<PAGE>
As filed with the Securities and Exchange Commission on October 5, 2000
Registration No. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
MULTILINK TECHNOLOGY CORPORATION
(Name of issuer in its charter)
-----------
<TABLE>
<C> <C> <S>
California 3674 95-4522566
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
300 Atrium Drive, 2nd Floor
Somerset, New Jersey 08873
(732) 537-3700
(Address and telephone number of principal executive offices and principal
place of business)
Richard N. Nottenburg
President and Chief Executive Officer
300 Atrium Drive, 2nd Floor
Somerset, New Jersey 08873
(732) 537-3700
(Name, address and telephone number of agent for service)
-----------
Copies of all communications to be sent to:
<TABLE>
<S> <C>
Mark J. Kelson, Esq. William J. Whelan III, Esq.
Allen Matkins Leck Gamble & Mallory LLP Cravath, Swaine & Moore
1999 Avenue of the Stars, Suite 1800 Worldwide Plaza
Los Angeles, California 90067 825 Eighth Avenue
(310) 788-2400 New York, New York 10019
(212) 474-1000
</TABLE>
-----------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
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>
<CAPTION>
Title of Each Class of Proposed Maximum Amount of
Securities to be Registered Aggregate Offering Price(1) RegistrationFee
------------------------------------------------------------------------------
<S> <C> <C>
Class A Common Stock, $0.0001 par
value............................ $150,000,000 $39,600
------------------------------------------------------------------------------
</TABLE>
-------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act.
Includes proceeds from the sale of shares which the Underwriters have the
option to purchase to cover over-allotments, if any.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 2000
Shares
[MULTILINK TECHNOLOGY CORPORATION LOGO]
Class A Common Stock
--------
Prior to this offering, there has been no public market for our Class A
common stock. The initial public offering price is expected to be between $
and $ per share. We will apply to list our Class A common stock on The Nasdaq
Stock Market's National Market under the symbol "MLTC."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
Investing in our Class A common stock involves risks. See "Risk Factors" on
page 5.
<TABLE>
<CAPTION>
Underwriting Proceeds
Price to Discounts and to
Public Commissions Multilink
---------- ------------- ----------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of Class A 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
Salomon Smith Barney
Thomas Weisel Partners LLC
The date of this prospectus is , 2000.
<PAGE>
[graphics of Multilink products]
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Special Note Regarding Forward-
Looking Statements...................................................... 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 30
Management............................................................... 43
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Certain Transactions....................................................... 54
Principal Shareholders..................................................... 56
Description of Capital Stock............................................... 58
Shares Eligible for Future Sale............................................ 59
U.S. Federal Tax Considerations for Non-U.S. Holders....................... 62
Underwriting............................................................... 65
Notice to Canadian residents............................................... 68
Legal Matters.............................................................. 69
Experts.................................................................... 69
Additional Information..................................................... 69
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
This summary highlights information that we present more fully elsewhere in
this prospectus. You should read the entire prospectus carefully.
Multilink Technology Corporation
We design, develop and market high-bandwidth, advanced integrated circuits,
modules and higher-level assemblies that enable next generation optical
networking systems. We seek to be first to develop innovative components that
allow communications equipment manufacturers to rapidly build and deliver high
performance fiber optic systems more quickly and with more functionality and
greater performance than their competitors. We outsource semiconductor
fabrication and focus our efforts on the design, development and marketing of
our products. We work closely with our customers to design and deliver
integrated product solutions utilizing our semiconductor, circuit design and
systems level expertise.
Our current products address the markets for DWDM, or dense wavelength
division multiplexing, and SONET/SDH, or Synchronous Optical
Network/Synchronous Digital Hierarchy, optical transport equipment operating at
the fastest commercially available speeds of OC-192, or 10 gigabits per second.
We are in the early stages of developing products designed to address future
systems that may operate at speeds of OC-768, or 40 gigabits per second. We
sell our products to leading and emerging communications equipment
manufacturers that develop high-speed optical networking systems. Our customers
include Alcatel, Ciena, Cisco, JDS Uniphase, Lucent, ONI, Optimight, Qtera
(recently acquired by Nortel), Sycamore and TyCom.
As communications equipment manufacturers develop optical networking systems
that enable higher transmission speeds and deploy DWDM technology to increase
bandwidth, they must integrate a greater number of complex components that
generate, manipulate, transmit and receive electrical and optical signals.
These components include integrated circuits, modules and higher-level
assemblies and are becoming increasingly important for the manufacture of
optical networking systems. The need for communications equipment manufacturers
to focus on their core competencies and meet critical time-to-market
requirements, along with the complexities associated with the design and
development of state-of-the-art components, have caused these manufacturers to
increasingly rely upon sophisticated component suppliers.
We believe that we provide our customers with several key benefits,
including the following:
Sophisticated Products Developed Utilizing Systems Level Expertise. We
provide sophisticated products that meet the requirements of next generation
optical networking systems. Our system architects and design engineers have a
thorough understanding of high-bandwidth optical networking systems, which
enables us to anticipate and develop cost-effective next generation component
solutions for our customers. Our products incorporate unique circuit designs
that enable specific system level functions.
High-Speed Products that Meet Next Generation Optical Transmission
Requirements. We have an in-depth understanding of high-performance
semiconductor and advanced process technologies. Understanding these
technologies enables us to design high-speed analog, digital and mixed-signal
integrated circuits and modules that operate at speeds of 10 gigabits per
second or higher. We design our products utilizing the optimal process
technology for a particular function or product, such as Gallium Arsenide, or
GaAs, Complementary Metal Oxide Semiconductor, or CMOS, and Silicon Germanium,
or SiGe. We believe that this flexibility is unique and allows us to provide
optimal solutions to our customers, resulting in the rapid introduction of
high-speed, next generation optical networking systems.
High Level of Component Integration. Our high level of component integration
reduces the cost and complexity of our customers' optical networking systems.
When we are working with a customer that is
1
<PAGE>
developing and validating a new system that incorporates an important new
function not commercially available from other sources, we first provide a
module-based component composed of multiple discrete integrated circuits. The
module is designed as an integrated package that can be seamlessly placed into
a system, providing immediate functionality. As the system transitions to high
volume production, we collaborate with the customer to increase our solution's
level of component integration, moving from a module-based solution to a multi-
chip or single-chip solution.
Faster Time-to-Market. Time-to-market has become an important competitive
factor for communications equipment manufacturers. Through our systems level
and process technology expertise and our integration capabilities, we develop
sophisticated products that enable our customers to meet their time-to-market
requirements.
Our objective is to become the leading global supplier of high value
component solutions for optical networking systems. Key elements of our
strategy include:
.leveraging core competencies to rapidly introduce products that enable
next generation optical systems;
.expanding our customer relationships and the breadth of our customer base;
.maintaining and extending our technology leadership;
.pursuing strategic acquisitions and strategic relationships; and
.expanding to the edge of the optical transport network.
We were incorporated in July 1994. Our principal executive offices are
located at 300 Atrium Drive, 2nd Floor, Somerset, New Jersey 08873, and our
telephone number is (732) 537-3700. The address of our website is www.mltc.com.
Information on our website does not constitute a part of this prospectus.
We have applied for trademark protection for our "MLTC" mark. This
prospectus contains product names, trade names and trademarks of our company
and other entities.
2
<PAGE>
The Offering
<TABLE>
<C> <C> <S>
Class A common stock offered....................... shares
Common stock to be outstanding after this offering:
Class A common stock........................ shares
Class B common stock........................ 28,000,000 shares
----------
Total................................... shares
==========
Voting rights...................................... Holders of Class A
common stock are
entitled to one
vote per share on
all matters
submitted to a
vote of our
shareholders.
Holders of Class B
common stock are
entitled to ten
votes per share on
all matters
submitted to a
vote of our
shareholders.
Other rights....................................... Except as to
voting and
conversion rights,
each class of
common stock has
the same rights.
Each share of
Class B common
stock is
convertible at the
option of the
holder into one
share of Class A
common stock and
will, in general,
automatically
convert into one
share of Class A
common stock upon
the sale or other
transfer to any
person or entity
other than a
person or entity
that owns or
controls an entity
that owns Class B
common stock.
Use of proceeds.................................... For general
corporate
purposes,
including working
capital and
potential
acquisitions.
Proposed Nasdaq National Market symbol............. MLTC
</TABLE>
The number of shares of our common stock to be outstanding after this
offering is based on 57,116,400 shares outstanding as of September 30, 2000 and
excludes:
. 33,378,450 shares of Class A common stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of $1.03
per share;
. 13,621,550 shares of Class A common stock reserved for future issuance
under our stock option plans;
. 5,813,716 shares of Class A common stock issuable upon exercise of
outstanding warrants with a weighted average exercise price of $3.53 per
share; and
. 1,500,000 additional shares of Class A common stock reserved for future
issuance under our 2000 Employee Stock Purchase Plan.
------------
Except as otherwise indicated, the information in this prospectus reflects:
. the automatic conversion of our outstanding preferred stock into Class A
common stock upon the completion of this offering; and
. no exercise of the underwriters' over-allotment option.
3
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
----------- ------- ------- ------- ------- ------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenues.......... $ 25 $ 1,010 $ 1,541 $ 3,852 $20,395 $ 6,906 $ 28,667
Gross profit............ 25 281 363 2,005 13,647 4,672 17,808
Total operating
expenses............... -- 480 1,106 3,303 13,660 4,105 22,171
Operating income (loss)
....................... 25 (199) (743) (1,298) (13) 567 (4,363)
Net income (loss)....... $ 21 $ (186) $ (805) $(1,488) $ 25 $ 453 $ (4,682)*
====== ======= ======= ======= ======= ======= ========
Dividend related to
warrant issuance....... -- -- -- -- -- -- (6,375)
------ ------- ------- ------- ------- ------- --------
Net income (loss)
attributable to common
shareholders........... $ 21 $ (186) $ (805) $(1,488) $ (23) $ 453 $(11,105)
====== ======= ======= ======= ======= ======= ========
Net income (loss) per
share:
Basic................. $ -- $ (0.01) $ (0.03) $ (0.05) $ -- $ 0.02 $ (0.37)
====== ======= ======= ======= ======= ======= ========
Diluted............... $ -- $ (0.01) $ (0.03) $ (0.05) $ -- $ 0.01 $ (0.37)
====== ======= ======= ======= ======= ======= ========
Weighted average shares:
Basic................. -- 30,000 30,000 30,000 30,000 30,000 30,000
====== ======= ======= ======= ======= ======= ========
Diluted............... -- 30,000 30,000 30,000 30,000 37,598 30,000
====== ======= ======= ======= ======= ======= ========
Pro forma net income
(loss) per share:
Basic and diluted..... $ -- $ (0.22)
======= ========
Weighted average
shares............... 39,520 51,335
======= ========
</TABLE>
*The net loss for the six months ended June 30, 2000 includes non-cash
charges of $2.2 million related to deferred stock compensation and $6.5 million
related to warrant issuances.
See note 2 of notes to consolidated financial statements for an explanation
of the determination of the number of shares used in computing net income
(loss) per share data.
<TABLE>
<CAPTION>
As of June 30, 2000
-----------------------------
(unaudited)
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................ $52,358 $ $
Working capital.................................. 53,776
Total assets..................................... 69,405
Lease obligations--net of current portion........ 1,287
Redeemable convertible preferred stock........... 55,026
Total shareholders' equity....................... 3,236
</TABLE>
The pro forma balance sheet data above reflect the automatic conversion of
our outstanding preferred stock into Class A common stock upon the completion
of this offering. The pro forma as adjusted balance sheet data gives effect to
our receipt of the net proceeds from the sale of shares of Class A common
stock in this offering at an assumed initial public offering price of $ per
share (the midpoint of the range on the cover of this prospectus), after
deducting estimated underwriting discounts and commissions and estimated
offering expenses.
4
<PAGE>
RISK FACTORS
This offering and any investment in our Class A common stock involves a high
degree of risk. You should carefully consider the risks described below and all
other information in this prospectus before deciding whether to purchase our
Class A common stock.
Risks Relating to Our Business
Our quarterly revenues and operating results have fluctuated in the past and
may continue to fluctuate because of a number of factors, any one of which
could adversely affect our stock price.
Our quarterly revenues and operating results have fluctuated in the past and
may continue to fluctuate significantly from quarter to quarter in the future.
It is possible that in future periods our revenues and operating results could
fall below the expectations of securities analysts or investors, which could
cause the market price of our Class A common stock to decline. Some of the
factors that affect our quarterly revenues and operating results, but which are
difficult to control or predict are:
. the reduction, rescheduling or cancellation of orders by any of our
customers or prospective customers;
. fluctuations in manufacturing yields and inventory levels;
. the availability of external foundry capacity, purchased parts and raw
materials;
. our ability to introduce new products and technologies on a timely basis;
. the announcement or introduction of new products and technologies by our
competitors;
. competitive pressures on selling prices;
. the amounts and timing of costs associated with warranties and product
returns;
. the amounts and timing of investments in research and development;
. market acceptance of our products and of our customers' products;
. the ability of our customers to obtain components from their other
suppliers;
. costs associated with acquisitions and the integration of acquired
operations;
. general communications and semiconductor industry conditions; and
. general economic conditions.
A few customers account for a majority of our sales, and the loss of one or
more key customers could significantly reduce our revenues and any profits.
Historically, a relatively small number of customers has accounted for a
majority of our revenues. For example, our three largest customers accounted
for approximately 84% of our revenues for the six months ended June 30, 2000
and 74% of our revenues in 1999. Our top three customers for the six months
ended June 30, 2000 were Lucent, Cisco and Alcatel, representing approximately
50%, 18% and 16% of our revenues, respectively. Our top three customers in 1999
were Lucent, Alcatel and TyCom, representing approximately 36%, 20% and 18% of
our revenues, respectively. We anticipate that relatively few customers will
continue to account for a significant portion of our revenues. A reduction,
delay or cancellation of orders from one or more significant customers or the
loss of one or more key customers in any period could significantly reduce our
revenues and any profits.
5
<PAGE>
We have incurred net losses in the past and may incur net losses in the future.
We incurred net losses of $0.8 million in 1997 and $1.5 million in 1998. We
had net income of $24,540 in 1999. We had net losses of $4.7 million for the
six months ended June 30, 2000. We expect to continue to incur amortization of
deferred stock compensation and to increase our expenses for research and
development in the next few years. Consequently, our ability to achieve and
maintain profitability would be materially affected if we fail to significantly
increase our revenues.
Failure to effectively manage our anticipated growth and expansion could place
a significant strain on our limited personnel and other resources and could
adversely affect our business and operating results.
We have grown rapidly in the last year and expect to continue to grow in
future periods. Our current organizational structure and systems are not
adequate for our expected growth plans. To manage expanded operations
effectively, we must continue to improve our operational, financial and
management systems and successfully hire, train, motivate and manage our
employees. We also plan to expand our general administration capabilities to
address the increased reporting and other administrative demands that will
result from our becoming a public company. In addition, the expansion of our
manufacturing requirements and our ability to outsource our manufacturing needs
in the future will require significant additional management, technical and
administrative resources. We cannot be certain that we will be able to
effectively manage our growth.
Our future success depends on the continued service of our engineering,
technical and key management personnel and our ability to identify, hire and
retain additional engineering, technical and key management personnel.
There is intense competition for qualified personnel in our industry,
particularly for engineers and senior level management. Loss of the services
of, or failure to recruit, engineers or other technical and key management
personnel could be significantly detrimental to our product and process
development programs and adversely affect our business and operating results.
We may not be able to continue to attract and retain engineers or other
qualified personnel necessary for the development of our products and business
or to replace engineers or other qualified personnel who may leave us in the
future. Our anticipated growth is expected to place increased demands on our
resources and likely will require the addition of new management personnel.
Our future success depends in part on the continued service of our key
executives.
Our success depends in part upon the continued service of our executive
officers, particularly Dr. Richard N. Nottenburg, our President, Chief
Executive Officer and Co-Chairman of the Board, and Dr. Jens Albers, our
Executive Vice President and Co-Chairman of the Board. Neither Dr. Nottenburg
nor Dr. Albers has an employment or non-competition agreement with us. The loss
of either of these key individuals would be detrimental to our ongoing
operations and prospects.
Several of our key personnel are relatively new and must be integrated into our
organization.
Several of our key personnel have recently joined us, including Eric M.
Pillmore, our Chief Financial Officer, who joined us in July 2000. Therefore,
there has been little or no opportunity to evaluate the effectiveness of our
executive management team as a combined unit. Our future performance will
depend in part on our ability to successfully integrate our newly hired
executive officers and key personnel into our management team, and our ability
to develop an effective working relationship among management.
We sell substantially all of our products based on individual purchase orders,
and we cannot predict the size or timing of our orders.
We sell substantially all of our products based on individual purchase
orders, rather than long-term contracts. As a result, our customers generally
can cancel or reschedule orders on short notice and are not
6
<PAGE>
obligated to purchase a specified quantity of any product. We cannot assure you
that our existing customers will continue to place orders with us, that orders
by existing customers will be repeated at current or historical levels or that
we will be able to obtain orders from new customers. We cannot predict the
size, timing or terms of incoming purchase orders; therefore, decreases in the
number or size of orders or the development of customer orders with new terms
may adversely affect our business and operating results.
Because we do not have substantial noncancellable backlog, we typically plan
our production and inventory levels based on internal forecasts of customer
demand that are highly unpredictable and can fluctuate substantially. In
anticipation of long lead times to obtain certain inventory and materials, we
order materials in advance of anticipated customer sales. This advance ordering
might result in excess inventory levels or unanticipated inventory write-downs
if our customers cancel orders or change the specifications for their orders.
If we are unable to plan inventory and production levels effectively, our
business and operating results could be materially harmed.
We will lose significant customer sales and may not be successful if customers
and prospective customers do not qualify our products to be designed into their
systems.
Because our products must function as part of a larger system or network,
our customers often undertake extensive qualification processes prior to
placing large product orders. Once communications equipment manufacturers
decide to use a particular supplier's products or components, they incorporate
those products or components into their system design, which are known as a
design-wins. Suppliers who fail to achieve design-wins are unlikely to make
sales to those customers for particular projects until at least the adoption of
future redesigned systems. Even then, many companies may be reluctant to
incorporate entirely new products into their new system designs, as this could
involve significant additional redesign efforts. If we fail to achieve design-
wins we will lose the opportunity for significant sales to those customers for
a lengthy period of time. Although a design-win increases the likelihood that
our products will be incorporated into the systems of our customers or
prospective customers, it does not obligate that customer or prospective
customer to purchase specified quantities of our products.
Our products are incorporated into sophisticated systems, and defects may be
discovered only after full deployment, which could seriously harm our business.
Our products are complex and are designed to be deployed in large quantities
across sophisticated networks. Because of the nature of our products, they can
only be fully tested when completely deployed in large networks with high
amounts of traffic. Our customers may discover errors or defects in our
products, or our products may not operate as expected, after they have been
fully deployed. If our products have defects or do not operate as expected, we
could experience:
. loss of, or delay in, revenues and loss of market share;
. loss of existing customers;
. failure to attract new customers or achieve market acceptance for our
products;
. diversion of development resources;
. increased service and warranty costs;
. legal actions by our customers;
. increased insurance costs; and
. damage to our reputation and customer relationships.
The occurrence of any of these problems could seriously harm our business
and result in decreased revenues and increased operating expenses. Defects,
integration issues or other performance problems in our
7
<PAGE>
products could result in financial or other damages to our customers or could
negatively affect market acceptance for our products.
The markets in which we compete are highly competitive and failure to compete
effectively could harm our business.
The markets in which we compete are highly competitive. Our ability to
compete successfully in our markets depends on a number of factors, including:
. product time-to-market;
. product performance;
. product price;
. product quality;
. product reliability;
. success in designing and subcontracting the manufacture of new products
that implement new technologies;
. market acceptance of our competitors' products;
. efficiency of production;
. expansion of production of our products for particular systems
manufacturers; and
. customer support and reputation.
We compete primarily against Applied Micro Circuits, Conexant, Giga
(recently acquired by Intel), Infineon, JDS Uniphase, Lucent (microelectronics
division), Maxim, Nortel (microelectronics division), NTT Electronics, Philips,
PMC-Sierra and Vitesse. Many of our competitors operate their own fabrication
facilities and have longer operating histories and a greater presence in key
markets, greater name recognition, access to larger customer bases and
significantly greater financial, sales and marketing, distribution, technical
and other resources. As a result, our competitors may be able to adapt more
quickly to new or emerging technologies, changes in customer requirements or
devote greater resources to the promotion and sale of their products. In
addition, our competitors may develop technologies that more effectively
address the transmission of digital information through existing analog
infrastructures at a lower cost, thereby rendering our products obsolete. Our
competitors that have large market capitalizations or cash reserves are also
better positioned than we are to acquire other companies, thereby obtaining new
technologies or products. Any of these acquisitions could give our competitors
a strategic advantage that could adversely affect our business, financial
condition and results of operations.
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 forged by competitors could emerge
and rapidly acquire significant market share.
We must incur substantial research and development expenses.
In order to remain competitive, we must continue to make substantial
investments in research and development to develop new and enhanced products.
We cannot assure you that we will have sufficient resources to invest in the
development of new and enhanced technologies and competitive products. Our
failure to continue to make sufficient investments in research and development
programs could significantly reduce our revenue growth and harm our business.
Additionally, our products have a short life cycle; therefore, we have limited
time to capitalize upon our research and development investments and generate
revenues. We cannot
8
<PAGE>
assure you that our research and development investments will result in
revenues in excess of our expenses, if at all, or will result in any
commercially accepted products.
We incur research and development expenses in advance of obtaining access to
the required technology, and as a result, these investments may not result in
the production of any marketable products.
We often incur substantial research and development expenses for the
development of products incorporating emerging process technologies. We make
these substantial investments in the product design stage and prior to gaining
access to these process technologies. Failure to gain access to these process
technologies could prevent our products' development and commercialization and
materially harm our business.
We will compete with IBM for sales of products that we jointly develop.
We have a joint development agreement with International Business Machines,
or IBM, pursuant to which we jointly develop integrated circuits. Under this
agreement, both parties can sell our jointly developed products to third
parties. Because IBM is a larger company, with a longer operating history and
substantially greater resources, it may be able to attract more customers, and
we may not have the opportunity to sell the jointly developed products to those
customers.
We may need to make acquisitions in order to remain competitive in our market.
Our business or the value of your investment could be adversely affected as a
result of any potential acquisitions.
To compete effectively, we may find it necessary to acquire additional
businesses, products or technologies. If we identify an appropriate acquisition
candidate, we may not be able to negotiate the terms of the acquisition
successfully, finance the acquisition or effectively integrate the acquired
business, products, technologies or personnel into our existing business and
operations. Further, completing a potential acquisition and integrating an
acquired business will cause significant diversions of management's time and
resources. If we consummate one or more significant acquisitions in which the
consideration consists of stock or other securities, the value of your
investment in our company could be significantly diluted. If we were to proceed
with one or more significant acquisitions in which the consideration included
cash, we could be required to use a substantial portion of our available cash,
including proceeds of this offering. In addition, we may be required to
amortize significant amounts of goodwill and other intangible assets in
connection with future acquisitions, which could significantly reduce our
operating and net income.
Our operating results are subject to fluctuations because of sales to foreign
customers.
International sales accounted for approximately 25% of our revenues for the
six months ended June 30, 2000 and 16% of our revenues in 1999. International
sales may increase in future periods and may account for an increasing portion
of our revenues. As a result, an increasing portion of our revenues may be
subject to certain risks associated with international sales, including:
. changes in regulatory requirements;
. increases in tariffs and other trade barriers;
. timing and availability of export licenses;
. political and economic instability;
. difficulties in accounts receivable collections;
. difficulties in staffing and managing foreign subsidiary and branch
operations;
. difficulties in managing distributors;
. difficulties in obtaining governmental approvals for communications and
other products;
9
<PAGE>
. foreign currency exchange fluctuations;
. the burden of complying with a wide variety of complex foreign laws and
treaties; and
. potentially adverse tax consequences.
We are subject to the risks associated with the imposition of legislation
and regulations relating to the import or export of high technology products.
We cannot predict whether quotas, duties, taxes or other charges or
restrictions upon the importation or exportation of our products will be
implemented by the United States or other countries. Some of our customer
purchase orders and agreements are governed by foreign laws, which may differ
significantly from U.S. laws. Therefore, we may be limited in our ability to
enforce our rights under these agreements and to collect damages, if awarded.
Because sales of our products have been denominated to date primarily in
U.S. dollars, increases in the value of the U.S. dollar could increase the
price of our products so that they become more expensive to customers in the
local currency of a particular country, leading to a reduction in sales and
profitability in that country. Future international activity may result in
increased foreign currency denominated sales. Gains and losses on the
conversion to U.S. dollars of accounts receivable, accounts payable and other
monetary assets and liabilities arising from international operations may
contribute to fluctuations in our results of operations.
If we become subject to unfair hiring claims we could incur substantial costs
in defending ourselves or our management's attention could be diverted away
from our operations.
Companies in our industry often hire individuals formerly employed by their
competitors. In such cases, these competitors frequently claim that the hiring
company has engaged in unfair hiring practices. We have received claims of this
kind in the past from our competitors, and we cannot assure you that we will
not receive claims of this kind in the future or that those claims will not
result in material litigation. We could incur substantial costs in defending
ourselves or our employees against such claims, regardless of the merits of the
claims. In addition, defending ourselves from such claims could divert the
attention of our management away from our operations.
Risks Relating to Manufacturing
Our dependence on TRW and other third-party manufacturing and supply
relationships could negatively impact the production of our products and
significantly harm our business.
We do not own or operate manufacturing facilities necessary for the
production of most of our products. We rely on several outside foundries for
the manufacture and assembly of most of our products, and we expect this to
continue for the foreseeable future. Our mixed-signal products, which comprise
a significant portion of our current revenues, are based predominantly on GaAs
HBT wafers supplied by TRW. TRW is our sole supplier of these wafers. We have a
wafer supply agreement with TRW, under which we do not have the contractual
right to obtain all the GaAs HBT wafers we require for the current production
for our mixed-signal products. Finding alternative sources for these wafers
will result in substantial delays in production and additional costs. To date,
we have no other wafer supply agreements with our other suppliers.
Our dependence upon third parties that manufacture, assemble or package our
products may result in:
. lack of assured semiconductor wafer supply and reduced control over
delivery schedules and quality;
. the unavailability of, or delays in obtaining access to, key process
technologies;
. limited control over manufacturing yields and quality assurance;
. inadequate capacity during periods of excess demand;
. inadequate allocation of production capacity to meet our needs;
10
<PAGE>
. increased costs of materials or manufacturing services;
. difficulties selecting and integrating new subcontractors;
. limited warranties on wafers or products supplied to us;
. inability to take advantage of price reductions; and
. misappropriation of our intellectual property.
Any one of these factors could adversely affect our business.
While we believe we have good relations with our outside foundries and
suppliers, we cannot be certain that we will be able to maintain these
favorable relations. Additionally, because there is a limited number of
foundries and suppliers that can produce our products, establishing
relationships and increasing production with new outside foundries takes a
considerable amount of time. Thus, there is no readily available alternative
source of supply for our production needs. A manufacturing disruption, such as
a raw material shortage, experienced by TRW or any of our other outside
foundries and suppliers could impact the production of some of our products for
a substantial period of time. Our outside foundries' and suppliers' inability
to increase their production capacity or to continue to allocate capacity to
manufacture our components, could also limit our ability to grow our business.
We may face production delays if the subcontractors we use to manufacture our
wafers or products discontinue the manufacturing processes needed to meet our
demands or fail to advance the process technologies needed to manufacture our
products.
Our wafer and product requirements represent a small portion of the total
production of the third-party foundries that manufacture our products. As a
result, we are subject to the risk that our external foundries may not continue
to devote resources to the continued development and improvement of the process
technologies on which the manufacturing of our products are based. This could
increase our costs and harm our ability to deliver our products on time.
Our operating results substantially depend on manufacturing output and yields,
which may not meet expectations.
Manufacturing semiconductors requires manufacturing tools that are unique to
each product produced. If one of these unique manufacturing tools of our
outside foundries was damaged or destroyed, then the ability of these foundries
to manufacture the related product would be impaired and our business would
suffer. In addition, our manufacturing yields decline whenever a substantial
percentage of wafers must be rejected or significant portions of each wafer are
nonfunctional. Such declines can be caused by many factors, including minute
levels of contaminants in the manufacturing environment, design imperfections,
defects in masks used to print circuits on a wafer and difficulties in the
fabrication process. Many of these problems are difficult to diagnose, are time
consuming and expensive to remedy and can result in shipment delays.
Difficulties associated with adapting our technology and product design to
the proprietary process technology and design rules of our outside foundries
can lead to reduced yields. Since low yields may result from either design or
process technology failures, yield problems may not be effectively determined
or resolved until an actual product exists that can be analyzed and tested. As
a result, yield problems may not be identified until well into the production
process, and resolution of yield problems may require cooperation between
ourselves and our manufacturers. In some cases this risk could be compounded by
the offshore location of some of our manufacturers, increasing the effort and
time required to identify, communicate and resolve manufacturing yield
problems. Manufacturing defects that we do not discover during the
manufacturing or testing process may lead to costly product recalls.
Difficulties in diagnosing and solving the complicated problems of assembling
these types of semiconductors could also reduce our yields.
11
<PAGE>
If we are unable to commit to deliver sufficient quantities of our products to
satisfy our customers' needs, it may be difficult for us to attract new orders
and customers or we may lose current orders and customers.
Our customers typically require that we commit to provide specified
quantities of products over a given period of time. We may be unable to deliver
sufficient quantities of our products for any of the following reasons:
. our reliance on third-party manufacturers;
. our limited infrastructure, including personnel and systems;
. the limited availability of raw materials; and
. competing customer demands.
If we are unable to commit to deliver sufficient quantities of our products to
satisfy a customer's anticipated needs, we may lose the order and the
opportunity for significant sales to that customer and may be unable to attract
new orders and customers.
Our business depends on the continued availability of raw materials and
advanced process technologies at reasonable prices.
Highly specialized raw materials and advanced process technologies are
needed for the production of our products. In some cases, there are only two or
three suppliers of such materials and technologies in the world. We depend on
the continued availability of these materials and technologies at reasonable
prices. We may not be able to fulfill customer purchase requests if there is a
substantial increase in the price for these materials or if our outside
suppliers cannot provide adequate quantities of raw materials for the
production of our products. This may result in decreased revenues and adversely
affect our operating results.
Risks Relating to Our Industry
The markets we serve are subject to rapid technological change, and if we are
unable to develop and introduce new products, our revenues could stop growing
or could decline.
The markets we serve frequently undergo transitions in which products
rapidly incorporate new features and performance standards on an industry-wide
basis. Products for communications applications, as well as for high-speed
computing applications, are based on continually evolving industry standards. A
significant portion of our revenues in recent periods has been, and is expected
to continue to be, derived from sales of products based on existing
transmission standards. However, our ability to compete in the future will
depend on our ability to identify and ensure compliance with evolving industry
standards.
The emergence of new industry standards could render our products
incompatible with products developed by major communications equipment
manufacturers. If our products are unable to support the new features, the
enhanced integration of functions or the performance levels required by
communications equipment manufacturers in these markets, we would likely lose
business from an existing or potential customer. Moreover, we would not have
the opportunity to compete for new business until the next product transition
occurs. As a result, we could be required to invest significant time and effort
and to incur significant expense to redesign our products to ensure compliance
with relevant standards. If our products are not in compliance with prevailing
industry standards for a significant period of time, we could miss
opportunities to achieve crucial design-wins.
Moreover, to improve the cost-effectiveness and performance of our products,
we may be required to transition one or more of our products to process
technologies with smaller components, other materials or higher speeds. We may
not be able to improve our process technologies and develop or otherwise gain
access to new process technologies in a timely or cost-effective manner.
12
<PAGE>
These risks may lead to increased costs or delay product delivery, which
would harm our profitability and customer relationships. Consequently, our
revenues could be significantly reduced for a substantial period if we fail to
develop products with required features or performance standards, if we
experience a delay as short as a few months in bringing a new product to
market, or if our customers fail to achieve market acceptance of their
products.
We operate in the highly cyclical semiconductor industry.
The semiconductor industry has experienced significant downturns, often in
connection with, or in anticipation of, maturing product cycles (of both
semiconductor companies' and their customers' products) and declines in general
economic conditions. These downturns have been characterized by diminished
product demand, production overcapacity, high inventory levels and accelerated
erosion of average selling prices. Any future downturns could have a material
adverse effect on the growth of our business and revenues. From time to time
the semiconductor industry also has experienced periods of increased demand and
production capacity constraints. We may experience substantial changes in
future operating results due to general semiconductor industry conditions,
general economic conditions and other factors.
Slow growth in the build-out of the communications infrastructure and
uncertainties in network service providers' purchasing programs, as well as
consolidation in the network service provider industry, may adversely affect
our future business and operating results.
Our business prospects depend substantially on the continued build-out of
the communications infrastructure. A number of network service providers have
recently announced plans to curtail the level of their capital expenditures on
their infrastructure build-out, which could significantly reduce the demand for
our products by communications equipment manufacturers. In addition, network
service providers typically purchase network equipment pursuant to multi-year
purchasing programs that may increase or decrease annually as the providers
adjust their capital equipment budgets and purchasing priorities. Network
service providers' curtailment or termination of purchasing programs or
decreases in capital budgets, particularly if significant and unanticipated by
us and our communications equipment manufacturer customers, could materially
and adversely affect our revenue and business prospects. Additionally,
consolidation among network service providers may cause delays in the purchase
of our products and a reexamination of strategic and purchasing decisions by
these network service providers and our current and potential communications
equipment manufacturer customers, which could harm our business and financial
condition.
Necessary licenses of third-party technology may not be available to us or may
be prohibitively expensive, which could adversely affect our ability to produce
and sell our products.
From time to time we may be required to license technology from third
parties to develop new products or product enhancements. We cannot assure you
that third-party licenses will be available to us on commercially reasonable
terms, if at all. Our inability to obtain any third-party license required to
develop new products and product enhancements could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, if at all, any of which could seriously harm our ability to sell our
products.
We may not be able to protect our intellectual property adequately.
Our intellectual property is critical to our ability to successfully design
products for the optical networking systems market. We currently have no
patents, and we cannot assure you that our pending patent application or any
future applications will be approved. Further, we cannot assure you that any
issued patents will provide us with competitive advantages or will not be
challenged by third parties, or that if challenged, will be found to be valid
or enforceable. Additionally, we cannot assure you that the patents of others
will not have an adverse effect on our ability to do business. Furthermore,
others may independently develop similar products or processes, duplicate our
products or processes or design around any patents that may be issued to us.
13
<PAGE>
We rely on the combination of maskwork protection under the Semiconductor
Chip Protection Act of 1984, trademarks, copyrights, trade secrets, employee
and third-party nondisclosure agreements and licensing arrangements to protect
our intellectual property. Despite these efforts, we cannot be certain that
others will not independently develop substantially equivalent intellectual
property or otherwise gain access to our intellectual property, or disclose
such intellectual property, or that we can meaningfully protect our
intellectual property.
We could be harmed by litigation involving patents and proprietary rights.
The semiconductor industry is characterized by substantial litigation
regarding patent and other intellectual property rights. We may be accused of
infringing upon the intellectual property rights of third parties.
Additionally, we have indemnification obligations to our customers with respect
to intellectual property infringement claims by third parties. Such
intellectual property infringement claims by third parties or indemnification
claims by our customers could harm our business.
Any litigation relating to the intellectual property rights of third
parties, whether or not determined in our favor or settled by us, could be
costly and could divert the efforts and attention of our management and
technical personnel. In the event of any adverse ruling in any litigation, we
could be required to:
. pay substantial damages;
. cease the manufacturing, use and sale of certain products;
. discontinue the use of certain process technologies; and
. obtain a license from the third-party claiming infringement, which might
not be available on reasonable terms, if at all.
The communications industry is subject to government regulations that could
harm our business.
The Federal Communications Commission, or FCC, has jurisdiction over the
entire communications industry in the United States and, as a result, our
products and our customers' products are subject to FCC rules and regulations.
Current and future FCC rules and regulations affecting communications services,
our products or our customers' businesses or products could negatively affect
our business. In addition, international regulatory standards could impair our
ability to develop products in the future. Delays caused by our compliance with
regulatory requirements could result in postponements or cancellations of
product orders, which would harm our business, results of operations and
financial condition. Further, we cannot be certain that we will be successful
in obtaining or maintaining any regulatory approvals that may, in the future,
be required to operate our business.
Risks Relating to this Offering
Technology company stock prices are especially volatile, and this volatility
may depress our stock price or lead to class action litigation.
The stock market, and specifically the stock prices of technology companies,
have been very volatile. The market price of our shares of Class A common stock
may fluctuate significantly in response to a number of factors, beyond our
control, including:
. changes in financial estimates by securities analysts;
. announcements by us, our customers or our competitors;
. changes in market valuations of similar companies;
. changes in accounting rules and regulations; and
. future sales of our common stock by our existing shareholders.
14
<PAGE>
As a result of this volatility, you may be unable to resell your shares at
or above the offering price.
Securities class action litigation has often been brought against companies
that experience volatility in the market price of their securities. Litigation
brought against us could result in substantial costs to us in defending against
a lawsuit and management's attention could be diverted from our business.
Our securities have no prior market, and our stock price may decline after the
offering.
Before this offering, there has not been a public market for our Class A
common stock, and an active public market for our Class A common stock may not
develop or be sustained after this offering. The initial public offering price
will be determined by negotiations between representatives of the underwriters
and us. After this offering, the market price of our Class A common stock may
fall below the initial public offering price.
If a significant number of shares become available for sale and are sold in a
short period of time, the market price of our stock could decline.
If our shareholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our Class A common
stock could fall. Based on shares outstanding as of September 30, 2000, upon
completion of this offering, we will have shares of common
stock outstanding. Other than the shares of Class A common stock sold in this
offering, approximately shares will immediately be eligible for sale in
the public market. Our shareholders are subject to agreements with the
underwriters that restrict their ability to transfer their stock for 180 days
from the date of this prospectus, subject to certain exceptions. For a detailed
description of these restrictions, please see "Underwriting." After these
agreements expire, an additional shares will be eligible for
sale in the public market. For a detailed discussion of the shares eligible for
future sale, please see "Shares Eligible for Future Sale."
In addition, under an Investors' Rights Agreement some of our current
shareholders have "demand" and/or "piggyback" registration rights in connection
with future offerings of our common stock. "Demand" rights enable shareholders
to demand that their shares be registered and may require us to file a
registration statement under the Securities Act at our expense. "Piggyback"
rights require us to notify the shareholders of our stock if we propose to
register any of our securities under the Securities Act, and grant such
shareholders the right to include their shares in the registration statement.
All of our shareholders who are parties to the Investors' Rights Agreement have
agreed not to exercise their registration rights until 180 days following the
date of this prospectus without the consent of Credit Suisse First Boston
Corporation.
We have broad discretion in our use of the offering proceeds, and the
investment of these proceeds may not yield a favorable return.
Our management has broad discretion over how the proceeds of this offering
are used and could spend these proceeds in ways with which our shareholders may
not agree. The proceeds may be invested in ways that do not yield favorable
returns.
As a new investor, you will experience immediate and substantial dilution in
the value of the Class A common stock.
The assumed initial offering price of $ per share is substantially
higher than the current book value per share of our outstanding common stock.
If you purchase shares of Class A common stock in this offering, you will incur
immediate and substantial dilution of approximately $ per share in pro
forma net tangible book value. If the holders of outstanding options and
warrants exercise those options and warrants, you will incur further dilution.
15
<PAGE>
Because existing shareholders own a large percentage of our voting shares, your
voting power may be limited.
We currently have 28,000,000 shares of Class B common stock outstanding,
each of which entitles the holder to ten votes. Only Class A common stock will
be sold in this offering. All of the Class B common stock is held by officers,
directors or other persons or entities owning 5% or more of the outstanding
shares of our common stock.
Following consummation of this offering, it is anticipated that our
executive officers, directors and their affiliates will beneficially own or
control shares representing % of the voting power of our outstanding capital
stock. Dr. Richard Nottenburg, as a result of his stock ownership and a voting
trust agreement with Dr. Jens Albers, will alone control % of the
outstanding voting power of our capital stock. In addition, persons and
entities owning more than 5% of our outstanding shares of common stock will, in
the aggregate, control % of the outstanding voting power of our capital
stock. As a result, our directors and 5% shareholders acting together will have
the ability to control all matters submitted to our shareholders for approval,
including the election and removal of directors and the approval of any merger,
consolidation or sale of all or substantially all of our assets. These
shareholders may make decisions that are adverse to your interests.
Our board of directors may issue, without shareholder approval, shares of
preferred stock that have rights and preferences superior to those of our
shares of common stock and that may prevent or delay a change of control.
Our articles of incorporation provide that our board of directors may issue
new shares of preferred stock without shareholder approval. Some of the rights
and preferences of these shares of preferred stock would be superior to the
rights and preferences of shares of our common stock. Accordingly, the issuance
of new shares of preferred stock may adversely affect the rights of the holders
of shares of our common stock. In addition, the issuance of new shares of
preferred stock may prevent or delay a change of control of our company.
We may need additional capital, which may not be available, and our ability to
grow may be limited as a result.
We may be required, or could elect, to seek additional funding at any time
following this offering. We anticipate incurring significant expenses in
connection with increased research and development activities, and we may
engage in acquisitions. The hiring of additional personnel to support these
functions, including the expansion of our sales and marketing organizations,
will also require a significant commitment of resources. In addition, if the
market for our products develops at a slower pace than anticipated, or if we
fail to continue to expand our market share, we may continue to utilize
significant amounts of capital. If cash from available sources is insufficient,
or if cash is used for acquisitions or other unanticipated uses, we may need
additional capital sooner than anticipated. In the event we are required, or
elect, to raise additional funds, we may not be able to do so on favorable
terms, if at all.
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
the federal securities laws that relate to future events or our future
financial performance. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by the forward-looking statements. These
risks and other factors include those listed under "Risk Factors" and elsewhere
in this prospectus. In some cases, you can identify forward-looking statements
by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue" or
the negative of these terms or other comparable terminology. In addition, these
forward-looking statements include, but are not limited to, statements
regarding the following:
. anticipated development and release of new products;
. anticipated sources of future revenues;
. the expansion of our foundry or other manufacturing relationships;
. potential future acquisitions;
. anticipated expenditures for research and development, sales and
marketing and general and administrative expenses; and
. the adequacy of our capital resources to fund our operations.
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.
17
<PAGE>
USE OF PROCEEDS
We will receive net proceeds from this offering of approximately $
million, assuming an initial public offering price of $ per share and after
deducting underwriting discounts and commissions and estimated offering
expenses. If the underwriters exercise their over-allotment option in full, our
net proceeds will be approximately $ million.
The principal purposes of this offering are to obtain additional capital, to
create a public market for our Class A common stock and to facilitate future
access to public capital markets. As of the date of this prospectus, we have
not allocated the net proceeds of this offering to specific uses. We expect to
use the net proceeds primarily for general corporate purposes, including
working capital. The amounts we actually expend for working capital and other
purposes may vary significantly and will depend on a number of factors,
including the amount of our future revenues and other factors described under
"Risk Factors." We may also use a portion of the net proceeds to acquire
products, technologies or businesses that are complementary to our current and
future business and product lines. We currently have no commitments or
agreements with respect to any acquisition. Pending use of the net proceeds of
this offering, we intend to invest the net proceeds in interest-bearing,
investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain any future earnings to fund the development and
growth of our business and do not anticipate paying any cash dividends for the
foreseeable future.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
. on an actual basis;
. on a pro forma basis to give effect to the automatic conversion of all
outstanding shares of preferred stock into Class A common stock upon the
completion of this offering; and
. on a pro forma as adjusted basis to reflect our receipt of the net
proceeds from the sale of shares of Class A common stock in this
offering at an assumed initial public offering price of $ per share,
after deducting estimated underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
As of June 30, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 52,358 $ 52,358 $
======== ======== ===
Lease obligations, net of current portion...... $ 1,287 $ 1,287 $
-------- -------- ---
Redeemable convertible preferred stock:
Series A, $0.0001 par value; 9,000,000 shares
authorized, 1,711,640 shares issued and
outstanding, actual; no shares authorized,
issued and outstanding pro forma and pro
forma as adjusted........................... 15,026 --
Series B, $0.0001 par value; 1,000,000 shares
authorized, issued and outstanding, actual;
no shares authorized, issued and outstanding
pro forma and pro forma as adjusted......... 40,000 --
Shareholders' equity:
Common stock, $.0001 par value:
Class A; 200,000,000 shares authorized,
2,000,000 shares issued and outstanding,
actual; 200,000,000 shares authorized,
29,116,400 shares issued and outstanding
pro forma; 200,000,000 shares authorized,
shares issued and outstanding pro forma
as adjusted................................. -- 3
Class B; 100,000,000 shares authorized,
28,000,000 shares issued and outstanding,
actual, pro forma and pro forma as
adjusted.................................... 3 3
Additional paid-in-capital................... 25,785 80,808
Deferred stock compensation.................. (9,052) (9,052)
Accumulated deficit.......................... (13,500) (13,500)
Accumulated other comprehensive income....... 1 1
-------- -------- ---
Total shareholders' equity................. 3,236 58,265
-------- -------- ---
Total capitalization................... $111,908 $111,908 $
======== ======== ===
</TABLE>
The share information above excludes the following as of September 30, 2000:
. 33,378,450 shares of Class A common stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of $1.03
per share;
. 13,621,550 shares of Class A common stock reserved for future issuance
under our stock option plans;
. 5,813,716 shares of Class A common stock issuable upon exercise of
outstanding warrants with a weighted average exercise price of $3.53 per
share; and
. 1,500,000 additional shares of Class A common stock reserved for future
issuance under our 2000 Employee Stock Purchase Plan.
19
<PAGE>
DILUTION
If you invest in our Class A common stock, your interest will be diluted to
the extent of the difference between the public offering price per share of our
Class A common stock and the pro forma as adjusted net tangible book value per
share of our Class A common stock after this offering. Our pro forma net
tangible book value as of June 30, 2000 was $ , or $ per share. Pro
forma net tangible book value per share represents the amount of our total
tangible assets less total liabilities, divided by the pro forma number of
shares of common stock outstanding after giving effect to the automatic
conversion of all of our outstanding shares of preferred stock into shares of
Class A common stock.
After giving effect to our sale of shares of Class A common stock in
this offering at an assumed initial public offering price of $ per share,
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses, our pro forma as adjusted net tangible book value
as of June 30, 2000 would have been $ million, or $ per share. This
represents an immediate increase in pro forma net tangible book value of $
per share to existing shareholders and an immediate dilution of $ per
share to new investors of Class A common stock in this offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................ $
Pro forma net tangible book value at June 30, 2000............. $
Increase attributable to new investors.........................
---
Pro forma as adjusted net tangible book value after this
offering........................................................
-----
Dilution to new investors........................................ $
=====
</TABLE>
The following table shows on a pro forma basis, as of September 30, 2000,
the number of shares of stock purchased from us, the total consideration paid
to us and the average price per share paid by the existing shareholders and by
new investors, before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us, at an assumed
initial public offering price of $ per share.
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration
-------------- -------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............ % $ % $
New investors....................
---- --- ---- ---
Total.......................... 100% 100%
==== === ==== ===
</TABLE>
The above table and calculations exclude:
. 33,378,450 shares of Class A common stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of $1.03
per share;
. 13,621,550 shares of Class A common stock reserved for future issuance
under our stock option plans;
. 5,813,716 shares of Class A common stock issuable upon exercise of
outstanding warrants with a weighted average exercise price of $3.53 per
share; and
. 1,500,000 additional shares of Class A common stock reserved for future
issuance under our 2000 Employee Stock Purchase Plan.
New investors will suffer additional dilution upon exercise of any
outstanding options or warrants.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
You should read the selected consolidated financial data in conjunction with
our financial statements and related notes included in this prospectus as well
as the section of the prospectus entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The statement of operations
data for the years ended December 31, 1997, 1998 and 1999 and the balance sheet
data as of December 31, 1998 and 1999 are derived from, and qualified by
reference to, our audited consolidated financial statements included in this
prospectus. The statement of operations data for the years ended, and the
balance sheet data as of December 31, 1996 and 1997 are derived from, and
qualified by reference to, our audited consolidated financial statements, which
are not included in this prospectus. The statement of operations data for the
year ended December 31, 1995 and the balance sheet data as of December 31, 1995
are unaudited. The statement of operations data for the six months ended June
30, 1999 and 2000 and the balance sheet data as of June 30, 2000 are unaudited.
In the opinion of management, all necessary adjustments, consisting only of
normal recurring adjustments, have been included to present fairly the
unaudited interim results when read in conjunction with the audited financial
statements and notes thereto appearing in this prospectus. Historical results
are not necessarily indicative of results that may be expected for any future
period.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------ -----------------
1995 1996 1997 1998 1999 1999 2000
----------- -------- -------- -------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Product................ $-- $ -- $ 94 $ 2,126 $19,383 $5,960 $ 28,667
Development............ 25 1,010 1,447 1,726 1,012 946 --
--- ------ ------ ------- ------- ------ --------
Total revenues....... 25 1,010 1,541 3,852 20,395 6,906 28,667
Cost of revenues........ -- 729 1,178 1,847 6,748 2,234 10,859
--- ------ ------ ------- ------- ------ --------
Gross profit............ 25 281 363 2,005 13,647 4,672 17,808
--- ------ ------ ------- ------- ------ --------
Operating expenses:
Research and
development, excluding
deferred stock
compensation.......... -- 279 650 2,219 8,779 2,584 8,934
Sales and marketing,
excluding deferred
stock compensation.... -- 94 190 349 2,292 795 2,514
General and
administrative,
excluding deferred
stock compensation.... -- 107 266 391 1,767 664 2,029
Deferred stock
compensation.......... -- -- -- 344 822 62 2,238
Warrant issuances...... -- -- -- -- -- -- 6,456
--- ------ ------ ------- ------- ------ --------
Total operating
expenses............ -- 480 1,106 3,303 13,660 4,105 22,171
--- ------ ------ ------- ------- ------ --------
Operating income
(loss)................. 25 (199) (743) (1,298) (13) 567 (4,363)
Other income and
(expenses)............. -- 13 (61) (189) 57 (114) 128
--- ------ ------ ------- ------- ------ --------
Income (loss) before
provision for income
taxes.................. 25 (186) (804) (1,487) 44 453 (4,235)
Provision for income
taxes.................. 4 -- 1 1 19 -- 447
--- ------ ------ ------- ------- ------ --------
Net income (loss)....... $21 $ (186) $ (805) $(1,488) $ 25 $ 453 $ (4,682)*
=== ====== ====== ======= ======= ====== ========
Accretion of redeemable
convertible preferred
stock to redemption
value.................. -- -- -- -- (48) -- (48)
Dividend related to
warrant issuance....... -- -- -- -- -- -- (6,375)
Net income (loss)
attributable to common
shareholders........... $21 $ (186) $ (805) $(1,488) $ (23) $ 453 $(11,105)
=== ====== ====== ======= ======= ====== ========
Net income (loss) per
share:
Basic.................. $-- $(0.01) $(0.03) $ (0.05) $ -- $ 0.02 $ (0.37)
=== ====== ====== ======= ======= ====== ========
Diluted................ $-- $(0.01) $(0.03) $ (0.05) $ -- $ 0.01 $ (0.37)
=== ====== ====== ======= ======= ====== ========
Weighted average shares:
Basic.................. -- 30,000 30,000 30,000 30,000 30,000 30,000
=== ====== ====== ======= ======= ====== ========
Diluted................ -- 30,000 30,000 30,000 30,000 37,598 30,000
=== ====== ====== ======= ======= ====== ========
Pro forma net income
(loss) per share:
Basic and diluted...... $ -- $ (0.22)
======= ========
Weighted average
shares................ 39,520 51,335
======= ========
</TABLE>
*The net loss for the six months ended June 30, 2000 includes non-cash
charges of $2.2 million related to deferred stock compensation and $6.5 million
related to warrant issuances.
See note 2 of notes to consolidated financial statements for an explanation
of the determination of the number of shares used in computing net income
(loss) per share data.
21
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
----------- -------- -------- -------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Deferred Stock
Compensation:
Cost of revenues........ $ -- $ -- $ -- $ -- $ 19 $-- $ 159
Research and
development............ -- -- -- 344 216 59 793
Sales and marketing..... -- -- -- -- 31 3 89
General and
administrative......... -- -- -- -- 556 -- 1,197
---- ---- ---- ---- ---- --- ------
Total................ $ -- $ -- $ -- $344 $822 $62 $2,238
==== ==== ==== ==== ==== === ======
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------ As of June 30,
1995 1996 1997 1998 1999 2000
----------- ----- ----- ------- ------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $21 $ 281 $ 273 $ 303 $ 8,997 $ 52,358
Working capital
(deficit).............. 21 (287) (90) (34) 15,108 53,776
Total assets............ 21 783 793 1,747 22,644 69,405
Long-term obligations,
net of current......... -- 3 926 2,189 3,926 1,287
Redeemable convertible
preferred stock........ -- -- -- -- 14,978 55,026
Total shareholders'
equity (deficit)....... 21 (161) (856) (1,995) (714) 3,236
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements included elsewhere in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these forward-
looking statements as a result of various factors including those set forth
under "Risk Factors" and elsewhere in this prospectus.
Overview
We design, develop and market high-bandwidth, advanced integrated circuits,
modules and higher-level assemblies that enable next generation optical
networking systems. We outsource substantially all of our semiconductor
fabrication and focus our efforts on the design, development and marketing of
our products.
From our inception on July 26, 1994 through December 31, 1996, our
operations consisted primarily of start-up activities, including development of
our initial products. During 1996, we began generating development revenues
through technology development contracts with several of our customers. In July
1997, we began shipping our first product for customer evaluation. During the
first quarter of 1998, we recognized our first significant product revenues and
further invested in research and development, sales and marketing, operations
and our general and administrative infrastructure.
For the six months ended June 30, 2000, we shipped our products to 23
customers. To date, we have generated a substantial portion of our revenues
from a limited number of customers. Our top three customers for the six months
ended June 30, 2000 were Lucent, Cisco and Alcatel, representing approximately
50%, 18% and 16% of our revenues, respectively. Our top three customers in 1999
were Lucent, Alcatel and TyCom, representing approximately 36%, 20% and 18% of
our revenues, respectively. We expect that in future periods our customer base
will become less concentrated both generally and within our top three
customers.
We have focused our initial sales and marketing efforts on North American
and European communications equipment manufacturers. For the six months ended
June 30, 2000, we derived 75% of our total revenues from communications
equipment manufacturers in North America compared with 84% in 1999. We
currently sell through our direct sales force in North America and Europe, and
through selected independent manufacturing representatives in North America and
independent sales representatives in France, Israel, China and Korea.
International revenues are denominated primarily in U.S. dollars, which reduces
our exposure to foreign currency risks. We expect international revenues to
increase as a percentage of total revenues, driven primarily by increased sales
to customers in Europe and Asia.
Revenues. We recognize product revenues at the time of shipment. Allowances
are provided for estimated returns at the time of sale. Our customers are not
obligated by long-term contracts to purchase our products and can generally
cancel or reschedule orders on short notice. We historically derived our
development revenues from technology development contracts. Under these
contracts, we received payments from customers for designing and developing
products for use in their optical networking equipment. We recognize
development revenues using the percentage-of-completion method, measured by the
percentage of costs incurred to date to estimated total costs for each
contract. We recognized no development revenues for the six months ended June
30, 2000, and do not expect to recognize any significant development revenues
in the future.
Cost of Revenues. Cost of revenues consist of component and materials cost,
direct labor, manufacturing, overhead costs and estimated warranty costs. We
outsource substantially all of the fabrication and assembly, and a portion of
the testing, of our products. Accordingly, a significant portion of our cost of
revenues consist of payments to our third-party manufacturers. As revenues
increase, we believe favorable trends should occur in manufacturing costs due
to our ability to absorb overhead costs over higher volumes.
23
<PAGE>
Research and Development. Research and development expenses consist
primarily of salaries and related personnel costs, equipment, material, and
third-party costs and fees related to the development and prototyping of our
products, depreciation associated with engineering and design software costs.
We expense our research and development costs as they are incurred, except for
engineering and design software, which are capitalized and depreciated over the
life of the software. Research and development is key to our future success,
and we intend to significantly increase our research and development expenses
in future periods in absolute dollar amounts.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related expenses for personnel engaged in sales,
marketing, customer service and application engineering support functions and
costs associated with trade shows. We expect that sales and marketing expenses
will increase in future periods in absolute dollar amounts as we hire
additional sales and marketing personnel, initiate additional marketing
programs, establish sales offices in additional domestic and international
locations and expand our customer service and support organizations.
General and Administrative. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance, accounting,
facilities, information services, human resources, recruiting, professional
fees and other corporate expenses. We expect general and administrative
expenses to increase in absolute dollar amounts as we add personnel and incur
additional costs related to the growth of our business and our operation as a
public company.
Deferred Stock Compensation. In connection with the granting of stock
options to our employees, officers and directors, we recorded deferred stock
compensation of $6.0 million for the six months ended June 30, 2000, $6.0
million in 1999 and $0.5 million in 1998. Deferred stock compensation
represents the difference between the grant price and the fair value of the
common stock underlying options granted during these periods. Deferred stock
compensation is presented as a reduction of shareholders' equity. We are
amortizing our deferred stock compensation using the graded vesting method, in
accordance with FASB Interpretation No. 28, over the vesting period of each
respective option, generally four years. Based on our balance of deferred
stock compensation as of June 30, 2000, we estimate our amortization of
deferred stock compensation for each of the periods below to be as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ --------------
(in thousands)
<S> <C>
2000 (including $2.2 million of amortization during the six
months ended June 30, 2000)............................... $ 5,041
2001....................................................... 3,502
2002....................................................... 1,839
2003....................................................... 802
2004....................................................... 105
-------
Total.................................................... $11,289
=======
</TABLE>
Results of Operations
Six Months Ended June 30, 2000 and 1999
Revenues. Revenues increased to $28.7 million for the six months ended June
30, 2000, compared with $6.9 million for the six months ended June 30, 1999.
The increase was due to higher unit volume shipments of integrated circuits,
modules and higher-level assemblies to existing and new customers and the
introduction of new products. We recognized no development revenues for the six
months ended June 30, 2000, compared to $0.9 million of development revenues
for the six months ended June 30, 1999.
24
<PAGE>
Gross Profit. Cost of revenues increased to $10.9 million for the six months
ended June 30, 2000, compared with $2.2 million for the six months ended June
30, 1999. Gross profit as a percentage of revenues, or gross margin, declined
to 62% in the six months ended June 30, 2000 compared with 68% in the
six months ended June 30, 1999. The decline was due primarily to lower selling
prices for some of our integrated circuit products.
Research and Development. Research and development expenses increased to
$8.9 million for the six months ended June 30, 2000, compared with $2.6 million
for the six months ended June 30, 1999. The increase was due primarily to the
addition of engineering personnel and increased costs for engineering and
design software. Research and development expenses as a percentage of revenues
decreased for the six months ended June 30, 2000 to 31%, compared with 37% for
the six months ended June 30, 1999. The decrease was attributable to a higher
growth in revenues.
Sales and Marketing. Sales and marketing expenses increased to $2.5 million
for the six months ended June 30, 2000, compared with $0.8 million for the six
months ended June 30, 1999. The increase was due primarily to the addition of
sales and marketing personnel. Sales and marketing expenses as a percentage of
revenues were 9% for the six months ended June 30, 2000, compared with 12% for
the six months ended June 30, 1999. The decrease was a result of higher growth
in revenues.
General and Administrative. General and administrative expenses increased to
$2.0 million for the six months ended June 30, 2000, compared with $0.7 million
for the six months ended June 30, 1999. The increase was due primarily to the
addition of personnel and the associated payroll and related costs within the
areas of finance, human resources and business development. General and
administrative expenses as a percentage of revenues was 7% for the six months
ended June 30, 2000, compared with 10% for the six months ended June 30, 1999.
The decrease was a result of higher growth in revenues.
Deferred Stock Compensation. Amortization of deferred stock compensation
increased to $2.2 million for the six months ended June 30, 2000, compared with
$61,896 for the six months ended June 30, 1999, due to a greater number of
option grants to new and existing employees.
Warrant Issuances. We incurred non-cash charges of $6.5 million related to
warrant issuances during the six months ended June 30, 2000. These charges
represented the fair values of a warrant issued to a third party in conjunction
with a development agreement and a warrant issued to outside counsel for past
services. These warrants are fully exercisable and non-forfeitable. We have
expensed the value of these warrants because there is no third party
performance required with respect to the warrants, and the activities
underlying the development agreement relate to research and development efforts
for which we cannot determine the benefit, if any, which may result.
Years Ended December 31, 1999 and 1998
Revenues. Revenues increased to $20.4 million in 1999, compared with $3.9
million in 1998. The increase was due to increases in shipments of integrated
circuits, modules and higher-level assemblies to existing and new customers and
the introduction of new products. Development revenues declined to $1.0 million
in 1999, compared with $1.7 million in 1998.
Gross Profit. Cost of revenues increased to $6.7 million in 1999, compared
with $1.8 million in 1998. Gross margin increased to 67% in 1999, compared with
52% in 1998. The increase in gross margin in 1999 was due to increased sales of
higher margin products relative to revenues associated with lower margin
development contracts in 1998.
Research and Development. Research and development expenses increased to
$8.8 million in 1999, compared with $2.2 million in 1998. The increase was due
primarily to the addition of engineering personnel and increased costs for
engineering and design software. Research and development expenses as a
percentage
25
<PAGE>
of revenues decreased in 1999 to 43%, compared with 58% in 1998, due primarily
to higher growth in revenues during this period.
Sales and Marketing. Sales and marketing expenses increased to $2.3 million
in 1999, compared with $0.3 million in 1998. The increase was due primarily to
the addition of personnel and related costs in the areas of sales, application
engineering and marketing activities.
General and Administrative. General and administrative expenses increased to
$1.8 million in 1999 compared with $0.4 million in 1998. The increase was due
primarily to the addition of human resources and administrative personnel and
the relocation of our headquarters facility to Somerset, New Jersey.
Deferred Stock Compensation. Amortization of deferred stock compensation
increased to $0.8 million in 1999 from $0.3 million in 1998 due to a greater
number of option grants made to new and existing employees.
Years Ended December 31, 1998 and 1997
Revenues. Revenues increased to $3.9 million in 1998, compared with $1.5
million in 1997. The increase was due to increases in development revenues and
shipments of our initial products. In 1998 and 1997, a significant percentage
of our revenues was derived from technology development contracts.
Gross Profit. Cost of revenues increased to $1.8 million in 1998, compared
with $1.2 million in 1997. Gross margin increased to 52% in 1998, compared with
24% in 1997. The increase in gross margin in 1998 was due to an increased
proportion of product revenues as compared to development revenues.
Research and Development. Research and development expenses increased to
$2.2 million in 1998, compared with $0.7 million in 1997. The increase was due
primarily to the addition of engineering personnel and increased costs for
engineering and design software.
Sales and Marketing. Sales and marketing expenses increased to $0.3 million
in 1998, compared with $0.2 million in 1997.
General and Administrative. General and administrative expenses increased to
$0.4 million in 1998, compared with $0.3 million in 1997.
Deferred Stock Compensation. Amortization of deferred stock compensation was
$0.3 million in 1998. No amortization of deferred stock compensation was
recorded during 1997.
26
<PAGE>
Quarterly Results of Operations
The following table sets forth for the periods presented certain data from
our consolidated statement of operations. The consolidated statement of
operations data have been derived from our unaudited quarterly consolidated
financial statements. In the opinion of management, these statements have been
prepared on substantially the same basis as the audited consolidated financial
statements and include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial information for
the periods presented. This information should be read in conjunction with the
consolidated financial information and notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Three-Months Ended
----------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
1999 1999 1999 1999 2000 2000
--------- -------- ------------- ------------ --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product................ $2,406 $3,555 $5,322 $8,100 $12,347 $16,320
Development............ 323 623 66 -- -- --
------ ------ ------ ------ ------- -------
Total revenues........ 2,729 4,178 5,388 8,100 12,347 16,320
Cost of revenues........ 747 1,487 1,771 2,743 4,817 6,042
------ ------ ------ ------ ------- -------
Gross profit............ 1,982 2,691 3,617 5,357 7,530 10,278
Operating expenses:
Research and
development, excluding
deferred stock
compensation.......... 793 1,792 2,288 3,906 3,848 5,086
Sales and marketing,
excluding deferred
stock compensation.... 325 470 602 895 1,186 1,328
General and
administrative,
excluding deferred
stock compensation.... 207 457 509 594 1,145 884
Deferred stock
compensation.......... 26 36 57 704 836 1,402
Warrant issuances...... -- -- -- -- 81 6,375
------ ------ ------ ------ ------- -------
Total operating
expenses............. 1,351 2,755 3,456 6,099 7,096 15,075
------ ------ ------ ------ ------- -------
Operating income
(loss)................. 631 (64) 161 (742) 434 (4,797)
Other income and
expenses............... (42) (72) 181 (9) (63) 191
------ ------ ------ ------ ------- -------
Income (loss) before
provision for income
taxes.................. 589 (136) 342 (751) 371 (4,607)
Provision for income
taxes.................. -- -- -- 19 -- 447
====== ====== ====== ====== ======= =======
Net income (loss)....... $ 589 $ (136) $ 342 $ (770) $ 371 $(5,054)
====== ====== ====== ====== ======= =======
</TABLE>
Liquidity and Capital Resources
We have funded our operations primarily through private sales of preferred
stock. We also secured additional financing through capital leases for some of
our equipment needs. We generated positive cash flow from operations for the
six months ended June 30, 2000. As of June 30, 2000, we had cash and cash
equivalents of $52.4 million.
Cash used for operations increased to $5.8 million in 1999 from $0.9 million
in 1998. This increase was due primarily to higher accounts receivable and
inventory balances. Cash provided from operations increased to $8.2 million for
the six months ended June 30, 2000 compared with $0.6 million for the six
months ended
27
<PAGE>
June 30, 1999. This was due to an increase in accounts payable and accrued
expenses and a reduction in accounts receivable, partially offset by an
increase in inventory.
Cash generated from financing activities increased to $15.2 million in 1999
from $1.0 million in 1998. This increase was due primarily to the sale of $15.2
million of Series A preferred stock in June 1999. Cash generated from financing
activities also increased to $37.3 million for the six months ended June 30,
2000 compared with $14.9 million for the six months ended June 30, 1999. This
increase was due primarily to the sale of $40.0 million of Series B preferred
stock in March through May 2000, offset by our repayment of $2.4 million of
principal and interest under a promissory note.
Cash and cash equivalents increased to $9.0 million on December 31, 1999
from $0.3 million on December 31, 1998. This increase was due primarily to the
sale of the Series A preferred shares during June 1999. Cash and cash
equivalents, increased to $52.4 million on June 30, 2000 from $9.0 million on
December 31, 1999 due primarily to the sale of the Series B preferred shares
during March through May 2000.
We are obligated to make payments of approximately $5.3 million over the
lease periods of our operating leases, with $1.2 million due in 2001. We
believe the net proceeds of this offering, together with our current cash and
cash equivalents will be sufficient to meet our capital and operating
requirements at least through the next 12 months, although we could be
required, or could elect, to seek additional funding prior to that time.
Recently Issued Accounting Pronouncements
In June 1998, June 1999 and June 2000, the Financial Accounting Standards
Board, or the FASB, issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement
No. 133" and SFAS No. 138, "Accounting for Derivative Instruments and Hedging
Activities--An Amendment of SFAS No. 133." SFAS No. 133, as amended, requires
the recognition of all derivatives as either assets or liabilities in the
balance sheet and the measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the planned
use of the derivative and the resulting designation. We are required to
implement SFAS No. 133, as amended, in the first quarter of 2001. We have not
determined the effects, if any, adoption of SFAS No. 133, as amended, will have
on our consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, or SAB
101, "Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. We have incorporated the impact of SAB 101 into our
financial position and results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, "Accounting
for Certain Transactions Involving Stock Compensation--an interpretation of APB
Opinion No. 25". FIN 44 clarifies the application of Accounting Practice Board
Opinion No. 25, "Accounting for Stock Issued to Employee," or APB 25. FIN 44
clarifies the following: the definition of an employee, the criteria for
determining whether a plan qualifies as a non-compensatory plan, the accounting
consequences of various modifications to the terms of previously fixed stock
options or awards and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occur after either December
15, 1998, or January 12, 2000. We do not expect the adoption of FIN 44 to have
a material impact on our financial position or results of operations.
28
<PAGE>
Qualitative and Quantitative Disclosures About Market Risk
Foreign Currency Risk
We develop and market our products in North America and Europe. As a result,
our financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. As our
sales are currently primarily made or denominated in U.S. dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets.
Although a substantial portion of our revenues is realized in U.S. dollars,
we receive revenues and incur expenses in currencies other than U.S. dollars.
Fluctuations in the exchange rates between the U.S. dollar and other currencies
may have a material effect on our results of operations. We do not currently
engage in currency hedging activities. Although we have not experienced
significant foreign exchange rate losses to date, we may in the future,
especially to the extent that we do not engage in hedging.
The economic impact of currency exchange rate movements on our operating
results is complex because such changes are often linked to variability in real
growth, inflation, interest rates, governmental actions and other factors.
These changes, if material, may cause us to adjust our financing and operating
strategies. Consequently, isolating the effect of changes in currency does not
incorporate these other important economic factors.
Interest Rate Risk
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly because the majority of our investments are in
short-term instruments. Due to the short-term nature of our investments, we
believe that there is no material risk exposure. Therefore, no quantitative
tabular disclosures have been included.
29
<PAGE>
BUSINESS
Overview
We design, develop and market high-bandwidth, advanced integrated circuits,
modules and higher-level assemblies that enable next generation optical
networking systems. We seek to be first to develop innovative products with
system functions that allow communications equipment manufacturers to rapidly
build and deliver high performance fiber optic systems ahead of their
competitors. We work closely with our customers to design and deliver
integrated product solutions utilizing our semiconductor, circuit design and
systems level expertise. Our current products address the markets for DWDM and
SONET/SDH optical networking equipment operating at the fastest commercially
available speeds of OC-192, or 10 gigabits per second. We are in the early
stages of developing products that are designed to address future systems that
may operate at speeds of OC-768, or 40 gigabits per second. We sell our
products to leading and emerging communications equipment manufacturers that
develop high-speed optical networking systems. Our customers include Alcatel,
Ciena, Cisco, JDS Uniphase, Lucent, ONI, Optimight, Qtera (recently acquired by
Nortel), Sycamore and TyCom.
Industry Background
Dramatic Increase in the Volume of Communications Traffic
The volume of data traffic across communications networks has grown rapidly
over the past decade. This growth has been driven by the increased use of data-
intensive applications such as electronic commerce, Internet access, e-mail,
streaming audio and video, remote access and other new applications. This data
traffic is also expected to accelerate in the coming years. RHK, Inc., a
leading market research and consulting firm, estimates that data traffic across
communications networks will increase from 350,000 terabytes per month in 1999
to more than 16 million terabytes per month in 2003. Ten terabytes is the
equivalent of all of the information contained in the Library of Congress. This
dramatic increase in data traffic and the deployment of bandwidth-intensive
applications and services has placed a significant burden on the traditional
communications infrastructure, resulting in network congestion, decreased
reliability and an inability to scale network capacity effectively.
Development of Fiber Optic Networks
Much of the public network's infrastructure was originally designed to
transmit voice communications utilizing copper wire as the primary transmission
medium. This copper wire-based infrastructure is ill-suited for high-speed data
transmission due to bandwidth limitations and high maintenance and
administration costs. The inadequacy of the legacy public network
infrastructure is particularly acute in the backbone, or core portion of the
network. The core is the portion of the network characterized by long distance
transmissions at high-speeds, or bit rates. Communications service providers
are upgrading their network architectures by increasing bandwidth and switching
capabilities for high-speed data and voice transmissions and are replacing
conventional copper wire technology with fiber optic technology. Fiber optics
offers substantially greater capacity than copper wire and is less error-prone
and, as a result has become the transmission medium of choice for both
incumbent and emerging service providers. SONET and SDH are the standards, or
protocols, for the transmission of communications traffic over optical fiber.
SONET and SDH facilitate high data integrity and improve network reliability at
the higher transmission rates demanded in newly developed optical networking
systems.
Innovations in Optical Networking Systems
The increased demand for bandwidth is driving communications equipment
manufacturers to incorporate technologies that increase the capacity of optical
networking systems. The two primary approaches for increasing capacity are
higher transmission speeds and higher channel density. The majority of new
optical networking systems deployed by service providers addressing the network
core operate at 10 gigabits per
30
<PAGE>
second, or Gb/s. We believe future network deployments will incorporate systems
that operate at 40 Gb/s or faster when the technology becomes commercially
available. DWDM is a technology development that increases the capacity of
existing fiber optic networks by combining multiple light beams of information,
each at a different wavelength, or channel, onto a single strand of optical
fiber. Higher transmission speeds and increased deployments of DWDM technology
have significantly increased the complexity of optical networking systems. In
addition, we believe that next generation optical networks will add substantial
functionality and innovations to the optical transport layer to further
optimize available capacity.
Components for Optical Networking Systems
As communications equipment manufacturers develop systems that enable higher
transmission speeds and deploy DWDM technology to increase bandwidth, they must
integrate a greater number of complex components that generate, manipulate,
transmit and receive electrical and optical signals. These components include
integrated circuits, modules and higher-level assemblies and are becoming
increasingly important for the manufacture of optical networking systems. These
components are viewed as critical to communications equipment manufacturers
seeking competitive advantages. The need for communications equipment
manufacturers to focus on their core competencies and meet aggressive time-to-
market demands for new optical networking systems, along with the complexities
associated with the design and development of state-of-the-art components, have
caused communications equipment manufacturers to increasingly rely upon
sophisticated component suppliers.
Requirements for Supplying Components in Optical Networking Systems
To meet the performance and functionality requirements of optical networking
systems, communications equipment manufacturers are seeking suppliers that can
deliver increasingly sophisticated component solutions. These component
suppliers must provide each of the following:
Systems Level Expertise. Component suppliers must understand the
performance, functionality and integration requirements of the system into
which their components are incorporated. Without this critical systems
knowledge, a component supplier will have difficulty meeting the time-to-market
and functionality requirements of the communications equipment manufacturers,
thereby resulting in costly delays and missed revenue opportunities.
Advanced Technologies and Processes that Enable High-Speed
Transmission. Building high-speed integrated circuits requires access to
specialized process technologies and advanced circuit design approaches. The
vast majority of the semiconductor industry employs a CMOS transistor built on
silicon material. Because of demanding performance requirements, alternatives
to CMOS have emerged in the communications industry. Specifically, GaAs and
SiGe have emerged as semiconductor technologies that are effective in
addressing high-speed optical communications requirements. Component suppliers
are also exploring other semiconductor technologies, such as Indium Phosphide,
or InP, to address the requirements of future, higher speed communications
systems. Each of these processes poses significant challenges and has distinct
characteristics that require extensive knowledge and expertise. Communications
equipment manufacturers are looking for component suppliers that have the
necessary expertise to use the optimal processes in order to provide next
generation optical systems solutions for their customers.
Highly Integrated Product Solutions. In order to rapidly and cost
effectively introduce new products and simplify the design and manufacture of
optical networking systems, communications equipment manufacturers seek
component suppliers that can provide highly integrated solutions. These
integrated solutions are modules or higher-level assemblies that combine
numerous discrete components into a package or board to be sold as a single
product, which eliminates the time and expense associated with sourcing and
integrating components from multiple suppliers. As systems are manufactured in
greater volumes, communications equipment manufacturers require that modules
and higher-level assemblies be integrated further into multi-chip or single-
chip solutions. This integration provides for faster and more efficient
production, reduced part count and
31
<PAGE>
smaller design for placement into the network equipment, significantly reducing
manufacturing costs for communications equipment manufacturers.
The Multilink Solution
We design, develop and market high-bandwidth, advanced integrated circuits,
modules and higher-level assemblies that enable next generation optical
networking systems. Our integrated circuits and modules consist primarily of
application specific standard products, or ASSPs, which are highly technical
standardized products designed for use by several customers. These ASSPs can
also be designed into custom made higher-level assemblies for insertion into a
specific customer system. When appropriate, we also develop customer-specific
components for strategic customers. We are able to offer our customers
proprietary design skills, an in-depth understanding of high-speed process
technologies and a thorough understanding of next generation optical networking
system requirements. By offering highly integrated products, our customers are
able to concentrate their efforts on their core competencies and introduce
optical networking systems to the market in a shorter time and with more
functionality and greater performance than their competitors.
We believe we provide our customers with several key benefits, including the
following:
Sophisticated Products Developed Utilizing Systems Level Expertise
We provide sophisticated products that meet the functionality requirements
of next generation optical networking equipment. Our systems architects and
design engineers have a thorough understanding of high-bandwidth fiber optic
networking systems applications. This systems level expertise enables us to
anticipate and develop cost-effective next generation component solutions for
our customers. Our products incorporate unique circuit designs that enable
specific systems level functions, such as detecting transmission errors. For
example, our MTC-1224 CDR DMUX exhibits superior loss of signal characteristics
that reduce error rates and increase systems efficiency. Alternative solutions
in the market require a more costly and complex design to achieve the same
performance and quality standards.
High-Speed Products that Meet Next Generation Optical Transmission
Requirements
We have an in-depth understanding of high-performance semiconductor and
advanced process technologies. Understanding these technologies enables us to
design high-speed analog, digital and mixed-signal integrated circuits and
modules that operate at speeds of 10 Gb/s or higher. We design our products
utilizing the optimal process technology, such as GaAs, CMOS, and SiGe for a
particular function or product. We are also exploring the use of other
technologies for developing higher speed components. We believe this
flexibility is unique and allows us to provide optimal solutions to our
customers, resulting in the rapid introduction of high-speed, next generation
systems. For example, with our MTC-1215 MUX, we were the first supplier to
design and manufacture a SiGe component for use in a 12.3 Gb/s fiber optic
transmitter for ultra long-haul transmission systems. This product provides
significantly reduced power consumption and improved performance over competing
products.
High Level of Component Integration
Our highly integrated mixed-signal integrated circuits and modules offer
innovative functions that allow our customers to be first-to-market with high
performance fiber optic systems. When we are working with a customer that is
developing and validating a new system that incorporates an important new
function not commercially available from other sources, we first provide a
module-based component composed of multiple discrete integrated circuits. The
module is designed as an integrated package that can be seamlessly placed into
a system providing immediate functionality. As the system transitions to high
volume production, we collaborate with our customers to increase our solution's
level of component integration and functionality, moving from a module-based
solution to a multi-chip or single-chip solution. This higher-level of
component integration reduces the cost and complexity of our customers' systems
and enables them to meet their time to
32
<PAGE>
market requirements. For example, we have developed a complete three component
solution for the physical layer of an optical transmitter, including a
multiplexer, a limiting amplifier and a modulator driver. We have further
reduced the component count to two, by integrating the limiting amplifier into
the modulator driver. This new modulator driver, the MTC 5525, achieves
superior performance, while integrating numerous discrete components into a
highly integrated low part-count chip set.
Faster Time-to-Market
Competition among network service providers to incorporate the latest
technology into their networks is shortening the cycle for new product
introductions, with each successive generation of communications equipment
being adopted more quickly than the last. As a result, time-to-market has
become a differentiating, competitive factor for communications equipment
manufacturers. Through our systems level and process technology expertise and
our integration capability, we develop sophisticated products that enable our
customers to meet their critical time-to-market requirements.
The Multilink Strategy
Our goal is to become the leading global supplier of high value component
solutions for optical networking systems. Key elements of our strategy
include:
Leveraging Core Competencies to Rapidly Introduce Products that Enable Next
Generation Optical Systems
We have developed substantial competencies in mixed-signal circuit and
module design and advanced semiconductor process technologies. Many of our
engineers have worked for leading communications equipment manufacturers and
are experienced in the development of communications systems. We intend to
continue providing sophisticated products that meet the requirements of next
generation optical networking systems. We will continue to capitalize on our
design competencies and our integration capabilities to provide our customers
with new modules and higher-level assemblies so they can quickly and cost-
effectively introduce new systems with greater functionality. We will continue
to develop new products using leading-edge technologies that allow us to
transition these modules and higher-level assemblies into highly integrated,
multi-chip or single-chip solutions, enabling us to address our customers'
higher volume production requirements.
Expanding our Customer Relationships and the Breadth of Our Customer Base
We intend to further strengthen our existing customer relationships and
expand our customer base by continuing to target leading edge communications
equipment manufacturers, anticipating their needs through a collaborative
design and development process and providing ongoing, in-depth customer
support. We participate early in the design process of our customers' products
and aid in the design of their future systems architecture. Our application
engineers and marketing personnel work closely with our customers to define
and implement the appropriate solution and to provide continuous support. This
extensive customer interaction allows us to further develop our systems
expertise and to expand the functionality of our products in our customers'
optical networking systems, providing us with a strategic advantage over our
competitors.
Maintaining and Extending Technology Leadership
We have established a reputation as a technology leader in the design and
development of components for next generation optical networking systems. We
intend to maintain and extend our technological advantage by further investing
in research and development, focusing on high bit rate component solutions and
vigorously recruiting and retaining talented engineers. We will also continue
to work closely with our foundry partners to drive the development of future
generation process technologies.
33
<PAGE>
Pursuing Strategic Acquisitions and Strategic Relationships
We intend to pursue strategic acquisitions that provide us with
complementary products and technologies and highly qualified engineering
personnel. We also intend to continue to establish strategic relationships to
expand our technology leadership and secure access to advanced process
technologies. For example, we have entered into a semiconductor development and
a joint development agreement with IBM and a wafer supply agreement with TRW.
We believe that establishing strategic relationships with companies with
products or technologies that we deem complementary to our current and future
offerings will enable us to more effectively penetrate new and existing market
segments and offer our customers additional high value solutions.
Expanding to the Edge of the Optical Transport Network
We focus on solutions for optical networking systems in the innovative and
high-growth network core market. Our products are particularly well-suited for
long-haul, ultra long-haul and high channel count DWDM systems. We will
continue to build on our expertise in DWDM and long-haul applications for the
core of the network and leverage this expertise to address emerging
metropolitan or regional optical networking systems. We have started to expand
our addressable market to the network edge as systems operating at OC-192 are
beginning to be deployed in this portion of the network. The edge of the
network is that portion of the network that aggregates different types of data
traffic, such as internet protocol, asynchronous transfer mode and SONET/SDH,
for transport over the network core.
Customers
During the six months ended June 30, 2000, we shipped our products to 23
customers. We sell our integrated circuits, modules and higher-level assemblies
to leading and emerging communications equipment manufacturers that develop
high-speed optical transport systems. The following is a representative list of
our customers:
<TABLE>
<S> <C>
Alcatel ONI
Ciena Optimight
Cisco Qtera (recently acquired by Nortel)
JDS Uniphase Sycamore
Lucent TyCom
</TABLE>
Lucent, Alcatel, and TyCom accounted for approximately 36%, 20% and 18% of
our revenues for the year ended December 31, 1999. Lucent, Cisco and Alcatel
accounted for approximately 50%, 18% and 16% of our revenues for the six months
ended June 30, 2000.
Products
We design and develop advanced products targeted for use in high bandwidth
optical networking systems. These products consist of integrated circuits,
modules and higher-level assemblies that generate, manipulate, transmit and
receive electrical and optical signals.
Our products focus on three segments of optical networking systems: the
physical media dependent layer, or PMD, the physical layer and the datalink
layer. Collectively, the products within these segments connect data processing
devices to optical fiber and constitute an integral part of optical networking
systems.
34
<PAGE>
The following is a diagram that shows the different functions required for
fiber optic transmission systems:
[GRAPH APPEARS HERE]
PMD layer devices perform the conversion between electrical and optical
signals and can be categorized as either transmitters or receivers.
Transmitters convert voice and data transmissions carried as electrical
signals into optical signals for transmission over optical fiber, while
receivers convert optical signals into electrical signals. Transmitters are
composed of an electrical to optical, or E/O, converter, which converts
electrical signals to optical pulses, and a driver, which amplifies and
conditions signals for use by the E/O converter. E/O converters are composed
of a light source, or laser, and an external modulator, which creates
individual pulses of light, or optical signals. Receivers consist of a
semiconductor device that converts an optical signal into electrical pulses,
an optical-to-electrical, or O/E, converter, and a transimpedance amplifier,
or TIA, which amplifies these electrical pulses.
The physical layer is composed of mixed-signal devices, which include both
digital and analog circuits and can be categorized as either multiplexers or
demultiplexers. Multiplexers combine multiple slower signals into a single
high-speed signal, while demultiplexers perform the reverse function.
Datalink layer devices connect the physical layer to networking equipment.
Datalink devices have three primary functions: framing, mapping and forward
error correction, or FEC. In framing and mapping, which generally occur
simultaneously, data is placed in formatted frames, prior to being transmitted
over fiber, to make the data recognizable at the receiving end of the
transmission. In forward error correction, data is placed in special frames
that can be used to correct errors that occur during transmission.
Our Physical Layer Products
We have broad experience in the production of physical layer products. We
have designed our multiplexers with exceptionally low jitter, which is a type
of noise in optical channels, directly improving signal quality and
transmission distance. We have designed our demultiplexers with highly
sensitive signal processing that eliminates the need for additional components
to perform the same function. Our demultiplexers are highly insensitive to
jitter, allowing for longer optical transmission distances. We are currently
broadening our portfolio of multiplexers and demultiplexers to include product
offerings that incorporate greater functionality, higher-levels of
integration, lower power consumption and tighter integration with our datalink
layer components. We are currently involved in the early stage development of
products that will operate at speeds of 40 Gb/s.
35
<PAGE>
Our physical layer products can incorporate the following functions:
. Clock Multiplier Unit, or CMU, converts the clock at the input of the
multiplexers into the higher speed clock needed at the output. Clocks
synchronize the movement of data throughout communications systems;
. Input Phase Locked Loop, or IPLL, synchronizes the transfer of data from
Datalink devices into a multiplexer;
. Loss of Signal, or LOS, is an alarm that SONET/SDH systems need to
analyze potential system faults; and
. Clock and Data Recovery, or CDR, extracts data from the noisy signals
received from optical systems.
The following table describes our physical layer products:
<TABLE>
<CAPTION>
Model Features and Benefits Stage
<C> <S> <C>
Multiplexers
-------------------------------------------------------------------------------
MTC1203 . incorporates a CMU Shipping
. low jitter
. operates at 9.9 Gb/s
-------------------------------------------------------------------------------
MTC1207A/B Same as MTC 1203 plus Shipping
. lower power consumption
. potentially reduces component count of
transmitters
. operates at 9.9 or up to 10.7 Gb/s
-------------------------------------------------------------------------------
MTC1215 . low power flexible device for proprietary Shipping
transport systems
. operates from 8.0 to 13.0 Gb/s
-------------------------------------------------------------------------------
MTC1223A/B/D Same as MTC 1207 plus Sampling
. simpler integration with datalink layer devices in Q4-2000
due to IPLL
. lower cost packaging
. operates at 9.9, 10.7 or 12.3 Gb/s
-------------------------------------------------------------------------------
MTC1233S Same as MTC 1223 plus Sampling
. lower power consumption in 2001
. multifrequency operation reduces customer
inventory stocking units
. operates at 9.9 or 10.7 Gb/s
<CAPTION>
Model Features and Benefits Stage
<C> <S> <C>
Demultiplexers
-------------------------------------------------------------------------------
MTC1204 . integrated CDR Shipping
. very high sensitivity to reduce customer
component count
. incorporates a LOS
. operates at 9.9 Gb/s
-------------------------------------------------------------------------------
MTC1224A/B/D Same as MTC 1204 plus Shipping
. 4x improvement in sensitivity
. input signal processing for special signal from
DWDM systems
. lower cost packaging
. operates at 9.9, 10.7 or 12.3 Gb/s
-------------------------------------------------------------------------------
MTC1210 . flexible device for proprietary transport Shipping
systems
. operates from 8.0 to 13.0 Gb/s
-------------------------------------------------------------------------------
MTC1234S Same as MTC 1224 plus Sampling
. lower power consumption in 2001
. multifrequency operation reduces customer
inventory stocking units
. operates at 9.9 and 10.7 Gb/s
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Model Features and Benefits Stage
<S> <C> <C>
Clock and Data Recovery
-------------------------------------------------------------------------------------------
MTC5585 . filter-based CDR module with high jitter Shipping
tolerance
. operates at 9.9 Gb/s
-------------------------------------------------------------------------------------------
MTC5589 Same as MTC5585 except operating at 10.6 Gb/s Shipping
-------------------------------------------------------------------------------------------
MTC5585D Same as MTC5585 except operating at 12.25 Shipping
Gb/s
-------------------------------------------------------------------------------------------
MTC5590 CDR that extracts the signal timing from Shipping
incoming data
</TABLE>
Our PMD Products
There are two primary types of modulators: crystal-based modulators, which
offer optimal performance for long-haul systems but consume significant power
and cannot be integrated with lasers; and semiconductor-based modulators, which
use less power and can feature on-chip integration with lasers. We currently
produce two drivers for crystal-based modulators. These products have been
designed to improve signal quality and system efficiency. We are investing in
development of future versions of these drivers, integrating more functions and
improving performance.
The following table describes our PMD products:
<TABLE>
<CAPTION>
Model Features and Benefits Stage
<S> <C> <C>
Crystal-Based Modulator Drivers
-------------------------------------------------------------------------------------------
MTC5515 . designed for use in JDS Uniphase systems Shipping
. easy system integration
. operates at 10 Gb/s
-------------------------------------------------------------------------------------------
MTC5525 . higher output voltage ensures better system Currently
performance Sampling
. higher sensitivity allows operations with
competitive multiplexers
. special input circuitry allows easier
system integration
. built in level control eases use in high-
channel count DWDM systems
. operates at 10 Gb/s
-------------------------------------------------------------------------------------------
MTC5526 Same as MTC 5525 plus Sampling
. lowest power consumption with these in 2001
features
. operates at 10 Gb/s
</TABLE>
Datalink Products
We are currently investing in the development of numerous datalink layer
products, including FEC devices and Framer/Mappers that integrate the framing
and mapping functions. In FEC, we have invested heavily in algorithm,
architecture and product development for both standards-based FEC and advanced
FEC. FEC allows communications equipment manufacturers to increase the number
of DWDM optical channels in a fiber strand and/or to increase the length of the
fiber transmission system. In addition, FEC devices can be designed to support
new optical networking standards. We expect to begin sampling our first FEC
device for 10 Gb/s systems during 2001. Future FEC products will address higher
performance and/or higher bit rates. Framer/Mappers in development include
advanced products for 10 Gb/s and 40 Gb/s systems.
37
<PAGE>
Technology
One of our primary competitive advantages is our technological expertise.
Our engineers have expertise in DWDM and SONET/SDH systems, mixed-signal
architecture and design, digital integrated circuit architecture and high-speed
module and higher-level assembly. We also have access to advanced integrated
circuit technologies and processes. Together, these capabilities have enabled
us to provide our customers with highly integrated and multifunctional
products.
Systems Level Knowledge. Our key engineers have extensive systems level
expertise and are intimately familiar with the requirements of and challenges
faced by our customers. We apply our systems level expertise by collaborating
with our customers in the early design phase of systems development. We also
have a fiber optic test facility that simulates real-world conditions to verify
that our products meet the stringent demands of optical networking systems.
Mixed-Signal Circuit Design. Our team of mixed-signal engineers and
architects has developed numerous analog and mixed-signal integrated circuits
for the communications industry and has extensive expertise working with
advanced high-speed process technologies. Our team has an in-depth
understanding of the physics of these process technologies and the ability to
develop and extend existing process models that allow high first-pass success
rates in new leading-edge process technologies.
Digital Circuit Design. The requirements for developing digital integrated
circuits for the high-speed optical networking systems are very demanding and
require a number of dedicated skills. Our engineers have the expertise and
experience to define and develop complex architectures, often based on advanced
algorithms. We believe that this expertise enables our digital integrated
circuits design engineers to develop superior integrated circuits for advanced
networking functions such as FEC. We have recruited a dedicated engineering
team that applies advanced process technologies, design methodologies and tools
in order to develop and verify highly complex integrated circuits that operate
at very high-speeds.
Module and Higher-Level Assembly Integration. We have extensive experience
integrating components into high-speed higher-level assemblies. At speeds such
as OC-192, the complexity of circuit boards increases significantly, thereby
requiring greater skill and precision in design and fabrication. This skill and
precision necessitates specialized expertise in microwave circuit and systems
design, fiber optic systems knowledge and package technologies. Our team
includes senior level engineers with expertise in each of these necessary
areas.
Process Technology. We have access to and expertise in leading-edge process
technologies for high-speed integrated circuits development. We have
established long-term relationships with suppliers that provide access to
leading technologies. These advanced process technologies include Gallium
Arsenide Heterojunction Bipolar Transistor, or GaAs HBT, High-Electron Mobility
Transistor, or HEMT, SiGe HBT and fine-geometry CMOS. We design our products
using the best process technology to meet the price and performance
requirements of our customers.
Strategic Relationships
We have established strategic relationships with both TRW and IBM. In June
1997, we entered into a supply agreement with TRW, pursuant to which TRW
supplies us with a minimum number of processed GaAs wafers annually for a fixed
price per wafer. During May 2000, we entered into a series of agreements with
IBM. Our semiconductor development agreement with IBM provides us with certain
models and design kits for use in the fabrication process to develop new
integrated circuits. Under our joint development agreement with IBM, pursuant
to which we licensed to IBM and IBM licensed to us, certain technology, we
jointly develop integrated circuits. We are both permitted to sell the jointly
created products to third parties, subject to a fixed royalty fee payable to
the other party.
38
<PAGE>
Sales, Marketing and Customer Support
Sales
We target leading and emerging communications equipment manufacturers that
develop high-speed optical transport networking systems. We manage the sales
process by interacting with our customers at multiple layers of our
organization. Our initial contact with a potential customer generally begins
with either direct contact by our management or sales force or through third-
party manufacturers' or independent sales representatives. Our strategic
account managers and marketing personnel manage the customer relationship
throughout the pre- and post-sales process. As needed, systems engineering
personnel from our research and development group have detailed technical
interactions with our customers during product definition. Our application
engineers assist the customer in designing the solution into the customer's
systems. Close interaction further enables us to establish strategic customer
programs or relationships.
We sell our products through our direct sales force and through
manufacturers' or independent sales representatives working under the direction
of our strategic account managers. As of September 30, 2000, our direct sales
force consisted of seven direct sales professionals, managers and
administrative personnel located at our headquarters in Somerset, New Jersey
and in Bochum, Germany. We expect to open additional sales offices and to
increase our direct sales force worldwide.
Marketing
We market our products extensively in North America and Europe to establish
our visibility as a leading supplier of high value components for optical
networking systems. In addition, our marketing personnel support sales and
customer systems design activities through technical marketing and applications
engineering. As of September 30, 2000, our marketing staff included 18
marketing professionals, applications engineers and administrative personnel.
Our marketing activities include:
. seminar programs, trade shows, guest speaker invitations and technical
conferences;
. public relations activities and customer events;
. advertising, technical articles in industry publications and marketing
collateral materials; and
. communication on the Internet.
Customer Service and Support
Our customer support activities are primarily managed by our applications
engineering group consisting of both field applications engineers and internal
applications experts. This group supports customers during their design
activities to facilitate our customers' success, and can perform experiments to
validate customers' design ideas including insertion into our fiber optic test
facility. Our philosophy is to provide comprehensive customer support to
facilitate the design of our complex products into our customers' systems. Our
applications engineering group is also the initial point of contact for our
customers should they experience any problems with a product after purchase.
Operations and Manufacturing
We outsource the fabrication and assembly of most of our semiconductor
devices. We have in-house semiconductor testing capabilities that allow us to
develop and perform testing for low and medium volume production. We expect to
gradually outsource our testing from our in-house capabilities to outside
vendors for higher volume production. As a fabless semiconductor company, we
are able to concentrate our resources on the design, development and marketing
of our products.
39
<PAGE>
Wafer Manufacturing
We outsource substantially all of our semiconductor fabrication to several
of the world's leading foundries for high bit-rate technologies including TRW,
IBM, United Monolithic Semiconductors and TriQuint Semiconductor. Our mixed-
signal products, which comprise a significant portion of our current revenues,
are based predominantly on GaAs HBT wafers supplied by TRW. TRW is our sole
supplier of these wafers. Our manufacturing strategy is to qualify and utilize
leading process technology for the fabrication of high bit-rate semiconductor
devices and to utilize our foundries for a variety of different semiconductor
technologies. There are certain risks associated with our dependence upon
external foundries, including reduced control over delivery schedules, quality
assurance, manufacturing yields and costs, the potential lack of adequate
capacity during periods of excess demand, limited warranties on wafers or
products supplied to us, increases in the prices and potential misappropriation
of our intellectual property. Under our supply agreement with TRW, we do not
have the contractual right to obtain all the GaAs HBT wafers we require for the
current production of our mixed-signal products. Finding alternative sources
for these wafers will result in substantial delays in production and additional
costs. We do not have long-term wafer supply agreements with any other outside
foundries that guarantee wafer or product quantities, prices or delivery lead
times.
Packaging, Assembly, and Testing
The primary vendors for the packaging, assembly and testing of our
integrated circuit products are ASAT in Nancy, France and Elmo Semiconductor, a
division of Kimbell Electronics. The primary outsource vendor for the assembly
and testing of our driver module products is QuinStar.
We operate in-house module manufacturing facilities that allow rapid
prototyping and development of new products and also serve to complement our
outsource module manufacturing partners. We have in-house module and integrated
circuits testing facilities in California, New Jersey and Germany. We maintain
comprehensive review and inspection of our outsourcing facilities to ensure
compliance with our quality standards for manufacturing assembly and test. Our
manufacturing processes and outsource vendors utilize stringent quality
controls, including incoming material inspection, in-process testing, and final
test.
Research and Development
We have assembled a team of experienced engineers and technologists with
significant experience in their fields of expertise. As of September 30, 2000,
we had 100 employees dedicated to research and development, of whom 65 hold
advanced degrees, including 16 PhDs. We have an additional 40 engineering
employees dedicated to marketing, application engineering and business
development of whom 21 hold advanced degrees, including 3 PhDs. These employees
are involved in advancing our core technologies and applying these core
technologies to product development and activities in our targeted markets.
We believe that the achievement of higher-levels of integration,
functionality and performance and the introduction of new products in our
target markets is essential. As a result, we have made and will continue to
make substantial investments in research and development. Our research and
development expense for the six months ended June 30, 2000 was approximately
$8.9 million. Our research and development expenses for 1999, 1998 and 1997
were approximately $8.8 million, $2.2 million and $0.7 million, respectively.
Competition
We compete with component suppliers for optical networking systems. We
believe that the principal factors of competition for these markets are:
. product time-to-market;
. product performance;
. product price;
. product quality;
40
<PAGE>
. product reliability;
. success in designing and subcontracting the manufacture of new products
that implement new technologies;
. market acceptance of competitors' products;
. efficiency of production;
. expansion of production of our products for particular systems
manufacturers; and
. 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. We
compete primarily against Applied Micro Circuits, Conexant, Giga (recently
acquired by Intel), Infineon, JDS Uniphase, Lucent (microelectronics division),
Maxim, Nortel (microelectronics division), NTT Electronics, Philips, PMC-Sierra
and Vitesse. In certain circumstances, most notably with respect to ASICs
supplied to Lucent and Nortel, our customers or potential customers have
internal integrated circuit and/or manufacturing capabilities.
In addition, suppliers may begin to offer product solutions increasingly
including both electronic and optical components. This creates the potential
that suppliers of optical components, which are currently complementary to
suppliers of electronic components, may become competitors as they broaden
their product portfolio with electronic components, or vice versa. Companies
with existing capabilities or products in both areas may benefit from
significant competitive advantages.
Intellectual Property
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property laws, 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 one U.S. 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.
Employees
As of September 30, 2000, we had a total of 232 employees, including 25 in
sales and marketing and application engineering, 76 in manufacturing,
purchasing and quality, 100 in research and development and 31 in general and
administrative functions. Of these employees, approximately 178 were located in
the United States, 36 were located in Europe and 18 were located in Israel.
None of our employees is represented by a collective bargaining agreement, nor
have we experienced any work stoppage. We consider our relations with our
employees to be good.
Facilities
Our corporate headquarters facility, of approximately 12,663 square feet, is
located in Somerset, New Jersey. We lease our corporate headquarters facility
pursuant to a sublease agreement that expires in April
41
<PAGE>
2007. We also lease our principal design facility, consisting of approximately
21,000 square feet, in Somerset, New Jersey, pursuant to a lease agreement that
expires in December 2004. We lease approximately 9,677 square feet of office
space in Santa Monica, California on a month-to-month basis, pursuant to a
lease agreement that expired in September 2000. We also lease approximately
3,214 square feet of laboratory and office space in Carson, California on a
month-to-month basis pursuant to the terms of a lease that expired in August
2000.
In addition, we have lease agreements for an approximately 479 square meter
facility in Bochum, Germany, which expires in September 2005, an approximately
529 square meter facility in Munich, Germany, which expires in July 2005, an
approximately 36 square meters facility in Kaunas, Lithuania, which is month-
to-month, an approximately 50 square meter facility in Vilnius, Lithuania,
which is month-to-month and an approximately 612 square meter facility in
Israel, which expires in May 2003.
Legal Proceedings
We are not currently a party to any material pending legal proceedings.
42
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding our executive
officers and directors as of September 30, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Richard N. Nottenburg... 46 President, Chief Executive Officer and Co-Chairman
Jens Albers ............ 37 Executive Vice President and Co-Chairman
Eric M. Pillmore........ 47 Senior Vice President, Chief Financial Officer and Secretary
G. Bradford Jones....... 45 Director(1)(2)
John Walecka ........... 41 Director(1)(2)
Stephen R. Forrest ..... 50 Director(1)(2)
</TABLE>
---------------------
(1) Member of the Audit Committee of the Board of Directors
(2) Member of the Compensation Committee of the Board of Directors
Richard N. Nottenburg. Dr. Nottenburg is one of our founders and has been
our President since our inception in 1994. He also serves as our Chief
Executive Officer and Co-Chairman of the Board. Dr. Nottenburg has over 20
years of experience in the design and development of high bit-rate electronics.
He is an internationally recognized expert in advanced integrated circuit
technologies and in the design of fiber-optic communications integrated
circuits. Dr. Nottenburg was an associate professor of electrical engineering
at the University of Southern California from 1991 to 1999. From 1984 to 1991,
Dr. Nottenburg worked at AT&T Bell Labs (now Lucent Technologies, Inc.) and
Bell Communications Research. In 1990, Dr. Nottenburg became a Distinguished
Member of the technical staff of AT&T Bell Labs. He received his doctoral
degree in electrical engineering from the Swiss Federal Institute of
Technology.
Jens Albers. Dr. Albers is one of our founders. He also serves as our
Executive Vice President and Co-Chairman of the Board. He founded our foreign
subsidiaries and previously worked as our Vice President for Business
Development and Vice President for European Operations and Strategic Planning.
From 1993 to 1995, Dr. Albers was a consultant, and, in 1994 and 1995, served
as a Managing Director for Micram Microelectronic GmbH, Bochum, Germany. From
1988 to 1997, Dr. Albers worked in the Department for Semiconductor Devices and
Circuits at Ruhr-University in Bochum, Germany. Dr. Albers has extensive design
and development experience in fiber-optic communication integrated circuits. He
received his doctoral degree in electrical engineering from Ruhr-University,
Bochum, Germany.
Eric M. Pillmore. Mr. Pillmore has been our Senior Vice President and Chief
Financial Officer since July 2000. From April 2000 to May 2000, he was Chief
Financial Officer and Vice President Finance and Administration for McData
Corporation. From January 2000 to April 2000, he was Senior Vice President,
Finance and Director, Broadband Communications Sector of Motorola Corporation,
the successor by acquisition to General Instrument Corporation, or GI. From
March 1996 to January 2000, Mr. Pillmore worked for GI, ultimately holding the
position of Senior Vice President, Finance and Chief Financial Officer. From
March 1996 to November 1996, Mr. Pillmore was Vice President, Finance of GI.
From January 1994 to February 1996, he was Manager, Finance of the Plastics
Americas Division of General Electric Company. He was Manager, Finance of GE
Medical Systems Asia, Ltd. from March 1992 to January 1994 and Director,
Finance of GE/Yokogawa Medical Systems, Ltd. from June 1991 to February 1994.
G. Bradford Jones. Mr. Jones has been one of our directors since June 1999.
Mr. Jones is a founding partner of Redpoint Ventures, formed in October 1999,
and a general partner with Brentwood Venture Capital, a firm he joined in 1981.
Mr. Jones also currently serves on the board of directors of Digital Island,
Stamps.com,
43
<PAGE>
Interpore International, Onyx Acceptance Corporation, Trading Edge, and several
other privately held companies. Mr. Jones received his B.S. in chemistry from
Harvard University, his masters degree in physics from Harvard University and
his J.D. and M.B.A. from Stanford University.
John Walecka. Mr. Walecka has served as one of our directors since June
1999. Mr. Walecka is a founding partner of Redpoint Ventures, formed in October
1999, and a general partner with Brentwood Venture Capital, a firm he joined in
1984. Mr. Walecka also currently serves as a member of the board of directors
of Rhythms NetConnections, Inc., Netro Corporation, Vitria Technology, Inc.,
and several privately held companies. Mr. Walecka received a B.S. and an M.S.
in engineering from Stanford University and an M.B.A. from the Stanford
Graduate School of Business.
Stephen R. Forrest. Dr. Forrest has served as one of our directors since
June 1999. Dr. Forrest has been a professor of electrical engineering at
Princeton University since 1992 and has served as the Chairman of Princeton's
Department of Electrical Engineering since 1997. From 1992 to 1997, Dr. Forrest
served as the Director of the Center for Photonics and Optolectronic Materials
at Princeton University, and from 1989 to 1992, he served as the Director of
the National Center for Integrated Photonic Technology. From 1985 to 1992, Dr.
Forrest was professor of electrical engineering at the University of Southern
California. Dr. Forrest is the author of approximately 280 papers published in
professional journals and holds approximately 50 patents in the areas of
organic thin film materials and devices and semiconductor photonic materials
and devices. Dr. Forrest received his masters and doctoral degrees in physics
from the University of Michigan.
Board of Directors
Our board of directors consists of five members. Each director holds office
until his or her successor is duly elected and qualified.
Committees
Our board of directors has an audit committee and a compensation committee.
Audit Committee. The audit committee makes recommendations to the board of
directors regarding the selection of independent accountants, reviews the
results and scope of audit and other services provided by our independent
accountants and reviews and evaluates the audit and control functions. The
audit committee currently consists of Mr. Walecka, Mr. Jones and Dr. Forrest.
Compensation Committee. The compensation committee reviews and makes
recommendations regarding our stock plans and makes decisions concerning
salaries and incentive compensation for our executive officers. The
compensation committee currently consists of Dr. Forrest, Mr. Jones and Mr.
Walecka.
Compensation Committee Interlocks and Insider Participation
Our board of directors established the compensation committee in September
2000. Prior to establishing the compensation committee, our board of directors
as a whole performed the functions delegated to the compensation committee,
including participating in deliberations concerning executive officer
compensation. During the last fiscal year, no member of our board of directors
or compensation committee 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.
Director Compensation
Our directors are reimbursed for expenses incurred in connection with
attending board and committee meetings but are not otherwise compensated for
their services as board members. Effective upon the closing of this offering,
non-employee board members will receive a series of option grants over their
period of board service. Each individual who first becomes a non-employee board
member at any time on or after the effective
44
<PAGE>
date of this offering will receive a non-statutory option grant for 50,000
shares of Class A common stock on the date such individual joins the board,
provided such individual has not been in our prior employ. In addition, on the
date of each annual stockholders meeting held after the effective date of this
offering, each non-employee board member who is to continue to serve as a non-
employee board member (including the individuals who are currently serving as
non-employee board members) will automatically be granted a non-statutory
option to purchase 10,000 shares of Class A common stock, provided such
individual has served on the board for at least six months. There will be no
limit on the number of such 10,000 share option grants any one eligible non-
employee board member may receive over his or her period of continued board
service, and non-employee board members who have previously been in our employ
will be eligible to receive one or more such annual option grants over their
period of board service.
Executive Officers
Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors and
executive officers.
Compensation
The following table sets forth all compensation paid or accrued during the
year ended December 31, 1999 to our Chief Executive Officer and our other
executive officers who earned more than $100,000 during 1999. In accordance
with the rules of the Securities and Exchange Commission, the compensation
described in this table does not include perquisites and other personal
benefits received by the executive officers named in the table below which do
not exceed the lesser of $50,000 or 10% of the total salary and bonus reported
for these officers.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------ ------------
Securities
All Other Underlying
Name and Principal Position Salary Bonus Compensation Options
--------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Richard N. Nottenburg.............. $219,849 $101,250 -- 6,600,000
Co-Chairman, President and Chief
Executive Officer
Jens Albers........................ $155,427 $ 55,556 -- 5,800,000
Co-Chairman and Executive Vice
President
Eric M. Pillmore(1)................ -- -- -- --
Senior Vice President, Chief
Financial Officer and Secretary
</TABLE>
---------------------
(1) Mr. Pillmore joined us on July 17, 2000.
Option Grants in 1999
During 1999, we granted options to purchase an aggregate of 20,011,250
shares of our Class A common stock to our employees, directors and consultants.
All options were granted under our 1998 Stock Option Plan and our 1999 Stock
Option Plan at exercise prices equal to the fair market value of our Class A
common stock on the date of grant, as determined in good faith by our board of
directors.
45
<PAGE>
The following table sets forth information concerning individual grants of
stock options made during 1999 to each of the executive officers named in the
compensation table. The 5% and 10% assumed annual rates of compounded stock
price appreciation are mandated by rules of the Securities and Exchange
Commission and do not represent our estimate or projection of our future stock
prices. The potential realizable values are calculated by assuming that an
assumed initial public offering price of $ per share was the fair market
value of our shares of common stock at the time of grant, that the shares of
Class A common stock appreciate at the indicated rate for the entire term of
the option and that the option is exercised at the exercise price and sold on
the last day of the option term at the appreciated price.
<TABLE>
<CAPTION>
Potential
Individual Grants Realizable Value
------------------------------------------------- at
Assumed Annual
Rates of Stock
Number of % of Total Price
Securities Options Appreciation for
Underlying Granted to Option Term
Options Employees in Exercise Price Expiration -----------------
Name Granted Fiscal Year Per Share Date 5% 10%
---- ---------- ------------ -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Richard N.
Nottenburg(1).......... 2,300,000 11.49% $0.20 01/28/09
Richard N. Nottenburg... 4,300,000 21.49 0.55 10/14/09
Jens Albers(2).......... 2,000,000 9.99 0.20 01/28/09
Jens Albers............. 3,800,000 18.99 0.55 10/14/09
Eric M. Pillmore(3)..... -- -- -- -- -- --
</TABLE>
---------------------
(1) 300,000 of the shares subject to these options vested immediately upon
grant. One-fourth of the remainder of the shares subject to these options
vest each year for four years beginning with the first anniversary of the
date of grant.
(2) 200,000 of the shares subject to these options vested immediately upon
grant. One-fourth of the remainder of the shares subject to these options
vest each year for four years beginning with the first anniversary of the
date of grant.
(3) Mr. Pillmore joined us on July 17, 2000.
Option Grants in 2000
The table below shows the number of shares subject to option grants to our
executive officers during the period from January 1, 2000 through the date of
this prospectus, and sets forth the current value of the option grants based on
an assumed initial public offering price of $ per share. All options were
granted under our 1999 Stock Option Plan at an exercise price equal to the fair
market value of our Class A common stock on the date of grant, as determined in
good faith by our board of directors.
<TABLE>
<CAPTION>
Number of
Securities
Underlying
Options Exercise Price Expiration Current
Name Granted Per Share Date Value
---- ---------- -------------- ---------- -------
<S> <C> <C> <C> <C>
Richard N. Nottenburg.............. -- -- -- --
Jens Albers........................ -- -- -- --
Eric M. Pillmore(1)................ 1,000,000 $2.50 7/17/10 $
</TABLE>
---------------------
(1) Mr. Pillmore joined us on July 17, 2000. Mr. Pillmore's options vest
according to the following vesting schedule: one-third of the shares
subject to these options vest one year after the date of grant of the
option and one-twenty-fourth of the remaining shares subject to these
options vest each month thereafter until July 2003.
46
<PAGE>
Aggregate Option Exercises in 1999 and Year-End Option Values
None of our executive officers exercised any options in 1999. The following
table sets forth the number and value of securities underlying unexercised
options held by each of our executive officers as of December 31, 1999. The
value of unexercised in-the-money options at 1999 year end has been calculated
on the basis of an assumed initial public offering price of $ per share,
less the applicable exercise price per share, multiplied by the number of
shares underlying the options.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
December 31, 1999 December 31, 1999
------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard N. Nottenburg....... 300,000 6,300,000 $ $
Jens Albers................. 200,000 5,600,000
Eric M. Pillmore(1)......... -- -- -- --
</TABLE>
---------------------
(1) Mr. Pillmore joined us on July 17, 2000.
Employee Benefit Plans
1998 Stock Option Plan
Our board of directors adopted the 1998 Stock Option Plan in June 1998. Our
shareholders approved the 1998 plan in February 1999. The 1998 plan was amended
in January 1999 and in July 2000. A total of 24,000,000 shares of Class A
common stock have been authorized and reserved for issuance under the 1998
plan. As of September 30, 2000, options to purchase an aggregate of 19,411,250
shares were outstanding and 4,588,750 shares were available for option grants
under the 1998 plan. All outstanding options under the 1998 plan will be
transferred to and administered under the successor 2000 Stock Incentive Plan
upon completion of this offering, and no further option grants will be made
under the 1998 plan.
Prior to September 2000, the board of directors administered the 1998 plan.
Since its formation in September 2000, the compensation committee has
administered the 1998 plan. Under the 1998 plan, key employees and non-employee
members of the board have been granted options to purchase shares of Class A
common stock. The plan administrator had complete discretion to determine which
eligible individuals will receive option grants, determine the type, number,
vesting requirements and other features and conditions of option grants,
interpret the 1998 plan and make all other decisions relating to the operation
of the 1998 plan.
Options granted under the 1998 plan were either incentive stock options
within the meaning of Section 422 of the Internal Revenue Code, which permits
the deferral of taxable income related to the exercise of these options, or
non-statutory options not entitled to this deferral. Incentive stock options
were only granted to employees and the term of an incentive stock option could
not exceed ten years. The exercise price of incentive stock options granted
under the 1998 plan were less than 100% of the fair market value of the Class A
common stock on the date of grant, and the exercise price for non-statutory
stock options were determined by the plan administrator on the grant date. The
exercise price for the shares of Class A common stock subject to the option
grants made under the 1998 plan may be paid in cash or check.
1999 Stock Option Plan
Our board of directors adopted the 1999 Stock Option Plan in June 1999. Our
shareholders approved the 1999 plan in May 2000. The 1999 plan was amended in
September 1999, July 2000 and August 2000. A total of 18,000,000 shares of
Class A common stock have been authorized and reserved for issuance under the
1999 plan. As of September 30, 2000, options to purchase an aggregate of
13,967,200 shares were outstanding and 4,032,800 shares were available for
option grants under the 1999 plan. All outstanding options under the 1999
47
<PAGE>
plan will be transferred to the successor 2000 Stock Incentive Plan upon
completion of this offering, and no further option grants will be made under
the 1999 plan.
Prior to September 2000, the board of directors administered the 1999 plan.
Since its formation in September 2000, the compensation committee has
administered the 1999 plan. Under the 1999 plan, employees, non-employee
members of the board and consultants were granted options to purchase shares of
Class A common stock. The plan administrator had complete discretion to
determine which eligible individuals were to receive option grants, determine
the type, number, vesting requirements and other features and conditions of
option grants, interpret the 1999 plan and make all other decisions relating to
the operation of the 1999 plan.
Options granted under the 1999 plan were either incentive stock options or
non-statutory options. Incentive stock options were only granted to employees
and the term of an incentive stock option could not exceed ten years. The
exercise price of incentive stock options granted under the 1999 plan were in
no event less than 100% of the fair market value of the Class A common stock on
the date of grant, and the exercise price for non-statutory stock options was
determined by the plan administrator on the grant date.
2000 Stock Incentive Plan
Introduction. The 2000 Stock Incentive Plan is intended to serve as the
successor program to our 1998 Stock Option Plan and our 1999 Stock Option Plan.
The 2000 plan was adopted by our board of directors in August 2000. Subject to
shareholder approval, the 2000 plan will become effective upon completion of
this offering. At that time, all outstanding options under our existing 1998
Stock Option Plan and our 1999 Stock Option Plan will be transferred to the
2000 plan, and no further option grants will be made under the 1998 plan or the
1999 plan. The transferred options will continue to be governed by their
existing terms, unless our compensation committee decides to extend one or more
features of the 2000 plan to those options.
Share Reserve. We have authorized up to 47,000,000 shares of our Class A
common stock for issuance under the 2000 plan. This share reserve consists of
the number of shares we estimate will be carried over from the 1998 plan and
the 1999 plan plus an increase of 5,000,000 shares. The share reserve under our
2000 plan will automatically increase on the first trading day in January each
calendar year, beginning with calendar year 2001, by an amount equal to four
percent of the total number of shares of our common stock outstanding on the
last trading day of December in the prior calendar year, but in no event will
this annual increase exceed 5,000,000 shares and in no event will the total
number of shares of Class A common stock in the share reserve (as adjusted for
all such annual increases) exceed 100,000,000 shares. In addition, no
participant in the 2000 plan may be granted stock options, direct stock
issuances or share right awards for more than 3,000,000 shares of Class A
common stock in total in any calendar year.
Programs. Our 2000 plan has five separate programs:
. the discretionary option grant program, under which the compensation
committee may grant (1) non-statutory options to purchase shares of our
Class A common stock to eligible individuals in our employ or service
(including employees, non-employee board members and consultants) at an
exercise price not less than 85% of the fair market value of those shares
on the grant date and (2) incentive stock options to purchase shares of
Class A common stock to eligible employees at an exercise price not less
than 100% of the fair market value of those shares on the grant date;
. the stock issuance program, under which eligible individuals may be
issued shares of Class A common stock directly, upon the attainment of
performance milestones or the completion of a specified period of service
or as a bonus for past services;
. the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary each year to the
acquisition of special below-market stock option grants;
48
<PAGE>
. the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of Class A common stock at an exercise
price equal to 100% of the fair market value of those shares on the grant
date; and
. the director fee option grant program, under which our non-employee board
members may be given the opportunity to apply a portion of any retainer
fee otherwise payable to them in cash each year to the acquisition of
special below-market option grants.
Eligibility. The individuals eligible to participate in our 2000 plan
include our officers and other employees, our board members and any consultants
we hire.
Administration. Our compensation committee will administer the discretionary
option grant and stock issuance programs. This committee will determine which
eligible individuals are to receive option grants or stock issuances under
those programs, the time or times when the grants or issuances are to be made,
the number of shares subject to each grant or issuance, the status of any
granted option as either an incentive stock option or a non-statutory stock
option under the federal tax laws, the vesting schedule to be in effect for the
option grant or stock issuance and the maximum term for which any granted
option is to remain outstanding. The compensation committee will also have the
authority to select the executive officers and other highly compensated
employees who may participate in the salary investment option grant program in
the event that program is put into effect for one or more calendar years.
Discretionary Option Grant Program. Under this program, our employees, third
party service providers and non-employee board members may be granted statutory
stock options or non-statutory stock options.
Program Features. Our discretionary option grant program will include the
following features:
. The exercise price for any options granted under the 2000 plan may be
paid in cash or in shares of our Class A common stock valued at fair
market value on the exercise date. The option may also be exercised
through a same-day sale program without any cash outlay by the optionee.
. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from our 1998 plan and 1999 plan, in return for the
grant of new options for the same or different number of option shares
with an exercise price per share based upon the fair market value of our
Class A common stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election to
surrender their outstanding options for a payment from us equal to the
fair market value of the shares subject to the surrendered options less
the exercise price payable for those shares. We may make the payment in
cash or in shares of our Class A common stock.
Change in Control. Our discretionary option grant program will include the
following change in control provisions which may result in the accelerated
vesting of outstanding option grants and stock issuances:
. In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program that is
not to be assumed, or otherwise compensated for, by the successor
corporation will immediately become exercisable for all the option
shares, and all outstanding unvested shares will immediately vest. Except
to the extent as limited by the plan administrator, our repurchase rights
with respect to those shares are to be assigned to the successor
corporation.
. The compensation committee will have complete discretion to grant one or
more options that will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the optionee's
service with us or the acquiring entity is subsequently terminated. The
vesting of any outstanding shares under the stock issuance program may be
accelerated upon similar terms and conditions.
. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful
49
<PAGE>
tender offer for more than fifty percent of our outstanding voting stock
or a change in the majority of our board through one or more contested
elections. This accelerated vesting may occur either at the time of the
transaction or upon the subsequent termination of the individual's
service.
Stock Issuance Program. Eligible individuals may be issued shares of Class A
common stock through direct issuances in amounts to be determined by the
compensation committee. Shares of Class A common stock may also be issued
pursuant to awards that entitle the recipients to receive shares upon the
attainment of designated performance goals. Under this program, the purchase
price for the shares shall not be less than 100% of the fair market value of
the shares on the date of issuance, and payment may be in the form of cash or
past services rendered. In the event of a change of control, our repurchase
rights for unvested shares under this program will terminate and all shares of
stock subject to those rights shall immediately vest in full, unless assigned
to the successor corporation or as limited by the plan administrator.
Salary Investment Option Grant Program. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of our executive officers and other highly compensated employees
may elect to reduce his or her base salary for the calendar year by an amount
not less than $10,000 nor more than $50,000. Each selected individual who makes
this election will automatically be granted, on the first trading day in
January of the calendar year for which his or her salary reduction is to be in
effect, an option to purchase that number of shares of Class A common stock
determined by dividing the salary reduction amount by two-thirds of the fair
market value per share of our Class A common stock on the grant date. The
option will have an exercise price per share equal to one-third of the fair
market value of the option shares on the grant date. As a result, the option
will be structured so that the fair market value of the option shares on the
grant date less the aggregate exercise price payable for those shares will be
equal to the amount of the salary reduction. The option will become exercisable
in a series of twelve equal monthly installments over the calendar year for
which the salary reduction is to be in effect. In the event of a change of
control while the optionee remains in our service, each outstanding option
under this program will automatically accelerate so that each option shall vest
and become exercisable immediately prior to the change of control.
Automatic Option Grant Program. Each individual who first becomes a non-
employee board member at any time after the effective date of this offering
will receive an option grant to purchase 50,000 shares of Class A common stock
on the date the individual joins the board. In addition, on the date of each
annual shareholders meeting held after the effective date of this offering,
each non-employee board member who is to continue to serve as a non-employee
board member, including each of our current non-employee board members, will
automatically be granted an option to purchase 10,000 shares of Class A common
stock, provided that the individual has served on the board for at least six
months.
Each automatic grant will have an exercise price per share equal to the fair
market value per share of our Class A common stock on the grant date and will
have a term of 10 years, subject to earlier termination following the
optionee's cessation of board service. The option will be immediately
exercisable for all of the option shares; however, we may repurchase, at the
exercise price paid per share, any shares purchased under the option which are
not vested at the time of the optionee's cessation of board service. The shares
subject to each initial 50,000 share automatic option grant will vest at a rate
of 25% per year for each year of continuous board service following the option
grant date. However, the shares will immediately vest in full upon certain
changes in control or ownership or upon the optionee's death or disability
while a board member. The shares subject to each annual 10,000 share automatic
grant will vest in full after one year of board service following the option
grant date.
In the event a of change in control while the optionee remains on our board,
each outstanding option under this program will automatically accelerate so
that each option shall vest and become exercisable immediately prior to the
change of control.
Director Fee Option Grant Program. If this program is put into effect in the
future, then each non-employee board member may elect to apply all or a portion
of any cash retainer fee for the year to the
50
<PAGE>
acquisition of a below-market option grant. The option grant will automatically
be made on the first trading day in January in the year for which the non-
employee board member would otherwise be paid the cash retainer fee in the
absence of his or her election. The option will have an exercise price per
share equal to one-third of the fair market value of the option shares on the
grant date, and the number of shares subject to the option will be determined
by dividing the amount of the retainer fee applied to the program by two-thirds
of the fair market value per share of our Class A common stock on the grant
date. As a result, the option will be structured so that the fair market value
of the option shares on the grant date less the aggregate exercise price
payable for those shares will be equal to the portion of the retainer fee
applied to that option. The option will become exercisable in a series of
twelve equal monthly installments over the calendar year for which the election
is in effect. However, the option will become immediately exercisable for all
the option shares upon the death or disability of the optionee while serving as
a board member. In the event of a change of control while the optionee remains
on our board, each outstanding option under this program will automatically
accelerate so that each option shall vest and become exercisable immediately
prior to the change of control.
Additional Program Features. Our 2000 plan will also have the following
features:
. Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock or
a change in the majority of our board through one or more contested
elections. In return for the surrendered option, the optionee will be
entitled to a cash payment from us in an amount per surrendered option
share based upon the highest price per share of our Class A common stock
paid in a tender offer, or the fair market value per share of our Class A
common stock on the effective date of a change in the majority of our
board.
. The board may amend or modify the 2000 plan at any time, subject to any
required shareholder approval. The 2000 plan will terminate no later than
the tenth anniversary of the completion of this offering.
2000 Employee Stock Purchase Plan.
Introduction. Our 2000 Employee Stock Purchase Plan was adopted by our board
of directors in September 2000. Subject to shareholder approval, this plan will
become effective upon the completion of this offering. The plan is designed to
allow our eligible employees and the eligible employees of our participating
subsidiaries to purchase shares of our Class A common stock, at semi-annual
intervals, with their accumulated payroll deductions.
Share Reserve. We have initially reserved 1,500,000 shares of our Class A
common stock for issuance under this purchase plan. The reserve will
automatically increase on the first trading day in January each calendar year,
beginning in calendar year 2001, by an amount equal to one percent of the total
number of outstanding shares of our common stock on the last trading day in
December in the prior calendar year. In no event will any annual increase
exceed 1,000,000 shares and in no event will the total number of shares of
Class A common stock reserved for issuance under the plan (as adjusted for all
such annual increases) exceed 11,500,000 shares.
Administration. Our compensation committee will administer the purchase
plan. The compensation committee shall have full authority to interpret and
construe any provisions of the purchase plan and adopt such rules and
regulations for administering the purchase plan as it may deem necessary in
order to comply with the requirements of Section 423 of the Internal Revenue
Code.
Offering Periods. The purchase plan will have a series of successive
offering periods, each with a maximum duration of 24 months. The initial
offering period will start upon completion of this offering and will
51
<PAGE>
end on the last business day in December 2002. The next offering period will
start on the first business day in January 2003, and subsequent offering
periods will set by our compensation committee.
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period on
the start date of the offering period or any semi-annual entry date within that
period. Semi-annual entry dates will occur on the first business day of January
and July each year. Individuals who become eligible employees after the start
date of an offering period may join the plan on any subsequent semi-annual
entry date within that offering period.
Payroll Deductions. A participant may contribute up from 1% to 15% of the
participant's cash earnings through payroll deductions, and the accumulated
deductions will be applied to the purchase of shares on each semi-annual
purchase date. The purchase price per share will be equal to 85% of the fair
market value per share of Class A common stock on the participant's entry date
into the offering period or, if lower, 85% of the fair market value per share
on the semi-annual purchase date. Semi-annual purchase dates will occur on the
last business day of June and December each year. However, a participant may
not purchase more than 5,000 shares on any purchase date, and not more than
500,000 shares may be purchased in total by all participants on any purchase
date. Our compensation committee will have the authority to change these
limitations for any subsequent offering period.
Reset Feature. If the fair market value per share of our Class A common
stock on any purchase date is less than the fair market value per share on the
start date of the then current two-year offering period, then that offering
period will automatically terminate, and a new two-year offering period will
begin on the next business day. All participants in the terminated offering
will be transferred to the new offering period.
Change in control. Should we be acquired by merger or sale of substantially
all of our assets or more than fifty percent of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of the acquisition. The purchase price will be equal to
the lesser of 85% of the market value per share of Class A common stock on the
participant's entry date into the offering period in which an acquisition
occurs or 85% of the fair market value per share immediately prior to the
acquisition.
Plan Provisions. The following provisions will also be in effect under the
plan:
. The plan will terminate no later than the tenth anniversary of the
completion of this offering.
. The board may at any time amend, suspend or discontinue the plan.
However, some amendments may require stockholder approval.
401(k) Plan
Effective September 1, 1998, we established a 401(k) defined contribution
plan, in which all of our U.S. employees may participate. Plan participants
contribute up to 15% of their eligible compensation to the plan, subject to the
statutorily prescribed annual limit, which is $10,500 for 2000. We intend the
plan to qualify under Section 401(k) of the Internal Revenue Code so that
contributions by employees to the plan, and income earned, if any, on plan
contributions, are not taxable to employees until withdrawn from the plan. From
the plan's inception through March 31, 2000, we made matching contributions on
behalf of the plan participants at the rate of 25% of participant contributions
up to 6% of compensation. The plan was updated on April 1, 2000 for a change in
the matching contribution rate to 50% of participant contributions up to 6% of
compensation. During 1998, 1999 and the six months ending June 30, 2000, we
made matching contributions of $4,306, $21,632 and $35,201, respectively.
Employment Agreements and Change in Control Arrangements
None of our executive officers has employment agreements with us.
Accordingly, the employment of any such executive officer may be terminated at
any time at the discretion of the board of directors.
52
<PAGE>
Director and Officer Indemnification and Liability
Our articles of incorporation limit the personal liability of our directors
for monetary damages to the fullest extent permitted by California law.
California law provides that directors of a company will not be personally
liable for monetary damages for breach of their fiduciary duties as a director,
except liability associated with any of the following:
. acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law;
. acts or omissions that a director believes to be contrary to the best
interests of the company or its shareholders or that involve the absence
of good faith on the part of the director, for any transaction from which
a director derived an improper personal benefit;
. acts or omissions that show a reckless disregard for the director's duty
to the company or its shareholders in circumstances in which the director
was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of a serious injury to the
company or its shareholders;
. acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of the director's duty to the company or
its shareholders;
. concerning contacts or transactions between the company and a director;
and
. concerning directors' liability for improper dividends, loans and
guarantees.
The limitation of directors' liability does not affect liabilities arising
under federal securities law and does not affect the availability of
injunctions and other equitable remedies.
Our articles of incorporation and bylaws also include an authorization for
us to indemnify our directors, officers, employees and other agents, by
agreement or otherwise, to the fullest extent permitted by law. In addition, we
may, at our discretion, provide indemnification to persons whom we are not
obligated to indemnify. We believe that indemnification under our bylaws covers
at least negligence and gross negligence on the part of the indemnified
parties. Our bylaws also allow us to enter into indemnity agreements with
individual directors, officers, employees and other agents.
We have entered into indemnification agreements with each of our officers
and directors containing provisions that require us to, among other things,
indemnify those officers and directors against liabilities that may arise by
reason of their status or service as directors or officers, other than
liabilities arising from willful misconduct of a culpable nature, to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to cover our directors and officers under any of
our liability insurance policies applicable to directors and officers. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
53
<PAGE>
CERTAIN TRANSACTIONS
Sales of Stock
We have issued and sold shares of our capital stock in private placement
transactions as follows:
. 1,670,000 shares of Series A preferred stock at a price of $9.00 per
share in June 1999 (each of which converts into ten shares of our Class A
common stock, effectively reducing the purchase price to $0.90 per
share);
. 41,640 shares of Series A preferred stock at a price of $9.00 per share
in September 1999 (each of which converts into ten shares of our Class A
common stock, effectively reducing the purchase price to $0.90 per
share); and
. 1,000,000 shares of Series B preferred stock at a price of $40.00 per
share in March through May 2000 (each of which converts into ten shares
of our Class A common stock, effectively reducing the purchase price to
$4.00 per share).
All shares of preferred stock will convert into Class A common stock on a
10-for-1 basis upon the closing of this offering. All holders of preferred
stock have entered into the lock-up agreements described in "Underwriting."
In connection with the sale of Series B preferred stock, in May 2000 we
issued to holders of our Series A preferred stock warrants to purchase up to
250,000 shares of Series B preferred stock at an exercise price of $40.00 per
share. To the extent outstanding, these warrants will convert on a 10-for-1
basis into warrants to purchase 2,500,000 shares of our Class A common stock at
an exercise price of $4.00 per share upon the closing of this offering.
The following table summarizes, on an as-converted basis to Class A common
stock, the shares of capital stock purchased by and warrants issued to
beneficial owners holders of more than 5% of our outstanding Class A common
stock in these private placement transactions, although this table does not
necessarily reflect outstanding amounts:
<TABLE>
<CAPTION>
Warrants to
Purchase
Series A Series B Series B
Preferred Preferred Preferred
Name of Purchaser Stock Stock Stock
----------------- ---------- --------- -----------
<S> <C> <C> <C>
TRW, Inc.................................. -- 1,250,000 --
Entities affiliated with Brentwood Venture
Capital.................................. 16,700,000 -- 2,439,200
Entities affiliated with Redpoint
Ventures................................. -- 2,000,000 --
Entities affiliated with Meritech Capital
Partners ................................ -- 3,750,000 --
International Business Machines
Corporation.............................. -- 2,500,000 2,500,000
</TABLE>
Affiliated Relationships
Messrs. Jones and Walecka, who are members of our board of directors, are
partners in entities affiliated with Brentwood Venture Capital and are founding
partners of entities affiliated with Redpoint Ventures. Additionally, Brentwood
Venture Capital and Redpoint Ventures is an investor in Meritech Capital
Partners.
Other Matters
TRW
In June 1997, we entered into a supply agreement with TRW pursuant to which
TRW supplies us with a certain number of processed GaAs HBT wafers annually for
a fixed price per wafer. The agreement was amended in June 1999 to revise the
wafer delivery requirement thereunder.
54
<PAGE>
IBM
During May 2000, we entered into a series of agreements with IBM. Our
semiconductor development agreement with IBM provides us with certain models
and design kits for use in the fabrication process to develop new integrated
circuits. Under our joint development agreement with IBM, pursuant to which we
licensed to IBM and IBM licensed to us, certain technology, we jointly develop
integrated circuits. We are both permitted to sell the jointly created products
to third parties, subject to a fixed royalty fee payable to the other party.
ASIP
In July 2000, we entered into a stock purchase and option agreement with
ASIP, an optical device start-up entity, pursuant to which we purchased
1,666,667 shares of ASIP's Series A preferred stock at an aggregate purchase
price of $833,334. We were also granted an option to purchase, and we granted
ASIP an option to require us to purchase upon the attainment of certain
performance goals, 833,333 shares of ASIP's Series B preferred stock at an
aggregate purchase price of $1,666,666. The other investors in the transaction
were Redpoint Ventures and certain of its affiliates.
Dr. Stephen Forrest, one of our directors, is a founder and director of
ASIP. Additionally, Dr. Richard Nottenburg, our Co-Chairman of the Board,
President and Chief Executive Officer, and G. Bradford Jones and John Walecka,
two of our directors, are each directors of ASIP. Additionally, Messrs. Jones
and Walecka are founding partners of entities affiliated with Redpoint
Ventures.
Other
As of the date of this prospectus, Allen Matkins Leck Gamble & Mallory LLP
and its affiliates beneficially own or have the right to purchase 481,800
shares of our Class A common stock. Allen Matkins has represented and continues
to represent us with respect to a variety of legal matters, including in
connection with this offering.
55
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our shares of Class A common stock and Class B common stock as of
September 30, 2000, and as adjusted to reflect the sale of the Class A common
stock offered hereby, by the following:
. each shareholder known by us to own beneficially more than 5% of our
outstanding shares of Class A common stock or Class B common stock;
. each of our executive officers named in the compensation table above;
. each of our directors; and
. all current executive officers and directors as a group.
As of September 30, 2000 there were 41,483,116 shares of Class A common
stock and 28,000,000 shares of Class B common stock outstanding, assuming that
all outstanding preferred shares have been converted into shares of Class A
common stock. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission. For purposes of calculating the
number of shares beneficially owned by a shareholder and the percentage
ownership of that shareholder, shares of common stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days of September 30, 2000 are deemed outstanding for purpose of
computing percentage ownership. The numbers shown in the table below assume no
exercise of the underwriters' over-allotment option. Unless otherwise noted, we
believe that each of the shareholders has sole investment and voting power with
respect to the common stock indicated, except to the extent shared by spouses
under applicable law.
Unless otherwise listed, the address for each shareholder listed in the
table below is c/o Multilink Technology Corporation, 300 Atrium Drive, 2nd
Floor, Somerset, New Jersey 08873.
<TABLE>
<CAPTION>
Shares Beneficially Percentage of Total
Owned Voting Power
--------------------- -----------------------
Name or Group of Class A Class B Before After
Beneficial Owners Shares Shares(1) Offering Offering
----------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Directors And Executive
Officers
Richard N.
Nottenburg(2).......... 1,875,000 15,820,000 33.63%
Jens Albers(3).......... 1,600,000 8,480,000 *
Eric M. Pillmore........ -- -- *
G. Bradford Jones(4).... 23,139,200 -- 36.44
John Walecka(5)......... 23,139,200 -- 36.44
Stephen R. Forrest(6)... 50,000 -- *
All directors and
executive officers as a
group (6 persons)...... 26,664,200 15,820,000 70.08
5% Shareholders
Entities associated with
Brentwood Venture
Capital(7)............. 21,139,200 -- 36.02
Matthias Bussmann....... -- 6,480,000 13.62
International Business
Machines
Corporation(8)......... 5,000,000 -- 1.05
TRW, Inc................ 1,250,000 5,700,000 12.24
Entities associated with
Meritech Capital
Partners(9)............ 3,750,000 -- *
</TABLE>
---------------------
* Less than 1%
(1) Holders of Class B common stock are entitled to ten votes per share. Each
share of Class B common stock is convertible at the option of the holder
into one share of Class A common stock and will, in general, automatically
convert into one share of Class A common stock upon sale or other transfer
to any person or entity other than a person or entity that owns or controls
an entity that owns Class B common stock.
56
<PAGE>
(2) Includes 1,875,000 shares subject to an option exercisable within 60 days
of September 30, 2000. Also includes 8,480,000 shares of Class B common
stock owned by Dr. Albers over which Dr. Nottenburg has sole voting power
pursuant to a voting trust agreement between Dr. Nottenburg and Dr. Albers.
Dr. Nottenburg disclaims beneficial interest in such shares.
(3) Includes 1,600,000 shares subject to an option exercisable within 60 days
of September 30, 2000. Dr. Nottenburg has sole voting power over Dr.
Albers' shares of Class B common stock pursuant to a voting trust agreement
between Dr. Nottenburg and Dr. Albers. Dr. Nottenburg disclaims beneficial
interest in such shares.
(4) Mr. Jones is a general partner of entities affiliated with Brentwood
Venture Capital and entities affiliated with Redpoint Ventures. The shares
listed include (i) 18,700,000 shares held by entities affiliated with
Brentwood Venture Capital, (ii) 2,439,200 shares issuable to entities
affiliated with Brentwood Venture Capital pursuant to currently exercisable
warrants, and (iii) 2,000,000 shares held by entities affiliated with
Redpoint Ventures. Mr. Jones disclaims beneficial interest in the shares
held by these entities, except to the extent of his pecuniary interest in
these entities. Shares of preferred stock held by entities affiliated with
Brentwood Venture Capital possess voting rights entitling the holder to ten
votes per share of common stock into which the preferred stock is
convertible. Upon the conversion of such shares into Class A common stock
upon the closing of this offering, each share so converted will entitle the
holder to one vote per share.
(5) Mr. Walecka is a general partner of entities affiliated with Brentwood
Venture Capital and entities affiliated with Redpoint Ventures. The shares
listed include (i) 18,700,000 shares held by entities affiliated with
Brentwood Venture Capital, (ii) 2,439,200 shares issuable to entities
affiliated with Brentwood Venture Capital pursuant to currently exercisable
warrants, and (iii) 2,000,000 shares of held by entities affiliated with
Redpoint Ventures. Mr. Walecka disclaims beneficial interest in the shares
held by these entities, except to the extent of his pecuniary interest in
these entities. Shares of preferred stock held by entities affiliated with
Brentwood Venture Capital possess voting rights entitling the holder to ten
votes per share of common stock into which the preferred stock is
convertible. Upon the conversion of such shares into Class A common stock
upon the closing of this offering, each share so converted will entitle the
holder to one vote per share.
(6) Consists of 50,000 shares subject to an option exercisable within 60 days
of September 30, 2000.
(7) Includes 20,505,000 shares held by or issuable to Brentwood Associates IX,
L.P. and 634,200 shares held by or issuable to Brentwood Affiliates Fund
III.
(8) Includes 2,500,000 shares subject to a currently exercisable warrant.
(9) Consists of 3,690,000 shares held by Meritech Capital Partners L.P. and
60,000 shares held by Meritech Capital Affiliates.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our articles of incorporation authorize the issuance of up to 310,000,000
shares of capital stock, of which 200,000,000 shares are Class A common stock,
100,000,000 shares are Class B common stock, and 10,000,000 shares are
preferred stock. From time to time, our board may establish the rights and
preferences of the preferred stock. The following summary of our capital stock
is, by necessity, not complete. We encourage you to refer to our articles of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus is a part, and to applicable provisions of
California law for a more complete description.
Common Stock
We are authorized to issue up to 300,000,000 shares of common stock, $0.0001
par value, of which 200,000,000 shares have been designated as Class A common
stock and 100,000,000 shares have been designated as Class B common stock. At
September 30, 2000, 2,000,000 shares of Class A common stock were issued and
outstanding and held by one shareholder, and 28,000,000 shares of Class B
common stock were issued and outstanding and held by four shareholders. After
giving effect to this offering and the automatic conversion of our outstanding
shares of preferred stock into shares of Class A common stock, there will be
shares of Class A common stock issued and outstanding and 28,000,000
shares of Class B common stock issued and outstanding.
The shares of our Class B common stock are substantially identical to the
shares of our Class A common stock, except that the holders of Class A common
stock are entitled to one vote per share and the holders of the Class B common
stock are entitled to ten votes per share on all matters submitted to
shareholder vote. Holders of shares of Class A common stock and holders of
shares of Class B common stock vote together as a single class on all matters
submitted to a shareholder vote, except (1) as otherwise required by law or (2)
with respect to a proposed issuance of additional shares of Class B common
stock, which issuance requires the affirmative vote of the holders of a
majority of the outstanding shares of Class B common stock, voting separately
as a class. Each share of Class B common stock is convertible at the option of
the holder into one share of Class A common stock and will, in general,
automatically convert into one share of Class A common stock upon sale or other
transfer to any person or entity other than a person or entity that owns or
controls an entity that owns Class B common stock.
Under our bylaws, holders of common stock will not have cumulative voting
rights after we are a "listed corporation" under California law. In such event,
the holders of the remaining shares will not be able to elect any directors. We
anticipate we will qualify as a listed corporation as of the closing of this
offering.
Preferred Stock
Our articles of incorporation provide that our board of directors has the
authority, without the action of our shareholders, to designate and issue
preferred stock in one or more series and to designate the rights, preferences
and privileges of each such series. The rights, preferences and privileges of
each series of preferred stock may be greater than the rights of our 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 our common stock until
the board of directors determines the specific rights of the holders of any
preferred stock that may be issued. However, the effects might include, among
other things: (1) restricting dividends on common stock; (2) diluting the
voting power of the common stock; (3) impairing the liquidation rights of the
common stock; and (4) delaying or preventing a change in our control without
further action by the shareholders. Upon the completion of this offering, no
shares of preferred stock will be outstanding, and we have no present plans to
issue any shares of preferred stock.
Transfer Agent and Registrar
The transfer agent and registrar for our Class A common stock is
. The transfer agent's address is
, and its telephone number is
.
Nasdaq Stock Market National Market Listing
We will apply to list our common shares on The Nasdaq Stock Market's
National Market under the symbol "MLTC."
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has not been any public market for shares of our
Class A common stock, and we cannot predict the effect, if any, that market
sales of shares of our Class A common stock by our existing shareholders or the
availability of shares of our Class A common stock for sale will have on the
market price of shares of our Class A common stock. Nevertheless, sales of
substantial amounts of shares of our Class A common stock by our existing
shareholders in the public market, or the perception that such sales could
occur, could adversely affect the market price of shares of our Class A common
stock and could impair our future ability to raise capital through the sale of
equity securities.
Upon completion of this offering, we will have a total of shares of
Class A common stock outstanding, without giving effect to any warrants which
remain outstanding at the closing of this offering, and assuming no exercise of
outstanding options or warrants. Shares sold in this offering will be freely
tradeable, except that any shares held by our "affiliates," as that term is
defined in Rule 144 promulgated under the Securities Act of 1933, may only be
sold in compliance with the limitations described below. The remaining
shares outstanding of Class A common stock will be deemed "restricted
securities" as defined under Rule 144. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, summarized below.
Lock-Up Agreements
Our officers and directors and all of our shareholders 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. If the reported last sale price of our
common stock on The Nasdaq Stock Market's National Market is at least twice the
public offering price per share shown on the cover page of this prospectus for
20 of the 30 trading days ending on the last trading day preceding the 90th day
after the date of this prospectus, then 25% of the shares of our outstanding
common stock, or shares, will be released from these
restrictions. The release of these shares will occur on the later of:
. the 91st day after this offering; or
. the second trading day following the public release of our financial
results for the quarter immediately after this offering.
Under the lock-up agreements described above and the provisions of Rules
144, 144(k) and 701, additional shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
Maximum
Number
of
Shares Date
------- ----
<C> <S>
After the date of this prospectus
After 90 days from the date of this prospectus (assuming the
conditions described in the preceding paragraph are satisfied)
After 180 days from the date of this prospectus (subject, in some
cases, to volume limitations and contractual vesting schedules)
</TABLE>
In addition, as of the date of this prospectus, options to purchase a total
of shares of common stock are outstanding, all of which will become
exercisable concurrent with this offering (without regard to the
59
<PAGE>
above-mentioned lock up period) and shares of common stock will be
issuable upon the exercise of outstanding warrants that are currently
exercisable.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year would be entitled to sell in any three-month
period up to the greater of:
. 1% of the then-outstanding shares of common stock, or approximately
shares immediately after this offering; or
. the average weekly trading volume of the common shares during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who has not been one of our affiliates during
the preceding 90 days and who has beneficially owned the restricted shares for
at least two years is entitled to sell them without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule
144.
Rule 701
Any of our employees, directors, officers, consultants or advisors who
purchased shares from us in connection with a written stock or option plan
before the effective date of this offering is entitled to rely on the resale
provisions of Rule 701, subject to the lock-up agreements described above. In
general, Rule 701 permits non-affiliates to sell their Rule 701 shares 90 days
after the effectiveness of a registration statement relating to a company's
initial public offering 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 the
holding period of Rule 144.
Stock Options and Warrants
As of September 30, 2000, options to purchase a total of 33,378,450 shares
of Class A common stock under our existing stock plans were outstanding.
Warrants to purchase 5,813,716 shares of Class A common stock or shares
convertible, on a one-for-one basis, into Class A common stock were also
outstanding as of September 30, 2000. An additional 8,621,550 shares of Class A
common stock were available for future option grants under our existing stock
plans. An additional 5,000,000 shares of Class A common stock will become
available for future option grants under our proposed 2000 incentive plan, and
1,500,000 shares of Class A common stock will become available for future
purchase under our proposed 2000 employee stock purchase plan, each of which
will become effective upon the effectiveness of this offering.
We intend to file a registration statement on Form S-8 to register shares of
Class A common stock issued or reserved for issuance under our existing stock
plans, our proposed 2000 stock incentive plan and our proposed employee stock
purchase plan within 180 days after the date of this prospectus, thus
permitting the resale of such shares by nonaffiliates in the public market
without restriction under the Securities Act, subject to the lock-up agreements
described in "Underwriting."
Registration Rights
Pursuant to an investors' rights agreement we entered into with holders of
our preferred stock, the holders of 32,116,400 shares of Class A common stock,
assuming conversion of all outstanding shares of preferred stock and the
exercise of all warrants to purchase preferred stock (which convert into
warrants to purchase
60
<PAGE>
Class A common stock upon the effectiveness of this offering), are entitled to
registration rights regarding those shares. Under the terms of the agreement,
if, at any time after six months following the initial public offering, we
propose to register any of our securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, the holders of these shares are entitled to notice of the
registration and to include their common stock in the registration at our
expense. This right is subject to conditions and limitations, including the
right of the underwriters in an offering to limit the number of shares included
in the registration. The holders of these shares may also require us to file up
to two registration statements under the Securities Act at our expense with
respect to their common stock. We are required to use best efforts to effect
these registrations, subject to conditions and limitations. Furthermore, the
holders of these registration rights may require us to file additional
registration statements on Form S-3, subject to conditions and limitations.
These rights terminate on the earlier of five years after the effective date of
this offering, or when a holder is able to sell all its shares pursuant to Rule
144 under the Securities Act in any 90-day period. Under the investors' rights
agreement, we have a contractual right to prohibit any sales of common stock by
the holders for a period of 180 days following this offering and 90 days
following any follow-on offering by us. All holders of registerable securities
have agreed not to exercise their registration rights until 180 days following
the date of this prospectus without the consent of Credit Suisse First Boston
Corporation.
61
<PAGE>
U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a general discussion of the material U.S. federal income
tax consequences of the ownership and disposition of our common stock to a non-
U.S. holder. In this discussion, a non-U.S. holder is any holder that for U.S.
federal income tax purposes is not a U.S. person. For purposes of this
discussion, the term U.S. person means:
. a citizen or resident of the United States;
. a corporation or other entity taxable as a corporation created or
organized in the United States or under the laws of the United States or
any political subdivision thereof;
. an estate whose income is included in gross income for U.S. federal
income tax purposes regardless of its source; or
. a trust whose administration is subject to the primary supervision of a
U.S. court and one or more U.S. persons have the authority to control all
substantial decisions of the trust.
If a partnership holds common stock, the tax treatment of a partner will
generally depend on the status of the partner and upon the activities of the
partnership.
This discussion does not address all aspects of U.S. federal income taxation
that may be relevant in light of a non-U.S. holder's special tax status or
special tax situations. U.S. expatriates, life insurance companies, tax-exempt
organizations, dealers in securities or currency, banks or other financial
institutions, investors whose functional currency is other than the U.S.
dollar, and investors that hold common stock as part of a hedge, straddle or
conversion transaction are among those categories of potential investors that
are subject to special rules not covered in this discussion. This discussion
does not address any tax consequences arising under the laws of any state,
local or non-U.S. taxing jurisdiction. Furthermore, the following discussion is
based on current provisions of the Internal Revenue Code of 1986, as amended,
and administrative and judicial interpretations thereof, all as in effect on
the date hereof, and all of which are subject to change, possibly with
retroactive effect. Accordingly, each non-U.S. Holder should consult a tax
advisor regarding the U.S. federal, state, local and non-U.S. income and other
tax consequences of acquiring, holding and disposing of shares of our common
stock.
Dividends
We have not paid any dividends on our common stock and we do not plan to pay
any dividends for the foreseeable future. However if we do pay dividends on our
common stock, those payments will constitute dividends for U.S. tax purposes to
the extent paid from our current and accumulated earnings and profits, as
determined under U.S. federal income tax principles. To the extent those
dividends exceed our current and accumulated earnings and profits, the
dividends will constitute a return of capital and will first reduce a holder's
basis, but not below zero, and then will be treated as gain from the sale of
stock.
Any dividend paid to a non-U.S. holder of common stock generally will be
subject to U.S. withholding tax either at a rate of 30% of the gross amount of
the dividend or such lower rate as may be specified by an applicable tax
treaty. In order to receive a reduced treaty rate, a non-U.S. holder must
provide us with an IRS form W-8BEN certifying to us your qualification for the
reduced rate.
Dividends received by a non-U.S. holder that are effectively connected with
a U.S. trade or business conducted by the non-U.S. holder are exempt from such
withholding tax. In order to obtain this exemption, a non-U.S. holder must
provide us with an IRS Form W-8ECI certifying to us such exemption. Such
effectively connected dividends, although not subject to withholding tax, are
taxed at the same graduated rates applicable to U.S. persons, net of certain
deductions and credits.
62
<PAGE>
In addition to the graduated tax described above, dividends received by a
corporate non-U. S. holder that are effectively connected with a U.S. trade or
business of the corporate non-U.S. holder may also be subject to a branch
profits tax at a rate of 30% or such lower rate as may be specified by an
applicable tax treaty.
A non-U.S. holder of common stock that is eligible for a reduced rate of
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
Internal Revenue Service ("IRS").
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax
on any gain realized upon the sale or other disposition of our common stock
unless:
. the gain is effectively connected with a U.S. trade or business of the
non-U.S. holder (which gain, in the case of a corporate non-U.S. holder,
must also be taken into account for branch profits tax purposes);
. the non-U.S. holder is an individual who holds his or her common stock as
a capital asset (generally, an asset held for investment purposes) and
who is present in the U.S. for a period or periods aggregating 183 days
or more during the calendar year in which the sale or disposition occurs
and certain other conditions are met; or
. we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time within the shorter of the five-
year period preceding the disposition or the holder's holding period for
our common stock. We have determined that we are not and do not believe
that we will become a "U.S. real property holding corporation" for U.S.
federal income tax purposes.
Backup Withholding and Information Reporting
Generally, we must report annually to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax authorities in the
recipient's country of residence.
Dividends paid to a non-U.S. Holder at an address within the United States
may be subject to backup withholding at a rate of 31% if the non-U.S. Holder
fails to establish that it is entitled to an exemption or to provide a correct
taxpayer identification number and other information to the payer. Backup
withholding generally will not apply to dividends paid to non-U.S. Holders at
an address outside the United States on or prior to December, 2000 unless the
payer has knowledge that the payee is a U.S. person. Under recently finalized
Treasury Regulations regarding withholding and information reporting, payment
of dividends to non-U.S. Holders at an address outside the United States after
December, 2000 may be subject to backup withholding at a rate of 31% unless
such non-U.S. Holder satisfies various certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the U.S. office of a broker is
subject to information reporting and backup withholding at a rate of 31% unless
the holder certifies its non-U.S. status under penalties of perjury or
otherwise establishes an exemption. Generally, the payment of the proceeds of
the disposition by a non-U.S. Holder of common stock outside the U.S. to or
through a foreign office of a broker will not be subject to backup withholding
but will be subject to information reporting requirements if the broker is a
U.S. person or has certain other connections to the United States, unless the
broker has documentary evidence in its files of the holder's non-U.S. status
and certain other conditions are met, or the holder otherwise establishes an
exemption. Neither backup withholding nor information reporting generally will
apply to a payment of the proceeds of a disposition of common stock by or
through a foreign office of a foreign broker not subject to the preceding
sentence.
63
<PAGE>
In general, the recently promulgated final Treasury Regulations, described
above, do not significantly alter the substantive withholding and information
reporting requirements but would alter the procedures for claiming benefits of
an income tax treaty and change the certifications procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-U.S. holders should consult their tax advisors
regarding the effect, if any, of those final Treasury Regulations on an
investment in our common stock. Those final Treasury Regulations generally are
effective for payments made after December, 2000.
Backup withholding is not an additional tax. Rather, the U.S. income tax
liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained, provided that the required information is furnished to
the IRS.
64
<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, Salomon Smith
Barney Inc. and Thomas Weisel Partners LLC are acting as representatives, the
following respective numbers of shares of Class A common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
Salomon Smith Barney Inc. .........................................
Thomas Weisel Partners LLC.........................................
----
Total............................................................
====
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of Class A 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 may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares from us at the initial public offering
price less the underwriting discounts and commissions. This option may be
exercised only to cover any over-allotments of Class A common stock.
The underwriters propose to offer the shares of Class A 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 selling concession of $ per
share. The underwriters and selling group members may allow a discount of $
per share on sales to other broker/dealers. After the initial public offering,
the public offering price and concession and discount to broker/dealers may be
changed by the representatives.
The following table summarizes the compensation and estimated expenses we
will pay:
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts
and
Commissions paid by
us..................... $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
The representatives have informed us that the underwriters do not expect
discretionary sales to exceed 5% of the shares of Class A common stock being
offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the SEC a
registration statement under the Securities Act 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
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 grants of options to purchase shares of common
stock under any of our stock option plans disclosed in this prospectus and
existing on the date hereof, issuances of common stock pursuant to the exercise
of employee stock options outstanding on the date hereof and the filing of a
Registration Statement on Form S-8.
65
<PAGE>
Our officers and directors and all of our shareholders 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. If the reported last sale price of our
common stock on The Nasdaq Stock Market's National Market is at least twice the
public offering price per share shown on the cover page of this prospectus for
20 of the 30 trading days ending on the last trading day preceding the 90th day
after the date of this prospectus, then 25% of the shares of our outstanding
common stock, or shares, will be released from these
restrictions. The release of these shares will occur on the later of:
. the 91st day after this offering; or
. the second trading day following the public release of our financial
results for the quarter immediately after this offering.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of Class A common stock for persons associated with us
who have expressed an interest in purchasing Class A 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 will apply to list the shares of Class A common stock on The Nasdaq Stock
Market's National Market under the symbol "MLTC."
Affiliates of Credit Suisse First Boston Corporation beneficially own 25,000
shares of our Series B convertible preferred stock which will convert into
250,000 shares of our Class A common stock upon the completion of this
offering. Affiliates of Thomas Weisel Partners LLC beneficially own 25,000
shares of our Series B convertible preferred stock which will convert into
250,000 shares of our Class A common stock upon the completion of this
offering.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has acted as lead-manager or co-
manager on numerous public offerings of equity securities. Thomas Weisel
Partners LLC does not have any material relationship with us or any of our
officers, directors or other controlling persons, except with respect to its
affiliates' ownership of our Series B convertible preferred stock and its
contractual relationship with us under the underwriting agreement entered into
in connection with this offering.
Prior to this offering, there has been no public market for our Class A
common stock. The initial public offering price will be determined by
negotiation between us and the underwriters and will not necessarily reflect
the market price of the Class A common stock following the offering. The
principal factors that will be considered in determining the public offering
price will include:
. the information in this prospectus and otherwise available to the
underwriters;
. market conditions for initial public offerings;
66
<PAGE>
. 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 recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies; and
. the general condition of the securities markets at the time of this
offering.
We offer no assurances that the initial public offering price will
correspond to the price at which the Class A common stock will trade in the
public market subsequent to the offering or that an active trading market for
the Class A common stock will develop and continue after the offering.
In connection with the offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the over-
allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.
. Syndicate covering transactions involve purchases of the Class A common
stock in the open market after the distribution has been completed in
order to cover syndicate short positions. In determining the source of
shares to close out the short position, the underwriters will consider,
among other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase shares
through the over-allotment option. If the underwriters sell more shares
than could be covered by the over-allotment option--a naked short
position--the position can only be closed out by buying shares in the
open market. A naked short position is more likely to be created if the
underwriters are concerned that there could be downward pressure on the
price of the shares in the open market after pricing that could adversely
affect investors who purchase in the offering.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the Class A common stock originally sold by
the syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
Class A common stock or preventing or retarding a decline in the market price
of the Class A common stock. As a result, the price of the Class A common stock
may be higher than the price that might otherwise exist in the open market.
These transactions may be effected on The Nasdaq Stock Market's National Market
or otherwise and, if commenced, may be discontinued at any time.
A prospectus in electronic format will 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.
67
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the Class A 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 Class A common stock are made. Any resale of the Class A common stock
in Canada must be made under applicable securities laws which will vary
depending on the relevant jurisdiction, and which may require resales to be
made under available statutory exemptions or under a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the Class A common
stock.
Representations of Purchasers
By purchasing Class A common stock in Canada and accepting a purchase
confirmation, purchasing is representing to us and the dealer from whom the
purchase confirmation is received that:
. the purchaser is entitled under applicable provincial securities laws to
purchase the Class A common stock without the benefit of a prospectus
qualified under those securities laws;
. where required by law, the purchaser is purchasing as principal and not
as agent; and
. the purchaser has reviewed the text above under Resale Restrictions.
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named may
be located outside of Canada and, as a result, it may not be possible for
Canadian purchasers to effect service of process within Canada upon the issuer
or such persons. All or a substantial portion of the assets of the issuer and
such persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against the issuer or such persons in Canada or
to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
Notice to British Columbia Residents
A purchaser of Class A common stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any Class A common stock acquired by such purchaser pursuant to this offering.
The 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 for Class A common stock acquired on the same
date and under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of Class A common stock should consult their own legal
and tax advisors with respect to the tax consequences of an investment in the
Class A common stock in their particular circumstances and about the
eligibility of the Class A common stock for investment by the purchaser under
relevant Canadian legislation.
68
<PAGE>
LEGAL MATTERS
Allen Matkins Leck Gamble & Mallory LLP, Los Angeles, California, will pass
on the legality of the Class A common stock offered by this prospectus.
Cravath, Swaine & Moore, New York, New York, has represented the underwriters.
EXPERTS
The financial statements of Multilink Technology Corporation as of December
31, 1998 and 1999, and for each of the three years in the period ended December
31, 1999, included in this prospectus have been audited by Deloitte & Touche
LLP, independent auditors as stated in their report appearing herein and
elsewhere in this registration statement, and have been so included in reliance
upon the report of such firm given upon their authority as experts in auditing
and accounting.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1. This
prospectus, which forms a part of the registration statement, does not contain
all the information included in the registration statement. Certain information
is omitted and you should refer to the registration statement and its exhibits.
With respect to references made in this prospectus to any of our contracts or
other documents, such references are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contract or document. You may read and copy the registration statement,
including exhibits and schedules filed with it, at the SEC's public reference
facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain information on the operation of the SEC's public
reference facilities by calling the SEC at 1-800-SEC-0330. The SEC maintains a
website (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants, such as us, that file
electronically with the SEC.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements under the Exchange Act and, in accordance
with this law, will file periodic reports, proxy statements and other
information with the SEC. These periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference facilities and the website of the SEC referred to above.
69
<PAGE>
MULTILINK TECHNOLOGIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Multilink Technology Corporation:
We have audited the accompanying consolidated balance sheets of Multilink
Technology Corporation and subsidiaries (the "Company") as of December 31, 1998
and 1999, and the related consolidated statements of operations, shareholders'
equity (deficit), and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Los Angeles, California
June 15, 2000
F-2
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999 and June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
Pro Forma
December 31, Shareholders'
------------------------ June 30, Equity
1998 1999 2000 June 30, 2000
----------- ----------- ----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $ 302,636 $ 8,997,086 $52,357,911
Accounts receivable, net
of allowance for
uncollectible accounts
of $11,300, $51,000 and
$51,000 as of December
31, 1998 and 1999 and
June 30, 2000........... 656,326 5,216,702 3,279,827
Inventories.............. 368,597 5,002,280 6,726,876
Note receivable.......... -- -- 50,000
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... 154,388 -- --
Prepaid expenses and
other current assets.... 36,332 346,957 1,218,172
----------- ----------- -----------
Total current assets... 1,518,279 19,563,025 63,632,786
Property and equipment,
net...................... 221,080 2,667,877 4,102,295
Deferred income taxes..... -- -- 1,239,302
Deposits and other
assets................... 7,585 413,400 431,068
----------- ----------- -----------
Total assets........... $ 1,746,944 $22,644,302 $69,405,451
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......... $ 853,755 $ 2,691,143 $ 5,391,941
Accrued expenses......... 276,283 1,015,741 2,441,674
Accrued warranty costs... 184,372 254,360 492,487
Billings in excess of
costs and estimated
earnings on uncompleted
contracts............... 222,031 -- --
Lease obligations--
current portion......... 16,077 493,804 660,973
Income taxes payable..... -- -- 869,657
----------- ----------- -----------
Total current
liabilities........... 1,552,518 4,455,048 9,856,732
----------- ----------- -----------
Lease obligations--net of
current portion.......... 27,950 1,537,568 1,286,547
----------- ----------- -----------
Line of credit from
shareholder.............. 2,161,398 2,387,962 --
----------- ----------- -----------
Commitments and
contingencies
Redeemable convertible
preferred stock:
Series A; $.0001 par
value; 9,000,000 shares
authorized, none issued
and outstanding as of
December 31, 1998;
1,711,640 issued and
outstanding as of
December 31, 1999 and
June 30, 2000 (actual);
no shares issued and
outstanding as of June
30, 2000 (pro forma).... -- 14,978,163 15,025,711 --
Series B; $.0001 par
value; 1,000,000 shares
authorized, none issued
and outstanding as of
December 31, 1998 and
1999; 1,000,000 issued
and outstanding as of
June 30, 2000 (actual);
no shares issued and
outstanding as of
June 30, 2000 (pro
forma).................. -- -- 40,000,000 --
Shareholders' equity
(deficit):
Common stock, $.0001 par
value:
Class A: 200,000,000
shares authorized, none
issued and outstanding
at December 31, 1998
and 1999; 2,000,000
issued and outstanding
as of June 30, 2000
(actual) 29,116,400
issued and outstanding
as of June 30, 2000
(pro forma)............. -- -- 200 2,912
Class B: 100,000,000
shares authorized;
30,000,000 shares
issued and outstanding
as of December 31, 1998
and 1999; 28,000,000
issued and outstanding
as of June 30, 2000
(actual and pro
forma).................. 3,000 3,000 2,800 2,800
Additional paid-in-
capital................. 630,750 7,077,088 25,784,613 80,807,612
Deferred stock
compensation............ (155,630) (5,365,749) (9,051,914) (9,051,914)
Accumulated deficit...... (2,467,623) (2,443,083) (13,500,361) (13,500,361)
Accumulated other
comprehensive income
(loss).................. (5,419) 14,305 1,123 1,123
----------- ----------- ----------- ------------
Total shareholders'
equity (deficit)...... (1,994,922) (714,439) 3,236,461 $ 58,262,172
----------- ----------- ----------- ============
Total liabilities and
shareholders' equity
(deficit)............. $ 1,746,944 $22,644,302 $69,405,451
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997, 1998 and 1999 and Six Months
Ended June 30, 1999 (Unaudited) and 2000 (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
------------------------------------ ------------------------
1997 1998 1999 1999 2000
---------- ----------- ----------- ---------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues
Product............... $ 93,918 $ 2,125,748 $19,383,258 $5,960,184 $ 28,667,129
Development........... 1,447,219 1,725,816 1,011,744 946,209 --
---------- ----------- ----------- ---------- ------------
Total revenues...... 1,541,137 3,851,564 20,395,002 6,906,393 28,667,129
---------- ----------- ----------- ---------- ------------
Cost of revenues (Note
15).................... 1,178,053 1,847,179 6,747,882 2,233,784 10,858,689
---------- ----------- ----------- ---------- ------------
Gross profit............ 363,084 2,004,385 13,647,120 4,672,609 17,808,440
---------- ----------- ----------- ---------- ------------
Operating expenses:
Research and
development,
excluding deferred
stock compensation
(Note 15)............ 650,303 2,218,472 8,778,922 2,584,229 8,934,427
Sales and marketing,
excluding deferred
stock compensation
(Note 15)............ 190,175 349,180 2,291,780 795,197 2,513,993
General and
administrative,
excluding deferred
stock compensation
(Note 15)............ 265,533 391,284 1,767,146 664,001 2,029,079
Deferred stock
compensation
(Note 15)............ -- 343,870 822,582 61,896 2,238,302
Warrant issuances..... -- -- -- -- 6,455,606
---------- ----------- ----------- ---------- ------------
Total operating
expenses........... 1,106,011 3,302,806 13,660,430 4,105,323 22,171,407
---------- ----------- ----------- ---------- ------------
Operating income
(loss)................. (742,927) (1,298,421) (13,310) 567,286 (4,362,967)
Other income and
expenses
Interest expense...... (60,965) (188,417) (226,564) (131,210) (199,862)
Other income.......... -- -- 283,632 16,885 327,333
---------- ----------- ----------- ---------- ------------
Income (loss) before
provision for income
taxes.................. (803,892) (1,486,838) 43,758 452,961 (4,235,496)
Provision for income
taxes.................. 1,419 800 19,218 200 446,782
---------- ----------- ----------- ---------- ------------
Net income (loss)....... (805,311) (1,487,638) 24,540 452,761 (4,682,278)
Accretion of redeemable
convertible preferred
stock to redemption
value.................. -- -- 47,548 -- 47,548
Dividend related to
warrant issuance....... -- -- -- -- 6,375,000
---------- ----------- ----------- ---------- ------------
Net income (loss)
attributable to common
shareholders........... $ (805,311) $(1,487,638) $ (23,008) $ 452,761 $(11,104,826)
========== =========== =========== ========== ============
Net income (loss) per
share:
Basic................. $ (0.03) $ (0.05) $ 0.00 $ 0.02 $ (0.37)
========== =========== =========== ========== ============
Diluted............... $ (0.03) $ (0.05) $ 0.00 $ 0.01 $ (0.37)
========== =========== =========== ========== ============
Weighted average shares
of common stock:
Basic................. 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
========== =========== =========== ========== ============
Diluted............... 30,000,000 30,000,000 30,000,000 37,598,127 30,000,000
========== =========== =========== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 1997, 1998 and 1999 and Six Months Ended June 30,
2000 (Unaudited)
<TABLE>
<CAPTION>
Class A Class B Accumulated
Common Stock Common Stock Additional Deferred Other
---------------- ------------------ Paid-in Stock-Based Accumulated Comprehensive
Shares Amount Shares Amount Capital Compensation Deficit Income (Loss)
--------- ------ ---------- ------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY
1, 1997........... 30,000,000 $3,000 $ 12,250 $ (174,674) $(1,172)
Fair value of
common stock
purchase option... 119,000
Comprehensive
income:
Net loss......... (805,311)
Other
comprehensive
income--Foreign
currency
translation
adjustment...... (9,086)
Comprehensive
loss..............
--------- ---- ---------- ------ ----------- ----------- ------------ -------
BALANCE, DECEMBER
31, 1997.......... 30,000,000 3,000 131,250 (979,985) (10,258)
Deferred stock
compensation...... 499,500 $ (499,500)
Amortization of
deferred stock
compensation...... 343,870
Comprehensive
income:
Net loss......... (1,487,638)
Other
comprehensive
income--Foreign
currency
translation
adjustment....... 4,839
Comprehensive
loss..............
--------- ---- ---------- ------ ----------- ----------- ------------ -------
BALANCE, DECEMBER
31, 1998.......... 30,000,000 3,000 630,750 (155,630) (2,467,623) (5,419)
Warrants issued
in connection
with the Series A
preferred stock
financing......... 330,549
Warrants issued
in connection
with equipment
financing......... 130,636
Deferred stock
compensation...... 6,032,701 (6,032,701)
Amortization of
deferred stock
compensation...... 822,582
Accretion of
redeemable
convertible
preferred stock... (47,548)
Comprehensive
income:
Net income....... 24,540
Other
comprehensive
income--Foreign
currency
translation
adjustment....... 19,724
Comprehensive
income............
--------- ---- ---------- ------ ----------- ----------- ------------ -------
BALANCE, DECEMBER
31, 1999.......... 30,000,000 3,000 7,077,088 (5,365,749) (2,443,083) 14,305
Conversion of
Class B common
stock to Class A
common stock
(unaudited)....... 2,000,000 $200 (2,000,000) (200)
Deferred stock
compensation
(unaudited)....... 5,924,467 (5,924,467)
Amortization of
deferred stock
compensation
(unaudited)....... 2,238,302
Accretion of
redeemable
convertible
preferred stock
(unaudited)....... (47,548)
Warrant issuances
(unaudited)....... 6,455,606
Dividend related
to warrant
issuance
(unaudited)....... 6,375,000 (6,375,000)
Comprehensive
income:
Net loss
(unaudited)...... (4,682,278)
Other
comprehensive
loss--Foreign
currency
translation
adjustment (unaudited).. (13,182)
Comprehensive
loss
(unaudited).......
--------- ---- ---------- ------ ----------- ----------- ------------ -------
BALANCE, JUNE 30,
2000 (UNAUDITED).. 2,000,000 $200 28,000,000 $2,800 $25,784,613 $(9,051,914) $(13,500,361) $ 1,123
========= ==== ========== ====== =========== =========== ============ =======
<CAPTION>
Total
-----------
<S> <C>
BALANCE, JANUARY
1, 1997........... $ (160,596)
Fair value of
common stock
purchase option... 119,000
Comprehensive
income:
Net loss......... (805,311)
Other
comprehensive
income--Foreign
currency
translation
adjustment...... (9,086)
-----------
Comprehensive
loss.............. (814,397)
-----------
BALANCE, DECEMBER
31, 1997.......... (855,993)
Deferred stock
compensation...... --
Amortization of
deferred stock
compensation...... 343,870
Comprehensive
income:
Net loss......... (1,487,638)
Other
comprehensive
income--Foreign
currency
translation
adjustment....... 4,839
-----------
Comprehensive
loss.............. (1,482,799)
-----------
BALANCE, DECEMBER
31, 1998.......... (1,994,922)
Warrants issued
in connection
with the Series A
preferred stock
financing......... 330,549
Warrants issued
in connection
with equipment
financing......... 130,636
Deferred stock
compensation...... --
Amortization of
deferred stock
compensation...... 822,582
Accretion of
redeemable
convertible
preferred stock... (47,548)
Comprehensive
income:
Net income....... 24,540
Other
comprehensive
income--Foreign
currency
translation
adjustment....... 19,724
-----------
Comprehensive
income............ 44,264
-----------
BALANCE, DECEMBER
31, 1999.......... (714,439)
Conversion of
Class B common
stock to Class A
common stock
(unaudited)....... --
Deferred stock
compensation
(unaudited)....... --
Amortization of
deferred stock
compensation
(unaudited)....... 2,238,302
Accretion of
redeemable
convertible
preferred stock
(unaudited)....... (47,548)
Warrant issuances
(unaudited)....... 6,455,606
Dividend related
to warrant
issuance
(unaudited)....... --
Comprehensive
income:
Net loss
(unaudited)...... (4,682,278)
Other
comprehensive
loss--Foreign
currency
translation
adjustment (unaudited).. (13,182)
-----------
Comprehensive
loss
(unaudited)....... (4,695,460)
-----------
BALANCE, JUNE 30,
2000 (UNAUDITED).. $3,236,461
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1998 and 1999 and Six Months
Ended June 30, 1999 (Unaudited) and 2000 (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
---------------------------------- ------------------------
1997 1998 1999 1999 2000
--------- ----------- ---------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $(805,311) $(1,487,638) $ 24,540 $ 452,761 $(4,682,278)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Warrant issuances..... -- -- -- -- 6,455,606
Provision for
uncollectible
accounts receivable.. 3,600 3,362 39,700 (900) --
Depreciation and
amortization......... 39,923 59,737 292,628 41,564 836,250
Deferred stock
compensation......... -- 343,870 822,582 61,896 2,238,302
Amortization of
discount on line of
credit from
shareholder.......... -- 74,375 -- -- --
Interest expense on
line of credit from
shareholder.......... 44,625 161,398 226,564 96,699 61,206
Deferred income
taxes................ (5,582) -- -- -- (1,239,302)
Changes in operating
assets and
liabilities:
Accounts receivable.. 136,416 (505,612) (4,595,088) (106,376) 1,936,875
Inventories.......... (46,700) (271,751) (4,633,683) (1,132,616) (1,724,596)
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts........... (100,247) (54,519) 159,376 102,415 --
Prepaid expenses and
other current
assets.............. 18,087 (26,753) (315,778) 12,397 (871,215)
Deposits and other
assets.............. (5,479) (2,106) (275,179) (24,104) (17,668)
Accounts payable..... (97,575) 655,828 1,842,376 386,809 2,700,798
Accrued expenses..... 27,837 143,032 744,446 395,570 1,425,932
Accrued warranty
costs............... 149,736 (25,813) 69,988 79,610 238,127
Accrued loss on
uncompleted
contract............ 22,643 (22,643) -- -- --
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts........... (414,019) 158,702 (222,031) (185,809) --
Income taxes
payable............. -- -- -- -- 869,657
Customer deposit..... 95,900 (95,900) -- 415,000 --
--------- ----------- ---------- ----------- -----------
Net cash provided by
(used in) operating
activities......... (936,146) (892,431) (5,819,559) 594,916 8,227,694
--------- ----------- ---------- ----------- -----------
Cash flows from
investing activities:
Purchases of property
and equipment......... (64,743) (68,538) (695,491) (346,961) (2,115,179)
--------- ----------- ---------- ----------- -----------
Cash flows from
financing activities:
Issuance of preferred
stock, net............ -- -- 15,261,164 14,886,404 37,550,832
Borrowings under line
of credit from
shareholder........... 1,000,000 1,000,000 -- -- --
Note receivable........ -- -- -- -- (50,000)
Payments on lease
obligations........... -- (13,984) (46,450) (10,271) (239,340)
--------- ----------- ---------- ----------- -----------
Net cash provided by
financing
activities......... 1,000,000 986,016 15,214,714 14,876,133 37,261,492
--------- ----------- ---------- ----------- -----------
Effect of exchange rate
changes on cash........ (6,553) 4,194 (5,214) 40,138 (13,182)
--------- ----------- ---------- ----------- -----------
Net increase in cash and
cash equivalents....... (7,442) 29,241 8,694,450 15,164,226 43,360,825
Cash and cash
equivalents, beginning
of period.............. 280,837 273,395 302,636 302,636 8,997,086
--------- ----------- ---------- ----------- -----------
Cash and cash
equivalents, end of
period................. $ 273,395 $ 302,636 $8,997,086 $15,466,862 $52,357,911
========= =========== ========== =========== ===========
Supplemental disclosures
of cash flow
information--Cash paid
during the period for:
Income taxes........... $ -- $ 800 $ 38,800 $ 38,800 $ 844,000
Interest............... $ 107 $ 1,904 $ 4,318 $ 2,385 $ 120,411
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
AND FOR THE PERIOD ENDED JUNE 30, 2000 (UNAUDITED)
1. BUSINESS AND BASIS OF PRESENTATION
Multilink Technology Corporation and its subsidiaries (collectively, the
"Company") are in the business of designing, developing, and marketing high-
bandwidth, advanced integrated circuits, modules and higher-level assemblies
that enable next generation optical networking systems. The Company was
incorporated in 1994, and is headquartered in Somerset, New Jersey. The Company
has wholly-owned subsidiaries located in Bochum, Germany ("Multilink GmbH"),
and Vilnius, Lithuania ("UAB Multilink Technology").
On May 31, 2000, the Company's board of directors approved a ten-for-one
stock split. The Company's consolidated financial statements have been
retroactively adjusted to show the effect of this stock split for all periods
presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Condensed Consolidated Interim Financial Statements--The condensed
consolidated financial statements as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 are unaudited. In the opinion of management, the
unaudited financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting of normal
recurring adjustments as well as a charge related to the issuance of warrants
(see Note 16), necessary for a fair presentation of the financial position and
the results of operations as of such date and for such periods. Results of
interim periods are not necessarily indicative of the results to be expected
for the entire fiscal year. The interim tax provision is computed utilizing the
estimated effective annual income tax rate.
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of Multilink Technology Corporation and its
wholly owned subsidiaries, Multilink GmbH and UAB Multilink Technology.
Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to concentration of credit risk consists principally of cash, cash
equivalents and accounts receivable. The Company places its cash and cash
equivalents with high-credit, quality institutions and limits the amount of
credit exposure to any one institution. The Company's accounts receivable arise
from sales directly to customers. The Company performs ongoing credit
evaluations of its customers before granting uncollateralized credit and
provides allowances for estimated credit losses. To date the Company has not
experienced any material credit losses. The following is a summary of the
percentage of revenues from major customers:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
---------------- ------------
1997 1998 1999 1999 2000
---- ---- ---- ----- -----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Lucent....................................... * 10.2% 36.1% 50.0% 49.9%
Alcatel...................................... * * 19.7% 18.0% 16.3%
TyCom........................................ 19.3% 38.9% 18.5% * *
Cisco........................................ 20.2% * * * 18.2%
NGK-Locke.................................... 31.5% * * * *
JDS Uniphase................................. * 11.6% * * *
</TABLE>
---------------------
* Customer's sales represented less than 10% of total sales in the respective
period.
F-7
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31,
--------------- June 30,
1998 1999 2000
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Customer gross accounts receivable as a
percent of total gross accounts receivable:
Lucent.................................... 20% 25% 11%
Alcatel................................... -- 29% 21%
TyCom..................................... 25% 23% 13%
Cisco..................................... -- -- 39%
</TABLE>
Foreign Currency Translation--Assets and liabilities of Multilink GmbH and
UAB Multilink Technology are translated into U.S. dollars using the exchange
rates in effect at the balance sheet date. Results of operations are translated
using the average exchange rates prevailing throughout the period. The
aggregate effect of translating the financial statements of Multilink GmbH and
UAB Multilink Technology into U.S. dollars is included as a separate component
of accumulated other comprehensive income (loss) in the accompanying statement
of shareholders' equity (deficit).
Cash Equivalents--The Company classifies all highly liquid investments
purchased with maturities of three months or less as cash equivalents.
Inventories--Inventories are stated at the lower of cost (first-in, first-
out) or market.
Property and Equipment--Property and equipment are recorded at cost.
Depreciation and amortization are provided for using the straight-line method
over the estimated useful lives of the respective assets.
Impairment of Long-Lived Assets--The Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may no longer be recoverable. If the estimated
future cash flows (undiscounted and without interest charges) from the use of
an asset are less than the carrying value, a write-down would be recorded to
reduce the related asset to its estimated fair value. For purposes of
estimating future cash flows from possibly impaired assets, the Company groups
assets at the lowest level for which there are identifiable cash flows that are
largely independent of the cash flows of other groups of assets. Based upon the
above described evaluation, the Company has concluded that its long-lived
assets are not impaired.
F-8
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited Pro Forma Net Loss Per Share and Unaudited Pro Forma Shareholders'
Equity--Pro forma net loss per share has been computed to give effect to the
fact that, if the offering contemplated by this prospectus is consummated it
would result in the conversion of all of the Series A and Series B redeemable
convertible preferred stock outstanding at June 30, 2000 (using the if-
converted method) into an aggregate 27,116,400 shares of Class A common stock
(see Notes 7 and 16).
Unaudited pro forma shareholders' equity at June 30, 2000, as adjusted for
the conversion of redeemable convertible preferred stock into Class A common
stock, is reflected on the consolidated balance sheet. Pro forma basic and
diluted net loss per share is as follows:
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
1999 2000
------------ --------------
<S> <C> <C>
Net loss attributable to common shareholders.... $ (23,008) $(11,104,826)
Accretion of redeemable preferred stock......... 47,548 47,548
---------- ------------
Adjusted net (loss) income attributable to
common shareholders............................ $ 24,540 $(11,057,278)
========== ============
Shares used in computing basic net loss per
share.......................................... 30,000,000 30,000,000
Adjusted to reflect the effect of the assumed
conversion of all redeemable convertible
preferred stock from the date of issuance...... 9,519,532 21,334,807
---------- ------------
Weighted average shares used in computing pro
forma basic net loss per share................. 39,519,532 51,334,807
========== ============
Pro forma basic net loss per share attributable
to common shareholders......................... $ 0.00 $ (0.22)
========== ============
</TABLE>
Revenue Recognition--Product revenue is recognized upon shipment. The
Company accrues related product return reserves at the time of sale.
Development revenues are recognized using the percentage-of-completion method,
measured by the percentage of costs incurred to date to estimated total costs
for each contract. Contract costs include all direct material and labor costs
and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs, and depreciation and amortization. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined.
Warranty Costs--Substantially all of the Company's products are sold with a
one-year warranty. Development contract costs include a provision for estimated
product warranties to be provided by the Company upon contract completion and
product shipment. Estimated warranty costs for all other products are provided
for upon shipment to customers.
Income Taxes--Deferred income tax assets and liabilities are computed
annually based on enacted tax laws and rates for temporary differences between
the financial accounting and income tax bases of assets and liabilities. A
valuation allowance is established, when necessary, to reduce deferred income
tax assets to the amount that is more likely than not to be realized.
Equity-Based Compensation--The Company accounts for stock-based employee
compensation arrangements in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." Under APB Opinion No. 25, compensation expense is based on the
difference, if any, on the date of grant, between the fair value of the
Company's stock and the exercise price. The Company accounts for stock options
issued to
F-9
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
nonemployees in accordance with the provisions of SFAS No. 123, and Emerging
Issues Task Force Consensus on 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."
Net Income (Loss) Per Share of Common Stock--Basic net income or loss per
share excludes dilution for potentially dilutive securities and is computed by
dividing net income or loss attributable to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted net
income or loss per share reflects the potential dilution that could occur if
securities or other instruments to issue common stock were exercised or
converted into common stock. Potentially dilutive securities are excluded from
the computation of diluted net income or loss per share when their inclusion
would be antidilutive. A reconciliation between basic and diluted weighted
average shares outstanding is as follows:
<TABLE>
<CAPTION>
December 31, June 30,
--------------------------------- ---------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average shares
outstanding, basic..... 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
Dilutive shares issuable
in connection with
stock plans............ -- 843,226 8,483,024 5,799,218 21,862,836
Dilutive shares issuable
in connection with
warrants granted....... -- -- 165,796 12,032 641,086
Conversion of preferred
stock to common stock
....................... -- -- 9,519,532 1,786,877 21,334,807
---------- ---------- ---------- ---------- ----------
Weighted average shares
outstanding, diluted... 30,000,000 30,843,226* 48,168,352* 37,598,127 73,838,729*
========== ========== ========== ========== ==========
</TABLE>
* Since there was a loss attributable to common shareholders in these
periods, 30,000,000 shares was used in calculating diluted loss per share, as
inclusion of the incremental shares shown in this calculation would be
antidilutive.
Fair Value of Financial Instruments--SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure about the fair value of
financial instruments whether or not such instruments are recognized in the
balance sheet. Due to the short-term nature of the Company's financial
instruments, other than debt, fair values are not materially different from
their carrying values. Based on the borrowing rates available to the Company
for similar variable rate debt, the carrying value of capital lease obligations
approximates fair value. The fair value of the line of credit from shareholder
cannot be determined due to its related-party nature.
Segments--The Company has adopted SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," which requires companies to report
selected information about operating segments, as well as enterprise-wide
disclosures about products and services, geographic areas and major customers.
Operating segments are determined based on the way management organizes its
business for making operating decisions and assessing performance. The Company
has determined that it conducts its operations in one business segment, the
development and marketing of products that enable next generation optical
networking systems.
Effects of Recent Accounting Pronouncements--In June 1998, June 1999 and
June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
F-10
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting
for Derivative Instruments and Hedging Activities--An Amendment of SFAS No.
133." SFAS No. 133, as amended, requires the recognition of all derivatives as
either assets or liabilities in the balance sheet and the measurement of those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the planned use of the derivative and the resulting
designation. The Company is required to implement SFAS No. 133, as amended, in
the first quarter of 2001. The Company has not determined the effects, if any,
adoption of SFAS No. 133, as amended, will have on its consolidated financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, ("SAB 101") "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
has reviewed these criteria and believes its policies for revenue recognition
to be in accordance with SAB 101.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation--an interpretation of APB Opinion No. 25." FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to
the terms of the previously fixed stock options or awards; and the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000. The
Company does not expect the application of FIN 44 to have a material impact on
the Company's financial position or results of operations.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------- June 30,
1998 1999 2000
--------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Finished goods.............................. $ -- $ 450,205 $1,347,433
Work-in-progress............................ -- 1,900,866 1,408,581
Raw materials............................... 368,597 2,651,209 3,970,862
--------- ---------- ----------
Total..................................... $ 368,597 $5,002,280 $6,726,876
========= ========== ==========
</TABLE>
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of costs and estimated earnings on uncompleted contracts as of
December 31, 1998 is as follows:
<TABLE>
<S> <C>
Costs incurred on uncompleted contracts........................... $ 538,302
Estimated earnings on uncompleted contracts....................... 379,055
---------
Subtotal.......................................................... 917,357
Less billings to date............................................. 985,000
---------
Total........................................................... $ (67,643)
=========
</TABLE>
F-11
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These amounts are reflected in the accompanying balance sheet as of December
31, 1998 under the following captions:
<TABLE>
<S> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts......................................... $ 154,388
Billings in excess of costs and estimated earnings on
uncompleted contracts......................................... (222,031)
---------
Total........................................................ $ (67,643)
=========
</TABLE>
There were no uncompleted contracts at December 31, 1999, or June 30, 2000.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated December 31,
Useful Life -------------------- June 30,
(Years) 1998 1999 2000
--------------------- -------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Machinery and
equipment.............. 5 $320,563 $2,920,192 $4,099,951
Furniture and fixtures.. 3 20,424 58,996 473,059
Leasehold improvements shorter of asset life
....................... or lease term 6,227 107,451 503,716
-------- ---------- ----------
Total................. 347,214 3,086,639 5,076,726
Accumulated depreciation
and amortization....... (126,134) (418,762) (974,431)
-------- ---------- ----------
Property and equipment,
net.................... $221,080 $2,667,877 $4,102,295
======== ========== ==========
</TABLE>
Property leased under capital leases (which is included in property and
equipment in the accompanying balance sheets) consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------- June 30,
1998 1999 2000
-------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Machinery and equipment.................. $ 58,011 $2,091,805 $2,091,805
Accumulated amortization................. (8,957) (177,498) (177,498)
-------- ---------- ----------
Total.................................. $ 49,054 $1,914,307 $1,914,307
======== ========== ==========
</TABLE>
6. LINE OF CREDIT FROM SHAREHOLDER
The Company had a line of credit facility from a shareholder that provided
for borrowings up to $2,000,000. The credit facility was provided to the
Company pursuant to a Share Purchase Agreement executed in 1997 (see Note 7).
In connection with the Share Purchase Agreement, the Company's then existing
shareholders granted to the party providing the credit facility a share
purchase option, which expired on October 31, 1998. The fair value of the
option was estimated at $119,000 and was reflected as a discount on borrowings
under the line of credit agreement and an increase in additional paid-in
capital. The discount was amortized to interest expense on a straight-line
basis over the 16-month option period (through October 31, 1998). Outstanding
borrowings under the credit facility accrued interest at 6.0%, compounded
semiannually, through expiration of the share purchase option on October 31,
1998, upon which date the interest rate converted to a certain bank's prime
rate plus 2.0% (10.5 percent). Outstanding unpaid interest (which amounted
F-12
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to $161,398 and $387,962 as of December 31, 1998 and 1999, respectively) is due
on October 31, 2002. As of December 31, 1999, outstanding borrowings under the
credit facility amounted to $2,000,000, excluding accrued interest are due on
October 31, 2002. Borrowings under the credit facility are not guaranteed or
collateralized.
7. CAPITALIZATION
Capital Reorganization--Effective February 26, 1999, the Board of Directors
amended the Company's articles of incorporation to reorganize its capital
structure by authorizing three classes of stock designated, respectively, as
"Class A common stock," "Class B common stock" and "preferred stock." Under the
amended articles, the total number of shares of stock the Company is authorized
to issue is 310 million shares. 200 million shares are Class A common stock,
par value $.0001 per share; 100 million shares are Class B common stock, par
value $.0001 per share; and ten million shares are preferred stock, par value
$.0001 per share.
Upon the adoption of the restated articles of incorporation, each
outstanding share of common stock (15,000 shares, par value $1 per share) was
converted into 2,000 shares of Class B common stock. The accompanying
consolidated financial statements have been adjusted to give effect for the
capital reorganization and conversion for all periods presented.
Each share of Class A common stock entitles the holder to one vote on all
matters submitted to a vote of the shareholders of the corporation. Each share
of Class B common stock entitles the holder to 10 votes on all matters
submitted to a vote of the shareholders of the corporation. Subject to the
preferences that may be applicable to preferred stock outstanding at the time,
upon liquidation, dissolution, or winding up of the corporation, all of the
remaining assets of the Company to be distributed will be distributed ratably
to the holders of Class A and B common stock in proportion to the amount of
stock owned by each holder.
Redeemable Convertible Preferred Stock--In June 1999, the Company issued
1,711,640 shares of Series A redeemable convertible preferred stock to an
institutional investor for $9 per share, or proceeds of $14,930,615, net of
$474,145 in offering costs. Significant terms of the Series A redeemable
convertible preferred stock are as follows:
. At the option of the holder, each share of Series A redeemable
convertible preferred stock is convertible at any time into ten shares
of Class A common stock, subject to certain dilutive issuances. As of
December 31, 1999, no such dilutive issuances had occurred. Shares
automatically convert into Class A common stock upon the earlier of (a)
completion of an initial public offering of the Company's common stock
yielding gross proceeds to the Company in excess of $15,000,000 and at a
price per share not less than $1.50 (as adjusted for any stock
dividends, splits or similar capital modifications), and (b) the
election by holders of at least a majority of the then outstanding
shares of Series A redeemable convertible preferred stock.
. Series A preferred shareholders are entitled to annual non-cumulative
cash dividends when and if declared by the Company's Board of Directors.
Dividends shall be paid to the holders of the Series A preferred stock
prior to any cash dividends being paid to the holders of common stock.
. In the event of any liquidation of the Company, the holders of Series A
preferred stock have a liquidation preference over common stock of $9
per share, which is presently equal to the aggregate amount of
$15,404,760, plus declared and unpaid dividends, if any.
. Holders of the Series A preferred stock are entitled to the number of
votes equal to the number of Class A common stock into which each share
is convertible.
F-13
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. The Series A preferred stock is mandatorily redeemable upon the election
of at least a majority of the holders of the then outstanding shares of
Series A preferred stock beginning in March 2005. The aggregate
redemption amount of $15,404,760, or $9 per share, plus declared but
unpaid dividends, is payable in cash by the Company in three equal
annual installments. Redeemable preferred stock is stated at the
redemption amount and issuance costs are netted against the proceeds and
accreted as a charge against additional paid-in capital over the
expected life of the redeemable preferred stock.
Share Purchase Agreement--On June 17, 1997, the Company, the Company's
shareholders, and a third party executed a Share Purchase Agreement whereby the
third party purchased 5,700,000 shares of the Company's Class A common stock
from the shareholders for $1,000,000. In addition, the shareholders granted the
third party an exclusive option to purchase all remaining outstanding capital
stock of the Company for $5,000,000. The unexercised option expired on October
31, 1998. In connection with the Share Purchase Agreement, the third party
extended a $2,000,000 line-of-credit facility to the Company (see Note 6). The
Share Purchase Agreement required the Company to execute a Supply Agreement
with the third party (see Note 9).
8. STOCK OPTIONS AND WARRANTS
Stock Options--As of December 31, 1999, the Company has two stock option
plans (the "1998 Plan" and the "1999 Plan") under which employees, consultants,
and directors may be granted options to purchase common stock up to an
aggregate of 37,000,000 shares. Options vest over periods of four or five years
and expire 10 years from the grant date. When the exercise price of employee
stock options issued under the Plan equals the fair value of the underlying
stock, no compensation expense is recorded. Compensation expense is recognized
for the fair value of options granted to non-employees and to the extent the
fair value of the underlying stock exceeds the exercise price of employee stock
options. During 1998 and 1999, the Company issued employee common stock options
with exercise prices less than the fair value of the underlying common stock.
The weighted-average fair value of the common stock, based upon equity security
transactions entered into by the Company with certain third parties, was $0.20
per share in 1998 and $0.667 per share in 1999. Accordingly, the Company
recorded $499,500 and $6,032,701 of the intrinsic value of such options as
stock compensation in 1998 and 1999, respectively. Deferred stock compensation
of $343,870 and $822,582 was amortized to expense during the years ended 1998
and 1999, respectively. At December 31, 1999, $5,365,749 of stock compensation
is deferred as a component of shareholders' deficit and will be amortized to
expense through 2003 as earned by the related employees.
F-14
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the six months ended June 30, 2000 (unaudited), options to purchase
5,127,000 shares of Class A common stock were granted. The weighted-average
grant date fair value of the 5,127,000 options granted was $1.63 per share. All
of these options granted during the six months ended June 30, 2000 had exercise
prices below fair value of the Company's stock at the time of issuance.
A summary of the option transactions under the Plan follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise Range of
Shares Price Exercise Prices
---------- --------- ---------------
<S> <C> <C> <C>
Granted during 1998.................. 2,700,000 $0.015 $0.008--$0.025
----------
Outstanding, December 31, 1998....... 2,700,000 $0.015 $0.008--$0.025
Granted.............................. 22,011,250 $0.393 $0.20--$0.707
Cancelled............................ (2,000,000) $0.200 $0.20
----------
Outstanding, December 31, 1999....... 22,711,250 $0.365 $0.008--$0.707
Granted (unaudited).................. 5,127,000 $1.259 $0.71--$1.35
Cancelled (unaudited)................ (155,000) $0.419 $0.30--$0.71
----------
Outstanding, June 30, 2000
(unaudited)......................... 27,683,250 $0.527 $0.008--$1.35
----------
</TABLE>
As of June 30, 2000 there were 9,316,750 shares available for future grant
under the plan.
Additional information regarding options outstanding as of December 31, 1999
is as follows:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
-------------------------------- -------------------------------
Weighted- Weighted-
Average Average
Weighted- Remaining Weighted- Remaining
Range of Number Average Contractual Number Average Contractual
Exercise of Exercise Life of Exercise Life
Prices Shares Price (Years) Shares Price (Years)
-------------- ---------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
$0.008--$0.025 2,700,000 $0.016 8.7 2,097,000 $0.013 8.6
$0.20--$0.30 8,711,250 $0.208 9.1 --
$0.55--$0.707 11,300,000 $0.569 9.8 30,000 $0.550 9.7
---------- ---------
22,711,250 $0.365 9.4 2,127,000 $0.021 8.6
========== =========
</TABLE>
As permitted under SFAS No. 123, the Company has elected to follow APB
Opinion No. 25 and related interpretations in accounting for stock-based awards
to employees. Pro-forma information regarding net income is required by SFAS
No. 123. This information is required to be determined as if the Company had
accounted for its stock-based awards to employees under the fair value method
of that statement. The fair value of options granted during the years ended
December 31, 1998 and 1999, as reported below has been estimated at the date of
grant using the minimum value option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1998 1999
------ ------
<S> <C> <C>
Risk-free interest rate.................................... 5.9% 6.8%
Dividend yield............................................. -- --
Expected life (years)...................................... 7 7
</TABLE>
The weighted-average estimated fair value of employee stock options granted
during the years ended December 31, 1998 and 1999 was $0.191 and $0.417 per
share, respectively.
F-15
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period in 1998 and
1999. There were no stock options outstanding in 1997. The Company's pro-forma
information is as follows:
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1998 1999
----------- ---------
<S> <C> <C>
Net loss attributable to common shareholders:
As reported...................................... $(1,487,638) $ (23,008)
Pro forma........................................ $(1,493,665) $(574,035)
Net loss per share attributable to common
shareholders:
As reported: Basic and diluted................. $ (0.05) $ 0.00
Pro forma: Basic and diluted................... $ (0.05) $ (0.02)
</TABLE>
The effects on pro-forma disclosures of applying SFAS No. 123 are not likely
to be representative of the effects on pro-forma disclosures of future years.
Warrants--In June 1999, the Company granted 516,670 Class A common stock
purchase warrants to certain third parties in exchange for their services
rendered in connection with the Series A preferred stock financing (see Note
7). The warrants were fully vested and exercisable on the grant date for $0.30
per option share into one share of Class A common stock and expire five years
from the grant date (June 2004). The fair value of the warrants was estimated
at $330,549 using the Black-Scholes option-pricing model and was reflected as a
reduction in the proceeds from issuance of the Series A preferred stock and an
increase in additional paid-in capital.
In September 1999, the Company granted 163,640 Class A common stock purchase
warrants to secure a capital equipment lease with a bank (see Note 9). The
warrants were fully vested and exercisable on the grant date for $0.55 per
option share into one share of Class A common stock and expire five years from
the grant date (September 2004). The fair value of this warrant was estimated
at $130,636 using the Black-Scholes option-pricing model and was reflected as
an increase in deferred financing fees, which are included in deposits and
other assets on the accompanying balance sheet, and an increase in additional
paid-in capital. The deferred financing fees are being amortized to other
expense on a straight-line basis over the three year term of the lease.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases--The Company leases its office facilities and certain
equipment under operating lease agreements expiring at various dates through
2004 and thereafter.
<TABLE>
<S> <C>
2000............................................................. $ 1,566,182
2001............................................................. 1,191,638
2002............................................................. 731,309
2003............................................................. 547,524
2004............................................................. 568,101
Thereafter....................................................... 712,082
-----------
$ 5,316,836
===========
</TABLE>
F-16
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental expense under operating leases was $125,316, $264,549 and $509,451
for the years ended December 31, 1997, 1998 and 1999.
Capital Leases--The Company leases certain equipment under capital leases.
The following is a schedule of future minimum lease payments under the leases
together with the present value of the net minimum lease payments as of
December 31, 1999 and the fiscal years thereafter:
<TABLE>
<S> <C>
2000............................................................. $ 691,658
2001............................................................. 787,227
2002............................................................. 777,582
2003............................................................. 100,258
----------
Total minimum lease payments..................................... 2,356,725
Less amount representing interest................................ 325,353
----------
Present value of minimum lease payments.......................... 2,031,372
Less current portion of capital lease obligation................. 493,804
----------
Long-term portion of capital lease obligation.................... $1,537,568
==========
</TABLE>
Supply Agreement--The Company purchases silicon wafer material and
engineering services from a shareholder under the terms of a Supply Agreement,
which was executed during 1997 (and amended in 1999) in connection with a Share
Purchase Agreement with the shareholder (see Note 7). Under the terms of the
Supply Agreement, as amended, which expires in December 2002, the Company is
obligated to purchase certain minimum quantities of wafer material at various
fixed prices. The minimum quantity purchase requirements in 2000, 2001, and
2002 are equal to the greater of the 1998 minimum purchase quantity
($1,200,000) or the actual quantity purchased in the immediately preceding
year. The Company has met all such commitments as of December 31, 1999 and
anticipates exceeding the minimum purchase quantities under the Supply
Agreement. The Company purchased approximately $188,000, $1,059,000 and
$4,438,000 of materials and engineering services from the shareholder during
the years ended December 31, 1997, 1998 and 1999, respectively.
10. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Current:
State..................................... $ 4,554 $ 800 $ 1,553
Federal................................... 2,447 -- 17,665
--------- --------- ---------
Total current........................... 7,001 800 19,218
--------- --------- ---------
Deferred benefit............................ (316,147) (575,872) (350,661)
Valuation allowance......................... 310,565 575,872 350,661
--------- --------- ---------
Total....................................... $ 1,419 $ 800 $ 19,218
========= ========= =========
</TABLE>
F-17
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The effective income tax rate differs from the federal statutory income tax
rate applied to loss before income taxes due to the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Federal statutory income
tax rate................. (35.0)% (35.0)% 35.0 %
Meals and entertainment... 0.1 0.1 17.2
Foreign income............ -- (0.8) (26.1)
Research and development
tax credits.............. -- (4.0) (342.8)
Valuation allowance....... 39.7 42.7 363.7
Other..................... (4.6) (2.9) (3.1)
------- ------- --------
Total................... 0.2 % 0.1 % 43.9 %
======= ======= ========
</TABLE>
The components of net deferred income taxes consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
--------- -----------
<S> <C> <C>
Current deferred income tax assets:
Accounts receivable allowances................... $ 4,893 $ 21,608
Accrued expenses................................. 50,006 77,618
Inventory reserves............................... 31,393 55,925
Costs and expenses capitalizable as inventory for
tax purposes.................................... 315 138,348
Valuation allowance.............................. (86,607) (293,499)
--------- -----------
Total current deferred income tax assets....... -- --
--------- -----------
Non-current deferred income tax assets:
Net operating loss carryforwards................. 630,728 191,563
Tax credit carryforwards......................... -- 446,598
Depreciation..................................... 94,169 30,891
Deferred stock compensation...................... 148,896 348,510
Valuation allowance.............................. (873,793) (1,017,562)
--------- -----------
Total non-current deferred income tax assets... -- --
--------- -----------
Net deferred income tax assets..................... $ -- $ --
========= ===========
</TABLE>
At December 31, 1999, the Company has an NOL carryforward for federal income
tax purposes of approximately $547,000 which expires in varying amounts
beginning in 2012 through 2019.
11. EMPLOYEE BENEFIT PLAN
Effective September 1, 1998, the Company established a 401(k) defined
contribution plan, in which all of its U.S. employees may participate. Plan
participants contribute up to 15% of their eligible compensation to the plan,
subject to the statutorily prescribed annual limit. The Company intends the
plan to qualify under Section 401(k) of the Internal Revenue Code so that
contributions by employees to the plan, and income earned, if any, on plan
contributions, are not taxable to employees until withdrawn from the plan. From
the plan's inception through December 31, 1999, the Company made matching
contributions on behalf of the plan participants at the rate of 25% of
participant contributions up to 6% of compensation. During 1998 and 1999, the
Company made matching contributions of $4,306 and $21,632, respectively.
F-18
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
During 1997, the Company issued a common stock purchase option to a
shareholder in connection with obtaining a line of credit from a shareholder
(see Note 6).
During 1998 and 1999, the Company financed the acquisition of equipment
under capital leases in the amounts of $58,011 and $2,033,794, respectively.
During 1999, the Company granted Class A common stock purchase warrants to
certain third parties in exchange for their services rendered in connection
with the Series A preferred stock financing. The fair value of the warrants was
estimated at $330,549 and was reflected as a reduction in the proceeds from
issuance of the Series A preferred stock and a credit to additional paid-in
capital (see Note 8).
During 1999, the Company granted Class A common stock purchase warrants to
secure equipment financing with a bank. The fair value of the warrants was
estimated at $130,636 and was reflected as a financing charge on the
accompanying consolidated statement of operations in 1999 and a credit to
additional paid-in capital (see Note 8).
13. RELATED PARTY TRANSACTIONS
The Company purchases certain products from certain of its equity holders.
For the years ended December 31, 1998 and 1999 and for the six months ended
June 30, 1999 and 2000 purchases from such parties have been approximately
$1,059,000, $4,438,000, $1,289,000 and $4,135,000, respectively. At December
31, 1998 and 1999 and June 30, 2000 accounts payable to these parties were
approximately $499,000, $714,000 and $3,018,000, respectively.
14. GEOGRAPHIC INFORMATION
Revenues to geographic locations are as follows:
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1997 1998 1999 1999 2000
---------- ---------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
North America........... $ 903,648 $3,350,841 $17,154,130 $6,616,756 $21,543,932
Europe.................. 637,489 486,840 3,179,033 280,537 7,021,876
Asia.................... -- 13,883 61,839 9,100 101,321
---------- ---------- ----------- ---------- -----------
Total................. $1,541,137 $3,851,564 $20,395,002 $6,906,393 $28,667,129
========== ========== =========== ========== ===========
</TABLE>
Substantially all identifiable assets are located in the North America.
F-19
<PAGE>
MULTILINK TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. AMORTIZATION OF DEFERRED STOCK COMPENSATION
The composition of the amortization of deferred stock compensation is as
follows:
<TABLE>
<CAPTION>
Year Ended December Six Months
31, Ended June 30,
---------------------- ------------------
1997 1998 1999 1999 2000
---- -------- -------- ------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cost of revenues.................. $ -- $ -- $ 19,031 $ -- $ 159,281
Research and development.......... -- 343,870 216,404 59,093 792,588
Sales and marketing............... -- -- 31,071 2,803 88,702
General and administrative........ -- -- 556,076 -- 1,197,731
---- -------- -------- ------- ----------
Total........................... $ -- $343,870 $822,582 $61,896 $2,238,302
==== ======== ======== ======= ==========
</TABLE>
16. SUBSEQUENT EQUITY TRANSACTIONS (UNAUDITED)
Preferred Stock Financing--In May 2000, the Company completed a 1,000,000
share, Series B convertible preferred stock offering for $40 per share, or
gross proceeds of $40,000,000. The Series B preferred stock have rights and
privileges substantially similar to the Series A preferred stock (see Note 7).
Series B convertible preferred stock will automatically convert into ten shares
of common stock upon the closing of a qualified initial public offering, as
defined. In conjunction with this offering, the Company issued 250,000 warrants
exercisable at $40 per share to Series A preferred shareholders. Such grant was
made in accordance with the original terms of the preferred stock investor's
rights agreement and the value of the warrants at the date of grant
($6,375,000), as determined by an independent appraisal, has been treated as a
dividend.
Semiconductor Development Agreement and Stock Warrants--In May 2000, the
Company executed a Semiconductor Development Agreement (the "Agreement") with a
third party, which provides the Company with access to one or more of the third
party's semiconductor fabrication processes solely for the development of
product prototypes. The Agreement expires in June 2005. Upon the execution of
the Agreement, the Company granted the third party a fully exercisable warrant
to purchase (a) 250,000 shares of Series B preferred stock for $40 per share
from the grant date through the date of the closing of an initial public
offering of the Company's common stock yielding not less than $10 million, net
of underwriting discounts and commissions (a "Qualified Public Offering"), or
(b) 2,500,000 shares of Class A common stock, from the date, if any, of a
Qualified Public Offering, through May 2005 for $4 per share. Neither the
Agreement nor the terms of the warrant requires the third party to meet any
performance requirements or prohibit the third party from participating in
other similar programs with other parties. As such, the warrant is not subject
to any forfeiture for any reason. The Company has measured the value of the
warrant at the date of grant at $6,375,000, by utilizing an independent
appraisal.
The Company has expensed the value of this fully exercisable, nonforfeitable
warrant in the accompanying statement of operations for the six months ended
June 30, 2000, since there is no third party performance required with respect
to the warrant and the activities underlying the Agreement relate to research
and development efforts for which the Company cannot determine the benefit, if
any, which may result.
Stock Options Granted to Employees--In addition, the Company has granted
5,695,200 stock options to employees during the quarter ended September 30,
2000. The Company will record deferred stock compensation expense for the
difference between the exercise price and the fair value of the underlying
common stock at the date of grant. This amount will be amortized over the
vesting period of the related stock options.
******
F-20
<PAGE>
[MULTILINK TECHNOLOGY CORPORATION 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 the
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the securities being registered. All amounts are estimates
except the Securities and Exchange Commission registration fee, the NASD filing
fee and The Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................. $39,600
NASD filing fee..................................................... 15,500
Nasdaq National Market filing fee................................... *
Printing costs...................................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Transfer Agent and Registrar Fees................................... *
Miscellaneous ...................................................... *
-------
Total............................................................. $ *
=======
</TABLE>
---------------------
* To be filed by amendment
Item 14. Indemnification of Directors and Officers.
Our articles of incorporation limit the personal liability of our directors
for monetary damages to the fullest extent permitted by the California General
Corporation Law. Under the California General Corporation Law, a director's
liability to a company or its shareholders may not be limited with respect to
the following items: (1) acts or omissions that involve intentional misconduct
or a knowing and culpable violation of law, (2) acts or omissions that a
director believes to be contrary to the best interests of the company or its
shareholders or that involve the absence of good faith on the part of the
director, (3) any transaction from which a director derived an improper
personal benefit, (4) acts or omissions that show a reckless disregard for the
director's duty to the company or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of a serious injury to the company or
its shareholders, (5) acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the company
or its shareholders, (6) contracts or transactions between the company and a
director within the scope of Section 310 of the California General Corporation
Law or (7) improper dividends, loans and guarantees under Section 316 of the
California General Corporation Law. The limitation of liability does not affect
the availability of injunctions and other equitable remedies available to our
shareholders for any violation by a director of the director's fiduciary duty
to us or our shareholders.
Our articles of incorporation also include an authorization for Multilink to
indemnify its "agents," as defined in Section 317 of the California General
Corporation Law, through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this provision, our bylaws provide
for indemnification of our directors, officers and employees. In addition, we
may, at our discretion, provide indemnification to persons whom we are not
obligated to indemnify.
Our bylaws also allow us to enter into indemnity agreements with individual
directors, officers, employees and other agents. We have entered into these
indemnity agreements with all of our directors and executive officers. These
agreements provide the maximum indemnification permitted by law. These
agreements, together with our bylaws and articles of incorporation, may require
us, among other things, to (1) indemnify our directors or executive officers,
other than for liability resulting from willful misconduct of a culpable
nature, (2) advance expenses to them as they are incurred, provided that they
undertake to repay the amount advanced
II-1
<PAGE>
if it is ultimately determined by a court that they are not entitled to
indemnification, and (3) obtain directors' and officers' insurance if available
on reasonable terms. Section 317 of the California General Corporation Law and
our bylaws make provision for the indemnification of officers, directors and
other corporate agents in terms sufficiently broad to indemnify such persons,
under certain circumstances, for liabilities, including reimbursement of
expenses incurred, arising under the Securities Act of 1933, as amended.
With the approval of our board of directors, we intend to obtain directors'
and officers' liability insurance prior to the effectiveness of this offering.
There is no pending litigation or proceeding involving any of our directors,
officers, employees or agents in which indemnification will be required or
permitted. Moreover, we are not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification. We believe
that the foregoing indemnification provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers.
The Underwriting Agreement (the form of which is filed as Exhibit 1.1
hereto) provides for indemnification by our underwriters and by for certain
liabilities arising under the Securities Act or otherwise.
Item 15. Recent Sales of Unregistered Securities.
Each share of our Class B common stock is convertible into one share of
Class A common stock at any time at the option of the holder, and will
automatically convert upon transfer, except to certain permitted transferees as
described in our articles of incorporation.
Following is a description of all securities that the registrant has issued
within the past three years without registering the securities under the
Securities Act (adjusted for a 200-for-1 stock split in March 1999 and a
10-for-1 stock split in June 2000):
. In June 1999, we sold an aggregate of 1,670,000 shares of Series A
convertible preferred stock (which convert into 16,700,000 shares of
Class A common stock) to Brentwood Venture Capital, and certain of its
affiliates, for aggregate cash consideration of $15,030,000 (or $.90 per
share of Class A common stock).
. In June 1999, we issued a warrant to purchase 166,670 shares of Class A
common stock at an exercise price of $.30 per share to a private investor
as a fee in connection with the Series A preferred stock sale.
. In June 1999, we issued a warrant to purchase 350,000 shares of Class A
common stock at an exercise price of $.30 to our law firm.
. In September 1999, we sold an aggregate of 41,640 shares of Series A
convertible preferred stock (which convert into 416,400 shares of Class A
common stock) to certain private investors for aggregate cash
consideration of $374,760 (or $.90 per share of Class A common stock).
. In October 1999, we issued a warrant to Imperial Bank to purchase 163,640
shares of Class A common stock at an exercise price of $.55 per share.
. In February 2000, we issued a warrant to a partner in our law firm to
purchase 100,000 shares of Class A common stock at an exercise price of
$1.35 per share.
. Between March 2000 and May 2000, we sold an aggregate of 1,000,000 shares
of Series B convertible preferred stock (which convert into 10,000,000
shares of Class A common stock) to certain private investors for
aggregate cash consideration of $40,000,000 (or $4.00 per share of
Class A common stock).
. In May 2000, we issued a warrant to purchase 250,000 shares of Series B
convertible preferred stock (which convert into 2,500,000 shares of Class
A common stock) to a strategic partner at an exercise price of $40 per
share (or $4.00 per share of Class A common stock) in connection with a
technology development arrangement.
II-2
<PAGE>
. In May 2000, we issued warrants to purchase an aggregate of 250,000
shares of Series B convertible preferred stock (which convert into
2,500,000 shares of Class A common stock) to our Series A preferred
shareholders at an exercise price of $40 per share (or $4.00 per share of
Class A common stock) pursuant to the terms of an investors' rights
agreement.
. In August 2000, we issued warrants to purchase an aggregate of 33,406
shares of Class A common stock to 3 vendors at an exercise price of $4.00
per share.
. From July 1998 through September 30, 2000, we granted stock options to
purchase an aggregate of 33,378,450 shares of Class A common stock to
employees and consultants with aggregate exercise prices ranging from
$0.08 to $3.90 per share pursuant to our stock option plans. As of
September 30, 2000, no shares of Class A common stock have been issued
upon exercise of options.
No underwriters were used in connection with these sales and issuances
above. 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 us 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.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of the Registrant, as
amended
3.2 Amended and Restated Bylaws of the Registrant
4.1* Specimen Class A Common Stock certificate
5.1* Opinion of Allen Matkins Leck Gamble & Mallory LLP as to the legality
of the shares being registered
9.1 Amended and Restated Voting Trust Agreement dated March 8, 1999
10.1 Form of Indemnification Agreement entered into by the Registrant and
each of its directors and officers
10.2 1998 Stock Option Plan, as amended
10.3 1999 Stock Option Plan, as amended
10.4 2000 Stock Incentive Plan
10.5* 2000 Employee Stock Purchase Plan
10.6 Amended and Restated Investors Rights Agreement, dated March 31, 2000,
among the Registrant and the shareholders named therein, as amended
10.7 Lease dated March 10, 1999, between the Registrant and Spieker
Properties, L.P., as amended
10.8 Facilities Use Agreement dated April 5, 1999, between the Registrant
and TRW, Inc.
10.9 Sublease Agreement dated August 1999, between the Registrant and IMS
Health Incorporated
10.10 Lease Agreement dated November 18, 1999, between the Registrant and
First Industrial, L.P.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.11 Master Lease Agreement dated September 14, 1999, between the Registrant
and Imperial Bank Equipment Leasing, a Division of Imperial Bank
10.12* Supply Agreement dated June 29, 1997, between the Registrant and TRW,
Inc.
10.13* Amendment to Supply Agreement dated January 13, 1999, between the
Registrant and TRW, Inc.
10.14* Amendment to Supply Agreement dated June 30, 1999, between the
Registrant and TRW, Inc.
10.15* Semiconductor Development Agreement dated May 18, 2000, between the
Registrant and International Business Machines Corporation
10.16* Joint Development Agreement effective as of May 18, 2000, between the
Registrant and International Business Machines
10.17* Development Agreement dated September 1, 1999, by and between the
Registrant and Tyco Submarine Systems Ltd.
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP, Independent Accountants
23.2* Consent of Allen Matkins Leck Gamble & Mallory LLP (contained in the
opinion filed as Exhibit 5.1 hereto)
24.1 Power of Attorney (See Page II-6)
27.1 Financial Data Schedule
</TABLE>
---------------------
* To be filed by amendment
(b) Financial Statement Schedules.
All schedules are omitted because they are inapplicable or the requested
information is shown in the consolidated financial statements of the registrant
or related 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 for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, 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 such director, officer or controlling person in
connection with the securities being registered, 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.
II-4
<PAGE>
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 a 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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Somerset, State of New
Jersey, on the 5th day of October 2000.
MULTILINK TECHNOLOGY CORPORATION
/s/ Richard N. Nottenburg
By: _________________________________
Richard N. Nottenburg
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints Richard N. Nottenburg and Eric M. Pillmore, and each of them, with
full power of substitution and resubstitution and full power to act without the
other, as his true and lawful attorney-in-fact and agent to act in his name,
place and stead and to execute in the name and on behalf of each person,
individually and in each capacity stated below, and to file, any and all
amendments to this registration statement, including any and all post-effective
amendments thereto and any registration statement relating to the same offering
as this registration statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing, ratifying and confirming all that said attorneys-in-
fact and agents or any of them or their or his substitute or substitutes may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated below on the 5th day of October 2000.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard N. Nottenburg President, Chief Executive October 5, 2000
____________________________________ Officer and Director
Richard N. Nottenburg (Principal Executive
Officer)
/s/ Eric M. Pillmore Chief Financial Officer October 5, 2000
____________________________________ (Principal Financial and
Eric M. Pillmore Accounting Officer), Senior
Vice President and
Secretary
/s/ Jens Albers Executive Vice President and October 5, 2000
____________________________________ Director
Jens Albers
/s/ G. Bradford Jones Director October 5, 2000
____________________________________
G. Bradford Jones
/s/ John Walecka Director October 5, 2000
____________________________________
John Walecka
/s/ Stephen Forrest Director October 5, 2000
____________________________________
Stephen Forrest
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of the Registrant, as
amended
3.2 Amended and Restated Bylaws of the Registrant
4.1* Specimen Class A Common Stock certificate
5.1* Opinion of Allen Matkins Leck Gamble & Mallory LLP as to the legality
of the shares being registered
9.1 Amended and Restated Voting Trust Agreement dated March 8, 1999
10.1 Form of Indemnification Agreement entered into by the Registrant and
each of its directors and officers
10.2 1998 Stock Option Plan, as amended
10.3 1999 Stock Option Plan, as amended
10.4 2000 Stock Incentive Plan
10.5* 2000 Employee Stock Purchase Plan
10.6 Amended and Restated Investors Rights Agreement, dated March 31, 2000,
among the Registrant and the shareholders named therein, as amended
10.7 Lease dated March 10, 1999, between the Registrant and Spieker
Properties, L.P., as amended
10.8 Facilities Use Agreement dated April 5, 1999, between the Registrant
and TRW, Inc.
10.9 Sublease Agreement dated August 1999, between the Registrant and IMS
Health Incorporated
10.10 Lease Agreement dated November 18, 1999, between the Registrant and
First Industrial, L.P.
10.11 Master Lease Agreement dated September 14, 1999, between the Registrant
and Imperial Bank Equipment Leasing, a Division of Imperial Bank
10.12* Supply Agreement dated June 29, 1997, between the Registrant and TRW,
Inc.
10.13* Amendment to Supply Agreement dated January 13, 1999, between the
Registrant and TRW, Inc.
10.14* Amendment to Supply Agreement dated June 30, 1999, between the
Registrant and TRW, Inc.
10.15* Semiconductor Development Agreement dated May 18, 2000, between the
Registrant and International Business Machines Corporation
10.16* Joint Development Agreement effective as of May 18, 2000, between the
Registrant and International Business Machines
10.17* Development Agreement dated September 1, 1999, by and between the
Registrant and Tyco Submarine Systems Ltd.
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP, Independent Accountants
23.2* Consent of Allen Matkins Leck Gamble & Mallory LLP (contained in the
opinion filed as Exhibit 5.1 hereto)
24.1 Power of Attorney (See Page II-6)
27.1 Financial Data Schedule
</TABLE>
---------------------
* To be filed by amendment
