
. 2,831,840 shares of common stock issuable upon the exercise of
outstanding stock options as of March 31, 2000 at a weighted average
exercise price of $3.44 per share;
. 26,750 shares of common stock issuable upon the exercise of outstanding
warrants as of March 31, 2000 at a weighted average exercise price of
$4.00 per share;
. 5,814,042 shares of common stock available for issuance under our 1997
Stock Plan following this offering; and
. 500,000 additional shares of common stock available for issuance under
our 2000 Employee Stock Purchase Plan immediately following this
offering.
Unless otherwise specifically stated, information throughout this
prospectus:
. reflects the conversion of all outstanding shares of preferred stock
into shares of common stock automatically upon completion of this
offering; and
. assumes no exercise of the underwriter's over-allotment option.
2
<PAGE>
Summary Consolidated Financial Information
<TABLE>
<CAPTION>
Period from Fiscal Year Three Months
February 21, 1997 Ending December 31, Ended March 31,
(inception) to --------------------- -----------------
December 31, 1997 1998 1999 1999 2000
----------------- --------- ---------- ------- --------
(in thousands except per share data) (unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Total revenues.......... $ 300 $ 752 $ 3,744 $ 50 $ 4,723
Operating loss.......... $(2,102) $ (9,722) $ (20,781) $(3,452) $(10,312)
Net loss................ $(1,937) $ (9,256) $ (19,749) $(3,427) $(10,058)
Deemed dividend on
Series B convertible
preferred stock........ $(2,800) $ -- $ -- $ -- $ --
------- --------- ---------- ------- --------
Net loss applicable to
common stockholders.... $(4,737) $ (9,256) $ (19,749) (3,427) $(10,058)
Historical basic and
diluted net loss per
share applicable to
common stockholders.... $ (0.59) $ (1.15) $ (2.23) $ (0.42) $ (1.03)
Shares used to compute
basic and diluted net
loss per share
applicable to common
stockholders........... 8,000 8,056 8,842 8,227 9,808
Pro forma basic and
diluted net loss per
share applicable to
common stockholders.... $ (0.91) $ (0.40)
========== ========
Shares used to compute
pro forma basic and
diluted net loss per
share applicable to
common stockholders.... 21,755 25,258
========== ========
</TABLE>
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(unaudited, in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents and short-term
investments.................................... $23,358 $23,358 $106,088
Working capital................................. $21,350 $21,350 $104,080
Total assets.................................... $33,724 $33,724 $116,454
Long-term debt and capital lease obligations,
less current portion........................... $ 417 $ 417 $ 417
Total stockholders' equity...................... $26,250 $26,250 $108,980
</TABLE>
See note 1 of notes to consolidated financial statements for an explanation
of the determination of the number of shares used in computing per share data.
The pro forma amounts above reflect the conversion of 15,450,236 shares of
preferred stock into the same number of shares of common stock upon the
completion of this offering.
The pro forma as adjusted amounts above give effect to the sale of 4,000,000
shares of common stock in this offering and the sale of 700,000 shares of
common stock in the private placement, in each case at an assumed offering
price of $19.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses.
In our discussion throughout this prospectus, references to the year ended
December 31, 1997 refer to the period from February 21, 1997 (inception)
through December 31, 1997.
3
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making a
decision to purchase our common stock. You may lose all or part of your
investment. If any of the following risks actually occur, our business,
financial condition or results of operations could be harmed. If that happens,
the trading price of our common stock could decline.
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.
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 $10.1
million for the three month period ended March 31, 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 176 currently.
This expansion is placing a significant strain on our managerial, operational
and financial resources. Further, Faraj Aalaei, our Chief Executive Officer,
has only recently been appointed to this position. As a result, he may not yet
be fully integrated into his new position. We expect that further significant
expansion will be required to address growth in our customer base and market
opportunities. Failure to manage our growth could harm our business.
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. We are actively searching for research and
development engineers, who are in short supply. Our business will be harmed if
we encounter delays in hiring these additional engineers. Furthermore,
competitors and others have in the past and may in the future attempt to
recruit our employees. We do not have employment contracts with any of our key
personnel nor do we maintain key person life insurance on our key personnel.
4
<PAGE>
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.
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.
5
<PAGE>
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 us.
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, STMicroelectronics, and Texas Instruments. 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.
Our current products do not interoperate with certain products offered by
suppliers to our customers and are subject to evolving industry standards. If
our products do not interoperate with our target customers' networks or an
industry standard that achieves market acceptance, sales of our products will
decline.
Our products do not interoperate with the equipment of certain network
equipment vendors who supply our target customers. In some cases, these network
equipment vendors sell proprietary or non-interoperable systems to our target
customers with which our products will not function. In these cases, potential
customers who wish to purchase DSL products and who have purchased other
network equipment that does not function with our DSL products may not purchase
our products.
Also, the emergence of new industry standards, whether through adoption by
official standards committees or widespread use by our target customers, could
require us to redesign our products. If such standards become widespread and
our products do not meet these standards, our customers and potential customers
would not purchase our products.
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 is not accepted
in the marketplace, we may not achieve sales of our products in volume
quantities, which would have a negative impact on our results of operations.
Because manufacturers of communications equipment may be reluctant to change
their sources of components, if we do not achieve design wins with such
manufacturers, we may be unable to secure sales from these customers in the
future.
Once a manufacturer of communications equipment has designed a supplier's
semiconductor into its products, the manufacturer may be reluctant to change
its source of semiconductors due to the significant costs
6
<PAGE>
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. 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 Industries
accounted for 34.4% of our revenues and sales to NEC accounted for 21.1% of our
revenues. For the three months ended March 31, 2000, sales to Sumitomo Electric
Industries, Lucent Technologies and Copper Mountain Networks accounted for
39.1%, 26.9% and 12.3%, respectively, of our revenues. We do not have formal
long-term agreements with these customers relating to the sale of our products,
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. In 1999, 81.6% of our sales were to
customers located in Asia. 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.
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.
7
<PAGE>
Because our operating results from quarter to quarter will fluctuate, the price
of our stock may decline.
Our revenues, expenses and operating results have fluctuated in the past and
are likely to fluctuate significantly in the future on a quarterly and an
annual basis due to a number of factors, many of which are outside our control.
For example, our results of operations could be negatively affected by the
following:
. the timing and size of purchase orders from, and shipments to, our
customers;
. unexpected delays in introducing new or enhanced products, including
manufacturing delays;
. the volume and average cost of products manufactured; and
. the timing and size of expenses, including expenses of developing new
products and product improvements.
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 will 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. For example, in the fourth
quarter of 1999, we expected to receive an order from a customer for a shipment
of one of our products. Due to a temporary shortage of a particular component
of the customer's product, the customer was forced to delay the manufacture of
its product, and therefore delayed placing their purchase order with us.
You will experience immediate dilution of $15.61 per share and you will be
diluted further as outstanding stock options are exercised.
The initial public offering price is substantially higher than the current
book value per share of our outstanding common stock. As a result, you will
experience immediate dilution of approximately $15.61 per share, assuming an
initial public offering price of $19.00 per share, in the book value of our
common stock from the price you pay for our common stock. In addition, we have
issued a large number of options to acquire common stock at prices
significantly below the initial public offering price. As of March 31, 2000,
options to purchase 2,831,840 shares of our common stock were outstanding, with
a weighted average exercise price of $3.44 per share. As these options are
exercised, you will be diluted further.
Because our principal stockholders and management may have the ability to
control stockholder votes, the premium over market price that an acquiror might
otherwise pay may be reduced and any merger or takeover may be delayed.
Immediately following the offering, our officers and directors and their
affiliates will own or control approximately 24.4% of our common stock
(assuming no purchases of shares of common stock in this offering by our
officers and directors and their affiliates). Accordingly, our officers 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,
8
<PAGE>
takeover or other business combination involving us. This concentration of
ownership could also adversely affect our stock's market price or lessen any
premium over market price that an acquiror might otherwise pay.
The large number of shares eligible for public sale after this offering 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--in the public market
following this offering, 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. The
shares in this offering will be freely tradable immediately upon completion of
this offering. In addition, upon the expiration of lock-up agreements on the
181st day after completion of this offering, 26,162,845 of shares of common
stock held by existing stockholders will be freely tradable. In addition,
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. A private placement of 700,00
shares will occur immediately prior to the closing of this offering. These
shares will become eligible for sale on the public market one year from the
date of this prospectus or earlier upon registration under the Securities Act.
Sales of these shares in the future, whether due to early release from lockup
agreements, termination of these agreements of expiration of holding periods,
could cause the market price of the our common stock to decline. For a more
detailed discussions of when shares will become freely tradable, see "Shares
Eligible for Future Sale."
9
<PAGE>
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance
and involve known and unknown risks, uncertainties and other factors that may
cause our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the forward-
looking statements. These risks and other factors include those listed under
"Risk Factors" and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," or the
negative of these terms or other comparable terminology. These statements are
only predictions. In evaluating these statements, you should specifically
consider various factors, including the risks outlined under "Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
USE OF PROCEEDS
We expect to receive net proceeds of approximately $82.7 million from the
sale of the 4,000,000 shares of common stock in this offering and the sale of
700,000 shares of common stock in the private placement (or approximately $93.3
million if the underwriters' over-allotment option is exercised in full), at an
assumed initial public offering price of $19.00 per share, after deducting
underwriting discounts and commissions and estimated offering expenses.
We expect to use the net proceeds from this offering for working capital and
general corporate purposes. We expect these purposes to include funding our
business operations, which are currently generating negative cash flow, hiring
additional engineering and technical personnel, and expanding our facilities.
We are not currently able to estimate the allocation of proceeds specifically.
Accordingly, our management will have considerable discretion in the
application of the net proceeds, and may apply the net proceeds in ways which
do not increase our operating results or our market value. You will not have
the opportunity, as part of your investment decision, to assess whether the
proceeds are being used appropriately. Pending application of the net proceeds,
we intend to invest the proceeds in interest-bearing investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.
10
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of March 31,
2000 on the following three bases:
. our actual capitalization derived from our financial statements as of
March 31, 2000;
. on a pro forma basis to give effect to the conversion of all shares of
preferred stock into 15,450,236 shares of common stock automatically
upon completion of this offering; and
. on an as adjusted basis to reflect (a) the sale of 4,000,000 shares of
our common stock in this offering at an assumed initial offering price
of $19.00 per share and the receipt by us of the estimated proceeds,
after deducting underwriting discounts and commissions and estimated
offering expenses and (b) the sale of 700,000 shares of common stock in
the private placement at an assumed price of $19.00 per share.
You should read this table in conjunction with our Financial Statements and
the accompanying Notes, Selected Financial Data, and Management's Discussion
and Analysis included elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands except share and
per share data)
<S> <C> <C> <C>
Current portion of long-term debt and capital
lease obligations............................. $ 662 $ 662 $ 662
-------- -------- --------
Long-term debt and other liabilities........... 561 561 561
-------- -------- --------
Stockholders' equity:
Preferred stock, $0.001 par value: none
authorized, none outstanding (actual);
10,000,000 authorized, none outstanding (pro
forma and pro forma as adjusted)(1)......... -- -- --
Convertible preferred stock, $0.001 par
value: 15,630,000 authorized, 15,450,236
outstanding (actual); none authorized, none
outstanding (pro forma and pro forma as
adjusted)................................... 15 -- --
Common stock, $0.001 par value: 32,000,000
authorized, 11,987,511 outstanding (actual);
100,000,000 authorized, 27,437,747
outstanding (pro forma); 100,000,000
authorized, 32,137,747 outstanding (pro
forma as adjusted)(1)....................... 12 27 32
Additional paid-in capital..................... 104,081 104,081 186,806
Stockholder notes receivable................... (440) (440) (440)
Accumulated other comprehensive income......... (15) (15) (15)
Deferred compensation.......................... (33,603) (33,603) (33,603)
Accumulated deficit............................ (43,800) (43,800) (43,800)
-------- -------- --------
Total stockholders' equity................... 26,250 26,250 108,980
-------- -------- --------
Total capitalization....................... $ 27,473 $ 27,473 $110,203
======== ======== ========
</TABLE>
- --------------------
(1) Upon completion of this offering, our certificate of incorporation will be
amended to authorize 100,000,000 shares of common stock and 10,000,000
shares of undesignated preferred stock.
The data in the table above excludes:
. 2,831,840 shares of common stock issuable upon the exercise of
outstanding stock options as of March 31, 2000 at a weighted average
exercise price of $3.44 per share;
. 26,750 shares of common stock issuable upon the exercise of outstanding
warrants as of March 31, 2000 at a weighted average exercise price of
$4.00 per share;
. 5,814,042 shares of common stock available for issuance under our 1997
Stock Plan following this offering; and
. 500,000 additional shares of common stock available for issuance under
our 2000 Employee Stock Purchase Plan immediately following this
offering.
11
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of common
stock after this offering.
Our pro forma net tangible book value as of March 31, 2000 was $26.3 million
or $.96 per share of common stock. Net tangible book value per share represents
the amount of our total tangible assets less total liabilities, divided by the
pro forma number of 27,437,747 shares of common stock outstanding after giving
effect to the conversion of all outstanding shares of preferred stock into
common stock upon completion of this offering. Dilution in net tangible book
value per share represents the difference between the amount per share paid by
purchasers of shares of common stock in this offering and the net tangible book
value per share of common stock immediately after the completion of this
offering and the private placement. After giving effect to the sale of the
4,000,000 shares of common stock in this offering and the 700,000 shares
offered in the private placement at an assumed initial public offering price of
$19.00 per share, and after deducting underwriting discounts and estimated
offering expenses, our pro forma net tangible book value as of March 31, 2000
would have been $109.0 million or approximately $3.39 per share. This
represents an immediate increase in net tangible book value of $2.43 per share
to existing stockholders and an immediate dilution of $15.61 per share to new
investors, or approximately 82.2% of the assumed initial public offering price
of $19.00 per share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $19.00
Pro forma net tangible book value per share at March 31, 2000
before the offering............................................ $0.96
Increase per share attributable to new investors in this
offering....................................................... $2.43
-----
Net tangible book value per share after this offering............. $ 3.39
------
Dilution per share to new investors............................... $15.61
======
</TABLE>
The following table shows on a pro forma basis after giving effect to this
offering, as of March 31, 2000, the number of shares of common stock purchased
from us, the total consideration paid to us, and the average price per share
paid by existing stockholders by investors participating in the private
placement, and by the investors purchasing shares of common stock in this
offering (at an assumed initial public offering price of $19.00 per share
before deducting the underwriting discounts and commissions and estimated
offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 27,437,747 85.4% $ 58,568,000 39.6% $ 2.13
Private placements...... 700,000 2.2% 13,300,000 9.0% $19.00
New investors in the
offering............... 4,000,000 12.4% 76,000,000 51.4% $19.00
---------- ---- ------------ ---- ------
Total................. 32,137,747 100% 147,868,000 100% $ 4.60
========== ==== ============ ==== ======
</TABLE>
The foregoing discussion and table are based on actual shares outstanding on
March 31, 2000 and assume no exercise of any stock options or warrants
outstanding as of such date. As of March 31, 2000, there were options and
warrants outstanding to purchase 2,831,840 and 26,750 shares of common stock,
respectively, at a weighted average exercise price of $3.44 and $4.00 per
share, respectively. To the extent any of these options or warrants are
exercised, there will be further dilution to investors.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with the consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The statement of operations data for the
period from February 21, 1997 (inception) to December 31, 1997 and for the
years ended December 31, 1998 and 1999 and the balance sheet data as of
December 31, 1998 and 1999 are derived from, and are qualified by reference to,
the audited consolidated financial statements and related notes appearing
elsewhere in this prospectus. The balance sheet data as of December 31, 1997
are derived from audited financial statements not appearing in this prospectus.
The statement of operations data for the three month periods ended March 31,
1999 and 2000 and the balance sheet data as of March 31, 2000 are derived from
unaudited consolidated financial statements not included in this prospectus
and, in our opinion, include all adjustments, consisting only of normal
recurring adjustments, which are necessary for a fair presentation of the
results of operations as of and for the relevant period. Historical results are
not necessarily indicative of results that may be expected for any future
period.
<TABLE>
<CAPTION>
Period from Years Ended Three Months
February 21, 1997 December 31, Ended March 31,
(inception) to ----------------- -----------------
December 31, 1997 1998 1999 1999 2000
----------------- ------- -------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
Product................ $ -- $ -- $ 2,509 $ -- $ 4,723
Technology
development........... 300 752 1,235 50 --
------- ------- -------- ------- --------
Total revenues......... 300 752 3,744 50 4,723
Cost of revenues........ -- -- 3,118 -- 3,483
------- ------- -------- ------- --------
Gross profit............ 300 752 626 50 1,240
Operating expenses:
Research and
development........... 1,844 7,913 13,357 2,306 6,017
Sales and marketing.... 341 1,466 3,823 700 2,773
General and
administrative........ 217 1,095 4,227 496 2,762
------- ------- -------- ------- --------
Total operating
expenses.............. 2,402 10,474 21,407 3,502 11,552
------- ------- -------- ------- --------
Operating loss.......... (2,102) (9,722) (20,781) (3,452) (10,312)
Interest income, net.... 165 466 1,032 25 254
------- ------- -------- ------- --------
Net loss................ (1,937) (9,256) (19,749) (3,427) (10,058)
Deemed dividend on
Series B convertible
preferred stock........ (2,800) -- -- -- --
------- ------- -------- ------- --------
Net loss applicable to
common stockholders.... $(4,737) $(9,256) $(19,749) $(3,427) $(10,058)
======= ======= ======== ======= ========
Historical basic and
diluted net loss per
share applicable to
common stockholders.... $ (0.59) $ (1.15) $ (2.23) $ (0.42) $ (1.03)
======= ======= ======== ======= ========
Shares used to compute
basic and diluted net
loss per share
applicable to common
stockholders........... 8,000 8,056 8,842 8,227 9,808
======= ======= ======== ======= ========
Pro forma basic and
diluted net loss per
share applicable to
common stockholders.... $ (0.91) $ (0.40)
======== ======= ========
Shares used to compute
pro forma basic and
diluted net loss per
share applicable to
common stockholders.... 21,755 25,258
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31, 2000
----------------------- ---------------
Pro
1997 1998 1999 Actual Forma
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents and short-
term investments..................... $13,645 $ 7,926 $28,313 $23,358 $23,358
Working capital....................... $12,537 $ 6,686 $26,043 $21,350 $21,350
Total assets.......................... $16,339 $12,010 $35,587 $33,724 $33,724
Liabilities........................... $ 2,183 $ 2,751 $ 5,532 $ 7,474 $ 7,474
Total stockholders' equity............ $14,156 $ 9,259 $30,055 $26,250 $26,250
</TABLE>
See note 1 of notes to consolidated financial statements for an explanation
of the determination of the weighted average common and common equivalent
shares used to compute net loss per share.
The pro forma amounts above reflect the conversion of all outstanding shares
of preferred stock into 15,450,236 shares of common stock upon completion of
this offering.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We provide system-level products that enable broadband communications to the
home and business enterprise. We serve the DSL market and plan to leverage our
communications technology and expertise to serve the voice over data networks
and home networking markets before the end of this year. Our current customers
are broadband access equipment vendors who manufacture DSL equipment for use in
the phone companies' communications infrastructure or DSL modems for Internet
or other network access in a home or small business.
We were incorporated on February 21, 1997 and commenced operations on April
1, 1997. Consequently, our results of operations for and as of the year ended
December 31, 1997 include organizational activities and operations for the
period from February 21, 1997 (inception) through December 31, 1997. In our
discussion below, references to the year ended December 31, 1997 refer to the
period from February 21, 1997 (inception) through December 31, 1997. During the
period from February 1997 through June 1999 we were a development stage company
focused on developing our initial products, recruiting personnel, building our
corporate infrastructure and raising capital, and therefore had no product
revenue. In 1999, we began shipping our CopperLite CO and CopperLite CPE
families of products and recorded our first significant product revenues in the
third quarter. We emerged from the development stage at that time. During 1999,
we also increased our investment in research and development, sales and
marketing, operations and our general and administrative infrastructure.
Our revenues currently are derived from the sale of our DSL products which
include the CopperLite CO, CopperLite CPE and Optimizer families of products.
To date, we have generated a substantial portion of our revenues from a limited
number of customers. Our top two customers in 1999 were Sumitomo Electric
Industries and NEC who accounted for 34.4% and 21.1%, respectively, of our 1999
revenues. In addition, for the three months ended March 31, 2000, sales to
Sumitomo Electric Industries, Lucent Technologies and Copper Mountain Networks
accounted for 39.1%, 26.9% and 12.3%, respectively, of our revenues. While we
are seeking to diversify our customer base, we cannot assure you that these
efforts will be successful.
Historically, we have received significant revenues under best efforts
technology development agreements. Revenues under these agreements represent
payments we received for the performance of contract engineering services.
Under these agreements, we generally received payments upon the completion of
contractual milestones. We are not required to refund any payments under the
contracts.
Our policy is to recognize revenue under technology development agreements
when applicable contractual milestones have been met, including deliverables,
and in any case, revenue recognized does not exceed the amount that would be
recognized using the percentage of completion method. In this regard, the
timing of technology development revenue depends on the timing of completion of
milestones under individual agreements. We believe that technology development
revenue will not be significant after 1999.
We have focused our initial sales and marketing efforts on Asian and North
American communications equipment manufacturers. During 1999 and for the three
month period ended March 31, 2000, 81.6% and 51.2% of our sales were to Asia,
respectively. While we are developing our European sales organization and are
continuing to develop our North American sales organization, we expect that the
majority of our revenues will be derived from Asia for the foreseeable future.
We currently sell through our direct sales force in Japan, Singapore and North
America and through our representatives in Korea and Taiwan. International
revenues are denominated solely in U.S. dollars, which reduces our exposure to
foreign currency exchange risks.
We recognize product revenue at the time of shipment to customers when no
significant obligations remain. Allowances are provided for estimated returns
at the time of shipment. In circumstances where we have not shipped the final
version of our product, or when a customer has delayed its acceptance of our
product, we defer recognition of the revenue associated with the given product
at the time of shipment. This deferred revenue is recognized when the final
version of the product is delivered or upon acceptance by the customer. As of
December 31, 1999, we had $122,000 in deferred revenue which was comprised
primarily of
14
<PAGE>
prepayments from certain customers. As of March 31, 2000, we had $125,000 in
deferred revenue which was comprised primarily of unearned technology
development fees.
It usually takes more than one year for us to realize volume shipments of
our products after we first contact a customer. We first work with customers to
achieve a design win, which may take six months or longer. Our customers then
complete the design, testing and evaluation of their systems and begin the
marketing process, a period which typically lasts an additional three to six
months or longer. As a result, a significant period of time may elapse between
our sales efforts and our realization of revenues, if any, from volume
purchases of our products by our customers. Our customers are not obligated by
long-term contracts to purchase our products and can generally cancel or
reschedule orders on short notice.
We outsource the fabrication, assembly and testing of our products.
Accordingly, a significant portion of our cost of revenues consists of payments
to our manufacturing partners. Costs of revenues also encompass our internal
manufacturing and operations functions and a portion of our information systems
and facilities costs.
Research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers,
prototype costs related to the fabrication of our silicon chips, and
depreciation associated with software development tools and amortization of
deferred compensation. We expense our research and development costs as they
are incurred. Several components of our research and development effort require
significant expenditures, the timing of which can cause significant quarterly
variability in our expenses. For example, we require a substantial number of
prototypes to build and test our complex products and therefore, incur
significant prototype costs. Because our research and development is key to our
future success, we intend to significantly increase our research and
development expenditures in future periods.
Sales and marketing expenses consist primarily of salaries, commissions, and
related expenses for personnel engaged in marketing, sales, customer service
and applications engineering support functions, costs associated with
promotional and other marketing expenses, as well as amortization of deferred
compensation. We intend to expand our direct and indirect sales operations
substantially, both domestically and internationally, in order to increase
market awareness, support customer requirements, and increase orders for our
products. We expect that sales and marketing expenses will increase over the
next year as we hire additional sales and marketing personnel, initiate
additional marketing programs to support our products and establish sales
offices in additional domestic and international locations. We intend to expand
our use of independent manufacturers' representatives. To date, we have entered
into agreements with only a small number of representatives and we believe that
to be successful, we must reach agreement with additional representatives in
several countries. In addition, the complexity of our products and the
applications support necessary for successful interoperability and customer
specific applications requires highly trained customer service and support
personnel. We expect to significantly expand our customer service and support
organization to meet these requirements.
General and administrative expenses consist primarily of salaries and
related expenses for executives, finance, accounting, facilities, information
services, human resources, recruiting expenses, professional fees, other
corporate expenses, and amortization of deferred compensation. We expect
general and administrative expenses to increase as we add personnel and incur
additional costs related to the growth of our business and our operation as a
public company.
In connection with the grant of certain stock options and equity
compensation to our employees, technical advisors and directors, we have
recorded deferred compensation expense of $42.5 million. Deferred compensation
represents the difference between the grant price and the deemed fair value of
our common stock options granted during these periods. Deferred compensation
expense is being amortized using the graded vesting method, in accordance with
Statement of Financial Accounting Standards No. 123 and FASB Interpretation No.
28, over the vesting period of each respective option, generally four years.
Under the graded vesting method, each option grant is separated into portions
based on their vesting terms which results in acceleration of amortization
expense for the overall award. The accelerated amortization pattern results in
15
<PAGE>
expensing approximately 59% of the total award in year 1, 25% in year 2, 12% in
year 3 and 4% in year 4. Unamortized deferred compensation is presented as a
reduction of stockholders' equity. See note 7 of notes to consolidated
financial statements for more information about the deferred compensation
expense.
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 $10.1
million for the three month period ended March 31, 2000. We expect to continue
to incur net losses for the foreseeable future, and these losses may be
substantial. Further, we expect to incur substantial negative cash flow in the
future.
Results of Operations
The following table sets forth, for the periods presented, certain data from
our consolidated statement of operations expressed as a percentage of total
revenues.
<TABLE>
<CAPTION>
Three
Years Ended Months
Period From December Ended March
February 21, 1997 31, 31,
(Inception) to ------------- -------------
December 31, 1997 1998 1999 1999 2000
----------------- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
As a Percentage of Total
Revenues:
Total revenues.............. 100 % 100 % 100 % 100 % 100 %
Cost of revenues............ 0 0 83 0 74
---- ------ ---- ------ ----
Gross profit................ 100 100 17 100 26
Operating expenses:
Research and development.. 615 1,052 357 4,612 127
Sales and marketing....... 114 195 102 1,400 59
General and
administrative........... 72 146 113 992 58
---- ------ ---- ------ ----
Total operating
expenses............... 801 1,393 572 7,004 244
Operating loss.............. (701) (1,293) (555) 6,904 (218)
Interest income............. 71 77 34 150 8
Interest expense............ (16) (15) (6) (100) (2)
---- ------ ---- ------ ----
Net loss.................... (646)% (1,231)% (527)% (6,854)% (213)%
==== ====== ==== ====== ====
</TABLE>
Three months ended March 31, 1999 and 2000
Revenues
Our revenues increased to $4.7 million for the three months ended March 31,
2000 compared to $50,000 for the three months ended March 31, 1999. The
increase reflects increasing unit shipments as we continue to ramp deliveries
of our initial products. Revenues for the first quarter of 1999 consisted
solely of technology development revenues. We had no technology development
revenues in the first quarter of 2000. Our major customers for the three months
ended March 31, 2000 were Sumitomo Electric Industries, Lucent Technologies and
Copper Mountain Networks, Inc. with 39.1%, 26.9% and 12.3% of total revenues,
respectively. Revenues to international customers comprised 54% of our revenues
for the three months ended March 31, 2000.
Cost of revenues
Cost of revenues was $3.5 million in the three months ended March 31, 2000
resulting in a gross margin of 26%. The amortization of deferred compensation
included in manufacturing spending for the three months ended March 31, 2000
was $218,000. As our revenues increase during our early stage of product
shipments, we incur proportionally high manufacturing costs due to relatively
low volumes to absorb overhead costs, including amortization of deferred
compensation.
16
<PAGE>
Research and Development Expenses
Research and development expenditures increased 161% to $6.0 million for the
three months ended March 31, 2000 as compared to $2.3 million for the three
months ended March 31, 1999. The increase was primarily due to the addition of
engineering personnel and an increase of $1.9 million in the amortization of
deferred compensation.
Sales and Marketing Expenses
Sales and marketing expenditures increased 296% to $2.8 million for the
three months ended March 31, 2000 as compared to $700,000 for the three months
ended March 31, 1999. The increase was due to the addition of personnel and an
increase of $1.0 million in the amortization of deferred compensation.
General and Administrative Expenses
General and administrative expenditures increased 457% to $2.8 million for
the three months ended March 31, 2000 from $496,000 for the three months ended
March 31, 1999. This increase was due to the addition of personnel and the
associated payroll and related costs, and an increase of $1.5 million in the
amortization of deferred compensation. Additionally, general and administrative
expense for the three months ended March 31, 2000 includes $225,000 for
severance costs related to the termination of a former officer.
Amortization of Deferred Compensation
During the three months ended March 31, 2000, we recorded $22.3 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 $127,000 for the three months ended March 31, 1999
to $4.7 million for the three months ended March 31, 2000. The following table
details the amount of deferred compensation included in expenses.
<TABLE>
<CAPTION>
Expenses
Excluding
Amortization Amortization
of Deferred of Deferred Total
Compensation Compensation Expenses
------------ ------------ --------
<S> <C> <C> <C>
For the three months ended March 31, 2000
Cost of revenues............................ $ 3,265 $ 218 $ 3,483
Research and development.................... 4,076 1,941 6,017
Sales and marketing......................... 1,749 1,024 2,773
General and administrative.................. 1,204 1,558 2,762
------- ------ -------
Total..................................... $10,294 $4,741 $15,035
======= ====== =======
For the three months ended March 31, 1999
Research and development.................... $ 2,234 $ 72 $ 2,306
Sales and marketing......................... 684 16 700
General and administrative.................. 457 39 496
------- ------ -------
Total..................................... $ 3,375 $ 127 $ 3,502
======= ====== =======
</TABLE>
Interest Income
Interest income increased 379% to $359,000 for the three months ended March
31, 2000 as compared to $75,000 for the three months ended March 31, 1999. The
increase was primarily due to larger cash balances resulting from the issuance
of preferred stock in April 1999.
17
<PAGE>
Interest Expense
Interest expense increased 110% to $105,000 for the three months ended March
31, 2000 as compared to $50,000 for the three months ended March 31, 1999. The
increase was primarily due to the use of the line of credit.
Years Ended December 31, 1997, 1998 and 1999
Revenues
In 1997 and 1998, all of our revenue was derived from technology development
efforts and services. We received payments from potential future customers to
develop our technologies in such a way that also provided for their
requirements. This revenue was received primarily as an incentive for us to
continue this development effort. We believe we will recognize little or no
technology development revenue for the foreseeable future.
Revenues increased from $300,000 in 1997 to $752,000 in 1998 and increased
to $3.7 million in 1999. The increase in 1998 was attributable to increased
technology development revenues. The increase in 1999 was attributable to a
further increase in technology development revenue to $1.2 million and the
initial shipments of our products which generated significant revenues
beginning in the third quarter of 1999.
Cost of Revenues
The costs associated with our technology development revenues are closely
related to the costs of our ongoing research and development activities.
Generally, the incremental costs of providing any deliverables under our
technology development arrangements are not easily distinguishable from the
costs of our ongoing activities. The total incremental costs of our technology
development revenues are generally not significant. All such costs related to
technology development revenues for each of the years ended December 31, 1997,
1998 and 1999 have been included in research and development in our statements
of operations. Cost of revenues, which reflects costs of product revenues, was
$3.1 million in 1999.
Research and Development Expenses
Research and development expenses increased from $1.8 million in 1997 to
$7.9 million in 1998 and increased to $13.4 million in 1999. The increases in
1998 and 1999 were due primarily to additions in engineering personnel,
increased usage of materials necessary to build prototypes, increases in
depreciation resulting from the additional purchases of laboratory equipment
and software development tools and an increase in amortization of deferred
compensation.
Sales and Marketing Expenses
Sales and marketing expenses increased from $341,000 in 1997 to $1.5 million
in 1998 and increased further to $3.8 million in 1999. These increases were due
primarily to the addition of personnel, an increase in marketing activity such
as customer visits and attendance at trade shows and an increase in
amortization of deferred compensation.
General and Administrative Expenses
General and administrative expenses increased from $217,000 in 1997 to $1.1
million in 1998 and increased to $4.2 million in 1999. These increases were due
primarily to the addition of personnel in the accounting, human resources,
information services and facilities functions and an increase in amortization
of deferred compensation. The increase in 1999 was also due to our move to
larger facilities in September 1999. During 1999, we charged $150,000 to bad
debt expense to establish a reserve for unidentified potential bad debt
exposures. The amount was determined in consideration of the early stage of our
customer relationships.
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Amortization of Deferred Compensation
During 1998 and 1999 we recorded a total of $20.2 million of deferred stock
compensation. Amortization of deferred stock compensation increased from zero
in 1997 to $69,000 in 1998 and increased to $4.1 million in 1999. Deferred
stock compensation is being amortized using the graded vesting method in
accordance with FAS 123 and FAS Interpretation 28, over the vesting period of
each respective option, generally four years. Under the graded vesting method,
each option grant is separated into portions based on their vesting terms which
results in acceleration of amortization expense for the overall award. The
accelerated amortization pattern results in expensing approximately 59% in year
1, 25% in year 2, 12% in year 3 and 4% in year 4.
Interest Income
Interest income increased from $214,000 in 1997 to $582,000 in 1998 and
increased to $1.3 million in 1999. These increases were due to higher cash and
cash equivalent balances resulting from successful preferred stock financings
in 1998 and 1999.
Interest Expense
Interest expense increased from $49,000 in 1997 to $116,000 in 1998 and
increased to $242,000 in 1999. These increases were due to higher average
outstanding debt balances during 1998 and outstanding balances under our
working capital line of credit during 1999.
Deemed Dividend
In connection with Series B3 convertible preferred stock financings in July
and September 1997, we issued rights to certain stockholders, which provided
for the purchase of 2,000,000 shares of Series B1 convertible preferred stock
at $2.00 per share and 800,000 shares of Series B2 convertible preferred stock
at $2.50 per share. The rights were immediately exercisable and expired
approximately one year after their initial grant. We recorded noncash deemed
dividends of $2.8 million for 1997, representing the fair value of the rights
issued, which reduced income available to common stockholders. No such
dividends were recorded in 1998 or 1999.
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<PAGE>
Quarterly Results of Operations
Our quarterly results of operations fluctuate from period-to-period
depending on factors such as the timing of significant expenditures for
prototype development, the success of our initial sales efforts, the timing of
significant design wins and orders, and period-to-period difficulties that may
be encountered with our manufacturing subcontractors. We believe that period-
to-period comparisons of our financial results should not be relied upon to
predict future results. We may experience significant fluctuations in period-
to-period operating results.
The following table presents certain quarterly financial information derived
from our statements of operations and such data as a percentage of revenues for
the four quarters ended December 31, 1999 and the quarter ended March 31, 2000.
This data has been derived from unaudited consolidated financial statements. In
our opinion these statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information
when read in conjunction with our annual audited consolidated financial
statements and related notes appearing elsewhere in this prospectus. These
operating results are not necessarily indicative of results of any future
period.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------
Mar 31, Jun 30, Sep 30, Dec 31, Mar 31,
1999 1999 1999 1999 2000
------- ------- ------- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Product.................. $ 0 $ 0 $ 651 $ 1,858 $ 4,723
Technology development... 50 655 200 330 0
------- ------- ------- ------- --------
Total revenues......... 50 655 851 2,188 4,723
Cost of revenues........... 0 0 1,108 2,010 3,483
------- ------- ------- ------- --------
Gross profit............... 50 655 (257) 178 1,240
Operating expenses:
Research and
development............. 2,306 3,238 3,501 4,312 6,017
Sales and marketing...... 700 440 770 1,913 2,773
General and
administrative.......... 496 732 1,148 1,851 2,762
------- ------- ------- ------- --------
Total operating
expenses.............. 3,502 4,410 5,419 8,076 11,552
------- ------- ------- ------- --------
Operating loss............. (3,452) (3,755) (5,676) (7,898) (10,312)
Interest income, net....... 25 260 491 256 254
------- ------- ------- ------- --------
Net loss................... $(3,427) $(3,495) $(5,185) $(7,642) $(10,058)
======= ======= ======= ======= ========
As a Percentage of Total
Revenues
Revenues:
Product.................. 0 % 0 % 76 % 85 % 100 %
Technology development... 100 100 24 15 0
------- ------- ------- ------- --------
Total revenues......... 100 100 100 100 100
Cost of revenues........... 0 0 130 92 74
------- ------- ------- ------- --------
Gross profit............... 100 100 (30) 8 26
Operating expenses:
Research and
development............. 4,612 494 411 197 127
Sales and marketing...... 1,400 67 90 87 59
General and
administrative.......... 992 112 135 85 58
------- ------- ------- ------- --------
Total operating
expenses.............. 7,004 673 637 % 369 245 %
Operating loss............. (6,904) (573) (667) (361) (218)
Interest income, net....... 50 40 58 12 6
------- ------- ------- ------- --------
Net loss................... (6,854)% (534)% (609)% (349)% (213)%
======= ======= ======= ======= ========
</TABLE>
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Technology development revenues fluctuated during the four quarters ending
December 31, 1999 and the quarter ended March 31, 2000 based primarily on the
timing of contracts from our customers for contract engineering services and
completion of milestones under the contracts. This portion of our business will
diminish in the future and we expect that technology development revenue will
not be a significant portion of our total revenue after March 31, 2000.
We commenced product shipments and recorded our first related revenue in the
third quarter of 1999. Product revenues increased from the third quarter of
1999 to the fourth quarter of 1999 and increased further to the first quarter
2000 primarily due to increasing unit sales and deliveries to additional
customers. Future product revenue will vary in part on the timing of orders
from our customers.
Costs of revenues in the third and fourth quarters of 1999 and the first
quarter of 2000 reflect the early stage of our production efforts. Because a
portion of our manufacturing costs are fixed, low initial production volumes
cause high per-unit allocation of manufacturing overhead costs. As our
production volumes increase, we expect costs of revenue to decline as a
percentage of revenue.
Operating expenses increased in each of the four quarters of 1999 and
further increased to the first quarter of 2000 as we transitioned from a
development stage company to our initial production and customer deliveries.
The increase was due to hiring of new personnel and increases in amortization
of deferred compensation.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of approximately $55.8 million of convertible preferred stock, net of
offering costs. We also generated $2.3 million from the exercise of stock
options and have secured additional financing through capital leases and
secured debt.
Cash used for operations increased from $7.8 million in 1998 to $12.2
million in 1999. This increase was primarily due to an increase in our net loss
from $9.3 million in 1998 to $19.7 million in 1999. Cash used for operations
increased from $2.6 million for the three months ended March 31, 1999 to $4.7
million for the three months ended March 31, 2000. This increase was primarily
due to the increase in quarterly net losses.
Cash generated from financing activities increased from $4.8 million in 1998
to $35.6 million in 1999. This increase is due primarily to the sale of $35.6
million in convertible preferred stock in 1999. Cash generated from financing
activities of $1.3 million as compared to cash used in financing activities of
$108,000 was primarily due to the proceeds from the exercise of stock options
for $1.5 million.
Cash and cash equivalents, and short-term investments increased from $7.9
million on December 31, 1998 to $28.3 million on December 31, 1999. This
increase was due primarily to the receipt of $35.6 million from the sale of
preferred stock. Cash and cash equivalents and short term investments decreased
from $28.3 million as of December 31, 1999 to $23.4 million as of March 31,
2000 due primarily to purchases of fixed assets and cash used in operations at
$4.7 million.
Accounts receivable were $2.6 million on March 31, 2000. Our customers are
billed at the time of shipment, typically with payment terms of thirty days.
Generally, customers have paid us within the payment terms.
We maintain a $5.0 million revolving credit agreement with Mitsubishi
Electric to finance wafer inventory purchases. The interest rate under the
credit agreement was based on the lender's internal interest rate, which was
required to be at least 1.00% below the prime rate on the date of invoice
(7.25% at December 31, 1999), generally thirty days after receipt of the
wafers. The credit agreement expires on January 31, 2001, subject to automatic
extensions thereafter from year to year. As of March 31, 2000, $2.9 million was
outstanding under the agreement.
We expect to devote substantial capital resources to continue our research
and development efforts, to hire and expand our sales, support, marketing, and
product development organizations, to expand marketing
21
<PAGE>
programs, to establish additional facilities worldwide and to fund other
general corporate activities. We currently anticipate that the net proceeds
from this offering, together with our current cash, cash equivalents, and short
term investments will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
If the proceeds of this offering, together with our existing cash balances
and cash flow expected from future operations, are not sufficient to meet our
liquidity needs, we will need to raise additional funds. If adequate funds are
not available on acceptable terms or at all, we may not be able to take
advantage of market opportunities, develop or enhance new products, pursue
acquisitions that would complement our existing product offerings or enhance
our technical capabilities, execute our business plan or otherwise respond to
competitive pressures or unanticipated requirements.
Year 2000 Compliance
As of the date of this prospectus, we have not experienced any significant
disruptions related to Year 2000 issues, nor do we expect to experience any
Year 2000-related disruptions in the operation of our systems. To our
knowledge, none of our customers have experienced any Year 2000-related issues
with our products. Additionally, to our knowledge, none of our manufacturing,
assembly or testing partners or our other suppliers have experienced any
material Year 2000 problems. Although most Year 2000 problems should have
become evident on January 1, 2000, additional Year 2000-related problems may
become evident only after that date. For example, some software programs may
have difficulty resolving the so-called "century leap year" algorithm which
will also occur during the Year 2000. We will continue to monitor our mission
critical computer applications and those of our suppliers and vendors
throughout the year, to ensure that any late Year 2000 matters that may arise
are promptly addressed. We do not expect to incur any significant costs
relating to Year 2000 matters.
Qualitative and Quantitative Disclosures About Market Risk
The primary objective of our investment activities is to preserve principal
while concurrently maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we may
invest in may be subject to market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate
at the then-prevailing rate and the prevailing interest rate later rises, the
current value of the principal amount of our investment will decline. To
minimize this risk in the future, we intend to maintain our portfolio of cash
equivalents and short-term investments in a variety of securities, including
commercial paper, money market funds, government and non-government debt
securities and certificates of deposit. In general, money market funds are not
subject to market risk because the interest paid on such funds fluctuates with
the prevailing interest rate. As of December 31, 1999, all of our investments
were in money market funds, or high quality commercial paper, government and
non-government debt securities and auction rate preferred stock. A hypothetical
100 basis point increase in interest rates would result in an approximate
$138,000 decrease in the fair value of our available-for-sale securities as of
December 31, 1999. See note 2 of the notes to the consolidated financial
statements.
Recent Accounting Pronouncements
In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires
entities to capitalize certain costs related to internal-use software once
certain criteria have been met. We adopted SOP 98-1 for the fiscal year ending
December 31, 1999. The adoption did not have a material impact on our financial
position or results of operations.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted.
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We adopted SOP 98-5 for the fiscal year ending December 31, 1999. The adoption
did not have a material impact on our financial position or results of
operations
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting methods for derivative financial instruments and hedging
activities related to those instruments, as well as other hedging activities.
Because we do not currently hold any derivative instruments and do not engage
in hedging activities, we expect that the adoption of SFAS No. 133 will not
have a material impact on our financial position, results of operations or cash
flows. We will be required to implement SFAS No. 133 for the year ending
December 31, 2001.
23
<PAGE>
BUSINESS
Introduction
Centillium delivers products that enable broadband communications to the
home and business. We provide broadband equipment vendors with system-level
products for the DSL market and are leveraging our core technology and
expertise to develop products for complementary markets which share common
technologies and customers. We plan to release products before the end of this
year that target the voice over data networks and home networking markets. Our
core technology and expertise have enabled us to establish a viable long-term
product roadmap within these three complementary markets.
Industry Overview
Growing Demand for High-Speed Network Access Creating Last Mile Bottleneck
The volume of traffic transmitted over communications networks has grown
dramatically in recent years. Consumers are seeking low-cost, high-speed access
to Internet content and other services that require transmission of large
amounts of data such as highly graphical Web sites, audio, video and high-speed
data. Businesses have even greater requirements for high-speed access in order
to implement electronic commerce strategies or Web-based business models and to
provide telecommuting employees with the same capabilities they would
experience at the office.
As more consumers and businesses have begun to rely on the Internet and
communications networks, the demand for access to these networks has
accelerated. As a result, the number of devices and access lines leading into
these networks has undergone dramatic growth. International Data Corporation,
or IDC, estimates that in 1997, 15 million or 15% of United States' households
had two or more access lines and that this number will grow to 34 million or
30% of United States' households by 2002. A significant number of these
additional access lines are being used to access the Internet and other
communications networks. According to IDC, today nearly 70 million or 86%, of
home Internet users worldwide access the Internet via traditional analog
telephone lines. In addition, the demand for access is increasing as more and
more small businesses, self-employed individuals, and corporate telecommuters
are regularly accessing the Internet and other communications networks. IDC
estimates that there are 27 million households with at least one person doing
some business-related work from home. Many users are demanding the same access
speeds from their home offices that they experience at corporate locations.
To meet the demand for high-speed, broadband data transmission, network
access providers continue to upgrade the main transmission channels, or
backbone, of their networks with faster equipment. While this network backbone
is now capable of delivering data at very high speeds, an access bottleneck
continues to exist between the telephone companies' central offices and the
end-users' homes or offices. These copper line connections between the central
office and the end-user are commonly known as the last mile. The last mile
infrastructure was originally designed for low-speed analog voice traffic
rather than high-speed digital data transmission. As a result, access to the
Internet and private communications networks over the copper wire
infrastructure of the last mile has typically been limited to data transmission
rates of up to 56 kilobits per second using standard dial-up analog modems. At
this rate, several minutes may be required to access a media-rich Web site, and
several hours may be required to transfer or download large files.
New Competition Driving Digital Subscriber Line Technologies as a Bottleneck
Solution
The local phone companies have continued to offer higher speed access
services based on older technologies. However, the historical pricing structure
has limited these services to larger businesses and has limited incentives for
phone companies to deploy alternative technologies. The competitive environment
started to change with the passage of the Federal Telecommunications Act of
1996 and was accelerated with the merger of AT&T and TCI. The Federal
Telecommunications Act intensified the competitive environment by requiring
local phone companies to lease portions of their networks, including the last
mile, to other
24
<PAGE>
telecommunications service providers. These changes in competitive structures
coincided with the maturation of DSL technology enabling high bandwidth data
networking over the existing last mile of copper infrastructure. As a result, a
number of companies, including Covad Communications, MCI WorldCom, NorthPoint
Communications, Rhythms NetConnections and Sprint, are now deploying high-speed
access services using DSL technologies to businesses and residences over the
copper infrastructure owned by the local phone companies. In addition, AT&T has
announced plans to offer broadband and interactive services, including
telephone services, on a broad scale over TCI's cable systems over the next few
years. In response to these competitive pressures, and in an effort to increase
revenues and maintain their existing customer base, local phone companies are
now also aggressively committing their resources to deploy DSL services.
DSL enables data transmission speeds of 128 kilobits per second to 52
megabits per second using the existing local loop copper wire infrastructure.
DSL delivers "always on" availability, eliminating the tedious dial-up process
associated with traditional analog modem technologies. DSL equipment is
deployed at each end of the copper wire and the transmission speed depends on
the length and condition of the existing wire as well as the capabilities of
the DSL equipment.
High-Speed Access Driving Demand for New Networking Technologies
As network access providers begin to deploy high-speed data access across
the last mile to businesses and residences, opportunities for additional
networking technologies have emerged. Two of these technologies are voice over
data networks, which allows integrated transmission of voice and data, and home
networking, which enables users to share high bandwidth resources throughout
the home.
Voice Over Data Networks
Voice over data networks technology enables voice signals to be transmitted
over networks originally designed for data transmission. Voice over data
networks technology compresses voice signals into discrete packets of data
which can be more efficiently transmitted. As a result, multiple voice
channels, as well as data, can be transmitted over a single copper line
previously capable of transmitting only one voice channel.
This technology represents a substantial opportunity for small to medium
sized businesses to significantly reduce their costs for telephone services and
for residences to easily add additional phone numbers. Voice over data networks
technology allows network access providers to offer both data and currently
more lucrative voice services to these businesses and residences. According to
Dataquest, while North American data services revenues from annual recurring
retail subscriptions are projected to grow at a rate of 27% from 1999 to 2003
and were estimated to be $27 billion in 1999, revenues from telecommunications
services in North America in 1999 were estimated to be $207 billion.
Home Networking
As high-speed access is more fully deployed, as the price of personal
computers continues to decline and as the availability of network enabled
devices and applications increases, opportunities are emerging for vendors to
offer cost effective home networking solutions. Home networking allows multiple
users to share high bandwidth resources throughout the home. This provides
consumers with cost savings from sharing hardware, software and high-speed
Internet access, allowing a broader range of home computing applications, and
increased convenience. According to Cahners In-Stat Group, the reasons
consumers cited for desiring to own a home network were:
. Internet access sharing;
. printer sharing;
. file sharing;
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. connecting laptop to work;
. home control;
. multiplayer gaming;
. distributed video; and
. remote monitoring or security.
Emerging home networking technologies include both the Home Phoneline
Networking Association or HPNA standard, which uses the existing telephone
wiring of a home, and other standards based on wireless technology. Both of
these solutions eliminate the need to add additional network wiring throughout
the home.
The Challenges for Equipment Manufacturers and Network Access Providers
The commitment of equipment manufacturers and network access providers to
solve the access bottleneck and develop the broadband access market has created
a number of opportunities and challenges. As the bandwidth bottleneck eases,
allowing greater data throughput at a lower cost, there is an emerging demand
for new cost- and time-saving technologies, such as voice over data networks
and home networking. However, the challenges of solving the bottleneck and
providing these emerging applications remain significant. These challenges
include the following:
Constantly evolving technology and networking standards. Communications
equipment manufacturers face significant challenges to ensure that their
products interoperate with counterpart products of other manufacturers based on
the same technology. Manufacturers often work together to create
interoperability standards for products based on new technologies. However,
changes in the market landscape or improvements in a given technology can cause
changes to these standards, often requiring existing equipment to be upgraded
or replaced.
Size constraints. The size of the components and systems necessary to enable
DSL is critical for several reasons. DSL equipment must physically fit within
the local telephone company's existing infrastructrure. For example,
residential phone lines often terminate at a digital loop carrier, which is a
fixed size box, holding equipment that aggregates a neighborhood's phone lines
onto a higher speed channel for transmission to the central office. When a
digital loop carrier is upgraded for DSL access, the physical size of the box
limits the amount of DSL equipment which can be installed without replacing the
digital loop carrier. In addition, high-speed modems for laptops and other
mobile high-speed access equipment must meet ever smaller size constraints.
Power constraints. Low power consumption is critical for the addition of new
equipment within existing communications systems. Service providers' equipment
is often limited by a fixed level of available power, and any additions of
equipment must operate efficiently within those limitations. Also, consumers
desire high-speed modems which can be powered directly by their personal
computer or laptop, without the need for external power supplies. This requires
modems to function using low levels of power.
Shorter product life-cycles. The adoption of new communications technologies
is driving the need for more rapid introduction of new communications products.
In this rapidly evolving environment, communications equipment manufacturers
and their suppliers must have the flexibility to respond quickly in order to
maintain market leadership.
To meet these challenges, manufacturers of broadband voice and data
communication equipment require vendors who provide "system-level" products.
System-level products integrate components into a single product that are
typically sold separately, such as digital integrated circuits, combined
digital and analog integrated circuits, and communications software. System-
level products allow equipment manufacturers to reduce the time it takes for
their products to reach the market and to focus their resources on adding
features which differentiate their products from those of their competitors.
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Solution
We provide system-level products that enable broadband communications to the
home and business. Our products integrate our programmable digital signal
processor, our mixed-signal semiconductor, our digital semiconductor and our
related software. We currently serve the DSL market and are leveraging our
programmable digital signal processor, algorithms and systems expertise to
develop products for complementary markets. We plan to release products that
target the voice over data networks and home networking markets before the end
of this year. This expertise has enabled us to establish a viable long-term
product roadmap within these three complementary markets. Key features of our
solution include:
Flexibility due to programmable digital signal processor. Our products are
designed based on our software-upgradable, proprietary digital signal
processor, which performs the calculations necessary to encode or decode
digital data for transmission over a network. The primary set of processing
instructions, or algorithms, contained in our digital signal processor are
implemented with software, as opposed to hardware that cannot be reprogrammed.
As a result, our solution allows remote upgrade of digital signal processor
algorithms, eliminating the need for costly hardware replacements and ensuring
adaptability to evolving industry standards and flexibility to meet evolving
demand for new features. The in-house expertise we have built while developing
our programmable digital signal processor enables us to quickly offer
customization for each customer's unique requirements throughout the life cycle
of their products.
High level of semiconductor integration reduces size. Our ability to
efficiently combine a number of functions into a single integrated circuit
allows us to eliminate the need for peripheral components such as additional
microprocessors and external memory, which substantially reduces the size of
our customers' products. For example, one of our DSL products supports eight
phone lines, or ports, with just two integrated circuits, compared to competing
products which can require from 15 to 32 integrated circuits to service the
same number of ports. This reduced size allows our customers'
DSL infrastructure products to support a greater number of subscriber lines for
a given amount of space at the telephone company's central office.
Additionally, we believe our business card-sized DSL modem is currently the
smallest product of its type commercially available.
Low power consumption. According to TeleChoice, our DSL solution offers the
lowest per port power consumption in the industry. For our DSL modem products,
low power consumption means that the modem can be powered by a desktop or
laptop computer without an external power supply. For our DSL infrastructure
products, lower power consumption allows network access providers to support a
greater number of DSL lines within equipment supported by a fixed amount of
available power. Our products also feature built-in sleep-mode power management
to ensure operational efficiency.
System-level products deliver fast time-to-market. We believe our products
offer the most complete system-level solutions available to our target
customers. Instead of obtaining integrated circuits, software and algorithms
from different vendors and integrating the components themselves, our customers
can use our solutions to deliver their products with little additional time or
use of engineering resources. This complete solution provides manufacturers
with the competitive edge they need to ensure fast time-to-market while
retaining the flexibility to differentiate their products.
Strategy
Our objective is to be the leading provider of system-level products for
equipment manufacturers serving the broadband communications markets. Key
elements of our strategy include the following:
Target complementary high-growth broadband communications markets. Our
strategy is to focus on complementary, high-growth broadband communications
markets and to develop system-level solutions for applications in those
markets. Our initial products are designed for the DSL infrastructure equipment
market and DSL end-user equipment market. We are also leveraging our core
technologies to design and develop products for the voice over data networks
and home networking markets. By targeting these complementary
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<PAGE>
markets, which share common technologies and customers, we are able to more
effectively utilize our existing engineering, sales and marketing resources.
Strengthen and expand relationships with strategic customers. We have
established customer relationships with key equipment manufacturers, including
Advanced Fibre Communications, Copper Mountain Networks, Creative Technology,
Lucent Technologies, NEC and Sumitomo Electric Industries. We have shipped DSL
products to each of these manufacturers, and have recognized approximately $6.8
million in revenue from sales to this group through March 31, 2000. We do not
have long-term agreements with these customers relating to the sale of our
products. Rather, they purchase our products on an order-by-order basis. These
companies are market and technology leaders within the broadband communications
market and selling products to these companies provides references for our
products which help to secure future sales. Collaborating with these industry
leaders also helps us to enhance our technological capabilities. We believe
these strategic relationships are essential to our continued growth and the
further development and acceptance of our technologies.
Extend technology leadership. We have invested substantial resources to
establish our technology leadership. We believe we are the first company to
deliver a DSL infrastructure product which manages multiple ports and the first
to deliver a set of the two primary semiconductors for a DSL modem which
requires less than one watt of power. An important element of our technological
leadership is our programmable digital signal processor and associated
processing instructions, or algorithms, which are optimized for high bandwidth
communications applications. This core technology can be extended through the
manipulation of algorithms and software to develop multiple communications
products for complementary markets.
Leverage system-level expertise. Many of our system-level engineers have
previous experience as employees of communication equipment manufacturers and
are therefore very familiar with the requirements of, and challenges faced by,
our customers. We combine this system-level engineering expertise with our
expertise in integrated circuit, digital signal processor, and software design
to develop products that allow our customers to optimize time-to-market,
performance, and systems cost.
Pursue strategic acquisitions. Our strategy is to enhance our growth
capability by pursuing selective acquisitions. This strategy allows us to more
rapidly obtain complementary technologies and engineering talent and to access
key markets and customer relationships. We believe completing selective
acquisitions will be important to remain competitive as a complete solutions
provider to manufacturers of broadband communications equipment.
Products
We currently target the DSL market with our DSL infrastructure equipment and
end-user equipment products and we are leveraging our technological expertise
by developing products for markets that are complementary to the DSL market. We
have plans to release products before the end of this year that target the
voice over data networks and home networking markets.
DSL Products
Each of our DSL products consists of two semiconductor chips--a mixed-signal
chip and a digital chip--and related software. The mixed-signal chip translates
signals between analog and digital formats. Our single mixed-signal chip
replaces the multiple components used in competing solutions. Our digital chip
incorporates our proprietary software programmable digital signal processor,
which provides flexibility for enhancements and upgrades.
The following features are common to each of our DSL products:
. ADSL. Our DSL products are based on a type of DSL technology known as
asymmetrical DSL or ADSL. ADSL technology provides substantially faster
transmission of data from the network to the
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end-user than from the user to the network. This tradeoff works to the
consumer's advantage in that most users typically download more data
from the network than they send to the network.
. Full rate ADSL / G.lite. Each of our DSL products is designed for use
with either the full rate ADSL standard or the G.lite standard. G.lite
is a version of ADSL which provides slower transmission speeds than full
rate ADSL but is easier to install at the consumer's home.
. Regional transmission standards. Our standard DSL products conform to
transmission standards used throughout most of the world. Our
"Universal" DSL products also conform to the DSL transmission standard
most commonly used in Japan.
DSL Infrastructure Products
We offer two families of DSL infrastructure products: CopperLite CO and
CopperFlite CO. Our CopperLite products are designed for use with the G.lite
standard and our CopperFlite products are designed for use with both the full
rate ADSL and G.lite standards. We began shipping our CopperLite CO products
in the third quarter of 1999, and we expect to begin shipment of our
CopperFlite CO products in the first half of this year.
Our DSL infrastructure products are designed for use in the following types
of DSL equipment:
. DSLAM. A DSL access multiplexer, or DSLAM, aggregates the data traffic
from a substantial number of home telephone lines for transmission
through a data network.
. Central office switch. A central office switch is a device that enables
telephone subscribers to dial and make a connection with any other
subscriber in the telephone network.
. Remote terminal. A remote terminal is a generic name for
telecommunications equipment that is located outside the telephone
company's central office facility.
<TABLE>
<CAPTION>
Product Key Features Introduction Date
<C> <S> <C>
CopperLite CO G.lite 3rd quarter 1999
Supports 8 ports
- ----------------------------------------------------------------------------------
Universal G.lite 3rd quarter 1999
CopperLite CO Supports 4 ports
Compatible with Japanese regional transmission
standard
- ----------------------------------------------------------------------------------
CopperFlite CO Full rate ADSL and G.lite 1st quarter 2000
Supports 4 ports
- ----------------------------------------------------------------------------------
Universal Full rate ADSL and G.lite 1st half 2000
CopperFlite CO Supports 4 ports
Compatible with Japanese regional transmission
standard
</TABLE>
DSL End-User Equipment Products
We offer four families of DSL end-user equipment products: CopperLite CPE,
CopperFlite CPE, Optimizer and Flite Optimizer.
Our CopperLite CPE products are designed for use with the G.lite standard
and our CopperFlite CPE products are designed for use with both the full rate
ADSL and G.lite standards. We began shipping our CopperLite CPE products in
1999 and we expect to begin shipping our CopperFlite CPE product in the first
half of 2000.
29
<PAGE>
Our CopperLite CPE and CopperFlite CPE products are deployed for use as a
subsystem for devices which distribute network access for multiple appliances.
Examples of these devices include the following:
. Integrated access device / residential gateway. An integrated access
device and a residential gateway combine multiple voice and data
channels for transmission from a home or small business to the telephone
company's central office.
. Set-top box. A set-top box processes transmissions from the traditional
cable television infrastructure and delivers digital signals which can
include voice, video or Internet access.
. Bridge / router. A bridge or router is a device that resides between
network segments and forwards data to its appropriate destination.
<TABLE>
<CAPTION>
Product Key Features Introduction Date
<S> <C> <C>
3rd quarter
CopperLite CPE--UTOPIA G.lite 1999
- ------------------------------------------------------------------------------------------
3rd quarter
Universal G.lite 1999
CopperLite CPE--UTOPIA Compatible with Japanese regional transmission
standard
- ------------------------------------------------------------------------------------------
CopperFlite CPE--UTOPIA Full rate ADSL and G.lite 1st half 2000
- ------------------------------------------------------------------------------------------
Universal Full rate ADSL and G.lite 2nd half 2000
Compatible with Japanese regional transmission
CopperFlite CPE--UTOPIA standard
</TABLE>
Our Optimizer products are designed for use with the G.lite standard and our
Flite Optimizer products are designed for use with both the full rate ADSL and
G.lite standards. Both of these products are deployed for use as either an
internal or external modem for a laptop or personal computer. These products
can also be deployed within a set-top box, which is a device that processes
transmissions from the traditional cable television infrastructure and delivers
digital signals which can include voice, video or Internet access.
<TABLE>
<CAPTION>
Product Key Features Introduction Date
<C> <S> <C>
Optimizer--PCI G.lite 4th quarter 1999
Compatible with dial-up soft modem
- ----------------------------------------------------------------------------------------
Universal G.lite 1st quarter 2000
Optimizer--PCI Compatible with Japanese regional transmission
standard
Compatible with dial-up soft modem
- ----------------------------------------------------------------------------------------
Optimizer--USB G.lite 3rd quarter 1999
Directly powered by user's computer
- ----------------------------------------------------------------------------------------
Universal G.lite 4th quarter 1999
Optimizer--USB Compatible with Japanese regional transmission
standard
Directly powered by user's computer
- ----------------------------------------------------------------------------------------
Flite Optimizer--PCI Full rate ADSL and G.lite 1st half 2000
Compatible with dial-up soft modem
- ----------------------------------------------------------------------------------------
Universal Full rate ADSL and G.lite 2nd half 2000
Flite Optimizer--PCI Compatible with Japanese regional transmission
standard
Compatible with dial-up soft modem
- ----------------------------------------------------------------------------------------
Flite Optimizer--USB Full rate ADSL and G.lite 1st half 2000
Directly powered by user's computer
- ----------------------------------------------------------------------------------------
Universal Full rate ADSL and G.lite 2nd half 2000
Flite Optimizer--USB Compatible with Japanese regional transmission
standard
Directly powered by user's computer
</TABLE>
30
<PAGE>
Voice Over Data Networks Products
We have near-term plans to offer products which enable voice transmissions
over data networks. Voice over data networks technology allows multiple
telephone channels to be compressed and transmitted simultaneously with data
over a single copper line which previously carried only one telephone channel.
It also allows voice transmissions to be delivered over networks originally
designed to deliver only data. Today's data networks are based on efficient,
cost effective transmission methodologies. Applying technology which allows the
transmission of voice over the more efficient data networks could potentially
reduce the cost of voice transmissions. These data networks use several
different transmission standards, such as asynchronous transfer mode or ATM,
frame relay and Internet protocol.
We plan to begin shipments of our first voice over data networks
transmission product, Siren CO, in the second half of this year. Siren CO will
be marketed to manufacturers of broadband infrastructure products for inclusion
in equipment such as DSLAMs and gateways. Siren CO will support the ATM
transmission standard only.
We are also developing a product, to be called Siren CPE, for use in voice-
enabling equipment installed at the end-user's home or business. Examples of
such equipment are an integrated access device, or IAD, which aggregates
multiple voice and data channels from a home or business for transmission over
the data network, and a private branch exchange, or PBX, which is a computer
server that manages telephone calls in medium to large businesses. We expect to
begin shipments of Siren CPE in the second half of this year.
We expect to release Siren products that support the frame relay and
Internet protocol standards as well as the ATM standard in the year 2001.
<TABLE>
<CAPTION>
Introduction
Product Transmission Standards Date
<C> <C> <S>
Siren CO ATM 2nd half 2000
- ---------------------------------------------------------------
Siren CPE ATM 2nd half 2000
- ---------------------------------------------------------------
Siren-VoX ATM, frame relay and Internet protocol 2001
</TABLE>
Home Networking Products
We plan to offer products for the home networking market before the end of
this year. Our first home networking product will consist of a set of two
semiconductors and related software that will be used with a user's home
computer or laptop. Home networking allows multiple users to share high
bandwidth resources throughout the home. This provides consumers with cost
savings from sharing hardware, software and high-speed Internet access and
allows a broader range of home computing applications as well as increased
convenience. Emerging home networking technologies include the Home Phoneline
Networking Association or HPNA standard, which uses the existing telephone
wiring of a home, and other standards based on wireless technology. These
solutions eliminate the need to add additional network wiring throughout the
home.
Technology
Our primary competitive advantage is found in our technology expertise in
several key areas. These areas of expertise include our system-level knowledge,
our programmable digital signal processor, our signal processing algorithms,
our digital chip design capability, our mixed-signal chip design capability and
our system-level software. Together, these capabilities have enabled us to
provide system-level communications products which have:
. flexibility due to programmability;
. low power consumption; and
. small size.
31
<PAGE>
System-level knowledge. Most of our system-level engineers have previous
experience as employees of communication equipment manufacturers and are
therefore very familiar with the requirements of and challenges faced by our
customers. We combine this system-level engineering expertise with our
expertise in integrated circuit, digital signal processor, algorithm, and
software design to develop products that allow our customers to optimize time-
to-market, performance, and systems cost.
Software programmable digital signal processor. A cornerstone of our
technology is our internally developed, software programmable digital signal
processor. A digital signal processor, as it relates to communications
applications, encodes digital data for transmission over bandwidth limited
media such as copper telephone lines, and recovers the encoded data at the
receiving end. Our software programmable digital signal processor is optimized
for communications applications and provides high processing bandwidth with low
power requirements. This digital signal processor can be programmed for several
different applications such as DSL, voice over packet and home networking. We
currently use this core technology in every product line that is being
developed within our company. This software programmable digital signal
processor technology gives us the advantage of field programmability and
upgradability of devices for future standards.
Signal processing algorithms. A key component of our continued success is
the expertise that we have developed in the areas of communications algorithms.
Communications algorithms are the processes and techniques used to transform a
digital data stream into a specially-conditioned analog signal suitable for
transmission across copper telephone wires. Our signal processing engineers,
many of whom are PhDs, have a thorough understanding of and practical
experience in the process of transmitting and receiving a digital data stream
in analog form. We also have significant experience developing algorithms which
enable voice compression, echo cancellation and telephony signal processing.
This expertise has allowed our engineers to design highly efficient algorithms
which enable us to produce high performance, reprogrammable and low power
consuming products.
Digital chip design. We have digital chip design experts with many years of
experience in the area of high complexity and high-speed digital chip
development. We perform both the logic design and the physical layout design
for our products. All of our chips are designed and manufactured using the
latest development tools and silicon process technologies. This design
expertise has enabled us to develop our high performance, low-power-consuming
digital chips.
Mixed-signal chip design. Our team of analog engineers has developed
numerous analog circuits for the communications industry and has substantial
experience in signal conversion techniques. This experience has enabled us to
develop our mixed-signal chip. This mixed-signal chip translates signals
between analog and digital formats. We believe our mixed-signal chip contains
the highest level of integration in the industry, replacing the multiple
components used in competing DSL solutions and also supporting multiple
telephone lines for DSL infrastructure products.
System software. Our software engineers have expertise in developing code
that addresses the needs of network equipment manufacturers and service
providers. Our knowledge of network operation and architectures allows us to
write software that ensures that our products are interoperable with
communications equipment vendors' products. In addition, our understanding of
various operating systems and personal computer environments allows us to
create software that provides for simple installation and operation.
32
<PAGE>
Customers
We have sold our products to the broadband access equipment vendors listed
below. We have recognized at least $15,000 in revenue during the twelve month
period ended March 31, 2000 from each of the customers listed.
<TABLE>
<S> <C> <C>
Market Sectors Company
DSL Infrastructure Advanced Fibre Communications Mitsubishi Electric
Equipment Copper Mountain Networks Nortel Networks
LG Information and Sumitomo Electric Industries
Communications
Lucent Technologies Sungmi Telecom Electronics
NEC
- ---------------------------------------------------------------------------------------
DSL End-User Equipment Askey Computer NEC
CIS Technology Sumitomo Electric Industries
Creative Technology Xpeed
</TABLE>
For the year ended December 31, 1999, Sumitomo Electric Industries and NEC
were our largest customers and accounted for 34.4% and 21.1%, respectively, of
our total revenue. In addition, for the period ended March 31, 2000, Sumitomo
Electrics Industries, Lucent Technologies, Copper Mountain Networks and NEC
accounted for 39.1%, 26.9%, 12.3% and 7.5%, respectively, of our total
revenues. We do not have formal long-term agreements with these customers
relating to the sale of our products, but rather sell our products to them on
an order-by-order basis.
We have achieved design wins, but have not yet received orders for product
shipments, from several additional companies including Accelerated Networks,
Interspeed, and Aztech Systems. We count a design win after a company has
purchased one of our reference designs, sampled our products, and indicated an
interest in purchasing our products.
Sales and Marketing
Our sales and marketing strategy is to achieve design wins with technology
leaders in each of our targeted broadband communications markets by, among
other things, providing superior application and engineering support. We
believe that providing comprehensive product service and support is critical to
shortening our customers' design cycles and maintaining a competitive position
in our targeted markets. We market and sell our products through our direct
sales force and through our independent manufacturers' representatives. Our
sales managers are dedicated to principal customers to promote close
cooperation and communication. Representatives support the sales managers by
providing leads, nurturing customer relationships, closing design wins and
securing customer orders.
We manage a number of marketing programs designed to communicate our
capabilities and benefits to broadband access equipment manufacturers. Our Web
site is an important marketing tool where a wide range of information is
available including product information, white papers, application notes, press
releases, and contributed articles. In addition, we participate in industry
trade shows, technical conferences and technology seminars, conduct press tours
and publish technical articles in industry journals.
Research and Development
We have assembled a core team of experienced engineers and technologists,
many of whom are leaders in their particular field or discipline. Our engineers
and technologists have collectively co-authored 66 patents and 15 published
papers and hold 76 advanced degrees, including 21 PhDs. As of April 24, 2000,
we had 128 employees with engineering degrees. These employees are involved in
advancing our core technologies, as well as applying these core technologies to
product development activities in our targeted markets.
33
<PAGE>
We believe that the achievement of higher levels of integration,
functionality and performance and the introduction of new products in our
target markets is essential to our growth. As a result, we plan to increase
research and development staffing levels in 2000 and 2001. Research and
development expense for 1997, 1998 and 1999 was approximately $1.8 million,
$7.9 million and $13.4 million, respectively. Research and development expense
for the three month periods ending March 31, 1999 and 2000 was approximately
$2.3 million and $6.0 million, respectively.
Operations and Manufacturing
We outsource the fabrication, assembly and testing of our semiconductor
devices. This fabless model allows us to focus our resources on the design,
development and marketing of our products. We manage the production of our
chips through our operations and manufacturing services group which is
comprised of six functions. These functions include technology engineering,
analog test engineering, digital test engineering, quality and reliability,
manufacturing and information systems and facilities.
We source our semiconductor fabrication from three of the world's largest
foundries: Mitsubishi Electric, United Microelectronics Corporation and Taiwan
Semiconductor Manufacturing Corporation. Our manufacturing strategy is to
qualify and utilize multiple facilities within a given foundry partner for the
fabrication of a given semiconductor device. This second source strategy seeks
to ensure production and performance consistency, both of which are critical
for our products while maintaining multiple channels of supply.
The primary vendor for the assembly and testing of our products is ST
Assembly Test Services. We have qualified and utilized other vendors as a
second source for the packaging and testing of our products. Amkor/Anam Group
and Siliconware Precision Industries Company, Limited provide additional
assembly services, and additional testing services are provided by Digital
Testing Services and Advanced Semiconductor Engineering.
Competition
Although we produce system-level products, we primarily compete with vendors
of semiconductor devices for the DSL market. We believe that the principal
factors of competition for semiconductor vendors to these markets are product
capabilities, level of integration, performance and reliability, power
consumption, price, time-to-market, system cost, intellectual property,
customer support and reputation. We believe we compete favorably with respect
to each of these factors.
We compete with a number of major domestic and international suppliers of
semiconductors for both DSL central office and customer premises equipment and
with suppliers of semiconductors for equipment enabling voice over packet. Our
principal competitors that supply semiconductors for the DSL market include
Alcatel Microelectronics, Analog Devices, Conexant Systems, GlobeSpan, Lucent
Microelectronics, STMicroelectronics and Texas Instruments.
Many of our competitors operate their own fabrication facilities and have
longer operating histories and presence in key markets, greater name
recognition, access to larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and
other resources. As a result, our competitors may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements or devote
greater resources to the promotion and sale of their products. Current and
potential competitors have established or may establish financial or strategic
relationships among themselves or with existing or potential customers,
resellers or other third parties. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. In addition, our competitors may in the future
develop technologies that more effectively address the transmission of digital
information through existing analog infrastructures at a lower cost. We cannot
assure you that we will be able to compete successfully against current or
potential competitors, or that competition will not have a material adverse
effect on our business, financial condition and results of operations.
34
<PAGE>
Intellectual Property
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property law, nondisclosure agreements and other protective
measures to protect our proprietary rights. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect
such intellectual property. To date, we have been granted two U.S. patents and
have an additional 12 U.S. patent applications pending and one additional
international patent application pending.
Although we employ a variety of intellectual property in the development and
manufacturing of our products, we believe that none of such intellectual
property is individually critical to our current operations. However, taken as
a whole, we believe our intellectual property rights are significant and that
the loss of all or a substantial portion of such rights could have a material
adverse effect on our results of operations. There can be no assurance that our
intellectual property protection measures will be sufficient to prevent
misappropriation of our technology. In addition, the laws of many foreign
countries do not protect our intellectual properties to the same extent as the
laws of the United States. From time to time, we may desire or be required to
renew or to obtain licenses from others in order to further develop and market
commercially viable products effectively. There can be no assurance that any
necessary licenses will be available on reasonable terms.
In December 1999 we entered into a license agreement with MIPS Technologies
to use their core processor. The agreement expires in December 2004. None of
our products currently shipping use the MIPS core processor, however we plan to
use the MIPS core processor in several of our future products.
Employees
As of March 31, 2000, we had a total of 151 employees, of whom 97 are
engineers. Seventy-eight of our employees have advanced degrees including 17
PhDs. None of our employees is represented by a labor union. We have not
experienced any work stoppages, and we consider our relations with our
employees to be good. Our future performance depends in significant part upon
the continued service of our key personnel, none of whom is bound by an
employment agreement requiring service for any definite period of time. Our
future success also depends on our continued ability to attract, integrate,
retain and motivate highly qualified sales, technical and managerial personnel.
Competition for such qualified personnel is intense.
Facilities
Our principal executive and corporate offices are located in Fremont,
California, in approximately 40,000 square feet of leased office space under a
lease that expires in April 2004. In addition, under this lease we have the
option to lease an additional 17,500 square feet. We also have an option to
extend the term of this lease for an additional 5 years, through April 2009. We
believe our space is adequate for our current operations and that additional
leased space can be obtained on commercially reasonable terms if needed.
Legal Proceedings
We are not currently a party to any material legal proceedings.
35
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to our
executive officers and directors as of March 31, 2000.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Faraj Aalaei........................ 39 Chief Executive Officer and Director
Shahin Hedayat...................... 39 President and Director
Vice President and Chief Financial
John W. Luhtala..................... 57 Officer
Surendra B. Mandava................. 42 Vice President, Engineering
Jon S. Sherburne.................... 49 Vice President, Worldwide Sales
William F. Mackenzie................ 33 Vice President, Operations
Kamran Elahian...................... 45 Director and Chairman of the Board
Irwin Federman(1)................... 64 Director
Robert C. Hawk(1)(2)................ 60 Director
Lip-Bu Tan(1)(2).................... 40 Director
</TABLE>
- ---------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Faraj Aalaei is our Chief Executive Officer and one of our co-founders. Mr.
Aalaei served as our Vice President, Marketing and Business Development, from
our inception in February 1997 until January 2000, when he was named Chief
Executive Officer. Prior to helping found our company, Mr. Aalaei was the
Director of Access Products at Fujitsu Network Communications, Inc., a designer
and manufacturer of fiber-optic transmission and broadband switching platforms,
from October 1993 to March 1997. Mr. Aalaei also designed advanced
telecommunications products at AT&T Bell Laboratories, a telecommunications
company, from May 1985 to October 1993. Mr. Aalaei received a B.S. in
Electrical Engineering from Wentworth Institute of Technology, an M.S. in
Electrical Engineering from the University of Massachusetts and an M.B.A. from
the University of New Hampshire.
Shahin Hedayat is our President and one of our co-founders. Mr. Hedayat
served as our Vice President, Engineering, Chief Technical Officer and a
Director from our inception in February 1997 until January 2000, when he was
named President. Mr. Hedayat has more than 15 years experience in the
semiconductor industry. From September 1985 to February 1997, Mr. Hedayat held
various positions at Cirrus Logic, including Vice President of Engineering for
Computer Telephony products. He was the architect of V.32bis and V.34 products,
which achieved multi-million unit shipments. Mr. Hedayat holds six U.S.
patents. Mr. Hedayat holds a B.S. and an M.S. in Electrical Engineering from
the University of Michigan at Ann Arbor.
John W. Luhtala joined us as Vice President and Chief Financial Officer in
December 1999. From January 1997 to December 1999, Mr. Luhtala was Senior Vice
President, Operations, and Chief Financial Officer at the Santa Cruz Operation
(SCO), a supplier of UNIX operating systems. From May 1996 to December 1996,
Mr. Luhtala was Chief Financial Officer and Vice President of Mergers,
Acquisitions, and Joint Ventures for SyQuest Technology, a manufacturer of
removable cartridge disk drives. Before SyQuest, Mr. Luhtala spent nine years
with Amdahl Corporation in various financial management positions, including
International Treasury Manager, Director of Finance for Amdahl France,
Assistant Controller, and Director of Finance for Compatible Systems. Prior to
Amdahl, Mr. Luhtala held various international and domestic management
positions with Sensormatic Electronics, US Leasing International, and
Richardson-Vicks. Mr. Luhtala holds a B.A. from Bradley University, a J.D. from
New York University and an M.B.A. from Stanford University.
Surendra B. Mandava is one of our co-founders, and has served as our Vice
President, Engineering, since December 1999. He had served as our Director of
Design Engineering since we commenced operations in
36
<PAGE>
February 1997. From November 1992 to February 1997, Mr. Mandava held various
positions at Cirrus Logic, including Manager, Integrated Circuit Design. Mr.
Mandava holds a M.S. in Electrical Engineering from the Indian Institute of
Technology and a B.S. in Electronics & Communications from the Regional
Engineering College in Trichy, India.
Jon S. Sherburne has served as our Vice President for Worldwide Sales since
September 1999. From October 1997 to September 1999, Mr. Sherburne was Vice
President of Worldwide Sales at Maker Communications, Inc. From September 1988
to September 1997, Mr. Sherburne spent nine years with VLSI Technology in
various positions, including Director of Apple Worldwide Sales, Vice President
of North American Computer and Government Sales and Technology Centers, and
Vice President of Western U.S. Sales and Technology Centers. Prior to VLSI,
Sherburne held various management and engineering positions at Advanced Micro
Devices and Texas Instruments.
William F. Mackenzie has served as our Vice President, Operations and
Manufacturing Services since May 1998. Mr. Mackenzie was Corporate Director of
Customer Quality and Reliability Systems at LSI Logic from March 1996 to May
1998 and worked at LSI Canada as Director of Operations from August 1990 to
March 1996. Mr. Mackenzie also served as Manager of Process Engineering,
Motorola Semiconductors, Inc. in Scotland. Mr. Mackenzie holds a B.Sc. (Hon.)
in Applied Physics from the University of Strathclyde in Scotland.
Kamran Elahian is one of our co-founders and has served as Chairman of the
Board since we started operations in April 1997. Mr. Elahian has co-founded ten
Silicon Valley companies since 1981, including CAE Systems, a computer-aided
engineering software company, Cirrus Logic, a semiconductor company, and
Momenta Corporation, a pen-based computer company. Mr. Elahian is also co-
founder and chairman of NeoMagic, a multimedia accelerator IC company,
Planetweb, an Internet appliance software company, Actelis Networks, a
broadband communications system company, Cahoots, an Internet software company,
KangarooNet, a knowledge management software company and Schools Online, a non-
profit organization providing PCs and Internet connections to schools through
the U.S. and several other countries. In addition, Mr. Elahian is a general
partner in Global Catalyst Partners, a Palo Alto-based venture capital fund.
Mr. Elahian holds a B.S. in Computer Science, a B.S. in Mathematics and an M.E.
in Computer Graphics from the University of Utah.
Irwin Federman has served on our Board of Directors since May 1998. Mr.
Federman has been a general partner of U.S. Venture Partners, a venture capital
firm, since April 1990. Mr. Federman serves on the boards of directors of
SanDisk Corporation, a solid-state storage system company, Komag, Inc., a
storage media manufacturer, MMC Networks, Inc., a network system component
company, Netro Corporation, a wireless communication equipment company,
CheckPoint Software Technologies, Ltd., a network security software company,
QuickLogic Corporation, a semiconductor company, and several privately-held
companies. He holds a B.S. in Economics from Brooklyn College and an honorary
Doctorate of Engineering Science from Santa Clara University.
Robert C. Hawk has served on our Board of Directors since November 1997. Mr.
Hawk is President of Hawk Communications, Inc., a telecommunications company,
and recently retired as President and Chief Executive Officer of U.S. West
Multimedia Communications, Inc., where he headed the cable, data and telephone
communications business from 1985 to 1996. Previously, he was President of the
Carrier Division of U.S. West. Mr. Hawk also served as Vice President of
Marketing and Strategic Planning for CXC Corporation, and as a director of
Advanced Systems Development for AT&T/American Bell, a telecommunications
company. Mr. Hawk currently serves on the boards of Xylan Corporation, PairGain
Technologies, Inc., Premisys Communications, Concord Communications, and
Radcom, Inc. Mr. Hawk holds a B.A. in Business Administration from the
University of Iowa and an M.B.A. from the University of San Francisco.
Lip-Bu Tan has served on our Board of Directors since April 1997. Since
1984, Mr. Tan has been a General Partner of the Walden Group and Chairman of
Walden International Investment Group. Mr. Tan is
37
<PAGE>
currently a director of Creative Technology Ltd., MediaRing.com, Inc.,
Integrated Silicon Solutions, Inc., and several privately-held companies. Mr.
Tan holds a B.S. in Physics from Nanyang University, Singapore, an M.S. in
Nuclear Engineering from the Massachusetts Institute of Technology and an
M.B.A. from the University of San Francisco.
Board of Directors
Our board of directors currently consists of six members. Each director
holds office until his or her term expires or until his or her successor is
duly elected and qualified. Upon completion of this offering, our amended and
restated certificate of incorporation and bylaws will provide for a classified
board of directors. In accordance with the terms of our certificate, our board
of directors will be divided into three classes whose terms will expire at
different times. The three classes will be comprised of the following
directors:
. Class I consists of Robert C. Hawk and Irwin Federman, who will serve
until the annual meeting of stockholders to be held in 2001;
. Class II consists of Kamran Elahian and Lip-Bu Tan, who will serve until
the annual meeting of stockholders to be held in 2002; and
. Class III consists of Faraj Aalaei and Shahin Hedayat, who will serve
until the annual meeting of stockholders to be held in 2003.
At each annual meeting of stockholders beginning with the 2001 annual
meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their successors have been duly
elected and qualified. Any additional directorships resulting from an increase
in the number of directors will be distributed among the three classes so that,
as nearly as possible, each class will consist of an equal number of directors.
Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Irwin Federman, Robert Hawk and Lip-Bu Tan. The
audit committee reviews our internal accounting procedures, consults with and
reviews the services provided by our independent accountants and makes
recommendations to the board of directors regarding the selection of
independent accountants. The compensation committee consists of Lip-Bu Tan and
Robert Hawk. The compensation committee reviews and recommends to the board of
directors the salaries, incentive compensation and benefits of our officers and
employees and administers our stock plans and employee benefit plans.
Compensation Committee Interlocks and Insider Participation
Our board of directors established the compensation committee in April 1999.
Prior to establishing the compensation committee, our board of directors as a
whole performed the functions delegated to the compensation committee. No
member of our compensation committee has served as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee. Since the formation of the compensation committee, none
of its members has been our officer or employee.
Director Compensation
Effective upon the closing of this offering, our non-employee directors will
be eligible to receive grants of options to purchase our common stock pursuant
to a fixed formula under our 1997 Stock Plan, as amended. Upon the closing of
this offering, each current non-employee director will automatically receive an
option to purchase 20,000 shares of our common stock. Each individual that
becomes a non-employee director following this offering will be granted an
option to purchase 20,000 shares of our common stock on the date that such
38
<PAGE>
person becomes a director. The shares subject to each of these options will
vest and become fully exercisable in equal annual installments over a four year
period following the date of grant. Additionally, beginning at our annual
meeting of stockholders to be held in 2001 and at each successive annual
stockholder meeting, each non-employee director who has previously served at
least six consecutive months prior thereto will receive an option to purchase
5,000 shares of our common stock. The shares subject to these annual option
grants will fully vest and become fully exercisable on the first anniversary of
the date of grant. The exercise price per share for all options automatically
granted to directors under our 1997 Stock Plan, as amended, will be equal to
the market price of our common stock on the date of grant and will have a ten
year term, but will generally terminate within a specified time following the
date the option holder ceases to be a director or consultant.
Employee directors are eligible to participate in our 2000 Employee Stock
Purchase Plan and to receive discretionary grants under our 1997 Stock Plan, as
amended.
Executive Compensation
Summary Compensation Table
The following table sets forth information regarding compensation for the
fiscal year ended December 31, 1999 that we paid for services rendered by our
current Chief Executive Officer, our other executive officers who earned more
than $100,000 during 1999 and our former Chief Executive Officer.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
---------------- ------------
Securities
Underlying
Name and Principal Position Salary Bonus Options
- --------------------------- -------- ------- ------------
<S> <C> <C> <C>
Faraj Aalaei(1)................................... $144,139 $20,000 --
Chief Executive Officer
Shahin Hedayat.................................... $145,022 -- --
President
William F. Mackenzie.............................. $148,822 -- 30,000
Vice President, Operations
Surendra B. Mandava............................... $127,771 -- --
Vice President, Engineering
Travis White(2)................................... $225,000 50,000 --
Former Chief Executive Officer
</TABLE>
- ---------------------
(1) Mr. Aalaei became our Chief Executive Officer in January 2000. All
information in this table relates to compensation paid to Mr. Aalaei during
1999 for his services as Vice President, Marketing and Business
Development.
(2) Mr. White was our Chief Executive Officer from April 1998 through January
2000. All information in this table relates to compensation paid to Mr.
White during 1999 for his services as Chief Executive Officer.
Option Grants in 1999
During 1999, we granted options to purchase an aggregate of 2,106,600 shares
of our common stock to our employees, directors and consultants. All options
were granted under our 1997 Stock Plan at exercise prices equal to the fair
market value of our common stock on the date of grant, as determined in good
faith by our board of directors.
Of the executive officers named in the table above, only Mr. Mackenzie
received a grant of options during 1999. The following table sets forth
information relating to Mr. Mackenzie's grant, including the potential
realizable value of the grant at the end of the option term assuming that the
fair market value of our common
39
<PAGE>
stock appreciates from the midpoint of the offering price at assumed rates of
5% and 10% over the option term. The assumed 5% and 10% rates of stock price
appreciation are provided in accordance with rules of the SEC and do not
represent our estimate or projection of our future common stock price.
<TABLE>
<CAPTION>
Potential Realizable
Current Value at Assumed
Number of % of Total Value Based Annual Rates of
Securities Options on Assumed Stock Appreciation
Underlying Granted to Exercise Offering for Option Term
Option Employees Price Expiration Price of ---------------------
Name Grant During 1999 Per Share Date $19.00 5% 10%
- ---- ---------- ----------- --------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
William F. Mackenzie.... 30,000 1.4% $1.60 8/12/09 $522,000 $880,500 $1,430,400
</TABLE>
Option Grants in 2000
During the period from January 1, 2000 through the date of this prospectus,
we have granted options to purchase an aggregate of 2,428,500 shares of our
common stock to employees. All options were granted under our 1997 Stock Plan
at exercise prices equal to the fair market value of our common stock on the
date of grant, as determined in good faith by our board of directors. The table
below shows the options granted during this period to our directors and
executive officers, and sets forth the current value of the option grants based
on an assumed initial public offering price of $19.00 per share.
<TABLE>
<CAPTION>
Number of % of Total Current Value
Securities Options Based on
Underlying Granted to Exercise Assumed
Option Employees Price Expiration Offering Price
Name Grant During Period Per Share Date of $19.00
- ---- ---------- ------------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Faraj Aalaei...... 500,000 20.6% $ 5.00 2/10/10 $7,000,000
150,000 6.2% $10.00 4/13/10 $1,350,000
</TABLE>
Aggregate Option Exercises in 1999 and Option Values at December 31, 1999
The following table sets forth information concerning stock options held by
the executive officers named in the summary compensation table above at
December 31, 1999. The value of unexercised in-the-money options is based on a
value of $3.00 per share, the fair market value of our common stock at December
31, 1999, as determined by our board, less the per share exercise price. All
options were granted under our 1997 Stock Plan.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options at
at December 31, 1999 December 31, 1999
Shares Acquired Value ------------------------------------ -------------------------
On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
--------------- -------- ----------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William F. Mackenzie.... 65,625 -- 117,500 -- $ 305,500 --
21,875
Travis White............ 150,000 -- 506,757 -- $1,317,569 --
125,000
</TABLE>
The shares acquired by Messrs. Mackenzie and White during 1999 upon exercise
of options are subject to repurchase options by us which lapse as the shares
vest. There was no value realized by Messrs. Mackenzie or White upon exercise
of these options because the fair market value on the date of exercise had not
changed from the fair market value on the date of grant, as determined by our
board.
All options issued under our 1997 Stock Plan to our executive officers are
immediately exercisable upon grant, although the shares issued upon exercise
are subject to our right to repurchase them, which right lapses
40
<PAGE>
over time as the shares vest. Therefore, all options held by Messrs. Mackenzie
and White as of December 31, 1999 were exercisable, subject to our repurchase
option.
Benefit Plans
1997 Stock Plan
Our 1997 Stock Plan was adopted by the board of directors and our
stockholders in March 1997. In July 1997, the 1997 Stock Plan was amended to
increase the number of shares of common stock available for issuance under the
plan from 1,000,000 to 2,000,000. In March 1998, the 1997 Stock Plan was
further amended to increase the number of shares of common stock available for
issuance under the plan to 2,930,257. In May 1998, the 1997 Stock Plan was
amended to further increase the number of shares of common stock available for
issuance under the plan to 5,430,257. The 1997 Stock Plan was further amended
in December 1999 to increase the number of shares available for issuance under
the plan to 6,930,257 shares.
As of March 31, 2000, options to purchase an aggregate of 2,831,840 shares
were outstanding, 3,860,551 shares of common stock had been purchased pursuant
to exercises of stock options and stock purchase rights and 244,299 shares were
available for future grant.
In April 2000, our board of directors amended and restated the 1997 Stock
Plan to:
. Increase the number of shares of common stock available for issuance
under the plan to 12,500,000;
. Provide for the number of shares available for issuance under the plan
to be increased annually, on the first day of each fiscal year beginning
in 2001, by an additional amount equal to 6.0% of the number of
outstanding shares of common stock on the date of the annual increase;
and
. Provide for the automatic grants of stock options to non-employee
directors. See "Management-- Board of Directors--Director Compensation."
Our stockholders approved these amendments in April 2000.
Our 1997 Stock Plan provides for the grant of incentive stock options (as
defined in Section 422 of the Internal Revenue Code) to employees and
nonstatutory stock options and stock purchase rights to employees, directors
and consultants. This plan may be administered by the board of directors or a
committee appointed by the board. The committee may make final and binding
determinations regarding the terms and conditions of the awards granted,
including the exercise price, the number of shares subject to the award and the
exercisability thereof, forms of agreement for use under the plan and
interpretation of plan terms.
The committee determines the exercise price of options granted under the
1997 Stock Plan, but with respect to non-statutory stock options intended to
qualify as "performance based compensation" within the meaning of 162(m) of the
Internal Revenue Code, and all incentive stock options the exercise price must
at least equal the fair market value of our common stock on the date of grant.
However, for any employee holding more than 10% of the voting power of all
classes of our stock, the exercise price will be no less than 110% of the fair
market value. The committee determines the term of options granted under the
1997 Stock Plan, except the term of incentive stock options may not exceed ten
years.
An optionee whose relationship with us or any related corporation ceases for
any reason, other than death or total and permanent disability, may generally
exercise options in the three-month period following such cessation, unless
such options terminate or expire sooner. The three-month period is generally
extended to twelve months for terminations due to death or total and permanent
disability. In the event of our merger with or into another corporation or the
sale of substantially all of our assets, the successor company may either
assume or substitute outstanding options or stock purchase rights. If any
optionee's stock purchase rights are not assumed or substituted, the committee
will provide notice to each optionee that he or she has the right to exercise
the option, or stock purchase right as to all shares subject to the option or
stock purchase right for a period of 15 days from the date of such notice. The
1997 Stock Plan will terminate in 2010, unless sooner terminated by the board
of directors.
41
<PAGE>
The price to be paid for the shares granted pursuant to stock purchase is
determined by the committee. We are generally granted a repurchase option
exercisable on the voluntary or involuntary termination of the purchaser's
employment with us for any reason, including death or disability. The
repurchase price shall be the original purchase price paid by the purchaser.
The repurchase option shall lapse at a rate determined by the committee. Once
the stock purchase right has been exercised, the purchaser shall have the
rights equivalent to those of a stockholder.
Automatic option grants to non-employee directors. The 1997 Stock Plan
generally provides for an automatic initial grant of an option to purchase
20,000 shares of our common stock to each person who first becomes a non-
employee director on or after the effective date of this offering. After the
initial grant, each non-employee director will automatically be granted
subsequent options to purchase 5,000 shares of our common stock each year on
the date of our annual stockholder's meeting, if on such date he or she has
served on our board of directors for at least six months. Each initial option
grant and each subsequent option grant shall have a term of 10 years. Each
initial option grant will fully vest in equal annual installments over the four
year period from the grant date, and each subsequent option grant will fully
vest on the first anniversary of the grant date. The exercise price of all
options will be 100% of the fair market value per share of our common stock on
the date of grant.
2000 Employee Stock Purchase Plan
Our board of directors adopted our 2000 Employee Stock Purchase Plan in
February 2000. This plan provides our employees with an opportunity to purchase
our common stock through accumulated payroll deductions. A total of 500,000
shares of common stock has been reserved for issuance under the purchase plan.
In addition, the purchase plan provides for annual increases in the number of
shares available for issuance under the purchase plan on the first day of each
fiscal year, beginning in 2001, equal to the lesser of 1% of the outstanding
shares of common stock on the first day of the fiscal year or 400,000 shares or
such lesser amount as may be determined by the board. The board of directors or
a committee appointed by the board administers the purchase plan. The board or
its committee has full and exclusive authority to interpret the terms of the
purchase plan and determine eligibility.
Employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, an employee may not be granted an
option to purchase stock under the purchase plan if such an employee:
. immediately after grant owns stock possessing five percent or more of
the total combined voting power or value of all classes of our capital
stock; or
. whose rights to purchase stock under our employee stock purchase plan
accrues at a rate which exceeds $25,000 worth of stock for each calendar
year.
Our purchase plan is intended to qualify under Section 423 of the Internal
Revenue Code and contains consecutive six month offering periods. The offering
periods generally start on the first trading day on or after May 1 and November
1 of each year, except for the first such offering period which commences on
the first trading day on or after the effective date of this offering and ends
on the last trading day on or after October 31, 2000.
The purchase plan permits participants to purchase common stock through
payroll deductions of up to 10.0% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions but excludes payments for overtime, shift premium payments,
incentive compensation, incentive payments, bonuses and other compensation. The
maximum number of shares a participant may purchase during a single offering
period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the purchase plan is generally 85% of the lower of the fair
market value of the common stock (i) at the beginning of the offering period or
(ii) at the end of the
42
<PAGE>
offering period. Participants may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with us.
A participant may not transfer rights granted under the purchase plan other
than by will, the laws of descent and distribution or as otherwise provided
under the purchase plan.
The purchase plan provides that, if we merge with or into another
corporation or sell substantially all of our assets, the successor corporation
will assume or substitute for each outstanding purchase right. If the successor
corporation refuses to assume or substitute for the outstanding purchase
rights, the offering period then in progress will be shortened, and a new
exercise date will be set.
The purchase plan will terminate in 2010. However, the board of directors
has the authority to amend or terminate the purchase plan, except that, subject
to some exceptions described in the purchase plan, no such action may adversely
affect any outstanding rights to purchase stock under the purchase plan.
401(k) Plan
In March 1997, we adopted a 401(k) Profit Sharing Plan and Trust covering
our eligible employees. The 401(k) Profit Sharing Plan and Trust excludes
nonresident alien employees. The 401(k) Profit Sharing Plan and Trust is
intended to qualify under Section 401(k) of the Internal Revenue Code, so that
contributions to the 401(k) Profit Sharing Plan and Trust by employees or by us
and the investment earnings thereon are not taxable to the employees until
withdrawn. If our 401(k) Profit Sharing Plan and Trust qualifies under Section
401(k) of the United States tax code, our contributions will be deductible by
us when made. Our employees may elect to reduce their current compensation by
up to the statutorily prescribed annual limit of $10,500 in 2000 and to have
those funds contributed to the 401(k) Profit Sharing Plan and Trust. The 401(k)
Profit Sharing Plan and Trust permits us, but does not require us, to make
additional matching contributions on behalf of all participants. To date, we
have not made any contributions to the 401(k) Profit Sharing Plan and Trust.
Limitations on Liability and Indemnification
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for the following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification. We have entered
into agreements to indemnify our directors, executive officers and controller,
in addition to indemnification provided for in our bylaws. These agreements,
among other things, provide for indemnification of our directors and executive
officers for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by or in our rights, arising out of such person's services
as a director or executive officer to us, any of our subsidiaries or any other
company or enterprise to which the person provides services at our request. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
43
<PAGE>
RELATED PARTY TRANSACTIONS
Sales of Stock
Since our inception in February 1997, we have issued and sold shares of our
capital stock in private placement transactions as follows:
. 8,000,000 shares of restricted common stock at a price of $0.001 per
share in February 1997;
. 1,680,000 shares of Series A preferred stock at a price of $0.50 per
share in April 1997;
. 500,000 shares of Series B1 preferred stock at a price of $2.00 per
share in September 1997;
. 1,500,000 shares of Series B1 preferred stock at a price at $2.00 per
share in June 1998;
. 800,000 shares of Series B2 preferred stock at a price of $2.50 per
share in July 1997;
. 972,250 shares of Series B3 preferred stock at $4.00 per share in July
1997;
. 1,151,482 shares of Series B3 at a price of $4.00 per share in September
1997;
. 1,127,000 shares of Series B3 preferred stock at a purchase price of
$4.00 per share in October 1997;
. 108,750 shares of Series B3 preferred stock at a price of $4.00 per
share in April 1998; and
. 7,610,754 shares of Series C preferred stock at a price of $5.00 per
share in April 1999.
We recorded noncash deemed dividends of $2,800,000 for the year ended
December 31, 1997, to reflect the value of rights granted to certain
stockholders to purchase 2,000,000 shares of Series B1 preferred stock at
$2.00 per share and 800,000 shares of Series B2 preferred stock at $2.50 per
share, both less than the $4.00 per share price received for the Series B3
preferred stock. The rights were exercised in July 1997, September 1997 and
June 1998, as reflected above. See note 7 of the notes to the financial
statements.
All shares of preferred stock will convert into common stock on a 1-for-1
basis on the closing of this offering.
The following table summarizes the shares of capital stock purchased by
executive officers, directors and 5% stockholders in these private placement
transactions, although this table does not necessarily reflect currently
outstanding amounts:
<TABLE>
<CAPTION>
Restricted Series A Series B1 Series B2 Series B3 Series C
Common Preferred Preferred Preferred Preferred Preferred
Name of Purchaser Stock Stock Stock Stock Stock Stock
----------------- ---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kamran Elahian.......... 1,573,187 -- -- -- -- --
Shahin Hedayat.......... 2,510,493 -- -- -- -- --
Faraj Aalaei............ 1,305,440 -- -- -- -- --
Surendra B. Mandava..... 1,305,440 -- -- -- -- --
Anthony O'Toole......... 1,305,440 -- -- -- -- --
Robert C. Hawk.......... -- -- -- -- -- 15,000
Entities affiliated with
Walden International
Investment Group....... -- 500,000 1,000,000 -- 325,000 550,000
Entities affiliated with
U.S. Venture Partners.. -- 500,000 1,000,000 -- 250,000 550,000
Entities affiliated with
Vertex Management...... -- -- -- 800,000 500,000 380,000
The Chase Manhattan
Bank, as Trustee for
the First Plaza Group
Trust.................. -- -- -- -- -- 1,600,000
</TABLE>
Affiliated Relationships
Mr. Tan, a member of our board of directors, is affiliated with Walden
International Investment Group. Mr. Federman, a member of our board of
directors, is affiliated with U.S. Venture Partners.
44
<PAGE>
Grants of Options
From our inception in February 1997 through the date of this prospectus, we
have granted options to purchase our common stock to our directors and
executive officers as follows:
<TABLE>
<CAPTION>
Date of Number of Exercise Price
Name Grant Options Per Share
---- -------- --------- --------------
<S> <C> <C> <C>
Robert C. Hawk............................. 11/24/97 49,500 $ 0.40
William F. Mackenzie....................... 6/16/98 175,000 $ 0.40
8/12/99 30,000 $ 1.60
Jon S. Sherburne........................... 10/13/99 215,000 $ 2.00
John W. Luhtala............................ 12/9/99 175,000 $ 3.00
Faraj Aalaei............................... 2/10/00 500,000 $ 5.00
4/13/00 150,000 $10.00
</TABLE>
Offers of Employment
John W. Luhtala, our Chief Financial Officer, is party to an offer letter
with us dated November 30, 1999. Under the terms of the offer letter, in the
event that we experience a change in control, following which Mr. Luhtala's
employment is terminated or his duties significantly reduced, the vesting of
Mr. Luhtala's stock options will be accelerated by one year.
Jon S. Sherburne, our Vice President for Worldwide Sales, is party to an
offer letter with us dated August 17, 1999. Under the terms of the offer
letter, in the event we experience a change in control, following which Mr.
Sherburne's employment is terminated or his duties significantly reduced, the
vesting of Mr. Sherburne's stock options will be accelerated by one year.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors
and executive officers. Such indemnification agreements will require us to
indemnify our directors and executive officers to the fullest extent permitted
by Delaware law.
Agreement with Former Chief Executive Officer
Travis White, our former Chief Executive Officer, resigned his position as
Chief Executive Officer in January 2000. Additionally, his employment
terminated on March 31, 2000. In connection with the termination of Mr. White's
employment relationship with us, we entered into an Agreement and Mutual
Release with Mr. White on February 2, 2000. Under the terms of the agreement,
in exchange for a release by Mr. White of all potential claims against us, we
have agreed to pay Mr. White a total of $225,000 over the next year. On
Mr. White's termination date, 211,064 options with an option price of $0.40 per
share were accelerated and fully vested as provided by his original employment
agreement and in accordance with the terms of his original option grant.
Future Agreements
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us
and our officers, directors, principal stockholders and their affiliates will
be approved by a majority of the board of directors, including a majority of
the independent, disinterested outside directors on the board of directors, and
will be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
45
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of March 31, 2000 and as adjusted
to reflect the sale of common stock offered hereby by the following:
. each stockholder known by us to own beneficially more than 5% of our
common stock;
. each of our executive officers named in the compensation table above;
. each of our directors; and
. all directors and executive officers as a group.
As of March 31, 2000, there were 27,437,747 shares of our common stock
outstanding, assuming that all outstanding preferred stock has been converted
into common stock. Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed below, on the information
furnished by such owners, have sole voting power and investment power with
respect to such shares. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percent ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after March
31, 2000 are deemed outstanding, while such shares are not deemed outstanding
for purposes of computing percent ownership of any other person. Unless
otherwise indicated in the footnotes below, the persons and entities named in
the table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. The
address for those individuals for which an address is not otherwise indicated
is Centillium Communications, Inc., 47211 Lakeview Boulevard, Fremont, CA
94538.
<TABLE>
<CAPTION>
Percentage of Shares
Shares Beneficially Beneficially Owned Percentage of Shares
Name or Group of Owned Prior Prior to the Beneficially Owned
Beneficial Owners to the Offering Offering After the Offering
----------------- ------------------- -------------------- --------------------
<S> <C> <C> <C>
5% Stockholders
Entities affiliated with
Walden International
Investment Group(1).... 2,375,000 8.7% 7.4%
750 Battery Street #700
San Francisco, CA 94111
Entities affiliated with
U.S. Venture
Partners(2)............ 2,300,000 8.4% 7.2%
2180 Sand Hill Road
Menlo Park, CA 04025
Entities affiliated with
Vertex Management(3)... 1,680,000 6.1% 5.2%
Three Lagoon Drive,
Suite 220
Redwood City, CA 94065
The Chase Manhattan
Bank, as Trustee for
the First Plaza Group
Trust.................. 1,600,000 5.8% 5.0%
767 Fifth Avenue
New York, NY 10153
Anthony O'Toole(4)...... 1,305,440 4.8% 4.1%
Directors and Executive
Officers
Shahin Hedayat.......... 2,510,493 9.1% 7.8%
Faraj Aalaei(5)......... 1,805,440 6.6% 5.6%
Kamran Elahian.......... 1,573,187 5.7% 4.9%
Surendra B. Mandava..... 1,305,440 4.8% 4.1%
Jon S. Sherburne(6)..... 215,000 0.8% 0.7%
William F.
Mackenzie(7)........... 205,000 0.7% 0.6%
John W. Luhtala(8)...... 175,000 0.6% 0.5%
Robert C. Hawk(9)....... 64,500 0.2% 0.2%
All directors and
executive officers as a
group (8 persons)...... 7,854,060 28.6% 24.4%
</TABLE>
46
<PAGE>
- ---------------------
(1) Consists of 1,115,910 shares held by Pacven Walden Ventures III, L.P.,
675,000 shares held by Seed Ventures II, Ltd., 212,727 shares held by Asian
Ventures Capital Investment Corporation, 196,363 shares held by TWG
Investment LDC, 135,000 shares held by O,W&W Investments Ltd., and 40,000
shares held by OCBC, Wearnes & Walden Investments (Singapore) Ltd.
(2) Consists of 2,070,000 shares held by U.S. Ventures V, L.P., 115,000 shares
held by USVP V International, L.P., 62,900 shares held by 2180 Associates
Fund V, L.P., and 52,100 shares held by USVP V Entrepreneur Partners L.P.
(3) Consists of 650,000 shares held by Vertex Technology Fund Pte. Ltd, 650,000
shares held by Vertex Asia Limited, and 380,000 shares held by Vertex
Technology Fund II Limited.
(4) Mr. O'Toole is one of our co-founders, and is also currently one of our
employees.
(5) Includes 500,000 shares underlying options that are immediately exercisable
subject to a repurchase option by us which lapses as the shares vest.
(6) Consists of shares received on early exercise of stock options. These
shares are subject to a repurchase option by us which lapses as the shares
vest.
(7) Consists of 87,500 shares received on early exercise of stock options,
which shares are subject to a repurchase option by us which lapses as the
shares vest, and an additional 117,500 shares underlying options that are
immediately exercisable subject to a repurchase option by us which lapses
as the shares vest.
(8) Consists of shares underlying options that are immediately exercisable
subject to a repurchase option by us which lapses as the shares vest.
(9) Consists of 49,500 shares received on early exercise of stock options,
which shares are subject to a repurchase option by us which lapses as the
shares vest, and 15,000 shares of Series C preferred stock.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our certificate of incorporation that becomes effective upon the closing of
this offering authorizes the issuance of up to 100,000,000 shares of common
stock, $0.001 par value, and authorizes the issuance of 10,000,000 shares of
undesignated preferred stock, $0.001 par value. From time to time, our board of
directors may establish the rights and preferences of the preferred stock. As
of March 31, 2000, 11,987,511 shares of common stock were issued and
outstanding and held by 135 stockholders, and 15,450,236 shares of preferred
stock were issued and outstanding and held by 164 stockholders. Upon the
closing of this offering, all outstanding shares of preferred stock will
convert into an aggregate of 15,450,236 shares of common stock. The following
description of our capital stock is, by necessity, not complete. We encourage
you to refer to our certificate of incorporation and bylaws, which are included
as exhibits to the registration statement of which this prospectus forms a
part, and applicable provisions of Delaware law for a more complete
description.
Common Stock
Each holder of common stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that may be applicable to any outstanding
preferred stock, holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the board of
directors out of funds legally available for that purpose. See "Dividend
Policy." In the event of our liquidation, dissolution or winding up, the
holders of common stock are entitled to share in our assets remaining after the
payment of liabilities and the satisfaction of any liquidation preference
granted to the holders of any outstanding shares of preferred stock. Holders of
common stock have no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. The rights, preferences and privileges of the holders of common
stock are subject to, and may be adversely affected by the rights of the
holders of shares of any series of preferred stock that we may designate in the
future.
Preferred Stock
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may
be greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; or
. delaying or preventing a change in control of our company without
further action by the stockholders.
Upon the closing of this offering, no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.
Registration Rights of Certain Holders
After this offering, holders of shares of common stock and shares of common
stock issuable upon exercise of outstanding warrants (the "registrable
securities") or their transferees are entitled to certain rights with respect
to the registration of such shares under the Securities Act. These rights are
provided under the terms of an agreement between us and the holders of the
registrable securities. Beginning 180 days following the date of
48
<PAGE>
this prospectus, holders of at least 20% of the registrable securities may
require, on no more than two occasions, that we use our best efforts to
register the registrable securities for public resale. We are obligated to
register these shares only if the outstanding registrable securities have an
anticipated public offering price of at least $25,000,000. Also, holders of
registrable securities may require, no more than once during any six-month
period, that we register their shares for public resale on Form S-3 or similar
short-form registration if the value of the securities to be registered is at
least $2,000,000. Furthermore, in the event we elect to register any of our
shares of common stock for purposes of effecting any public offering, the
holders of registrable securities are entitled to include their shares of
common stock in that registration, but we may reduce the number of shares
proposed to be registered in view of market conditions. These registration
rights have been waived with respect to this offering. We will bear all
expenses in connection with any registration, other than underwriting discounts
and commissions. All registration rights will terminate five years following
the consummation of this offering, or with respect to each holder of
registrable securities, at such time as the holder is entitled to sell all then
held shares in any 90-day period under Rule 144 of the Securities Act.
Certain Charter and Bylaw Provisions and Delaware Law
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the following more difficult:
. our acquisition by a tender offer;
. our acquisition by a proxy contest; or
. the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of us to
first negotiate with our board of directors. We believe that the benefits of
increased protection of our potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure outweighs
the disadvantages of discouraging such proposals because negotiation of such
proposals could result in an improvement of their terms.
Classified Board
Our board of directors is divided into three classes. The directors in each
class will serve for a three-year term, with our stockholders electing one
class each year. This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us, because it generally makes it more difficult for
stockholders to replace a majority of the directors.
Restrictions on Persons Able to Call Stockholder Meetings
Under our bylaws, only the board of directors, the chairman of the board and
the president may call special meetings of stockholders.
Advance Notification of Stockholder Nominations and Proposals Required
Our bylaws establish advance notice procedures for stockholder proposals and
the nomination of candidates for election as directors, other than nominations
made by or at the direction of the board of directors or a committee of the
board.
Delaware Anti-takeover Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested
49
<PAGE>
stockholder, unless the business combination or the transaction in which the
person became an interested stockholder is approved in a prescribed manner.
Generally, a business combination includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an interested stockholder is a person who, together
with its affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Stockholder Action By Written Consent Eliminated
Our certificate of incorporation eliminates the right of stockholders to act
by written consent without a meeting.
Undesignated Preferred Stock
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change our control.
These and other provisions may have the effect of deferring hostile takeovers
or delaying changes in our control or management.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Chase Mellon
Shareholder Services, L.L.C.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our stock.
Future sales of substantial amounts of our common stock in the public market
following this offering or the possibility of such sales occurring could
adversely affect market prices for our common stock or could impair our ability
to raise capital through an offering of equity securities. Furthermore, since
no shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale as described below, sales of
substantial amounts of our common stock in the public after these restrictions
lapse could adversely affect the prevailing market price and our ability to
raise equity capital in the future.
Upon completion of this offering, we will have 32,137,747 shares of common
stock outstanding (assuming conversion of all of the currently outstanding
shares of preferred stock) based on shares outstanding as of March 31, 2000 and
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options. Of these shares, all of the shares sold in this
offering will be freely transferable without restriction under the Securities
Act, unless these shares are purchased by "affiliates" as that term is used
under the Securities Act and the Regulations promulgated thereunder.
Of these shares, the remaining 27,437,747 shares as of March 31, 2000, which
were sold by us in reliance on exemptions from the registration requirements of
the Securities Act, are restricted securities within the meaning of Rule 144
under the Securities Act and become eligible for sale in the public market as
follows:
. no shares will be eligible for immediate sale on the date the
registration statement of which this prospectus is a part is declared
effective;
. no shares will be eligible for sale prior to 180 days from the date the
registration statement of which this prospectus is a part is declared
effective; and
. beginning 181 days after the effective date, 26,162,845 shares will
become eligible for sale, subject to the provisions of Rules 144 or 701,
upon the expiration of agreements not to sell such shares entered into
between the underwriters and such stockholders.
As of March 31, 2000, options to purchase a total of 2,831,840 shares of
common stock, all of which were issued under the 1997 Stock Plan, were
outstanding and exercisable. All of the shares subject to options are subject
to lock-up agreements. An additional 244,299 shares of common stock were
available as of March 31, 2000 for future option grants or direct issuances
under the 1997 Stock plan. Any shares subject to lock-up agreements may be
released at any time without notice by the underwriters.
In general, under Rule 144 as currently in effect, a person (or group of
persons whose shares are aggregated), including an affiliate, who has
beneficially owned restricted shares for at least one year is entitled to sell,
within any three-month period commencing 90 days after the date of completion
of this offering, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of common stock (approximately 321,000 shares
immediately after this offering), or the average weekly trading volume in the
common stock during the four calendar weeks preceding such sale, subject to the
filing of a Form 144 with respect to such sale and certain other limitations
and restrictions. In addition, a person who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years, would
be entitled to sell such shares without regard to the requirements described
above.
Any of our employees, officers or directors of or consultant who purchased
his or her shares prior to the date of completion of this offering or who holds
vested options as of that date pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701, which
permits non-affiliates to sell their Rule 701 shares without having to comply
with the public-information, holding-period, volume-limitation or notice
provisions of Rule 144 and permits affiliates to sell their Rule 701 shares
without having to comply with Rule 144's holding-period restrictions, in each
case commencing 90 days after the date of completion of this offering.
51
<PAGE>
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof.
Our officers, directors and stockholders have agreed that they will not
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, enter into a
transaction which would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of our common stock, whether any such aforementioned
transaction is to be settled by delivery of our common stock or such other
securities, in cash or otherwise, or publicly disclose the intention to make
any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
As soon as practicable after the effective date of the registration
statement of which this prospectus is a part, we intend to file a registration
statement on Form S-8 under the Securities Act to register shares of common
stock issuable under our 1997 Stock Plan and our 2000 Employee Stock Purchase
Plan, thus permitting the resale of such shares by non-affiliates in the public
market without restriction under the Securities Act. Such registration
statement will become effective immediately upon filing.
Prior to this offering, there has been no public market for our common
stock, and any sale of substantial amounts in the open market may adversely
affect the market price of our common stock offered hereby.
52
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, FleetBoston Robertson
Stephens Inc. and Salomon Smith Barney Inc. are acting as representatives, the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
FleetBoston Robertson Stephens Inc. ..............................
Salomon Smith Barney Inc. .........................................
---------
Total.......................................................... 4,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 600,000 additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- ------------------------
Without
Without With Over- With
Over-allotment Over-allotment allotment Over-allotment
-------------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts
and Commissions paid by
us..................... $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
The expenses of the offering that are payable by us are estimated to be
$1,250,000.
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
A prospectus in electronic format may be made available on the Web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters
for sale to their online brokerage account holders. Internet distributions will
be allocated by the underwriters that will make Internet distributions on the
same basis as other allocations.
We and our executive officers, directors and certain other of our security
holders have agreed not to offer, sell, contract to sell, announce an intention
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Securities and Exchange Commission a registration statement under the
Securities Act relating to, any shares of common stock or securities
convertible into or exchangeable or exercisable for any common stock without
the prior written consent of Credit Suisse First Boston Corporation for a
period of 180 days after the date of this prospectus.
53
<PAGE>
The underwriters have reserved for sale at the initial public offering price
up to 200,000 shares of the common stock for employees, directors and certain
other persons associated with us who have expressed an interest in purchasing
common stock in this offering. The number of shares available for sale to the
general public in this offering will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the
other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We have applied the shares of common stock quoted on The Nasdaq Stock
Market's National Market under the symbol "CTLM."
We and the underwriters have agreed to indemnify each other against
liabilities, including liabilities under the Securities Act.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include:
. the information in this prospectus and otherwise available to the
underwriters;
. the history and the prospects for the industry in which we will compete;
. the ability of our management;
. the prospects for our future earnings;
. the present state of our development and our current financial
condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
We cannot be sure that the initial public offering price will correspond to
the price at which the common stock will trade in the public market following
this offering or that an active trading market for the common stock will
develop and continue after this offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Exchange Act.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
54
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of our common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of our common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws, (ii) where
required by law, the purchaser is purchasing as principal and not as agent, and
(iii) the purchaser has reviewed the text above under "Resale Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of our directors and officers as well as the experts named herein may be
located outside of Canada and, as a result, it may not be possible for Canadian
purchasers to effect service of process within Canada upon us or our directors
and officers. All or a substantial portion of the assets of the issuer and
these persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against the issuer or these persons in Canada or
to enforce a judgment obtained in Canadian courts against us or our directors
and officers outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
55
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by Brobeck,
Phleger & Harrison LLP, San Francisco, California. As of the date of this
prospectus, WS Investment Company 97A, an investment partnership composed of
certain current and former members of and persons associated with Wilson
Sonsini Goodrich & Rosati, Professional Corporation, and a current member of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, collectively own
150,000 shares of preferred stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1998 and 1999, and for the
period from February 21, 1997 (inception) through December 31, 1997, and for
the years ended December 31, 1998 and 1999. We have included our financial
statements and schedule in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.,
a registration statement on Form S-1 under the Securities Act with respect to
the shares of common stock offered hereby. This prospectus does not contain all
the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. You may inspect a copy of the registration statement
without charge at the Public Reference Room of the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information about the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. You may obtain copies of all or any portion of the
registration statement from the Public Reference Room upon payment of
prescribed fees. The SEC maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC.
56
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Stockholders' Equity........................... F-5
Consolidated Statements of Cash Flows..................................... F-8
Notes to Consolidated Financial Statements................................ F-9
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Centillium Communications, Inc.
We have audited the accompanying consolidated balance sheets of Centillium
Communications, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the period from February 21, 1997 (inception) to December 31, 1997 and for
the years ended December 31, 1998 and 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Centillium
Communications, Inc. at December 31, 1998 and 1999, and the results of its
operations and its cash flows for the period from February 21, 1997
(inception) to December 31, 1997 and for the years ended December 31, 1998 and
1999, in conformity with accounting principles generally accepted in the
United States.
Ernst & Young LLP
San Jose, California
February 9, 2000
F-2
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
------------------ March March 31,
1998 1999 31, 2000 2000
-------- -------- -------- -------------
(Unaudited)
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.......... $ 2,816 $ 3,202 $ 11,663
Short-term investments............. 5,110 25,111 11,695
Accounts receivable, net of
allowance for doubtful
accounts of $150 at December 31,
1999 and $200 at March 31, 2000... -- 915 2,632
Inventories........................ -- 1,211 1,207
Other current assets............... 257 515 1,066
-------- -------- --------
Total current assets............. 8,183 30,954 28,263
Property and equipment, net.......... 3,784 4,531 5,317
Other assets......................... 43 102 144
-------- -------- --------
Total assets................... $ 12,010 $ 35,587 $ 33,724
======== ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Working capital line of credit..... $ -- $ 2,044 $ 2,861
Accounts payable................... 128 810 1,687
Accrued payroll and related
expenses.......................... 388 900 1,002
Accrued liabilities................ 171 325 576
Deferred revenue................... 75 122 125
Capital lease obligations--current
portion........................... 209 160 107
Current portion of long-term debt.. 526 550 555
-------- -------- --------
Total current liabilities...... 1,497 4,911 6,913
Capital lease obligations--long-term
portion............................. 169 -- --
Long-term debt....................... 1,066 549 417
Other liabilities.................... 19 72 144
Commitments
Stockholders' equity:
Preferred Stock, $0.001 par value:
Authorized shares--None actual and
10,000,000 pro forma
Issued and outstanding shares--None
actual and pro forma -- -- -- $ --
Convertible preferred stock, $0.001
par value:
Authorized shares 15,630,000 actual
and none pro forma
Issued and outstanding shares
7,839,482 in 1998,
15,450,236 in 1999 and at March
31, 2000, and none pro forma
(aggregate liquidation preference
of $58,332 at December 31, 1999
and March 31, 2000)............... 8 15 15 --
Common stock, $0.001 par value:
Authorized shares 32,000,000 actual
and 100,000,000 pro forma.........
Issued and outstanding shares
8,505,600 in 1998, 10,318,841 in
1999, 11,987,511 at March 31, 2000
and 27,437,747 pro forma.......... 9 10 12 27
Additional paid-in capital........... 23,681 80,270 104,081 104,081
Stockholder notes receivable......... -- (430) (440) (440)
Accumulated other comprehensive
income.............................. -- (25) (15) (15)
Deferred compensation................ (446) (16,043) (33,603) (33,603)
Accumulated deficit.................. (13,993) (33,742) (43,800) (43,800)
-------- -------- -------- --------
Total stockholders' equity..... 9,259 30,055 26,250 $ 26,250
-------- -------- -------- ========
Total liabilities and
stockholders' equity.......... $ 12,010 $ 35,587 $ 33,724
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
Centillium Communications, Inc.
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Period From
February 21, Years Ended Three Months
1997 (Inception) December 31, Ended March 31,
to December 31, ----------------- -----------------
1997 1998 1999 1999 2000
---------------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Product revenues........ $ $ -- $ 2,509 $ -- $ 4,723
Technology development
revenues............... 300 752 1,235 50 --
------- ------- -------- ------- --------
Total revenues...... 300 752 3,744 50 4,723
Cost of revenues........ -- -- 3,118 -- 3,483
------- ------- -------- ------- --------
Gross profit............ 300 752 626 50 1,240
Operating expenses:
Research and
development.......... 1,844 7,913 13,357 2,306 6,017
Sales and marketing... 341 1,466 3,823 700 2,773
General and
administrative....... 217 1,095 4,227 496 2,762
------- ------- -------- ------- --------
Total operating
expenses........... 2,402 10,474 21,407 3,502 11,552
------- ------- -------- ------- --------
Operating loss.......... (2,102) (9,722) (20,781) (3,452) (10,312)
Interest income......... 214 582 1,274 75 359
Interest expense........ (49) (116) (242) (50) (105)
------- ------- -------- ------- --------
Net loss................ (1,937) (9,256) (19,749) (3,427) (10,058)
Deemed dividend on
Series B convertible
preferred stock........ (2,800) -- -- -- --
------- ------- -------- ------- --------
Net loss applicable to
common stockholders.... $(4,737) $(9,256) $(19,749) $(3,427) $(10,058)
======= ======= ======== ======= ========
Historical basic and
diluted net loss per
share applicable to
common stockholders.... $ (0.59) $ (1.15) $ (2.23) $ (0.42) $ (1.03)
======= ======= ======== ======= ========
Shares used to compute
basic and diluted net
loss per share
applicable to common
stockholders........... 8,000 8,056 8,842 8,227 9,808
======= ======= ======== ======= ========
Pro forma basic and
diluted net loss per
share applicable to
common stockholders.... $ (0.91) $ (0.40)
======== ========
Shares used to compute
pro forma basic and
diluted net loss per
share applicable to
common stockholders.... 21,755 25,258
======== ========
</TABLE>
F-4
<PAGE>
Centillium Communications, Inc.
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Convertible Accumulated
Preferred Stock Common Stock Additional Stockholders' Other Total
---------------- ---------------- Paid-In Deferred Notes Accumulated Comprehensive Stockholders'
Shares Amount Shares Amount Capital Compensation Receivable Deficit Income Equity
--------- ------ --------- ------ ---------- ------------ ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash proceeds
from issuance
of common
stock.......... -- $ -- 8,000,000 $ 8 $ -- $ -- $ -- $ -- $ -- $ 8
Cash proceeds
from issuance
of Series A
convertible
preferred
stock, net of
issuance
costs.......... 1,680,000 2 -- -- 817 -- -- -- -- 819
Issuance of
warrants to
purchase Series
B3 convertible
preferred
stock.......... -- -- -- -- 24 -- -- -- -- 24
Issuance of
Series B3
convertible
preferred stock
and associated
rights for cash
and
stockholders
note
receivable, net
of issuance
costs.......... 3,250,732 3 -- -- 12,977 -- (728) -- -- 12,252
Noncash deemed
dividends to
Series B1 and
B2
stockholders... -- -- -- -- 2,800 -- -- (2,800) -- --
Cash proceeds
from exercise
of right to
purchase Series
B2 convertible
preferred
stock, net of
issuance
costs.......... 800,000 1 -- -- 1,993 -- -- -- -- 1,994
Cash proceeds
from exercise
of right to
purchase Series
B1 convertible
preferred
stock, net of
issuance
costs.......... 500,000 1 -- -- 995 -- -- -- -- 996
Exercise of
option to
purchase common
stock for
stockholders'
note
receivable..... -- -- 45,000 -- 18 -- (18) -- -- --
Noncash issuance
of common stock
for services
and other...... -- -- 5,000 -- -- -- -- -- -- --
Net loss and
comprehensive
net loss....... -- -- -- -- -- -- (1,937) -- (1,937)
--------- ---- --------- --- ------- ----- ----- ------- ---- -------
Balance at
December 31,
1997............ 6,230,732 7 8,050,000 8 19,624 -- (746) (4,737) -- 14,156
Cash proceeds
from payments
on
stockholders'
notes
receivable..... -- -- -- -- -- -- 746 -- -- 746
Noncash issuance
of common stock
for services
and other...... -- -- 29,850 -- 15 -- -- -- -- 15
Cash proceeds
from issuance
of Series B3
convertible
preferred
stock, net of
issuance
costs.......... 108,750 -- -- -- 434 -- -- -- -- 434
</TABLE>
F-5
<PAGE>
Centillium Communications, Inc.
Consolidated Statements of Stockholders' Equity--Continued
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Convertible Accumulated
Preferred Stock Common Stock Additional Stockholders' Other
----------------- ------------------ Paid-In Deferred Notes Accumulated Comprehensive
Shares Amount Shares Amount Capital Compensation Receivable Deficit Income
---------- ------ ---------- ------ ---------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
warrants to
purchase Series
B3 convertible
preferred
stock........... -- -- -- -- 11 -- -- -- --
Cash proceeds
from exercise of
rights to
purchase Series
B1 convertible
preferred stock,
net of issuance
costs........... 1,500,000 1 -- -- 2,998 -- -- -- --
Exercise of
options to
purchase common
stock for cash.. -- -- 425,750 1 84 -- -- -- --
Deferred
compensation
related to stock
option grants... -- -- -- -- 515 (515) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 69 -- -- --
Net loss and
comprehensive
net loss........ -- -- -- -- -- -- (9,256) --
---------- --- ---------- --- ------- -------- ----- -------- ----
Balance at
December 31,
1998............. 7,839,482 8 8,505,600 9 23,681 (446) -- (13,993) --
Noncash issuance
of common stock
for services and
other........... -- 97,643 -- 173 -- -- -- --
Cash proceeds
from issuance of
Series C
convertible
preferred stock,
net of issuance
costs........... 7,610,754 7 -- -- 35,568 -- -- -- --
Exercise of
options to
purchase common
stock for cash
and notes....... -- -- 1,719,348 1 1,149 -- (430) -- --
Repurchase of
unvested
shares.......... -- -- (3,750) -- (2) -- -- -- --
Deferred
compensation
related to stock
option grants... -- -- -- -- 19,701 (19,701) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 4,104 -- -- --
Net loss........ -- -- -- -- -- -- -- (19,749) --
Unrealized loss
on available
for-sale
investments..... -- -- -- -- -- -- -- -- (25)
Total
comprehensive
net loss........ -- -- -- -- -- -- -- -- --
---------- --- ---------- --- ------- -------- ----- -------- ----
Balance at
December 31,
1999............. 15,450,236 $15 10,318,841 $10 $80,270 $(16,043) $(430) $(33,742) $(25)
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Issuance of
warrants to
purchase Series
B3 convertible
preferred
stock........... 11
Cash proceeds
from exercise of
rights to
purchase Series
B1 convertible
preferred stock,
net of issuance
costs........... 2,999
Exercise of
options to
purchase common
stock for cash.. 85
Deferred
compensation
related to stock
option grants... --
Amortization of
deferred
compensation.... 69
Net loss and
comprehensive
net loss........ (9,256)
-------------
Balance at
December 31,
1998............. 9,259
Noncash issuance
of common stock
for services and
other........... 173
Cash proceeds
from issuance of
Series C
convertible
preferred stock,
net of issuance
costs........... 35,575
Exercise of
options to
purchase common
stock for cash
and notes....... 720
Repurchase of
unvested
shares.......... (2)
Deferred
compensation
related to stock
option grants... --
Amortization of
deferred
compensation.... 4,104
Net loss........ (19,749)
Unrealized loss
on available
for-sale
investments..... (25)
-------------
Total
comprehensive
net loss........ (19,774)
-------------
Balance at
December 31,
1999............. $30,055
</TABLE>
F-6
<PAGE>
Centillium Communications, Inc.
Consolidated Statements of Stockholders' Equity--Continued
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Convertible Accumulated
Preferred Stock Common Stock Additional Stockholders' Other
----------------- ------------------ Paid-In Deferred Notes Accumulated Comprehensive
Shares Amount Shares Amount Capital Compensation Receivable Deficit Income
---------- ------ ---------- ------ ---------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noncash issuance
of common stock
for services
(unaudited)..... 900 -- 5
Exercise of
options to
purchase common
stock for cash
and notes
(unaudited)..... 1,670,453 2 1,506 (10)
Repurchase of
unvested shares
(unaudited)..... (2,683) -- (1)
Deferred
compensation
related to stock
option grants
(unaudited)..... 22,301 (22,301)
Amortization of
deferred
compensation
(unaudited)..... 4,741
Net loss
(unaudited)..... (10,058)
Unrealized gain
on available-
for-sale
investments
(unaudited)..... 10
Total
comprehensive net
loss
(unaudited)......
---------- --- ---------- --- -------- -------- ----- -------- ----
Balance at March
31, 2000
(unaudited)...... 15,450,236 $15 11,987,511 $12 $104,081 $(33,603) $(440) $(43,800) $(15)
========== === ========== === ======== ======== ===== ======== ====
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Noncash issuance
of common stock
for services
(unaudited)..... 5
Exercise of
options to
purchase common
stock for cash
and notes
(unaudited)..... 1,498
Repurchase of
unvested shares
(unaudited)..... (1)
Deferred
compensation
related to stock
option grants
(unaudited)..... --
Amortization of
deferred
compensation
(unaudited)..... 4,741
Net loss
(unaudited)..... (10,058)
Unrealized gain
on available-
for-sale
investments
(unaudited)..... 10
-------------
Total
comprehensive net
loss
(unaudited)...... (10,048)
-------------
Balance at March
31, 2000
(unaudited)...... $(26,250)
=============
</TABLE>
F-7
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three Months
Period From Years Ended Ended
February 21, 1997 December 31, March 31
(Inception) to ----------------- -----------------
December 31, 1997 1998 1999 1999 2000
----------------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss................ $(1,937) $(9,256) $(19,749) $(3,427) $(10,058)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization
expense.............. 83 1,231 2,258 498 749
Amortization of
deferred
compensation......... -- 69 4,104 127 4,741
Amortization of
warrants issued in
conjunction with debt
and other............ 6 6 10 2 2
Issuance of common
stock for services
and other............ -- 15 173 -- 5
Changes in operating
assets and
liabilities:
Accounts receivable.. -- -- (915) -- (1,717)
Inventories ......... -- -- (1,211) -- 4
Other current
assets.............. (352) 95 (258) -- (551)
Other assets......... (136) 93 (59) 1 (42)
Working capital line
of credit........... -- -- 2,044 -- 817
Accounts payable..... 610 (482) 682 269 877
Accrued payroll and
related expenses.... 187 201 512 (155) 102
Deferred revenue..... -- 75 47 92 3
Accrued liabilities.. 62 109 154 (46) 251
Other liabilities.... -- 19 53 6 72
------- ------- -------- ------- --------
Net cash used in
operating activities... (1,477) (7,825) (12,155) (2,633) (4,745)
Investing activities
Purchases of short-term
investments............ (4,013) (8,837) (27,626) (1,015) (3,329)
Sales and maturities of
short-term
investments............ -- 7,740 7,600 2,900 16,755
Purchases of property
and equipment.......... (1,732) (2,721) (3,005) (451) (1,535)
------- ------- -------- ------- --------
Net cash used in
investing activities... (5,745) (3,818) (23,031) 1,434 11,891
Financing activities
Principal payments on
capital leases......... (55) (203) (223) (54) (54)
Proceeds from borrowings
under long-term debt
obligations............ -- 1,000 -- -- --
Principal payments on
long-term debt
obligations............ -- (234) (498) (122) (128)
Proceeds from issuance
of common stock, net of
repurchases............ 8 85 718 68 1,497
Proceeds from
stockholders note
receivable............. -- 746 -- -- --
Proceeds from issuance
of note payable........ 840 -- -- -- --
Proceeds from issuance
of preferred stock..... 16,061 3,433 35,575 -- --
------- ------- -------- ------- --------
Net cash provided (used)
by financing
activities............. 16,854 4,827 35,572 (108) 1,315
------- ------- -------- ------- --------
Net increase (decrease)
in cash and cash
equivalents............ 9,632 (6,816) 386 (1,307) 8,461
Cash and cash
equivalents at
beginning of period.... -- 9,632 2,816 2,816 3,202
------- ------- -------- ------- --------
Cash and cash
equivalents at end of
period................. $ 9,632 $ 2,816 $ 3,202 $ 1,509 $ 11,663
======= ======= ======== ======= ========
Supplemental disclosures
of cash flow
information
Cash paid for interest.. $ 19 $ 111 $ 244 $ 50 $ 105
Supplemental disclosures
of non-cash
transactions
Issuance of warrants in
conjunction with debt
and other.............. $ 24 $ 11 $ -- -- $ --
Property and equipment
acquired under capital
lease.................. $ 557 $ 88 $ -- -- $ --
Noncash deemed dividends
to Series B
stockholders........... $ 2,800 $ -- $ -- -- $ --
Issuance of common stock
for note receivable.... $ 746 $ -- $ 430 -- $ 10
Deferred compensation
related to stock option
grants................. $ -- $ 515 $ 19,701 $ 670 $ 22,301
</TABLE>
See accompanying notes.
F-8
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations
Centillium Communications, Inc. (Centillium or the Company) was incorporated
in California on February 21, 1997 for the purpose of developing, producing,
and marketing semiconductor devices for equipment manufacturers serving the
broadband communications markets. The Company has focused initially on
developing products designed for the digital subscriber line (DSL) central
office and customer premises market. In December 1999, the Company
reincorporated in Delaware. Share amounts in the accompanying financial
statements have been restated to retroactively reflect the impact of the
reincorporation.
During the period from February 1997 through June 1999, Centillium was a
development stage company. Operating activities during this period were related
primarily to the design and development of our initial products, building our
corporate infrastructure, establishing relationships with customers and
suppliers, and raising capital. The Company began significant customer
shipments in the third quarter of 1999 and exited the development stage at that
time.
Centillium has incurred significant losses since inception and, as of March
31, 2000, had an accumulated deficit of approximately $43,800,000 (unaudited)
including a net loss for the year ended December 31, 1999 of $19,749,000 and a
net loss for the three months ended March 31, 2000 of $10,058,000 (unaudited).
Principles of Consolidation
The consolidated financial statements include all the accounts of the
Company and those of its wholly-owned subsidiary. All significant intercompany
accounts and transaction have been eliminated.
Interim Financial Information
The financial information at March 31, 2000 and for the three months ended
March 31, 2000 and 1999 is unaudited, but includes all adjustments (consisting
of normal recurring adjustments) that Centillium considers necessary for a fair
presentation of its consolidated financial position at such date and its
consolidated operating results and cash flows for those periods. Operating
results for the three months ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the entire year or any
future period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenues related to product sales are generally recognized when the products
are shipped to the customer, title has transferred and no significant
obligations remain. In circumstances where the customer has delayed its
acceptance of our product, we defer recognition of the revenue until
acceptance. Generally, the Company's customers do not have rights to return,
however our products are warranted to be free from defect for a period of one
year. A provision is made for warranty returns as shipments are made. To date,
such returns have not been material.
The Company has also performed research and product development work under
best efforts technology development agreements. Revenues under technology
development agreements are recognized when applicable
F-9
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
contractual milestones have been met, including deliverables, and in any case,
does not exceed of the amount that would be recognized using the percentage-of-
completion method. Due to technological risk factors, the costs of these
development agreements are expensed as incurred and were included in research
and development expenses in the accompanying statements of operations.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist principally of cash, cash equivalents,
short-term investments, and accounts receivable. The Company places its short-
term investments in high-credit quality financial institutions. The Company is
exposed to credit risk in the event of default by these institutions to the
extent of the amount recorded on the balance sheet. Accounts receivable are
billed in U. S. currency derived from revenues earned from customers primarily
located in Japan and the United States. The Company performs ongoing credit
evaluations of its customers' financial condition and generally does not
require collateral, but obtains letters of credit or prepayments as deemed
necessary. The Company maintains reserves for potential credit losses, and
historically, such losses have been immaterial.
Customer Concentrations
The Company's customers, which account for more than 10% of revenues in each
respective year are as follows:
<TABLE>
<CAPTION>
Period From Years Ended
February 21, 1997 December 31,
(Inception) Through --------------- Three Months Ended
December 31, 1997 1998 1999 March 31, 2000
------------------- ------ ------ ------------------
(unaudited)
<S> <C> <C> <C> <C>
Mitsubishi Electric..... 50% 60% * *
NEC..................... -- 10% 21% *
Sumitomo Electric....... 50% 13% 34% 39%
Sungmi Telecom
Electronics............ -- 15% * *
Lucent Technologies..... -- -- -- 27%
Copper Mountain
Networks............... -- -- -- 12%
</TABLE>
- ---------------------
* Represents less than 10% of revenues.
Cash Equivalents and Short-Term Investments
The Company invests its excess cash in money market accounts and debt
instruments and considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are recorded at cost, which approximates fair value.
Investments with an original maturity at the time of purchase of over three
months are classified as short-term investments. Under the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," management
classifies investments as available-for-sale at the time of purchase and
periodically reevaluates such designation. At December 31, 1998 and 1999, all
of the Company's investments in debt securities were classified as available-
for-sale with changes in market value recorded as unrealized gains and losses
in accumulated other comprehensive income until their disposition. Realized
gains and losses and declines in value judged to be other than temporary on
available-for-sale securities are included in interest income. The cost of
securities sold is based on the specific-identification method.
F-10
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories
Inventory is stated at the lower of cost (first in, first out) or market.
The components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------ March 31,
1998 1999 2000
----- ------ -----------
(unaudited)
<S> <C> <C> <C>
Inventories:
Work-in-process................................... $ -- $ 486 672
Finished goods.................................... -- 725 535
----- ------ ------
$ -- $1,211 $1,207
===== ====== ======
</TABLE>
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Property and equipment are depreciated for financial reporting purposes using
the straight-line method over the assets' estimated useful lives of three
years. Leasehold improvements are amortized using the straight-line method over
the shorter of the useful lives of the assets or the terms of the leases.
Property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------- March 31,
1998 1999 2000
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Equipment and software........................ $ 4,882 $ 7,567 $ 8,904
Furniture and fixtures........................ 165 352 424
Leasehold improvements........................ 51 184 310
------- ------- -------
5,098 8,103 9,638
Accumulated depreciation and amortization..... (1,314) (3,572) (4,321)
------- ------- -------
Property and equipment, net................... $ 3,784 $ 4,531 $ 5,317
======= ======= =======
</TABLE>
Development Costs
In accordance with Financial Accounting Standards Board Statement No. 86,
"Accounting for Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," costs incurred in the research and development of the software
embedded in our products are expensed as incurred until technological
feasibility has been established. The Company believes its current process for
developing software is essentially completed concurrently with the
establishment of technological feasibility which is evidenced by a working
model which includes the semiconductor device and embedded software;
accordingly, development costs incurred after the establishment of
technological feasibility have not been material and, therefore, have been
expensed.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
not significant for the period from February 21, 1997 (inception) to December
31, 1997 or for the years ended December 31, 1998 and 1999.
Comprehensive Net Loss
During the year ended December 31, 1998, the Company adopted the Financial
Accounting Standard Board's Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards
for the reporting and display of comprehensive income and its
F-11
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
components in a full set of general purpose financial statements. The Company's
comprehensive net loss was the same as its net loss for the period from
February 21, 1997 (inception) to December 31, 1997 and for the year ended
December 31, 1998. Comprehensive loss for the year ended December 31, 1999
includes the net unrealized loss on available-for-sale investments.
Net Loss Per Share
Basic and diluted net loss per common share is presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS
128), for all periods presented. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 98, common stock and convertible
preferred stock issued or granted for nominal consideration prior to the
anticipated effective date of the Company's initial public offering must be
included in the calculation of basic and diluted net loss per common share as
if they had been outstanding for all periods presented.
In accordance with FAS 128, basic and diluted net loss per share have been
computed using the weighted average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Pro forma
basic and diluted net loss per share, as presented in the statements of
operations, have been computed as described above and also gives effect, under
Securities and Exchange Commission guidance, to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance.
The following table presents the computation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Period From
February 21, 1997 Years Ended Three Months
(Inception) December 31, Ended March 31,
Through ----------------- -----------------
December 31, 1997 1998 1999 1999 2000
----------------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss applicable to
common stockholders.... $(4,737) $(9,256) $(19,749) $(3,427) $(10,058)
======= ======= ======== ======= ========
Basic and diluted:
Weighted average shares
of common stock
outstanding............ 8,001 8,205 9,363 8,576 11,027
Less weighted average
shares subject to
repurchase(1).......... 1 149 521 349 1,219
------- ------- -------- ------- --------
Weighted average shares
used in computing basic
and diluted, net loss
per share applicable to
common stockholders.... 8,000 8,056 8,842 8,227 9,808
======= ======= ======== ======= ========
Basic and diluted net
loss per share
applicable to common
stockholders........... $ (0.59) $ (1.15) $ (2.23) $ (0.42) $ (1.03)
======= ======= ======== ======= ========
Pro forma:
Shares used above....... 8,842 9,808
Pro forma adjustment to
reflect weighted
average effect of the
assumed conversion of
convertible preferred
stock.................. 12,913 15,450
-------- --------
Shares used in computing
pro forma basic and
diluted, net loss per
share applicable to
common stockholders.... 21,755 25,258
======== ========
Pro forma basic and
diluted net loss per
share applicable to
common stockholders.... $ (0.91) $ (0.40)
======== ========
</TABLE>
- ---------------------
(1) The weighted average period over which repurchase options lapse is
approximately 3.9 years, 2.9 years and 2.5 years for the period from
February 21, 1997 (inception) through December 31, 1997 and for the years
ended December 31, 1998 and 1999, respectively.
F-12
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has excluded all outstanding warrants, stock options, and shares
subject to repurchase by the Company from the calculation of basic and diluted
net loss per share because these securities are antidilutive for all periods
presented. Options and warrants to purchase 1,774,000, 3,385,007, 3,417,007 and
2,858,590 shares of common stock have been excluded for the period from
February 21, 1997 (inception) through December 31, 1997, for the years ended
December 31, 1998 and 1999 and for the three month period ended March 31, 2000,
respectively.
Business Segment Information
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (FAS 131). FAS 131 superseded Statement of Financial
Accounting Standards No. 14 "Financial Reporting for Segments of a Business
Enterprise" (FAS 14). FAS 131 establishes standards for the way that public
business enterprises report on information about operating segments in annual
financial statements and interim financial reports. FAS 131 also establishes
standards for related disclosures about products and services, geographic
areas, and major customers.
Unaudited Pro Forma Stockholders' Equity
If the offering contemplated by the Company is consummated, each share of
convertible preferred stock outstanding will automatically be converted into
one share of common stock. Unaudited pro forma stockholders' equity at March
31, 2000, is adjusted for the assumed conversion of convertible preferred stock
based on the shares of convertible preferred stock outstanding at March 31,
2000 disclosed on the balance sheet, and the restatement of our certificate of
incorporation to reflect 100,000,000 authorized shares of common stock and
10,000,000 authorized shares of undesignated preferred stock.
Unaudited basic and diluted pro forma net loss per share, as presented in
the consolidated statements of operations, has been computed using the weighted
average number of common shares outstanding, adjusted to include the pro forma
effects of the conversion of the preferred stock to common stock as if such
conversion had occurred on January 1, 1999 for the year ended December 31,
1999, or at the date of original issuance, if later.
Stock-Based Compensation
As described in Note 7, the Company has elected to account for its employee
stock plan in accordance with Accounting Principles Board opinion No. 25,
"Accounting For Stock Issued to Employees" (APB opinion No. 25 ), and to adopt
the disclosure-only provisions as required under statement of Financial
Accounting Standards No. 123, "Accounting For Stock-Based Compensation" (FAS
123).
The Company accounts for stock issued to non-employees in accordance with
the provisions of FAS 123 and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services." Direct grants of
shares of common stock are made to certain advisors and consultants to the
Company for past services with no vesting or future performance obligations.
The fair value of such grants is immediately charged to expense in accordance
with EITF 96-18.
New Accounting Pronouncements
In March 1998, the AICPA issued Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP
98-1). SOP 98-1 requires entities to capitalize certain costs related to
internal-use software once certain criteria have been met. SOP 98-1 is
effective for years beginning after December 15, 1998. The Company adopted SOP
98-1 for the fiscal year ending December 31, 1999. The adoption of SOP 98-1 did
not have a material impact on the Company's financial position or results of
operations.
F-13
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In April 1998, the AICPA issued Statement of Position No. 98-5, "Reporting
on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires that all
start-up costs related to new operations must be expensed as incurred. In
addition, all start-up costs that were capitalized in the past must be written
off when SOP 98-5 is adopted. The Company implemented SOP 98-5 on January 1,
1999. The adoption of SOP 98-5 did not have a material impact on its financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 establishes accounting methods for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. The Company will be required
to implement FAS 133 for the fiscal year ending December 31, 2001. Because the
Company does not currently hold any derivative instruments and does not engage
in hedging activities, the Company does not expect that the adoption of FAS 133
will have a material impact on its financial position or results of operations.
Reclassifications
Certain prior year balances have been reclassified to conform to current
year presentation.
F-14
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Cash Equivalents and Short-Term Investments
All debt securities held by the Company as of December 31, 1998 and 1999 and
as of March 31, 2000, mature within one year. The estimated fair market values
of cash equivalents and short-term investments are based on quoted market
prices. Cash equivalents and short-term investments as of December 31, 1998 and
1999 and March 31, 2000 (unaudited) were as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gain Loss Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Cash equivalents:
Money market funds................ $ 1,312 $ -- $ -- $ 1,312
Corporate debt securities......... 500 -- -- 500
------- ----- ----- -------
1,812 -- -- 1,812
------- ----- ----- -------
Short-term investments:
Corporate debt securities......... 2,910 -- -- 2,910
Obligations of U.S. government and
affiliated agencies.............. 1,000 -- -- 1,000
Auction rate preferred stock and
other............................ 1,200 -- -- 1,200
------- ----- ----- -------
5,110 -- -- 5,110
------- ----- ----- -------
Total cash equivalents and
short-term investments......... $ 6,922 $ -- $ -- $ 6,922
======= ===== ===== =======
<CAPTION>
December 31, 1999
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gain Loss Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Cash equivalents:
Money market funds................ $ 970 $ -- $ -- $ 970
------- ----- ----- -------
Short-term investments:
Commercial paper.................. 7,945 -- (4) 7,941
Corporate debt securities......... 10,997 -- (11) 10,986
Obligations of U.S. government and
affiliated agencies.............. 5,994 -- (10) 5,984
Auction rate preferred stock and
other............................ 200 -- -- 200
------- ----- ----- -------
25,136 -- (25) 25,111
------- ----- ----- -------
Total cash equivalents and
short-term investments......... $26,106 $ -- $ (25) $26,081
======= ===== ===== =======
</TABLE>
<TABLE>
<CAPTION>
March 31, 2000 (unaudited)
-----------------------------------------
Estimated
Gross Gross Fair
Amortized Unrealized Unrealized Market
Cost Gain Loss Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Cash equivalents
Money market funds.................. $ 8,217 $ -- $ -- $ 8,217
------- ---- ---- -------
Short-term investments
Corporate debt securities........... 6,010 -- (11) 5,999
Obligations of US government and
affiliated agencies................ 4,000 -- (4) 3,996
Auction rate preferred stock and
other.............................. 1,700 -- -- 1,700
------- ---- ---- -------
11,710 -- (15) 11,695
------- ---- ---- -------
Total cash equivalents and short-
term investments................. $19,927 $ -- $(15) $19,912
======= ==== ==== =======
</TABLE>
F-15
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Realized gains and losses are included in interest income and interest
expense, respectively, and were not significant for the period from February
21, 1997 (inception) to December 31, 1997 or for the years ended December 31,
1998 and 1999 or for the three month period ending March 31, 2000 (unaudited).
3. Working Capital Line of Credit
The Company maintains a revolving credit agreement ("Credit Agreement") with
Mitsubishi International. The Credit Agreement is used to provide 90 day
extended credit terms to finance wafer inventory purchases. Borrowings of up to
$5,000,000 under the Credit Agreement are permitted. The interest rate under
the Agreement was based on the lender's internal interest rate, which was
required to be at least 1.00% below the prime rate on the date of invoice
(7.25% at December 31, 1999), generally thirty days after receipt of the
wafers. The Company also pays a commission of 2.00% on all purchases. The
Credit Agreement expires on January 31, 2001, subject to automatic extensions
thereafter from year to year unless either party gives a termination notice.
Under the terms of the Credit Agreement, Mitsubishi International maintains a
security interest in all inventory, cash and investments, and accounts and
notes receivable of the Company. The Credit Agreement contains standard events
of default which if triggered can permit Mitsubishi International to declare
all amounts outstanding under the Credit Agreement immediately due and payable.
Such events of default include failure to comply with the terms of the Credit
Agreement, bankruptcy and default and acceleration of any other indebtedness of
the Company. As of December 31, 1999 and March 31, 2000, $2,044,000 and
$2,861,000 (unaudited), respectively, was outstanding under the agreement.
4. Deferred Revenue
During the year ended December 31, 1998, the Company entered into a
technology development agreement with a strategic partner that called for the
Company to receive cash payments from the strategic partner as the Company
reached certain milestones as defined under the technology development
agreement. At December 31, 1998 the Company recorded $75,000 of deferred
revenue related to milestones under the agreement that were pending acceptance
by the customer. Final acceptance of all milestones was received in 1999.
At December 31, 1999, the Company recorded $122,000 in deferred revenue
which related to advance payments for unfilled orders. At March 31, 2000, the
Company recorded $125,000 (unaudited) in deferred revenue which related
primarily to unearned technology development fees.
5. Long-Term Debt Obligations
In April 1998, the Company entered into an agreement with a bank and a
financial institution, which allows the Company to make multiple draws up to
$1,000,000 for the purchase of equipment. The facility bears interest at the
U.S. Treasury note yield plus 2.50% per annum (7.30% at December 31, 1999).
Draws under the facility are payable via principal and interest payments made
ratably over a forty-two month period from the initial draw date. The Company
had approximately $962,000 and $706,000 outstanding against the equipment
facility as of December 31, 1998 and 1999, respectively, and no remaining
amount was available as the aggregate draw under the facility had reached
$1,000,000 during the year ended 1999. At the end of the equipment facility's
term, the Company is obligated to make an additional payment of total facility
draws multiplied by 15% ($150,000 as of December 31, 1998 and 1999). The
Company is recording the additional payment as interest expense over the life
of the related long-term obligation. The Company has accrued approximately
$4,000 and $46,000 relating to this additional payment as of December 31, 1998
and 1999, respectively.
F-16
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In conjunction with the equipment facility described above, the Company
issued a warrant to the bank and to the financial institution to purchase 1,800
and 9,450 shares, respectively, of the Company's Series B3 convertible
preferred stock at an exercise price of $4.00 per share. The warrants are
immediately exercisable and will expire at the later of 10 years after the date
of grant or five years after the closing of the Company's initial public
offering. The fair value is not material for reporting purposes.
In September 1997, the Company negotiated a $1,000,000 term loan with a bank
to finance equipment purchases. The term loan bears interest at the bank's
prime rate plus 0.25% per annum (8.75% at December 31, 1999). The note is
payable via monthly interest payments until April 1998 at which time the
Company began making thirty-six equal monthly payments of principal and
interest. As of December 31, 1998 and 1999, the Company had approximately
$626,000 and $347,000 outstanding against the term loan, respectively.
In conjunction with the term loan described above, the Company issued a
warrant for the purchase of 5,000 shares of the Company's Series B3 convertible
preferred stock at an exercise price of $4.00 per share. The warrant is
immediately exercisable and will expire after September 25, 2002. The fair
value is not material for reporting purposes.
Outstanding borrowings under the long-term debt obligations are secured by
all of the Company's assets. The long-term debt obligations contain affirmative
and negative covenants and will, among other things, limit the Company's
ability to incur additional debt, pay cash dividends, or purchase or sell
certain assets. The obligations also require the Company to restrict certain
acquisitions, mergers, consolidations, or similar transactions.
Maturities under the Company's long-term debt obligations at December 31,
1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000.................................................................. $550
2001.................................................................. $409
2002.................................................................. $140
</TABLE>
6. Commitments
The Company leases its primary facility under an operating lease that
expires in April 2004. Additionally, the Company leases certain software under
an operating lease that expires in September 2001. Rental expense was
approximately $57,000 for the period from February 21, 1997 (inception) to
December 31, 1997 and $341,000 and $642,000 for the years ended December 31,
1998 and 1999.
The Company leases certain equipment under a non-cancelable capital lease
agreement. Equipment under the agreement that was included in property and
equipment was approximately $644,000 and $636,000 at December 31, 1998 and
1999, respectively. The related accumulated amortization was approximately
$227,000 and $440,000 at December 31, 1998 and 1999, respectively. Amortization
expense related to assets under capital lease is included with depreciation
expense. In addition, the related equipment secures the capital lease, and the
Company is required to maintain liability and property damage insurance.
In July 1997, the Company issued a warrant in conjunction with the capital
lease agreement mentioned above. The warrant is immediately exercisable and
allows the holder to purchase 10,500 shares of the Company's Series B3
convertible preferred stock at an exercise price of $4.00 per share. The
warrant expires after June 30, 2004. The fair value assigned to the warrant is
not material for financial reporting purposes.
F-17
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under the Company's operating leases and
capital lease at December 31, 1999 are approximately as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Lease Lease
--------- -------
<S> <C> <C>
2000....................................................... $1,079 $165
2001....................................................... 1,236 --
2002....................................................... 960 --
2003....................................................... 1,008 --
2004....................................................... 437 --
------ ----
Total minimum payments..................................... $4,720 165
======
Less amount representing interest.......................... (5)
----
Total principal balance of capital lease obligation........ $160
====
</TABLE>
The Company does not own or operate a fabrication facility and substantially
all of its wafer requirements are currently supplied by foundries located in
Asia. The Company's purchase obligations to these foundries are based on wafer
supply agreements or noncancelable purchase orders. As of December 31, 1999,
the Company's noncancelable purchase obligation is $706,000.
7. Stockholders' Equity
Convertible Preferred Stock
Series A, B1, B2, B3, and C convertible preferred stockholders generally
have the same voting rights as common stockholders and will generally vote with
common stockholders as a single class except when electing members of the
Company's Board of Directors.
When electing directors, the holders of shares of Series B convertible
preferred stock, voting as a class, are entitled to elect two directors; the
holders of common stock, voting as a class, shall be entitled to elect
two directors; and the holders of all classes of capital stock, voting as a
single class (on an as-converted to common stock basis), shall be entitled to
elect any remaining directors.
In the event of any voluntary or involuntary liquidation of the Company,
Series A, B1, B2, B3, and C stockholders are entitled to a per share
liquidation preference of $0.50, $2.00, $2.50, $4.00, and $5.00, respectively,
plus accrued dividends, if any.
The holders of Series A, B1, B2, B3, and C convertible preferred shares are
entitled to noncumulative cash dividends of $0.04, $0.16, $0.20, $0.32, and
$0.40 per share, respectively, when and if declared by the Board of Directors.
No cash dividends have been declared through December 31, 1999. The following
is a summary of outstanding convertible preferred shares at December 31, 1999
(excludes outstanding Series B3 convertible preferred stock warrants):
<TABLE>
<CAPTION>
Convertible Preferred Shares
-----------------------------
Authorized Outstanding
-------------- --------------
<S> <C> <C>
Series A....................................... 1,680,000 1,680,000
Series B1...................................... 2,000,000 2,000,000
Series B2...................................... 800,000 800,000
Series B3...................................... 3,500,000 3,359,482
Series C....................................... 7,650,000 7,610,754
-------------- --------------
15,630,000 15,450,236
============== ==============
</TABLE>
F-18
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Each convertible preferred share is convertible at the option of the holder
into one share of common stock, subject to adjustments for future dilution. The
convertible preferred shares automatically convert into common stock at the
then applicable conversion rate upon the earlier of (a) the underwritten public
offering of the Company's common stock at an offering price of at least $8.00
per share of common stock with gross proceeds not less than $25,000,000 or (b)
the date on which the Company obtains the consent of at least two-thirds of the
then outstanding shares of Series A, B1, B2, B3, and C stockholders. The
Company has fully reserved shares of common stock for issuance upon the
conversion of Series A, B1, B2, B3, and C convertible preferred stock.
Convertible Preferred Stock Rights
In connection with Series B3 convertible preferred stock financings in July
and September 1997, the Company issued rights to certain stockholders which
provided for the purchase of 2,000,000 shares of Series B1 convertible
preferred stock at $2.00 per share and 800,000 shares of Series B2 convertible
preferred stock at $2.50 per share. The rights were immediately exercisable and
expired approximately one year after their initial grant. The Company recorded
noncash deemed dividends of $2,800,000 for the period from February 21, 1997
(inception) to December 31, 1997, representing the fair value of the rights
issued.
Common Stock Reserved
Common stock reserved is as follows at December 31, 1999:
<TABLE>
<S> <C>
Common stock options............................................ 3,390,257
Series B3 convertible preferred stock warrants.................. 26,750
Convertible preferred stock..................................... 15,450,236
----------
18,867,243
==========
</TABLE>
In March 1997, the Board of Directors approved a stock option plan that
authorized the grant of options to purchase up to 2,000,000 shares of the
Company's common stock. During the years ended December 31, 1998 and 1999
respectively, the Company's Board of Directors authorized an additional
3,430,257 shares and 1,500,000 shares of the Company's common stock for the
stock option plan. The plan is administered by the Board of Directors and
provides for incentive stock options or nonqualified stock options to be issued
to employees, directors, and consultants of the Company. Prices for incentive
stock options may not be less than the fair value of the common stock at the
date of grant. Prices for nonqualified stock options may not be less than 85%
of the fair value of the common stock at the date of grant. Options are
immediately exercisable and generally vest over a period of four years from the
date of grant. Any unvested stock issued is subject to repurchase by the
Company at the original issuance price upon termination of the option holder's
employment. Unexercised options expire ten years after the date of grant.
Deferred Compensation
During the years ended December 31, 1998 and 1999, the Company recorded
deferred compensation of approximately $515,000 and $19,701,000, respectively.
This deferred compensation represents the difference between the grant price
and the deemed fair value for financial statement reporting purposes of the
Company's common stock options granted during these periods. Deferred
compensation expense is being amortized using the graded vesting method, in
accordance with FAS 123 and FAS Interpretation No. 28, over the vesting period
of each respective option, generally four years. Under the graded vesting
method, each option grant is separated into portions based on their vesting
terms which results in acceleration of amortization expense for the overall
award. The accelerated amortization pattern results in expensing approximately
59% of the total award in year 1, 25% in year 2, 12% in year 3 and 4% in year
4.
F-19
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred compensation expense was allocated among the associated expense
categories as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended Three Months
December 31, Ended
------------ March 31
1998 1999 2000,
----- ------ ------------
(unaudited)
<S> <C> <C> <C>
Cost of sales......................................... $ -- $ 134 $ 218
Research and development.............................. 29 1,749 1,941
Sales and marketing................................... 5 821 1,024
General and administrative............................ 35 1,400 1,558
----- ------ ------
$ 69 $4,104 $4,741
===== ====== ======
</TABLE>
The following is a summary of additional information with respect to the
stock option plan:
<TABLE>
<CAPTION>
Options Outstanding and
Exercisable
----------------------------
Options Number Weighted
Available of Average Exercise
for Grant Shares Price
---------- ---------- ----------------
<S> <C> <C> <C>
Options authorized................... 2,000,0000 -- $ --
Options granted...................... (1,803,500) 1,803,500 $0.25
Options exercised.................... -- (45,000) $0.40
---------- ---------- -----
Balance at December 31, 1997......... 196,500 1,758,500 $0.25
Options authorized................... 3,430,257 -- $ --
Options granted...................... (2,166,757) 2,166,757 $0.40
Options exercised.................... -- (425,750) $0.19
Options canceled..................... 141,250 (141,250) $0.35
---------- ---------- -----
Balance at December 31, 1998......... 1,601,250 3,358,257 $0.35
Options authorized................... 1,500,000 -- $ --
Options granted...................... (2,106,600) 2,106,600 $1.80
Options exercised.................... -- (1,719,348) $0.67
Options available due to repurchase
of unvested shares.................. 3,750 -- $0.40
Options canceled..................... 355,252 (355,252) $0.30
---------- ---------- -----
Balance at December 31, 1999......... 1,353,652 3,390,257 $1.09
Options granted (unaudited).......... (1,381,500) 1,381,500 $5.62
Options exercised (unaudited)........ -- (1,670,453) $0.90
Options available due to repurchase
of unvested shares (unaudited)...... 2,683 -- $0.40
Options canceled (unaudited)......... 269,464 (269,464) $0.79
---------- ---------- -----
Balance at March 31, 2000
(unaudited)......................... 244,299 2,831,840 $3.44
========== ========== =====
</TABLE>
F-20
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, the following table summarizes information about stock options
that were outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
-----------------------------------------
Number Weighted
Range of of Average Weighted Average
Exercise Prices Shares Exercise Price Contractual Life
--------------- --------- -------------- ----------------
<S> <C> <C> <C>
$0.05-$0.60........................ 1,990,407 $0.36 8.22
$1.00-$1.60........................ 639,250 $1.49 9.48
$1.80-$3.00........................ 760,600 $2.66 9.78
---------
3,390,257 $1.09 8.81
=========
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and
related interpretations in accounting for its employee stock options because,
as discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (FAS 123), requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB Opinion
No. 25, when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The option valuation models used to fair value options under FAS 123 were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected life of the option. Because the Company's employee stock options have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Pro forma information regarding net loss is required by FAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options granted during the period from February 21, 1997
(inception) to December 31, 1997 and the years ended December 31, 1998 and 1999
under the fair value method of FAS 123. The fair value for these options was
estimated at the date of grant using the minimum value method with the
following weighted average assumptions: weighted average risk-free interest
rates of 6.02%, 5.14%, and 5.50% for the period from February 21, 1997
(inception) to December 31, 1997 and the years ended December 31, 1998 and
1999, respectively; no dividend yields or volatility factors of the expected
market price of the Company's common stock; a weighted average expected life of
the option of five years for the period from February 21, 1997 (inception) to
December 31, 1997 and for the year ended December 31, 1998; and a weighted
average expected life of the option of four years for the year ended December
31, 1999.
F-21
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of FAS 123 pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. Had
compensation expense for the Company's stock option plan been determined on the
fair value at the grant dates for awards under the plan consistent with the
method of FAS 123, the Company's net loss would have been increased to the
following approximate FAS 123 pro forma amounts:
<TABLE>
<CAPTION>
Period From Years Ended
February 21, 1997 December 31,
(Inception) to -----------------
January 31, 1997 1998 1999
----------------- ------- --------
<S> <C> <C> <C>
FAS 123 Pro forma net loss applicable to
common stockholders...................... $(4,747) $(9,415) $(20,075)
FAS 123 Pro forma basic and diluted net
loss per share applicable to
common shareholders...................... $ (0.59) $ (1.17) $ (2.27)
</TABLE>
The options' weighted average grant date fair value, which is the value
assigned to the options under FAS 123, was approximately $0.05 for the period
from February 21, 1997 (inception) to December 31, 1997 and $0.24 and $0.36 for
the years ended December 31, 1998 and 1999, respectively.
The pro forma impact of options on the net losses for the period from
February 21, 1997 (inception) to December 31, 1997 and the years ended December
31, 1998 and 1999 is not representative of the effects on net income (loss) for
future years, as future years will include the effects of options vesting as
well as the impact of multiple years of stock option grants. The full effect of
FAS 123 will not be fully reflected until fiscal 2001.
Stockholders' Notes Receivable
In November 1999, the Company issued 215,000 shares of common stock in
connection with the exercise of an employee stock option at an exercise price
of $2.00 per share in return for a full recourse note receivable for $430,000.
The note bears interest at 6.00% per annum and is due October 2004. Under the
terms of the employee's employment agreement, payment may be required earlier
in connection with certain events including an initial public offering by the
Company or termination of the employee.
8. Income Taxes
Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for the period from February
21, 1997 (inception) to December 31, 1997 and for the years ended December 31,
1998 and 1999.
The difference between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate of 34% to income
before taxes is explained as follows:
<TABLE>
<CAPTION>
Inception
to 1997 1998 1999
--------- ------ ------
<S> <C> <C> <C>
Tax (benefit) at federal statutory rate............. (659) (3,147) (6,715)
Loss for which no tax benefit is currently
recognizable....................................... 659 3,147 6,715
---- ------ ------
Total tax provision............................... -0- -0- -0-
==== ====== ======
</TABLE>
As of December 31, 1999, the Company has $23,000,000 of net operating loss
carryforwards for federal and state purposes. The Company also has federal and
state research and development tax credit carryforwards of approximately
$900,000 and $600,000, respectively. The net operating losses and credit carry
forwards will expire at various dates beginning in the years 2005 through 2019,
if not utilized.
F-22
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Utilization of the net operating losses may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986, as amended, and similar state provisions. The
annual limitation may result in the expiration of net operating losses and tax
credit carry forwards before full utilization.
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred taxes consist of the following (in thousands):
<TABLE>
<CAPTION>
Period From
February 21,
1997
(Inception)
Through Years Ended
December 31, December 31,
------------ -----------------
1997 1998 1999
------------ ------- --------
<S> <C> <C> <C>
Deferred tax liabilities:
Other......................................... $ (217) $ (182) $ (197)
Deferred tax assets:
Net operating losses.......................... 950 4,310 9,100
Tax credit carryforwards...................... 240 950 1,296
Reserves and accruals......................... 37 142 2,173
------- ------- --------
Total deferred tax assets...................... 1,227 5,402 12,569
Valuation allowance........................... (1,010) (5,220) (12,372)
------- ------- --------
Net deferred tax assets........................ 217 182 197
Net deferred taxes............................. $ -- $ -- $ --
======= ======= ========
</TABLE>
Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Based upon the weight of available evidence, which includes the
Company's historical operating performance and the reported cumulative net
losses to date, the Company has provided a full valuation allowance against its
deferred tax assets.
The valuation allowance increased by approximately $1,010,000, $4,210,000
and $7,152,000 for the period from February 21, 1997 (inception) through
December 31, 1997 and for the years ended December 31, 1998 and 1999,
respectively. The increase in the valuation allowance for all periods presented
is due to the requirement to provide a full valuation allowance against the
increasing deferred tax assets.
9. Business Segment Information
The Company operates in one business segment, the sale of products for the
DSL market, which it sells primarily to original equipment manufacturers and
companies in the communications industries.
The Chief Executive Officer has been identified as the Chief Operating
Decision Maker (CODM) because he has final authority over resource allocation
decisions and performance assessment. The CODM does not receive discrete
financial information about the individual components.
F-23
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's customers, who account for more than 10% of revenues in each
respective period, are as follows:
<TABLE>
<CAPTION>
Period From
February 21,
1997 Three
(Inception) Years Ended Months
Through December 31, Ended
December 31, --------------- March 31,
1997 1998 1999 2000
------------ ------ ------ -----------
(unaudited)
<S> <C> <C> <C> <C>
Mitsubishi Electric............... 50% 60% * *
NEC............................... -- 10% 21% *
Sumitomo Electric................. 50% 13% 34% 39%
Sungmi Telecom Electronics........ -- 15% * *
Lucent Technologies............... -- -- -- 27%
Copper Mountain................... -- -- * 12%
</TABLE>
* Represents less than 10% of revenues.
Revenues by geographic region were as follows (in thousands):
<TABLE>
<CAPTION>
Period From
February 21, Three
1997 Years Ended Months
(Inception) to December 31, Ended
December 31, ------------- March 31,
1997 1998 1999 2000
-------------- ------------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
United States....................... $ -- $ -- $ 686 $2,164
Asia................................ 300 752 3,055 2,420
Other............................... -- -- 3 139
---- ----- ------- ------
Total............................... $300 $ 752 $ 3,744 $4,723
==== ===== ======= ======
</TABLE>
10. 401(k) Profit Sharing Plan and Trust
The Company has adopted a 401(k) Profit Sharing Plan and Trust that allows
eligible employees to make contributions subject to certain limitations. The
Company may make discretionary contributions based on profitability as
determined by the Board of Directors. There was no amount contributed by the
Company to the plan and for the period from February 21, 1997 (inception) to
December 31, 1997 and the years ended December 31, 1998 and 1999.
11. Related Party Transactions
During the period from February 21, 1997 (inception) to December 31, 1997,
the Company recognized revenue of $300,000 in connection with two separate
technology development agreements with two separate Series B3 convertible
preferred stockholders. There were no amounts due or due from the Series B3
convertible preferred shareholders at December 31, 1997. During the year ended
December 31, 1998 and 1999, the Series B3 convertible preferred stockholders'
ownership interests were diluted as a result of subsequent Company financings
and are no longer considered related parties.
F-24
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Subsequent Events
Initial Public Offering
In February 2000, the Board of Directors approved the filing of a
Registration Statement with the Securities and Exchange Commission permitting
the Company to sell common stock to the public. Upon completion of the initial
public offering, the Company's Certificate of Incorporation will be amended to
authorize 100,000,000 shares of common stock and 10,000,000 shares of preferred
stock.
2000 Employee Stock Purchase Plan
In February 2000, the Board of Directors approved the 2000 Employee Stock
Purchase Plan (the Purchase Plan). A total of 500,000 shares of common stock
has been reserved for issuance under the Purchase Plan. In addition, the
Purchase Plan provides for automatic annual increases on the first day of each
of the Company's fiscal years beginning on January 1, 2001 equal to the lesser
of 400,000 shares or 1% of the Company's outstanding common stock on the date
of the annual increase, or a lesser number of shares determined by the Board of
Directors. The plan was approved by the stockholders in April 2000.
Officer Resignation
The Company's former Chief Executive Officer resigned from his position as
Chief Executive Officer in January 2000. In connection with his resignation,
the Company entered into an Agreement and Mutual Release on February 2, 2000.
Under the terms of the agreement, his employment will terminate on March 31,
2000. As of such termination date, approximately 211,000 options with an
exercise price of $0.40 per share will accelerate and be fully vested in
accordance with his original employment agreement. Additionally, the Company
will pay severance totalling $225,000.
1997 Stock Plan
In April 2000, the Board of Directors and stockholders approved an increase
in the number of shares reserved for issuance under the 1997 Stock Plan by
5,569,743 shares. In addition, the Board of Directors and stockholders approved
an automatic increase in the number of shares reserved under the Plan on the
first day of the Company's fiscal year beginning on January 1, 2001 equal to 6%
of the Company's outstanding common stock on the date of the annual increase.
F-25
<PAGE>
[Centillium logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses other than
underwriting discounts and commissions, payable by Centillium Communications,
Inc. in connection with the sale of common stock being registered. All amounts
are estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 29,146
NASD filing fee.................................................. 11,540
Nasdaq National Market listing fee............................... 100,000
Printing and engraving costs..................................... 200,000
Legal fees and expenses.......................................... 400,000
Accounting fees and expenses..................................... 400,000
Blue Sky fees and expenses....................................... 3,000
Transfer Agent and Registrar fees................................ 20,000
Miscellaneous expenses........................................... 86,314
----------
Total.......................................................... $1,250,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article 13 of our Amended and Restated Certificate of Incorporation provides
for the indemnification of directors to the fullest extent permissible under
Delaware law.
Article 12 of our Amended and Restated Bylaws provides for the
indemnification of officers, directors and third parties acting on behalf of
the Registrant if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to our best interest, and, with respect to
any criminal action or proceeding, the indemnified party had no reason to
believe his or her conduct was unlawful.
We have entered into indemnification agreements with its directors and
executive officers, in addition to indemnification provided for in our Amended
and Restated Bylaws, and intends to enter into indemnification agreements with
any new directors and executive officers in the future.
Item 15. Recent Sales of Unregistered Securities
During the last three years, we have sold unregistered securities to a
limited number of persons as described below:
. In April 1997, we sold in the aggregate 1,680,000 shares of unregistered
Series A Preferred Stock at a price per share of $0.50 to certain
investors for aggregate cash consideration of $840,000.
. In September 1997 and June 1998, we sold in the aggregate 2,000,000
shares of unregistered Series B1 Preferred Stock at a price per share of
$2.00 to certain investors for aggregate cash consideration of
$4,000,000.
. In July 1997, we sold in the aggregate 800,000 shares of unregistered
Series B2 Preferred Stock at a price per share of $2.50 to certain
investors for aggregate cash consideration of $2,000,000.
. In July 1997, September 1997, October 1997 and April 1998, we sold in
the aggregate 3,359,482 shares of unregistered Series B3 Preferred Stock
at a price per share of $4.00 to certain investors for aggregate cash
consideration of $13,437,928.
II-1
<PAGE>
. In April 1999, we sold in the aggregate 7,610,754 shares of unregistered
Series C Preferred Stock at a price per share of $5.00 to certain
investors for aggregate cash consideration of $38,053,770.
. In May 1997 we issued a warrant to Lighthouse Capital Partners II, L.P.
for 10,500 shares of Series B3 preferred stock at an exercise price of
$4.00 per share;
. In September 1997 we issued a warrant to Silicon Valley Bank for 5,000
shares of Series B3 preferred stock at an exercise price of $4.00 per
share;
. In April 1998 we issued a warrant to MMC/GATX Partnership No. 1 for
9,450 shares of Series B3 preferred stock at an exercise price of $4.00
per share; and
. In April 1998 we issued a warrant to Silicon Valley Bank for 1,800
shares of Series B3 preferred stock at an exercise price of $4.00 per
share.
We relied upon Section 4(2) of the Securities Act in each of the private
placement transactions listed above. We determined, based on information
received from the investors, including questionnaires and representations
contained in the purchase agreements, that each investor was either an
accredited investor or had such knowledge and experience in financial matters
such that he or she was capable of evaluating the merits and risks of the
investments. All recipients either received adequate information about
Centillium or had access, through employment or other relationships, to such
information. The recipients of securities in each transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and other instruments issued in such
transactions.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1** Underwriting Agreement
3.1(a)* Certificate of Incorporation of the Registrant, as currently in
effect
3.1(b)* Amended and Restated Certificate of Incorporation of the Registrant
to be filed upon completion of the offering
4.1** Specimen certificate of common stock
4.2(a)* Bylaws of the Registrant as currently in effect
4.2(b) Bylaws of the Registrant as in effect upon completion of the offering
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1 Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2 1997 Stock Plan
10.3* 2000 Employee Stock Purchase Plan
10.4* Second Amended and Restated Investors' Rights Agreement dated as of
April 30, 1999 between the Registrant and the stockholders named
therein
10.5* Lease, dated August 16, 1999, between the Registrant and Renco
Investment Company
10.6 Trade Financing Agreement, dated February 1, 1999, between the
Registrant and Mitsubishi International Corporation
10.7* Cooperation Agreement, dated March 2, 1998, between the Registrant
and Sungmi Telecom Electronics Co., Ltd.
10.8* Cooperation Agreement, dated November 30, 1997, between the
Registrant and Askey Computer Corporation
10.9* Cooperation Agreement, dated October 15, 1997, between the Registrant
and Sumitomo Electric Industries, Ltd.
10.10* Addendum to Cooperation Agreement, dated April 20, 1999, between the
Registrant and Sumitomo Electric Industries, Ltd.
10.11* Cooperation Agreement, dated April 3, 1998, between the Registrant
and NEC Corporation
10.12* Addendum to Cooperation Agreement, dated February 23, 1999, between
the Registrant and NEC Corporation
10.13* Co-Development Agreement, dated October 15, 1997, between the
Registrant and Mitsubishi Electric Corporation
10.14* Addendum to Co-Development Agreement, dated June 21, 1999, between
the Registrant and Mitsubishi Electric Corporation
10.15* Cooperation Agreement, dated August 25, 1997, between the Registrant
and Mitsubishi Electric Corporation
10.16* Wafer Supply Agreement, dated April 22, 1999, between the Registrant
and Mitsubishi Electronics America
10.17* Agreement and Mutual Release dated February 2, 2000 between the
Registrant and A. Travis White
10.18* Offer letter between the Registrant and John W. Luhtala dated
November 30, 1999
10.19* Offer letter between the Registrant and Jon S. Sherburne dated August
17, 1999
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10.20* Technical Services Consulting Agreement, dated March 19, 1998, between
Registrant and Mitsubishi Corporation
10.21 Foundry Agreement, dated March 7, 2000, between Registrant and United
Microelectronics Corporation
10.22 Assembly and Test Services Agreement, dated February 28, 2000, between
Registrant and ST Assembly and Test Services, Ltd.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2** Consent of Counsel (see Exhibit 5.1)
24.1* Power of Attorney (see page II-5)
27.1* Financial Data Schedules
</TABLE>
- ---------------------
* Previously filed.
** To be filed by amendment.
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
Schedule Page
-------- ----
<C> <S>
Schedule II--Valuation and Qualifying Accounts
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment to the Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fremont, State of California, on the 1st day of
May, 2000.
CENTILLIUM COMMUNICATIONS, INC.
*
By: _________________________________
Faraj Aalaei, Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<C> <S> <C>
* Chief Executive Officer May 1, 2000
______________________________________ and Director (Principal
Faraj Aalaei Executive Officer)
/s/ John W. Luhtala Vice President and Chief May 1, 2000
______________________________________ Financial Officer
John W. Luhtala (Principal Financial and
Accounting Officer)
* President and Director May 1, 2000
______________________________________
Shahin Hedayat
* Director May 1, 2000
______________________________________
Kamran Elahian
* Director May 1, 2000
______________________________________
Irwin Federman
* Director May 1, 2000
______________________________________
Robert C. Hawk
* Director May 1, 2000
______________________________________
Lip-Bu Tan
</TABLE>
By: /s/ John W. Luhtala
-------------------------------
John W. Luhtala Attorney-in-fact
II-5
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Deductions Balance at
of Period Expenses Write-Offs End of Period
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for Doubtful
Accounts
Period from February 21, 1997
(Inception) to
December 31, 1997............ $ -- $ -- $ -- $ --
Year ended December 31, 1998.. $ -- $ -- $ -- $ --
Year ended December 31, 1999.. $ -- $ 150(1) $ -- $ 150
</TABLE>
- ---------------------
(1) The 1999 balance represents a reserve for unidentified bad debt exposures.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1** Underwriting Agreement
3.1(a)* Certificate of Incorporation of the Registrant, as currently in
effect
3.1(b)* Amended and Restated Certificate of Incorporation of the Registrant
to be filed upon completion of the offering
4.1** Specimen certificate of common stock
4.2(a)* Bylaws of the Registrant as currently in effect
4.2(b) Bylaws of the Registrant as in effect upon completion of the offering
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1 Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2 1997 Stock Plan
10.3* 2000 Employee Stock Purchase Plan
10.4* Second Amended and Restated Investors' Rights Agreement dated as of
April 30, 1999 between the Registrant and the stockholders named
therein
10.5* Lease, dated August 16, 1999, between the Registrant and Renco
Investment Company
10.6 Trade Financing Agreement, dated February 1, 1999, between the
Registrant and Mitsubishi International Corporation
10.7* Cooperation Agreement, dated March 2, 1998, between the Registrant
and Sungmi Telecom Electronics Co., Ltd.
10.8* Cooperation Agreement, dated November 30, 1997, between the
Registrant and Askey Computer Corporation
10.9* Cooperation Agreement, dated October 15, 1997, between the Registrant
and Sumitomo Electric Industries, Ltd.
10.10* Addendum to Cooperation Agreement, dated April 20, 1999, between the
Registrant and Sumitomo Electric Industries, Ltd.
10.11* Cooperation Agreement, dated April 3, 1998, between the Registrant
and NEC Corporation
10.12* Addendum to Cooperation Agreement, dated February 23, 1999, between
the Registrant and NEC Corporation
10.13* Co-Development Agreement, dated October 15, 1997, between the
Registrant and Mitsubishi Electric Corporation
10.14* Addendum to Co-Development Agreement, dated June 21, 1999, between
the Registrant and Mitsubishi Electric Corporation
10.15* Cooperation Agreement, dated August 25, 1997, between the Registrant
and Mitsubishi Electric Corporation
10.16* Wafer Supply Agreement, dated April 22, 1999, between the Registrant
and Mitsubishi Electronics America
10.17* Agreement and Mutual Release dated February 2, 2000 between the
Registrant and A. Travis White
10.18* Offer letter between the Registrant and John W. Luhtala dated
November 30, 1999
10.19* Offer letter between the Registrant and Jon S. Sherburne dated August
17, 1999
10.20* Technical Services Consulting Agreement, dated March 19, 1998,
between Registrant and Mitsubishi Corporation
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10.21 Foundry Agreement, dated March 7, 2000, between Registrant and United
Microelectronics Corporation
10.22 Assembly and Test Services Agreement, dated February 28, 2000, between
Registrant and ST Assembly and Test Services, Ltd.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2** Consent of Counsel (see Exhibit 5.1)
24.1* Power of Attorney (see page II-5)
27.1* Financial Data Schedules
</TABLE>
- ---------------------
* Previously filed.
** To be filed by amendment.
<PAGE>
EXHIBIT 4.2(b)
BYLAWS
OF
CENTILLIUM COMMUNICATIONS, INC
(a Delaware Corporation)
<PAGE>
BYLAWS OF
CENTILLIUM COMMUNICATIONS, INC.
(a Delaware Corporation)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES.................................................... 1
1.1 REGISTERED OFFICE...................................................... 1
1.2 OTHER OFFICES.......................................................... 1
ARTICLE II - MEETINGS OF STOCKHOLDERS............................................ 1
2.1 PLACE OF MEETINGS...................................................... 1
2.2 ANNUAL MEETING......................................................... 1
2.3 SPECIAL MEETING........................................................ 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS....................................... 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS........ 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE........................... 3
2.7 QUORUM................................................................. 3
2.8 ADJOURNED MEETING; NOTICE.............................................. 4
2.9 VOTING................................................................. 4
2.10 WAIVER OF NOTICE....................................................... 4
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING............................. 5
2.12 PROXIES................................................................ 5
2.13 ORGANIZATION........................................................... 5
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE.................................. 6
ARTICLE III - DIRECTORS.......................................................... 6
3.1 POWERS................................................................. 6
3.2 NUMBER OF DIRECTORS.................................................... 6
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS............................... 6
3.4 RESIGNATION AND VACANCIES.............................................. 7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE............................... 7
3.6 REGULAR MEETINGS....................................................... 7
3.7 SPECIAL MEETINGS; NOTICE............................................... 7
3.8 QUORUM................................................................. 8
3.9 WAIVER OF NOTICE....................................................... 8
3.10 ADJOURNMENT............................................................ 8
3.11 NOTICE OF ADJOURNMENT.................................................. 8
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING...................... 8
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
---
<S> <C>
3.13 FEES AND COMPENSATION OF DIRECTORS.................................... 9
3.14 APPROVAL OF LOANS TO OFFICERS......................................... 9
ARTICLE IV - COMMITTEES......................................................... 9
4.1 COMMITTEES OF DIRECTORS............................................... 9
4.2 MEETINGS AND ACTION OF COMMITTEES..................................... 10
4.3 COMMITTEE MINUTES..................................................... 10
ARTICLE V - OFFICERS............................................................ 11
5.1 OFFICERS.............................................................. 11
5.2 ELECTION OF OFFICERS.................................................. 11
5.3 SUBORDINATE OFFICERS.................................................. 11
5.4 REMOVAL AND RESIGNATION OF OFFICERS................................... 11
5.5 VACANCIES IN OFFICES.................................................. 11
5.6 CHAIRMAN OF THE BOARD................................................. 12
5.7 PRESIDENT............................................................. 12
5.8 VICE PRESIDENTS....................................................... 12
5.9 SECRETARY............................................................. 12
5.10 CHIEF FINANCIAL OFFICER............................................... 13
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS...................................................... 13
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS............................. 13
6.2 INDEMNIFICATION OF OTHERS............................................. 14
6.3 INSURANCE............................................................. 14
ARTICLE VII - RECORDS AND REPORTS............................................... 15
7.1 MAINTENANCE AND INSPECTION OF RECORDS................................. 15
7.2 INSPECTION BY DIRECTORS............................................... 15
7.3 ANNUAL STATEMENT TO STOCKHOLDERS...................................... 15
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS........................ 15
7.5 CERTIFICATION AND INSPECTION OF BYLAWS................................ 16
ARTICLE VIII - GENERAL MATTERS.................................................. 16
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING................. 16
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS............................. 16
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.................... 16
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES...................... 17
8.5 SPECIAL DESIGNATION ON CERTIFICATES................................... 17
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
---
<S> <C>
8.6 LOST CERTIFICATES..................................................... 18
8.7 TRANSFER AGENTS AND REGISTRARS........................................ 18
8.8 CONSTRUCTION; DEFINITIONS............................................. 18
ARTICLE IX - AMENDMENTS........................................................ 18
9.1 AMENDMENTS BY STOCKHOLDERS AND DIRECTORS.............................. 18
9.2 SUPERMAJORITY VOTE.................................................... 19
</TABLE>
-iii-
<PAGE>
BYLAWS
------
OF
--
CENTILLIUM COMMUNICATIONS, INC.
------------------------------
(a Delaware Corporation)
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be fixed in the certificate
of incorporation of the corporation.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the [third
Tuesday of May] in each year at [10:00 a.m]. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next succeeding full business day. At the meeting, directors shall be elected,
and any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
---------------
Except as otherwise required by law, a special meeting of the stockholders
may be called only by the Board of Directors, the Chairman of the Board, or the
President; provided however, that if at any time no directors remain in office,
then a special meeting for the purpose of electing directors may be called in
accordance with the procedure set forth in the Bylaws. No business may be
transacted at such special meeting otherwise than as specified in the notice of
such meeting.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings of stockholders shall be sent or otherwise given in
accordance with Section 2.6 of these bylaws not less than ten (10) nor more than
sixty (60) days before the date of the meeting. The notice shall specify the
place, date and hour of the meeting and (i) in the case of a special meeting,
the purpose or purposes for which the meeting is called (no business other than
that specified in the notice may be transacted) or (ii) in the case of the
annual meeting, those matters which the board of directors, at the time of
giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
---------------------------------------------------------------
Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,
(a) nominations for the election of directors, and
(b) business proposed to be brought before any stockholder meeting
may be made by the board of directors or proxy committee appointed by the
board of directors or by any stockholder entitled to vote in the election of
directors generally if such nomination or business proposed is otherwise proper
business before such meeting. However, any such stockholder may nominate one or
more persons for election as directors at a meeting or propose business to be
brought before a meeting, or both, only if such stockholder has given timely
notice to the secretary of the corporation in proper written form of their
intent to make such nomination or nominations or to propose such business. To
be timely, such stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the corporation not less than one hundred
twenty (120) calendar days in advance of the date of the corporation's proxy
statement released to stockholders in connection with the previous year's annual
meeting of stockholders; provided, however, that in the event that no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than thirty (30) days from the date contemplated at the time of
the previous year's proxy statement, notice by the stockholder to be timely must
be so received a reasonable time before the solicitation is made. To be in
proper form, a stockholder's notice to the secretary shall set forth:
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(i) the name and address of the stockholder who intends to
make the nominations or propose the business and, as the case may be, of the
person or persons to be nominated or of the business to be proposed;
(ii) a representation that the stockholder is a holder of
record of stock of the corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice;
(iii) if applicable, a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder;
(iv) such other information regarding each nominee or each
matter of business to be proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or intended
to be nominated, or the matter been proposed, or intended to be proposed by the
board of directors; and
(v) if applicable, the consent of each nominee to serve as
director of the corporation if so elected.
The chairman of the meeting shall refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. Notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
------
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to
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vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting in accordance with Section 2.7 of these bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the certificate of incorporation or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.
If a quorum be initially present, the stockholders may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.
2.8 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time and place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation or
these bylaws, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder with respect to any matter submitted to a
vote of the stockholders and stockholders shall not be entitled to cumulate
their votes in the election of directors.
2.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or
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special meeting of the stockholders need be specified in any written waiver of
notice unless so required by the certificate of incorporation or these bylaws.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
------------------------------------------
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.
If the board of directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
The record date for any other purpose shall be as provided in Section 8.1
of these bylaws.
2.12 PROXIES
-------
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.
2.13 ORGANIZATION
------------
The president, or in the absence of the president, the chairman of the
board, or, in the absence of the president and the chairman of the board, one of
the corporation's vice presidents, shall call the meeting of the stockholders to
order, and shall act as chairman of the meeting. In the absence of the
president, the chairman of the board, and all of the vice presidents, the
stockholders shall appoint a chairman for such meeting. The chairman of any
meeting of stockholders shall determine the order of business and the procedures
at the meeting, including such matters as the regulation of the manner of voting
and the conduct of business. The secretary of the corporation shall act as
secretary at any
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meetings of the stockholders, but in the absence of the secretary at any meeting
of the stockholders, the chairman of the meeting may appoint any person to act
as secretary of the meeting.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation and these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The board of directors shall initially consist of six members. The board
of directors may increase or decrease the number of directors constituting the
board of directors upon the approval of a majority of the directors then in
office. The number of directors so determined shall be the authorized number
of directors of the corporation. No reduction of the authorized number of
directors shall have the effect of removing any director before that
director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy, shall hold office until the expiration of the term for which elected
and until a successor has been elected and qualified.
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3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
All vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; provided, that whenever the holders of any class or classes of stock
or series thereof are entitled to elect one or more directors by the provisions
of the certificate of incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors. If any regular
meeting day shall fall on a legal holiday, then the meeting shall be held next
succeeding full business day.
3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time
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of the holding of the meeting. Any oral notice given personally or by telephone
may be communicated either to the director or to a person at the office of the
director who the person giving the notice has reason to believe will promptly
communicate it to the director. The notice need not specify the purpose or the
place of the meeting, if the meeting is to be held at the principal executive
office of the corporation.
3.8 QUORUM
------
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.10
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
certificate of incorporation and other applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
----------------
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
3.10 ADJOURNMENT
-----------
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
---------------------
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote
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of the board of directors. Such written consent and any counterparts thereof
shall be filed with the minutes of the proceedings of the board.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have and may exercise all
the powers and authority of the board, but no such committee shall have the
power of authority to:
(a) amend the certificate of incorporation (except that a committee
may, to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the board of directors as provided in
Section 151(a) of the General Corporation Law of Delaware, fix the designations
and any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the corporation or the
conversion
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into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
corporation);
(b) adopt an agreement of merger or consolidation under Sections 251
or 252 of the General Corporation Law of Delaware;
(c) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets;
(d) recommend to the stockholders a dissolution of the corporation or
a revocation of a dissolution; or
(e) amend the bylaws of the corporation; and, unless the board
resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
4.3 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
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ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and such
other officers as may be appointed in accordance with the provisions of Section
5.3 of these bylaws. Any number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
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5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
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The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
--------------------------------------------------
AND OTHER AGENTS
----------------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware as the same now exists or may hereafter
be amended, indemnify any person against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit,
or proceeding in which such person was or is a party or is threatened to be made
a party by reason of the fact that such person is or was a director or officer
of the corporation. For purposes of this Section 6.1, a "director" or "officer"
of the corporation shall mean any person (i) who is or was a director or officer
of the corporation, (ii) who is or was serving at the request of the corporation
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
Board of Directors of the corporation.
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The corporation shall pay the expenses (including attorney's fees) incurred
by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding referred to in this
Section 6.1 in advance of its final disposition; provided, however, that payment
of expenses incurred by a director or officer of the corporation in advance of
the final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by the director or officer to repay all amounts
advanced if it should ultimately be determined that the director of officer is
not entitled to be indemnified under this Section 6.1 or otherwise.
The rights conferred on any person by this Article shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the corporation's Certificate of Incorporation, these
bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.
Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit, or
proceeding, in which such person was or is a party or is threatened to be made a
party by reason of the fact that such person is or was an employee or agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) shall mean any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
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<PAGE>
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine (and to make copies of) the
corporation's stock ledger, a list of its stockholders and its other books and
records for a purpose reasonably related to his or her position as a director.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, if any, the president, any vice president, the
chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation. The authority herein granted may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
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<PAGE>
7.5 CERTIFICATION AND INSPECTION OF BYLAWS
--------------------------------------
The original or a copy of these bylaws, as amended or otherwise altered to
date, certified by the secretary, shall be kept at the corporation's principal
executive office and shall be open to inspection by the stockholders of the
corporation, at all reasonable times during office hours.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-----------------------------------------------------
For purposes of determining the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) days before any such action. In that case, only
stockholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the General Corporation Law of Delaware.
If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
-----------------------------------------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
--------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
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<PAGE>
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
------------------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the board
of directors, every holder of stock represented by certificates and, upon
request, every holder of uncertificated shares, shall be entitled to have a
certificate signed by, or in the name of the corporation by, the chairman or
vice-chairman of the board of directors, or the president or vice-president, and
by the treasurer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.
Certificates for shares shall be of such form and device as the board of
directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of shares
for which it is issued; a summary statement or reference to the powers,
designations, preferences or other special rights of such stock and the
qualifications, limitations or restrictions of such preferences and/or rights,
if any; a statement or summary of liens, if any; a conspicuous notice of
restrictions upon transfer or registration of transfer, if any; a statement as
to any applicable voting trust agreement; if the shares be assessable, or, if
assessments are collectible by personal action, a plain statement of such facts.
Upon surrender to the secretary or transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on
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<PAGE>
the face or back of the certificate that the corporation shall issue to
represent such class or series of stock; provided, however, that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements there may be set forth on the face or back of
the certificate that the corporation shall issue to represent such class or
series of stock a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, the designations, the preferences
and the relative, participating, optional or other special rights of each class
of stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights.
8.6 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 TRANSFER AGENTS AND REGISTRARS
------------------------------
The board of directors may appoint one or more transfer agents or transfer
clerks, and one or more registrars, each of which shall be an incorporated bank
or trust company -- either domestic or foreign, who shall be appointed at such
times and places as the requirements of the corporation may necessitate and the
board of directors may designate.
8.8 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
ARTICLE IX
AMENDMENTS
----------
9.1 AMENDMENTS BY STOCKHOLDERS AND DIRECTORS
----------------------------------------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote or by the board of directors of
the corporation. The fact that such
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<PAGE>
power has been so conferred upon the directors shall not divest the stockholders
of the power, nor limit their power to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.
9.2 SUPERMAJORITY VOTE
------------------
Notwithstanding anything to the contrary in the bylaws, neither Section 2.3
(special meeting), Section 2.5 (advance notice of stockholder nominees and
stockholder business), nor this Section 9.2 (supermajority vote) of the bylaws
shall be repealed or amended, nor shall any provision inconsistent with the
aforementioned provisions be adopted and added to the bylaws except upon the
affirmative vote of not less than two-thirds of the shares of the corporation
issued and outstanding.
Amended and Restated Bylaws adopted by the Board of Directors of the
Corporation at Fremont, California, this 10th day of February, 2000.
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<PAGE>
EXHIBIT 10.1
CENTILLIUM COMMUNICATIONS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this __day of
________,2000 by and between Centillium Communications, Inc., a Delaware
corporation (the "Company"), and ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals such as Indemnitee to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW THEREFORE, in consideration for Indemnitee's services as an officer or
director of the Company, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee if
-----------------------
Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit, proceeding or any alternative
dispute resolution mechanism, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by reason
of the fact that Indemnitee is or was a director, officer, employee or agent of
the Company, or any subsidiary of the Company, by reason of any action or
inaction on the part of Indemnitee while an officer or director or by reason of
the fact that Indemnitee is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement (if such settlement is
approved in advance by the Company, which approval shall not be unreasonably
withheld) actually and reasonably incurred by Indemnitee in connection with such
action, suit or proceeding if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that Indemnitee did not act in good faith and in a manner which
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that Indemnitee's conduct was unlawful.
<PAGE>
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Company or any subsidiary of the Company to procure a judgment in
its favor by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, by reason of
any action or inaction on the part of Indemnitee while an officer or director or
by reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees) and, to the fullest extent permitted by law, amounts
paid in settlement actually and reasonably incurred by Indemnitee in connection
with the defense or settlement of such action or suit if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company, except that no indemnification
shall be made in respect of any claim, issue or matter as to which Indemnitee
shall have been adjudged to be liable to the Company unless and only to the
extent that the Court of Chancery of the State of Delaware or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
Indemnitee is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery of the State of Delaware or such other court shall
deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Subsections (a) and (b) of this Section 1, or in
defense of any claim, issue or matter therein, Indemnitee shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
Indemnitee in connection therewith.
2. Agreement to Serve. In consideration of the protection afforded by this
------------------
Agreement, if Indemnitee is a director of the Company, he or she agrees to serve
at least for the six months after the effective date of this Agreement as a
director and not to resign voluntarily during such period without the written
consent of a majority of the Board of Directors. If Indemnitee is an officer of
the Company not serving under an employment contract, he or she agrees to serve
in such capacity at least for the balance of the current fiscal year of the
Company and not to resign voluntarily during such period without the written
consent of a majority of the Board of Directors. Following the applicable period
set forth above, Indemnitee agrees to continue to serve in such capacity at the
will of the Company (or under separate agreement, if such agreement exists) so
long as he or she is duly appointed or elected and qualified in accordance with
the applicable provisions of the Bylaws of the Company or any subsidiary of the
Company or until such time as he or she tenders his or her resignation in
writing. Nothing contained in this Agreement is intended to create in Indemnitee
any right to continued employment.
3. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 1 (a) or (b) hereof (but not amounts actually paid in settlement of any
such action, suit or proceeding). Indemnitee hereby undertakes to repay such
amounts advanced only if, and to the extent that, it shall ultimately be
determined that Indemnitee is not entitled to be indemnified by the Company as
authorized hereby. The advances to
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<PAGE>
be made hereunder shall be paid by the Company to Indemnitee within thirty (30)
days following delivery of a written request therefor by Indemnitee to the
Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
--------------------------------
precedent to his or her right to be indemnified under this Agreement, give the
Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the President of the
Company at the address shown on the signature page of this Agreement (or such
other address as the Company shall designate in writing to Indemnitee). Notice
shall be deemed received three business days after the date postmarked if sent
by domestic certified or registered mail, properly addressed; or five business
days if sent by airmail to a country outside of North America; otherwise notice
shall be deemed received when such notice shall actually be received by the
Company. In addition, Indemnitee shall give the Company such information and
cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) Procedure. Any indemnification and advances provided for in
---------
Section 1 and this Section 3 shall be made no later than thirty (30) days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws, providing for indemnification, is not paid in full by
the Company within thirty (30) days after a written request for payment thereof
has first been received by the Company, Indemnitee may, but need not, at any
time thereafter, bring an action against the Company to recover the unpaid
amount of the claim and, subject to Section 13 of this Agreement, Indemnitee
shall also be entitled to be paid for the expenses (including attorneys' fees)
of bringing such action. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in connection with any
action, suit or proceeding in advance of its final disposition) that Indemnitee
has not met the standards of conduct which make it permissible under applicable
law for the Company to indemnify Indemnitee for the amount claimed. However,
Indemnitee shall be entitled to receive interim payments of expenses pursuant to
Subsection 3(a) unless and until such defense may be finally adjudicated by
court order or judgment from which no further right of appeal exists. It is the
parties' intention that if the Company contests Indemnitee's right to
indemnification, the question of Indemnitee's right to indemnification shall be
for the court to decide, and neither the failure of the Company (including its
Board of Directors, any committee or subgroup of the Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
that indemnification of Indemnitee is proper in the circumstances because
Indemnitee has met the applicable standard of conduct required by applicable
law, nor an actual determination by the Company (including it Board of
Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its stockholders) that Indemnitee has not met such applicable
standard of conduct, shall create a presumption that Indemnitee has or has not
met the applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of Indemnitee, all amounts payable as a result of such proceeding in accordance
with the terms of such policies.
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<PAGE>
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 3(a) hereof to advance the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election to request that the Company advance
expenses to Indemnitee. After delivery of such notice, approval of such counsel
by Indemnitee and the retention of such counsel by the Company, the Company
shall not be liable to Indemnitee under this Agreement for any fees of counsel
subsequently incurred by Indemnitee with respect to the same proceeding,
provided that (i) Indemnitee shall have the right to employ his or her own
counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the
employment of counsel by Indemnitee has been previously authorized by the
Company, (B) Indemnitee shall have reasonably concluded that there may be a
material conflict of interest between the Company and Indemnitee in the conduct
of any such defense, or (C) the Company shall not, in fact, have employed
counsel to assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by
law, notwithstanding that such indemnification is not specifically authorized by
the other provisions of this Agreement, the Company's Certificate of
Incorporation, the Company's Bylaws or by statute. In the event of any change,
after the date of this Agreement, in any applicable law, statute, or rule which
expands the right of a Delaware corporation to indemnify a member of its board
of directors or an officer, such changes shall be, ipso facto, within the
purview of Indemnitee's rights and Company's obligations, under this Agreement.
In the event of any change in any applicable law, statute or rule which narrows
the right of a Delaware corporation to indemnify a member of its board of
directors or an officer, such changes, to the extent not otherwise required by
such law, statute or rule to be applied to this Agreement shall have no effect
on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested Directors, the General Corporation Law of
the State of Delaware, or otherwise, both as to action in Indemnitee's official
capacity and as to action in another capacity while holding such office. The
indemnification provided under this Agreement shall continue as to Indemnitee
for any action taken or not taken while serving in an indemnified capacity even
though he or she may have ceased to serve in such capacity at the time of any
action, suit or other covered proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by him
or her in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceeding, but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for the portion of
such expenses, judgments, fines or penalties to which Indemnitee is entitled.
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<PAGE>
6. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge
----------------------
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the furore to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from time
----------------------------------------
to time, make a good faith determination whether or not it is practicable for
the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or the most favorably insured of the Company's
officers, if Indemnitee is not a director of the Company but is an officer.
Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain such insurance if the Company determines in good faith that such
insurance is not reasonably available, if the premium costs for such insurance
are disproportionate to the amount of coverage provided, if the coverage
provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent of the Company.
8. Severability. Nothing in this Agreement is intended to require or shall
------------
be construed as requiring the Company to do or fail to do any act in violation
of applicable law. The Company's inability, pursuant to court order, to perform
its obligations under this Agreement shall not constitute a breach of this
Agreement. The provisions of this Agreement shall be severable as provided in
this Section 8. If this Agreement or any portion hereof shall be invalidated on
any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Any other provision herein to the contrary notwithstanding,
----------
the Company shall not be obligated pursuant to the terms of this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors has approved the initiation or bringing of such suit; or
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<PAGE>
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(c) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company, its
parent or any of its subsidiaries; or
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger with the Company, which constituent corporation, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that if Indemnitee is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, Indemnitee shall stand in the same position under the
provisions of this Agreement with respect to the resulting or surviving
corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; and references to "serving at the request
of the Company" shall include any service as a director, officer, employee or
agent of the Company which imposes duties on, or involves services by, such
director, officer, employee or agent with respect to an employee benefit plan,
its participants, or beneficiaries; and if Indemnitee acted in good faith and in
a manner Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
13. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that
-6-
<PAGE>
each of the material assertions made by Indemnitee as a basis for such action
were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
14. Notice. Except as provided in Section 3(b), all notices, requests,
------
demands and other communications under this Agreement shall be in writing and
shall be deemed duly given (i) if delivered by hand and receipted for by the
party addressee on the date of such receipt, or (ii) if mailed by domestic
certified or registered mail with postage prepaid, on the third business day
after the date postmarked. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
16. Choice of Law. This Agreement shall be governed by and its provisions
construed in accordance with the laws of the State of Delaware, as applied to
contracts between Delaware residents entered into and to be performed entirely
within Delaware without regard to the conflict of law principles thereof.
17. Period of Limitations. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
-------- -------
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
18. Subrogation. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless it is in writing signed
by both of the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar), nor shall such waiver constitute a continuing
waiver.
20. Integration and Entire Agreement. This Agreement sets forth the entire
understanding between the parties hereto and supersedes and merges all previous
written and oral
-7-
<PAGE>
negotiations, commitments, understandings and agreements relating to the subject
matter hereof between the parties hereto.
[The Remainder of this Page Intentionally Left Blank]
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
Centillium Communications, Inc.
a Delaware Corporation
By:____________________________________
____________________________________
AGREED TO AND ACCEPTED:
INDEMNITEE:
_____________________________________
_____________________________________
(signature)
Address:
_____________________________________
_____________________________________
-9-
<PAGE>
Exhibit 10.2
CENTILLIUM COMMUNICATIONS, INC.
1997 STOCK PLAN
(as amended and restated effective ________)
1. Purposes of the Plan. The purposes of this 1997 Stock Plan are:
--------------------
. to attract and retain the best available personnel for positions
of substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means Centillium Communications, Inc., a Delaware
-------
corporation.
(h) "Consultant" means any person, including an advisor, engaged by
----------
the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
--------
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
<PAGE>
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Inside Director" means a Director who is an Employee.
---------------
(p) "IPO Effective Date" means the date upon which the Securities and
------------------
Exchange Commission declares the initial public offering of the Company's common
stock as effective.
(q) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(r) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
-2-
<PAGE>
(s) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(t) "Option" means a stock option granted pursuant to the Plan.
------
(u) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(v) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are surrendered in exchange for Options with a lower exercise price.
(w) "Optioned Stock" means the Common Stock subject to an Option or
--------------
Stock Purchase Right.
(x) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(y) "Outside Director" means a Director who is not an Employee.
----------------
(z) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(aa) "Plan" means this 1997 Stock Plan.
----
(bb) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of Stock Purchase Rights under Section 11 of the Plan.
(cc) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(dd) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(ee) "Section 16(b)" means Section 16(b) of the Exchange Act.
-------------
(ff) "Service Provider" means an Employee, Director or Consultant.
----------------
(gg) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 14 of the Plan.
(hh) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ii) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
-3-
<PAGE>
3. Stock Subject to the Plan. Subject to the provisions of Section 14 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 12,500,000 Shares, plus an annual increase to be added on the
first day of the Company's fiscal year beginning in 2001 equal to 6% of the
outstanding shares on such date. The Shares may be authorized, but unissued, or
reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. Different Committees with
------------------------------
respect to different groups of Service Providers may administer the Plan.
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
----------
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
(iv) Other Administration. Other than as provided above, the
--------------------
Plan shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
-4-
<PAGE>
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or Stock Purchase Right or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 16(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by an Optionee
to have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the Company
any instrument required to effect the grant of an Option or Stock Purchase Right
previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
-5-
<PAGE>
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of
the Company, Options to purchase more than 1,500,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 1,500,000
Shares, which shall not count against the limit set forth in subsection (i)
above.
(iii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 14.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 14), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 20 of the Plan, the amendment and
------------
restatement of the Plan shall become effective upon the IPO Effective Date. It
shall continue in effect for a term of ten (10) years from the date of obtaining
stockholder approval of the Plan in 2000, unless terminated earlier under
Section 16 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock
-6-
<PAGE>
Option shall be five (5) years from the date of grant or such shorter term as
may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to
--------------
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price of less than 100% of the Fair Market Value per Share
on the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions that must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
-7-
<PAGE>
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 14 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence
of a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the
-8-
<PAGE>
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or
administrator of the Optionee's estate or, if none, by the person(s) entitled to
exercise the Option under the Optionee's will or the laws of descent or
distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by
-9-
<PAGE>
cancellation of any indebtedness of the purchaser to the Company. The repurchase
option shall lapse at a rate determined by the Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 14
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Formula Option Grants to Outside Directors. Outside Directors shall be
------------------------------------------
automatically granted Options each year in accordance with the following
provisions:
(a) All Options granted pursuant to this Section shall be
Nonstatutory Stock Options and, except as otherwise provided herein, shall be
subject to the other terms and conditions of the Plan.
(b) Each person who first becomes an Outside Director on or after the
IPO Effective Date, whether through election by the stockholders of the Company
or appointment by the Board to fill a vacancy, shall be automatically granted an
Option to purchase 20,000 Shares (the "First Option") on the date he or she
first becomes an Outside Director; provided, however, that an Inside Director
who ceases to be an Inside Director but who remains a Director shall not receive
a First Option.
(c) Each Outside Director shall be automatically granted an Option to
purchase 5,000 Shares (a "Subsequent Option") following each annual meeting of
the stockholders of the Company, except in the case of the first such annual
meeting after the IPO Effective Date if such annual meeting is held within six
(6) months of the IPO Effective Date, if as of such date, he or she shall
continue to serve on the Board and shall have served on the Board for at least
the preceding six (6) months.
(d) Notwithstanding the provisions of subsections (b) and (c) hereof,
any exercise of an Option granted before the Company has obtained stockholder
approval of the Plan in accordance with Section 20 hereof shall be conditioned
upon obtaining such stockholder approval of the Plan in accordance with Section
20 hereof.
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<PAGE>
(e) The terms of each First Option granted pursuant to this Section
shall be as follows:
(i) the term of the First Option shall be ten (10) years.
(ii) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the First Option.
(iii) the First Option shall vest as to ______ of the Shares
subject to the First Option on the anniversary of its date of grant provided
that the Optionee continues to serve as a Director on such date.
(f) The terms of each Subsequent Option granted pursuant to this
Section shall be as follows:
(i) the term of the Subsequent Option shall be ten (10) years.
(ii) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Subsequent Option.
(iii) the Subsequent Option shall vest as to 100% of the Shares
subject to the Subsequent Option on each anniversary of its date of grant
provided that the Optionee continues to serve as a Director on such dates.
14. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to
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<PAGE>
such transaction as to all of the Optioned Stock covered thereby, including
Shares as to which the Option would not otherwise be exercisable. In addition,
the Administrator may provide that any Company repurchase option applicable to
any Shares purchased upon exercise of an Option or Stock Purchase Right shall
lapse as to all such Shares, provided the proposed dissolution or liquidation
takes place at the time and in the manner contemplated. To the extent it has not
been previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. With
respect to Options granted to an Outside Director pursuant to Section 13 that
are assumed or substituted for, if following such assumption or substitution the
Optionee's status as a Director or a director of the successor corporation, as
applicable, is terminated other than upon a voluntary resignation by the
Optionee, then the Optionee shall fully vest in and have the right to exercise
the Option as to all of the Optioned Stock, including Shares as to which it
would not otherwise be vested or exercisable.
In the event that the successor corporation refuses to assume or
substitute for the Option or Stock Purchase Right, the Optionee shall fully vest
in and have the right to exercise the Option or Stock Purchase Right as to all
of the Optioned Stock, including Shares as to which it would not otherwise be
vested or exercisable. If an Option or Stock Purchase Right becomes fully
vested and exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee in writing
or electronically that the Option or Stock Purchase Right shall be fully vested
and exercisable for a period of fifteen (15) days from the date of such notice,
and the Option or Stock Purchase Right shall terminate upon the expiration of
such period.
For the purposes of this paragraph, the Option or Stock Purchase
Right shall be considered assumed if, following the merger or sale of assets,
the option or right confers the right to purchase or receive, for each Share of
Optioned Stock subject to the Option or Stock Purchase Right immediately prior
to the merger or sale of assets, the consideration (whether stock, cash, or
other securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
15. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the
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<PAGE>
determination shall be provided to each Optionee within a reasonable time after
the date of such grant.
16. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
17. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
18. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
19. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
20. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
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<PAGE>
EXHIBIT 10.6
TRADE FINANCING AGREEMENT
This AGREEMENT is made and entered into as of the first day of February, 1999 by
and between Centillium Technology Corporation, a company organized and existing
under the laws of California, having an office and place of business at 46531
Fremont Boulevard, Fremont, California 94538 (hereinafter referred to as "CTC")
and Mitsubishi International Corporation, a company organized and existing under
the laws of New York, U.S.A., having an office and place of business at 850
Hansen Way, Suite 100, Palo Alto, California 94306 (hereinafter referred to as
"MIC").
WITNESSETH:
WHEREAS, CTC has been engaged in the business of designing and selling
semiconductors (hereafter referred to as "Products"), and
WHEREAS, MIC has for many years engaged in the business of international trading
and trade financing.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained, the parties hereto agree as follows:
1. APPOINTMENT
-----------
CTC hereby appoints MIC as its non-exclusive buying agent for purchasing of
Products from semiconductor manufacturers (hereinafter referred to as
"Foundries") and providing MIC's trade financing to CTC and MIC accepts such an
appointment.
2. SCOPE OF WORK
-------------
a. CTC shall negotiate and settle directly with Foundries regarding
prices, other payment terms and delivery schedule of Products from
Foundries to CTC.
b. Upon request of CTC, MIC shall support negotiations between Foundries
and CTC.
c. CTC shall place purchase orders with Foundries for Products and send
copies to MIC with the following provisions:
(1) CTC shall notify MIC 2 days prior to its issuance of the purchase
order.
(2) The purchase order shall instruct Foundries to ship Products to
CTC's designated location but to deliver appropriate invoices to
MIC and to accept payment from MIC.
(3) The purchase order shall instruct Foundries to acknowledge in
writing the order to both CTC and MIC.
d. MIC on behalf of CTC shall pay Foundries pursuant to payment terms of
the purchase order from CTC to Foundries.
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<PAGE>
e. MIC shall bill CTC upon receipt of the invoice from Foundries but
defer the due date for payment from CTC to MIC for 90 days beyond the
due date for the payment from MIC to Foundries.
f. Upon CTC's request, MIC shall assist CTC in establishing and keeping
close communications and relations with Foundries.
3. TERMS OF PAYMENT
----------------
a. Payment to be made by CTC to MIC shall be net 120 days after the
delivery of Products from Foundries.
b. The invoice amount from MIC to CTC shall include MIC's commission and
interest.
c. In the event that MIC pays Foundries in Japanese Yen,
(1) MIC shall apply the tentative exchange rate in computing CTC's
liability to MIC prior to the payment date from MIC to Foundries.
The exchange rate used by MIC will be stated on the face of the
invoice.
(2) The US$/Japanese Yen exchange rate for the date when MIC pays
Foundries shall be applied to the invoice from MIC to CTC. A
revised invoice will be issued to CTC with the new exchange rate
used by MIC stated on the face of the revised invoice.
(3) CTC shall have the option to pay MIC in either US Dollars or in
Japanese Yen. In the event that CTC shall pay MIC in Japanese Yen
for MIC's invoice to CTC, CTC shall give a written notice at
least five (5) business days prior to MIC's payment of required
Japanese Yen amount to Foundries.
d. In the event that CTC requires MIC to execute a forward foreign
exchange contract in order to fix the US$/Japanese Yen exchange rate
for a specified future period,
(1) CTC shall give MIC a written request at least one (1) business
day before the day when MIC shall execute the forward foreign
exchange contract.
(2) CTC shall give MIC the written request no later than five (5)
business days prior to MIC's payment of required Japanese Yen
amount to Foundries.
(3) The written request from CTC to MIC shall state the following
details:
i) Date of Request
ii) Calendar month in which Japanese Yen amount is required
iii) Required amount of Japanese Yen
iv) Schedule of shipment to which the forward foreign exchange
contract shall be applied
-2-
<PAGE>
(4) MIC shall inform CTC of the contracted forward foreign exchange
rate and the corresponding US$ amount to purchase the Japanese
Yen amount within two (2) business days of CTC's written request.
(5) Any reasonable charges caused by the cancellation and/or
extension of the forward foreign exchange contract shall be the
paid by CTC.
(6) In the event that MIC's payment amount to Foundries does not
reach the forward foreign exchange contract amount for a
particular calendar month, CTC shall have the option to purchase
the Japanese Yen by using the remaining balance of the forward
foreign exchange contract.
CTC shall give MIC a written request at least 10 business days
prior to the end of the month. MIC shall make a T.T. Remittance
of the purchased Japanese Yen amount to CTC's bank account after
MIC confirms receipt of CTC's payment of the US$ amount
equivalent to the remaining Japanese Yen balance amount to MIC's
bank account.
4. COMMISSION
----------
a. As full compensation for the services rendered by MIC to CTC
hereunder, CTC agrees to a commission at the rate set forth in
Subsection 4.b on the price of each sale of Products from MIC to CTC
b. The commission for each month shall be determined on the first day of
each month as follows:
(1) In the event that the total sales amount from MIC to CTC in the
previous month shall be equal to or less than $1,000,000, the
commission rate for the calendar month shall be 2% of the
purchase price of Products from Foundries to MIC.
(2) In the event that the total sales amount from MIC to CTC in the
previous month shall be more than $1,000,000, the commission rate
for the calendar month shall be 1.50% of the purchase price of
the Products from Foundries to MIC.
(3) If there is a need to change the commission rate, the rate shall
be reviewed and determined by written mutual agreement between
CTC and MIC from time to time at the request of either party.
5. INTEREST
--------
a. The trade financing made hereunder shall bear interest (computed on
the basis of the 365-day year) at the rate of MIC's internal interest
rate on each order from CTC to MIC.
b. MIC's internal interest rate to CTC shall be adjusted subject to the
USA financial market situation, but at least 1.0% below the prime rate
of interest as published in the Wall Street Journal on the date of the
invoice.
c. MIC shall confirm to CTC MIC's internal interest rate upon receipt of
each order from CTC.
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<PAGE>
6. CREDIT LINE
-----------
a. The credit line and the period of the credit line from MIC to CTC
shall be set forth in Exhibit A attached hereto.
b. The subsequent credit line and the period of the subsequent credit
line shall be determined by the end of the period of the credit line
set forth in Exhibit A by mutual agreement.
7. EVENT OF DEFAULT
----------------
a. Each of the following events and occurrences shall constitute an event
of default ("Event of Default") under this Agreement:
(1) CTC fails to pay when due any amount (including interest) payable
under this Agreement and such failure is not cured within 5
business days thereafter;
(2) CTC fails to comply with any other terms or conditions contained
herein and such failure is not remedied within thirty (30) days
thereafter;
(3) CTC is in default of the terms of any indebtedness of CTC to any
other lender or financier and such indebtedness is accelerated
and becomes payable by reason of such default;
(4) the commencement of proceedings in bankruptcy, or for
reorganization of CTC under the Federal Bankruptcy Code, as
amended, or any other laws, whether state or federal, for the
benefit of the debtor, which are not revoked within sixty (60)
days of their commencement;
(5) the appointment of a receiver, trustee or custodian for CTC or
for the substantial part of the assets of CTC, or the institution
of proceedings for dissolution or the full or partial liquidation
of CTC, and such receiver, trustee or custodian shall not be
discharged within sixty (60) days of their appointment;
(6) the discontinuance of the business of CTC; or
(7) the dissolution of CTC.
b. If an Event of Default shall occur and be continuing, MIC may, by
written notice to CTC, (1) declare all outstanding amounts, together
with accrued interest and any other sums payable hereunder, to be
immediately due and payable, and the same shall thereupon become due
and payable without presentment, demand, protest or notice of any
kind, and CTC shall pay to MIC the entire amount then outstanding and
interest accrued thereon, and (2) declare the credit line granted by
MIC hereunder canceled, such cancellation becoming effective upon the
giving of such notice.
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<PAGE>
8. SECURITY AGREEMENT AND GUARANTY
-------------------------------
MIC's obligations under this Agreement, shall not become effective unless
and until CTC shall enter into and deliver a General Security Agreement
with MIC in the form of Exhibit B attached hereto by which CTC agrees to
grant a security interest in the collateral identified in the General
Security Agreement as a security for the payments to be made by CTC
hereunder.
9. TERMS AND TERMINATION
---------------------
This Agreement shall be in effect for a period of one (1) year commencing
on the date first above written and shall be extended for one (1) year and
thereafter from year to year successively unless a notice is given by one
of the parties to the other at least ninety (90) days before the end of the
then current term that it does not wish to extend this Agreement.
10. RELATIONSHIP BETWEEN THE PARTIES
--------------------------------
The relationship between CTC and MIC shall be that of an independent
contractor. Unless otherwise mutually agreed, MIC is not authorized to
make, nor shall it make any promise or commitment which binds CTC to any
third party without the prior written consent of CTC.
11. CONFIDENTIAL INFORMATION
------------------------
a. "Confidential Information" means all or any portion of information
disclosed by one party to the other during the term of this Agreement
which is: (i) written, recorded, graphical, or in other tangible form
and which is marked "Proprietary," "Confidential" or with a similar
legend denoting the proprietary interest of the disclosing party; or
(ii) oral information to the extent it is identified by the disclosing
party as "Proprietary" or "Confidential" at the time of oral
disclosure; provided, however, Confidential Information shall not
include information that: (a) is or becomes publicly known through no
fault of the receiving party; or (b) is in the possession of the
receiving party prior to its disclosure by the disclosing party and
not subject to other restriction on disclosure.
b. Each party hereby agrees not to use, utilize, disclose or reveal
Confidential Information to any person, company or other entities
without obtaining written consent by the disclosing party.
12. ASSIGNMENT
----------
It is agreed that this Agreement and the rights and obligations of the
parties hereunder shall not be assigned to any third party without the
prior written consent of the other party.
13. INDEMNIFICATION
---------------
CTC hereby agrees to indemnify, defend and hold MIC harmless from and
against any and all losses, costs, liabilities, claims and expenses
including attorney fees (Indemnifiable Expenses) arising out of, relating
to or in connection with Products or their infringement of any patent,
copyright or mask work right of any third party,
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<PAGE>
or the design, manufacture, condition or use of Products other than
Indemnifiable Expenses which arise solely due to an omission to act by MIC.
14. NOTICE
------
Notices and other communications made by one of the parties to this
Agreement shall be deemed given and effective upon receipt when posted by
registered mail, postage prepaid, sent by overnight courier or transmitted
by facsimile addressed to the other party as follows:
To CTC:
Centillium Technology Corporation
46531 Fremont Boulevard
Fremont, California 94538
Facsimile Number: (510) 252-7804
To MIC:
Mitsubishi International Corporation
850 Hansen Way, Suite 100
Palo Alto, California 94306
Facsimile Number: (650) 493-0318
15. GOVERNING LAW
-------------
This Agreement shall be governed by and construed in all respects in
accordance with the laws of California, U.S.A.
16. ENTIRE AGREEMENT
----------------
This Agreement represents the entire agreement between the parties hereto
with respect to the subject matter hereof and shall supersede all previous
communications, representations or agreements, either oral or written,
between the parties hereto with respect to the subject matter hereof, and
no agreement or understanding varying or extending the same will be binding
upon either party hereto unless in writing, signed by a duly authorized
officer or representative thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed in duplicate, each duplicate to serve as an original as of the day and
year first above written.
Centillium Technology Corporation Mitsubishi International Corporation
/s/ A. Travis White /s/ Masayoshi Hirano
- ------------------- --------------------
Travis White Masayoshi Hirano
President & General Manager
Chief Executive Officer Palo Alto Office
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<PAGE>
Exhibit A
CREDIT LINE
-----------
CTC and MIC agree with the credit line and credit line period from MIC to CTC as
follows:
CREDIT LINE: US$ 1,000,000
CREDIT LINE PERIOD: From February 1, 1999 to January 31, 2000
The credit line after 2000 shall be determined by the end of January, 2000 by
mutual agreement between CTC and MIC.
Mitsubishi International Corporation Centillium Technology Corporation
/s/ Masayoshi Hirano /s/ Travis White
- -------------------------- ----------------------
By: Masayoshi Hirano By: Travis White
Title: General Manager Title: President & CEO
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<PAGE>
Exhibit B
GENERAL SECURITY AGREEMENT
--------------------------
This General Security Agreement (the "Agreement") made this first day of
February 1999, between Mitsubishi International Corporation, a company organized
and existing under the laws of New York (herein called "Secured Party") and
Centillium Technology Corporation, a company organized and existing under the
laws of California (herein called "Debtor").
A. Debtor and Secured Party have entered into that certain Trade
Financing Agreement of even date herewith, wherein Secured Party shall provide
trade financing to Debtor (the "Trade Financing Agreement");
B. It is a condition precedent to Secured Party's obligations under the
Trade Financing Agreement, that Debtor shall grant security interests to Secured
Party pursuant to the terms and conditions set forth herein.
1. DEFINITIONS OF TERMS USED HEREIN
--------------------------------
(a) "Insolvency" for purposes of this Agreement shall include, but is not
limited to,
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<PAGE>
(1) the insolvency, suspension of usual business, general assignment
or failure of the Debtor, or of any endorser, guarantor, surety or other person
liable upon or for any of the liabilities of the Debtor hereunder (hereafter
sometimes referred to as "accommodation party"), or
(2) the appointment of a receiver, conservator, rehabilitator or
similar officer for the Debtor or accommodation party or for any of the property
of any hereof and such receiver, conservator, rehabilitator or similar officer
is not discharged within 45 days, or
(3) the issuance of any warrant of attachment against any property of
the Debtor or any accommodation party, that remains unbonded for a period of 45
days, or the taking of possession of, or assumption of control over, all or any
substantial party of the property of the Debtor or any accommodation party by
the United States government, foreign governments (de facto or de jure) or any
agency of any thereof, or
(4) the filing of a petition in bankruptcy by Debtor or against the
Debtor or accommodation party which is not discharged within 45 days, or
(5) the commencement of any proceeding by Debtor or against the
Debtor or any accommodation party under any bankruptcy or debtor's law (or
similar law analogous in purpose or effect) for the relief or reorganization,
extension, arrangement or readjustment of any of the obligations of any thereof,
and which proceeding is not dismissed within 45 days, or
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<PAGE>
(6) the commencement of any proceedings supplementary to any
execution relating to any judgment against the Debtor or any accommodation
party.
(b) "Collateral" means, whether now owned or hereafter acquired:
(1) all inventory in all of its forms, wherever located, now or
hereafter existing (including, without limitation, (i) all integrated circuits
and semiconductor products, and all raw materials and work-in-process therefor,
finished goods thereof and materials used or consumed in the manufacture or
production thereof, (ii) all goods in which the Debtor has an interest in mass
or a joint or other interest or right of any kind (including, without
limitation, goods in which the Debtor has an interest or right as consignee) and
(iii) all goods that are returned to or repossessed by the Debtor), and all
accessions to any of the foregoing, products of any of the foregoing and
documents for any of the foregoing (any and all such inventory, accessions,
products and documents herein called the "Inventory");
(2) all accounts, contract rights, chattel paper, instruments,
general intangibles and other obligations of any kind (including, without
limitation, all rights to purchase and receive integrated circuits or
semiconductor products, to receive payments of money or to receive other value
pursuant to contracts, agreements or other arrangements with third parties for
the purchasing, trading, lending, borrowing or exchanging of integrated circuits
or semiconductor products), now or hereafter existing, whether or not arising
out of or in connection with the sale or lease of goods or the rendering of
services, and all rights now or hereafter existing in and to all security
agreements, leases and other contracts securing or otherwise relating to any
such accounts, contract rights, chattel paper, instruments, general intangibles
or obligations (any and all such accounts, contract rights, chattel paper,
instruments, general intangibles, obligations and rights, to the extent not
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<PAGE>
described in Section 1(b)(3) below, herein called the "Receivables," and any and
all such leases, security agreements and other contracts herein called the
"Related Contracts");
(3) all of the following (the "Deposit Account Collateral"):
a. any and all cash or deposit accounts of Debtor, including,
without limitation, but not limited to, the accounts set forth on Schedule 1
attached hereto (the "Deposit Accounts"), all funds held therein and all
certificates and instruments, if any, from time to time representing or
evidencing the Deposit Accounts;
b. all investment property held in or through, or represented by,
the Deposit Accounts from time to time, including, without limitation, all
securities, security entitlements as securities accounts, so held or represented
and all certificates and instrument, if any, from time to time representing or
evidencing the same;
c. all notes, certificates of deposit, deposit accounts, checks and
other instruments from time to time delivered to or otherwise possessed by the
Secured Party for or on behalf of the Debtor in substitution for or in addition
to any or all of the then existing Deposit Account Collateral; and
d. all interest, dividends, cash, instruments and other property
from time to time received, receivable or otherwise distributed in respect of or
in exchange for any or all of the then existing Deposit Account Collateral; and
(4) all proceeds of any and all of the foregoing Collateral
(including, without limitation, proceeds that constitute property of any type
described in Section l(b)(1), (2) or (3)) and, to the extent not otherwise
included, all (i) books and records, of
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whatever nature and in whatever form, relating to the foregoing, (ii) payments
under insurance (whether or not the Secured Party is the loss payee thereof), or
under any indemnity, warranty or guaranty, payable by reason of loss or damage
to or otherwise with respect to any of the foregoing Collateral and (iii) cash.
2. SECURITY INTEREST
-----------------
The Debtor hereby pledges and assigns to the Secured Party and hereby
grants to the Secured Party a security interest in all of Debtor's right, title
and interest in and to the Collateral in order to secure payment and performance
of all liabilities and obligations of Debtor to the Secured Party arising from
the payment and performance of all of Debtor's liabilities, duties, and
obligations now or hereafter existing under or in connection with the Trade
Financing Agreement whether for principal, interest, fees, expenses,
indemnification or otherwise, and all obligations of the Debtor under this
Agreement (all being hereafter called the "Obligations").
3. SALE OF MATERIALS
-----------------
Subject to the terms and provisions of this Agreement and in consideration
of the security interests herein granted, the Secured Party will, from time to
time, but on such terms and conditions as Secured Party may specify and subject
to its absolute right to refuse so to do, sell or cause any of its
correspondents to sell to Debtor materials or goods produced by or services
performed by Foundries, at the request of or for the account of the Debtor.
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<PAGE>
4. MUTUAL AGREEMENT
----------------
(a) Without limiting the foregoing in any way whatsoever, the security
interest created herein shall extend, apply and continue to any and all future
sales of materials or goods or services by the Secured Party or its
representatives or agents to Debtor, and
(b) Secured Party and Debtor as used in this Agreement include the
successor and assigns of those parties, and
(c) The law governing the interpretation of this Agreement, the security
interests created by this Agreement and the perfection of such security
interests shall be that of the State of California, and
(d) This Agreement shall be given its plain and simple meaning consistent
with performance thereof by the parties and the California Commercial Code. The
titles of the several articles shall not be considered a part of this Agreement
so as to otherwise alter such meaning, and
(e) Neither party hereto shall be deemed to have waived any of its rights
hereunder unless such waiver be in writing and signed by the party making such
waiver, and
(f) Whenever in this Agreement the context so requires, the singular shall
include the plural, and
-6-
<PAGE>
(g) This Agreement shall terminate after written notice from either party
to the other, that no further sales of semiconductor products from Foundries to
Debtor are to be made, is received and Debtor pays in full all obligations and
all indebtedness of Debtor to the Secured Party, and
(h) This Agreement shall take effect immediately upon execution by the
Debtor, and the execution hereof by the Secured Party shall not be required as a
condition to the effectiveness of this Agreement. The provision for execution of
this Agreement by the Secured Party is only for the purpose of filing this
Agreement as a security agreement under the Uniform Commercial Code, if
execution hereof by the Secured Party is required for purpose of such filing.
5. REPRESENTATIONS AND WARRANTIES BY DEBTOR
----------------------------------------
Debtor hereby represents and warrants the following:
(a) Debtor's mailing address is:
Centillium Technology Corporation
46531 Fremont Boulevard
Fremont, California 94538
The address of Debtor's chief executive office is:
Centillium Technology Corporation
46531 Fremont Boulevard
Fremont, California 94538
-7-
<PAGE>
The address at which Debtor keeps all of its records which are
controlling for the general accounting purposes of Debtor is:
Centillium Technology Corporation
46531 Fremont Boulevard
Fremont, California 94538
All Inventory presently held by Debtor is kept at the following
locations:
Centillium Technology Corporation
46531 Fremont Boulevard
Fremont, California 94538
(b) Debtor is a company duly organized, existing and in good standing
under the laws of California and is duly qualified to transact intrastate
business and is in good standing in the State of California and in each other
state in which it owns or leases any material property and conducts any material
business, and Debtor is empowered to enter into this Agreement.
(c) All information supplied and statements made by Debtor in any
financial, credit or accounting statement presented to the Secured Party, if
any, prior to or pursuant to this Agreement are or will be true and correct.
Quarterly financial statements are subject to normal year-end adjustment.
(d) The Debtor is the legal and beneficial owner of the Collateral, free
and clear of any lien other than the security interest created by this
Agreement. No effective financing
-8-
<PAGE>
statement or other instrument similar in effect covering all or any part of the
Collateral is on file in any recording office, except such as may have been
filed in favor of the Secured Party relating to this Agreement.
(e) The Debtor does not maintain any cash or other deposit accounts other
than the deposit accounts listed on Schedule 1.
(f) None of the Receivables is evidenced by a promissory note or other
instrument or by chattel paper.
(g) The Debtor has exclusive possession and control of the Inventory.
6. DUTIES AND OBLIGATIONS OF DEBTOR
--------------------------------
(a) Without the prior written consent of the Secured Party, the Debtor
will not file or authorize or permit to be filed in any jurisdiction any
financing or like statement with respect to the Collateral in which the Secured
Party is not named as the sole secured party.
(b) Debtor will have and maintain insurance at all times with respect to
all inventory and goods, including, without limitation, goods in transit, at
their full insurable value against risk of fire (including, without limitation,
so-called extended coverage), theft, and all other usual risks and such special
risks as the Secured Party may reasonably designate, in such form, for such
periods and written by such companies as may be satisfactory to Secured Party,
such insurance to be payable to the Secured Party and Debtor as their interests
may appear, that all policies of insurance shall provide for ten (10) days,
written minimum cancellation notice to the Secured Party and at the request of
the Secured Party shall be delivered to and held by it. In the event of failure
by Debtor to provide
-9-
<PAGE>
insurance as herein provided, Secured Party may, at Secured Party's option,
provide such insurance and Debtor shall pay to Secured Party the costs of such
insurance and Secured Party may, at Secured Party's option, declare Debtor in
default and proceed with its remedies granted herein.
(c) Debtor shall defend at its cost any claim that (i) it does not have
good and valid title to the Collateral, or that (ii) this Agreement does not
constitute a valid first priority lien and charge upon the Collateral. The
assertion by anyone of any claim shall not constitute a default hereunder if
such claim is diligently, adequately and successfully contested by Debtor or is
settled or discharged by Debtor with reasonable diligence. In the event of
failure by the Debtor to diligently defend or contest any such claim, Secured
Party may, at Secured Party's option, contest, settle or discharge any such
claim, and Debtor shall pay to Secured Party, on demand, the reasonable cost and
expense, including, without limitation, attorney's fees, thereof.
(d) As to Deposit Accounts.
(1) All certificates and instruments, if any, representing or
evidencing the Deposit Account Collateral shall be delivered to and held by or
on behalf of the Secured Party pursuant hereto and shall be in suitable form for
transfer by delivery, or shall be accompanied by duly executed instruments of
transfer or assignment in blank, all in form and substance satisfactory to the
Secured Party. The Secured Party shall have the right, at any time in its
discretion and without notice to the Debtor, to transfer to or register in the
name of the Secured Party or any of its nominees any or all of the Deposit
Account Collateral. In addition, the Secured Party shall have the right at any
time to exchange any certificates or instruments representing or evidencing any
Deposit Account Collateral for certificates or instruments of smaller or larger
denominations.
-10-
<PAGE>
(2) So long as any of the Obligations remains unpaid, the Borrower
will observe the agreements set forth below.
a. The Debtor will maintain the deposit accounts set forth on
Schedule 1 with the Silicon Valley Bank and Morgan Stanley & Co., Inc.
respectively. The Debtor will not maintain any cash or other deposit accounts
with any financial or other institutions other than the deposit accounts set
forth on Schedule 1 without the prior written consent of the Secured Party.
b. It shall be a term and condition of the Deposit Accounts,
notwithstanding any term or condition to the contrary in any other agreement
relating to the Deposit Accounts, that (i) so long as no Default or Event of
Default has occurred and is continuing, amounts held in the Deposit Accounts may
be withdrawn to or for the account of the Borrower at any time; and (ii) if a
Default or an Event of Default occurs and is continuing, no amount (including
interest on and other proceeds of the cash and other property held in the
Deposit Accounts) shall be paid or released to or for the account of, or
withdrawn by or for the account of, the Debtor from any of the Deposit Accounts,
except in accordance with the terms of Section 14.
(e) As to Inventory.
(1) The Debtor will keep the Inventory (other than Inventory sold in
the ordinary course of business) at the places therefor specified in Section
5(a) or, upon 30 days' prior written notice to the Secured Party, at other
places in jurisdictions where all action required by Section 12(b)(2) has been
taken with respect to the Inventory; provided,
--------
-11-
<PAGE>
however, that in no event shall any Inventory be located outside the United
- -------
States of America; and
(2) The Debtor will pay promptly when due all property and other
taxes, assessments and governmental charges or levies imposed upon, and all
claims (including, without limitation, claims for labor, materials and supplies)
against, the Inventory, except to the extent that the validity thereof is being
contested in good faith and by proper proceedings and that appropriate reserves
are being maintained therefor.
(f) As to Receivables.
(1) The Debtor will keep its place of business or, if it has more
than one place of business, its chief executive officer and the office where it
keeps its records concerning the Receivables at the location therefor specified
in Section 5(a) or, upon 30 days' prior written notice to the Secured Party, at
other locations in jurisdictions where all actions required by Section 12(b)(2)
have been taken with respect to Receivables; provided, however, that in no event
-------- -------
shall any of the Debtor's records concerning Receivables be located outside the
United States of America. The Debtor will hold and preserve such records and
will permit representatives of the Secured Party at any time during normal
business hours to inspect and make abstracts from such records.
7. DEBTOR REMAINS LIABLE. Anything herein to the contrary
---------------------
notwithstanding, (a) the Debtor shall remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein to perform
all of its duties and obligations thereunder to the same extent as if this
Agreement had not been executed, (b) the exercise by the Secured Party of any of
its rights hereunder shall not release the Debtor from any of its duties or
obligations under the contracts and agreements included in the
-12-
<PAGE>
Collateral, and (c) the Secured Party shall not have any obligation or liability
under the contracts and agreements included in the Collateral by reason of this
Agreement and shall not be obligated to perform any of the obligations or duties
of the Debtor thereunder or to take any action to collect or enforce any claim
for payment assigned hereunder.
8. TRANSFERS AND OTHER LIENS. The Debtor agrees that it will not (a)
-------------------------
sell, assign (by operation of law or otherwise) or otherwise dispose of, or
grant any option with respect to, any of the Collateral, except for sales of
Inventory in the ordinary course of business, or (b) create or permit to exist
any lien upon or with respect to any of the Collateral, except for the security
interest created by this Agreement.
9. SECURED PARTY APPOINTED ATTORNEY-IN-FACT. The Debtor hereby
----------------------------------------
irrevocably appoints the Secured Party the Debtor's attorney-in-fact, with full
authority in the place and stead of the Debtor and in the name of the Debtor or
otherwise, from time to time in the Secured Party's discretion to take any
action and to execute any instrument that the Secured Party may deem necessary
or advisable to accomplish the purposes of this Agreement, including, without
limitation, the following:
(a) to obtain and adjust insurance required to be paid to the Secured
Party pursuant to Section 6(b);
(b) To ask for, demand, collect, sue for, recover, compromise,
receive, and give acquittance and receipts for moneys due and to become due
under or in respect of any of the Collateral;
(c) to receive, endorse and collect (i) any drafts or other
instruments, documents and chattel paper in connection with Section 9(a) or (b)
and (ii) all instruments
-13-
<PAGE>
made payable to the Debtor representing any interest payment, dividend, return
of principal or other distribution in respect of the Deposit Account Collateral
or any part thereof, and to give full discharge for the same; and
(d) to file any claims, take any action or institute any proceedings
that the Secured Party may deem necessary or desirable for the collection of any
of the Collateral or otherwise to enforce the rights of the Secured Party with
respect to any of the Collateral.
10. SECURED PARTY MAY PERFORM. If the Debtor failures to perform any
-------------------------
agreement contained herein, the Secured Party may itself perform, or cause
performances of, such agreement, and the expenses of the Secured Party incurred
in connection therewith shall be payable by the Debtor.
11. SECURED PARTY'S DUTIES. The powers conferred on the Secured Party
----------------------
under this Agreement are solely to protect its interest in the Collateral and
shall not impose any duty upon it to exercise any such powers. Except for the
safe custody of any Collateral in its possession and the accounting for moneys
actually received by it hereunder, the Secured Party shall not have any duty as
to any Collateral, as to ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relative to any
Deposit Account Collateral, whether or not the Secured Party has or is deemed to
have knowledge of such matters, or as to the taking of any necessary steps to
preserve rights against other parties or any other rights pertaining to any
Collateral. The Secured Party shall be deemed to have exercised reasonable care
in the custody and preservation of any Collateral in its possession if such
Collateral is accorded treatment substantially equal to the treatment that the
Secured Party accords its own property.
-14-
<PAGE>
12. RIGHTS OF THE SECURED PARTY PRIOR TO DEFAULT
--------------------------------------------
(a) Notwithstanding any other part of this Agreement, the Secured
Party may enter upon Debtor's premises at any reasonable time and upon
reasonable prior notice and with minimum interference with Debtor's business
operations to inspect Debtor's books and records pertaining to the Collateral or
its proceeds and Debtor shall assist the Secured Party in whatever way
reasonably necessary to make any inspection.
(b) The Debtor hereby agrees that upon five (5) business days
written notice from the Secured Party it will do any or all of the following:
(1) deliver to the Secured Party lists or copies of all
accounts which are proceeds of Debtor's inventory promptly after they arise;
(2) join with the Secured Party at its request in executing
financing statements and pay the cost of filing the same wherever the Secured
Party deems appropriate and will do, make, execute and deliver all such
reasonably additional and further acts, things, deeds, assurance and instruments
as the Secured Party may reasonably require to completely vest in it and assure
to it its rights hereunder in and to the Collateral and will pay all reasonable
out-of-pocket expenses, including, without limitation, the enforcement of any of
the Obligations or the administration, preservation, or protection of or
realization upon the Collateral or any part thereof.
13. EVENTS OF DEFAULT
-----------------
Each of the following shall be an event of default.
-15-
<PAGE>
(a) An Event of Default as defined in the Trade Financing Agreement shall
have occurred and be continuing.
(b) Debtor defaults in the due performance or observance of any
obligation of Debtor under this Agreement and fails to cure such default within
30 days after receipt of written notice from Secured Party.
(c) Any representation or warranty or guarantee made by Debtor herein or
in any other statement heretofore or hereafter furnished by Debtor to the
Secured Party proves to be false or misleading in any material respect.
(d) Debtor becomes insolvent as defined in Section 1(a) above.
(e) This Agreement, for any reason except as may be permitted by the
terms hereof, ceases to create a valid and perfected first-priority security
interest in any of the Collateral.
14. ADDITIONAL RIGHTS OF SECURED PARTY AFTER DEFAULT
------------------------------------------------
(a) When Debtor is in default hereunder, all obligations secured hereby
shall become immediately due and payable at Secured Party's option without
notice to Debtor, and Secured Party may in its sole discretion proceed to
enforce payment of the same and exercise any or all of the rights and remedies
afforded to Secured Party by the Uniform Commercial Code or otherwise possessed
by Secured Party.
(b) In addition thereto, the Debtor further agrees as follows:
-16-
<PAGE>
(1) In the event that notice is necessary under applicable law,
written notice mailed to the Debtor or any accommodation party given seven (7)
business days prior to the date of public sale of any of the Collateral subject
to the security interest created herein or prior to the date after which private
sale or any other disposition of said Collateral will be made shall constitute
reasonable notice, but notice given in any other reasonable manner or at any
other time shall be sufficient.
(2) Without precluding any other methods of sale, the sale of
Collateral shall have been made in commercially reasonable manner if conducted
in conformity with reasonable practices for disposing of similar property.
(3) The Collateral need not be present at any public or private sale
or in view of the purchaser or purchasers and title shall pass upon such sale
wherever the property or any part thereof is located with like effects as though
all the property were present and in possession of the person conducting the
sale and were physically delivered to the purchaser or purchasers; the Secured
Party may bid for and purchase at any public or private sale the Collateral
offered for sale or any part thereof and by such Secured Party shall become the
owner thereof.
(4) The Secured Party may require the Debtor to assemble the
Collateral, taking all necessary or appropriate action to preserve and keep it
in good condition and make such available to the Secured Party at a place and
time convenient to both parties, all at the expense of the Debtor. Furthermore,
in any such event, to the extent permitted under applicable law, full power and
authority are hereby given to the Secured Party to sell, assign and deliver the
whole of the Collateral or any part thereof, at any time at any broker's board,
or at public or private sale, at the option of the Secured Party and no delay on
the Secured Party's part in exercising any power of sale or any other rights or
-17-
<PAGE>
options hereunder, and no notice or demand, which may be given to or made upon
the Debtor by the Secured Party with to or made upon the Debtor by the Secured
Party with respect to any power of sales or other right or option hereunder,
shall constitute a waiver thereof, or limit or impair the Secured Party's right
to take any action or to exercise any power of sale or any other rights
hereunder, without notice or demand, or prejudice the rights of the Secured
Party as against the Debtor in any respect.
(c) Without limiting any of foregoing, the Secured Party upon default of
the Debtor, may take possession of the Collateral. In taking possession, the
Secured Party may proceed without judicial process or may proceed by action. The
Debtor, upon two (2) business days written notice from the Secured Party, must
assemble all of the Collateral and make it available to the Secured Party at a
place designated by the Secured Party which is reasonably convenient to the
Secured Party and the Debtor. At the Secured Party's option, the Secured Party
may, without removal from the Debtor's premises determine that any or all of the
Collateral is unusable, and may dispose of the unusable Collateral on the
premises of the Debtor.
(d) Debtor will deliver to the Secured Party promptly upon receipt all
proceeds of the Inventory received by the Debtor including, without limitation,
proceeds of accounts referred to above, in the exact form in which they are
received.
(e) To evidence the Secured Party's rights hereunder, Debtor will assign
or endorse proceeds of Collateral to the Secured Party.
(f) Debtor will notify its account debtors that their accounts have been
assigned to the Secured Party and shall be paid to the Secured Party and
indicate on all invoices to such account debtors that the accounts are payable
to the Secured Party. The Secured Party
-18-
<PAGE>
shall have full power to so notify account debtors, to collect, compromise,
endorse, sell, or otherwise deal with accounts and proceeds thereof in its own
name or that of Debtor at any time. The Secured Party in its sole discretion may
apply cash proceeds to the payment of any liabilities or may release such cash
proceeds to Debtor for use in the operation of Debtor's business.
15. DISPOSITION OF PROCEEDS FROM SALE OF DEBTOR'S COLLATERAL AFTER
--------------------------------------------------------------
DEFAULT BY DEBTOR.
- ------------------
(a) After default, the Secured Party may sell, lease or otherwise dispose
of any or all of the Collateral in its then condition or after preparation or
processing. The proceeds of disposition shall be applied first to the reasonable
expenses of retaking, holding, preparation for sale, selling and the like and
the reasonable attorney's fees and legal expenses incurred by the Secured Party
and second to the satisfaction of all of the indebtedness owed by the Debtor to
the Secured Party and any amount remaining shall be returned to the Debtor.
(b) If the proceeds from the sale of the Collateral are not sufficient to
satisfy the indebtedness of the Debtor to the Secured Party, the Secured Party
may proceed against the Debtor for any deficiency.
16. RIGHTS OF DEBTOR.
-----------------
Until default, Debtor may use its inventory and goods in any lawful manner
not inconsistent with this Agreement and with the terms of insurance thereon;
may sell its inventory and goods in the ordinary course of business; and may use
and consume any raw
-19-
<PAGE>
materials or supplies, the use and consumption of which is necessary in order to
carry on Debtor's business.
17. AMENDMENT OF AGREEMENT, WAIVERS, ETC.
-------------------------------------
(a) Debtor reserves the right to request the amendment of this
Agreement to accommodate accounts receivable financing at some time in the
future. Debtor will negotiate new terms with the Secured Party at that time. No
amendment or waiver of any provision of this Agreement or consent to any
departure by the Debtor therefrom shall in any event be effective unless the
same is in writing and signed by the Secured Party, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
(b) The waiver (whether express or implied) by the Secured Party of
any breach of any term or condition of this Agreement shall not prejudice any
remedy of the Secured Party in respect of any continuing or other breach of the
terms and conditions hereof and shall not be construed as a bar to any right or
remedy that the Secured Party would otherwise have on any future occasion under
this Agreement.
(c) No failure to exercise or delay in exercising, on the part of
the Secured Party, any right, power or privilege under this Agreement shall
operate as a waiver thereof or the exercise of any other right, power or
privilege.
18. Addresses for Notices. All notices and other communications provided
---------------------
for hereunder shall be in writing (including, without limitation, communication
by telecopier) and shall be mailed, telecopied, or delivered to the Debtor or
the Secured Party, as the case may be, at the address therefor set forth in the
Trade Financing Agreement or at
-20-
<PAGE>
such other address as may be designated by such party in a written notice to the
other party complying with the terms of this section. All such notices and other
communications shall be effective as provided in the Trade Financing Agreement.
IN WITNESS HEREOF, the parties hereto have executed this Agreement as of
the date first above written.
DEBTOR: Centillium Technology Corporation
BY: /s/ A. Travis White
TITLE: President and Chief Executive Officer
ADDRESS: 46531 Fremont Boulevard
Fremont, California 94538
SECURED PARTY: Mitsubishi International Corporation
By: /s/ Masayoshi Hirano
TITLE: General Manager of Palo Alto Office
ADDRESS: 850 Hansen Way, Suite 100
Palo Alto, California 94306
-21-
<PAGE>
Schedule 1
Deposit Accounts
- ---------------------------------------------------------------------------
Silicon Valley Bank
3303 Tasman Drive
Mail Stop NC11
Santa Clara, CA 95054
Checking Account No. ___________________
Payroll Account No. ___________________
Money Market Account No. ___________________
Morgan Stanley & Co., Inc.
[Address]
Checking Account No. ___________________
Payroll Account No. ___________________
Money Market Account No. ___________________
-22-
<PAGE>
EXHIBIT 10.21
UMC
Foundry Agreement
Between
United Microelectronics Corporation
And
Centillium Communications, Inc.
<PAGE>
FOUNDRY AGREEMENT
-----------------
This Foundry Agreement (the "Agreement") is entered into this March 7th , 2000
(the "Effective Date") by and between Centillium Communications Inc., a
corporation having its principal place of business at 47211 Lakeview Blvd.,
Fremont, California, 94538 ("Buyer") and UMC Group (USA), a California
corporation having its principal place of business at 488 DeGuigne Drive,
Sunnyvale, California, 94086 ("Seller"), for provision of foundry services to be
performed by United Microelectronics Corporation, an ROC corporation
("Manufacturer").
RECITALS
A. WHEREAS, Seller is in the business of furnishing integrated circuit
manufacturing services performed by Manufacturer, which shall perform, at
Seller's request, the manufacturing services contracted for with Seller
hereunder;
B. WHEREAS, Buyer desires to have Seller furnish integrated circuit
manufacturing services for it;
NOW, THEREFORE, in consideration of the following covenants and conditions the
parties agree:
1 DEFINITIONS
1.1 "Products" shall mean the products to be manufactured pursuant to this
--------
Agreement as specified in Quotation(s).
1.2 "Quotation(s)" shall mean the quotations attached hereto under Exhibit a
------------
and such further quotations as are agreed upon in a writing signed by Buyer
and an Officer of Seller. Each such Quotation shall describe the Products
to be manufactured, prices, fees and charges for the Products, acceptance
criteria for Products, all aspects of, and services needed for, mask
making, testing, assembly and packaging, and all other specifications,
quantities, cycle and lead times and parameters for the Products. Prices
shall be separately itemized for mask sets, processed wafers, wafer probe,
assembly and final test.
2 PRODUCTION PROCEDURES
2.1 Product Prototype Approval. No Product prototypes shall be manufactured
--------------------------
except pursuant to a Quotation approved in writing by Buyer and an Officer
of Seller. For each Quotation for a new Product agreed upon by the parties,
Buyer will deliver a tape in GDS II format or a mask set. If Buyer provides
its design in the form of a tape, then upon receipt of the tape from Buyer,
Seller, or its subcontractors, will produce a mask set. In either case,
Seller will produce one or more pilot wafer runs according to the schedule
and at the price set forth in the Quotation. Within ninety
<PAGE>
(90) days after receipt of pilot run wafers for a new Product, Buyer may
return any claimed non-conforming pilot wafers to Seller with a written
rejection statement specifying the alleged failure or failures of the pilot
wafers to meet the Acceptance Criteria set forth in the Quotation. If Buyer
does not return the pilot wafers with a written rejection statement within
such ninety (90) day period, then the process and pilot wafers shall be
deemed to have been approved by Buyer. If any pilot wafer does not meet the
Acceptance Criteria for reasons attributable to Seller and is rejected by
Buyer, Seller shall at Seller's expense use commercially reasonable efforts
to rerun the pilot wafers and resubmit the results in a manner that
complies with the Acceptance Criteria. If Seller, within ninety (90) days
after receipt of Buyer's timely written rejection report, is unable to
supply Buyer with conforming pilot wafers, then either party may by written
notice to the other terminate this Agreement as to such Product and
Quotation, and if so terminated, Buyer will not owe Seller any amounts for
the pilot wafers involved (1) otherwise provided in the Quotation, or (2)
the noncompliance was attributable to Seller.
2.2 ECNs
----
2.2.1 Buyer ECNs. After initial qualification, Buyer shall have the right to
----------
make such changes as it deems appropriate to the design of Products to be
fabricated for it by Seller, provided however that each such change must be
timely documented by Buyer through written change notices. Notwithstanding
anything to the contrary, after process qualification runs for a particular
design have been made and approved by Seller and Buyer, any Buyer-requested
changes to design, process or materials for such Products shall be subject
to Seller's consent (which will not be unreasonably withheld) and payment
by Buyer of applicable reasonable costs, if any, related to such change.
2.2.2 Seller ECNs. For changes that Seller desires to make, the following
-----------
procedure shall apply:
2.2.2.1 Routine Changes. Seller may, with Buyer's prior written approval, which
---------------
may not unreasonably be withheld, make changes in the processes used to
manufacture Products (i) that do not materially affect physical or
functional interchangeability or performance; or (ii) when required for
purposes of safety and/or compliance with applicable law or regulations.
2.2.2.2 Material Changes.
-----------------
2.2.2.2.1 Seller shall give Buyer advance written notice of any proposed
change(s) ("Proposed Change Notice") in materials and/or to the
manufacturing processes qualified for production of Products, which, to
the best of Seller's knowledge, might affect the form, fit, performance,
maintainability, operation, function, reliability, interface,
interconnectability, compatibility, design rules, models, or size of the
chips for Products then qualified and subject to open purchase orders from
Buyer.
<PAGE>
2.2.2.2.2 Such Proposed Change Notice shall describe the nature of the proposed
change(s), including reasons for the change(s), the anticipated
schedule for implementation of the change(s), and other relevant
technical and logistic considerations, including without limitation
quality and reliability data to the extent available.
2.2.2.2.3 Buyer shall approve or disapprove any such proposed change promptly,
but in no event may any such change be disapproved later than five
(5) business days after receipt of the Proposed Change Notice.
2.2.2.2.4 If Buyer disapproves such proposed change within the five business
day period allowed, Seller shall continue to manufacture and deliver
to Buyer unchanged Products in accordance with the applicable
Agreements for a minimum of six (6) months from the date Seller
issues the Proposed Change Notice.
2.2.2.2.5 Upon the expiration of three months after the following Proposed
Change Notice, Seller, in its discretion and by then giving a minimum
of three months prior written notice to the Buyer, may stop
manufacture and delivery of all Products involved without liability.
2.2.3 Quality Assurance. No additional quality assurance requirements or
-----------------
measurements (whether cv plots, metal step coverage analysis, SEM
analysis, or other) will be required except upon Seller's written
agreement as to the step or measurement to be performed, and Buyer's
written commitment to pay Seller's stated costs.
2.3 Production Runs, Pilot Runs, Hot Runs, etc. Exhibits a and B set forth the
------------------------------------------
terms applicable to Wafer Cycle Time, Pilot Runs, Hot Lots, Production Runs
and On Hold.
3 ORDER, DELIVERY, PRICING AND PAYMENT TERMS
3.1 Forecasts
---------
3.1.1 During the first seven calendar days of each month, Buyer will provide
to Seller by facsimile or other electronic communication a written
rolling forecast of its wafer capacity requirements from Seller's
facilities for the next twelve full calendar months (each a "Buyer
Forecast") (provided however that forecasts for the seventh and later
months are for reference only and not binding on either party).
3.1.1.1 Each such Buyer Forecast shall show the quantity of wafer outs and the
specific technology and/or process for the wafers listed. Buyer shall
make good faith efforts to ensure that all such Buyer Forecasts are
reasonable estimates of its anticipated needs. Subject to this
obligation, and except as expressly stated in this Section 3.1.1 and/or
in a written capacity quotation, all such Buyer
<PAGE>
Forecasts (and any responses to them) will be for planning purposes only,
and will not create any obligation to purchase and/or sell.
3.1.1.2 Each such Buyer Forecast shall constitute a commitment by the Buyer to
purchase a minimum of the following percentages of the amounts indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Month in the forecast First month Second month of Third month Fourth month Fifth & sixth
of forecast forecast of forecast of forecast months
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Minimum percentage
commitment for 100% 100% 100% 75% 50%
amounts forecast for
that month
- ---------------------------------------------------------------------------------------------------------
</TABLE>
3.1.1.3 Seller will provide a written response to each Buyer forecast within
two weeks of Seller's receipt. Subject to Section 3.1.2 below and the other
terms set forth in this Agreement, Seller's response shall accept the
quantities in the applicable months to the extent they are less than or
equal to those accepted by Seller for the applicable month(s) pursuant to
prior written agreement and/or forecasts. Seller's response may accept
and/or reject in whole or in part any additional forecast quantities for
those months.
3.1.2 To the extent that any forecast from Buyer pursuant to Section 3.1.1
above fails to forecast the full capacity or quantity if any, allocated or
promised to Buyer during any one or more of the first twelve months of such
forecast: (i) Seller shall be entitled in its sole and complete discretion
to enter commitments with others for such unexercised capacity for the
applicable months and in the amounts not so exercised, and (ii) such Buyer
will not have any right to require Seller to provide that unexercised
capacity to that Buyer in the month(s) involved.
3.2 Orders And Production Release. No order for production quantities of a
-----------------------------
Product shall be placed by Buyer unless and until Buyer has approved the
pilot runs or prototypes for the Product. If Buyer properly places an order
for production quantities of a Product, Seller may deem such an order as
written production release approval for such Product. All orders for
Products shall be in writing. Seller shall acknowledge in writing, within
three (3) business days of receipt of an order, either the acceptance of
the order, or the reason such order cannot be accepted, or if Seller wishes
to modify such order. If Seller does not provide such acknowledgement
within the time provided, Buyer shall contact Seller to determine the cause
for the lack of acknowledgment. No acceptance of a purchase order shall
constitute acceptance of any terms at variance with this Agreement and/or
previously agreed forecasts, and purchase orders shall be null and void as
to those variances.
3.3 Cancellation and Modifications to Orders.
-----------------------------------------
3.3.1 Cancellations and Modifications. Unless wafer processing has started, or
-------------------------------
Seller has incurred engineering or tooling charges, Buyer may cancel or
modify a
<PAGE>
purchase order without penalty by delivering to Seller a written notice of
cancellation or modification within three (3) days of Seller's receipt of
the original purchase order involved; provided however that no such
cancellation will relieve Buyer of any obligations under any other
applicable provisions or agreements including without limitation any
obligation to comply with loading commitments, forecasts and/or purchase
orders.
3.3.2 Cancellation Charges. In addition to, and without waiving any other
--------------------
remedies, the minimum charges for order cancellation shall be the contract
price multiplied by the proportion of the relative mask step at which the
wafer(s) were at the time of cancellation, plus all costs of starting wafer
materials and mask sets.
3.3.3 Partially Completed Products. In no event will Buyer have rights in
----------------------------
partially completed Products.
3.4 Delivery.
--------
3.4.1 Delivery will be made FCA (Incoterms 2000), Manufacturer's plant, Science
Based Industrial Park, HsinChu City, Taiwan, to a carrier designated in
writing by Buyer or, if Buyer fails to designate a carrier, to a carrier
designated by Seller.
3.4.2 Title to the Products will pass to Buyer upon delivery to carrier.
3.4.3 All shipping and delivery dates are subject to timely receipt of fully-
approved mask sets and fully-completed purchase orders in the HsinChu
office of Manufacturer's fab where the wafers are to be processed.
3.4.4 Seller shall make reasonable efforts to achieve on-time delivery and
linear shipments. Subject to this and Seller's written commitments for
wafer starts, SELLER SHALL NOT BE LIABLE FOR ANY DELAYS OR FAILURES TO MEET
DATES.
3.4.5 In the event of any delays and/or any breach of any written warranty,
Buyer may give prompt written notice to Seller, adjusting forecasted and/or
ordered amounts, and/or canceling orders for affected Products, to the
extent necessary as a result of any impact of such delay on Buyer's need
for such Products.
3.5 Pricing.
- -----------
3.5.1 Refer to Exhibit A.02 for Pricing. Exhibit A.02 shall be reviewed on a
yearly basis and pricing may be revised if needed. Such review shall be
done during the last quarter of each year to set prices for the following
year.
3.5.2 Any tax or related charge which Seller shall be required to pay to or
collect for any government upon or with respect to services rendered or the
sale, use or delivery of the Product or other materials (except for taxes
based on Seller's
<PAGE>
income) shall be billed to the Buyer as a separate item and paid by Buyer,
unless a valid exemption certificate is furnished by Buyer to Seller.
3.6 Payment
-------
3.6.1 Unless otherwise agreed or stated in Seller's quotation, full payment
shall be made in New Taiwan Dollars or U.S. Dollars (as stated in the
applicable Quotation or as otherwise agreed in writing) within 30 days of
delivery.
3.6.2 Seller reserves the right to change credit terms at any time in its
reasonable discretion.
3.6.3 Buyer will issue written purchase orders at least four weeks, plus the
agreed cycle time, prior to requested wafer out day.
3.6.4 Regardless of anything to the contrary, Buyer understands that Seller
generally needs to start more than the numbers of wafers ordered by Buyer
in order to guarantee the quantities of wafers so ordered which will yield
within the agreed specifications. Accordingly, Buyer will accept quantity
variations (and pay according to the agreed pricing) up to as much as ten
percent (10%) above the quantities stated in Buyer's purchase order(s).
4 RELIABILITY & QUALITY
4.1 Quality Data. Seller will provide, upon Buyer's written request during the
------------
term of their foundry relationship, Seller's available reliability and
quality data regarding Products produced for Buyer for the purpose of
maintaining consistent quality and reliability standards for such Products.
4.2 Traceability. During the term of the foundry relationship, Seller shall
------------
maintain fab and test lot traceability for Products manufactured on behalf
of Buyer.
4.3 Notification of Defects. Seller will promptly after discovery advise Buyer
-----------------------
of defects and/or non-conformity in Products already shipped to and/or in
lots currently in manufacture for Buyer.
4.4 Acceptance Criteria. Wafer acceptance will be subject to process control
-------------------
monitor acceptance criteria to be mutually agreed upon on a process-by-
process basis. Once approved, no such wafer acceptance criteria shall be
binding until in a writing signed by an Officer of Seller which clearly and
specifically identifies the Products (by mask or product number) and
processes (by Seller's process designation) involved. All accept/reject
criteria shall be stated in the agreed upon wafer acceptance and visual
inspection specifications and all critical dimension and process tolerances
shall be solely as agreed upon in writing.
<PAGE>
4.5 Stop Shipments.
--------------
4.5.1 Subject to Buyer's obligations with respect to volumes committed under
the ordering and forecasting procedures involved, upon receipt of Buyer's
written Stop Request, Seller will immediately stop shipment of Products
which are subject to a suspected failure to meet the criteria specified in
the wafer acceptance criteria agreed upon in writing between Buyer and
Seller. If Seller is responsible for such failure, and Seller is not able
to correct the matter within sixty (60) days of receipt of such Stop
Notice, then (i) Buyer may reject non-conforming Products, and, (ii) Buyer
may, without penalty (including loss of capacity), cancel any then-pending
purchase order(s) for such Products as to which Wafers have not been
started by sending written notice of cancellation to Seller within seventy-
five (75) days of the written Stop Request. Such a notice of cancellation
shall be effective on receipt by Seller.
4.5.2 If Buyer requests Seller to stop shipment of any Products which Buyer is
obligated to purchase, and the Products are determined in good faith by
Seller to have been processed in accordance with the applicable written
requirements, in addition to and without waiving any other remedies, Buyer
shall pay Seller in full for completed Products and, in addition, for
Seller's reasonable costs for work in progress. Under this Section 4.5
payment for completed Products will be at the purchase order price, and
payment for work in progress shall be based on Buyer's actual costs for raw
materials and the relative mask step reached when work is stopped.
4.6 Failure Analysis. Upon written request from Buyer and subject to
----------------
satisfactory arrangements for payment to Seller for the reasonable costs
involved, Seller will perform failure analysis of Products returned to
Seller pursuant to Seller's standard Return Policy and Procedures. If such
analysis shows the existence of material defects in breach of applicable
Seller warranties, Seller will not be entitled to payment for the cost of
Seller's failure analysis concerning such defects for the specific Products
which were subject to them.
4.7 Return Material Authorization (RMA). Buyer will not make any returns to
-----------------------------------
Seller without first obtaining a written Return Material Authorization
(RMA). Buyer agrees to pay Seller the full purchase price and all costs and
charges incurred by Seller in connection with any returned wafers or
Products which Seller determines were within Seller's specifications at the
time of initial delivery to the carrier or at the time of return to Seller.
Generally, Seller will analyze authorized returns within four (4) working
weeks of receipt by Seller, and promptly thereafter report on the results.
Buyer agrees to cooperate in good faith with Seller to resolve any problems
that may arise and to promptly send Seller the results of all tests and
analyses concerning Products.
5 WARRANTY
<PAGE>
5.1 Limited Warranty. Seller warrants Products delivered after initial
----------------
qualification shall be processed (i) using the masks (or duplicates of
them) which were used for qualification, (ii) within the tolerances stated
in Seller's applicable process specifications, and (iii) in compliance with
applicable Wafer Acceptance and/or Yield Criteria agreed to in a writing
signed by Seller and Buyer.
5.2 Exclusions.
----------
5.2.1 Products which have been subject to abuse, misuse, accident, alteration,
neglect, conditions outside specification, unauthorized repair or improper
application are not covered by any warranty.
5.2.2 Seller shall not be responsible for defects or claims caused by acts not
performed by Seller; or by design or application; or by combination of
Products with other things.
5.2.3 Products are not intended for use in, and no warranty is made with
respect to, applications where failure to perform can reasonably be
expected to result in significant injury (including, without limitation,
navigation, weaponry, aviation or nuclear equipment, or for surgical
implant or to support or sustain life) and Buyer will indemnify, defend,
and hold harmless Seller from all claims, damages and liabilities arising
out of any such matters.
5.3 Remedy. To the extent that any Products fail to meet the applicable
------
warranties and/or requirements due to reasons for which Seller is
responsible, Seller shall either (i) replace such Products without charge,
or (ii) refund the payments made to Seller for such Products, all within
sixty (60) calendar days of Seller's receipt of written notice from Buyer
of such non-conformity. The parties will discuss in good faith which of
these two remedies is the most appropriate; provided however that if they
cannot agree, Seller may choose in its sole discretion between the two
remedies, and provided further that all Products for which refund and/or
replacement is sought and all returns shall be handled pursuant to Seller's
Return Policy and Procedures.
5.4 Sole Warranty. This Section 5 is the only warranty by or on behalf of
-------------
Seller and may not be modified or amended except in writing signed by an
authorized officer of Seller and by Buyer. Buyer is not relying upon any
warranty or representation except for those specifically stated here or in
such a signed writing. With respect to obligations of Seller under this
Agreement which would logically be undertaken and/or performed by
Manufacturer, Seller guarantees Manufacturer's performance thereof.
5.5 No Reliance. Buyer is not relying on any statements or information in
-----------
Seller's literature, and Buyer will test all parts and applications under
extended field and laboratory conditions as appropriate. Notwithstanding
any cross-reference or statements of compatibility, functionality,
interchangeability, and the like, Seller
<PAGE>
made goods, embedded devices and processes may differ from similar goods,
devices and processes from other vendors in performance, function or
operation, or as to matters, ranges and conditions not stated in and/or
outside Seller's written specifications; and Buyer agrees that Seller makes
no warranties and is not responsible for such things. All reusable IP,
including that listed in Seller's Intellectual Property Catalog, and
including but not limited to blocks, libraries, tools, and documentation
therefor, is licensed to Buyer by the individual IP vendors and not by
Seller, and in any event Seller makes no warranty in connection with such
IP. Buyer is not relying on any statements or information provided by
Seller in connection with such IP, and Buyer will fully verify all IP as
appropriate and be responsible to ensure that such IP is compatible and
suitable for Buyer's intended purpose and applications.
5.6 Disclaimer. EXCEPT AS PROVIDED ABOVE, SELLER MAKES NO WARRANTIES OR
----------
CONDITIONS, EXPRESS, IMPLIED, OR STATUTORY, AND EXPRESSLY EXCLUDES AND
DISCLAIMS ANY WARRANTY OR CONDITION OF MERCHANTABILITY, NONINFRINGEMENT, OR
FITNESS FOR a PARTICULAR PURPOSE OR APPLICATION.
5.7 Limitation. REGARDLESS OF CAUSE OR REASON FOR DAMAGE (WHETHER ACCIDENT,
----------
NEGLIGENCE, OR OTHERWISE) SELLER SHALL HAVE NO LIABILITY (DIRECT,
CONSEQUENTIAL OR OTHER) FOR, IN CONNECTION WITH OR ARISING FROM PROPERTY
FURNISHED FOR USE AT OR LEFT AT SELLER; and by delivering or entrusting
property to Seller, Buyer expressly confirms this limitation.
Notwithstanding this limitation, Seller will replace, or pay the reasonable
retooling costs to replace, masks damaged or destroyed as a result of
Seller's negligence or fault. Upon written request sent to the billing
address listed on Buyer's latest-dated purchase order, Buyer will promptly
take possession of any and all property of Buyer, and should Buyer fail to
do so within thirty days of such request, Seller may destroy or reclaim
such property without liability.
6 LIMITATION OF LIABILITY
6.1 Force Majeure. Neither party will be liable for any loss, damage or claim
-------------
resulting from causes beyond its reasonable control, including but not
limited to, war, fire, delay caused by others, material shortage, force
majeure, or labor conditions; and in the event of such a condition(s), the
date(s) for Seller's performance will be extended for a period equal to any
resulting delay.
6.2 Limitation of Liability.
------------------------
6.2.1 SELLER'S LIABILITY ARISING OUT OF ANY QUOTATION, ANY AGREEMENT, ANY
BREACH THEREOF, OR ANY PRODUCTS OR SERVICES WILL BE LIMITED TO REFUND OF
THE PURCHASE PRICE
<PAGE>
OR REPLACEMENT OF PURCHASED PRODUCTS (RETURNED TO SELLER FREIGHT PREPAID);
OR 1N THE EVENT OF a FAILURE OR BREACH BY SELLER REGARDING DELIVERY, AN
AMOUNT EQUAL TO THE TOTAL PURCHASE PRICE OF THE PRODUCTS THAT HAVE NOT BEEN
DELIVERED DUE TO SUCH FAILURE. ALL CLAIMS WILL BE SUBJECT TO THE TIME
LIMITATIONS STATED IN SELLER'S RETURN POLICY AND PROCEDURE.
6.2.2 AS a SEPARATE LIMITATION, IN NO EVENT WILL SELLER BE LIABLE (i) FOR COSTS
OF SUBSTITUTE PRODUCTS, (ii) FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL OR
INDIRECT DAMAGES, OR (iii) FOR LOSS OF USE, OPPORTUNITY, MARKET POTENTIAL,
GOODWILL AND/OR PROFIT ON ANY THEORY (CONTRACT, TORT, FROM THIRD PARTY
CLAIMS OR OTHERWISE). THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY
FAILURE OF ESSENTIAL PURPOSE OR OF ANY FAILURE OR INADEQUACY OF ANY REMEDY.
THIS AGREEMENT STATES THE ONLY AND EXCLUSIVE REMEDY FOR ANY AND ALL CLAIMS
MADE AGAINST SELLER UNDER ANY AGREEMENT AND/OR WITH RESPECT TO WAFERS,
SERVICES AND/OR PRODUCTS.
6.3 Commencement of Actions or Proceedings. No action or proceeding (except for
--------------------------------------
payment for delivered Products) may be commenced by either party against
the other, whether for breach, indemnification, contribution or otherwise,
more than one year after delivery of the Products to the carrier; and no
claim may be brought unless the non-claiming party has first been given
commercially reasonable notice, a full written explanation of all pertinent
details (including copies of all materials), and a good faith opportunity
to resolve the matter.
6.4 BUYER EXPRESSLY AGREES TO THE LIMITATIONS OF SECTIONS 5, 6, 7 AND 8 AND TO
THEIR REASONABLENESS.
7 INDEMNIFICATION & COOPERATION
7.1 Indemnification by Seller. Seller will defend and/or settle all suits
-------------------------
against Buyer to the extent based on any claim that any processes (as
performed by Seller with respect to Products) infringe any R.O.C.,
Canadian, Japanese, European Community and/or U.S. patent, copyright, trade
secret or trademark; provided, however, that Buyer (i) gives immediate
written notice to Seller, (ii) permits Seller to defend, and (iii) gives
Seller all needed information, assistance, and authority.
7.2 Exclusions. Seller will not be responsible for infringements resulting from
----------
anything not manufactured entirely by Seller. or from any combination with
things or materials not furnished by Seller, or for any claim due in whole
or in part to any act, omission, design and/or specification of Buyer.
<PAGE>
7.3 THIS ARTICLE 7 STATES SELLER'S ENTIRE LIABILITY AND OBLIGATION WITH RESPECT
TO INTELLECTUAL PROPERTY INFRINGEMENT OR CLAIMS THEREFOR AND IS EXPRESSLY
SUBJECT TO ARTICLE 6. Except as to claims Seller is obligated to defend
and/or resulting from Seller's wrongdoing and/or negligence, BUYER WILL
INDEMNIFY, DEFEND AND HOLD HARMLESS SELLER FROM ALL CLAIMS, COSTS, LOSSES,
AND DAMAGES (INCLUDING REASONABLE ATTORNEYS' FEES) AGAINST AND/OR ARISING
OUT OF PRODUCTS AND/OR SERVICES.
7.4 Buyer Guarantee and Indemnity. Without limiting any other terms, Buyer
-----------------------------
guarantees that production of Products pursuant to Buyer's specifications
and/or designs will not infringe, misappropriate or violate any applicable
R.O.C., Canadian, Japanese, European Community and/or U.S. copyright,
trademark, patent, trade secret, mask work, or other rights of third
parties. In the event Buyer becomes party to any infringement or
misappropriation action or dispute with respect to Products, (i) Seller
may, at its sole option, immediately terminate and/or suspend performance,
and (ii) Buyer shall be fully and solely responsible, and will defend,
indemnify and hold Seller harmless from any and all damages, losses and
costs (including Seller's reasonable attorneys fees) resulting from any
claimed breach of Buyer's guarantee.
7.5 Cooperation. Seller and Buyer will cooperate in connection with any issue
-----------
raised with respect to intellectual property rights of third parties
relating to goods and/or to services under this Agreement. Without limiting
the foregoing, upon written notice to the other, any Party may suspend (i)
performance of its obligations, (ii) exercise of its rights of first
refusal with respect to capacity and/or (iii) providing capacity to the
extent that such Party has reasonable concerns that its future performance
in connection with such matters will subject it to claims by others with
respect to such matters, provided however that no such suspension will
affect any obligation to pay for Products delivered and/or manufactured in
whole or in part prior to the date of written notice concerning such
matters. In the event that Seller exercises any of its rights pursuant to
this Section 7, Seller will negotiate in good faith to minimize the
liability of Buyer to others.
8 CONFIDENTIALITY
8.1 NDA. The terms of the Reciprocal Non-Disclosure Agreement, attached hereto
---
as Exhibit C, are expressly incorporated herein.
8.2 Buyer's Masks and Databases. Seller will treat any and all masks and design
---------------------------
databases provided by Buyer as confidential, whether or not they are marked
as required by Exhibit C.
<PAGE>
8.3 Process Technology. Regardless of anything to the contrary., all processes,
------------------
recipes, and manufacturing, fabrication, assembly and test techniques, and
related improvements ("process technology") provided and/or developed by or
on behalf of Seller shall be wholly owned by and the property of Seller,
and Seller shall not be limited or restricted by this Agreement with
respect to any process technology unless clearly stated to the contrary in
a writing signed by an officer of Seller identifying the specific
information in precise detail.
9 TERMINATION & RELATIONSHIPS
9.1 Term. The term of this Agreement as related to any specific Product covered
----
by this Agreement shall be five (5) years from the date of the Quotation
for that Product, and shall thereafter be automatically extended for
additional one (1) year terms, unless and until a party to this Agreement
gives no less than one (1) year's notice that the term should not be
further extended for that Product. If Seller gives Buyer notice that the
terms for a Product will not be extended, then during the one (1). year
notice period Seller shall continue to accept and fill all orders placed by
Buyer for commercially reasonable quantities calling for delivery within
lead time of that Product.
9.2 Termination For Insolvency or Bankruptcy. Subject to Section 9.4 below,
----------------------------------------
Buyer and/or Seller (collectively "the Parties") shall have the right to
terminate the rights of the other Party under their applicable Agreements
(and any other agreement concerning Products) by giving written notice of
termination to that other Party at any time upon or after:
9.2.1 the filing by the other Party of a petition in bankruptcy or insolvency;
9.2.2 any adjudication that the other Party is bankrupt or insolvent;
9.2.3 the filing by the other Party of any petition or answer seeking
reorganization, readjustment or arrangement of its business under any law
relating to bankruptcy or insolvency;
9.2.4 the appointment of a receiver for all or substantially all of the
property of the other Party;
9.2.5 the making by the other Party of any assignment for the benefit of
creditors; or,
9.2.6 the institution of any proceeding for the liquidation or winding up of
the other Party's business or for the termination of its corporate charter.
Notwithstanding anything to the contrary, no termination under Section 9.2 as to
such other Party shall affect the rights of the Party giving the notice of
termination with respect to Products delivered and/or as to which production had
begun prior to the effective date of termination. Termination pursuant to this
Section 9.2 shall be effective
<PAGE>
immediately upon personal delivery, of the written notice, or in the case of
airmail notice, five days after dispatch.
9.3 Termination for Breach.
-----------------------
9.3.1 Termination Events. If any party fails to perform or violates any
------------------
material obligation under the applicable Agreements, effective upon thirty
(30) days' written notice to the breaching party specifying such default
(the "Default Notice"), the non-breaching party, may terminate the
applicable Agreement (and all related agreements concerning Products) as to
its responsibilities and obligations, without liability (subject to
Sections 9.4 and 9.5 below), unless:
9.3.1.1 The breach specified in the Default Notice has been cured within the
thirty (30) day period, or if the breach is disputed, the amount in dispute
is placed in a reasonably secure third party escrow account pending
resolution of the dispute;
or
9.3.1.2 The default reasonably requires more than (30) days to correct
(specifically excluding any failure to pay money), and the defaulting party
has begun substantial corrective action to remedy the default within such
thirty (30) day period and diligently pursues such action, in which event,
termination shall not be effective unless sixty (60) days has expired from
the date of the defaulting party's receipt of the Default Notice without
such corrective action being completed and the default remedied.
9.4 Effect of Termination.
----------------------
9.4.1 Termination by Buyer. If Buyer terminates the applicable Agreements for
--------------------
any reasons stated in Sections 9.2 and/or 9.3 above, Seller will, if so
requested in writing by Buyer: (i) cease all production required by Buyer's
then outstanding purchase orders under the Agreements; and (ii) otherwise
complete and deliver all Products pursuant to Buyer's then outstanding and
accepted purchase orders and invoice Buyer for the Products.
9.4.2 Termination by Seller. If Seller terminates this Agreement as to Buyer
---------------------
pursuant to Sections 9.2 and/or 9.3 above, in addition to and without
waiving any other remedy, Seller shall be entitled to payment in full upon
delivery of all completed Products manufactured on behalf of Buyer, as well
as to reimbursement for all reasonable direct costs incurred for up to one
month's work then in progress for Buyer.
9.5 Survival.
---------
9.5.1 All obligations to pay monies which accrue prior to termination and/or
expiration, and the provisions of the Reciprocal Non Disclosure Agreement
attached as Exhibit C, as well as all other obligations of confidentiality,
all limitations on
<PAGE>
warranties and remedies, all obligations with respect to indemnification
and cooperation, contribution, dispute resolution, and termination shall
survive the expiration and/or termination of the applicable Agreements
and/or of any purchase order or understanding concerning Products.
9.5.2 The exclusions and limitations of Sections 5, 6 and 7 will survive the
termination of the applicable Agreements, and shall apply notwithstanding
any claim of a failure of any one or more remedies to accomplish their
purpose. THE PARTIES EXPRESSLY WAIVE AND RELINQUISH ANY CONTRARY RIGHTS
UNDER ANY AGREEMENT, AND/OR LAW, DECISION, CUSTOM OR PRACTICE.
10 DISPUTE RESOLUTION
10.1 Management Resolution. Within thirty days of a written demand to meet to
---------------------
resolve such one or more disputes arising out of and/or relating to any
Agreement and/or Products, senior management with the authority to
negotiate and resolve the issues shall meet in Taiwan or in some other
mutually agreeable location to discuss the issues, and, from time to time
during the forty-five day period following such demand (or longer if
agreeable to the Parties), such management will negotiate and attempt to
resolve the issues as reasonably requested by any party involved.
10.2 Arbitration.
-----------
10.2.1 Any such disputes relating to and/or arising out of any Agreement and/or
Products which cannot be so resolved will be decided exclusively by binding
arbitration under procedures which ensure efficient and speedy resolution.
Such an arbitration may be commenced by Seller and/or Buyer (i) after the
expiration of the forty-five day period following the written demand to
meet to resolve the dispute pursuant to Section 10.1 above, and/or (ii) at
such earlier time as any Party involved repudiates and/or refuses to
continue with its obligations to negotiate in good faith.
10.2.2 The arbitration hearing will be before a panel of three neutral,
independent arbitrators. The arbitration hearing will be conducted in Santa
Clara, California (U.S.A).
10.2.3 The arbitration will be conducted under the International Rules of the
American Arbitration Association. Notwithstanding anything to the contrary:
10.2.3.1 the arbitrators will have no power to order discovery;
10.2.3.2 the arbitrators will follow such procedures and enter such orders and
conduct the hearing under conditions which ensure at least the same
degree of confidentiality for each party as provided by Seller's Standard
Non-Disclosure Agreement, and which adequately protect the participants
from disclosure of
<PAGE>
highly sensitive information to anyone other than the arbitrators and
lawyers (or comparable legal representatives) and reasonably necessary
expert witnesses and not to persons employed by one or more of the
parties nor to competitors of them, and
10.2.3.3 the arbitrators shall require pre-hearing exchange of documentary
evidence to be relied upon by each of the respective parties in their
respective cases in chief, and pre-hearing exchange of briefs, witness
lists and summaries of expected testimony.
10.2.4 The arbitrators will make their decision in writing; and their decision
will be binding upon the Parties and it may be entered by any court having
jurisdiction.
10.3 Injunctive Relief. Notwithstanding anything to the contrary, any party may
-----------------
apply to any court of competent jurisdiction for interim injunctive relief
with respect to irreparable harm which cannot be avoided and/or compensated
by such arbitration proceedings, without breach of this Section 10 and
without any abridgment of the powers of the arbitrators.
10.4 Governing Law. This Agreement and all foundry arrangements involving
-------------
Seller and all performance and disputes arising out of and/or relating to
such matters and/or any Products involved will be governed by the laws of
California and the United States of America, without reference to conflicts
of laws principles, and/or any contrary provision, including without
limitation, the U.N. Convention on Contracts for the International Sale of
Goods.
11 GENERAL
11.1 Non-Exclusive Relationship. Except as stated in a separate written
--------------------------
agreement signed by duly authorized officers of Seller and of Buyer,
nothing in the Agreements shall prohibit Buyer from purchasing goods and/or
foundry services from other suppliers, nor prohibit Seller from offering
wafers and/or foundry services to others or from offering products or
services on its own behalf.
11.2 No Agency or Partnership. Nothing in the Agreements shall be deemed to
------------------------
create a general or limited partnership or an agency relationship between
Buyer and/or Seller, and Buyer and Seller are independent companies. Buyers
will purchase products manufactured from Seller in an arm's length vendor-
purchaser relationship. No party shall be entitled to act on behalf of
and/or to bind any one or more of the others.
11.3 Compliance with Law. The parties will comply with all applicable
-------------------
restrictions and requirements of applicable law, including without
limitation those relating to labor, employment, environment, and export
control. Buyer agrees at its sole expense to comply with all applicable
laws in connection with the purchase, use or sale of the Products.
<PAGE>
11.4 No Implied Licenses. Nothing contained in this Agreement is intended to or
-------------------
shall be construed as:
11.4.1 conferring any right to the other Party to use in advertising,
publicity, or otherwise, any trademark, trade name or names of any Party,
or any contraction, abbreviation or simulation thereof; and/or
11.4.2 conferring by implication, estoppel or otherwise, upon any Party any
license or other right under any class or type of copyright, maskwork,
trademark, trade name, patent, utility, model or design patent except the
licenses and rights expressly granted under a written agreement signed by
the Parties.
11.5 Entire Agreement. This Agreement (including the attached exhibits)
----------------
contains all material and essential terms of a binding agreement between
the parties with respect to with respect to foundry., fabrication,
semiconductors, design support and goods, there are no other agreements
concerning such subject matter. This Agreement is the entire agreement
between the parties with respect to the stated subject matter; it
supersedes all prior understandings and agreements with respect to these
matters, and there are no prior representations, warranties or other
agreements relating thereto. This Agreement may not be modified, except in
writing signed by duly authorized officer of each party, and no addition,
deletion or modification shall be binding on Seller unless expressly agreed
to in a writing signed by an officer of Seller.
11.6 Notices. All notices, payments, reports and other communications required
-------
or permitted hereunder shall be in writing and shall be mailed by first
class, registered or certified mail, postage prepaid, or otherwise
delivered by hand, by messenger (including express mail courier services)
or by facsimile, addressed to the addresses first set forth above or at
such other address furnished with a notice in manner set forth herein. Such
notices shall be deemed to have been served when delivered or, if delivery
is not accomplished by reason of some fault of the addressee, when
tendered. Notices shall be addressed as follows:
If to Seller: UMC Group (USA) Copy to: Law+
488 DeGuigne Drive 993 Highlands Circle
Sunnyvale, CA 94086 Los Altos, CA 94024
Attn: President Attn: Peter Courture, Esq.
Fax (650) 968-8885
If to Buyer: Centillium Communications Inc.
47211 Lakeview Boulevard
Fremont, CA 94538
Attn: Vice President of Operations
<PAGE>
11.7 Assignment. Neither this Agreement nor any of the rights and obligations
----------
created hereunder may be assigned, transferred, pledged, or otherwise
encumbered or disposed of, in whole or in part, whether voluntarily or by
operation of law or otherwise, by any party, without the prior written
consent of the other party. This Agreement shall inure to the benefit of
and be binding upon the parties' permitted successors and assigns.
11.8 Captions and Section Headings. The captions and section and paragraph
-----------------------------
headings used in this Agreement are inserted for convenience only and shall
not affect the meaning or interpretation of this Agreement.
11.9 Partial Invalidity. If any paragraph, provision, or clause thereof in this
------------------
Agreement shall be found or be held to be invalid or unenforceable in any
jurisdiction in which this Agreement is being performed, the remainder of
this Agreement shall be valid and enforceable and the parties shall
negotiate, in good faith, a substitute, valid and enforceable provision
that most nearly reflects the parties' intent in entering into this
Agreement.
11.10 Presumptions. In construing the terms of this Agreement, no presumption
------------
shall operate in either party's favor as a result of its counsel's role in
drafting the terms or provisions hereof.
11.11 Language. The English language shall govern the meaning and
--------
interpretation of this Agreement.
11.12 Waiver. The failure of either party to enforce at any time the provisions
------
of this Agreement, or the failure to require at any time performance by the
other party of any of the provisions of this Agreement, shall in no way be
construed to be a present or future waiver of such provisions, nor in any
way affect the right of either party to enforce each and every such
provision thereafter. The express waiver by either party of any provision,
condition or requirement of this Agreement shall not constitute a waiver of
any future obligation to comply with such provision, condition or
requirement.
11.13 Cumulative Remedies. The remedies under this Agreement shall be
-------------------
cumulative and not alternative and the election of one remedy for a breach
shall not preclude pursuit of other remedies unless as expressly provided
in this Agreement.
11.14 Confidentiality of Agreement. Each party agrees that the terms and
----------------------------
conditions of this Agreement and Quotations shall be treated as
confidential information of both parties, and that neither party will
disclose the terms or conditions to any third party without the prior
written consent of the other party, provided, however, that each party may
disclose the terms and conditions of this Agreement, to the extent
necessary:
11.14.1 as required by any court or other governmental body;
<PAGE>
11.14.2 as otherwise required by law;
11.14.3 to legal counsel of the parties, accountants, and other professional
advisors;
11.14.4 in confidence, to banks, investors and other financing sources and
their advisors;
11.14.5 in connection with the enforcement of this Agreement or rights under
this Agreement; or
11.14.6 in confidence, in connection with an actual or prospective merger or
acquisition or similar transaction.
11.15 Authority. Each party represents that all corporate action necessary for
---------
the authorization, execution and delivery of this Agreement by such party
and the performance of its obligations hereunder has been taken.
11.16 Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, all of which, taken together, shall be regarded as one and
the same instrument.
IN WITNESS WHEREOF, the parties have authorized their undersigned
representatives to sign this Agreement and to bind them to its terms and
conditions in accordance with the foregoing.
Buyer: Seller:
/s/ William F. Mackenzie /s/ Jim Kupec
- ------------------------ -------------
Authorized Signature Authorized Signature
William F. Mackenzie Jim Kupec
- -------------------- ---------
Printed Name Printed Name
Vice President, Operations President, Worldwide Marketing/Sales
- -------------------------- ------------------------------------
Title Title
March 8, 2000 March 7, 2000
- ------------- -------------
Date Date
<PAGE>
EXHIBIT A
---------
Quotation
---------
Exhibit A.01 - Initial Process (es)
UMC STANDARD "0.35 um CMOS double-layer poly and triple-layer metal (2P3M)
process on 8-inch non-epi wafers".
Exhibit A.02 - Price Quote
William F. Mackenzie ref.:CC030200
Vice President of Operations 3/6/00(revised)
Centillium Communications
Process Technology
0.35 um CMOS double-layer poly and triple-layer metal (2P3M) process on 8-inch
non-epi wafers
Mask Tooling
A mask set for design using the above technology will be provided at a NRE
charge of $37,900. Mask charge per layer shall be as follows:
<TABLE>
<CAPTION>
Layer Price
- ----------- -------
<S> <C>
Diffusion $ 3,000
N-Well $ 1,600
P-Well $ 1,600
Poly 0 $ 3,000
HR $ 1,600
Poly 1 $ 3,000
N+ $ 1,600
P+ $ 1,600
SAB $ 1,600
Contact $ 3,000
Metal 1 $ 3,000
Via 1 $ 3,000
Metal 2 $ 3,000
Via 2 $ 3,000
Metal 3 $ 3,000
Pad $ 1,300
Total $37,900
</TABLE>
<PAGE>
Proto Lot
A proto lot, processed with HOT LOT status, consists of a minimum of 6 wafers
and without process split conditions, will be provided at a NRE charge of
$25,000 per lot. UMC guarantees that wafers from this prototype lot meet our
outgoing PCM specifications.
Corner Lot
An engineering comer lot with a maximum of 14 wafers, processed with QTAP
status, will be provided at a NRE charge of $25,000 per tot. UMC guarantees that
nominal wafers from this lot meet our outgoing PCM specifications.
Wafer Price
Monthly run-rate * 500 wafers: $1,400 per wafer
Monthly run-rate ** 500 wafers: $1,380 per wafer
Notes:
1. NRE charges for the proto and comer lots are applicable only for the first
tape-out of a new technology.
2. The Super Hot Lot charge is $5,000 per lot for the above mentioned process
technology.
3. Wafers shall meet UMC standard PCM data.
Exhibit A.03 - Fabrication Cycle Times
Prototype: 20 days Cycle Time from mask generation to wafer out.
11 days from Metal 1 to wafer out.
Production: 38 days to wafer out after P.O. acceptance.
Exhibit A.04 - CAPACITY
--------
<TABLE>
<CAPTION>
Product Current Capacity Additional forecast Upside Max Capacity
Based on monthly time needed before incremental to Current
submission of 12 wafer start to meet Capacity
month forecast Upside Demand
(wafers/month) (wafers/month)
<S> <C> <C> <C>
Analog CPE 100 8 weeks 100 WAFERS
Analog CO 100 8 weeks 100 WAFERS
Analog Line Driver 50 8 weeks 50 WAFERS
</TABLE>
- ------------
* less than
** greater than or equal to
<PAGE>
EXHIBIT B
PROCEDURES
B.1 QUALIFICATION, HOT RUNS & PILOT RUNS
------------------------------------
B.1.1 All pilot runs and hot runs ("Hot Lots") require Seller's written
consent.
B.1.2 For engineering lots, split and hold conditions will be as set by written
agreement with Seller, and no splits or hold conditions will be permitted
without Seller's written consent.
B.1.3 The minimum quantity of wafers for each split condition is two (2)
wafers.
B.1.4 The minimum quantity for each pilot run is twelve (12) wafer starts.
Regardless of anything to the contrary, Seller's only obligation for pilot runs
is that six (6) out of twelve (12) wafer starts shall meet the PCM
specifications agreed upon in writing before wafer start.
B.2. PRODUCTION RUNS & ON-HOLD WAFERS
--------------------------------
B.2.1 Unless otherwise conspicuously stated in a purchase order accepted and
signed by Seller, the minimum quantity in any lot shall be 25 wafers and no
staged wafer runs will be allowed in production without Seller's consent.
B.2.2 Subject to the other terms and conditions herein, by conspicuous written
request in Buyer's purchase order, Buyer may request staging of mask code and
gate array wafers as follows:
(a) the purchase order must include the holding stage and forecast release
date;
(b) the minimum quantity for any stage release shall be at least six (6)
wafers;
(c) all stage releases which have less than eighteen (18) wafers shall be
subject to surcharge in an amount Seller will quote;
(d) if the holding time for any step is more than four weeks, for each two
week and for each partial two week period thereafter, Buyer will pay a per hold
wafer surcharge equal to three percent (3%) of the total purchase order price;
(e) if any on-hold time exceeds eight weeks, Buyer will pay Seller the full
purchase order price plus the applicable surcharges stated above;
<PAGE>
(f) if any on-hold time exceeds ten weeks, in addition to all other
remedies, Seller may scrap the staged wafers from the production line, unless
before the expiration of that on-hold time Seller receives written request from
Buyer to return the staged wafers.
B.2.3 Regardless of anything to the contrary, once the purchase order has been
received by Seller, Seller will not be obligated to accept or honor orders or
requests to hold wafers.
B.3 Wafer Cycle Time. Unless otherwise agreed in writing, Wafer Cycle Time--the
----------------
time from wafer start (and written approval of PCM specifications) to final
visual inspection at Seller's premises--shall be as stated in Seller's written
quotation for the specific Products.
<PAGE>
Reciprocal NDA
RECIPROCAL NON-DISCLOSURE AGREEMENT
Effective Date: 8/11/98
-------
To protect certain confidential information that may be disclosed between
them. United Microelectronics Corporation, a California Corporation with
principal offices at 790 Palomar Ave. Sunnyvale, California ("UMC") and
Centillium Technology (the "Company") agree:
- ---------------------
1. This Reciprocal Non-Disclosure Agreement ("Agreement") shall only apply to
information designated as "CONFIDENTIAL" at the time of disclosure as follows:
(a) Confidential Information disclosed in any tangible form or thing must
be marked or labeled clearly as "CONFIDENTIAL" or with a similar legend
sufficient to notify the receiving party that it is subject to the terms of this
Agreement;
(b) Confidential Information disclosed in any of the manner must be clearly
identified as "CONFIDENTIAL" at the time of disclosure, and summarized in
reasonable detail and designated as "CONFIDENTIAL" in a writing delivered to the
receiving party within thirty (30) days of oral disclosure.
2. Each party agrees that for a period of five (5) years, and notwithstanding
any termination, expiration or cancellation hereunder, it will hold in strict
confidence and not disclose to any third party any Confidential Information
received from the other party hereto except as expressly agreed upon in writing.
Each party further agrees that it will not use or incorporate any Confidential
Information received from the other party hereto for any purpose whatsoever
except solely for the evaluation and/or pursuit of mutually amicable business
relations between the Company and UMC. Notwithstanding anything to the contrary,
to the extend reasonably appropriate in connection with the evaluation and/or
pursuit of mutually amicable business relations, UMC may disclose Confidential
Information from Company to one or more of the foundries within the UMC Group
subject to the requirement that the parties will be bound as if such foundry was
part to this Agreement. For purposes of this Agreement, the foundries in the UMC
Group include United Microelectronics Corporation's Fabs I and II, United
Semiconductor Corporation, United Integrated Circuits Corporation, United
Silicon, Inc. and the joint venture to be formed to operate the foundry location
currently known as UMC's Module 5 in the Science Based Industrial Park, Hsin-Chu
City, Taiwan.
3. Each party shall secure and safeguard any and all things, documents, work
in process, and work product that embodies Confidential Information of the other
in locked files or areas reasonably restricting access and preventing
unauthorized use and/or disclosure. Each party further agrees that it will
maintain reasonable procedures to prevent accidental or other loss of any
Confidential Information of the other, and to use at least the same degree of
care for such information as it uses to protect its own proprietary information.
In the event of any loss, disclosure or use of Confidential Information in
violation of this Agreement, the party involved shall immediately notify the
other.
4. The obligations of this Agreement shall not apply to Confidential
Information which the receiving party shows is:
(a) already in the possession of the receiving party at or before the time
of disclosure hereunder as reasonably shown by evidence existing at the
time of disclosure; or
23
UMC CONFIDENTIAL
24
<PAGE>
(b) now or hereafter publicly known through no wrongful act of the
receiving party (provided that if Confidential Information becomes publicly
known this shall not excuse a prior breach); or
(c) LAWFULLY RECEIVED FROM a THIRD PARTY WITHOUT OBLIGATION OF CONFIDENCE;
OR
(d) independently developed by the receiving party; or by persons not
having access to the Confidential Information; or
(e) approved for release by written authorization of the disclosing party
(f) disclosed pursuant to the requirement or demand of a lawful
governmental or judicial authority, but only to the extent required by
operation of law, regulation of court order.
5. Upon termination, cancellation or expiration of this Agreement, or upon
written request of the disclosing party, the receiving party shall promptly
return to the disclosing party all documents and other tangible things
reflecting Confidential Information of the disclosing party, together with all
copies, extract, summaries and (except as provided by agreement) other material
derived therefrom.
6. Confidential Information shall remain the property of the disclosing
party. The parties agree that nothing in this Agreement (expressly or impliedly)
grants any patent, copyright, trademark, mask work, trade secret or other
property right to the receiving party, by licensee or otherwise. The parties do
not intend that any agency, joint venture or partnership relationship be created
between them by this Agreement.
7. Neither party has an obligation under this Agreement to purchase nay item
or service from the other or to offer for sale products using or incorporating
Confidential Information. Either party may, at its sole discretion, and without
using Confidential Information of the other, offer products for sale, modify
products and/or discontinue products.
8. Notwithstanding anything to the contrary, all processes, recipes, and
manufacturing, fabrication, assembly and testing techniques, and improvements
relating thereto ("process technology") provided and/or developed by or on
behalf of UMC shall be wholly owned by and the property of UMC and UMC shall not
be limited or restricted by any terms of this Agreement with respect to any
process technology unless clearly stated to the contrary in a writing signed by
an officer of UMC and identifying the specific information involved in precise
detail.
9. This Agreement shall be governed by and construed under the laws of
California.
10. There are no understandings, agreements, or representations, expressed or
implied, regarding the Confidential Information except as stated above. This
agreement may not be amended, modified or altered except by a writing signed by
both parties hereto.
UMC COMPANY
By: /s/ Jean Tien By: /s/ William F. Mackenzie
------------- ------------------------
Name/Title: Jean Tien Name/Title: William F. Mackenzie
---------- --------------------
Customer Engineering Director Vice President, Operations
24
UMC CONFIDENTIAL
25
<PAGE>
EXHIBIT 10.22
CONFIDENTIAL
ASSEMBLY AND TEST SERVICES AGREEMENT
This Package and Test Agreement (the "Agreement"), is dated and effective as of
February 28th, 2000 (the "Effective Date"), by and between. ST Assembly and Test
Services Ltd a Singapore Corporation with offices at 5 Yishun Street, 768442,
Singapore (STATS), and Centillium Communications, Inc., a Delaware corporation
with offices at 47211 Lakeview Blvd., Fremont, California, 94538("Centillium").
RECITALS
WHEREAS, Centillium desires to purchase from STATS and STATS desires to
supply to Centillium Assembly and Test Services on the terms and conditions of
this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the parties agree as follows:
1.0 DEFINITIONS
1.1 "Assembly Cycle Time" means the period of time required to manufacture
-------------------
the Products, commencing upon wafer start and ending on the day when
STATS ships out (ex-factory) the ordered quantity of Products. The
Assembly and Test Cycles Times for Prototype Production and Volume
Production shall be as set forth in Exhibit A. Cycle Time does not
include local national holidays and other factory holidays and
shutdowns.
1.2 "Lead Time" means the period of time, in calendar days, from the
---------
placement of a particular order of a Product until the date of first
shipment (ex-factory) of the ordered quantity of the Product.
1.3 "Products" means the name of the package technology.
1.4 "Affiliate" means any corporation or business entity, which is owned
---------
or controlled by, owns or controls, or is under common ownership or
control with, a party. For purposes of this definition, "control" of a
corporation or business entity shall mean the right to exercise,
directly or indirectly, more than fifty percent (50%) of the voting
rights attributable to the shares of the corporation or business
entity or the power to direct or cause the direction of the management
or policies of the corporation or business entity.
Page 1 of 25
<PAGE>
2.0 INTELLECTUAL PROPERTY RIGHTS
2.1 Technical Information. All intellectual property and related rights in
---------------------
and to technical information of either party including an affiliate or
either party, which is provided to the other party in the course of
the development of the Product(s) shall continue to belong to such
providing party. This information shall be considered confidential and
covered by a separate Non Disclosure Agreement.
Page 2 of 25
<PAGE>
3.0 ASSEMBLY AND TEST SUPPLY
3.1 Assembly Manufacturing
3.1.1 On the terms and conditions of this Agreement, STATS will;
manufacture packages, wafer sort silicon and test assembled
packages
3.1.2 Centillium will take ownership of the packages after all
processing has been completed and electrical test continuity and
Visual Mechanical results meet specification, see exhibit B.
3.1.3 STATS will perform all Assembly and Test at its Singapore
manufacturing facility. If STATS desires to change the location
at which Assembly or Tests are being performed, STATS shall first
define a qualification plan and obtain Centillium's written
consent, more than 90 days prior to the location change.
Centillium reserves the right to approve all changes to location.
Centillium will notify STATS of approval or rejection within two
weeks from receiving STATS notification and supporting
documentation
3.1.4 If STATS desires to change the form, fit, function or
reliability STATS shall first define a qualification plan and
obtain Centillium written consent, more than 90 days prior to
such changes. Centillium reserves the right to approve all
changes to form, fit, function or reliability. Centillium will
notify STATS of approval or rejection within two weeks from STATS
Centillium's notification and supporting documentation
3.1.5 STATS will notify Centillium 90 days in advance, in writing, of
any changes that are not form, fit, function or reliability
related.
3.1.6 STATS agrees to provide End-of-Life Notification to Centillium
one year in advance of product discontinuance.
3.2 STATS will treat Centillium as a Key Account and as such will continue
to provide early access to newly developed processes during the period
this agreement is in force.
3.3 Qualification and Quality Control
3.3.1 Qualification Centillium and STATS will cooperate fully to
qualify jointly each product for which silicon is used in a
package technology and will be manufactured hereunder
("Qualification"). Accordingly, the parties will cooperate to
implement a Qualification procedure pursuant to which the parties
will agree on parameters to monitor product quality and
reliability. After qualification, Reliability Monitor data will
be provided to Centillium on a quarterly basis detailing; Number
of Lots, Number of devices, Number of passes/fails (cycles when
failed), Test criteria. EXHIBIT C
3.3.2 Changes After Qualification of any Product, STATS shall not
make any major and/or critical Process change which will impact
the performance, reliability or construction of the Products,
without Centillium prior written consent, which consent shall not
be unreasonably withheld. STATS shall notify Centillium in
writing in advance of major Process changes, including but not
limited to any changes which may:
Page 3 of 25
<PAGE>
3.3.2.1 Degrade Product quality or reliability;
3.3.2.2 Result in failure of the Product to meet Centillium
specifications
3.3.2.3 Substantially stow lead times
3.3.2.4 Change Process control variables, ranges or method;
3.3.2.5 Result in leadframe or substrate revisions or changes to
test methods/limits;
3.3.3 Problem Notification
STATS will classify and notify Centillium promptly (EXHIBIT D) upon
discovering major process problems in its manufacturing lines
that may affect the delivery capability of packages or package
yields or that it has caused via the use of returned material.
3.3.4 Yield Improvement Help STATS will notify Centillium of yield
trends on a quarterly basis and what action is being performed to
resolve the issues.
3.4 Capacity and Forecasts.
3.4.1 Capacity Agreement (EXHIBIT E)
In order to ensure capacity. Centillium will provide a 12 month
forecast with upside potential. STATS will agree to fulfill the
capacity requirement of the 12 month forecast. This forecast is
to be used for capacity planning only and the forecast on section
(3.4.2) will be used to purchase wafers. If Centillium has
unexpected demand above and beyond its upside forecast STATS
agrees to meet this upside 100%, within the specified cycle times
(EXHIBIT A) provided at least five (5) weeks notice is provided.
3.4.2 Three (3) Month Rolling Forecasts
Each month, Centillium will provide STATS a rolling forecast
("Forecast") of the number of packages and test time, which
Centillium intends to purchase weekly during the next three- (3)
months. The Forecast will be based on "packages out," i.e., on
deliveries expected to be made by STATS each week
3.4.3 Forecast Acknowledgment.
All Forecasts shall be mutually agreed in writing (e-mail) with PO
number and acknowledged package builds for each month of the
three- (3) month forecast
3.4.4 Required Orders
Upon mutual agreement by the parties regarding the forecast,
Centillium shall issue a "blanket" purchase order for those units
identified in the initial Forecast and each subsequent weekly
Forecast issued in accordance with this Agreement. Authorization
for payment against the forecast will be given upon the
determination of the quantity within 30 days of the shipment
date.
3.4.5 Purchase Order Process
A blanket purchase order and the forecast process as stated in section
3.4.4, 3.4.2 will initiate all purchases under this Agreement.
Forecast shall state unit quantities, unit descriptions,
requested delivery dates and shipping instructions. This
Agreement, any prices agreed upon by the parties pursuant to this
Agreement, unit quantities, unit descriptions, requested delivery
dates and shipping instructions, shall constitute the complete
agreement between the parties with respect to the purchase and
sale of the Products and shall
Page 4 of 25
<PAGE>
supersede all prior oral or written agreements, representations
and other communications between the parties relating to the
subject matter of this Agreement. This Agreement shall also
supersede any standard terms and conditions or pre-printed terms
and conditions found on any Purchase Order issued under this
Agreement.
3.4.6 Cancellation
------------
Centillium may cancel product purchase order(s) or any portions
thereof for any reason by notifying STATS in writing 48 hours
prior to the scheduled start date on the forecast, provided that
Centillium shall be liable for the costs of any direct or
indirect raw materials incurred by STATS in reliance of the
forecasts notwithstanding the cancellation or if Centillium's
confirmed orders are less than Centillium's forecasts orders.
3.4.7 Delivery Commitments.
--------------------
STATS will deliver products to the carrier for shipment, within one
(1) day. Upon Centillium request, STATS will halt production
during manufacture, the foregoing delivery commitments will be
extended by the number of days that the products are held.
3.4.8 Shipping
--------
All assembled units shall be delivered to Centillium, its designated
airport or Customers freight forwarder in the case of drop ship.
Pre-alerts are required to be sent from STATS to Centillium's
freight forwarder at least 24 hr. in advance. Products shall be
suitably packed for shipment in STATS JEDEC compliant standard
containers, marked for shipment as specified in Centillium's
purchase order, and delivered to a carrier or forwarding agent
chosen by Centillium. However, should Centillium fail to
designate a carrier, forwarding agent or type of conveyance,
STATS shall contact Centillium's shipping department.
3.5 Test and Inspection
3.5.1 Inspection Results
------------------
STATS will supply to Centillium, with each shipment, quality control
results, visual quality inspection results as agreed by the
parties and a certificate of compliance to show the assembly and
quality control steps were all completed
3.5.2 Regular Reports
---------------
STATS will supply Centillium with reliability and statistical quality
data on the STATS standard processes, which is made for the same
product line, at regular intervals to be agreed upon but no less
than once a quarter. The format and the contents of these
report(s) are to be mutually agreed upon. Upon reasonable notice,
STATS will allow Centillium on-site inspection at reasonable
intervals to ensure that STATS follows the reliability and
testing procedures set forth in this Agreement.
3.5.3 Incoming Inspection Packages and tested devices may be subject
-------------------
to incoming inspection, electrical testing and reliability
testing by Centillium in accordance with the acceptance criteria
set forth in Exhibit B and C hereto. Packages meeting applicable
initial acceptance criteria or updated acceptance criteria will
be deemed
Page 5 of 25
<PAGE>
accepted by Centillium. If packages do not meet this criteria
Centillium Communications will notify STATS within 72 hr.
3.5.4 Test or Visual/Mechanical Failure
---------------------------------
If any packages or lot of packages fails incoming inspection or test,
and if test failure is caused by any defect in the Process used
by STATS, Centillium may reject such lot or package in writing as
soon as possible but at least within forty-five (45) days after
delivery. In such event, STATS may, at its option, either re-
test, rework or refund Centillium the purchase price of STATS
services. Centillium will explain the reasons for wishing to
reject a lot, and STATS will be entitled to examine any lot that
Centillium wishes to reject. The parties will seek in good faith
to resolve any disagreement as to whether a lot is conforming.
After mutual agreement for return shipment, Centillium shall use
reasonable commercial efforts to use STATS original packing, but
in any event shall use commercially reasonable packaging, and
supply all identifying shipping documents in order to avoid any
deterioration of the goods.
3.5.5 Low Line Yield on Volume Production.
-----------------------------------
If the output per lot (i.e., electrical or visual mechanical yield,
which meets the inspection and test criteria, is less than yield
defined in Exhibit F and if Centillium so requests, STATS will
explain the reasons for the low line yield. Lots or packages with
yields below a yield defined in Exhibit F may not be shipped
unless Centillium prior approval is obtained. The Established
Standard Yield will be reviewed in every quarterly strategic
business review and mutually agreed upon to apply for the
following quarter and placed in Exhibit F.
Page 6 of 25
<PAGE>
4.0 COMPENSATION
4.1 Purchase Price
--------------
The price of the services shall be determined from time to time by
agreement and quotation. The fixed price for any quarter will be
reviewed during the last month of the previous quarter and mutually
agreed to by the parties in good faith. For example, the Q2 (May -
July) price will be finalized by March. If an agreement cannot be
made, the current price will continue to be valid for the products
already ordered.
4.2 Payment.
-------
STATS will invoice Centillium the (the "payer"), as specified in the
relevant Purchase Order. Past due invoices of Centillium to the payer
shall bear interest at the rate of US prime rate + 1.5%, however, this
payment can be delayed without charge if a quality or other process
issue causes a delay but not in excess of the maximum lawful rate,
until paid in full. If the due date of the invoice of STATS is not a
business day, the payer shall pay STATS on the next business day
following such due date. STATS may submit invoices for services not
earlier than the date of shipment to Centillium Payment shall be in
United States dollars unless otherwise agreed.
4.3 Taxes
-----
Purchase prices shall be exclusive of all taxes and customs duties
including any applicable goods and services tax, and Centillium shall
pay and be liable for all taxes and duties imposed by any taxing
jurisdiction in "Country of Origin" or at the location of
manufacturing.
Page 7 of 25
<PAGE>
5.0 WARRANTY AND DISCLAIMER; LIABILITY
5.1 LIMITED WARRANTY. Products sold by STATS are warranted to conform to
----------------
specifications therefor at the time of delivery to Centillium and to
remain free from defects in workmanship and material for a period of
three (3) months from the date of shipment by STATS. Any products
which fail to meet either such warranty shall, at upon mutual
agreement, either be repaired or replaced by STATS at no charge to
Centillium or STATS shall issue a credit therefor in the amount paid
by Centillium on the said invoice. STATS warranty obligation shall be
limited solely to such repair, replacement or credit. Such obligation
shall be conditioned upon receipt by STATS of notice of any alleged
non-conformance to specifications within thirty (30) days after
delivery to Centillium and of any alleged defect in material or
workmanship within thirty (30) days after discovery. Products, which
STATS consents or directs in writing to be returned, shall be returned
to STATS, freight prepaid, F.O.B. Centillium's facility in California
or other destination directed by. STATS warranty shall only apply if
the products have not been altered or repaired other than with
authorization from STATS and according to its approved procedures, the
products have not been subjects to misuse, abuse, improper
installation, misapplication, maintenance, neglect or accident, the
products have not been damaged by excessive physical or electrical
stress and the products have not had their serial numbers, or other
markings, if any, altered, defaced or removed. All Products or parts
determined to be defective shall become the property of STATS upon
replacement, and STATS reserves the right to utilize refurbished parts
to repair or replace the warranted products. Warranty repairs or
warranty replacements shall be subject to this warranty for the longer
of (a) ninety (90) days following shipment of the repaired/replaced
products, or (b) the remainder of the original warranty for the
defective product, which has been repaired or replaced.
THE FOREGOING WARRANTY IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY
OF MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE, COURSE OF
DEALING OR USAGE OF TRADE. STATS SHALL HAVE NO RESPONSIBILITY FOR ANY
PARTICULAR APPLICATION MADE OF ANY PRODUCT.
5.2 LIMITATION OF LIABILITY
-----------------------
UNDER NO CIRCUMSTANCE SHALL STATS OR ANY OF ITS AFFILIATES BE LIABLE TO
CENTILLIUM OR ANY OTHER PERSON OR ENTITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER BASED UPON LOST
GOODWILL, LOST PROFITS, WORK STOPAGE, PRODUCT FAILURE, IMPAIRMENT OF
OTHER GOODS OR OTHERWISE AND WHETHER ARISING OUT OF BREACH OF
WARRANTY, BREACH OF CONTRACT, NEGLIGENCE, TORT OR OTHERWISE.
Page 8 of 25
<PAGE>
6.0 INTELLECTUAL PROPERTY INDEMNITY
6.1 Indemnification by Centillium
-----------------------------
Centillium agrees to defend STATS and its Affiliates against any third-
party actions or claims arising out of the manufacture, use, sale,
offer for sale, or importation of Products and brought against STATS
to the extent based upon a claim that Centillium's specifications,
technology, or information made available to STATS, or the product
thereof infringes any worldwide patent, trademark or copyright, trade
secret or similar intellectual property right of any third party, and
Centillium agrees to purchase any work-in-process for Products and to
pay any settlement amounts or damages awarded against STATS and its
Affiliates (including reasonable attorneys fees and court costs) to
the extent based upon such a claim; provided that STATS and its
Affiliates provides Centillium (i) prompt notice thereof, (ii)
reasonable assistance in connection with the defense thereof (at
Centillium's expense excluding STATS and its Affiliates employee
expense), and (iii) full control of the defense and settlement
thereof. Centillium shall not settle any such claim in a manner that
has a material adverse effect on STATS and its Affiliates without
STATS and its Affiliates prior written consent. Centillium agrees to
keep STATS and its Affiliates apprised of the progress of any action
or claims covered by this Section 6.1. Notwithstanding the foregoing,
Centillium's obligation to indemnify STATS and its Affiliates under
this Section 6.1 shall not apply to any actions or claims described in
Section 6.2 below.
6.2 Indemnification by STATS.
-------------------------
6.2.1 STATS agrees to defend Centillium and/or its Associated
Companies against any third-party actions or claims arising out
of the manufacture, use, sale, offer for sale, or importation of
Products and brought against Centillium to the extent based upon
a claim that the use of any Process used by STATS or any
technology or information provided by STATS under this Agreement
infringes or misappropriates (directly or indirectly, such as,
without limitation, through the sale or importation of a wafer
manufactured by any such Process) any worldwide patent,
copyright, trade secret or other intellectual property right of
any third party, and agrees to pay any settlement amounts or
damages awarded against Centillium and/or its Associated
Companies (including reasonable attorneys fees and court costs)
to the extent based upon such a claim; provided that Centillium
and/or its Associated Companies provides STATS (i) reasonably
prompt notice thereof, (ii) reasonable assistance in connection
with the defense thereof (at Centillium's expense excluding
Centillium and/or Associated Company employee expense), and (iii)
allows STATS full control of the defense and settlement thereof.
STATS shall not settle any such claim in a manner that has a
material adverse effect on Centillium without Centillium's prior
written consent. STATS agrees to keep Centillium apprised of the
progress of any action covered by this Section 6.2.
6.2.2 STATS shall at all times have the right to: (i) obtain
appropriate licenses to, or (ii) modify the Process provided that
the resulting Product complies with the specifications set forth
in Exhibit B and subject to Centillium's right to
Page 9 of 25
<PAGE>
approve such changes in advance, such pre-approval not to be
unreasonably withheld.
6.2.3 Exclusions. STATS shall not be obligated to indemnify and hold
----------
harmless Centillium where the infringement is caused by: (i) the
use of Products by Centillium in combination with other circuits
components, components, devices or products if both the
infringement would not have occurred but for such combination and
could have been avoided by a different commercially viable
combination and such combination is not reasonably necessary to
use the Product for its intended purpose; (ii) use of the
Products by Centillium and/or its Associated Companies in
applications or environments for which Products were not
designed; or (iii) modifications to the Products by Centillium
and/or its Associated Companies if such infringement would have
been avoided absent such modifications, unless such modifications
were authorized by STATS.
6.3 Entire Liability. THE FOREGOING STATES EACH PARTY'S ENTIRE LIABILITY
-----------------
AND OBLIGATION (EXPRESS, STATUTORY, IMPLIED OR OTHERWISE) UNDER THIS
AGREEMENT WITH RESPECT TO INFRINGEMENT OF THIRD PARTY INTELLECTUAL
PROPERTY. IN NO EVENT SHALL STATS'S LIABILITY PURSUANT TO SECTION 6.2
ARISING OUT OF ANY INFRINGEMENT CLAIM EXCEED THE AMOUNT PAD OR PAYABLE
BY CENTILLIUM HEREUNDER FOR THE PRODUCTS THAT ARE THE SUBJECT OF SUCH
CLAIM.
Page 10 of 25
<PAGE>
7.0 GENERAL PROVISIONS
7.1 Confidentiality. (5 years)
7.1.1 Confidential Information. "Confidential Information" means any
------------------------
technical data, trade secret, know-how, or other information
disclosed by any party (including the Associated Companies)
hereunder, either directly or indirectly, in writing, orally, by
drawing or by inspections, and which shall be marked by the
disclosing party as "Confidential" or "Proprietary". If such
information is disclosed orally, through demonstration or by
inspection, in order to be deemed Confidential Information, it
must be specifically designated as being of a confidential nature
at the time of disclosure and confirmed in writing to be received
by the receiving party within ten (10) days of such disclosure.
7.1.2 Exclusions. Notwithstanding the foregoing, Confidential
Information shall not include information which:
7.1.2.1 is known to the receiving party at the time of
disclosure or becomes known to the receiving party without
breach of this Agreement;
7.1.2.2 is or becomes publicly known through no wrongful act of
the receiving party or any affiliate of the receiving party;
7.1.2.3 is rightfully received from a third party without
restriction on disclosure;
7.1.2.4 is independently developed by the receiving party or any
of its affiliates by persons who had no access to the
information;
7.1.2.5 is furnished to any third party by the disclosing party
without restriction on its disclosure; or
7.1.2.6 is approved for release upon a prior written consent of
the disclosing party.
7.1.3 Compelled Disclosure. Notwithstanding the foregoing, a
--------------------
receiving party may disclose Confidential Information if such
Confidential Information is disclosed pursuant to judicial order,
requirement of a governmental agency or by operation of law;
provided, however, that the receiving party shall provide prior
notice to the disclosing party and thereafter use reasonable
commercial efforts to assist the disclosing party in preventing
or controlling such compelled disclosure.
7.1.4 Nondisclosure. The receiving party agrees that it will not
-------------
disclose any Confidential Information to any third party unless
that third party agrees to be bound to the confidentiality
obligations stated in this part VII and will not use Confidential
Information of the disclosing party for any purpose other than
for the performance of obligations hereunder during the term of
this Agreement. The receiving party further agrees that
Confidential Information shall remain the sole property of the
disclosing party and that it will take all reasonable precautions
to prevent any unauthorized disclosure of Confidential
Information by its employees and independent contractors. No
license shall be granted by the disclosing party to the receiving
party with respect to Confidential Information disclosed
hereunder unless otherwise expressly provided herein. Each party
will disclose the other's Confidential Information
Page 11 of 25
<PAGE>
only to those of its employees and personnel of Affiliates that
have a need to know and who are informed that such information is
confidential.
7.1.5 Return of Confidential Information. After expiration or
----------------------------------
termination of this Agreement upon the request of the disclosing
party, the receiving party will promptly return all Confidential
Information furnished hereunder and all copies thereof, and the
receiving party will certify that al such confidential
information has been returned or destroyed.
7.1.6 Publicity. The parties agree that all publicity and public
---------
announcements concerning the formation and existence of this
Agreement shall be jointly planned and coordinated by and among
the parties. Neither party shall disclose any of the provisions
of this Agreement, the existence of this Agreement, nor that the
parties are doing business with one another to any third party
without the prior written consent of the other party. Centillium
will be responsible for all communications with Centillium's
customers concerning the subject matter hereof, and STATS agrees
to forward to Centillium any communications it receives from
Centillium's customers. Notwithstanding the foregoing, any party
may disclose information concerning this Agreement as required by
the rules, orders, regulations, subpoenas or directives of a
court, government or governmental agency, after giving prior
notice to the other parties and either party may disclose this
Agreement to its attorneys, accountants or like consultants that
have a need to know or to potential investors or potential
acquiring companies.
7.1.7 Remedy for Breach of Confidentiality. If a party breaches any
------------------------------------
of its obligations with respect to confidentiality and
unauthorized use of Confidential Information hereunder, the non-
breaching party shall be entitled to equitable relief to protect
its interest therein, including but not limited to injunctive
relief, as well as money damages.
7.2 Term and Termination
--------------------
This Agreement shall remain in force for five (5) years from the time the
first product is released to production by Centillium unless it is
terminated earlier as provided in this Agreement. At the end of five
(5) years, this Agreement will be extended for another one (1) year
under the same terms and conditions provided herein unless either
party gives notice of termination twelve (12) months prior to the
expiration date. Notwithstanding the foregoing, all existing orders
and the provisions of Part 5.0, 6.0, and Section 7.6 (Export Controls)
shall survive any termination or expiration of this Agreement. The
obligations of confidentiality under Article 7.1 shall last during the
specific period set forth in Article 7.1.
7.2.1 Subject to Section 7.2(b), either party may terminate this
Agreement with immediate effect, at its sole discretion, upon
giving written notice to the other party, in case:
7.2.1.1 the other party defaults in the performance of any
material obligation hereunder, and if any such default is
not corrected within ninety (90) days after the defaulting
party receives written notice of such default from the non-
defaulting party,
7.2.1.2 the business of the other party as a commercial
enterprise ceases, or
Page 12 of 25
<PAGE>
7.2.1.3 The other party files a petition in bankruptcy, or is
adjudicated bankrupt, or makes a general assignment for the
benefit of creditors, or becomes insolvent, or is otherwise
unable to meet its business obligations for a period of three (3)
consecutive months.
7.2.2 In the event that STATS terminates this Agreement pursuant to
Section 7.2 above, STATS agrees to upon request to provide
Centillium customers with a continued supply of Packages and test
services. Centillium agrees to provide STATS with a list of such
customers reasonably prior to the occurrence of the events
specified in Sections 7.2.
7.3 Force Majeure. The parties shall not be liable to one another for
-------------
failure to perform any part of this Agreement except for any payment
obligation when such failure is due to fire, flood, strikes, labor
troubles or other industrial disturbances, inevitable accidents, war
(declared or undeclared), embargoes, blockades, legal restrictions,
governmental regulations or orders, riots, insurrections, year 2000
computer problems or any cause beyond the control of such party.
However, the party so prevented from performance shall use
commercially reasonable efforts to resume performance, and the parties
shall proceed under this Agreement when the causes of such
nonperformance have ceased or have been eliminated.
7.4 Assignment. The parties shall not assign or transfer this Agreement,
----------
in whole or in part, or any right or obligation hereunder to any third
party without the prior written consent of the other party, provided
that either party shall have the right to assign this Agreement to an
entity that acquires all or substantially all of its assets, without
the consent of the other party.
7.5 Governing Law: Disputes.
-----------------------
7.5.1 Except as hereinafter provided, all disputes or controversies
arising out of or in any manner relating to this Agreement which
the parties do not resolve in good faith within ten days after
either party notifies the other of its desire to arbitrate such
disputes or controversies shall be settled by arbitration by a
single arbitrator in accordance with the then standard prevailing
commercial rules, as modified or supplemented by this article, of
the American Arbitration Association ("AAA"). The arbitration
shall be held in Santa Clara County, California. The arbitration
award shall be in writing and shall specify the factual and legal
bases of such award. The arbitration award shall be final and
binding, and a judgment consistent therewith may be entered by
any court of competent jurisdiction. The parties agree that the
arbitration award shall be treated confidentially, and the
parties shall not, except as otherwise required by law or court
or, disclose the arbitration award to any third party, excluding
personnel I their affiliated companies and their attorneys and
accountants with a need to know, provided that such recipients
agree to be bound by the same restrictions as are contained in
this Agreement. The arbitrator shall not have the power to render
an award of punitive damages. To the extent of any conflict, this
article shall supersede and control AAA rules.
Page 13 of 25
<PAGE>
7.5.2 Nothing in this article shall be construed to preclude or in
any way prohibit either party from: (1) seeking any provisional
remedy, such as an injunction or a temporary restraining order;
or (2) instituting or prosecuting to judgment any lawsuit in any
court of competent jurisdiction to collect any money due.
7.5.3 Except as provided in this subsection, neither party shall have
the right to take depositions or obtain discovery of documents or
other information. After the appointment of the arbitrator, the
parties shall agree on (1) a reasonable number of and schedule
for depositions which the parties may take and (2) a reasonable
scope and schedule for the production of documents or other
information which is relevant to the subject matter of the
arbitration. If the parties cannot reach agreement on the number
of depositions, the scope, of production of documents or other
information and the schedule therefor, the arbitrator shall make
such determination(s). All discoveries shall be completed no
later than thirty (30) days prior to the arbitration hearing. The
arbitrator shall have the power to enforce any discovery agreed
upon by the parties or other wise required to be taken sanctions
and penalties as can be or may be imposed in like circumstance in
a civil actions by a California Superior Court, except the power
to order the arrest or imprisonment of a person.
7.5.4 No later than thirty (30) days prior to the arbitration
hearing, each party shall produce to the other party and the
arbitrator lists of the witnesses, documents and other
information which such party intends to use at the arbitration
hearing.
7.6 Export Controls. STATS and Centillium acknowledge that they are each
---------------
subject to regulation by agencies of the U.S. and "Country of Origin"
Governments, including the U.S. Department of Commerce, which prohibit
export or diversion of certain products and technology to certain
countries. Any and all obligations of the parties to provide technical
information, technical assistance, any media in which any of the
foregoing is contained, training and related technical data
(collectively, "Data") shall be subject in all respect to such United
States and "California" laws and regulation as shall from time to time
govern the license and delivery of technology and products abroad by
persons subject to the jurisdiction of the United States, including
the Export Administration Act of 1979, as amended, any successor
legislation, and the Export Administration Regulations issued by the
Department of Commerce, International Trade Administration, Bureau of
Export Administration.
Without in any way limiting the provisions of this Agreement, the parties
agree that unless prior written authorization is obtained from the
Bureau of Export Administration or unless the Export Administration
Regulations explicitly permit the re-export without such written
authorization, neither party will export, re-export, or transship,
directly or indirectly, the Products or any technical data disclosed
or provided to STATS, or the direct product of such technical data, to
country groups Q, S, W, Y, or Z (as defined in the Export
Administration Regulations and which currently consist of Albania,
Bulgaria, Cambodia, Cuba, the Czech Republic, Estonia, Laos, Latvia,
Libya, Lithuania, Mongolian People's Republic, North Korea, Poland,
Romania, the geographic area of the former Union of Soviet Socialist
Republics, the
Page 14 of 25
<PAGE>
Slovak Republic and Vietnam, or to the People's Republic of China
(excluding Taiwan), Haiti, Iran, Iraq, Syria, Yugoslavia (Serbia and
Montenegro), or to any other country, as to which the U.S. Governments
have placed an embargo against the shipment of products, which is in
effect during the term of this Agreement.
7.7 Notice Any notice required or permitted to be given under this
------
Agreement shall be delivered (i) by hand, (ii) by registered or
certified mail, postage prepaid, return receipt requested, to the
address of the other party first set forth above, or to such other
address as a party may designated by written notice in accordance with
this Section 7.7 by overnight courier, or (iii) by electronic
transmission with conforming letter mailed under the conditions
described in (ii). Notice so given shall be deemed effective when
received, or if not received by reason of fault of addressee, when
delivered.
If to ST Assembly and Test Services Ltd, to:
Exec. Vice President Sales
Singapore Account Manager
5 Yishun Street 23
768442
If to Centillium, to:
Vice President of Operations and Manufacturing
Centillium
47211 Lakeview Blvd
California, 94538
7.8 Relationship of Parties The relationship between Centillium and STATS
-----------------------
under this Agreement is that of independent contractors and neither
shall be, nor represent itself to be, the joint venture, franchiser,
franchisee, partner, broker, employee, servant, agent, or
representative of the other for any purpose whatsoever. No party is
granted any right or authority to assume or create any obligation or
responsibility, express or implied, on behalf of, or in the name of,
another party or to bind another in any matter or thing whatsoever.
7.9 Waiver
------
Should any of the parties fail to exercise or enforce any provision of this
Agreement or to waive any rights in respect thereto, such waiver or
failure shall not be construed as constituting a continuing waiver or
a waiver of any other right.
7.10 Severability
------------
In the event that any provision or provisions of this Agreement shall be
held to be unenforceable, the parties shall re-negotiate those
provisions in good faith to be valid, enforceable substitute
provisions which provisions shall reflect as closely as possible the
intent of the original provisions of this Agreement. If the parties
fail to negotiate
Page 15 of 25
<PAGE>
a substitute provision, this Agreement will continue in full force and
effect without said.
7.11 Entire Agreement This Agreement, including the Exhibits referred to
----------------
herein, contains the entire understanding of the parties, and
supersedes any prior agreement between or among the parties with
respect to its subject matter. In case of any conflicts between this
Agreement and any purchase orders, acceptances, correspondence,
memorandum, listing sheets and other documents forming part of any
order for Products, this Agreement shall govern. This Agreement shall
not be amended or modified except by written instrument signed by the
duly authorized representatives of the parties hereto. IN WITNESS
WHEREOF, the parties hereto have caused this Agreement to be signed by
their duly authorized representatives or officers, effective as of the
Effective Date.
STATS Centillium
By: /s/ By: /s/ WF Mackenzie
--- ----------------
Name: JUNE CHIA Name: William F Mackenzie
---------- -------------------
Title: EVP Sales & Marketing Title: VP Operations and Manufacturing
---------------------
Services
Page 16 of 25
<PAGE>
EXHIBITS
--------
A - Assembly and Test Cycle Times - Prototype and Production
B - Acceptance Criteria - Electrical and Visual Mechanical
C - Regular Data - SPC, Test and Reliability
D - Problem Resolution Procedures
E - Capacity Guarantee
F - Low yield limits
G - Specifications
H - WIP Reporting Format (minimum data set)
Page 17 of 25
<PAGE>
EXHIBIT A - Assembly and Test Cycle Times - Prototype and Production
--------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
TECHNOLOGY PROTOTYPE PRODUCTION HOT-LOT
- -------------------------------------------------------------------------------------------------------
LEADED ASSEMBLY 3 Days 5 Days 3 Days
- -------------------------------------------------------------------------------------------------------
NON-LEADED ASSEMBLY 2 Days 4 Days 2 Days
- -------------------------------------------------------------------------------------------------------
TEST 1 Day 3 Days 1 Day
- -------------------------------------------------------------------------------------------------------
</TABLE>
Page 18 of 25
<PAGE>
EXHIBIT B - ACCEPTANCE CRITERIA
-------------------------------
<TABLE>
<CAPTION>
TECHNOLOGY PROTOTYPE PRODUCTION AOQ
(PRODUCTION)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------
LEADED ASSEMBLY 4 mil Coplanarity 3 mil Coplanarity 15 DPM
- -----------------------------------------------------------------------------------
NON-LEADED 8 mil Coplanarity 6 mil Coplanarity 15 DPM
ASSEMBLY
- -----------------------------------------------------------------------------------
TEST Prototype Program Latest Program 35 DPM
- -----------------------------------------------------------------------------------
</TABLE>
Page 19 of 25
<PAGE>
EXHIBIT C - REGULAR DATA
------------------------
<TABLE>
<CAPTION>
Test Number of lots Devices tested Passes/Fails Test Criteria
<S> <C> <C> <C> <C>
Autoclave Number of lots Devices tested Passes/Fails Test Criteria
HAST Number of lots Devices tested Passes/Fails Test Criteria
Temp Cycle Number of lots Devices tested Passes/Fails Test Criteria
Thermal Shock Number of lots Devices tested Passes/Fails Test Criteria
Ball Shear Number of lots Devices tested Passes/Fails Test Criteria
Bond Pull Number of lots Devices tested Passes/Fails Test Criteria
Solderability Number of lots Devices tested Passes/Fails Test Criteria
Lead Strength Number of lots Devices tested Passes/Fails Test Criteria
Die Shear Number of lots Devices tested Passes/Fails Test Criteria
Mark Permanency Number of lots Devices tested Passes/Fails Test Criteria
SPC Number of lots Devices tested Cp Cpk
</TABLE>
Data is to be provided to the Centillium Reliability Engineer on a Monthly Basis
including FA Reports for all failures
Page 20 of 25
<PAGE>
EXHIBIT D Problem Resolution Procedures
When STATS identifies current or potential problems or Centillium Notifies STATS
of a potential problem
a) Accept such notice and classify it in accordance with
the following classifications:
i. Critical - Functional or Reliability failure resulting in missed
deliveries or customer lines down
ii. Major - Functional or Reliability failure which does
not resulting in missed deliveries or customer lines down
iii. Minor - Cosmetic problem or feature enhancement
b) Resolve such Engineering Complaint according to the
following classifications of the date of STATS's notice, unless the parties
mutually agree upon a later date. If unable to resolve an Engineering
Complaint within the specified period, STATS will issue an "interim report".
i. Critical - 1 day
ii. Major - 3 days
iii. Minor - 2 weeks
b) For Critical and Major complaints, STATS agrees to
acknowledge receipt of such Engineering Complaint and advise Centillium of
their proposed organization responsible for containing it within one (1)
working day of Centillium's receipt thereof.
c) For Minor complaints, STATS agrees to acknowledge
receipt of such Engineering Complaint and advise furnish Centillium a weekly
report of the status of open Engineering Complaints, in a mutually agreed upon
medium, together with a proposed schedule for their resolution.
Page 21 of 25
<PAGE>
EXHIBIT E Capacity Agreement
<TABLE>
<CAPTION>
MONTHS LEADED PACKAGES NON LEADED PACKAGES TEST TIME/HR TEST TIME/HR
(DIGITAL) (ANALOG)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 35000 75000 611 125
- ------------------------------------------------------------------------------------------------------
Apr 35000 75000 611 125
- ------------------------------------------------------------------------------------------------------
May 27500 67500 528 113
- ------------------------------------------------------------------------------------------------------
Jun 30000 70000 556 117
- ------------------------------------------------------------------------------------------------------
Jul 32500 62500 528 104
- ------------------------------------------------------------------------------------------------------
Aug 35000 75000 611 125
- ------------------------------------------------------------------------------------------------------
Sept 35000 75000 611 125
- ------------------------------------------------------------------------------------------------------
Oct 40000 80000 667 133
- ------------------------------------------------------------------------------------------------------
Nov 40000 100000 778 167
- ------------------------------------------------------------------------------------------------------
Dec 40000 155000 1083 258
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
. This forecast is to be used for capacity planning only and the forecast on section (3.4.2) will be
used to purchase wafers.
<S> <C>
. If Centillium has unexpected demand above and beyond its upside forecast STATS agrees to meet this
upside 100%, within the specified cycle times (EXHIBIT A) provided at least five (5) weeks notice is
provided for leaded and 8 weeks for non leaded
. Test time for Digital includes Sort
</TABLE>
Page 22 of 25
<PAGE>
EXHIBIT F LOW YIELD CRITERIA
<TABLE>
<CAPTION>
TECHNOLOGY DIGITAL TEST ANALOG AOQ AOQ
TEST (V/M) (ELECTRICAL)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LEADED ASSEMBLY 90% 62.5% 35 DPM 15 DPM
- -----------------------------------------------------------------------------------------------------------------
NON-LEADED ASSEMBLY 80% N/A 35 DPM 15 DPM
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
. If the lot does not meet the limit page the relevant Centillium engineer
Page 23 of 25
<PAGE>
EXHIBIT G - SPECIFICATIONS
<TABLE>
<CAPTION>
SPC monitoring of manufacturing sites CSP-OPQR- 16
<S> <C>
Reliability process monitoring program CSP-OPQR- 17
Packing and Transportation of wafers CSP-OPSH-1
Visual wafer inspection criteria CSP-OPQR-18
</TABLE>
Page 24 of 25
<PAGE>
EXHIBIT H - WIP Reporting Format (minimum data set)
1. Location
2. Requested Ship Date
3. Date and time file sent
4. Forecast Ship date
5. Customer or MELCO Devices Number
6. Ship confirmation date
7. Process Stage
8. Lot number
9. Package quantity into process stage
. Reports to be generated daily
Page 25 of 25
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 9, 2000, in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-30772) and related Prospectus of
Centillium Communications, Inc.
Our audits also included the financial statement schedule listed in Item
16(b) of Amendment No. 2 to the Registration Statement. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
April 28, 2000
