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Filed Pursuant to 424(b)(4) Registration No. 333-39128
PROSPECTUS
5,600,000 SHARES
[LOGO]
COMMON STOCK
------------------------------------------------------------
This is our initial public offering of shares of common stock. We are
offering 5,600,000 shares. No public market currently exists for our shares.
Our common stock has been approved for listing on the Nasdaq National Market
under the symbol "ITXI."
INVESTING IN OUR SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 6.
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Per
Share Total
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<S> <C> <C>
Public Offering Price.................................. $18.00 $100,800,000
Underwriting Discount.................................. $ 1.26 $ 7,056,000
Proceeds to Integrated Telecom Express, Inc............ $16.74 $ 93,744,000
</TABLE>
We have granted the underwriters a 30 day option to purchase up to 840,000
additional shares of common stock solely to cover over-allotments of shares, if
any.
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.
Lehman Brothers, on behalf of the underwriters, expects to deliver the
shares on or about August 22, 2000.
--------------------------------------------------------------------------------
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
WIT SOUNDVIEW
FIDELITY CAPITAL MARKETS
August 17, 2000
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[INSIDE FRONT COVER OF PROSPECTUS]
[GRAPHICS DEPICT INTEGRATED TELECOM EXPRESS PRODUCTS]
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary..................... 3
Risk Factors........................... 6
Forward-Looking Statements............. 16
Use of Proceeds........................ 17
Dividend Policy........................ 17
Capitalization......................... 18
Dilution............................... 19
Selected Financial Data................ 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 23
Business............................... 32
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PAGE
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Management............................. 45
Certain Transactions................... 57
Principal Stockholders................. 63
Description of Capital Stock........... 65
Shares Eligible for Future Sale........ 68
Underwriting........................... 70
Legal Matters.......................... 73
Change of Independent Accountants...... 73
Experts................................ 73
Additional Information................. 73
Index to Financial Statements.......... F-1
</TABLE>
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ABOUT THIS PROSPECTUS
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL SEPTEMBER 11, 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
We design, develop and market integrated circuit and software products that
are incorporated into asymmetric digital subscriber line broadband access
communications equipment. Manufacturers sell this equipment to service providers
who in turn provide high-speed asymmetric digital subscriber line service to
residential and business customers. Asymmetric digital subscriber line
technology permits high speed data transmission over copper telephone lines. Our
products, which include integrated circuits, software, reference designs and
development tools, are designed to meet the specific challenges facing
manufacturers of both customer premises and central office equipment. Our broad
knowledge of integrated circuit design, computer system design and operating
systems allows us to deliver widely compatible, highly-expandable solutions with
low power consumption and reduced number of integrated circuit components. We
currently offer two families of customer premises and central office equipment
products: Apollo integrated circuits with software, and SAM integrated circuits
with software. Applications for our Apollo product family include personal
computer network interface cards, external modems, gateways, routers and central
office equipment. Applications for our SAM product family include personal
computer communication hardware, personal computer motherboards, and Internet
access devices.
Our products are designed to enhance the performance of asymmetric digital
subscriber line equipment. Our Apollo family of products has its own
microprocessor to process the asymmetric digital subscriber line signal. Our SAM
family of products processes the asymmetric digital subscriber line signal using
software running on a personal computer.
- STANDARDS COMPLIANCE AND COMPATIBILITY. Our Apollo and SAM products are
compliant with international standards. We create production designs which
are complete sets of instructions describing how to build an asymmetric
digital subscriber line modem with our integrated circuit and software
solutions. These production designs are compatible with major equipment
providers including Alcatel Bell N.V., Cisco Systems and Nokia.
- EXPANDABLE AND FLEXIBLE. Our SAM products provides an optimized balance
of hardware and software functions, offering efficient, low-cost and low
power consumption integrated circuit and software solutions.
- ENABLE RAPID TIME-TO-MARKET. Our production designs and the standards
compliance and compatibility of our products facilitate integration of our
products into our customers' systems thereby reducing time-to-market.
- HIGH PERFORMANCE AND RELIABILITY. Our high-performance production designs
enable increased transmission rates over long distances and maintain
reliable connections under conditions of copper telephone line
interference.
- EASE OF INSTALLATION, USE AND UPGRADE. Our Apollo and SAM products are
designed to facilitate installation, operation and upgrading of customer
premises equipment with software that can be easily downloaded.
Our objective is to be a leading provider of integrated circuit and software
products for equipment manufacturers addressing the broadband access market. Key
elements of our strategy for achieving this objective include leveraging our
technology strengths; enabling the rapid adoption of asymmetric digital
subscriber line technology; strengthening and expanding our relationships with
key customers and suppliers; further penetrating worldwide markets for our
products; targeting other high-growth broadband access market opportunities and
building upon our core strengths and strategic investments.
We have a limited operating history and we have significant losses. We will
continue to have substantial future capital requirements. We expect to continue
to incur significant net losses for the foreseeable future. In addition, our
revenue has been and will continue to be derived from a limited number of
products and from a limited number of customers.
Integrated Telecom Express, Inc., or ITeX, was incorporated in California on
May 26, 1995, and reincorporated in Delaware on September 9, 1999. The address
of our principal executive offices is 2710 Walsh Avenue, Santa Clara, California
95051 where the telephone number is (408) 980-8689. Our Internet address on the
worldwide web is HTTP://WWW.ITEXINC.COM. Information contained on our website
does not constitute part of this prospectus.
3
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THE OFFERING
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<S> <C>
Common stock offered by Integrated Telecom 5,600,000 shares
Express....................................
Common stock offered in the private 166,667 shares of common stock to NEC
placement.................................. Corporation
Common stock to be outstanding after this
offering and the private placement......... 41,288,803 shares
Use of proceeds.............................. For working capital and general corporate
purposes, including expenditures for research
and development of new products and sales and
marketing.
Nasdaq National Market symbol................ "ITXI"
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of July 10, 2000, and excludes:
- 10,412,120 shares of common stock issuable as of July 10, 2000 upon the
exercise of outstanding stock options issued under our option plans at a
weighted average exercise price of $3.36 per share;
- 2,500,000 shares of common stock reserved as of July 10, 2000 for issuance
under our stock option plans;
- 600,000 shares of common stock initially reserved for issuance under our
employee stock purchase plan; and
- 1,214,286 shares of common stock issuable as of July 10, 2000 upon the
exercise of outstanding warrants with a weighted average exercise price of
$3.71 per share.
------------------------
EXCEPT AS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS ASSUMES:
- THE CONVERSION OF ALL OUTSTANDING SHARES OF OUR CONVERTIBLE PREFERRED
STOCK INTO 11,428,571 SHARES OF COMMON STOCK, AT A RATE OF ONE SHARE OF
PREFERRED STOCK INTO ONE SHARE OF COMMON STOCK IMMEDIATELY PRIOR TO THE
CLOSING OF THIS OFFERING;
- THE FILING OF AN AMENDED AND RESTATED CERTIFICATE OF INCORPORATION; AND
- THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
------------------------
You should rely only on the information contained in this document. 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.
4
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SUMMARY FINANCIAL DATA
The following table summarizes the consolidated financial data for our
business. You should read this information together with the financial
statements and the notes to those statements appearing elsewhere in this
prospectus. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue...................................... $ -- $ -- $ 3,053 $ 296 $ 14,401
Cost of revenue.............................. -- -- (2,811) (716) (8,531)
Operating loss from continuing operations.... (2,077) (10,152) (14,777) (7,553) (12,380)
Loss from discontinued operations............ (2,638) -- -- -- --
Net loss..................................... (3,906) (9,296) (13,708) (7,257) (11,474)
Basic and diluted net loss per share......... $ (0.17) $ (0.40) $ (0.59) $ (0.31) $ (0.49)
Shares used in computing basic and diluted
net loss per share......................... 22,753 23,058 23,148 23,098 23,488
Pro forma basic and diluted net loss per
share (unaudited).......................... $ (0.51) $ (0.33)
Pro forma basic and diluted weighted average
shares (unaudited)......................... 26,634 34,917
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<CAPTION>
AS OF JUNE 30, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $34,308 $34,308 $129,552
Working capital............................................. 32,913 32,913 128,157
Total assets................................................ 60,840 60,840 156,084
Long-term obligations, net of current portion............... 3,292 3,292 3,292
Mandatorily redeemable convertible preferred stock.......... 43,100 -- --
Mandatorily redeemable convertible preferred stock
warrants.................................................. 1,900 -- --
Total stockholders' equity (deficit)........................ (1,097) 43,903 139,147
</TABLE>
The pro forma amounts above reflect the conversion of 11,428,571 shares of
convertible preferred stock into the same number of shares of common stock upon
the completion of this offering and the reclassification of convertible
preferred stock warrants to reflect the change in nature of the underlying
equity instrument to common stock.
The pro forma as adjusted numbers are adjusted to reflect the receipt of the
net proceeds from the sale of the 5,600,000 shares of common stock offered
hereby and the sale of 166,667 shares of common stock to NEC Corporation in the
concurrent private placement, in each case at the initial public offering price
of $18.00 per share, after deducting the underwriting discount and estimated
offering expenses payable by us.
5
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`
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS
PROSPECTUS BEFORE DECIDING WHETHER TO INVEST IN SHARES OF OUR COMMON STOCK.
RISKS RELATING TO OUR BUSINESS
WE COMMENCED OPERATIONS AS A SUPPLIER OF INTEGRATED CIRCUIT AND SOFTWARE
SOLUTIONS IN LATE 1997, AND THEREFORE YOU WILL HAVE LIMITED HISTORICAL OPERATING
DATA TO EVALUATE OUR BUSINESS AND WE MAY NOT BE ABLE TO ACCURATELY PROJECT OUR
FUTURE OPERATING RESULTS.
From May 1995 until December 1997, we designed integrated circuits for
personal computers. In December 1997, we sold that business and focused
exclusively on the development of integrated circuit and software solutions for
the broadband access communications equipment industry with an initial emphasis
on products for the asymetrical digital subscriber line, or ADSL, market. We
began shipping products for the ADSL market in volume in the third quarter of
1999. Therefore, we have limited historical operating data that can be used in
evaluating our business and in projecting future operating results.
WE HAVE A HISTORY OF LOSSES, WE EXPECT FUTURE LOSSES AND WE MAY NOT ACHIEVE OR
MAINTAIN PROFITABILITY.
We incurred net losses of $11.5 million in the six months ended June 30,
2000. As of June 30, 2000, we had an accumulated deficit of $39.9 million. We
anticipate that we will incur net losses for the foreseeable future, and these
losses may be substantial. We may not be able to generate sufficient revenue to
achieve or maintain profitability.
BECAUSE OUR OPERATING RESULTS WILL FLUCTUATE FROM QUARTER TO QUARTER, THE PRICE
OF OUR STOCK MAY DECLINE.
Our operating results have fluctuated in the past and will fluctuate in the
future on a quarterly and an annual basis due to a number of factors, many of
which are outside our control. Our results of operations may fluctuate due to:
- the loss of or decrease in sales to a major customer;
- our failure to attract new customers;
- the timing and size of orders from, and shipments to, our customers;
- changes in the average cost of products;
- changes in the average selling price of products;
- the timing of the introduction of new or enhanced products; and
- the timing and size of expenses, including research and development
expenses.
Accordingly, you should not rely upon period-to-period comparisons as
indications of future performance. Fluctuations in our operating results may
result in a decline in the price of our stock.
THE MARKET FOR ADSL INTEGRATED CIRCUIT AND SOFTWARE PRODUCTS IS HIGHLY
COMPETITIVE, AND MANY OF OUR COMPETITORS ARE MORE ESTABLISHED AND HAVE GREATER
RESOURCES THAN WE DO.
The market for ADSL integrated circuit and software products is highly
competitive. Given our limited operating history in developing products for this
market, we may not have the financial
6
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resources, technical expertise or marketing and support capabilities to compete
successfully. Our principal competitors include Alcatel Microelectronics, Analog
Devices, Inc., Centillium Communications, Inc., Conexant Systems, Inc.,
GlobeSpan, Inc., Lucent Technologies Inc., STMicroelectronics N.V. and Texas
Instruments Incorporated. These competitors have longer operating histories and
presence in key markets, greater name recognition, larger installed customer
bases and significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than we have. They may be able to
introduce new technologies more rapidly, respond more quickly to changing
customer requirements or devote greater resources to the development, promotion
and sale of their products than we can. Further, some of these competitors have
captive manufacturing operations, and in the event of a manufacturing capacity
shortage, these competitors may be able to obtain products when we are unable to
do so. In addition, we anticipate that new competitors will enter this market as
ADSL becomes more widely deployed.
IF WE FAIL TO ENHANCE OUR EXISTING PRODUCTS OR TO DEVELOP AND INTRODUCE NEW
PRODUCTS THAT MEET CHANGING CUSTOMER REQUIREMENTS AND KEEP PACE WITH
TECHNOLOGICAL DEVELOPMENTS, WE WILL NOT SELL OUR PRODUCTS AND OUR REVENUES WILL
FLUCTUATE OR DECREASE.
The market for broadband access products is characterized by
rapidly-changing customer requirements and short product life cycles.
Accordingly, our future success will depend in large part upon our ability to:
- develop and market competitive products that meet our customers' changing
requirements;
- develop innovative features that differentiate our products from those of
our competitors;
- identify and respond to emerging technological trends;
- develop products that interoperate with competitors' products;
- respond effectively to product announcements by others;
- bring products to market on a timely basis; and
- introduce products that have competitive prices.
IF WE CONTINUE TO RAPIDLY EXPAND OUR OPERATIONS AND IF WE FAIL TO MANAGE GROWTH
EFFECTIVELY, OUR BUSINESS COULD BE HARMED.
We have rapidly expanded our operations, including the number of our
employees and the geographic scope of our activities. We expect that significant
further expansion will be required to address potential growth in our customer
base and market opportunities. If we are unable to manage growth effectively, we
may not be able to take advantage of market opportunities, develop or enhance
our products or our technical capabilities, execute our business plan or
otherwise respond to competitive pressures or unanticipated requirements. To
effectively manage the anticipated growth of our operations, we believe we must
both enhance our operational, financial and management information controls,
reporting systems and procedures and effectively manage multiple relationships
with our customers, suppliers and other third parties.
We have recently hired many new employees. Failure to properly train and
integrate these new employees into our business may disrupt our operations. We
may also have difficulties successfully identifying and exploiting existing and
potential market opportunities if our staffing is inadequate. In addition, we
have recently hired a number of members of our executive management team. Only
some of these executives have worked together before, and their failure to work
together to effectively manage our company will harm our business.
7
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In addition, we will need to find larger facilities to accommodate our
anticipated future growth. Office space and other facilities are expensive and
difficult to find in Northern California and Taiwan, where we primarily operate.
We may experience difficulties finding suitable facilities, and these facilities
may only be available at a significant additional expense.
OUR REVENUE HAS BEEN AND WILL CONTINUE TO BE DERIVED FROM A LIMITED NUMBER OF
PRODUCTS. IF ANY OF THESE PRODUCTS FAILS TO GAIN BROADER MARKET ACCEPTANCE, WE
MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUE.
For the year ended December 31, 1999 and for the six months ended June 30,
2000, 80.8% and 83.0% of our revenue was derived from sales of our Apollo Two
products. We expect that our Apollo Two products will continue to represent a
significant portion of our revenue in the foreseeable future. Therefore, we may
not be able to generate sufficient revenue if these products fail to achieve
broader market acceptance.
BECAUSE OUR PRODUCTS ARE USED AS COMPONENTS OF OUR CUSTOMERS' PRODUCTS, IF
COMMUNICATIONS EQUIPMENT MANUFACTURERS ARE NOT ABLE TO OBTAIN THE OTHER
COMPONENTS USED IN THEIR PRODUCTS, SALES OF OUR PRODUCTS WOULD BE HARMED.
Our customers incorporate our products into their equipment together with
products from other suppliers. For example, our Apollo Two turn-key reference
design requires electronic components and integrated circuits manufactured by
other companies. Some of these components may be sole-sourced or in limited
supply. Although alternative suppliers may be available, some of their
components have different attributes and may require a modification to our
customers' equipment. Therefore, if our customers are unable to obtain the other
required components for their equipment, they could cancel or delay purchases of
our products.
IF UNITED MICROELECTRONICS CORPORATION DOES NOT HAVE SUFFICIENT CAPACITY TO
SATISFY OUR INTEGRATED CIRCUIT REQUIREMENTS, WE COULD EXPERIENCE SUBSTANTIAL
DELAY OR INTERRUPTION IN THE SHIPMENT OF OUR INTEGRATED CIRCUITS OR AN INCREASE
IN COSTS WHICH WOULD NEGATIVELY AFFECT OUR OPERATING RESULTS.
We do not own or operate a semiconductor fabrication facility and depend on
United Microelectronics Corporation to manufacture all of our integrated
circuits. Most of our products are manufactured at a single facility, which
increases the risk of a disruption in supply. We have executed a term sheet with
United Microelectronics Corporation that states that it guarantees us a minimum
level of production capacity through 2003, provided that we use United
Microelectronics Corporation to manufacture substantially all of our integrated
circuits during this period. Other than this term sheet, we do not have a
long-term silicon wafer supply agreement with United Microelectronics
Corporation that guarantees silicon wafer or product quantities. Furthermore, we
do not have long-term agreements that guarantee silicon wafer prices, delivery
or lead times, as United Microelectronics Corporation manufactures our products
on a purchase order basis. We provide United Microelectronics Corporation with
rolling forecasts of our production requirements; however, the ability of United
Microelectronics Corporation to provide silicon wafers to us is limited by
United Microelectronics Corporation's available capacity. In addition, because
many of United Microelectronics Corporation's customers have greater financial
resources than we do and because many of their customers may have greater
capacity requirements than we do, United Microelectronics Corporation could
choose to prioritize capacity for other customers or reduce or eliminate
deliveries to us on short notice. Accordingly, United Microelectronics
Corporation may not allocate sufficient capacity to satisfy our requirements in
excess of the minimum levels in the term sheet. In addition, the manufacturing
process for our products is highly complex, requiring precise production in a
highly-controlled environment. Changes in the manufacturing processes or the
inadvertent use of defective or contaminated materials in the manufacturing of
our products could harm our silicon wafer supplier's ability to achieve
acceptable
8
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manufacturing yields. If our silicon wafer supplier manufactures our products
within its manufacturing specification limits and we do not achieve acceptable
yields as a result of our design, our cost of revenue may increase. In addition,
if our silicon wafer supplier does not manufacture our products within its
manufacturing specification limits, we may have difficulty obtaining adequate
product supplies and product shipments may be delayed. This could ultimately
lead to a loss of sales of our products and harm our business.
OUR DEPENDENCE UPON THIRD PARTIES TO PACKAGE AND TEST SUBSTANTIALLY ALL OF OUR
PRODUCTS REDUCES OUR CONTROL OF PRODUCT DELIVERY SCHEDULES AND QUALITY
ASSURANCE.
Because third parties package and test substantially all of our products, we
do not directly control our product delivery schedules and quality assurance.
This lack of control could result in product shortages and defects, which in
turn could increase our packaging and testing costs or delay product delivery.
We do not have long-term contracts with the companies that package and test our
products and we typically procure services from them on a per order basis.
Therefore, we may not be able to obtain these services on acceptable terms, if
at all. If we are required to find and qualify alternative packagers and
testers, we could experience delays in product shipments or a decline in product
quality.
A MAJORITY OF OUR OUTSOURCED OPERATIONS ARE LOCATED IN TAIWAN, INCREASING THE
RISK THAT A NATURAL DISASTER, LABOR STRIKE, WAR OR POLITICAL UNREST IN THAT
COUNTRY WOULD DISRUPT OUR OPERATIONS.
A majority of our outsourced operations are located in Taiwan. Events out of
our control such as earthquakes, fires, floods or other natural disasters in
Taiwan or political unrest, war, labor strikes or work stoppages in Taiwan would
disrupt our operations. The risk of earthquakes in Taiwan is significant because
of its proximity to major earthquake fault lines. An earthquake like the one
that occurred in Taiwan in September 1999 could cause significant delays in
shipments of our products until we are able to shift our outsourced operation.
In addition, there is currently significant political tension between Taiwan and
China, which could lead to hostilities. If any of these events occur, we may not
be able to obtain alternative capacity. Failure to secure alternative capacity
could cause a delay in the shipment of our products, which would cause our
revenue to fluctuate or decline.
WE DERIVE A SUBSTANTIAL AMOUNT OF OUR REVENUE FROM INTERNATIONAL SOURCES, AND
OUR FAILURE TO ADDRESS THE DIFFICULTIES ASSOCIATED WITH SELLING OUR PRODUCTS
OUTSIDE THE UNITED STATES WOULD CAUSE OUR SALES TO DECLINE.
If we are unable to address difficulties associated with selling our
products outside the United States, such as unexpected changes in regulatory
requirements, longer payment cycles and problems in collecting accounts
receivable and reduced protection for intellectual property rights in foreign
jurisdictions, our sales would decline and our business would be harmed. Many of
these difficulties are outside of our control. A substantial portion of our
revenue is derived from customers located outside the United States. For the
year ended December 31, 1999, sales to customers in Asia accounted for 50.2% of
our revenue, of which our sales to customers in South Korea constituted 12.2% of
our revenue. For the six months ended June 30, 2000, sales to customers in Asia
accounted for 55.5% of our revenue, of which sales to customers in South Korea
constituted 30.0% of our revenue. We estimate that, of sales to U.S.
communications equipment manufacturers in the year ended December 31, 1999 and
the six months ended June 30, 1999, 44.3% and 29.0% were ultimately intended for
equipment for service providers in the South Korean market. Combined with direct
sales to South Korea during the same periods, our estimated revenue exposure to
the South Korean market during these periods was 56.5% and 59.1%. We anticipate
that the majority of our revenue will continue to be directly or indirectly
derived from Asia, especially South Korea, for the foreseeable future. We do not
have any long-term commitments from our Asian customers and demand for our
products in Asia may not continue to grow. In addition, use of ADSL technology
in South Korea, and
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thus the demand for our products in South Korea, is related in part to a
government-sponsored initiative encouraging deployment of ADSL. If alternative
superior technologies are developed, support for the initiative may be
withdrawn, or demand from our customers in South Korea may decrease, our
business would be harmed.
BECAUSE DEVELOPMENT OF NEW PRODUCTS REQUIRES SUBSTANTIAL TIME AND EXPENSE, WE
MAY NOT BE ABLE TO RECOVER OUR DEVELOPMENT COSTS AND ACHIEVE AN ADEQUATE RETURN
ON INVESTMENT.
The development of new products requires substantial time and expense.
Improvements to existing products or the introduction of new products by us or
our competitors may replace or provide lower cost alternatives to our existing
products or render these products obsolete, unmarketable or inoperable.
Therefore, we may not be able to recover the costs of the development of our
products and achieve an adequate return on investment.
For example, we believe that our next-generation scalable ADSL modem, or SAM
Two, products will form the basis of a future family of ADSL integrated circuit
and software solutions. We have not yet completed development of these products.
Even if we complete development on a timely basis, these products may not
achieve market acceptance and generate significant revenue. If our SAM Two
products do not achieve broad market acceptance, revenue from our existing
products could be inadequate to cover our expenses and our operating results and
reputation could be damaged.
BECAUSE THE LENGTHY SALES CYCLE OF OUR PRODUCTS MAKES IT DIFFICULT TO ACCURATELY
PREDICT ACTUAL PRODUCT DEMAND, THE VOLUME OF PRODUCT SHIPPED MAY NOT CORRESPOND
WITH OUR PRODUCT FORECASTS. THEREFORE, WE MAY NOT BE ABLE TO RECOUP EXPENSES
INCURRED IN ANTICIPATION OF SALES OF OUR PRODUCTS.
The sales cycle of our products is lengthy and typically involves a detailed
initial technical evaluation of our products by our prospective customers,
followed by the design, manufacturing, testing and qualification of prototypes
incorporating our products. This process generally takes from three to six
months, and may last longer. Our customer purchase agreements generally contain
no minimum purchase requirements and customers typically purchase our products
pursuant to short-term purchase orders that may be canceled without charge.
Given this lengthy sales cycle, it is difficult to accurately predict when and
in what volume sales to a particular customer will occur, if at all.
Therefore, product revenue may not be commensurate with the level of
expenses that we incur preparing for anticipated sales. If our forecasts prove
to be inaccurate, our operating results could be harmed. For example, if we
purchase excess inventory, write-downs or write-offs could result. Conversely,
if we fail to purchase a sufficient supply of some products, revenue
opportunities could be lost and our customer relationships could be harmed.
BECAUSE PRICE COMPETITION, MATURING TECHNOLOGIES AND VOLUME PURCHASES BY LARGE
CUSTOMERS MAY RESULT IN A DECREASE IN THE AVERAGE SELLING PRICE OF OUR PRODUCTS,
THE GROSS MARGINS FOR OUR PRODUCTS MAY DECLINE.
Price competition may harm the gross margins of our products. Furthermore,
we anticipate that average selling prices of ADSL integrated circuits will
continue to decline as product technologies mature. Many of our competitors are
larger with greater resources. Therefore these competitors may be able to
achieve greater economies of scale and may be less vulnerable to price
competition. In addition, we expect that average selling prices of our products
will decrease in the future due to volume discounts to our large customers.
These declines in average selling prices will generally lead to declines in our
gross margins for these products, if manufacturing costs cannot be reduced at
the same or greater rates.
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DELAY IN THE DEVELOPMENT OF RETAIL AND PERSONAL COMPUTER ORIGINAL EQUIPMENT
MANUFACTURER SALES CHANNELS FOR ADSL MODEM DISTRIBUTION COULD LIMIT OUR SALES.
Our sales growth will depend in part on the development of retail and
personal computer original equipment manufacturer sales channels. Today, most
telecommunication service providers only support ADSL modems which they provide
directly to their subscribers. We believe that telecommunication service
providers will eventually support ADSL modems purchased as a part of a personal
computer, an Internet access device or separately by subscribers. Any
significant delay in development of these channels, as opposed to alternative
distribution channels, could limit sales of our products.
IF WE LOSE RIGHTS UNDER OUR AGREEMENT WITH UNITED MICROELECTRONICS CORPORATION,
UNDER WHICH WE WERE EXTENDED CERTAIN LICENSES GRANTED BY THIRD PARTIES TO UNITED
MICROELECTRONICS CORPORATION, WE WOULD LOSE A COMPETITIVE ADVANTAGE AND OUR
BUSINESS WOULD BE HARMED.
In August 1999, we entered into an agreement with United Microelectronics
Corporation under which we were extended certain licenses granted by Texas
Instruments to United Microelectronics Corporation in exchange for royalties,
patent cross licenses and other obligations. This agreement grants us access to
certain technology on favorable terms. If United Microelectronics Corporation
ceases to be our largest stockholder, we would lose rights under this agreement
and consequently we would lose a competitive advantage in the manufacture of our
products. If we lose these rights, we may not be able to secure such licenses on
reasonable terms, if at all.
THE MEASURES ON WHICH WE RELY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AFFORD
ONLY LIMITED PROTECTIONS.
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property laws, non-disclosure agreements and other measures
to protect our intellectual property. These measures afford only limited
protection, and we cannot be certain that these measures will adequately protect
our intellectual property. Despite our efforts to protect our intellectual
property both under the laws of the United States and under the laws of foreign
countries, unauthorized parties may copy aspects of our products or obtain and
use trade secrets or other information that we regard as proprietary. Our
competitors may also independently develop the same or similar technologies
without violating our intellectual property rights.
BECAUSE OUR INDUSTRY IS CHARACTERIZED BY FREQUENT LITIGATION OVER INTELLECTUAL
PROPERTY RIGHTS, WE MAY BE REQUIRED TO INCUR SUBSTANTIAL EXPENSES AND DIVERT
MANAGEMENT ATTENTION AND RESOURCES IN DEFENDING INTELLECTUAL PROPERTY LITIGATION
AGAINST US.
The industry in which we compete is characterized by numerous allegations of
and lawsuits involving infringement of intellectual property rights. An
infringement claim could be asserted against us in the future. The defense of
any such claim, regardless of its merit, could result in our incurring
substantial expenses and diverting significant management attention and other
resources away from our operations. In the event of an adverse result in any
future litigation or claim, we may be required to:
- pay substantial damages, including treble damages, if we are found to have
willfully infringed the intellectual property of another;
- halt the manufacture, sale and use of infringing products or technology;
- obtain licenses to the infringing technology, which may not be available
on commercially reasonable terms, or at all; or
- expend significant resources to develop non-infringing technology.
11
<PAGE>
WE MAY INCUR SUBSTANTIAL EXPENSES AND DIVERT MANAGEMENT RESOURCES IN PROSECUTING
OTHERS FOR THEIR UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY RIGHTS.
The markets in which we compete are characterized by frequent litigation
regarding patents and other intellectual property rights. We are aware of a
significant number of patents and patent applications relating to aspects of our
technologies filed by, and issued to, third parties. Should any of our
competitors file patent applications or obtain patents that claim inventions
also claimed by us, we may choose to participate in an interference proceeding
to determine the right to a patent for these inventions because if we fail to
enforce and protect our intellectual property rights, our business would be
harmed. Even if the outcome is favorable this proceeding could result in
substantial cost to us and disrupt our business.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS, AND THE LOSS OF, OR A SIGNIFICANT
REDUCTION IN ORDERS FROM, ANY OF THEM COULD HARM OUR OPERATING RESULTS.
If we are not successful in maintaining relationships with our customers and
obtaining new customers, our business and results of operations will suffer. We
sell our products primarily to communications equipment manufacturers. For the
year ended December 31, 1999, sales to Xpeed, Inc. and Lite-On Communications
Corporation accounted for 44.3% and 10.9% of our revenue. For the six months
ended June 30, 2000, sales to Xpeed, Inc. and Alcatel Bell N.V. accounted for
29.0% and 10.0% of our revenue.
Other than Alcatel Bell N.V., we do not have long-term agreements with these
customers relating to the sale of our products, but rather sell our products to
them on an order-by-order basis. We expect to continue to be dependent upon a
relatively small number of customers for a majority of our revenue.
IF WE BECOME SUBJECT TO PRODUCT RETURNS AND PRODUCT LIABILITY CLAIMS RESULTING
FROM DEFECTS IN OUR PRODUCTS, WE MAY FAIL TO ACHIEVE MARKET ACCEPTANCE OF OUR
PRODUCTS AND OUR BUSINESS COULD BE HARMED.
We develop complex products in an evolving marketplace. Despite testing by
us and our customers, software or hardware defects may be found in existing or
new products. These defects could result in a delay in recognition or loss of
revenue, loss of market share or failure to achieve market acceptance.
Additionally, these defects could result in financial or other damages to our
customers, cause us to incur significant warranty, support and repair costs and
divert the attention of our engineering personnel from our product development
efforts. In such circumstances, our customers could also seek and obtain damages
from us for their losses. A product liability claim brought against us, even if
unsuccessful, would likely be time consuming and costly to defend.
WE MAY FAIL TO ATTRACT OR RETAIN KEY PERSONNEL.
Our success depends to a significant degree upon the continued contributions
of our executive management team and our technical, product development,
marketing, sales and customer support personnel. The loss of key persons in
those areas could harm our business. Competition for these people is
particularly intense in Northern California and Taiwan, where we primarily
operate. Furthermore, we do not have any life insurance or other insurance
covering the loss of any of our key employees.
12
<PAGE>
RISKS RELATING TO OUR INDUSTRY
IF THE ADSL TECHNOLOGY UPON WHICH OUR PRODUCTS ARE BASED DOES NOT ACHIEVE BROAD
MARKET ACCEPTANCE, WE WOULD NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS.
ADSL services compete with many different broadband access technologies
including variants of digital subscriber line, or DSL, and other alternatives.
The introduction of new products or technologies by competitors or market
acceptance of products based on alternative technologies could render our
products less competitive or obsolete. If either of these events occurs, we
would be unable to sustain or grow our business. Competing technologies include:
- other variants of DSL, including high bit rate DSL, integrated DSL,
symmetrical DSL and very high bit rate DSL;
- other access solutions provided by telecommunications service providers
such as transmission through initiation of a temporary Internet connection
over an analog modem, integrated services digital networks and high
capacity telephone line services;
- broadband cable technologies;
- broadband wireless technologies; and
- broadband satellite technologies.
If these alternative technologies gain market share at the expense of ADSL,
demand for our products would decrease, and we would be unable to sustain or
grow our business.
CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS, BOTH IN THE U.S. AND
INTERNATIONALLY, COULD CAUSE SALES OF DIGITAL SUBSCRIBER LINE, AND SPECIFICALLY
ADSL, PRODUCTS TO DECLINE OR FAIL TO GROW AS ANTICIPATED.
The jurisdiction of the Federal Communications Commission extends to the
entire U.S. communications industry, including our customers and their products
and services that incorporate our products. Future Federal Communications
Commission regulations affecting the U.S. communications services industry, our
customers or our products may harm our business. For example, Federal
Communications Commission regulatory policies that affect the availability of
data and Internet services may impede our customers' penetration into some
markets or affect the prices that they can charge. The Federal Communications
Commission has, from time to time, considered new policies affecting Internet
services. This may cause sales of our products to decline. We face similar risks
from foreign regulatory agencies. Any delays in our ability to comply with
domestic and foreign regulatory requirements may result in order cancellations
or postponements of product purchases by our customers, which would harm our
business.
RISKS RELATING TO OUR OFFERING
OUR STOCK MAY BE THINLY TRADED OR ITS PRICE VOLATILE, WHICH MIGHT MAKE IT
DIFFICULT FOR INVESTORS TO SELL THEIR SHARES.
The stock markets, and in particular the Nasdaq National Market, experience
extreme price and volume fluctuations affecting the market prices of equity
securities of many technology companies. These fluctuations are often unrelated
to the operating performance of the respective companies. We expect that the
market price of our common stock will fluctuate due to the factors described
throughout this "Risk Factor" section as well as:
- changes in estimates of our financial performance or changes in
recommendations by securities analysts; and
13
<PAGE>
- changes in market valuations of other integrated circuit companies.
BECAUSE OF LIKELY FLUCTUATIONS IN THE PRICE OF OUR STOCK, WE MAY BE SUBJECT TO
CLASS ACTION LITIGATION, WHICH COULD DISTRACT MANAGEMENT AND RESULT IN
SUBSTANTIAL COSTS.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and resources from our operations and sales of our products, which would have a
negative impact on our business.
OUR CURRENT STOCKHOLDERS WILL BENEFIT FROM THIS OFFERING, AND YOU WILL
EXPERIENCE IMMEDIATE DILUTION.
The initial public offering price is expected to be substantially higher
than the current book value per share of our outstanding common stock. The pro
forma net tangible book value as of June 30, 2000 was $1.06 per share. After
giving effect to the sale of 5,600,000 shares of our common stock in this
offering and the sale of 166,667 shares of common stock to NEC Corporation, in
each case at the initial public offering price of $18.00 per share, our pro
forma net tangible book value as of June 30, 2000 would have been $3.22 per
share. As a result, investors purchasing our common stock will incur immediate
dilution of approximately $14.78 per share in the book value of our common stock
from the price they pay for our common stock. In addition, we have issued
options to acquire common stock at prices significantly below the initial public
offering price. To the extent such outstanding options are ultimately exercised,
there will be further dilution to investors in this offering.
THE LARGE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD
CAUSE OUR STOCK PRICE TO DECLINE.
After this offering, we will have outstanding approximately 41,288,803
shares of common stock after giving effect to the conversion of all outstanding
shares of preferred stock into common stock of which the 5,600,000 shares
offered hereby, and the sale of 166,667 shares of common stock to NEC
Corporation in the concurrent private placement, plus any shares issued upon
exercise of the underwriters' over-allotment option, will be freely tradeable.
If our stockholders sell substantial amounts of the common stock, including
shares issued upon the exercise of outstanding options, in the public market,
the market price of our common stock could decline. See "Shares Eligible For
Future Sale" for more information on the number of shares eligible for public
sale after this offering.
SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY MAKE ACQUIRING CONTROL OF OUR
COMPANY MORE DIFFICULT FOR A THIRD PARTY, WHICH COULD HARM OUR STOCK'S MARKET
PRICE OR REDUCE ANY PREMIUM OVER MARKET PRICE THAT AN ACQUIROR MIGHT OTHERWISE
PAY.
Our charter documents contain provisions providing for a classified board of
directors, eliminating cumulative voting in the election of directors and
restricting our stockholders from acting without a meeting. These provisions may
make certain corporate actions more difficult and might delay or prevent a
change in control and therefore limit the price that new investors will pay for
our stock. We will also indemnify officers and directors against losses incurred
in legal proceedings to the broadest extent permitted by Delaware law.
BECAUSE OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT MAY BE ABLE TO CONTROL
STOCKHOLDER VOTES, THE PREMIUM OVER MARKET PRICE THAT AN ACQUIROR MIGHT
OTHERWISE PAY MAY BE REDUCED AND ANY MERGER OR TAKEOVER MAY BE DELAYED.
Immediately following the offering, our principal stockholders, executive
officers, directors and their affiliates will own or control approximately 48.5%
of our common stock (assuming no purchases
14
<PAGE>
of shares of common stock in this offering by our executive officers and
directors and their affiliates). Accordingly, our principal stockholders,
executive officers, directors and their affiliates, as a group, may have the
ability to control the election of a majority of the members of our board of
directors and the outcome of corporate actions requiring stockholder approval.
This concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of us, or may impede a merger, consolidation,
takeover or other business combination involving us. This concentration of
ownership could also adversely affect our stock's market price or lessen any
premium over market price that an acquiror might otherwise pay.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, AND IF WE ARE UNABLE TO
SECURE ADEQUATE FUNDS ON TERMS ACCEPTABLE TO US, WE MAY BE UNABLE TO EXECUTE OUR
BUSINESS PLAN.
If the proceeds of this offering, together with our existing cash balances
and cash flows expected from future operations, are not sufficient to meet our
liquidity needs, we will need to raise additional funds. If adequate funds are
not available on acceptable terms or at all, we may not be able to take
advantage of market opportunities, develop or enhance new products, pursue
acquisitions that would complement our existing product offerings or enhance our
technical capabilities, execute our business plan or otherwise respond to
competitive pressures or unanticipated requirements.
WE HAVE BROAD DISCRETION OVER THE USE OF THE OFFERING PROCEEDS, AND HOW WE
INVEST THESE PROCEEDS MAY NOT YIELD A FAVORABLE RETURN.
Our management will have broad discretion over how the offering proceeds are
used and could spend these proceeds in ways which do not increase our operating
results or increase our market share. These proceeds may not be invested to
yield a favorable rate of return. Substantially all of the net proceeds of this
offering and from the sale of common stock to NEC Corporation in the concurrent
private placement are not allocated for specific uses other than working capital
and general corporate purposes, including expenditures for research and
development of new products and sales and marketing.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties associated with our business and operations. We use words such as
"anticipates," "believes," "plans," "expects," "future," "intends" and similar
expressions to identify such forward-looking statements. You should not place
undue reliance on these forward-looking statements, which apply only as of the
date of this prospectus. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks faced by us described under "Risk Factors" beginning on page 6 and
elsewhere in this prospectus.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 5,600,000 shares of common stock
offered in this offering and the sale of 166,667 shares of common stock in the
private placement are estimated to be $95.2 million at the initial public
offering price of $18.00 per share, after deducting the underwriting discount,
estimated offering expenses and assuming no exercise of the underwriters'
over-allotment option.
We have yet to determine our expected use of these proceeds. We currently
estimate that we will use the net proceeds of this offering primarily for
working capital and general corporate purposes, including approximately 50% of
the net proceeds for research and development of new products and approximately
40% of the net proceeds for sales and marketing efforts and general and
administrative expenses. This allocation is preliminary and is subject to change
based upon market conditions, the effectiveness of our marketing campaigns and
other factors. In addition, we may use a portion of the net proceeds to acquire
complementary products, technologies or businesses; however, we currently have
no commitments or agreements and are not involved in any negotiations to do so.
The amounts that we expend for these purposes will depend on a number of
factors, including future revenue growth, if any, and the amount of cash we
generate from operations. Pending use of the net proceeds of this offering, we
intend to invest the net proceeds in interest-bearing, investment-grade
securities.
Our management will have broad discretion over how these proceeds are used
and could spend these proceeds in ways which do not increase our operating
results or increase our market share. The proceeds may not be invested to yield
a favorable return.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
17
<PAGE>
CAPITALIZATION
The following table sets forth the following information:
- our actual capitalization as of June 30, 2000;
- our pro forma capitalization after giving effect to the conversion of all
outstanding shares of convertible preferred stock into shares of common
stock and the reclassification of convertible preferred stock warrants to
reflect the change in nature of the underlying equity instrument to common
stock; and
- the pro forma as adjusted capitalization after giving effect to the sale
of 5,600,000 shares of common stock in this offering and the sale of
166,667 shares of common stock to NEC Corporation in the concurrent
private placement, in each case at the initial public offering price of
$18.00 per share, less the underwriting discount and estimated offering
expenses payable by us.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 34,308 $ 34,308 $129,552
======== ======== ========
Long-term obligations, net of current portion............... $ 3,292 $ 3,292 $ 3,292
-------- -------- --------
Mandatorily redeemable convertible preferred stock; issuable
in series, $0.001 par value (actual); 13,500 shares
authorized, 11,429 shares issued and outstanding (actual),
no shares authorized, issued or outstanding (pro forma and
as adjusted).............................................. 43,100 -- --
Mandatorily redeemable convertible preferred stock
warrants.................................................. 1,900 -- --
-------- -------- --------
45,000 -- --
-------- -------- --------
Stockholders' equity:
Common stock, $0.001 par value; 46,100 shares authorized,
23,990 shares issued and outstanding (actual); 46,100
shares authorized, 35,419 shares issued and outstanding
(pro forma); 200,000 shares authorized, 41,186 shares
issued and outstanding (as adjusted)...................... 24 35 41
Additional paid-in capital.................................. 81,379 126,368 221,606
Deferred stock-based compensation........................... (42,096) (42,096) (42,096)
Notes receivable from stockholder........................... (502) (502) (502)
Accumulated deficit......................................... (39,902) (39,902) (39,902)
-------- -------- --------
Total stockholders' equity (deficit)........................ (1,097) 43,903 139,147
-------- -------- --------
Total capitalization........................................ $ 47,195 $ 47,195 $142,439
======== ======== ========
</TABLE>
This table excludes the following shares:
- 10,412,120 shares of common stock issuable as of July 10, 2000 upon the
exercise of outstanding share options under our option plan at a weighted
average exercise price of $3.36 per share;
- 2,500,000 shares of common stock reserved as of July 10, 2000 for issuance
under our stock plan;
- 600,000 shares of common stock initially reserved for issuance under our
employee stock purchase plan; and
- 1,214,286 shares of common stock issuable as of July 10, 2000 upon the
exercise of outstanding warrants with a weighted average exercise price of
$3.71 per share.
See the sections entitled "Management--Incentive Stock Plans," "Description
of Capital Stock" and notes 7 and 8 of Notes to Financial Statements.
18
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock (assuming
conversion of all outstanding shares of our convertible preferred stock on
June 30, 2000) was $37.4 million, or approximately $1.06 per share. Pro forma
net tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding. Dilution in net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the net tangible book value per share of our
common stock immediately afterwards. After giving effect to our sale of
5,600,000 shares of common stock offered by this prospectus and the 166,667
shares offered in the private placement each at the initial public offering
price of $18.00 per share and after deducting the underwriting discount and
estimated offering expenses payable by us, our net tangible book value would
have been approximately $132.7 million, or $3.22 per share. This represents an
immediate increase in net tangible book value of $2.16 per share to existing
stockholders and an immediate dilution in net tangible book value of $14.78 per
share to new investors purchasing shares of common stock in this offering. The
following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $18.00
Pro forma net tangible book value per share as of
June 30, 2000........................................... $1.06
Increase per share attributable to new investors.......... 2.16
-----
Pro forma net tangible book value per share after the
offering.................................................. 3.22
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $14.78
======
</TABLE>
This table excludes all options and warrants that will remain outstanding
upon completion of this offering. See notes 7 and 8 of Notes to Financial
Statements. The exercise of outstanding options and warrants having an exercise
price less than the offering price would increase the dilutive effect to new
investors.
The following table sets forth, as of June 30, 2000, on the pro forma basis
described above, the differences between the number of shares of common stock
purchased from us, the total price paid and average price per share paid by
existing stockholders by the investors participating in the private placement
and by the new investors in this offering each at the initial public offering
price of $18.00 per share, before deducting the underwriting discount and
estimated offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 35,418,621 86.0% $ 73,207,707 41.4% $ 2.07
Private placement investors........ 166,667 0.4 3,000,000 1.7 $18.00
New investors*..................... 5,600,000 13.6 100,800,000 56.9 $18.00
---------- ----- ------------ -----
Total............................ 41,185,288 100.0% $177,007,707 100.0%
========== ===== ============ =====
</TABLE>
------------------------
* Assumes the sale of 166,667 shares of common stock at the initial public
offering price of $18.00 per share.
If the underwriters over-allotment option is exercised in full, the
following will occur:
- the percentage of shares of common stock held by existing stockholders and
the private placement investors will be reduced to 84.3% and 0.4% of the
total number of shares of common stock outstanding, and
- the number of shares held by new public investors will be increased to
6,440,000 or approximately 15.3% of the total number of shares of our
common stock outstanding after this offering.
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and related notes beginning on page F-1 of this prospectus
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 24 of this prospectus. The selected statement of
operations data for each of the three years ended December 31, 1997, 1998 and
1999 and the selected balance sheet data as of December 31, 1998 and 1999 are
derived from, and qualified by reference to, the audited financial statements
included elsewhere in this prospectus. The selected statement of operations data
for each of the two years ended December 31, 1995 and 1996 and the selected
balance sheet data as of December 31, 1995, 1996 and 1997 are derived from
audited financial statements not included in this prospectus. The selected
statement of operations data for the six months ended June 30, 1999 and 2000 and
the selected balance sheet data as of June 30, 2000 are derived from, and
qualified by reference to, the audited financial statements included elsewhere
in this prospectus.
20
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................ $ -- $ -- $ -- $ -- $ 3,053 $ 296 $ 14,401
Cost of revenue (including stock-based
compensation expense of $0, $0, $0,
$0, $0, $0 and $59).................. -- -- -- -- (2,811) (716) (8,531)
------ ------- ------- -------- -------- ------- --------
Gross profit (loss).................... -- -- -- -- 242 (420) 5,870
------ ------- ------- -------- -------- ------- --------
Operating expenses:
Research and development............. -- -- 1,101 6,230 8,458 3,962 5,947
(exclusive of stock-based
compensation expense of $0, $0,
$10, $58, $97, $53 and $2,833)
Sales and marketing.................. -- -- -- 1,125 3,211 1,376 2,745
(exclusive of stock-based
compensation expense of $0, $0, $0,
$57, $86, $45 and $1,602)
General and administrative........... -- -- 943 2,571 3,086 1,633 1,673
(exclusive of stock-based
compensation expense of $0, $0 $23,
$111, $81, $44 and $3,450)
Amortization of deferred stock-based
compensation....................... -- -- 33 226 264 142 7,885
------ ------- ------- -------- -------- ------- --------
Total operating expenses........... -- -- 2,077 10,152 15,019 7,113 18,250
------ ------- ------- -------- -------- ------- --------
Operating loss from continuing
operations........................... -- -- (2,077) (10,152) (14,777) (7,533) (12,380)
Interest income, net................... -- -- 809 856 887 276 906
Other income........................... -- -- -- -- 182
------ ------- ------- -------- -------- ------- --------
Loss from continuing operations........ -- -- (1,268) (9,296) (13,708) (7,257) (11,474)
Income (loss) from discontinued
operations........................... 43 (62) (2,638) -- --
------ ------- ------- -------- -------- ------- --------
Net income (loss)...................... $ 43 $ (62) $(3,906) $ (9,296) $(13,708) $(7,257) $(11,474)
====== ======= ======= ======== ======== ======= ========
Basic and diluted net loss from
continuing operations per share...... $ -- $ -- $ (0.06) $ (0.40) $ (0.59) $ (0.31) $ (0.49)
Basic and diluted net income (loss)
from discontinued operations per
share................................ 0.01 -- (0.11) -- -- -- --
------ ------- ------- -------- -------- ------- --------
Basic and diluted net income (loss) per
share................................ $ 0.01 $ -- $ (0.17) $ (0.40) $ (0.59) $ (0.31) $ (0.49)
====== ======= ======= ======== ======== ======= ========
Shares used in computing basic and
diluted net income (loss) per
share................................ 6,000 22,750 22,753 23,058 23,148 23,098 23,488
====== ======= ======= ======== ======== ======= ========
Pro forma for conversion of convertible
preferred stock basic and diluted net
loss per share (unaudited)........... $ (0.51) $ (0.33)
======== ========
Pro forma basic and diluted weighted
average shares (unaudited)........... 26,634 34,917
======== ========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $1,864 $23,748 $ 6,394 $14,423 $38,513 $34,308
Working capital........................ 2,011 23,302 17,758 11,904 37,838 32,913
Total assets........................... 3,237 32,902 20,632 26,652 52,951 60,840
Long-term obligations, net of current
portion.............................. -- -- -- 4,125 1,500 3,292
Mandatorily redeemable convertible
preferred stock...................... -- -- -- 4,120 43,100 43,100
Mandatorily redeemable convertible
preferred stock warrants............. -- -- -- 880 1,900 1,900
Total stockholders' equity (deficit)... 2,043 25,878 20,249 14,208 1,099 (1,097)
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND
RELATED NOTES.
OVERVIEW
We provide integrated circuit and software products to the broadband access
communications equipment industry. Our products include integrated circuits,
software, production designs and test systems that enable communications
equipment manufacturers to provide high-speed, cost-effective asymmetrical
digital subscriber line, or ADSL, equipment to communications service providers
and their customers. Our software includes programs that enable the basic
function of our integrated circuits and reference designs, and that provide
access to the Internet, permitting equipment utilizing our solutions to
communicate with telecommunication service providers' central office equipment.
We were incorporated in California in May 1995 as Integrated Technology
Express, Inc. In early 1996, United Microelectronics Corporation contributed
cash and licensed technology to us in return for an equity interest. Our initial
products included personal computer data interface and integrated circuits using
analog and digital signals. In early 1997, we began to develop integrated
circuits and software solutions for the ADSL market. In late 1997, we sold our
personal computer-related operations, changed our name to Integrated Telecom
Express, Inc. and focused our product development efforts exclusively on the
ADSL market.
Subsequent to the sale of our personal computer-related business and through
1998, we were a development stage company and had no product revenue. In
April 1998, we licensed certain ADSL technology from Alcatel Bell N.V. to
complement our intellectual property. In the first quarter of 1999, we began
shipping our production designs and development tools for our initial ADSL
products. In the third quarter of 1999, we began volume shipments of these
products and recorded our first significant product revenue. Our production
designs are complete sets of instructions describing how to build an ADSL modem
with our integrated circuits and software. Beginning in the fourth quarter of
1999, we significantly increased our investment in operations, including
research and development and sales and marketing.
We sell our products to manufacturers of customer premises equipment and
telecommunications service providers' central office equipment. Our revenue is
currently derived from sales of our Apollo and SAM product families. Sales of
Apollo Two products represented 80.8% of revenue in the year ended December 31,
1999 and 83.0% of revenue in the six months ended June 30, 2000. We anticipate
that our Apollo and SAM product families will continue to generate substantially
all of our revenue for the foreseeable future. To date, we have derived a
substantial portion of our revenue from a limited number of customers and we
expect to continue to rely on a limited number of customers. During the year
ended December 31, 1999, Xpeed, Inc. and Lite-On Communications Corporation
accounted for 44.3% and 10.9% of our revenue. In the six months ended June 30,
2000, Xpeed and Alcatel Bell N.V. accounted for 29.0% and 10.0% of our revenue.
We have focused our initial sales and marketing efforts on worldwide
communications equipment manufacturers. We currently sell through our direct
sales force, independent sales representatives and distributors. Our sales
personnel are based in Santa Clara, California; Round Rock, Texas and Taipei,
Taiwan. For the year ended December 31, 1999, sales to customers in Asia
accounted for 50.2% of our revenue, of which our sales to customers in South
Korea constituted 12.2% of our revenue. For the six months ended June 30, 2000,
sales to customers in Asia accounted for 55.5% of our revenue, of which sales to
customers in South Korea constituted 30.0% of our revenue. We estimate that of
our sales to U.S. communications equipment manufacturers in the year ended
December 31, 1999 and the six months ended June 30, 1999, approximately 43.3%
and 29.0% of these U.S. sales were ultimately intended for equipment for service
providers in the South Korean market. Combined with direct sales
23
<PAGE>
to South Korea during the same periods, our estimated revenue exposure to the
South Korean market during these periods was 56.5% and 59.1%. We anticipate that
the majority of our revenue will continue to be derived directly or indirectly
from Asia, especially South Korea, for the foreseeable future. All revenue is
denominated in U.S. dollars.
In general, we require approximately six months to achieve volume shipments
of our products after we first contact a customer, if volume shipments are
achieved at all. This process includes sale of our turn-key reference design,
customer board development, testing, field trials and qualification by service
providers and receipt of volume orders. Sales from production designs accounted
for less than 10% of revenues for the year ended December 31, 1999 and less than
5% for the six month period ended June 30, 2000. As a result, a significant
period of time may elapse between our sales efforts and our realization of
revenue. Our customers are not obligated by long-term contracts to purchase our
products and can generally cancel or reschedule orders on short notice.
Revenue from product sales other than to distributors is recognized upon
shipment if a signed purchase order exists, the fee is fixed and determinable,
collection of resulting receivables is probable and product returns are
reasonably estimable. Revenue from shipments to distributors with the right of
return are deferred until the distributor resells the inventory. Upon shipment,
we also provide for the estimated costs that may be incurred for product
warranties. We develop and market personal computer network interface cards to
the ADSL market in addition to the sale of integrated circuit and software
products. We outsource the manufacturing of these cards to a manufacturer in
Taiwan, which incorporates our integrated circuits.
We outsource the fabrication, packaging and testing of our integrated
circuits. Therefore, a significant portion of our cost of revenue consists of
payments to our manufacturers. Our cost of revenue also includes expenses
relating to our internal operations as well as the amortization of fees for
licensed technology. In April 1998, we licensed certain technology from Alcatel,
an unrelated third party, to develop, manufacture and distribute products. The
terms of the agreement call for an initial licensing fee of $5 million with
additional royalties paid on sales of products developed at rates ranging from
2.5% to 6%. Minimum royalties payable under the contract amount to $500,000,
$1,000,000 and $1,500,000 for 1999, 2000 and 2001. The licensing fee is
amortized over the estimated useful life of seven years with royalties expensed
in the year incurred.
Research and development expenses, exclusive of stock-based compensation
expense, consist primarily of salaries and related personnel expenses, prototype
development costs, fees paid to outside service providers and overhead allocated
to product development of our integrated circuits, software and underlying
technologies. All research and development costs are expensed as incurred. Our
research and development efforts are periodically subject to significant,
non-recurring costs and fees that can cause significant variability in our
quarterly research and development expenses. We expect to increase our research
and development expenses as we continue to develop new products and improve our
core technologies.
Sales and marketing expenses, exclusive of stock-based compensation expense,
consist primarily of salaries, commissions and related expenses for personnel
engaged in sales, marketing, applications engineering support and customer
service functions, costs associated with promotional and other marketing
expenses. We intend to expand our direct and indirect sales operations
substantially, both domestically and internationally. In addition, we expect
sales and marketing expenses to increase as we expand our customer service and
support organization.
General and administrative expenses, exclusive of stock-based compensation
expense, include personnel and related costs associated with executive
management, finance, accounting, human resources, information services and
facilities.
In connection with the grant of stock options and equity compensation to our
employees, technical advisors and directors, we have recorded deferred
stock-based compensation expense of $7.94 million
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<PAGE>
as of June 30, 2000. Deferred stock-based compensation represents the difference
between the grant price and the deemed fair value of our common stock options
granted during these periods. Deferred stock-based compensation expense for
options granted is being amortized using the graded vesting method, in
accordance with Financial Accounting Standards Board, or FASB, Interpretation
No. 28, over the vesting period of each respective option, which is generally
four years. Under the graded vesting method, each option grant is separated into
portions based on its vesting terms, which results in acceleration of
amortization expense for the overall award. Deferred stock-based compensation
for options granted to non-employees is accounted for in accordance with the
provisions of Statement of Financial Accounting Standards, or SFAS, No. 123 and
Emerging Issues Task Force 96-18. Unamortized deferred stock-based compensation
is presented as a reduction of stockholders' equity.
We have recorded no provision for federal or state income taxes for any
period since our inception because we have incurred losses in each period. As of
June 30, 2000, we had net operating loss carryforwards for federal and
California income tax purposes of approximately $25.3 million and $14.4 million
available to offset income in future years. The net operating loss carryforwards
will expire at various dates from 2003 through 2013, if not utilized.
We have experienced net losses from continuing operations of approximately
$1.3 million, $9.3 million and $13.7 million for the years ended December 31,
1997, 1998 and 1999. Additionally, we experienced a net loss of $11.5 million
for the six months ended June 30, 2000. Our accumulated deficit as of June 30,
2000 was $39.9 million. We expect to continue to incur net losses for the
foreseeable future.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUE. Revenue increased from $296,000 for the six months ended June 30,
1999 to $14.4 million for the six months ended June 30, 2000. This increase was
primarily attributable to the commencement of volume sales of Apollo and SAM
products principally in the second half of 1999. For the six months ended
June 30, 2000, our Apollo Two products accounted for 83.0% of our revenue.
COST OF REVENUE. Cost of revenue increased from $716,000 for the six months
ended June 30, 1999 to $8.5 million for the six months ended June 30, 2000. This
increase was primarily attributable to the commencement of volume sales of
Apollo Two and SAM products in the second half of 1999. As a percentage of
revenue, cost of revenue decreased from 242% for the six months ended June 30,
1999 to 59% for the six months ended June 30, 2000, primarily due to the lower
impact of fixed license fee amortization over a larger revenue base. License fee
amortization was $607,000 and $857,000 for the six months ended June 30, 1999
and 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses, exclusive of
stock-based compensation expense, increased 50% from $4.0 million for the six
months ended June 30, 1999 to $6.0 million for the six months ended June 30,
2000. The increase is primarily attributable to increases in compensation levels
and payroll-related expenses associated with additional personnel. Amortization
of deferred stock-based compensation related to research and development
amounted to $53,000 and $2.8 million for the six months ended June 30, 1999 and
2000.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation and personnel-related expenses, commissions paid to distributors,
advertising, trade show and public relations expenses. Exclusive of stock-based
compensation, sales and marketing expenses increased 99% from $1.4 million for
the six months ended June 30, 1999 to $2.7 million for the six months ended
June 30, 2000. This increase was primarily attributable to increased
compensation expense and sales commissions which are determined as a percentage
of revenue. Amortization of deferred stock-based compensation related to sales
and marketing activities amounted to $45,000 and $1.6 million for the six months
ended June 30, 1999 and 2000.
25
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses, exclusive
of stock-based compensation expense, increased 2% from $1.6 million for the six
months ended June 30, 1999 to $1.7 million for the six months ended June 30,
2000. This increase was primarily attributable to increased personnel and higher
compensation levels. Amortization of deferred stock-based compensation related
to general and administrative activities amounted to $44,000 and $3.5 million
for the six months ended June 30, 1999 and 2000.
AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION. Amortization of deferred
stock-based compensation increased 5,494% percent from $142,000 for the six
months ended June 30, 1999 to $7.9 million for the six months ended June 30,
2000. This increase was primarily attributable to options granted to new and
existing employees.
INTEREST AND OTHER INCOME, NET. Interest and other income, net increased
228% from $276,000 for the six months ended June 30, 1999 to $906,000 for the
six months ended June 30, 2000. The increase was primarily attributable to
increased interest income earned on a higher average cash balance and higher
prevailing interest rates.
NET LOSS. Net loss increased 58% from $7.3 million for the six months ended
June 30, 1999 to $11.5 million for the six months ended June 30, 2000. This
increase was primarily attributable to higher gross profit, offset by increased
operating expenses.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE. Revenue increased from zero in 1998 to $3.1 million in 1999. This
increase was primarily attributable to the commencement of sales of our
production designs and ADSL development tool during the first half of 1999 and
the commencement of volume sales of our Apollo and SAM products during the
second half of 1999. For the year ended 1999, our Apollo Two products accounted
for 80.8% of our revenue, and production designs and development tools accounted
for approximately 19.0%.
COST OF REVENUE. Cost of revenue increased from zero in 1998 to
$2.8 million in 1999. This increase was primarily attributable to the
commencement of sales of our production designs and ADSL development tool and
our Apollo and SAM products. Adding further to the increase was the amortization
of our technology licensing fee from Alcatel. License fee amortization was
$1.2 million and zero in 1999 and 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses, exclusive of
stock-based compensation expenses, increased 36% from $6.2 million in 1998 to
$8.5 million in 1999. The increase is primarily attributable to increases in
compensation levels and payroll related expenses associated with additional
personnel. Amortization of deferred stock-based compensation related to research
and development amounted to $58,000 and $97,000 in 1998 and 1999.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation and personnel-related expenses, commissions paid to distributors,
advertising, trade show and public relations expenses. Exclusive of stock-based
compensation, sales and marketing expenses, increased 185% from $1.7 million in
1998 to $3.2 million in 1999. This increase was primarily attributable to
increased compensation expenses and accrued sales commissions, which are
determined as a percentage of revenue. Amortization of deferred stock-based
compensation related to sales and marketing activities amounted to $57,000 and
$86,000 in 1998 and 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses, exclusive
of stock-based compensation expense, increased 20% from $2.6 million in 1998 to
$3.1 million in 1999. This increase was attributable to increased compensation
levels and an increase in payroll related expenses associated with additional
personnel. Amortization of deferred stock-based compensation related to general
and administrative activities amounted to $111,000 and $81,000 in 1998 and 1999.
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<PAGE>
AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION. Amortization of deferred
stock-based compensation increased 17% percent from $226,000 in 1998 to $264,000
in 1999. This increase was primarily attributable to options granted to new and
existing employees.
INTEREST AND OTHER INCOME, NET. Interest and other income, net increased
25% from $856,000 in 1998 to $1.1 million in 1999. This increase was primarily
attributable to a non-operating gain of $182,000.
NET LOSS. Net loss increased 47% from $9.3 million in 1998 to
$13.7 million in 1999. This increase was primarily attributable to higher
operating expenses.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE. Revenue from continuing operations was zero in both 1997 and 1998.
In late 1997, we sold our personal computer-related operations, which related to
the design and sale of peripheral input/ output and mixed signal integrated
circuits for personal computers. These operations have been treated as
discontinued. During 1998, we focused on the development of our ADSL products,
which we began in early 1997.
COST OF REVENUE. Cost of revenue from continuing operations was zero in
both 1997 and 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses, exclusive of
stock-based compensation expense, for continuing operations increased 466% from
$1.1 million in 1997 to $6.2 million in 1998. The increase is primarily
attributable to increases in compensation levels and payroll related expenses
associated with additional personnel. Amortization of deferred stock-based
compensation related to research and development amounted to $10,000 and $58,000
in 1997 and 1998.
SALES AND MARKETING. Sales and marketing expenses, exclusive of stock-based
compensation expense, for continuing operations increased from zero in 1997 to
$1.1 million in 1998. This increase was primarily attributable to the
commencement of our initial marketing activities of ADSL products. Amortization
of deferred stock-based compensation related to sales and marketing activities
amounted to zero and $57,000 in 1997 and 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses, exclusive
of stock-based compensation expense, for continuing operations increased 173%
from $943,000 in 1997 to $2.6 million in 1998. This increase was primarily
attributable to an increased investment in our support infrastructure.
Amortization of deferred stock-based compensation related to general and
administrative activities amounted to $23,000 and $111,000 in 1997 and 1998.
AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION. Amortization of deferred
stock-based compensation for continuing operations increased 585% percent from
$33,000 in 1997 to $226,000 in 1998. This increase was primarily attributable to
options granted to new and existing employees.
INTEREST AND OTHER INCOME, NET. Interest and other income was essentially
unchanged at $809,000 in 1997 and $856,000 in 1998.
NET LOSS. Loss from continuing operations increased 633% from $1.3 million
in 1997 to $9.3 million in 1998. This increase was primarily attributable to the
increase in operating expenses.
QUARTERLY RESULTS OF OPERATIONS
Our quarterly results of operations fluctuate from period to period
depending on factors such as the timing of significant expenditures for research
and development, the timing of large marketing expenditures such as trade shows,
the success of our sales efforts and the timing of significant orders for our
products. We believe that you should not rely upon period-to-period comparisons
of our
27
<PAGE>
financial results to predict future results. We may experience significant
fluctuations in period-to-period operating results.
The following table presents certain quarterly financial information derived
from our statements of operations and such data as a percentage of revenue for
the five quarters ended June 30, 2000. This data has been derived from unaudited
financial statements. In our opinion, these statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information when read in conjunction with our annual audited
financial statements and related notes appearing elsewhere in this prospectus.
These operating results are not necessarily indicative of results of any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 2000 2000
-------- ------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Revenue..................................... $ 213 $ 499 $ 2,258 $ 4,115 $10,286
Cost of revenue............................. (384) (632) (1,463) (2,750) (5,781)
------- ------- ------- ------- -------
Gross profit (loss)......................... (171) (133) 795 1,365 4,505
------- ------- ------- ------- -------
Operating expenses:
Research and development (exclusive of
stock-based compensation expense of $25,
$22, $23, $157 and $2,676).............. 1,993 1,883 2,613 2,641 3,306
Sales and marketing (exclusive of
stock-based compensation expense of $22,
$19, $22, $346 and $1,256).............. 770 696 1,139 1,138 1,607
General and administrative (exclusive of
stock-based compensation expense of $20,
$13, $23, $259 and $3,191).............. 902 526 927 983 690
Amortization of deferred stock-based
compensation............................ 67 54 68 762 7,123
------- ------- ------- ------- -------
Total operating expenses................ 3,732 3,159 4,747 5,524 12,726
------- ------- ------- ------- -------
Operating loss.............................. (3,903) (3,292) (3,952) (4,159) (8,221)
Interest and other income, net.............. 122 137 656 464 442
------- ------- ------- ------- -------
Net loss.................................... $(3,781) $(3,155) $(3,296) $(3,695) $(7,779)
======= ======= ======= ======= =======
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 2000 2000
-------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF REVENUE:
Revenue...................................... 100% 100% 100% 100% 100%
Cost of revenue.............................. (150) (127) (65) (67) (56)
------ ---- ---- ---- ---
Gross profit (loss).......................... (80) (27) 35 33 44
------ ---- ---- ---- ---
Operating expenses:
Research and development................... 936 378 116 63 32
Sales and marketing........................ 362 139 50 28 16
General and administrative................. 423 105 41 24 7
Amortization of deferred stock-based
compensation............................. 31 11 3 19 69
------ ---- ---- ---- ---
Total operating expenses................. 1,752 633 210 134 124
------ ---- ---- ---- ---
Operating loss............................... (1,832) (660) (175) (101) (80)
Interest and other income, net............... 57 27 29 11 4
------ ---- ---- ---- ---
Net loss..................................... (1,775)% (633)% (146)% (90)% (76)%
====== ==== ==== ==== ===
</TABLE>
We commenced ADSL product shipments in the first quarter of 1999. Volume
shipments commenced in the third quarter of 1999 and grew significantly in the
fourth quarter of 1999 and the first quarter of 2000 as we shipped additional
orders to our initial customers and added new accounts.
Cost of revenue in the first, second and third quarters of 1999 reflects the
early stage of our revenue ramp. Because a portion of our cost of revenue is
fixed and allocated over a relatively small amount of revenue, our gross profit
was negative in these quarters. The fixed portion of our costs consists
primarily of amortization of license fees and, less significantly, manufacturing
overhead costs. As our sales revenue increases, we expect the impact of these
fixed costs to decline, resulting in a decline of cost of revenue as a
percentage of revenue.
Operating expenses remained relatively stable in the first three quarters of
1999, then increased in the fourth quarter of 1999 and the first quarter of 2000
as we added new employees, incurred sales commissions as our revenue continued
to ramp, accelerated our research and development expenditures and increased our
compensation levels to attract and retain qualified employees.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations and working capital requirements through the
sale of common and preferred stock. We have also received additional funds from
the exercise of stock options through the six months ended June 30, 2000.
Cash and cash equivalents increased 167% from $14.4 million as of
December 31, 1998 to $38.5 million as of December 31, 1999. This was primarily
due to the sale of $40.0 million of Series B convertible preferred stock in
November 1999. Cash and cash equivalents decreased 11% from $38.5 million as of
December 31, 1999 to $34.3 million as of June 30, 2000 primarily due to
purchases of fixed assets and use of cash in operations.
Cash used for continuing operations increased 72% from $7.7 million in the
year ended 1998 to $13.3 million in the year ended 1999. This was primarily due
to the net impact of increases in accounts receivable, inventory, prepayments
and accounts payable as our business ramped up. Cash used for continuing
operations decreased 69% from $5.7 million for the six months ended June 30,
1999 to $1.7 million for the six months ended June 30, 2000. This was primarily
due to the increase in cash received from sales.
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<PAGE>
Cash generated from financing activities increased from $5.2 million in 1998
to $40.3 million in 1999. This was primarily due to the sale of $40.0 million of
Series B preferred stock in 1999 compared to the sale of $5.0 million of
Series A preferred stock in 1998. Cash generated from financing activities
increased from $36,000 for the six months ended June 30, 1999 to $775,000 for
the six months ended June 30, 2000, representing the exercise of stock options,
offset by payments of capital lease obligations.
As of June 30, 2000, we had recorded liabilities for licenses and capital
leases in the amount of $7.0 million. In addition, we have commitments to pay
various royalties to providers of intellectual property based on our future
sales. While not yet committed, because our head office lease will expire as of
December 31, 2000, we anticipate significantly higher lease payments on new head
office space beginning on November 1, 2000, resulting in overlapping lease
payments in November and December of 2000 while we conduct leasehold
improvements on our new space.
We intend to use the net proceeds of this offering primarily for working
capital and general corporate purposes, including expenditures for research and
development of new products and sales and marketing efforts. In addition, we may
use a portion of the net proceeds of this offering to acquire complementary
products, technologies or businesses. We believe that the net proceeds from this
offering, together with our current cash, cash equivalents and short term
investments will be sufficient to finance our working capital and capital
expenditures for the next 12 months. Our management intends to invest any cash
in excess of current operating requirements in short-term, interest-bearing
investment-grade securities. Our future capital requirements will depend upon
many factors, including management of working capital, the timing of research
and product development efforts and the expansion of our marketing and
distribution efforts.
If the proceeds of this offering and the concurrent private placement,
together with our existing cash balances and cash flows expected from future
operations, are not sufficient to meet our liquidity needs, we will need to
raise additional funds. If adequate funds are not available on acceptable terms
or at all, we may not be able to take advantage of market opportunities, develop
or enhance new products, pursue acquisitions that would complement our existing
product offerings or enhance our technical capabilities, execute our business
plan or otherwise respond to competitive pressures. The issuance of additional
equity securities may dilute our existing stockholders.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while concurrently maximizing the income we receive from our investments without
significantly increasing risk. Some of the securities that we may invest in may
be subject to market risk. This means that a change in prevailing interest rates
may cause the principal amount of the investment to fluctuate. For example, if
we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the current
value of the principal amount of our investment will decline. To minimize this
risk in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities and
certificates of deposit. In general, money market funds are not subject to
market risk because the interest paid on such funds fluctuates with the
prevailing interest rate. As of December 31, 1999, all of our investments were
in money market funds, bank checking or savings accounts, or bank certificates
of deposit. A hypothetical 100 basis point increase in interest rates would
result in no decrease in the fair value of our available-for-sale securities as
of December 31, 1999.
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<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments and requires recognition of all derivatives
as assets or liabilities in the statement of financial position and measurement
of those instruments at fair value. The statement is effective for fiscal years
beginning after June 15, 2000. We will adopt the standard no later than the
first quarter of fiscal year 2001 and management does not expect a material
impact on our financial statements.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This Statement of Position provides
guidance on accounting for certain costs in connection with obtaining or
developing computer software for internal use and requires that entities
capitalize such costs once certain criteria are met. We adopted this Statement
of Position 98-1 as of January 1, 1999. The adoption of this Statement of
Position did not have a material effect on our financial position or results of
operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities."
This Statement of Position requires that entities expense start-up costs and
organization costs as they are incurred. We adopted this Statement of Position
98-5 as of January 1, 1999. The adoption of this Statement of Position did not
have a material effect on our financial position or results of operations.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." SAB 101 provides interpretive guidance on the recognition,
presentation and disclosure of revenue in financial statements under certain
circumstances. We adopted the provisions of Staff Accounting Bulletin 101 in
these financial statements for all periods presented.
In March 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation--an Interpretation of APB Opinion
No. 25." Financial Accounting Standards Board Interpretation 44 clarifies, among
other issues:
- the definition of employee for purposes of applying APB Opinion No. 25,
- the criteria for determining whether a plan qualifies as a non
compensatory plan,
- the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and
- the accounting for an exchange of stock compensation awards in a business
combination.
Financial Accounting Standards Board Interpretation 44 is effective July 1,
2000. We do not expect the adoption of Financial Accounting Standards Board
Interpretation 44 to have a material effect on our financial position or results
of operations.
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<PAGE>
BUSINESS
INTRODUCTION
We provide integrated circuit and software products to the broadband access
communications equipment industry. Our products include integrated circuits,
software, production designs and test systems that enable communications
equipment manufacturers to provide high-speed, cost-effective asymmetrical
digital subscriber line, or ADSL, equipment to communications service providers
and their customers. ADSL technology permits data transmission over copper
telephone lines. Our production designs are complete sets of instructions
describing how to build an ADSL modem with our integrated circuits and software.
We sell our products to manufacturers of both customer premises equipment and
service providers' central office equipment. Our products are standards
compliant, multiple vendor equipment compatible, reliable, expandable and
flexible. They also provide for rapid time-to-market and ease of installation
and use. These products are designed to enhance the delivery of applications
such as high-speed Internet access, electronic commerce, video-on-demand,
on-line gaming, telecommuting and remote access.
We have a limited operating history, and we are not profitable. We expect to
continue to incur net losses for the foreseeable future. In addition, our
revenue has been and will continue to be derived from a limited number of
products and from a limited number of customers.
INDUSTRY OVERVIEW
LARGE AND GROWING MARKET FOR BROADBAND COMMUNICATION CREATES ACCESS
BOTTLENECK
The Internet has emerged as a widespread commerce, communications and
entertainment medium for consumers and businesses. Dataquest estimates the
percentage of Internet households in North America will grow from 20 percent of
total households in 1998 to more than 40 percent by 2003. On a worldwide basis,
Dataquest estimates that the percentage of Internet households will grow from 2
percent of total households to almost 10 percent during the same period. The
volume of data transmitted across the Internet is growing with the increase in
both the amount and complexity of bandwidth-intensive applications and content
such as website graphics and multimedia video and audio. In addition, the rise
in the frequency and duration of Internet connections has compounded the growth
of Internet traffic. As a result, consumers and businesses increasingly seek
high-speed, always-connected and cost-effective access to the Internet.
Communication technologies continue to evolve rapidly to meet this growing
demand for broadband Internet access. Today, users primarily access the Internet
with an analog modem that establishes a connection through a single copper
telephone line with the telecommunication service provider's central office. The
56 kilobits per second, or Kbps, transmission speed of analog modems is
inadequate for accessing content-rich websites and has created what is referred
to as the last mile bottleneck.
Several technologies have been developed to alleviate the last mile
bottleneck. Many of these, however, suffer from limitations. An integrated
services digital network connection has a maximum transmission speed of 128
Kbps, is subject to a per use charge and cannot support simultaneous data and
analog voice traffic over a single copper telephone line. Cable modem networks
are a shared environment and are subject to reduced bandwidth per user as the
number of users increases. Broadband wireless systems have been deployed on a
limited basis and are currently expensive, subject to several regulatory
requirements and limited by geography and distance. Satellite communications
systems are expensive to deploy and maintain and require an additional telephone
line to support two-way communication. High-capacity telephone lines can be
installed to provide a high-speed last mile connection, but their high cost and
limited availability have restricted their deployment primarily to large
businesses and organizations.
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EMERGENCE OF DIGITAL SUBSCRIBER LINE TECHNOLOGY
Digital subscriber line technology has rapidly emerged as a reliable, easily
deployed and inexpensive broadband access solution for residential and business
customers. Digital subscriber line bandwidth can be priced to meet the needs of
individual customers. Data over a digital subscriber line is transmitted over
existing copper telephone lines making broadband networking across existing last
mile infrastructure for a large number of subscribers practical. In a digital
subscriber line installation, equipment is deployed at each end of the existing
telephone wire enabling broadband transmission. Digital subscriber line
technology provides a dedicated telephone connection between the service
provider's central office and the customer's premises equipment. As a result,
service does not degrade as the number of users increases. The rapid growth in
the deployment of digital subscriber line services may be attributed to an
overall increase in demand for broadband Internet services as well as an
increase in competition among service providers.
Digital subscriber line technologies currently include high bit rate digital
subscriber line; integrated digital subscriber line; symmetrical digital
subscriber line; very high bit rate digital subscriber line; and asymmetrical
digital subscriber line, or ADSL. High bit rate digital subscriber line is
expensive to deploy, does not support analog voice traffic and provides
symmetrical service best used within a business campus environment. Integrated
digital subscriber line provides simultaneous two-way throughput at speeds of
only 144 Kbps and does not support analog voice traffic. Symmetrical digital
subscriber line supports a maximum data transmission rate of 768 Kbps
downstream, or from the central office to the customer's premises, and upstream,
or from the customer's premises to the central office. However, symmetrical
digital subscriber line cannot simultaneously carry data and analog voice
traffic over a single copper telephone line. As a result, symmetrical digital
subscriber line has been deployed primarily to businesses because they are more
likely to have multiple telephone lines. Very high bit rate digital subscriber
line can deliver data at a maximum transmission rate of up to 52 Mbps.
Deployment of very high bit rate digital subscriber line has been limited
because its maximum effective distance of approximately 4,500 feet.
ADSL technology permits the simultaneous transmission of data and analog
voice traffic over a single copper telephone line and supports a data
transmission speed that is dependent upon the direction of data traffic and
distance from the service provider's central office. ADSL was originally
designed for the transmission of video and, as such, provides greater
transmission rates downstream than upstream. ADSL supports data transmission
rates of up to 8 Mbps downstream and up to 1 Mbps upstream and supports
connections at distances of up to 18,000 feet. This downstream transmission
speed of 8 Mbps is over one hundred times faster than the maximum transmission
speed available through an analog modem. We believe that the majority of
Internet users today have greater downstream capacity requirements than upstream
capacity requirements, and therefore ADSL technology would be highly effective
in matching communication system capabilities with Internet usage patterns.
Dataquest estimates that worldwide central office ADSL port shipments will
increase from 2.9 million in 1999 to 8.5 million in 2003. In addition, Dataquest
estimates that worldwide customer premises equipment shipments will increase
from 1.6 million in 1999 to 11.1 million in 2003. Growth in worldwide ADSL
deployment is due to a number of factors. For example, in Singapore, service
providers have deployed ADSL technologies primarily because they seek high
downstream capacity to provide bandwidth-intensive video and full-length movies
to their customers. In South Korea, ADSL deployment has grown in part as a
result of a government initiative to rapidly expand affordable broadband access
to homes and businesses. In the United States and other countries, the overall
increase in demand for bandwidth-intensive Internet services as well as the
intense competition among service providers to offer differentiated broadband
services in an affordable manner has lead to growth in ADSL deployment.
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Because the deployment of ADSL service has occurred only recently, ADSL does
suffer from the following limitations:
- ADSL service is not available in all locations due to the lack or
insufficiency of equipment in the customer's local central office, or the
distance from the local central office to the customer's location;
- some equipment providers' products are not compatible;
- not all telephone lines within ADSL service areas are yet qualified to
support ADSL;
- shortage of telecommunications service provider installers can cause
delays in meeting subscriber demand for new service; and
- limitations in the capacity of the telecommunications infrastructure can
sometimes prevent ADSL connections from transmitting data at committed
rates, if at all.
REQUIREMENTS OF ADSL EQUIPMENT
ADSL equipment is located at both ends of the copper telephone line and
consists of central office ADSL equipment and modems, gateways and routers at
the customer premises. Gateways translate data into different communications
standards. Routers direct data within the network. ADSL equipment manufacturers
require components such as integrated circuits and software that comply with
industry standards and compatible with other vendors' equipment. Beyond these
fundamental requirements, these manufacturers seek to differentiate themselves
from competitors by incorporating integrated circuit and software solutions that
are:
- expandable and flexible;
- cost-effective;
- reliable and high-performance; and
- easy to install and use.
While communications equipment manufacturers can combine integrated circuit
and software products from multiple sources, we believe that they generally
prefer system-level solutions that are easy to integrate and require minimal
testing and qualification. A system-level solution can streamline the component
and software selection process, reduce development time, assist in production
testing and facilitate end-user installation. We believe that system-level
solutions are becoming increasingly important to ADSL equipment manufacturers as
product life cycles shorten, standards evolve, competition increases and the
demand for broadband access grows.
THE ITEX SOLUTION
We offer two families of ADSL customer premises and central office equipment
products: Apollo integrated circuits with software, and SAM integrated circuits
with software. Our software includes programs that enable the basic function of
our integrated circuits and reference designs, and that provide access to the
Internet, permitting equipment utilizing our solutions to communicate with
telecommunication service providers' central office equipment.
Our production designs and ADSL development and test tool facilitate our
customers' rapid product development. We believe our intellectual property
portfolio and system-level expertise have enabled us to develop a compelling
product roadmap of ADSL broadband access solutions for residential and business
markets. Key benefits of our solution include:
STANDARDS COMPLIANCE AND COMPATIBILITY. Our integrated circuit and software
solutions are compliant with international standards. In addition, our
production designs are compatible with the
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equipment of all the major manufacturers including Alcatel Bell N.V., Cisco
Systems, Inc. and Nokia Corp.
EXPANDABLE AND FLEXIBLE. Our SAM integrated circuit and software solution
provides a expandability to the ADSL equipment market. Our SAM products
incorporate software programmable integrated circuits, allowing rapid
development of new products and functionality by equipment manufacturers based
upon software upgrades. We believe our SAM products could offer equipment
manufacturers the flexibility necessary to migrate to other broadband digital
subscriber line access equipment markets, such as very high bit rate digital
subscriber line, as demands or industry standards evolve.
ENABLE RAPID TIME-TO-MARKET. Our customers sell their equipment to service
providers doing business in a highly competitive industry, with rapid product
innovation and short product life cycles. Because our production designs are
standards-compliant and compatible with a broad variety of ADSL equipment,
equipment providers can integrate our products into their systems rapidly. In
addition, our system-level solution reduces the equipment manufacturers' need to
select and integrate products from multiple vendors.
HIGH PERFORMANCE AND RELIABILITY. Service providers require that equipment
enable them to provide high-performance, reliable and uninterrupted service. Our
high-performance production designs have been demonstrated to allow increased
data rates over long distances and maintain reliable connections even under
conditions of relatively high copper telephone line interference.
EASE OF INSTALLATION, USE AND UPGRADE. Service providers prefer equipment
that is easy to install and use and that supports easy upgrades of service that
will encourage rapid adoption of new services as they become available. Our
Apollo and SAM solutions are designed to facilitate easy installation, operation
and upgrading of ADSL customer premises equipment.
THE ITEX STRATEGY
Our objective is to be a leading provider of integrated circuit and software
solutions for equipment manufacturers addressing the broadband access market.
Key elements of our strategy for achieving this objective include:
LEVERAGE OUR TECHNOLOGY STRENGTHS. We have invested significant resources
to develop our technology strengths in integrated circuit design, system design,
digital signal processing algorithms and software. We license additional
technology from Alcatel and continue to develop functionality and software
support for use by ADSL equipment manufacturers. We are also devoting
substantial resources toward the enhancement of our proprietary SAM technology.
This technology, which was originally designed for the personal computer market,
is now being adapted for advanced multi-port central office applications.
ENABLE THE RAPID ADOPTION OF ADSL TECHNOLOGY. We believe that ease of use,
compatibility and reduced cost of ownership to service providers will be
critical to the continued adoption of ADSL. We intend to continue developing
production designs that enable communications equipment manufacturers to enter
the market and reduce the time-to-market of their products. We believe that
providing production designs to these manufacturers will enable service
providers to deploy ADSL services rapidly.
STRENGTHEN AND EXPAND OUR RELATIONSHIPS WITH KEY CUSTOMERS AND
SUPPLIERS. We have established customer and supplier relationships with a
number of market and technology leaders within the broadband access market. We
believe that close relationships with our customers enable us to align our
product development with the requirements of equipment manufacturers. For
example, we have entered into a technology and supply agreement with Alcatel
Bell N.V. and are jointly developing and marketing customer premises equipment
with NEC Corporation. In addition, we believe that
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maintaining close relationships with service providers is critical to the future
acceptance of our technology. We also believe that supplier relationships are
critical to the long-term success of companies in our industry. Accordingly, we
have executed a term sheet regarding cooperation on technology enhancements with
United Microelectronics Corporation. We have also executed a term sheet with
United Microelectronics Corporation stating that it guarantees us minimum
production capacity through 2003 provided that we use United Microelectronics
Corporation to manufacture substantially all of our integrated circuits. We
intend to strengthen our existing relationships over time and establish new
relationships with equipment manufacturers, service providers and manufacturing
partners.
FURTHER PENETRATE WORLDWIDE MARKETS FOR OUR PRODUCTS. We currently offer
our products to communications equipment manufacturers that serve a number of
key geographic markets, including countries that are early ADSL market adopters
such as South Korea, Singapore and Taiwan. We have also begun to develop
relationships with leading communications equipment manufacturers in other
regions including North America and Europe. We intend to continue devoting
substantial resources toward penetrating each of these markets and developing
relationships with the leading ADSL equipment manufacturers in each market.
TARGET OTHER HIGH-GROWTH BROADBAND ACCESS MARKET OPPORTUNITIES. We intend
to focus on high-growth broadband access markets that will enable us to leverage
our current technological strengths. For example, we are developing technologies
to address the future needs of central office equipments, small office and home
office networks and other variants of digital subscriber line technology. We
will continue to monitor trends in the broadband access markets and will devote
resources toward product development in segments that we believe will experience
rapid growth.
BUILD UPON OUR CORE STRENGTHS THROUGH STRATEGIC INVESTMENTS. We intend to
enhance our technological capabilities and capacity for growth by pursuing
investment opportunities. This strategy would augment our existing products with
complementary technologies and enhance the breadth and depth of our engineering
talent. These investments would also help us to access key customers and market
segments that we do not currently address with our existing solutions.
PRODUCTS
We deliver integrated circuit and software products that enable rapid
deployment of ADSL equipment. Our production designs are compatible with
equipment offered by our customers and other vendors. Our integrated circuit and
software products enable transmission speeds of up to 8 Mbps downstream and up
to 1 Mbps upstream. Our products are comprised of highly integrated circuits;
software for most Microsoft Windows operating systems and wide area network
protocol support; production designs; and ADSL test equipment and software. Our
production designs are complete sets of instructions describing how to build an
ADSL modem with our integrated circuits and software.
We offer two families of customer premises and central office equipment
products: Apollo integrated circuits with software, and SAM integrated circuits
with software. Each of our products consists of a combination of integrated
circuits. The first integrated circuit, used in both of our product families,
receives and transmits ADSL signals across copper telephone lines. Our second
integrated circuit relies upon embedded digital signal processing to process the
digitized ADSL signal. In contrast, our SAM family uses an optimized application
specific integrated circuit and software-based algorithms to process the
digitized ADSL signal.
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APOLLO FAMILY
Our Apollo family includes two integrated circuit and software products,
Apollo One and Apollo Two, and we are developing three additional products. The
Apollo One and Apollo Two products are compliant with all current ADSL standards
and are compatible with all major equipment vendor products. We promote market
acceptance of our Apollo products in customer premises equipment with our
production designs.
APOLLO FAMILY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
<C> <S> <C>
PRODUCTS APPLICATIONS INTRODUCTION DATE
--------------------------------------------------------------------------------------------
CURRENT
--------------------------------------------------------------------------------------------
APOLLO ONE - Central office ADSL access 3rd quarter 1999
equipment
- External modems
- Gateways
- Routers
--------------------------------------------------------------------------------------------
APOLLO TWO - Communications hardware for 3rd quarter 1999
personal computers
--------------------------------------------------------------------------------------------
FUTURE
--------------------------------------------------------------------------------------------
APOLLO THREE - Communications hardware for 3rd quarter 2000*
personal computers
--------------------------------------------------------------------------------------------
APOLLO FOUR - Communications hardware for 4th quarter 2000*
personal computers
--------------------------------------------------------------------------------------------
APOLLO FIVE - External modems 1st half 2001*
- Gateways
- Routers
--------------------------------------------------------------------------------------------
</TABLE>
* Anticipated introduction date.
APOLLO ONE. The Apollo One is our integrated circuit and software product
for central office ADSL equipment and stand-alone customer premises equipment
markets. Stand-alone customer premises equipment includes external modems,
gateways and routers. Gateways translate data into different communications
standards. Routers are devices that direct network data. The Apollo One
incorporates two integrated circuits. The first integrated circuit receives and
transmits ADSL signals with a demonstrated copper telephone line reach of up to
20,000 feet. The integrated circuit that receives and transmits ADSL signals
also provides the ability to extract the ADSL signal under poor telephone line
conditions and consolidates several functional blocks commonly found in discrete
components in other ADSL designs. The second integrated circuit of our Apollo
One incorporates digital signal processing and other functions. Because this
digital processing occurs in a single integrated circuit, our Apollo One product
requires minimal processing from the host equipment's microprocessor. We supply
a software application programming interface to more easily allow the customer
to write additional differentiated software to run on top of that provided with
the Apollo product. In addition, we are jointly developing a production design
with NEC Corporation to promote the deployment of the Apollo One into external
modem, gateway and router markets.
APOLLO TWO. Apollo Two is our integrated circuit and software products for
the personal computer communications hardware market. This product incorporates
the two Apollo One integrated circuits and an interface integrated circuit which
enables a lower cost product to be produced. In addition, we offer a production
design and complete software running under most Microsoft Windows operating
systems. We also supply software interfaces that manage Microsoft Windows
support for wide area network access.
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FUTURE APOLLO PRODUCTS. In the future, we intend to offer Apollo products
with lower costs, higher integration and expanded capabilities. We intend to
introduce the Apollo Three in the third quarter of 2000. The Apollo Three will
provide a greater level of component integration resulting in a smaller
integrated circuit size at a significantly reduced cost compared to the Apollo
Two. The Apollo Three combines the integrated digital circuits of the Apollo Two
into one integrated digital circuit, and includes a new integrated circuit that
integrates additional external components. The Apollo Four is based on the
Apollo Three and will be introduced in the second half of 2000. The Apollo Four
will feature an enhanced integrated circuit that receives and transmits ADSL
signals over copper telephone lines capable of supporting ADSL service over
existing integrated services digital network infrastructure. In the first half
of 2001, we expect to introduce the Apollo Five which will feature an integrated
circuit that incorporates a microprocessor and data interfaces for local area
networks and personal computers. Our Apollo Five will be targeted at the
customer premises equipment market, including ADSL external modems, gateways and
routers.
SAM FAMILY
Our SAM product family includes two integrated circuit and software
products, SAM One and SAM One Full Rate, which were specifically developed for
the sub $1,000 personal computer and Internet access device markets. We are
currently developing two additional products. SAM is our proprietary ADSL
product that consists of an optimized partitioning of integrated circuitry and
software-based digital signal processing, offering efficient, low-cost and low
power consuming integrated circuit and software products. Our SAM One products
are compliant with all current ADSL standards and are compatible with major
equipment vendor products.
SAM FAMILY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
<C> <S> <C>
PRODUCTS APPLICATIONS INTRODUCTION DATE
--------------------------------------------------------------------------------------------
CURRENT
--------------------------------------------------------------------------------------------
SAM ONE - Motherboards for personal computers 4th quarter 1999
- Communications hardware for
personal computers
- Internet access devices
--------------------------------------------------------------------------------------------
SAM ONE FULL RATE - Motherboards for personal computers 2nd quarter 2000
- Communications hardware for
personal computers
- Internet access devices
--------------------------------------------------------------------------------------------
FUTURE
--------------------------------------------------------------------------------------------
UNIVERSAL SAM ONE - Motherboards for personal computers 4th quarter 2000*
- Communications hardware for
personal computers
- Internet access devices
--------------------------------------------------------------------------------------------
SAM TWO - Central office ADSL access 1st half 2001*
equipment
- Multi-dwelling unit ADSL access
equipment
- High-end routers and bridge
external modems
--------------------------------------------------------------------------------------------
</TABLE>
* Anticipated introduction date.
SAM ONE. SAM One uses the personal computer host microprocessor and memory
to manage the digital signal processing of the incoming and outgoing ADSL
signals rather than incorporating a digital
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signal processor within our integrated circuit. SAM One is a fully-programmable
solution targeted at both the sub $1,000 personal computer and Internet access
device markets.
SAM One consists of two integrated circuits. The first integrated circuit
incorporates programmable features allowing this integrated circuit to receive
and transmit ADSL signals with a demonstrated copper telephone line reach from
the central office to the customer's premises up to 20,000 feet. In addition,
SAM One provides the ability to extract the ADSL signal under poor line
conditions and consolidates several discrete components in other ADSL designs.
The second integrated circuit is a low-cost design capable of handling most of
the computationally intensive ADSL functions while reducing integrated circuit
size and power dissipation. SAM software running on the personal computer host
microprocessor includes digital signal processing algorithms necessary to
process the ADSL data. We offer a production design incorporating this product
that is a robust, field-proven and cost-effective solution to the end user.
Our SAM One product includes a broad set of software support for Microsoft
Windows 98, 98se, NT4.0 and 2000. This support handles the interface from
Microsoft Windows to personal computer communications hardware or motherboards
equipped with our SAM One. Additional software manages the Windows support for
wide area network access. Our SAM One host-based software product allows
flexible programming.
SAM ONE FULL RATE. In May 2000, we introduced SAM One Full Rate, which
consists of our SAM One product with a software upgrade that allows full rate
ADSL transmission speeds of up to 8 Mbps downstream and 768 Kbps upstream. Our
SAM One Full Rate, like our SAM One, includes a complete set of software support
for the Windows 98, 98se, NT4.0 and 2000 operating systems. The SAM One Full
Rate host-based software product supports automatic configuration allowing
connection to central office ADSL equipment set to any of the ADSL standards.
FUTURE SAM PRODUCTS. In the future, we intend to offer software upgrades to
our SAM products as well as a new generation of SAM products that incorporate
our proprietary technology for new market segments. In the fourth quarter of
2000, we intend to introduce our Universal SAM One. It consists of a software
upgrade for the SAM One and will be compatible with all international integrated
services digital network transmission standards. In the first half of 2001, we
plan to introduce SAM Two, the next generation of our proprietary SAM-based
products. SAM Two will feature multi-port capability targeting central office
and small capacity central office ADSL equipment. In addition, SAM Two will
support stand-alone high-end routers and gateways. Our SAM Two digital
integrated circuit is based on our field-proven SAM One architecture, which
minimizes integrated circuit size and power consumption and incorporates our
proprietary signal processing algorithms. The SAM Two will offer high port
density, low cost and power utilization. It will also support voice over ADSL.
PRODUCTION DESIGNS, TEST EQUIPMENT AND SOFTWARE. We provide production
designs to our customers to facilitate the development of their customer
premises equipment using our products. These production designs provide complete
solutions that include detailed printed circuit board layout, component
selection and testing procedures, production software and wide area network
access software, easy installation of software and user guides. These production
designs enable our customers to quickly market a complete ADSL modem with
demonstrated compatibility, low cost design, high performance and compatibility
with the major Windows operating systems. We also provide software interfaces
that enable the customer to customize their product by adding system-level
functionality.
Our development tools enable our customers to achieve faster time-to-market
through laboratory evaluation and initial production testing of their designs as
well as the ability to conduct system diagnostics and performance reporting
capabilities. The development tool simulates a real-world ADSL environment
including the central office ADSL equipment. Our development tool includes a
complete central office ADSL transmission unit, test set-up and all of the
necessary software and diagnostic tools for our customers to diagnose and test
products developed with our integrated circuits.
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TECHNOLOGY
We believe that we have a competitive advantage in several key technology
areas: expandable modem products; software; communication and digital signal
processing algorithms; integrated circuit design for electronic signals in
multiple formats; analog and hardware system design capability; and wide area
network and local area network knowledge. Together, these capabilities have
helped enable us to provide system-level products to our customers that are
fully compliant with international communications standards and are compatible
with a broad range of ADSL equipment, and which allow our customers to introduce
their products to the market quickly.
EXPANDABLE MODEM PRODUCTS. Our broad knowledge of application specific
integrated circuits design, computer design and computer operating systems
enables us to build expandable ADSL products. For example, our proprietary SAM
products consists of an optimized balance of hardware and software functions,
offering efficient, low-cost, low power consumption integrated circuit and
software products. Our SAM One was specifically developed for the
price-sensitive sub $1,000 personal computer and Internet access device markets,
and uses the host microprocessor and shared system memory for low-cost,
high-performance solutions. In addition, our SAM One provides the ability to
expand to available host processing power, allowing efficient balance between
ADSL transmission data rates and host processor utilization. SAM Two builds on
the expandability of our SAM products by sharing a processor core among several
ports to conduct the ADSL digital signal processing. The resulting design will
offer price competitive integrated circuit and software products.
SOFTWARE. Our software engineers have expertise in developing code that
addresses the needs of communications equipment manufacturers and service
providers. Our knowledge of network operation and architectures allows us to
develop software that makes our products expandable with other communications
equipment. In addition, our understanding of various operating systems and
personal computer environments allows us to create software that provides for
simple installation and robust operation. Many of our software engineers have
extensive personal computer operating system expertise. This expertise allows us
to provide software that is compatible with various personal computer platforms
and enables the development of software interfaces for our customers.
COMMUNICATION AND DIGITAL SIGNAL PROCESSING ALGORITHMS. Our signal
processing engineers have substantial experience in the process of transmitting
and receiving signals across different physical transport media. Our engineers
also have significant experience developing algorithms. This expertise has
allowed our engineers to design highly-efficient algorithms that enable us to
produce high performance, reprogrammable products operating with low power
consumption.
MIXED ANALOG AND DIGITAL INTEGRATED CIRCUIT DESIGN. A mixed analog and
digital integrated circuit is an integrated circuit that uses analog and digital
signals. Our mixed analog and digital designers have substantial experience in
the telecommunications and data communications industry and analog-to-digital
and digital-to-analog signal conversion techniques. This experience has enabled
us to develop highly integrated mixed analog and digital integrated circuits.
Our mixed analog and digital integrated circuits replace multiple discrete
components used in many competing digital subscriber line solutions. Our digital
integrated circuit designers have many years of experience in the areas of high
complexity and high-speed digital integrated circuit development and
integration. All of our integrated circuits are designed and manufactured using
the latest development tools and silicon manufacturing technologies.
ANALOG AND HARDWARE SYSTEM DESIGN CAPABILITY. Our analog and digital
system-level engineers have extensive experience in the development of
telecommunication systems. In addition, our engineers have experience in the
Underwriters Laboratories, Inc. and Federal Communications Commission system
qualification certification processes. We are familiar with the implications of
the interference present in personal computer environments that can impact the
performance of ADSL. Our personal computer
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communications hardware receive and transmit ADSL signals with a demonstrated
copper telephone line reach from the central office to the customer of up to
20,000 feet.
We combine our analog and hardware system expertise with our experience in
integrated circuit, digital signal processing algorithms and software to develop
products that allow us to offer robust and manufacturable solutions for our
customers. This facilitates rapid time-to-market, superior performance and low
system cost.
WIDE AREA NETWORK AND LOCAL AREA NETWORK KNOWLEDGE. Our engineers have
broad knowledge of both wide area network and local area network environments.
Our engineers are familiar with the evolving requirements for the deployment of
digital subscriber line solutions and also have extensive experience in network
management software. This experience allows us to efficiently integrate the
software and hardware components to create our products.
CUSTOMERS
The following customers have each purchased over $200,000 of product for the
twelve months ended June 30, 2000:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
CUSTOMERS
--------------------------------------------------------------------------------------------
<S> <C>
ACN Technologies Inc. Interlink Systems Co., Ltd.
Alcatel Bell N.V. Lite-On Communications Corporation
Askey Computer Corporation Nokia Corp.
Aztech Systems Ltd. Samsung Electro-Mechanics Co., Ltd.
Bo Sung Hi-Net Ltd. Super Net Co., Ltd.
CIS Technology Inc. Tomis Information & Telecom Co.
D-Link Corporation Triz Ecommerce & Technology Communications
Garnet Systems Co., Ltd. TurboComm Tech Inc.
GVC Corporation Xpeed, Inc.
Hyundai Teletek Co., Ltd.
--------------------------------------------------------------------------------------------
</TABLE>
For the year ended December 31, 1999, sales to Xpeed, Inc. and Lite-On
Communications Corporation accounted for 44.3% and 10.9% of our revenue. In
addition, for the six months ended June 30, 2000, sales to Xpeed, Inc. and
Alcatel Bell N.V. accounted for 29.0% and 10.0% of our revenue. We have an
agreement with Alcatel Bell N.V. to supply Alcatel Bell N.V. with
fully-assembled network interface cards. We do not have long-term agreements
with any other customers relating to the sale of our products and generally sell
our products on an order-by-order basis.
As of June 30, 2000, in addition to the customers listed above, we had
achieved 55 design wins. We recognize a design win after a company has purchased
$15,000 of our Apollo or SAM products.
SALES AND MARKETING
Our sales and marketing plan is to expand our customer base in both the
customer premises and central office equipment markets on a worldwide basis. We
also intend to diversify our customer base both geographically and by product.
We intend to expand our product offering and continue to develop close
relationships with ADSL market leaders to maintain and grow our market presence.
We sell our products through our direct sales and sales representatives in Asia,
North America and Europe. We offer customer support through internal and field
application engineering personnel and multiple direct and independent sales
representatives worldwide.
We promote our business through extensive participation in industry forums
such as the DSL and Home Phoneline Network Alliance forums, industry seminars
and conferences. In addition, we test our
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products for expandability at the University of New Hampshire's independent
expandability laboratory. Our web site provides product information and services
including software downloads, white papers, design guides and installation
guides. In addition, we conduct global press tours with market analysts,
magazine editors and key communication industry leaders.
RESEARCH AND DEVELOPMENT
We believe that the development of products with high levels of integration,
functionality and performance is essential to our growth. Our engineers and
scientists have collectively co-authored 26 ITeX patent applications and hold
78 advanced degrees, including 20 Ph.D. degrees. We plan to increase research
and development headcount in 2000 and 2001. Research and development expenses
exclusive of stock-based compensation expense for 1997, 1998 and 1999 were
approximately $1.1 million, $6.2 million and $8.5 million. Research and
development expenses exclusive of stock-based compensation expense for the six
months ended June 30, 1999 and 2000 were approximately $4.0 million and
$5.9 million.
OPERATIONS AND MANUFACTURING
We outsource all of our integrated circuit fabrication, packaging and
testing, which allows us to concentrate on product design, marketing and sales.
By outsourcing manufacturing operations, we avoid the significant capital
expenditures associated with integrated circuit process development, integrated
circuit fabrication facilities and packaging and test equipment.
United Microelectronics Corporation fabricates all of our integrated
circuits. United Microelectronics Corporation has multiple manufacturing
facilities all but one of which are located in Taiwan. Currently, we utilize two
of United Microelectronics Corporation's 10 fabrication facilities, each of
which is capable of manufacturing integrated circuits with line widths to 0.13
microns and is currently qualified to 0.18 microns. Although we have developed a
contingency plan with United Microelectronics Corporation to provide for the
manufacture of our products in the event of a disruption in the operations of
one or more of its fabrication facilities, United Microelectronics Corporation
is under no obligation to provide additional support. If needed, we could shift
our production to these other facilities following qualification of these new
facilities. We have executed a term sheet with United Microelectronics
Corporation that states that it guarantees us minimum production capacity
through 2003 provided that we use United Microelectronics Corporation to
manufacture substantially all of our integrated circuits during that period.
Finished integrated circuits are transferred directly to packaging and testing
facilities.
We outsource our integrated circuit packaging to Advanced Semiconductor
Engineering, Inc., and Siliconware Precision Industries Co., Ltd., both of which
are located in Taiwan. Testing is outsourced to three companies in Taiwan: ASE
Test, Siliconware Corporation and World-Wide Test Technology, Inc. The majority
of our testing requirements can be handled by all three of those facilities. All
three facilities are being qualified to test our Apollo Three product.
We have employees responsible for test and product engineering located in
both the U.S. and Taiwan. In addition, we have a production control group that
handles the interface between our outside vendors as well as monitoring yields,
placing production orders and controlling inventory.
INTELLECTUAL PROPERTY
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property laws, nondisclosure agreements and other measures to
protect our proprietary rights. As of June 30, 2000, we owned four issued
patents, had received notices of allowance with respect to 10 patent
applications and have 12 additional patent applications pending. We have also
applied for patents in Japan and Europe. We also utilize unpatented proprietary
know-how and trade secrets and
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<PAGE>
employ various methods to protect them. We have applied to register the
trademarks ITeX, SAM and RapidSurf. All other trademarks or service marks
appearing in this prospectus are trademarks or service marks of the respective
companies that use them.
In April 1998, we entered into an agreement with Alcatel Bell N.V. to
license some of Alcatel's ADSL technology. Our Apollo and SAM families of
products incorporate this technology. This agreement expires in April 2008.
In August 1999, we entered into an agreement with United Microelectronics
Corporation through which we were extended certain licenses granted by Texas
Instruments to United Microelectronics Corporation in exchange for royalties,
patent cross licenses and other obligations. This agreement grants us access to
certain technology on favorable terms. If United Microelectronics Corporation
ceases to be our largest stockholder, we would lose rights under this agreement
and consequently we would lose a competitive advantage in the manufacture of our
products. If we lose these rights, we cannot assure you that we could secure
such licenses on reasonable terms, if at all.
Our intellectual property protection measures may not be sufficient to
prevent misappropriation of our technology. In addition, the laws of many
foreign countries do not protect our intellectual property 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. These licenses may not be available on
reasonable terms, or at all.
COMPETITION
We compete with suppliers of integrated circuits to the ADSL market. We
believe that the key competitive factors in this market are: product
capabilities, level of integration, performance and reliability, power
consumption, price, time-to-market, system cost, interoperability, customer
support and reputation. We believe we compete favorably with respect to each of
these factors.
We compete with a number of major domestic and international suppliers of
semiconductors for both digital subscriber line central office and customer
premises equipment. Our principal competitors include Alcatel Microelectronics,
Analog Devices, Inc., Centillium Communications, Inc., Conexant Systems, Inc.,
GlobeSpan, Inc., Lucent Technologies Incorporated, STMicroelectronics N.V. and
Texas Instruments Inc.
Many of our competitors operate their own fabrication facilities and have
longer operating histories and presence in key markets, greater name
recognition, access to larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and other
resources. As a result, our competitors may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products. Current and
potential competitors have established or may establish financial or strategic
relationships among themselves or with existing or potential customers,
resellers or other third parties. Accordingly, new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. In
addition, our competitors may in the future develop technologies that more
effectively address the transmission of digital information through existing
analog infrastructures at a lower cost.
Other technologies compete with ADSL to provide broadband last mile access.
These technologies include integrated services digital network, cable modem,
broadband wireless, satellite communication and high capacity telephone lines.
We believe that each of these technologies has limitations and that ADSL
competes favorably with each of them. For example, integrated services digital
network offers a maximum transmission speed of 128 Kbps, is subject to a per use
charge and cannot support simultaneous analog voice and data traffic over a
copper telephone line. While cable modems suffer from limited geographic
availability. Cable modem networks are a shared environment subject to
43
<PAGE>
reduced bandwidth per user as the number of users increases. Broadband wireless
is expensive to deploy and limited by geography and distance. Satellite
communication is also expensive to deploy and maintain and requires an
additional telephone line to support two-way communication. Finally, the expense
of high capacity telephone lines has restricted their deployment primarily to
large businesses and organizations.
In addition, ADSL competes with several other digital subscriber line
technologies, including high bit rate digital subscriber line, integrated
digital subscriber line, symmetrical digital subscriber line and very high bit
rate digital subscriber line. While some of these technologies offer greater
data transmission rates than ADSL, each suffers from limitations. For example,
high bit rate digital subscriber line is expensive to deploy and does not
support analog voice traffic. Integrated digital subscriber line provides
transmission speeds of only 144 Kbps and does not support voice traffic. While
symmetrical digital subscriber line supports a maximum data transmission rate of
768 Kbps upstream and downstream, it cannot simultaneously carry analog voice
and data traffic over a single copper telephone line. Very high bit rate digital
subscriber line can deliver data at a maximum transmission rate of 52 Mbps but
is limited to a maximum effective distance of 4,500 feet.
EMPLOYEES
As of June 30, 2000, we had a total of 141 employees, of whom 76 are
engineers, 20 of whom have Ph.D degrees. None of our employees is represented by
a labor union. There have been no work stoppages and we believe that our
relationships with our employees are good.
Our future performance depends on continued good relations with a
substantial percentage of our employees.
Our future growth and success will depend in part on our ability to attract
highly qualified new employees and to maintain low turnover rates. Competition
for qualified personnel is intense.
FACILITIES
We operate our primary executive, sales and marketing, and research and
development activities from our 21,636 square foot headquarters in Santa Clara,
California, under a lease that expires in December 2000. We intend to either
extend this lease or find alternative facilities. We will require additional
space to accommodate our expanding business. In addition, we lease space in
Round Rock, Texas; Taipei, Taiwan; and Hsin-Chu, Taiwan.
LEGAL PROCEEDINGS
From time to time, we may become involved in litigation relating to claims
arising from our ordinary course of business. We are not currently a party to
any material legal proceedings.
44
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to our
executive officers and directors as of July 10, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Daniel (Wen Chi) Chen................ 47 Chairman of the Board of Directors
Richard H. Forte..................... 56 President, Chief Executive Officer and Director
Young Way Liu........................ 45 Vice Chairman of the Board of Directors and Chief
Technology Officer
Robert M. Gardner.................... 57 Executive Vice President and Chief Operating Officer
Ralph Cognac......................... 56 Executive Vice President and Chief Marketing Officer
Timothy A. Rogers.................... 45 Chief Financial and Administrative Officer
Brian Gillings....................... 53 Senior Vice President, Corporate Strategy and
Development
Jow H. Peng.......................... 48 Vice President, Business Development
Max (Ming Kang) Liu.................. 41 Vice President, Technology and Advanced Architecture
Ying Shiau........................... 47 Vice President, Manufacturing
Terry Gou............................ 49 Director
Peter J. Courture.................... 45 Secretary and Director
David Lam............................ 57 Director
John Cioffi.......................... 43 Director
</TABLE>
DANIEL (WEN CHI) CHEN is a co-founder and has served as Chairman of the Board of
Directors since February 1998, and as President and Chief Executive Officer from
May 1995 to April 1998. From February 1995 to April 1996, Mr. Chen was Vice
President of the Computer and Communication division of United Microelectronics
Corporation, a semiconductor manufacturing company and a party related to us.
Mr. Chen received a B.S. in Electrical Engineering from Tamkang University.
RICHARD H. FORTE has served as President and Chief Executive Officer since
June 1999 and as a director since April 1999. From March 1996 to February 1999,
Mr. Forte was President and Chief Executive Officer of Vantis Corporation, a
semiconductor manufacturing company. From August 1991 to March 1996, Mr. Forte
was a Group Vice President of the Components and Communications Division,
managing five operating divisions for Advanced Micro Devices, Inc., a
semiconductor manufacturing company. Mr. Forte received a B.S. in Physics from
San Jose State University.
YOUNG WAY LIU is a co-founder and has served as Vice Chairman of the Board of
Directors and Chief Technology Officer since June 1999. From April 1998 to
June 1999, Mr. Liu was President and Chief Executive Officer. From April 1996 to
April 1998, Mr. Liu was Senior Vice President. From May 1995 to April 1996,
Mr. Liu was Vice President and Chief Financial Officer. Mr. Liu received a B.S.
in Electrophysics from National Chiao-Tung University in Hsin-Chu, Taiwan and an
M.S. in Computer Engineering from the University of Southern California.
ROBERT M. GARDNER has served as Executive Vice President and Chief Operating
Officer since October 1999. From February 1998 to September 1998, Mr. Gardner
was Interim President and Chief Executive Officer for FastParts, Inc., an
Internet business to business auction software company. From July 1997 to
January 1998, Mr. Gardner was Interim President and Chief Executive Officer for
Rebis Industrial Workgroup Software, a mechanical software company. From
October 1995 to July 1997, Mr. Gardner was President and Chief Executive Officer
of Design Acceleration, Inc., an electronic design automation software company.
Mr. Gardner received a B.S. in Electrical Engineering from California
Polytechnic University at Pomona.
RALPH COGNAC has served as Executive Vice President and Chief Marketing Officer
since March 2000. From October 1999 to March 2000, Mr. Cognac served as Vice
President of Worldwide Sales. From May 1999 to October 1999, Mr. Cognac was a
self-employed consultant. From September 1998 to
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<PAGE>
May 1999, Mr. Cognac was Vice President of Worldwide Sales for NeoParadigm
Labs, Inc., a semiconductor manufacturing company. From September 1995 to
September 1998, Mr. Cognac was Vice President of Worldwide Sales for Monolithic
Systems Semiconductor, Inc., a semiconductor manufacturing company. Starting in
February 1987, Mr. Cognac was a co-founder and Vice President of Worldwide Sales
and Marketing of Synergy Semiconductor Corporation, a semiconductor company.
Mr. Cognac joined Integrated Device Technology, Inc., a semiconductor
manufacturing company, in May 1982 as the company's first Vice President of
Marketing, and assumed responsibility for sales in 1984. Mr. Cognac received a
B.S. in Electrical Engineering and an M.B.A. from Arizona State University.
TIMOTHY A. ROGERS has served as Chief Financial and Administrative Officer since
July 1998. From February 1992 to February 1998, Mr. Rogers was Vice President of
J.P. Morgan & Co. Incorporated, an investment bank. From September 1986 to
January 1992, Mr. Rogers was Vice President of Salomon Brothers Inc., an
investment bank. Mr. Rogers also worked from September 1982 to August 1985 for
Bain & Co., a management consulting firm. Mr. Rogers received an A.B. in Asian
Studies from Dartmouth College and an M.B.A. from Stanford University.
BRIAN GILLINGS has served as Senior Vice President, Corporate Strategy and
Development since March 2000. From July 1999 to March 2000, Mr. Gillings served
as Vice President of Marketing. From April 1999 to July 1999, Mr. Gillings was a
self-employed consultant. From April 1998 to April 1999, Mr. Gillings was the
Vice President of Sales and Marketing for Advanced Communication Devices, Inc.,
a semiconductor manufacturing company. From June 1997 to April 1998,
Mr. Gillings was a self-employed consultant. From November 1995 to June 1997,
Mr. Gillings was the Vice President of Marketing for Orbit
Semiconductors, Inc., a semiconductor manufacturing company. From September 1983
to October 1989 Mr. Gillings served as director of business development at Maxim
Integrated Products, Inc., a semiconductor manufacturing company. Mr. Gillings
received a B.S. equivalent in Electrical Engineering from Harrow Technical
College and an M.S. equivalent in Electrical Engineering from the Polytechnic
University of South Bank.
JOW H. PENG has served as Vice President, Business Development since July 1999.
From August 1998 to July 1999, Mr. Peng served as Senior Director of Marketing.
From October 1997 to August 1998, Mr. Peng served as Director of Strategic
Planning. From April 1985 to October 1997, Mr. Peng was the lead member of the
technical staff for Pacific Telesis, Inc., a telecommunications service
provider. Mr. Peng received a B.S. in Electrical Engineering from National
Chiao-Tung University and an M.S. in Electrical Engineering from West Virginia
University.
MAX (MING KANG) LIU has served as Vice President, Technology and Advanced
Architecture since June 1999. Dr. Liu served as Vice President of System
Technology from April 1998 to June 1999. Dr. Liu served as Senior Director from
November 1997 to April 1998. Dr. Liu served as Chief Architect from May 1997 to
November 1997. From May 1995 to May 1997, Dr. Liu was a Manager of Project
Development for Quickturn Design Systems, Inc., an application specific
integrated circuit verification company. From 1989 to 1995, Dr. Liu was an
Assistant Professor in the Electrical and Computer Engineering Department at the
University of Arizona, Tucson, Arizona. Dr. Liu received a B.S. in Electrical
Engineering from National Taiwan University and an M.S. and Ph.D. in Electrical
Engineering from the University of California, Berkeley.
YING SHIAU has served as Vice President, Manufacturing since June 2000. From
August 1996 to June 2000, Mr. Shiau served as Senior Director of Corporate Yield
Improvement and Fab Outsourcing Operations for Cypress Semiconductor
Corporation, a supplier of integrated circuits. From July 1986 to August 1996,
Mr. Shiau was Manager of Product and Test Operations for Advanced Micro Devices,
Inc., a semiconductor manufacturing company. Mr. Shiau received a B.S. in
Physics from Soochow University in Taipei, Taiwan and an M.S. in Electrical
Engineering from Case Western Reserve University.
46
<PAGE>
TERRY GOU is a co-founder and has served as a director since October 1995.
Mr. Gou is the Chairman of Hon Hai Precision Industries Co., Ltd., a
manufacturer of personal computer connectors and components, a company which he
founded in 1974. Mr. Gou received a B.S. in Shipping Management from the China
College of Marine Technology and Commerce.
PETER J. COURTURE is a co-founder and has served as the Secretary and a director
since May 1995. Since 1993, Mr. Courture has held the position of General
Counsel for United Microelectronics Corporation, a party related to us.
Mr. Courture is also the sole shareholder of Law+, a provider of legal services
to us. Mr. Courture received a B.A. in Economics from Yale University and a J.D.
from Stanford Law School.
DAVID LAM has served as a director since June 1999. From 1989 to the present,
Dr. Lam has been the Chairman of the David Lam Group, a management consulting
firm. From April 1997 to March 1998, Dr. Lam was the Chief Executive Officer for
Caliper Technologies, Corp., a biotech laboratory equipment company specializing
in laboratory-on-a-chip technology. From October 1996 to June 1998, Dr. Lam was
a board member of Quickturn Design Systems, an electronic design automation
company. From November 1992 to October 1996, Dr. Lam was the Chief Executive
Officer of Expert Edge Corporation, a privately-held software developer. Since
September 1999, Dr. Lam has been a director of Ingenuus Corporation, a provider
of business to business collaboration applications. In 1980, Dr. Lam founded Lam
Research Corporation, a manufacturer of semiconductor manufacturing equipment.
Dr. Lam received a B.A.Sc. in Engineering Physics from the University of Toronto
and an M.S. and Sc.D. in Chemical Engineering from the Massachusetts Institute
of Technology.
JOHN CIOFFI has served as a director since December 1999. Dr. Cioffi has been a
professor of electrical engineering at Stanford University from January 1986 to
present. From March 1998 to November 1999, Dr. Cioffi was an electrical engineer
for Texas Instruments Incorporated. From July 1991 to March 1998, Dr. Cioffi was
a founder, Chief Technical Officer and director of Amati Communications
Corporation, a manufacturer of DSL components and equipment, which has since
been acquired by Texas Instruments. Dr. Cioffi received a B.S. in Electrical
Engineering from Illinois University and an M.S. and Ph.D. in Electrical
Engineering from Stanford University.
There are currently two vacancies on our board of directors. We intend to
fill at least one of these vacancies with an independent director as required by
the Nasdaq Stock Market within ninety days following this offering.
EXECUTIVE OFFICERS
Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been duly elected and qualified.
There are no family relationships among any of our directors, officers or key
employees.
CLASSIFIED BOARD
Our certificate of incorporation provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. To implement the classified structure, prior to the
consummation of the offering, two of the nominees to the board will be elected
to one-year terms, two will be elected to two-year terms and three will be
elected to three-year terms. Thereafter, directors will be elected for
three-year terms.
BOARD COMMITTEES
Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Mr. Gou and Drs. Cioffi and Lam. Mr. Gou will be
replaced by a new independent director as required by the Nasdaq Stock Market
within ninety days following this offering.
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<PAGE>
The audit committee reviews our internal accounting procedures, consults with
and reviews the services provided by our independent accountants and makes
recommendations to the board of directors regarding the selection of independent
accountants. The compensation committee consists of Messrs. Gou and Courture and
Dr. Lam. The compensation committee reviews and recommends to the board of
directors the salaries, incentive compensation and benefits of our officers and
employees, and administers our stock plans and employee benefit plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to establishing the compensation committee, the board of directors
performed the functions that are now delegated to the compensation committee. No
member of the board of directors or the compensation committee serves 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
Directors do not currently receive any cash compensation from us for their
service as members of the board of directors. However, Daniel (Wen Chi) Chen,
the Chairman of our Board of Directors receives compensation from us for
services he provides to us as an employee. During the past fiscal year and the
six months ended June 30, 2000, Mr. Chen received $119,846 in such compensation
from us. Directors are eligible to receive an option to purchase shares of our
common stock upon appointment to our board of directors under our 2000 Stock
Plan and directors are eligible to receive stock purchase rights under the 2000
Restricted Stock Purchase Plan.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The following table summarizes the compensation earned for services rendered
to us for the fiscal year ended December 31, 1999 by each person that served as
chief executive officer and our four most highly compensated executive officers
whose compensation as defined by the Securities and Exchange Commission exceeded
$100,000 during the fiscal year ended December 31, 1999. These executives are
referred to as the named executive officers elsewhere in this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
1999 ANNUAL ------------
COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(1)
--------------------------- -------- -------- ------------
<S> <C> <C> <C>
Richard H. Forte ........................................... $112,761 $44,677 600,000
President, Chief Executive Officer and Director
Young Way Liu .............................................. 121,359 -- 995,000
Former Chief Executive Officer, Vice Chairman of the Board
of Directors and Chief Technology Officer
Timothy A. Rogers .......................................... 143,262 23,608 230,000
Chief Financial and Administrative Officer
Jow H. Peng ................................................ 140,248 22,656 210,000
Vice President, Business Development
Max (Ming Kang) Liu ........................................ 147,073 23,988 190,000
Vice President, Technology and Advanced Architecture
</TABLE>
------------------------
(1) Information regarding the number of options granted consists of all options
granted from our inception through the fiscal year ended December 31, 1999.
48
<PAGE>
STOCK OPTION INFORMATION
The following table sets forth certain information with respect to stock
options granted to each of the named executive officers in the fiscal year ended
December 31, 1999, including the potential realizable value over the ten-year
term of the options, based on assumed rates of stock appreciation of 5% and 10%,
compounded annually. These assumed rates of appreciation comply with the rules
of the Securities and Exchange Commission and do not represent our estimate of
future stock price. Actual gains, if any, on stock option exercises will be
dependent on the future performance of our common stock. The assumed 5% and 10%
rates of stock appreciation are based on the initial public offering price of
$18.00 per share.
In the fiscal year ended December 31, 1999, we granted options to purchase
up to an aggregate of 2,080,400 shares to employees, directors and consultants.
All options were granted under our 1996 Stock Plan at exercise prices at or
above the fair market value of our common stock on the date of grant, as
determined in good faith by the board of directors. All options have a term of
up to ten years. Optionees may pay the exercise price by cash, check,
cancellation of any outstanding indebtedness of the option holder to us or
delivery of already-owned shares of our common stock.
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR OPTION TERM
OPTIONS EMPLOYEES PRICE EXPIRATION ------------------------------
NAME GRANTED IN 1999 (PER SHARE) DATE 5% 10%
---- ---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Forte...... 100,000 5.32% $3.00 4/15/05 $1,974,866 $ 2,602,853
500,000 26.59 3.00 6/28/05 9,874,329 13,014,265
Young Way Liu......... -- -- -- -- -- --
Timothy A. Rogers..... -- -- -- -- -- --
Jow H. Peng........... -- -- -- -- -- --
Max (Ming Kang) Liu... -- -- -- -- -- --
</TABLE>
49
<PAGE>
The following tables set forth certain information with respect to stock
options and restricted stock rights granted to our officers and directors from
December 31, 1999 to June 30, 2000.
OPTION GRANTS DURING SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
AGGREGATE NUMBER EXERCISE PRICE
NAME DATE OF GRANT OF OPTIONS PER SHARE
---- ------------- ---------------- --------------
<S> <C> <C> <C>
Daniel (Wen Chi) Chen.............. 5/10/00 250,000 $4.00
John Cioffi........................ 1/27/00 100,000 3.00
Ralph Cognac....................... 1/27/00 250,000 3.00
5/10/00 150,000 4.00
Peter J. Courture.................. 5/10/00 50,000 4.00
Richard H. Forte................... 5/10/00 600,000 4.00
Robert M. Gardner.................. 5/10/00 125,000 4.00
Brian Gillings..................... 5/10/00 75,000 4.00
Max (Ming Kang) Liu................ 5/10/00 160,000 4.00
Young W. Liu....................... 5/10/00 200,000 4.00
Jow H. Peng........................ 5/10/00 140,000 4.00
Timothy A. Rogers.................. 5/10/00 70,000 4.00
Ying Shiau......................... 6/8/00 155,000 5.00
</TABLE>
RESTRICTED STOCK RIGHT GRANTS DURING SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
AGGREGATE NUMBER EXERCISE PRICE
NAME DATE OF GRANT OF GRANTS PER SHARE
---- ------------- ---------------- --------------
<S> <C> <C> <C>
Daniel (Wen Chi) Chen.............. 5/10/00 100,000 $4.00
Ralph Cognac....................... 5/10/00 75,000 4.00
Richard H. Forte................... 5/10/00 150,000 4.00
Robert M. Gardner.................. 5/10/00 40,000 4.00
Brian Gillings..................... 5/10/00 25,000 4.00
Max (Ming Kang) Liu................ 5/10/00 30,000 4.00
Young W. Liu....................... 5/10/00 75,000 4.00
Jow H. Peng........................ 5/10/00 40,000 4.00
Timothy A. Rogers.................. 5/10/00 25,000 4.00
Ying Shiau......................... 6/8/00 50,000 5.00
</TABLE>
AGGREGATE OPTION EXERCISES AND OPTION VALUES
The following table describes for the named executive officers their option
exercises for the fiscal year ended December 31, 1999, and exercisable and
unexercisable options held by them as of December 31, 1999.
The value of unexercised in-the-money options at December 31, 1999 is based
on a value of $3.00 per share, the fair market value of our common stock as of
December 31, 1999, as determined by the board of directors, less the per share
exercise price, multiplied by the number of shares issued upon exercise of the
option. All options were granted under our 1996 Stock Plan. Of the options
listed below, 100,000 are immediately exercisable; however, as a condition of
exercise, the optionee must enter into a stock restriction agreement granting us
the right to repurchase the shares issuable by such exercise at their cost in
the event of the optionee's termination of employment.
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<PAGE>
AGGREGATE OPTION EXERCISES IN 1999 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Forte........... -- $-- -- 600,000 $ -- $ --
Young Way Liu.............. -- -- 395,250 599,750 625,000 --
Timothy A. Rogers.......... -- -- 69,958 160,042 -- --
Jow H. Peng................ -- -- 50,750 159,250 13,500 13,500
Max (Ming Kang) Liu........ -- -- 65,458 124,542 18,563 12,938
</TABLE>
STOCK PLANS
1996 STOCK PLAN
Our 1996 stock plan was adopted by our board of directors in January 1996,
and our stockholders initially approved the plan in March 1996. Our 1996 stock
plan provides for the grant of incentive stock options, which may provide for
preferential tax treatment, to our employees, and for the grant of nonstatutory
stock options and stock purchase rights to our employees, directors and
consultants. We have reserved an aggregate of 13,000,000 shares of our common
stock for issuance under this plan. As of July 10, 2000, 1,343,565 shares had
been issued pursuant to the exercise of options and stock purchase rights and
options to purchase 10,412,120 shares of common stock were outstanding.
1,244,315 shares were available for future grant. Upon completion of this
offering, we will not grant any additional stock options under our 1996 stock
plan. Instead we will grant options under our 2000 stock plan. The 1996 stock
plan provides that in the event of a change in control, each outstanding option
will be assumed or an equivalent option will be granted in its place by the
successor corporation. If the successor corporation refuses to assume or
substitute for the options, the options will terminate as of the closing of the
merger or sale of assets.
Certain options have a term of six (6) years from the vesting commencement
date and a vesting schedule as follows: 20% of the shares subject to each option
shall vest on the first anniversary of the vesting commencement date; 2 1/12% of
the shares subject to each option shall vest at the end of each of the 13th
through 24th months following the vesting commencement date; and 2 1/2% of the
shares subject to each option shall vest at the end of each of the 25th through
36th months following the vesting commencement date, 2 1/12% of the shares
subject to each option shall vest at the end of each of the 37th through 48th
months following the vesting commencement date.
Certain options have a term of six (6) years from the vesting commencement
date and a vesting schedule as follows: 20% of the shares subject to each option
shall vest on the first anniversary of the vesting commencement date; 1 2/3% of
the shares subject to each option shall vest at the end of each of the 13th
through 60th months following the vesting commencement date.
One certain option for 65,000 shares of our common stock, held by Vow &
Vogue, a consulting firm, has a term of six (6) years from the vesting
commencement date and a vesting schedule as follows: 50% of the shares subject
to the option shall vest on the first anniversary of the vesting commencement
date; and 50% of the shares subject to the option shall vest at the end of the
second anniversary of the vesting commencement date, October 1, 1999.
On May 10, 2000, our board of directors amended certain option agreements
under our 1996 Stock Plan to provide early exercise for the non-statutory
options granted to Richard H. Forte, Peter Courture, Terry Gou, David Lam and
John Cioffi. These non-statutory stock options and the restricted
51
<PAGE>
stock issuable upon their early exercise shall become fully vested at any time
during the vesting period for the individuals so affected upon the occurrence of
the following conditions:
- the individual has offered and is willing to continue to serve for the
duration of the vesting period;
- the individual involved is not then in default of material obligations to
us; and
- our stockholders or directors do not offer that person a reasonable
opportunity to continue in the capacity held so as to fully vest all
remaining shares granted.
In addition, the board resolved to allow Richard H. Forte, Robert Gardner,
Ralph Cognac, Brian Gillings, Max (Ming Kang) Liu, Jow Peng, Timothy Rogers,
Daniel (Wen Chi) Chen and Young Way Liu to fully accelerate the vesting of all
of their respective options granted under the 1996 Stock Plan upon a change of
control of the company and subject to the following conditions:
- the individual has offered and is willing to continue to serve for the
duration of the vesting period;
- the individual involved is not then in default of material obligations to
us; and
- our stockholders or directors do not offer that person a reasonable
opportunity to continue in the capacity held so as to fully vest all
remaining shares granted.
2000 STOCK PLAN
Our 2000 stock plan was adopted by our board of directors in May 2000, and
our stockholders approved the plan in August 2000. This plan provides for the
grant of incentive stock options to our employees and nonstatutory stock options
and stock purchase rights to our employees, directors and consultants. As of
July 10, 2000, a total of 2,500,000 shares of our common stock were reserved for
issuance pursuant to our 2000 stock plan. No options have yet been issued
pursuant to the 2000 stock plan. The number of shares reserved for issuance
under our 2000 stock plan will increase annually on January 1st of each calendar
year, effective beginning in 2001, equal to the lesser of: 4% of the outstanding
shares of our common stock on the first day of the year, 2,500,000 shares or
such lesser amount as our board of directors may determine. Our board of
directors or a committee of our board administers the 2000 stock plan. The
committee may consist of two or more "outside directors" to satisfy certain tax
and securities requirements. The administrator has the power to determine the
terms of the options or stock purchase rights granted, including the exercise
price, the number of shares subject to each option or stock purchase right, the
exercisability of the options and the form of consideration payable upon
exercise. The administrator determines the exercise price of options granted
under our stock option plan, but with respect to incentive stock options, the
exercise price must at least be equal to the fair market value of our common
stock on the date of grant. Additionally, the term of an incentive stock option
may not exceed ten years. The administrator determines the term of all other
options. No optionee may be granted an option to purchase more than 500,000
shares in any fiscal year. In connection with his or her initial service, an
optionee may be granted an additional option to purchase up to 500,000 shares of
our common stock. After termination of one of our employees, directors or
consultants, he or she may exercise his or her option for the period of time
stated in the option agreement. If termination is due to death or disability,
the option will generally remain exercisable for 12 months following such
termination. In all other cases, the option will generally remain exercisable
for 3 months. However, an option may never be exercised later than the
expiration of its term. The administrator determines the exercise price of stock
purchase rights granted under our 2000 stock plan. Unless the administrator
determines otherwise, the restricted stock purchase agreement will grant us a
repurchase option that we may exercise upon the voluntary or involuntary
termination of the purchaser's service with us for any reason (including death
or disability). The purchase price for shares we repurchase will generally be
the original price paid by the purchaser. The
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administrator determines the rate at which our repurchase option will lapse. Our
stock option plan generally does not allow for the transfer of options or stock
purchase rights and only the optionee may exercise an option and stock purchase
right during his or her lifetime. Our stock option plan provides that in the
event of our merger with or into another corporation or a sale of substantially
all of our assets, the successor corporation will assume or substitute for each
option or stock purchase right. If the outstanding options or stock purchase
rights are not assumed or substituted for, all outstanding options and stock
purchase rights will become immediately vested and exercisable for 15 days and
then will terminate. Our stock option plan will automatically terminate in 2010,
unless we terminate it sooner. In addition, our board of directors has the
authority to amend, suspend or terminate the stock option plan provided it does
not adversely affect any option previously granted under our stock option plan.
2000 RESTRICTED STOCK PURCHASE PLAN
Our 2000 restricted stock purchase plan was adopted by our board of
directors in January 2000, and our stockholders approved the plan in March 2000.
This plan provides for the grant of a right to purchase common stock, subject to
certain restrictions, to our employees, directors and consultants. As of
July 10, 2000, a total of 1,000,000 shares were reserved for issuance pursuant
to the 2000 restricted stock purchase plan. As of July 10, 2000, 610,000 stock
purchase rights were issued under the plan. Pursuant to the plan, each stock
purchase right issued under the plan is restricted for a period of four years
from the vesting commencement date. 100% of the restricted shares are released
from restriction on the fourth anniversary of grant; provided, that the shares
may be released early from the restriction subject to satisfaction of a variety
of milestones relating to completion of a qualified public offering, revenue,
gross margin, market capitalization and total equity raised in public offerings.
If all of the conditions for early release are met, our right to repurchase
the shares will lapse in accordance with the following schedule:
<TABLE>
<CAPTION>
NUMBER OF DAYS FOLLOWING THE END PERCENTAGE OF
OF QUALIFIED PUBLIC OFFERING SHARES VESTED
----------------------------------- --------------
<S> <C>
195 50%
545 80
915 100
</TABLE>
If the holder of the restricted stock ceases to be an employee, director or
consultant, other than on the holder's death or disability, the holder may
exercise the stock purchase right within 30 days from the date of termination to
the extent that the stock purchase right is vested on the date of termination.
If, on the date of termination, the holder is not vested as to the entire stock
purchase right, the shares covered by the unvested portion of the stock purchase
right revert to the plan. If the holder does not exercise the stock purchase
right within 30 days of the date of termination, the stock purchase right
terminates and the shares covered by the stock purchase right reverts to the
plan.
Our board of directors or a committee of our board administers the 2000
restricted stock purchase plan. The administrator has the power to determine the
terms of the stock purchase rights granted, including the fair market value and
the number of shares subject to each stock purchase right. Our stock repurchase
plan will automatically terminate in 2010, unless we terminate it sooner. In
addition, our board of directors has the authority to amend, suspend or
terminate the stock repurchase plan.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 employee stock purchase plan was adopted by our board of directors
in May 2000, and our stockholders approved the plan in August 2000. Concurrently
with this offering, we intend to establish an employee stock purchase plan. A
total of 600,000 shares of our common stock will be made available for sale. In
addition, our plan provides for annual increases in the number of shares
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<PAGE>
available for issuance under the plan on January 1st of each year, beginning in
2001, equal to the lesser of: 2% of the outstanding shares of our common stock
on the first day of the calendar year, 1,000,000 shares or such other lesser
amount as may be determined by our board of directors. Our board of directors or
a committee of our board administers the plan. Our board of directors or its
committee has full and exclusive authority to interpret the terms of the plan
and determine eligibility. All of our employees are eligible to participate if
they are customarily employed by us or any participating subsidiary for at least
20 hours per week and more than five months in any calendar year. However, an
employee may not be granted an option to purchase stock under the plan if such
employee:
- immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
- whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.
Our plan is intended to qualify for preferential tax treatment and contains
consecutive, overlapping 24-month offering periods. Each offering period
includes four 6-month purchase periods. The offering periods generally start on
the first trading day on or after August 1 and September 1 of each year, except
for the first such offering period which will commence on the first trading day
on or after the effective date of this offering and will end on the last trading
day on or before August 1, 2002.
The plan permits participants to purchase common stock through payroll
deductions of up to 10% of their eligible compensation which includes a
participant's base straight time gross earnings and commissions but excluding
all other compensation paid to our employees. A participant may purchase no more
than 10,000 shares during any 6-month purchase period.
Amounts deducted and accumulated by the participant are used to purchase
shares of our common stock at the end of each 6-month purchase period. The price
is 85% of the lower of the fair market value of our common stock at the
beginning of an offering period or after a purchase period ends. If the fair
market value at the end of a purchase period is less than the fair market value
at the beginning of the offering period, participants will be withdrawn from the
current offering period following their purchase of shares on the purchase date
and will be automatically re-enrolled in a new offering period. Participants may
end their participation at any time during an offering period, and will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with us.
A participant may not transfer rights granted under our employee stock
purchase plan other than by will, the laws of descent and distribution or as
otherwise provided under the plan.
In the event of our merger with or into another corporation or a sale of all
or substantially all of our assets, a successor corporation may assume or
substitute each outstanding option. If the successor corporation refuses to
assume or substitute for the outstanding options, the offering period then in
progress will be shortened, and a new exercise date will be set.
Our plan will terminate in 2010. However, our board of directors has the
authority to amend or terminate our plan, except that, subject to certain
exceptions described in the plan, no such action may adversely affect any
outstanding rights to purchase stock under our plan.
401(K) PLAN
In February 1997, we adopted a 401(k) plan to provide eligible employees
with a tax preferential savings and investment program. Employees become
eligible to participate in the 401(k) plan on the first day they perform an hour
of service for us. Our employee savings and retirement plan is qualified under
Section 401 of the Internal Revenue Code. Employees may elect to reduce their
current compensation by up to the statutorily prescribed annual limit and have
the amount of such reduction contributed to the 401(k) plan. We currently do not
make matching or additional contributions to the
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<PAGE>
401(k) plan on our employees' behalf. At the direction of each participant, the
trustee of the 401(k) plan invests the assets of the 401(k) plan in selected
investment options. Contributions by participants or by us to the 401(k) plan,
and income earned on plan contributions, are generally not taxable to the
participants until withdrawn, and contributions by us, if any, are generally
deductible by us when made.
EMPLOYMENT ARRANGEMENTS
From time to time, we have entered into employment agreements with our
executive officers, including the executive officers listed in the "Summary
Compensation Table."
RICHARD FORTE. In June 1999, Richard Forte accepted our offer of employment
and signed an Employment, Confidentiality & Invention Assignment Agreement. The
terms of Mr. Forte's employment are at will. Mr. Forte's starting base salary
was $200,000 per year. In addition, Mr. Forte was granted options to purchase
500,000 shares of our common stock at a fair market price of $3.00 per share. In
addition, upon the closing of our initial public offering, Mr. Forte will be
paid a bonus in the amount of $150,000. There are no severance or change of
control arrangements in Mr. Forte's employment agreement.
MAX (MING KANG) LIU. In April 1997, Max (Ming Kang) Liu accepted our offer
of employment and signed an employment, confidentiality & invention assignment
agreement. The terms of Mr. Liu's employment are at will. Mr. Liu's starting
base salary was $120,000 per year. In addition, Mr. Liu was granted options to
purchase 70,000 shares of our common stock at a fair market price of $2.55 per
share.
TIMOTHY ROGERS. In April 1998, Timothy Rogers accepted our offer of
employment. In May 1998, Mr. Rogers signed an employment, confidentiality &
invention assignment agreement in connection with accepting employment with us.
The terms of Mr. Rogers' employment are at will. Mr. Rogers' starting base
salary was $135,000 per year. In addition, Mr. Rogers was granted options to
purchase 230,000 shares of our common stock at a fair market price of $3.00 per
share, of which the grant of options to purchase 50,000 shares was contingent
upon the successful closing of the Series A Convertible Preferred Stock
offering.
JOW PENG. In August 1997, Jow Peng accepted our offer of employment and
signed an employment, confidentiality & invention assignment agreement. The
terms of Mr. Peng's employment are at will. Mr. Peng's starting base salary was
$134,000 per year. In addition, Mr. Peng was granted options to purchase 60,000
shares of our common stock at a fair market price of $2.55 per share.
RALPH COGNAC. In October 1999, Ralph Cognac accepted our offer of
employment and signed an employment, confidentiality & invention assignment
agreement. The terms of Mr. Cognac's employment are at will. Mr. Cognac's
starting base salary was $175,000 per year. In addition, Mr. Cognac was granted
options to purchase 250,000 shares of our common stock at a fair market price of
$3.00 per share. In addition, Mr. Cognac was granted the right to bonuses of
cash and/or stock upon the achievement of certain financial and product design
win milestones.
BRIAN GILLINGS. In July 1999, Brian Gillings accepted our offer of
employment and signed an employment, confidentiality & invention assignment
agreement. The terms of Mr. Gillings' employment are at will. Mr. Gillings'
starting base salary was $135,000 per year. In addition, Mr. Gillings was
granted options to purchase 225,000 shares of our common stock at a fair market
price of $3.00 per share.
ROBERT GARDNER. In September 1999, Robert Gardner accepted our offer of
employment and signed an employment, confidentiality & invention assignment
agreement. The terms of Mr. Gardner's employment are at will. Mr. Gardner's
starting base salary was $175,000 per year. In addition, Mr. Gardner was granted
options to purchase 400,000 shares of our common stock at a fair market
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<PAGE>
price of $3.00 per share. If Mr. Gardner's employment were to be terminated by
us without good cause after July 1, 2000, we would accelerate the vesting of
Mr. Gardner's options that would have otherwise vested upon the first
anniversary of Mr. Gardner's employment and pay him an amount equal to
12 months compensation at his then-current salary rate.
YOUNG WAY LIU. In March 1997, Young Way Liu signed an employment,
confidentiality and invention assignment agreement in connection with accepting
employment with us. The terms of his employment are at will. There are no
severance or change of control arrangements in this employment agreement.
YING SHIAU. In June 2000, Ying Shiau accepted our offer of employment and
signed an employment, confidentiality and invention assignment agreement in
connection with accepting employment with us. The terms of Mr. Shiau's
employment are at will. Mr. Shiau's starting base salary was $150,000 per year.
In addition, Mr. Shiau was granted options to purchase 155,000 shares of our
common stock at a fair market price of $5.00 per share. In addition, Mr. Shiau
was granted options to purchase 50,000 shares of our restricted common stock at
a fair market price of $5.00 per share.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether our bylaws would permit indemnification.
We will enter into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, will provide for indemnification of our
directors and executive officers for expenses, judgments, fines and settlement
amounts incurred by any such person in any action or proceeding arising out of
such person's services as a director or executive officer or at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
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<PAGE>
CERTAIN TRANSACTIONS
The following is a description of transactions since inception, to which we
have been a party in which any director, executive officer or holder of more
than 5% of our capital stock had or will have a direct or indirect material
interest other than compensation arrangements that are otherwise required to be
described under "Management."
PURCHASE OF COMMON SHARES
From October 1995 through February 1998, we sold 23,079,138 shares of common
stock at purchase prices of $0.05 to $3.00 per share. The following executive
officers, directors and holders of more than 5% of our securities purchased
shares of common stock:
<TABLE>
<CAPTION>
NAME OF PURCHASER NUMBER OF COMMON SHARES PRICE PER SHARE AGGREGATE PURCHASE PRICE
----------------- ----------------------- --------------- ------------------------
<S> <C> <C> <C>
Daniel (Wen Chi) Chen............... 250,000 $0.05 $ 12,500
Peter Courture(1)................... 50,000 0.05 2,500
Terry Gou........................... 250,000 0.05 12,500
Young Way Liu....................... 250,000 0.05 12,500
United Microelectronics
Corporation....................... 4,000,000 0.50 2,000,000
3,000,000 0.50 1,500,000(2)
Creative Group Limited.............. 3,000,000 0.50 1,500,000
500,000 3.00 1,500,000
Fortune Venture Capital............. 4,000,000 0.50 2,000,000
</TABLE>
------------------------
See the notes to the table on beneficial ownership in "Principal
Stockholders" for information relating to the beneficial ownership of such
shares.
(1) Peter Courture is General Counsel for United Microelectronics Corporation.
(2) Consideration for these common shares consisted of licensed technology from
United Microelectronics Corporation.
PURCHASE OF PREFERRED SHARES
We have issued preferred stock as follows:
- in October 1998, we issued 1,428,571 shares of Series A convertible
preferred stock in a private placement at a purchase price of $3.50 per
share and aggregate proceeds of $4,999,998.50; and
- in October 1999 and November 1999, we issued 10,000,000 shares of
Series B convertible preferred stock in a private placement at a purchase
price of $4.00 per share and aggregate proceeds of $40,000,000.
Our officers, directors and holders of more than 5% of our capital stock
participated in the foregoing transactions as follows:
<TABLE>
<CAPTION>
NAME OF PURCHASER NUMBER OF SERIES A SHARES NUMBER OF SERIES B SHARES AGGREGATE PURCHASE PRICE
----------------- -------------------------- -------------------------- ------------------------
<S> <C> <C> <C>
Intel Corporation........... 1,428,571 -- $5,000,000
714,286(1) -- --
Cioffi Family Trust(2)...... -- 37,500 150,000
</TABLE>
------------------------
See the notes to the table on beneficial ownership in "Principal
Stockholders" for information relating to the beneficial ownership of such
shares.
(1) Shares issuable pursuant to the exercise of a warrant for Series A preferred
stock.
(2) John Cioffi, one of our directors, serves as Trustee for the Cioffi Family
Trust.
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<PAGE>
GRANTS OF OPTIONS
Since inception, we have granted options to purchase our common stock to our
directors and executive officers as follows:
<TABLE>
<CAPTION>
AGGREGATE NUMBER WEIGHTED AVERAGE
NAME DATE(S) OF GRANT OF OPTIONS EXERCISE PRICE PER SHARE
---- ---------------- ---------------- ------------------------
<S> <C> <C> <C>
Daniel (Wen Chi) Chen..... 8/96 - 5/00 1,220,000 $2.69
John Cioffi............... 1/00 100,000 3.00
Ralph Cognac.............. 1/00 - 5/00 400,000 3.38
Peter J. Courture......... 4/98 - 5/00 100,000 3.28
Richard H. Forte.......... 5/99 - 5/00 1,200,000 3.50
Robert M. Gardner......... 9/99 - 5/00 525,000 3.24
Brian Gillings............ 7/99 - 5/00 300,000 3.25
Terry Gou................. 4/98 50,000 2.55
David Lam................. 6/99 100,000 3.00
Max (Ming Kang) Liu....... 6/97 - 5/00 350,000 3.37
Young W. Liu.............. 8/96 - 5/00 1,195,000 2.64
Jow H. Peng............... 10/97 - 5/00 350,000 3.32
Timothy A. Rogers......... 7/98 - 5/00 300,000 3.23
Ying Shiau................ 6/00 155,000 5.00
</TABLE>
GRANTS OF RESTRICTED STOCK RIGHTS
In May 2000, we granted restricted stock purchase rights to purchase our
common stock at an exercise price of $4.00, subject to a right of repurchase, to
our directors and executive officers as follows:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Daniel (Wen Chi) Chen....................................... 100,000
Ralph Cognac................................................ 75,000
Richard H. Forte............................................ 150,000
Robert M. Gardner........................................... 40,000
Brian Gillings.............................................. 25,000
Max (Ming Kang) Liu......................................... 30,000
Young W. Liu................................................ 75,000
Jow H. Peng................................................. 40,000
Timothy A. Rogers........................................... 25,000
</TABLE>
On June 8, 2000, we granted restricted stock purchase rights to Ying Shiau
to purchase our common stock at an exercise price of $5.00, subject to a right
of repurchase.
RELATIONSHIP WITH LAW+
During the past three fiscal years and the six months ended June 30, 2000,
Law+, a law firm of which one of our directors, Peter J. Courture, is the sole
shareholder, has provided legal services to us. Law+ is a law firm which
performs general counsel functions for United Microelectronics Corporation.
Mr. Courture is General Counsel to United Microelectronics Corporation, and all
payments for services
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<PAGE>
rendered to us by Law+, in the amount of $119,407, were made through United
Microelectronics Corporation.
LOANS TO EXECUTIVE OFFICERS AND DIRECTORS
On August 2, 1999, we loaned $461,910 at an interest rate of 7.75% per annum
to Richard H. Forte for a term of ninety (90) days, secured by a pledge of
collateral. On January 7, 2000, at the request of Mr. Forte, the board of
directors approved to extend the loan from October 31, 1999 to June 1, 2000,
with an adjustment of the interest rate from 7.75% to 8.25% for the period from
January 27, 2000 to June 1, 2000. On June 1, 2000, Mr. Forte repaid the loan.
LOANS TO EXERCISE OPTIONS
On May 10, 2000, we loaned $262,000 at an interest rate set at the Bank of
America prime rate plus 2% per annum to Peter Courture for a term of four years.
This loan is with full recourse and is also secured by 80,000 shares of our
common stock. On July 18, 2000, the board of directors approved an adjustment of
the interest rate from a rate set at the Bank of America prime rate plus 2% per
annum to an interest rate of three-month LIBOR plus 2%, which shall be adjusted
as published by the Wall Street Journal on January 1, April 1, July 1 and
October 1 each year.
On May 10, 2000, the board of directors authorized a loan to Mr. Forte
secured by shares of our common stock. On June 22, 2000, we loaned $240,000 at
an interest rate set at the Bank of America prime rate plus 2% per annum to
Richard Forte for a term of four years. This loan is with full recourse and is
also secured by 80,000 shares of our common stock. On July 18, 2000, the board
of directors approved the adjustment of the interest rate from a rate set at the
Bank of America prime rate plus 2% per annum to an interest rate of three-month
LIBOR plus 2%, which shall be adjusted as published by the Wall Street Journal
on January 1, April 1, July 1 and October 1 each year.
LOANS TO PURCHASE RESTRICTED STOCK
On June 26, 2000, the board of directors authorized loans to each key
officer and management team member secured by shares granted under the 2000
Restricted Stock Plan pursuant to an interest bearing full-recourse secured
promissory note payable to us, with the share certificates held by us. On
July 18, 2000, the board of directors approved such promissory notes at an
interest rate of three-month LIBOR plus 2%, which shall be adjusted as published
by the Wall Street Journal on January 1, April 1, July 1 and October 1 each
year, to our directors and executive officers as follows:
<TABLE>
<CAPTION>
NUMBER OF RESTRICTED AMOUNT OF
NAME COMMON SHARES PRICE PER SHARE PROMISSORY NOTE
---- -------------------- --------------- ---------------
<S> <C> <C> <C>
Richard H. Forte....................... 150,000 $4.00 $600,000
Robert M. Gardner...................... 40,000 4.00 160,000
Ralph Cognac........................... 75,000 4.00 300,000
Brian Gillings......................... 25,000 4.00 100,000
Max (Ming Kang) Liu.................... 30,000 4.00 120,000
Jow H. Peng............................ 40,000 4.00 160,000
Timothy A. Rogers...................... 25,000 4.00 100,000
Daniel (Wen Chi) Chen.................. 100,000 4.00 400,000
Young Way Liu.......................... 75,000 4.00 300,000
Ying Shiau............................. 50,000 5.00 250,000
</TABLE>
None of the executive officers has entered into a loan arrangement with us
for purchases of the restricted stock grants described above.
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<PAGE>
RELATIONSHIP WITH UNITED MICROELECTRONICS CORPORATION
We purchase the silicon wafers for our products from United Microelectronics
Corporation. For the year ended December 31, 1999, total purchases from United
Microelectronics Corporation amounted to $2,509,000. At December 31, 1999, the
net balance due United Microelectronics Corporation was $634,000. For the six
months ended June 30, 2000, the purchases from United Microelectronics
Corporation amounted to $4,893,000 and the net balance due United
Microelectronics Corporation amounted to $3,602,000.
In December 1997, in connection with the sale of our Taiwan subsidiary,
Integrated Technology Express (Taiwan), Inc., we sold 19,980,000 shares of
Integrated Technology Express (Taiwan), Inc., to United Microelectronics
Corporation for a total purchase price of $7,330,000.
We have executed a term sheet regarding cooperation on technology
enhancements with United Microelectronics Corporation.
We have also executed a term sheet with United Microelectronics Corporation
that states it guarantees us minimum production capacity through 2003 provided
that we use United Microelectronics Corporation to manufacture substantially all
of our integrated circuits. According to the terms of the agreement, United
Microelectronics Corporation will offer us rights of first refusal to purchase a
minimum quantity of eight inch silicon wafers at competitive prices. In return,
we will, on a quarterly basis during the period from January 1, 2000 to
December 31, 2003, offer to United Microelectronics Corporation purchase orders
equal to or in excess of 75% of our total foundry requirements for the relevant
periods.
Subject to our actual requirements, United Microelectronics Corporation will
offer us rights of first refusal on ten thousand silicon wafers in 2000, twenty
thousand silicon wafers in 2001, thirty five thousand silicon wafers in 2002 and
fifty thousand silicon wafers in 2003.
This agreement was subsequently amended in March 2000. We agreed to commit
80% of our silicon wafer capacity requirements with United Microelectronics
Corporation in exchange for a guarantee of delivery over the next four years.
In June 2000, we entered into an agreement with United Microelectronics
Corporation through which we were extended certain licenses granted by Texas
Instruments to United Microelectronics Corporation in exchange for royalties
equal to one percent of net sales billed for our products, patent cross licenses
and other obligations. This agreement grants us non-exclusive access, for the
limited purposes of using, selling, leasing, importing, offering for sale or
otherwise disposing of our products, to substantially the entire patent
portfolio of Texas Instruments on favorable terms. If United Microelectronics
Corporation ceases to be our largest stockholder, we would lose rights under
this agreement and consequently we would lose a competitive advantage in the
manufacture of our products. If we lose these rights, we cannot assure you that
we could secure such licenses on reasonable terms, if at all.
RELATED PARTY TRANSACTIONS AND DISCONTINUED OPERATIONS
In June 1998, we sold certain assets, mainly trademarks, licensing
agreements and service contracts to Integrated Technology Express
(Taiwan), Inc. and its U.S. subsidiary Integrated Technology Express, Inc. for
$1,911,000 in cash and $1,931,000 in a note receivable. The note is due in five
equal, annual installments beginning July 1, 1998 and bearing interest at 6% per
annum. At December 31, 1999, the current and long-term portions of the note
receivable amounted to $363,000 and $793,000, respectively. Interest income for
1998 and 1999 was $45,000 and $80,000 of which $45,000 and $35,000 was accrued
at December 31, 1998 and 1999. For the six months ended June 30, 1999 and 2000
interest income was $39,000 and $28,000 of which $39,000 and $28,000 was accrued
at June 30, 1999 and 2000 respectively.
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In the year ended December 31, 1999, we sold to and purchased fixed assets
from Integrated Technology Express, Inc. in the amount of $28,000 and $152,000.
SHARED FACILITIES, PURCHASE OF PRODUCTS AND SERVICES
In March 1998, we entered into a reimbursement agreement with Integrated
Technology Express, Inc. to share facilities and services of administrative
staff and resources. Under the agreement, the parties allocate the costs of the
shared portion of their respective operations. The agreement has no expiration
date. The total amounts that we billed to and reimbursed by Integrated
Technology Express, Inc. were $2,539,000 and $1,936,000 in 1998 and $843,000 and
$812,000 in 1999 and $412,000 and $403,000 for the six months ended June 30,
1999, and $234,000 and $294,000 for the six months ended June 30, 2000,
respectively. We also purchase certain of our finished products from Integrated
Technology Express, Inc., which amounted to $746,000 for the year ended
December 31, 1999, and $1.1 million for the six months ended June 30, 2000.
Additionally, in 1998 Integrated Technology Express, Inc. performed certain
nonrecurring engineering services for us in the amount of $290,000. At
December 31, 1998 and 1999, the net balance due to us from Integrated Technology
Express, Inc. was $313,000 and $192,000. At June 30, 2000, the net balance due
to Integrated Technology Express, Inc. was $435,000.
PROVIDING CONSULTING SERVICES
In 1997, we entered into an agreement in which we agreed to provide
consulting services to a related company. Revenue derived from consulting
services was approximately $175,000 for the year ended December 31, 1997, and is
included in the result for discontinued operations, and none for the years ended
December 31, 1998 and 1999.
INDEMNIFICATION AGREEMENTS
Our fourth amended and restated certificate of incorporation, which shall be
filed concurrently with the initial public offering, limits the liability of our
directors for monetary damages arising from a breach of their fiduciary duty as
directors to the fullest extent permitted by the Delaware General Corporation
Law.
Our bylaws provide that we shall indemnify our directors and officers to the
maximum extent and in the manner permitted by the Delaware General Corporation
Law against expenses (including attorneys' fees), judgments, fines, settlements,
and other amounts actually and reasonably incurred in connection with any
proceeding, arising by reason of the fact that such person is or was an agent of
the corporation. Our bylaws also provide that we may purchase and maintain
insurance on behalf of any person who is or was a director or officer against
any liability asserted against him and incurred by him in any such capacity
whether or not we would have the power to indemnify him against such liability
under the provisions of the Delaware General Corporation Law.
We will enter into indemnification agreements with each of our directors and
executive officers. Such indemnification agreements will require us to indemnify
our directors and executive officers to the fullest extent permitted by Delaware
General Corporation Law.
REGISTRATION RIGHTS
We have granted registration rights to holders of our Series A preferred
stock, Series B preferred stock, and certain of our founders. In addition, we
have granted registration rights to NEC Corporation in the concurrent private
placement. See the description of capital stock for a description of the
registration rights that we have granted.
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<PAGE>
EMPLOYMENT AGREEMENTS
We have entered into employment arrangements and compensation arrangements
with certain of our executive officers, see "Management--Employment
Arrangements" and "--Executive Officers--Summary Compensation Table." For
information regarding stock options, see "Management--Stock Plans."
FUTURE AGREEMENTS
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent, disinterested outside directors, and will be on terms no less
favorable to us than could be obtained from unaffiliated parties.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The table on the following page sets forth information regarding the
beneficial ownership of our common stock as of July 10, 2000, by the following
individuals or groups:
- each person or entity who is known by us to own beneficially more than 5%
of our outstanding stock;
- each of the named executive officers;
- each of our directors; and
- all directors and executive officers as a group.
Beneficial ownership of shares is determined under the rules of the
Securities and Exchange Commission and generally includes any shares over which
a person exercises sole or shared voting or investment power. Share ownership in
each case also includes shares issuable upon exercise of outstanding options and
warrants that are exercisable within 60 days. Unless otherwise indicated, the
address for each stockholder listed in the following table is c/o Integrated
Telecom Express, Inc., 2710 Walsh Avenue, Santa Clara, CA 95051. Except as
otherwise indicated, and subject to applicable community property laws, the
persons named in the table have sole voting and investment power with respect to
all shares of common stock held by them.
Applicable percentage ownership in the following table is based on
35,522,136 shares of common stock outstanding as of July 10, 2000, as adjusted
to reflect the conversion of all outstanding shares of preferred stock upon the
closing of this offering, and 41,288,803 shares of common stock outstanding
after completion of this offering.
The numbers shown in the following table assume no exercise by the
underwriters of their over-allotment option.
PRINCIPAL STOCKHOLDERS TABLE
<TABLE>
<CAPTION>
PERCENTAGE OF
BENEFICIAL OWNERSHIP
------------------------
NUMBER OF SHARES PRIOR TO AFTER
BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
---------------- ------------------- --------- --------
<S> <C> <C> <C>
5% STOCKHOLDERS:
United Microelectronics Corporation (1)................ 7,000,000 19.71% 16.95%
Fortune Venture Capital Corporation (2)................ 4,000,000 11.26 9.69
Creative Group Limited (3)............................. 3,500,000 9.86 8.48
Intel Corporation (4).................................. 2,142,857 5.92 5.10
DIRECTORS AND EXECUTIVE OFFICERS:
Daniel (Wen Chi) Chen (5).............................. 931,000 2.57 2.22
Richard H. Forte (6)................................... 370,833 1.04 0.89
Young Way Liu (7)...................................... 914,333 2.53 2.18
Timothy A. Rogers (8).................................. 134,250 * *
Jow H. Peng (9)........................................ 146,500 * *
Max (Ming Kang) Liu (10)............................... 180,292 * *
Terry Gou (11)......................................... 300,000 * *
Peter J. Courture (12)................................. 150,000 * *
David Lam (13)......................................... 100,000 * *
John Cioffi (14)....................................... 137,500 * *
Ying Shiau (15)........................................ 50,000 * *
All directors and officers as a group
(13 persons) (16).................................... 3,604,396 9.51 8.25
</TABLE>
------------------------
* Represents beneficial ownership of less than 1.0%.
63
<PAGE>
(1) The address of United Microelectronics Corporation is 3F, No. 76 Tunhwa
South Road, Section 2, Taipei, Taiwan R.O.C. John Hsuan is the Chairman of
United Microelectronics Corporation.
(2) The address of Fortune Venture Capital Corporation is 3F, No. 76 Tunhwa
South Road, Section 2, Taipei, Taiwan R.O.C. Robert Tsao is the Chairman of
Fortune Venture Capital Corporation.
(3) The address of Creative Group Limited is P.O. Box 71 Craigmuir Chambers,
Road Town, Tortola, British Virgin Islands. Ms. Chiu-Lian Huang is the
Director of Creative Group Limited.
(4) Includes 714,286 shares issuable pursuant to a warrant which is exercisable
within 60 days of July 10, 2000. The address of Intel Corporation is 2200
Mission College Boulevard, Santa Clara, CA 95052.
(5) Includes 581,000 shares issuable pursuant to options which are exercisable
within 60 days of July 10, 2000. This also includes 100,000 shares issuable
pursuant to restricted stock purchase rights exercisable within 60 days of
July 10, 2000, all of which are currently subject to a right of repurchase.
(6) Includes 71,667 shares subject to a right of repurchase. This also includes
120,833 shares issuable pursuant to options which are exercisable within 60
days of July 10, 2000. This also includes 150,000 shares issuable pursuant
to restricted stock purchase rights exercisable within 60 days of July 10,
2000, all of which would be subject to a right of repurchase.
(7) Includes 589,333 shares issuable pursuant to options which are exercisable
within 60 days of July 10, 2000. This also includes 75,000 shares issuable
pursuant to restricted stock purchase rights exercisable within 60 days of
July 10, 2000, all of which would be subject to a right of repurchase.
(8) Includes 109,250 shares issuable pursuant to options which are exercisable
within 60 days of July 10, 2000. This also includes 25,000 shares issuable
pursuant to restricted stock purchase rights exercisable within 60 days of
July 10, 2000, all of which would be subject to a right of repurchase.
(9) Includes 66,000 shares issuable pursuant to options which are exercisable
within 60 days of July 10, 2000. This also includes 40,000 shares issuable
pursuant to restricted stock purchase rights exercisable within 60 days of
July 10, 2000, all of which are currently subject to a right of repurchase.
(10) Includes 110,292 shares issuable pursuant to options which are exercisable
within 60 days of July 10, 2000. This also includes 30,000 shares issuable
pursuant to restricted stock purchase rights exercisable within 60 days of
July 10, 2000, all of which are currently subject to a right of repurchase.
(11) Includes 50,000 shares issuable pursuant to options which are exercisable
within 60 days of July 10, 2000, of which 22,500 are currently subject to a
right of repurchase.
(12) Includes 72,500 shares currently subject to a right of repurchase.
(13) Includes 100,000 shares issuable pursuant to options which are exercisable
within 60 days of July 10, 2000, of which 75,833 are currently subject to a
right of repurchase.
(14) Includes 100,000 shares currently subject to a right of repurchase and
37,500 shares held in the Cioffi Family Trust.
(15) Includes 50,000 shares issuable pursuant to restricted stock purchase
rights exercisable within 60 days of July 10, 2000, all of which would be
subject to a right of repurchase.
(16) Includes 1,776,396 shares issuable pursuant to options which are
exercisable within 60 days of July 10, 2000, of which 98,333 are currently
subject to a right of repurchase. This also includes 610,000 shares issuable
pursuant to restricted stock purchase rights exercisable within 60 days of
July 10, 2000, all of which are currently subject to a right of repurchase.
This also includes 244,167 shares currently subject to a right of
repurchase.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, we will be authorized to issue
200,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value. The following description of our
capital stock is materially complete.
COMMON STOCK
As of July 10, 2000, there were 24,093,565 shares of common stock
outstanding which were held of record by 201 stockholders. The holders of common
stock are entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the board of
directors out of funds legally available for that purpose. See "Dividend
Policy." In the event of our liquidation, dissolution or winding up, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred stock,
if any, then outstanding. The holders of common stock have no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. Wilson Sonsini
Goodrich & Rosati, Professional Corporation, counsel to us, shall opine that the
shares of common stock to be issued upon the closing of this offering, when
issued and sold in the manner described in this prospectus and in accordance
with the resolutions adopted by the board of directors, will be fully paid and
nonassessable.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in control of us without further action by
the stockholders.
Upon the closing no shares of preferred stock will be outstanding, and we
have no present plans to issue any shares of preferred stock.
Wit Capital Corporation purchased 37,500 shares of Series B preferred stock.
WARRANTS
As of July 10, 2000, there were warrants outstanding to purchase 714,286
shares of Series A preferred stock and 500,000 shares of Series B preferred
stock. These warrants will become exercisable for an aggregate of 1,214,286
shares of common stock upon the closing of this offering.
REGISTRATION RIGHTS
The holders of 13,003,571 shares of common stock, assuming conversion of all
outstanding shares of preferred stock, 166,667 shares of common stock to NEC
Corporation in the concurrent private
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<PAGE>
placement, and the holders of warrants to purchase preferred stock convertible
into 1,214,286 shares of common stock, or the registrable securities, are
entitled to certain rights with respect to registration of such shares under the
Securities Act. These rights are provided under the terms of an agreement
between the holders of registrable securities and us. Beginning 180 days
following the date of this prospectus, holders of at least 30% of the then
outstanding registrable securities may require on up to two occasions that we
register their shares for public resale. Also, holders of registrable securities
may require on two separate occasions within any 12 month period that we
register their shares for public resale on Form S-3 or similar short-form
registration if the value of the securities to be registered is at least
$1.0 million, however we may defer such registration for 90 days in view of
market conditions. Furthermore, in the event we elect to register any of our
shares of common stock for purposes of effecting any public offering, the
holders of registrable securities are entitled to include their shares of common
stock in the registration, but we may reduce the number of shares proposed to be
registered in view of market conditions. These registration rights have been
waived with respect to this offering. All expenses in connection with any
registration, other than underwriting discounts and commissions, will be borne
by us. All registration rights will terminate five years following the
consummation of this offering, or, with respect to each holder of registrable
securities, at such time as the holder is entitled to sell all of its shares in
any 90 day period under Rule 144 of the Securities Act.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE AND BYLAWS AND DELAWARE LAW
Certain provisions of Delaware law and our restated certificate of
incorporation and bylaws could make the following more difficult:
- the acquisition of us by means of a tender offer;
- acquisition of us by means of a proxy contest or otherwise; or
- the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of us to first
negotiate with our board. We believe that the benefits of increased protection
of our potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the disadvantages of
discouraging such proposals because negotiation of such proposals could result
in an improvement of their terms.
ELECTION AND REMOVAL OF DIRECTORS. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term, one
class being elected each year by our stockholders. This system of electing and
removing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of us because it generally makes
it more difficult for stockholders to replace a majority of the directors.
STOCKHOLDER MEETINGS. Under our bylaws, only the board of directors, the
chairman of the board and the president may call special meetings of
stockholders.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.
DELAWARE ANTI-TAKEOVER LAW. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless the "business combination"
or the transaction in which the person became an interested stockholder is
approved in a prescribed
66
<PAGE>
manner. Generally, a business combination includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an interested stockholder is a person who, together with
affiliates and associates, owns or within three years prior to the determination
of interested stockholder status, did own, 15% or more of a corporation's voting
stock. The existence of this provision may have an anti-takeover effect with
respect to transactions not approved in advance by the board of directors,
including discouraging attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
ELIMINATION OF STOCKHOLDER ACTION BY WRITTEN CONSENT. Our restated
certificate of incorporation eliminates the right of stockholders to act by
written consent without a meeting.
ELIMINATION OF CUMULATIVE VOTING. Our restated certificate of incorporation
and bylaws do not provide for cumulative voting in the election of directors.
UNDESIGNATED PREFERRED STOCK. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of us. These and other provisions may have the effect
of deferring hostile takeovers or delaying changes in control or management of
us.
CLASSIFIED BOARD. Our board of directors is divided into three classes. A
portion of our board of directors will be elected each year. To implement the
classified structure, prior to the consummation of the offering, two of the
nominees to the board will be elected to one-year terms, two will be elected to
two-year terms and three will be elected to three-year terms. Thereafter,
directors will be elected for three-year terms.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Equiserve Trust
Company.
NASDAQ NATIONAL MARKET LISTING
Our stock is quoted on the Nasdaq National Market under the symbol "ITXI."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and our
ability to raise equity capital in the future on terms favorable to us.
After the offering 41,288,803 shares of our common stock will be
outstanding, assuming that the underwriters do not exercise the over-allotment
option. Of these shares, all of the 5,600,000 shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by affiliates as that term is
defined in Rule 144 under the Securities Act. The remaining shares of common
stock held by existing shareholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Restricted securities may be sold
in the public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act, which rules are
summarized below.
The following table shows approximately when the 35,522,136 shares of our
common stock that are not being sold in this offering but which will be
outstanding when this offering is complete will be eligible for sale in the
public market:
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET
<TABLE>
<S> <C>
At the effective date....................................... 0
90 days after the effective date............................ 0
180 days after the effective date........................... 35,522,136
</TABLE>
Resale of 18,922,967 of the restricted shares that will become available for
sale in the public market starting 180 days after the effective date will be
limited by volume and other resale restrictions under Rule 144 because the
holders are our affiliates.
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 shares of our
common stock for at least one year is entitled to sell, within any three-month
period, a number of shares that is not more than the greater of:
- 1% of the number of shares of common stock then outstanding which will
equal approximately 412,888 shares immediately after this offering; or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the sale
on Form 144 is filed.
Sales under Rule 144 must also comply with manner of sale provisions 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 at any
time during the 90 days before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultant or advisors who purchase shares from us under a
stock option plan or other written agreement can resell those shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
complying with some of the restrictions, including the holding period, contained
in Rule 144. As of July 10, 2000, 1,343,565 shares outstanding had been issued
as a result of exercise of
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stock options. Of these shares, 1,108,148 shares will be vested and exercisable
and will be able to be resold after the 90 day period, subject to the lock-up
agreements described below.
LOCK-UP AGREEMENTS
Executive officers, directors, stockholders and optionees who will hold an
aggregate of 35,688,803 shares of our common stock after this offering will sign
lock-up agreements under which they will agree not to transfer or dispose of,
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for shares of common stock, for a period of
180 days after the date of this prospectus. This aggregate number of shares
includes the 166,667 shares to be sold to NEC Corporation in the concurrent
private placement. Transfers or dispositions can be made sooner with the prior
written consent of Lehman Brothers.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 13,003,571 shares of our
common stock, holders of 1,214,286 shares of our common stock issuable upon
conversion of warrants, assuming such warrants are converted, and 166,667 shares
of common stock to NEC Corporation in the concurrent private placement, will be
entitled to rights to registration of their shares under the Securities Act.
After registration, these shares will become freely tradable without
restrictions under the Securities Act. Any sales of securities by these
shareholders could have a material adverse effect on the trading price of our
common stock.
STOCK OPTIONS
Immediately after this offering we intend to file a registration statement
under the Securities Act covering shares of common stock subject to outstanding
options or reserved for issuance under our stock option plans. Each year as the
number of shares reserved for issuance under our 2000 stock plan and 2000
employee stock purchase plan automatically increases, we will file an amendment
to the registration statement covering the additional shares. As of July 10,
2000, under our 1996 stock plan, options to purchase 10,412,120 shares of common
stock were issued and outstanding, under our 2000 stock plan 2,500,000 shares
were reserved for future issuance and under our 2000 employee stock purchase
plan 600,000 shares were reserved for future issuance. This registration
statement is expected to be filed and become effective as soon as practicable
after the effective date of this offering. Accordingly, shares registered under
that registration statement will, upon the optionee's exercise and subject to
vesting provisions and Rule 144 volume limitations applicable to our affiliates,
be available for sale in the open market immediately after the 180 day lock-up
agreements expire.
WARRANTS
Upon consummation of the initial public offering, warrants to purchase
1,214,286 shares of common stock will remain outstanding. The warrants which
remain outstanding after this offering will have the registration rights
described above.
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<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters
named below, for whom Lehman Brothers Inc., Bear, Stearns & Co. Inc., Wit
SoundView Corporation and Fidelity Capital Markets, a division of National
Financial Services Corporation, are acting as representatives, has agreed to
purchase from us the number of shares of common stock shown opposite its name
below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Lehman Brothers Inc...................................... 2,640,750
Bear, Stearns & Co. Inc.................................. 1,383,250
Wit SoundView Corporation................................ 1,006,000
Fidelity Capital Markets, a division of National
Financial Services Corporation......................... 60,000
A.G. Edwards & Sons, Inc................................. 60,000
Salomon Smith Barney Inc................................. 60,000
SG Cowen Securities Corporation.......................... 60,000
UBS Warburg LLC.......................................... 60,000
Thomas Weisel Partners LLC............................... 60,000
First Security Van Kasper................................ 30,000
Gruntal & Co., L.L.C..................................... 30,000
Edward D. Jones & Co., L.P............................... 30,000
Kaufman Bros., L.P....................................... 30,000
Legg Mason Wood Walker, Incorporated..................... 30,000
Raymond James & Associates, Inc.......................... 30,000
Wachovia Securities, Inc................................. 30,000
---------
Total.................................................... 5,600,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement and that, if any of the shares of common
stock are purchased by the underwriters under the underwriting agreement, all of
the shares of common stock that the underwriters have agreed to purchase under
the underwriting agreement must be purchased. The conditions contained in the
underwriting agreement include the requirement that:
- the representations and warranties made by us to the underwriters are
true;
- there is no material change in the financial markets as to make it
impracticable or inadvisable to proceed with the public offering; and
- we deliver customary closing documents to the underwriters.
We have granted the underwriters an option to purchase up to an aggregate of
840,000 additional shares of common stock to cover over-allotments, if any, at
the public offering price less the underwriting discounts shown on the cover
page of this prospectus. The underwriters may exercise this option at any time
until 30 days after the date of the underwriting agreement. If this option is
exercised, each underwriter will be committed, so long as the conditions of the
underwriting agreement are satisfied, to purchase a number of additional shares
of common stock proportionate to the underwriter's initial commitment as
indicated in the table above and we will be obligated, under the over-allotment
option, to sell the shares of common stock to the underwriters.
The underwriters propose to offer the shares to the public initially at the
public offering price set forth on the cover page of this prospectus and to
selling group members at that price less a concession
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<PAGE>
of $0.76 per share. The underwriters and selling group members may allow a
discount of $0.10 per share on sales to other broker/dealers. After the initial
public offering, the public offering price and concession and discount to
dealers may be changed by the representatives.
The following table summarizes the compensation we will pay. The
underwriting discounts and commissions are equal to the public offering price
per share less the amount paid to us per share.
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by us........ $1.26 $7,056,000 $8,114,400
</TABLE>
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $1,500,000.
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We, our officers and directors and certain other stockholders have agreed
that without the prior consent of Lehman Brothers we will not offer, sell,
contract to sell, announce our intention to sell, pledge or otherwise dispose
of, directly or indirectly, or file with the Commission a registration statement
under the Securities Act relating to, any additional shares of common stock or
securities convertible into or exchangeable or exercisable for any of our shares
for a period of 180 days after the date of this prospectus, except in the case
of issuances by us upon the exercise of employee stock options outstanding on
the date hereof. Lehman Brothers may, in their sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements.
The underwriters have reserved for sale, at the initial public offering
price, up to 385,100 shares of the common stock for employees, directors and
other persons associated with us that have expressed an interest in purchasing
common stock in the offering. These persons must commit to purchase no later
than the close of business on the day following the date of this prospectus. The
number of shares available for sale to the general public in the offering will
be reduced to the extent such 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 relating to
the offering, including liabilities under the Securities Act, liabilities
arising from breaches of the representations and warranties contained in the
underwriting agreement, and liabilities incurred in connection with the directed
share program referred to above, and to contribute to payments that the
underwriters may be required to make for these liabilities.
Our shares are listed on the Nasdaq Stock Market's National Market under the
symbol "ITXI."
Prior to this offering, there has been no public market for the shares of
common stock. The initial public offering price was negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives considered:
- prevailing market conditions;
- our historical performance;
- our capital structure;
- estimates of our business potential and earning prospects;
- an overall assessment of our management; and
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<PAGE>
- the consideration of the above factors in relation to market valuation of
companies in related businesses.
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act.
- The underwriters may purchase and sell shares of common stock in the open
market. These transactions may include short sales and purchases to cover
short positions created by short sales. Short sales involve the sale by
the underwriters of a greater number of shares than they are required to
purchase in the offering. Covered short sales are sales made in an amount
not greater than the underwriters' option to purchase additional shares
from the issuer in the offering. The underwriters may close out any
covered short position by either exercising their option to purchase
shares or purchasing shares in the open market. In determining the source
of shares to close out the covered short position, the underwriters will
consider, among other things, the price of shares available for purchase
to the open market as compared to the price at which they may purchase
shares through the over-allotment option. Naked short sales are any sales
in excess of such option. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned that there
may be downward pressure on the price of the common stock in the open
market after pricing that could adversely affect investors who purchase in
the offering. Stabilizing transactions consist of various bids for or
purchases of common stock made by the underwriters in the open market
prior to the completion of the offering.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to cover
syndicate short positions.
Any offers in Canada will be made only under exemption from the requirements
to file a prospectus in the relevant province of Canada in which the sale is
made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
page of this prospectus.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
In November 1999, an affiliate of Wit SoundView Corporation purchased 37,500
shares of our Series B preferred stock for a total purchase price of $150,000.
These shares shall be converted into 37,500 shares of common stock upon the
closing of this offering.
A prospectus in electronic format is being made available on Internet web
sites maintained by Wit SoundView Corporation's affiliate, Wit Capital
Corporation, and may be made available on web sites maintained by other
underwriters. Wit SoundView Corporation may also market the offering over the
Internet. Other than the prospectus in electronic format, the information on any
underwriter's web site and any information contained in any other web site
maintained by an underwriter is not part of the prospectus or the registration
statement of which this prospectus forms a part.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic distribution through the Internet.
72
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. As of the date of this prospectus, WS Investment Company 2000
A composed of certain current and former members of and persons associated with
Wilson Sonsini Goodrich & Rosati, as well as certain individual attorneys of
this firm, own an option to purchase 100,000 shares of our common stock, subject
to vesting. Certain legal matters will be passed upon for the underwriters by
Cooley Godward LLP, Palo Alto, California.
CHANGE OF INDEPENDENT ACCOUNTANTS
On June 2, 1998 Ernst & Young LLP was dismissed as our independent
accountants. PricewaterhouseCoopers LLP was appointed our independent
accountants on October 28, 1998. The decision to change accountants was approved
by our board of directors. The audit report of Ernst & Young LLP on the
financial statements of Integrated Telecom Express, Inc. for the year ended
December 31, 1997 (not included in or made a part of this prospectus and/or
registration statement) contained no adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope or accounting
principle. In connection with its audit for the year ended December 31, 1997 and
for the interim period through June 2, 1998, there were no disagreements with
Ernst & Young LLP on any matter of accounting principles and practices,
financial statements and disclosures or auditing scope or procedures, which
disagreements, if not resolved to their satisfaction would have caused them to
make reference in connection with their opinion to the subject matter of the
disagreement.
For purposes of this filing, the financial statements for the year ended
December 31, 1997 as well as the financial statements for the years ended
December 31, 1998 and 1999 have been audited by PricewaterhouseCoopers LLP.
Prior to October 28, 1998, we had not consulted with PricewaterhouseCoopers LLP
on items that involved our accounting principles or the form of audit opinion to
be issued on our financial statements for the years ended December 31, 1997 or
1998.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and June 30, 1999
and 2000 and for each of the three years in the period ended December 31, 1999
and the six month periods ended June 30, 1999 and 2000 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, is materially complete. For further information with respect to us
and our common stock, see the registration statement and the exhibits and
schedules thereto. Any document we file may be read and copied at the
Commission's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information about the public reference rooms. Our filings with the Commission
are also available to the public from the Commission's website at
http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and,
accordingly, will file periodic reports, proxy statements and other information
with the Commission. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the Commission's
public reference rooms, and the website of the Commission referred to above.
73
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Integrated Telecom Express, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Integrated Telecom
Express, Inc. at December 31, 1998 and 1999 and June 30, 1999 and 2000, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 and the six month periods ended June 30, 1999 and
2000 in conformity with accounting principles generally accepted in the United
States. 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 of these statements in
accordance with auditing standards generally accepted in the United States,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, CA
July 21, 2000
F-2
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, JUNE 30, EQUITY AT
------------------- -------- JUNE 30,
1998 1999 2000 2000
-------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 14,423 $ 38,513 $34,308
Trade receivables, net.................................... -- 1,373 6,071
Receivable from ITE....................................... 313 192 177
Current portion of note receivable from ITE............... 343 363 748
Inventories............................................... -- 1,893 4,325
Prepaid expenses and other assets......................... 144 856 929
-------- -------- --------
Total current assets.................................. 15,223 43,190 46,558
Deposits.................................................... 50 -- --
Long-term portion of note receivable from ITE............... 1,156 793 408
Property and equipment, net................................. 2,172 2,140 7,411
Licenses, net............................................... 8,051 6,828 6,463
-------- -------- --------
Total assets.......................................... $ 26,652 $ 52,951 $60,840
======== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 202 $ 1,852 $ 7,852
Accrued expenses and other liabilities.................... 742 875 2,044
Current portion of payable for licenses................... 2,375 2,625 2,250
Current portion of capital leases......................... -- -- 1,499
-------- -------- --------
Total current liabilities............................. 3,319 5,352 13,645
Long-term portion of payable for licenses................... 4,125 1,500 750
Long-term portion of capital leases......................... -- -- 2,542
-------- -------- --------
Total liabilities..................................... 7,444 6,852 16,937
-------- -------- --------
Commitments (Note 12)
Mandatorily redeemable convertible preferred stock:
$0.001 par value, authorized: 10,000 shares in 1998 and
13,500 shares in 1999 and 13,500 shares at June 30,
2000; issued and outstanding: 1,429 shares in 1998 and
11,429 shares in 1999, and 11,429 shares at June 30,
2000 and none (unaudited) at June 30, 2000 (pro forma);
(aggregate liquidation preference of $5,000 at
December 31, 1998 and $45,000 at December 31, 1999 and
$45,000 at June 30, 2000 and $0 (unaudited) at June 30,
2000 (pro forma))....................................... 4,120 43,100 43,100 $ --
Mandatorily redeemable convertible preferred
stock warrants........................................ 880 1,900 1,900 --
-------- -------- -------- --------
5,000 45,000 45,000 --
-------- -------- -------- --------
Stockholders' equity (deficit):
Common stock--$0.001 par value, authorized: 34,750 shares
in 1998 and 46,100 shares in 1999 and 46,100 shares at
June 30, 2000; issued and outstanding: 23,080 shares in
1998 and 23,369 shares in 1999 and 23,990 shares at
June 30, 2000 and 35,419 (unaudited) shares at June 30,
2000 (pro forma)........................................ 23 23 24 35
Additional paid-in capital................................ 29,378 30,745 81,379 126,368
Deferred stock-based compensation......................... (473) (1,241) (42,096) (42,096)
Notes receivable from stockholder......................... -- -- (502) (502)
Accumulated deficit....................................... (14,720) (28,428) (39,902) (39,902)
-------- -------- -------- --------
Total stockholders' equity (deficit).................. 14,208 1,099 (1,097) $ 43,903
-------- -------- -------- ========
Total liabilities, mandatorily redeemable
convertible preferred stock and stockholders'
equity (deficit).................................. $ 26,652 $ 52,951 $60,840
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue.............................................. $ -- $ -- $ 3,053 $ 296 $ 14,401
Cost of revenue (including stock-based compensation
expense of $0, $0, $0, $0 and $59)................. -- -- (2,811) (716) (8,531)
------- ------- -------- ------- --------
Gross profit (loss).................................. -- -- 242 (420) 5,870
------- ------- -------- ------- --------
Operating expenses:
Research and development (exclusive of stock-based
compensation expense of $10, $58, $97, $53 and
$2,833).......................................... 1,101 6,230 8,458 3,962 5,947
Sales and marketing (exclusive of stock-based
compensation expense of $0, $57, $86, $45 and
$1,602).......................................... -- 1,125 3,211 1,376 2,745
General and administrative (exclusive of
stock-based compensation expense of $23, $111,
$81, $44 and $3,450)............................. 943 2,571 3,086 1,633 1,673
Amortization of deferred stock-based
compensation..................................... 33 226 264 142 7,885
------- ------- -------- ------- --------
Total operating expenses......................... 2,077 10,152 15,019 7,113 18,250
------- ------- -------- ------- --------
Operating loss from continuing operations............ (2,077) (10,152) (14,777) (7,533) (12,380)
Interest income, net................................. 809 856 887 276 906
Other income......................................... -- -- 182 -- --
------- ------- -------- ------- --------
Loss from continuing operations...................... (1,268) (9,296) (13,708) (7,257) (11,474)
Loss from discontinued operations.................... (2,638) -- -- -- --
------- ------- -------- ------- --------
Net loss............................................. $(3,906) $(9,296) $(13,708) $(7,257) $(11,474)
======= ======= ======== ======= ========
Basic and diluted net loss from continuing operations
per share.......................................... $ (0.06) $ (0.40) $ (0.59) $ (0.31) $ (0.49)
Basic and diluted net loss from discontinued
operations per share............................... (0.11) -- -- -- --
------- ------- -------- ------- --------
Basic and diluted net loss per share................. $ (0.17) $ (0.40) $ (0.59) $ (0.31) $ (0.49)
======= ======= ======== ======= ========
Shares used in computing basic and diluted net loss
per share.......................................... 22,753 23,058 23,148 23,098 23,488
======= ======= ======== ======= ========
Pro forma basic and diluted net loss per share
(unaudited)........................................ $ (0.51) $ (0.33)
======== ========
Pro forma shares used in computing basic and diluted
net loss per share (unaudited)..................... 26,634 34,917
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON NOTES TOTAL
STOCK ADDITIONAL DEFERRED RECEIVABLE STOCKHOLDERS'
------------------- PAID-IN STOCK-BASED FROM ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDER DEFICIT (DEFICIT)
-------- -------- ---------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996... 22,750 $23 $25,827 $ -- $ -- $ 28 $ 25,878
------ --- ------- -------- ----- -------- --------
Sale of subsidiary to related
party........................ -- -- (323) -- -- (1,546) (1,869)
Exercise of common stock
options...................... 14 -- 10 -- -- -- 10
Deferred compensation related
to stock option grants....... -- -- 599 (599) -- -- --
Amortization of deferred stock-
based compensation........... -- -- -- 136 -- -- 136
Net loss....................... -- -- -- -- -- (3,906) (3,906)
------ --- ------- -------- ----- -------- --------
Balance at December 31, 1997... 22,764 23 26,113 (463) -- (5,424) 20,249
Deemed contribution of capital
related to sale of licenses
to related parties........... -- -- 2,853 -- -- -- 2,853
Exercise of common stock
options...................... 316 -- 176 -- -- -- 176
Deferred compensation related
to stock option grants....... -- -- 236 (236) -- -- --
Amortization of deferred stock-
based compensation........... -- -- -- 226 -- -- 226
Net loss....................... -- -- -- -- -- (9,296) (9,296)
------ --- ------- -------- ----- -------- --------
Balance at December 31, 1998... 23,080 23 29,378 (473) -- (14,720) 14,208
Exercise of common stock
options...................... 289 -- 335 -- -- -- 335
Deferred compensation related
to stock option grants....... -- -- 1,032 (1,032) -- -- --
Amortization of deferred stock-
based compensation........... -- -- -- 264 -- -- 264
Net loss....................... -- -- -- -- -- (13,708) (13,708)
------ --- ------- -------- ----- -------- --------
Balance at December 31, 1999... 23,369 23 30,745 (1,241) -- (28,428) 1,099
Deferred compensation related
to stock option grants....... -- -- 48,799 (48,799) -- -- --
Exercise of common stock
options...................... 621 1 1,835 -- (502) -- 1,334
Amortization of deferred stock-
based compensation........... -- -- -- 7,944 -- -- 7,944
Net loss....................... -- -- -- -- -- (11,474) (11,474)
------ --- ------- -------- ----- -------- --------
Balance at June 30, 2000....... 23,990 $24 $81,379 $(42,096) $(502) $(39,902) $ (1,097)
====== === ======= ======== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $ (3,906) $ (9,296) $(13,708) $(7,257) $(11,474)
Adjustments to reconcile net loss to net cash used
in operating activities:
Loss from discontinued operations.............. 2,638 -- -- -- --
Depreciation and amortization.................. 292 822 2,193 1,109 1,798
Amortization of deferred stock-based
compensation................................... 33 226 264 142 7,944
Changes in current assets and liabilities, net
of effects of business sold:
Trade receivables.......................... -- -- (1,373) (56) (4,698)
Receivable from ITE........................ (17) (339) 121 112 15
Note receivable............................ 446
Prepaid expenses and other current
assets..................................... (368) 295 (712) (53) (521)
Other assets............................... (50) -- 50 -- --
Inventory.................................. -- -- (1,893) -- (2,432)
Accounts payable........................... 25 193 1,650 67 6,000
Accrued expenses and other liabilities..... 333 368 133 199 1,169
-------- -------- -------- ------- --------
Net cash used in continuing operations... (1,020) (7,731) (13,275) (5,737) (1,753)
Net cash used in discontinued
operations............................... (1,434) -- -- -- --
-------- -------- -------- ------- --------
Net cash used in operating activities.... (2,454) (7,731) (13,275) (5,737) (1,753)
-------- -------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and licenses....... (902) (3,143) (3,341) (2,048) (3,227)
Purchase of short-term investments, net............ (11,384)
Proceeds from short-term investments, net.......... -- 11,384 -- -- --
Net proceeds from sale of discontinued
operations......................................... 1,305 -- -- -- --
Purchase of property, equipment and licenses by
discontinued business............................ (3,801) -- -- -- --
Proceeds from sale of assets to ITE................ -- 1,911 28 28 --
Proceeds from note receivables due from ITE........ -- 432 343 -- --
-------- -------- -------- ------- --------
Net cash provided by (used in) investing
activities............................... (14,782) 10,584 (2,970) (2,020) (3,227)
-------- -------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred
stock and warrants............................... -- 5,000 40,000 -- --
Proceeds from exercise of common stock options..... 10 176 335 36 1,332
Payment of Capital Lease Obligations............... (557)
-------- -------- -------- ------- --------
Net cash provided by financing
activities............................... 10 5,176 40,335 36 775
-------- -------- -------- ------- --------
Effect of exchange rate changes on cash and cash
equivalents........................................ (72) -- -- -- --
Net increase in cash and cash equivalents............ (17,298) 8,029 24,090 (7,721) (4,205)
Cash and cash equivalents at beginning of year....... 23,692 6,394 14,423 14,423 38,513
-------- -------- -------- ------- --------
Cash and cash equivalents at end of year............. $ 6,394 $ 14,423 $ 38,513 $ 6,702 $ 34,308
======== ======== ======== ======= ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Sale of assets to ITE for note receivable.......... $ -- $ 1,931 $ -- $ -- $ --
Payable issued for licensing agreements............ $ -- $ 6,500 $ -- $ -- $ --
Assets purchased under capital leases.............. $ -- $ -- $ -- $ -- $ 4,598
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Integrated Telecom Express, Inc. ("ITeX" or the "Company", formerly
Integrated Technology Express, Inc.) was incorporated in California in May 1995
and re-incorporated in Delaware in May 1999. The Company designs and sells
integrated circuit and software solutions to the broadband access communications
equipment industry. The Company's products include integrated circuits,
software, turn-key reference designs and test systems that enable communications
equipment manufacturers to provide high-speed, cost-effective asymmetrical
digital subscriber line, or ADSL, equipment to communications service providers
and their customers. The industry in which the Company operates is characterized
by rapid technological change and significant volatility of product prices.
United Microelectronics Corporation ("UMC"), a public company in Taiwan,
directly and indirectly owned 46% of the Company's outstanding common stock at
June 30, 2000.
BASIS OF PREPARATION
The financial statements included the accounts of the Company's wholly-owned
subsidiary, Integrated Technology Express (Taiwan), Inc. or ("ITE"), until that
subsidiary was sold to a major stockholder of the Company on December 23, 1997
as described in Note 2.
FOREIGN CURRENCY TRANSLATION
The functional currency of ITE is the New Taiwan Dollar. Accordingly, prior
to the sale of the subsidiary on December 23, 1997, the assets and liabilities
of the Company's foreign subsidiary were translated into U.S. dollars at
exchange rates in effect at the balance sheet date. Income and expense items
were translated at average exchange rates for the period. Foreign currency
translation adjustments were included in accumulated other comprehensive income
as a separate component of stockholders' equity and eliminated in connection
with the sale of the subsidiary. Foreign currency transaction gains or losses
were recorded in operating expenses and were not significant for the year ended
December 31, 1997.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist principally of time deposits and a money market deposit account that are
stated at cost, which approximates fair value, held at two financial
institutions.
F-7
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
using the average cost method.
PROPERTY AND EQUIPMENT
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS No. 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS No. 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the long-lived asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Losses on long-lived assets to be disposed of are determined in a similar
manner, except that fair values are reduced for the cost of disposal. No losses
from impairment have been recognized in the financial statements.
Property and equipment are stated at cost. Depreciation is generally
computed using the straight-line method over the estimated useful lives of the
assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Machinery and equipment.................................. 3-5 years
Software................................................. 3 years
Furniture and equipment.................................. 5-7 years
Leasehold improvements................................... Shorter of the lease term or
the estimated useful life
</TABLE>
REVENUE RECOGNITION
Revenue from product sales other than to distributors with rights of return
is recognized upon shipment if a signed purchase order exists, the fee is fixed
and determinable, collection of resulting receivables is probable and product
returns are reasonably estimable. Subsequent to the sale of the products, the
Company has no obligation to provide any modification or customization,
upgrades, enhancements or any postcontract customer support. Revenues from
shipments to distributors with rights of return are deferred until the
distributor resells the inventory. Upon shipment, the Company also provides for
the estimated costs that may be incurred for product warranties.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. The Company has not
capitalized any software development costs to date and is in compliance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of
software development costs begins upon the establishment of technological
feasibility of the product. After technological feasibility is established,
material software development costs are capitalized. The capitalized cost is
then amortized on a straight-line basis over the estimated product life, or on
the ratio of current revenues to total projected product revenues, whichever is
greater. To date, the period between achieving technological feasibility, which
the Company has defined as the establishment of a working model which typically
occurs when beta testing commences, and the general availability of such
software has been short, and as such, software development costs qualifying for
capitalization have been insignificant.
F-8
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ADVERTISING EXPENSES
Advertising expenses are charged to operations when incurred and totaled
$46,000, $0 and $63,000 for the years ended December 31, 1997, 1998 and 1999,
respectively. During the six month periods ended June 30, 1999 and 2000, the
Company incurred $15,000 and $34,000 of advertising expenses, respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in accordance
with the provisions of APB No. 25 ("APB No. 25"), "Accounting for Stock Issued
to Employees" and complies with the disclosure provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." Under APB No. 25, compensation cost is, in general,
recognized based on the difference, if any, between the fair market value of the
Company's stock on the date of grant and the amount an employee must pay to
acquire the stock. Equity instruments issued to non-employees are accounted for
in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
96-18. Deferred stock-based compensation is being amortized using the graded
vesting method in accordance with Financial Accounting Standards Board
Interpretation No. 28 ("FIN No. 28") over the vesting period of each respective
option, which is generally four years. Under the graded vesting method, each
option grant is separated into portions based on its vesting terms which results
in acceleration of amortization expense for the overall award.
INCOME TAXES
The Company accounts for income taxes under the liability approach whereby
the expected future tax consequences of temporary differences between the book
and tax basis of assets and liabilities are recognized as deferred tax assets
and liabilities. A valuation allowance is established for any deferred tax
assets for which realization is uncertain.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss attributable
to common stockholders for the period by the weighted average number of shares
of common stock outstanding during the period less any shares subject to
repurchase. Diluted net loss per share is the same as basic net loss per share
for the periods presented because potentially dilutive common shares, composed
of common shares issuable upon the exercise of stock options and warrants and
upon conversion of convertible preferred shares, are not considered when their
effect would be to reduce the net loss per share.
PRO FORMA BALANCE SHEET INFORMATION (UNAUDITED)
Immediately prior to the effective date of the offering, the Company's
outstanding convertible preferred stock will automatically convert into common
stock at a one-to-one ratio and the underlying equity instrument into which the
preferred stock warrants are convertible will change to common stock from
preferred stock. The pro forma effects of this transaction are unaudited and
have been reflected in the accompanying Pro Forma Stockholders' Equity as of
June 30, 2000.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended December 31, 1999 and the
six months ended June 30, 2000 is computed using the weighted average number of
common shares outstanding,
F-9
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
including the conversion of the Company's convertible preferred stock into the
Company's common stock effective upon the closing of the Company's initial
public offering, as if such conversion occurred at January 1, 1999 or at date of
original issuance, if later. The calculation of pro forma diluted net loss per
share excludes incremental common stock issuable upon the exercise of stock
options and warrants as the effect would be anti-dilutive.
BUSINESS SEGMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about Segments of an
Enterprise and Related Information." The Company operates in one reportable
segment, using one measurement of profitability for its business. The Company
has sales outside the United States, which are described in Note 11. All
long-lived assets are maintained in the United States.
COMPREHENSIVE INCOME
Effective January 1, 1999, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in the financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources and does not differ from net losses for
the years ended December 31, 1997, 1998 and 1999 and the six month periods ended
June 30, 1999 and 2000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable and accounts payable are carried at cost, which approximates
their fair value because of the short-term maturity of these instruments.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments and
requires recognition of all derivatives as assets or liabilities in the balance
sheet and measurement of those instruments at fair value. The statement is
effective for fiscal years beginning after June 15, 2000. The Company will adopt
the standard no later than the first quarter of fiscal year 2001 and Management
does not expect a material impact on the Company's financial statements.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance on accounting for certain costs in connection with obtaining
or developing computer software for internal use and requires that entities
capitalize such costs once certain criteria are met. The Company adopted SOP
98-1 as of January 1, 1999. The adoption of this SOP did not have a material
effect on the Company's financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." This SOP requires that entities expense start-up costs and
organization costs as they are incurred. The
F-10
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company adopted SOP 98-5 as of January 1, 1999. The adoption of this SOP did not
have a material effect on the Company's financial position or results of
operations.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides interpretive guidance on the recognition,
presentation, and disclosure of revenue in financial statements under certain
circumstances. The Company adopted the provisions of SAB 101 in these financial
statements for all periods presented.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation--an interpretation of APB
Opinion No. 25." FIN 44 clarifies, among other issues (a) the definition of
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a non compensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000.
The Company does not expect the adoption of FIN 44 to have a material effect on
the Company's financial position or results of operations.
2. RELATED-PARTY TRANSACTIONS AND DISCONTINUED OPERATIONS
SALE OF ITE
In May 1996, the Company formed a Taiwanese subsidiary, Integrated
Technology Express (Taiwan), Inc. ("ITE") and was issued 19,980,000 shares in
exchange for $7,302,000, representing 99.9% of all ITE's shares issued and
outstanding. In December 1997, the Company decided to exit its previous business
of developing and marketing peripheral input/output and mixed signal integrated
circuits for personal computers, ceased all related activities and sold its
investment in ITE to UMC for cash consideration of $7,330,000. These operations
represented a different segment than the Company's current operations in the
broadband access communications equipment industry due to differences in the
nature of the products and in the type and class of customers. Therefore, the
operations in the previous business are reflected as discontinued operations in
the Company's statements of operations and statements of cash flows for the year
ended December 31, 1997. Net sales and costs of sales for discontinued
operations amounted to $38.2 million and $29.4 million for the year ended
December 31, 1997, respectively. The excess of the net assets of ITE at the time
of the sale over the sales consideration was charged to additional paid-in
capital as a deemed dividend in the amount of $323,000.
In June 1998, the Company sold certain assets, mainly trademarks, licensing
agreements and service contracts, to ITE and its U.S. subsidiary ("ITE-US") for
$1,911,000 in cash and $1,931,000 in a note receivable. The note is due in five
equal, annual installments beginning July 1, 1998 and bears interest at 6% per
annum. As ITE and the Company have certain common stockholders, the excess of
$2,853,000 of the sales price over the net book value of the assets sold was
credited to additional paid-in capital. At December 31, 1999, the current and
long-term portions of the note receivable amounted to $363,000 and $793,000,
respectively. Interest income for 1998 and 1999 was $45,000 and $80,000, of
which $45,000 and $35,000 was accrued at December 31, 1998 and 1999,
respectively. Interest income for the six month periods ending June 30, 1999 and
2000 was $39,000 and $28,000 of which $39,000 and $28,000 was accrued at
June 30, 1999 and 2000, respectively.
In the year ended December 31, 1999, the Company sold to and purchased fixed
assets from ITE-US in the amount of $28,000 and $152,000, respectively.
F-11
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SHARED FACILITIES, PURCHASE OF PRODUCTS AND SERVICES
In March 1998, the Company entered into a reimbursement agreement with
ITE-US to share facilities and services of administrative staff and resources.
Under the agreement, the parties allocate the costs of the shared portion of
their respective operations, using methods that the Company's management
believes are reasonable. Such allocations are not necessarily indicative of the
costs that would have been incurred by the Company in transactions with
unrelated third parties. The agreement has no expiration date. The total amounts
the Company billed and was reimbursed by ITE-US were $2,539,000 and $1,936,000
in 1998 and $843,000 and $812,000 in 1999 and $412,000 and $403,000 for the six
month period ended June 30, 1999, and $234,000 and $294,000 for the six month
period ended June 30, 2000, respectively. Amounts billed to ITE-US are
principally related to general and administrative services and are offset
against these expenses in the Statement of Operations. The Company also
purchases certain of its finished products from ITE-US, which amounted to
$746,000 and $1.1 million for the year ended December 31, 1999, and the six
month period ended June 30, 2000, respectively. Additionally, in 1998 ITE-US
performed certain nonrecurring engineering services for the Company in the
amount of $290,000. At December 31, 1998 and 1999, the net balance due to the
Company from ITE-US was $313,000 and $192,000, respectively. At June 30, 2000,
the net balance due to ITE-US was $435,000.
PURCHASE OF RAW MATERIALS
The Company purchases the wafers for its products from UMC and is dependent
upon UMC as its sole manufacturer of its integrated circuits. For the year ended
December 31, 1999, total purchases from UMC amounted to $2,509,000. At
December 31, 1999, the net balance due UMC was $634,000. For the six month
period ended June 30, 2000, purchases from UMC amounted to $4.9 million and the
net balance due to UMC was $3.6 million.
PROVIDING CONSULTING SERVICES
In 1997, the Company entered into an agreement in which the Company would
provide consulting services to a related company. Total consulting service
revenue was approximately $175,000 for the year ended December 31, 1997, and is
included in the loss from discontinued operations. There was none for the years
ended December 31, 1998 and 1999.
LOAN TO CHIEF EXECUTIVE OFFICER
In 1999, the Company granted its Chief Executive Officer a loan in the
amount of $462,000. The note receivable earned interest at 7.75% (subsequently
increased to 8.25%) and was secured by certain publicly traded securities. The
interest income recognized for the fiscal year 1999 and balance outstanding,
which is included in Prepaid Expenses and Other Assets in the Company's balance
sheets, were $15,000 and $477,000 at December 31, 1999. Interest income
recognized for the six months ended June 30, 2000 was $17,000. The loan was
repaid in June 2000.
SHAREHOLDERS NOTES RECEIVABLE
In May 2000, a director of the Company exercised 80,000 options for common
stock in exchange for two full recourse promissory notes collateralized by
common stock for a total of $262,000. The notes are collateralized by common
stock and both interest and principal mature on May 10, 2004. The notes have an
interest rate of LIBOR plus 2% and will be adjusted quarterly.
F-12
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In June 2000, an executive of the Company exercised 80,000 stock options
with an exercise price of $4.00 per share in exchange for a promissory note. The
note is collateralized by the common stock, and both interest and principal
matures in June 2004. The notes bears interest at LIBOR plus 2% which will be
adjusted quarterly.
3. BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- --------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INVENTORY:
Raw materials............................................. $ -- $ 119 $ 662
Work in progress.......................................... -- -- 816
Finished goods............................................ -- 1,774 2,847
------ ------- -------
$ -- $ 1,893 $ 4,325
====== ======= =======
PROPERTY AND EQUIPMENT:
Machinery and equipment................................... $ 714 $ 874 $ 1,695
Software.................................................. 1,380 1,912 6,869
Furniture and equipment................................... 832 994 1,193
Leasehold improvements.................................... 57 55 111
------ ------- -------
2,983 3,835 9,868
Less: Accumulated depreciation and amortization........... (811) (1,695) (2,457)
------ ------- -------
$2,172 $ 2,140 $ 7,411
====== ======= =======
At June 30, 2000, the Company had $4,215,000 of software under capital leases. The
amortization at June 30, 2000 was $383,000.
ACCRUED EXPENSES AND OTHER LIABILITIES:
Deferred revenue.......................................... $ -- $ 167 $ 114
Accrued compensation costs................................ 318 600 1,486
Other accruals............................................ 424 108 444
------ ------- -------
$ 742 $ 875 $ 2,044
====== ======= =======
</TABLE>
4. LICENSING AND ROYALTY ARRANGEMENTS
In April 1998, the Company entered into a ten year licensing agreement with
an unrelated party. Under the terms of the agreement, the Company licensed
certain technology to develop, manufacture and distribute products. Initial
payments for the licenses were $5,000,000. In addition, the Company is obligated
to pay royalties on sales of products developed at rates ranging from 2.5% to
6%. Minimum royalties payable for 1999, 2000 and 2001 amounted to $500,000,
$1,000,000 and $1,500,000, respectively.
The Company has capitalized the $8.0 million cost of this license including
minimum royalties and is amortizing the cost of the license on a straight-line
basis over its estimated useful life of seven years. Minimum royalties are
expensed in the year payable. Amortization expense was $1.2 million in the year
F-13
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ended December 31, 1999 and $607,000 and $857,000 for the six month periods
ended June 30, 1999 and 2000, respectively.
5. INCOME TAXES
There was no provision for income taxes in 1997, 1998 and 1999 or the six
month periods ended June 30, 1999 and 2000 because of the losses incurred.
As of June 30, 2000, the Company had federal and state net operating loss
carryforwards of approximately $25,300,000 and $14,400,000, respectively. The
net operating loss carryforwards will expire at various dates beginning in 2003
through 2013, if not utilized.
Under current tax rules, the amounts of and benefits from net operating loss
carryforwards may be impaired or limited in certain circumstances. Events which
cause limitations in the amount of net operating loss that the Company may
utilize in any year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three-year period.
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS
------------------- ENDED JUNE 30,
1998 1999 2000
-------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......... $ 4,159 $ 8,545 $ 9,446
Accruals and allowances................... 42 317 255
Property and equipment.................... 160 516 808
Credit carryforwards...................... 600 1,820 2,315
Capitalized R&D expenses.................. -- 700 844
------- -------- --------
Total deferred tax assets................... 4,961 11,898 13,668
Valuation allowance....................... (4,961) (11,898) (13,668)
------- -------- --------
Net deferred tax assets..................... $ -- $ -- $ --
======= ======== ========
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, the
timing and amount of which are uncertain. Accordingly, the net deferred tax
assets have been fully offset by a valuation allowance, and no income tax
benefit was recorded in 1997, 1998 and 1999. The valuation allowance for
deferred tax assets increased by $1,258,000, $3,569,000, $6,937,000 and
$1,769,000 during 1997, 1998, 1999, and the six months ended June 30,
respectively.
F-14
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss
per share for the period indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- -------------------
1997 1998 1999 1999 2000
------------- ------------ ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Numerator:
Loss from continuing operations................. $(1,268) $(9,296) $(13,708) $(7,257) $(11,474)
Loss from discontinued operations............... (2,638) -- -- -- --
------- ------- -------- ------- --------
Net loss........................................ $(3,906) $(9,296) $(13,708) $(7,257) $(11,474)
======= ======= ======== ======= ========
Denominator:
Shares used in computing basic and diluted net
loss per share................................ 22,753 23,058 23,148 23,098 23,488
======= ======= ======== ======= ========
Basic and diluted loss from continuing operations
per share....................................... $ (0.06) $ (0.40) $ (0.59) $ (0.31) $ (0.49)
======= ======= ======== ======= ========
Basic and diluted loss from discontinued
operations per share............................ $ (0.11) $ -- $ -- $ -- $ --
======= ======= ======== ======= ========
Basic and diluted net loss per share attributable
to common stockholders.......................... $ (0.17) $ (0.40) $ (0.59) $ (0.31) $ (0.49)
======= ======= ======== ======= ========
Antidilutive securities including options,
warrants, convertible preferred stock and
restricted stock rights not included in loss per
shares calculation.............................. 2,868 8,683 19,759 9,152 23,021
======= ======= ======== ======= ========
Pro forma:
Shares used above................................. 23,148 23,488
Pro forma adjustment to reflect weighted average
effect of the assumed conversion of convertible
preferred stock................................. 3,486 11,429
-------- --------
Shares used in computing pro forma basic and
diluted net loss per share attributable to
common stockholders............................. 26,634 34,917
======== ========
Pro forma basic and diluted net loss per share
attributable to common stockholders............. $ (0.51) $ (0.33)
======== ========
</TABLE>
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
In October 1998, the Company issued to a third-party 1,428,571 shares of
Series A Convertible Preferred Stock at $3.50 per share. In connection with the
issuance of Series A Convertible Preferred Stock, the Company issued a warrant
to purchase a total of 714,286 shares of convertible preferred stock with an
exercise price of $3.50 per share. The warrants are exercisable at any time
until October 2003. The Company has reserved 714,286 shares of Series A
Convertible Preferred Stock for the conversion of the outstanding warrants.
During October and November 1999, the Company issued to various third
parties 10,000,000 shares of Series B Convertible Preferred Stock at $4.00 per
share. In connection with the issuance of
F-15
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Series B Convertible Preferred Stock, the Company issued two warrants to
purchase a total of 500,000 shares of convertible preferred stock with an
exercise price of $4.00 per share. The warrants are exercisable at any time
until October 2004. The Company has reserved 500,000 shares of Series B
Convertible Preferred Stock for the conversion of the outstanding warrants.
The warrants issued in connection with Series A and Series B Convertible
Preferred Stock were valued at approximately $1.32 and $2.04, respectively.
The Company estimated the fair value of each warrant using the Black-Scholes
option pricing model using the following assumptions in addition to the
estimated fair value of the stock and the exercise price:
<TABLE>
<CAPTION>
SERIES A SERIES B
-------- --------
<S> <C> <C>
Fair value of preferred stock............................... $2.88 $4.00
Risk free interest rate..................................... 4.18% 6.03%
Expected life............................................... term term
Dividend yield.............................................. 0% 0%
Expected volatility......................................... 50% 50%
</TABLE>
In determining the estimated fair value of the convertible preferred stock,
the Company considered among other things, the sale of similar securities to
outside parties, the relative level of revenues and other operating results, the
absence of a public trading market for the Company's securities and the
competitive nature of the Company's market.
The following table summarizes the activity of convertible preferred stock
and warrants to purchase convertible preferred stock:
<TABLE>
<CAPTION>
SERIES A SERIES B WARRANTS TOTAL
------------------- ------------------- --------- -------------------
SHARES AMOUNT SHARES AMOUNT AMOUNT SHARES AMOUNT
-------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 and 1997.............. -- $ -- -- $ -- $ -- -- $ --
Issuance of preferred stock for cash................ 1,429 4,120 -- -- 880 1,429 5,000
----- ------ ------ ------- ------ ------ -------
Balances at December 31, 1998....................... 1,429 4,120 -- -- 880 1,429 5,000
Issuance of preferred stock for cash................ -- -- 10,000 38,980 1,020 10,000 40,000
----- ------ ------ ------- ------ ------ -------
Balances at December 31, 1999 and at June 30,
2000.............................................. 1,429 $4,120 10,000 $38,980 $1,900 11,429 $45,000
===== ====== ====== ======= ====== ====== =======
</TABLE>
The rights, privileges and preferences of Series A and Series B Convertible
Preferred Stock are as follows:
CONVERSION
Each share of Series A and Series B Convertible Preferred Stock may be
converted into shares of common stock on a one-for-one basis, subject to
adjustments under specific circumstances. Conversion is (i) at the option of the
preferred stockholder or (ii) automatic upon the closing of an initial public
offering at a per share price of not less than $10.50, as adjusted, and with
gross proceeds to the Company of more than $10,000,000. The Company has reserved
2,150,000 and 11,350,000 shares of common stock for the conversion of the
outstanding shares of Series A and Series B Convertible Preferred Stock.
F-16
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REDEMPTION
Both Series A and Series B Convertible Preferred Stock are redeemable upon a
change in control or sale of substantially all of the assets of the Company at a
redemption price equal to the liquidation preferences as described below.
DIVIDENDS
The holders of Series A and Series B Convertible Preferred Stock are
entitled to annual non-cumulative dividends of $0.185 and $0.20 per share, when,
and if, declared by the Company's Board of Directors. As of June 30, 2000, no
dividends have been declared.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company
either voluntary or involuntary, the assets available for distribution shall be
distributed up to $3.50 and $4.00 plus any declared but unpaid dividends per
outstanding share of Series A and Series B Convertible Preferred Stock,
respectively. If the Company's assets are insufficient to pay this distribution,
then the assets and the funds of the Company will be distributed ratably among
the holders of Series A and Series B Convertible Preferred Stock in proportion
to the preferential amount each such holder is entitled to receive. Any amounts
available for distribution in excess of the Series A and Series B liquidation
preference amounts will be distributed to the holders of common stock and
convertible preferred stock, on a as if converted basis, pro rata based on the
number of shares held. Holders of Series A and Series B Convertible Preferred
Stock may receive a maximum distribution of $10.50 per share. Any assets
available for distribution in excess of the Series A and Series B maximum
liquidation distribution will be distributed to the holders of common stock pro
rata based on the number of shares held. No conversion of convertible preferred
stock shall be permitted after a preferred stockholder has received payment
pursuant to his/her distribution rights herein.
VOTING RIGHTS
Each share of Series A and Series B Convertible Preferred Stock has one vote
for any and all matters upon which common stockholders are entitled to vote
upon.
8. STOCK OPTION PLAN
In January 1996, the Company authorized the 1996 Stock Option Plan (the
"Plan") under which the board of directors may issue incentive stock options or
nonstatutory stock options to employees, officers, directors and consultants of
the Company or any parent or subsidiary of the Company. Under the Plan,
13,000,000 shares of the Company's common stock have been reserved for stock
options issuance. Incentive and nonstatutory options to purchase shares of
common stock were granted at not less than 100% and 85%, respectively, of the
fair market value of the shares at the date of grant, as determined by the board
of directors, and generally expire six years from the date of grant. Incentive
and nonstatutory options which are granted to optionees who own more than 10% of
the total combined voting power of all classes of Company's stock were granted
at not less than 110% of the fair market value of the shares at the date of
grant, as determined by the board of directors. The term of options granted to
the optionees who own more than 10% of the total combined voting power of all
classes of stock of the Company is five years from the date of grant or shorter
term as provided in the written option agreement. Options granted under the Plan
generally vest and become exercisable over four years from the date the option
is granted.
F-17
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Activity under the Company's Stock Option Plan is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING WEIGHTED
SHARES ------------------------- AVERAGE
AVAILABLE NUMBER EXERCISE EXERCISE
FOR GRANT OF SHARES PRICE PRICE
---------- ---------- ------------ --------
<S> <C> <C> <C> <C>
Balance at December 31, 1996................... 1,475,000 2,525,000 $ 0.50-1.00 $0.510
Options granted.............................. (1,061,150) 1,061,150 2.55 2.55
Options exercised............................ -- (13,475) 0.50-2.55 0.75
Options canceled............................. 705,075 (705,075) 0.50-2.55 0.75
---------- ----------
Balance at December 31, 1997................... 1,118,925 2,867,600 $ 0.50-$2.55 $ 1.18
Additional shares reserved................... 3,000,000 -- -- --
Options granted.............................. (5,471,500) 5,471,500 2.55-3.00 2.97
Options exercised............................ -- (316,163) 0.50-2.55 0.56
Options canceled............................. 1,482,344 (1,482,344) 0.50-2.55 1.50
---------- ----------
Balance at December 31, 1998................... 129,769 6,540,593 $ 0.50-3.00 $ 2.64
Additional shares reserved................... 2,000,000 -- -- --
Options granted.............................. (2,080,400) 2,080,400 3.00 3.00
Options exercised............................ -- (289,347) 0.50-2.55 1.16
Options canceled............................. 1,215,496 (1,215,496) 0.50-3.00 2.79
---------- ----------
Balance at December 31, 1999................... 1,264,865 7,116,150 $ 0.50-3.00 $ 2.78
Additional shares reserved................... 4,000,000 -- -- --
Options granted.............................. (4,526,030) 4,526,030 3.00-12.00 4.14
Options exercised............................ -- (621,065) 0.50-4.00 2.95
Options canceled............................. 505,480 (505,480) 2.55-4.00 3.17
---------- ----------
Balance at June 30, 2000....................... 1,244,315 10,515,635 $ 0.50-12.00 $ 3.33
========== ==========
</TABLE>
The following table summarizes information about stock options outstanding
at June 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.50..................... 512,500 2.1 years $0.50 512,500 $0.50
$2.55..................... 584,646 3.4 years 2.55 366,574 2.55
$3.00..................... 5,686,057 4.5 years 3.00 1,480,672 3.00
$4.00..................... 3,395,432 5.9 years 4.00 745 4.00
$5.00..................... 207,000 5.9 years 5.00 -- 5.00
$12.00.................... 130,000 6.0 years 12.00 -- 12.00
---------- ---------
$0.50 - $12.00............ 10,515,635 4.8 years $3.33 2,360,491 $2.39
========== =========
</TABLE>
F-18
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2000 RESTRICTED STOCK PURCHASE PLAN
On May 15, 2000 the board of directors adopted the 2000 Restricted Stock
Purchase Plan (the "RSPP"). The RSPP provides for the grant of rights to
purchase restricted common stock, subject to certain restrictions, to employees,
directors and consultants and terminates automatically in 2010, unless
terminated sooner. As of June 30, 2000, a total of 1,000,000 shares were
reserved for issuance pursuant RSPP. The board of directors administers the RSPP
and has sole discretion to grant rights to purchase restricted common stock. The
board of directors determines the term of each grant, including exercise price
and number of shares for each right granted. Pursuant to the RSPP, each stock
purchase right issued under the plan is restricted for a period of four years
from the date of grant. 100% of the restricted shares are released from
restriction on the fourth anniversary of grant; provided, that the shares may be
released early from the restriction subject to satisfaction of a variety of
milestones relating to completion of a qualified public offering, revenue, gross
margin, market capitalization and total equity raised in public offerings.
In the six month period ended June 30, 2000, the company granted rights to
purchase 610,000 shares of restricted common stock with a weighted average
exercise price of $4.08 and a weighted average fair value of $14.16 per share.
The following table summarizes information about rights to purchase
restricted common stock outstanding at June 30, 2000:
<TABLE>
<CAPTION>
RIGHTS OUTSTANDING AND EXERCISABLE
--------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE
-------------- ----------- ------------ ---------
<S> <C> <C> <C>
$4.00........................................ 560,000 5.9 years $4.00
$5.00........................................ 50,000 6.0 years 5.00
---------
$4.00 - $5.00................................ 610,000 5.9 years $4.08
=========
</TABLE>
APB NO. 25 COMPENSATION COSTS TO EMPLOYEES
As calculated under APB No. 25, deferred stock-based compensation costs
related to stock options granted amounted to $266,000 through December 31, 1999
and $44,890,000 through June 30, 2000, of which $121,000, $71,000 and $51,000
was expensed in 1997, 1998 and 1999, respectively, and $34,000 and $7,131,000
was expensed in the six month periods ended June 30, 1999 and 2000,
respectively.
SFAS NO. 123 COMPENSATION COSTS TO CONSULTANTS
For the years ended December 31, 1997, 1998 and 1999 and the six month
period ended June 30, 2000, the Company granted options of 66,150 shares,
380,000 shares, zero shares and 165,000 shares for the Company's common stock,
amounting to an aggregate exercise price at December 31, 1999 of $1,219,000 and
$1,814,000 at June 30, 2000 to consultants and advisors under the 1996 Plan.
Certain of these options vest over periods of up to four years and the Company
will be required to record the change in the fair value of these options at each
reporting date prior to vesting and then finally at the vesting date of the
option. Deferred stock-based compensation expense in accordance with SFAS
No. 123 related to these options totaled $1,601,000 at December 31, 1999 and
$5,788,000 at June 30, 2000. Amortization of deferred stock-based compensation
expenses amounted to $15,000, $155,000 and
F-19
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
$213,000 for the year ended December 31, 1997, 1998 and 1999 and $108,000 and
$813,000 for the six month periods ended June 30, 1999 and 2000, respectively.
Total compensation expenses for employees, consultants and advisors were
allocated among the associated expense categories as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cost of revenue........................... $ -- $ -- $ -- $ -- $ 59
---- ---- ---- ---- ------
Research and development.................. 10 58 97 53 2,833
Sales and marketing....................... -- 57 86 45 1,602
General and administrative................ 23 111 81 44 3,450
---- ---- ---- ---- ------
Operating expenses...................... 33 226 264 142 7,885
---- ---- ---- ---- ------
Discontinued operations................... 103 -- -- -- --
---- ---- ---- ---- ------
$136 $226 $264 $142 $7,944
==== ==== ==== ==== ======
</TABLE>
SFAS NO. 123 PRO FORMA DISCLOSURES
In accordance with the provisions of SFAS No. 123, the fair value of each
option was estimated using the following assumptions for option grants during
1999 and the six month period ended June 30, 2000: dividend yield of 0%;
expected volatility of 0% for all periods before June 13, 2000 (the date of
first filing of the Registration Statement) and 70% afterwards; risk-free
interest rates ranging from 5.08% to 6.69%; and expected life of five years. The
weighted average fair value of options granted in 1997, 1998, 1999 and 2000 was
$1.14, $1.20, $0.74 and $10.39, respectively.
For purposes of SFAS No. 123 pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. Had
compensation expense for the Company's stock option plan been determined on the
fair value at the grant dates for awards under the Plan consistent with the
method of SFAS No. 123, the Company's net loss would have been increased to the
following approximate pro forma amounts:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SFAS No. 123 pro forma net
loss applicable to common
stockholders............... $(4,115) $(10,704) $(15,963) $(8,388) $(13,007)
SFAS No. 123 pro forma basic
and diluted net loss per
share applicable to common
stockholders............... $ (0.18) $ (0.46) $ (0.60) $ (0.36) $ (0.55)
</TABLE>
F-20
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The pro forma impact of options on the net losses for the year ended
December 31, 1997, 1998 and 1999 is not representative of the effects on net
income (loss) for future years, as future years will include the effects of
options vesting as well as the impact of multiple years of stock option grants.
2000 STOCK INCENTIVE PLAN
On May 15, 2000, the board of directors adopted the 2000 Stock Incentive
Plan (the "Plan"). The Plan provides for the grant of incentive stock options
("ISOs") as well as nonqualified stock options ("NSOs"). The board of directors
administers the Plan and has sole discretion to grant options to purchase shares
of the Company's common stock. The board of directors determines the term of
each option, option price, number of shares for which each option is granted,
whether restrictions will be imposed on the shares subject to options and the
rate at which each option is exercisable. The exercise price for options granted
will be determined by the board of directors, and for ISOs the exercise price
shall not be less than 100% of the fair market value per share of the underlying
common stock on the date granted (110% of fair market value for ISOs granted to
holders of more than 10% of the voting stock of the Company). The exercise price
for NSOs shall not be less than 100% of the fair market value per share of the
underlying common stock on the date granted, except for options granted pursuant
to a merger or other corporate transaction. The term of the options shall be set
forth in the applicable option agreement, except that in the case of ISOs the
option term shall not exceed ten years (five years for ISOs granted to holders
of more than 10% of the total combined voting power of the Company). The
aggregate number of shares of stock that may be delivered upon the exercise of
awards granted shall be 2,500,000 plus an annual increase to be added on the
first day of the Company's fiscal year beginning in 2001, equal to the lesser of
(i) 2,500,000 shares, (ii) 4% of the outstanding shares on such date or (iii) a
lesser amount determined by the board.
9. 401(K) PLAN
The Company's employee savings and retirement plan is qualified under
Section 401 of the Internal Revenue Code. Employees may elect to reduce their
current compensation by up to the statutorily prescribed annual limit and have
the amount of such reduction contributed to the 401(k) Plan. The Company
currently does not make matching or additional contributions to the 401(k) Plan
on its employees' behalf.
10. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. The Company limits the amount of deposits to any one
financial institution and financial instrument. The Company invests its excess
cash principally in certificates of deposit and money market accounts with
financial institutions in the U.S.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
also performs an analysis of the expected collectibility of accounts receivable
and makes an allowance for doubtful accounts receivable when necessary. For the
year ended December 31, 1999, two customers accounted for 44% and 11% of net
revenues. At December 31, 1999, two customers accounted for 44% and 22% of total
accounts receivable. For the six month period ended June 30, 2000, two customers
accounted for 29% and 10% of net revenues. At June 30, 2000, four customers
accounted for 12%, 30%, 14% and 11% of total accounts receivable.
F-21
<PAGE>
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. BUSINESS SEGMENTS, EXPORTS AND MAJOR CUSTOMERS
The Company operates in a single industry segment. The Company's accounts
receivable are derived from revenues generated from the following geographic
regions:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTH PERIOD
DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
United States........................... $ -- $ -- $1,432 $ 55 $ 4,916
Taiwan.................................. -- -- 1,109 224 2,764
Europe.................................. -- -- 7 -- 907
Rest of Asia, primarily Korea........... -- -- 505 17 5,814
---- ---- ------ ---- -------
$ -- $ -- $3,053 $296 $14,401
==== ==== ====== ==== =======
</TABLE>
12. COMMITMENTS
The Company leases its facilities and equipment in California, Texas and
Taiwan under noncancelable operating and capital leases which will expire
between December 2000 and January 2003. As of June 30, 2000, the following were
the future minimum obligations for the years ended December 31.
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- --------
<S> <C> <C>
2000...................................................... $ 238 $ 934
2001...................................................... 48 1,842
2002...................................................... 8 1,524
2003...................................................... -- 354
------ ------
Total..................................................... $ 294 4,654
======
Less: Interest portion.................................... (613)
------
4,041
Less: Current portion..................................... (1,499)
------
$2,542
======
</TABLE>
F-22
<PAGE>
[INSIDE BACK COVER OF PROSPECTUS]
<PAGE>
[GRAPHIC -- BACKGROUND MAP]
5,600,000 SHARES
[LOGO]
COMMON STOCK
-------------
PROSPECTUS
August 17, 2000
---------------------
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
WIT SOUNDVIEW
FIDELITY CAPITAL MARKETS
