<PAGE>
As filed with the Securities and Exchange Commission on August 10, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
X10 Wireless Technology, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3669 91-1989304
(State of or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or organization)
</TABLE>
15200 52nd Avenue South
Seattle, Washington 98188
(206) 241-3283
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
George E. Stevenson
Chairman of the Board and Chief Executive Officer
15200 52nd Avenue South
Seattle, Washington 98188
(206) 241-3283
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
<TABLE>
<S> <C>
Christopher W. Wright John M. Steel
Cydney S. Posner Mark F. Hoffman
Matthew D. Latimer Heidi M. Drivdahl
Eric Scott Carnell David F. Wickwire
Cooley Godward llp Gray Cary Ware & Freidenrich llp
5200 Carillon Point 999 Third Avenue, Suite 4000
Kirkland, Washington 98033-7355 Seattle, Washington 98104-4099
(425) 893-7700 (206) 839-4800
</TABLE>
----------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. [_] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Securities Aggregate Offering Amount of
To be Registered Amount(1) Registration Fee
--------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.001 par value.............. $75,000,000 $19,800
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 10, 2000.
PRELIMINARY PROSPECTUS
[LOGO OF X10]
Shares
X10 Wireless Technology, Inc.
Common Stock
-----------
We are offering shares of our common stock. This is our initial public
offering.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "XTEN." We estimate that the initial public offering price will be
between $ and $ per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT CERTAIN RISKS THAT YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-----------
<TABLE>
<CAPTION>
Per
Share Total
----- ------
<S> <C> <C>
Public offering price............................................. $ $
Underwriting discounts and commissions............................ $ $
Proceeds, before expenses, to us.................................. $ $
</TABLE>
-----------
The underwriters may purchase up to an additional shares of common stock
from us at the initial public offering price less the underwriting discount,
solely to cover over-allotments.
The underwriters expect to deliver the shares against payment in New York, New
York on or about , 2000.
-----------
Bear, Stearns & Co. Inc.
Prudential Volpe Technology
a unit of Prudential Securities
C.E. Unterberg, Towbin
The date of this prospectus is , 2000
<PAGE>
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read the entire prospectus carefully,
including the section entitled "Risk Factors" and our financial statements and
the related notes before making an investment decision.
X10 WIRELESS TECHNOLOGY, INC.
We offer an integrated suite of affordable hardware and software products
that provide networking solutions for homes and small businesses using
broadband wireless, powerline, phoneline and infrared technologies. The
products we offer allow users to access and control home networks directly from
a personal computer, or PC, or through remote controls, wall-mounted panels,
telephones or the Internet. We design and develop broadband wireless products
that enable users to receive and deliver video and audio content and to
distribute broadband Internet content from a PC to televisions, stereos and
other electronic entertainment devices within a home or small office. In
addition, we offer networking solutions based on other technologies that enable
consumers to control security, lighting, heating and air conditioning systems.
We sell these broadband wireless and control products primarily over the
Internet. In addition, we have recently started selling these products,
indirectly through our affiliates, to OEMs, which sell customized, bundled or
private-label versions of these products, and to retailers and other resellers.
In recent years, the increased availability of audio, video and other
bandwidth-intensive content for delivery to PCs, coupled with the rapid growth
in Internet use, has driven demand for broadband access at home and in the
workplace. According to International Data Corporation, an independent research
firm, installation of broadband access is expected to increase from 2.1 million
U.S. households in 1999 to 21.2 million U.S. households in 2003. Within the
home and small office environment, this increasing demand for broadband access,
together with the rapid growth in use of PCs and entertainment devices, has
fueled the need for home and small office networks that enable communications
among electronic and electric systems that are often centered around a PC. To
address this need, a number of companies have dedicated significant financial
and technical resources to developing different networking technologies that
rely on wireless, phoneline, powerline and Ethernet infrastructures. However,
many currently available networking products suffer from a number of
constraints related to cost, functionality and ease of use. We believe that
these limitations create a significant market opportunity for providers of
affordable and effective home and small office networking solutions.
Our technology platform includes wireless applications in the license-free
2.4 GHz frequency band. We believe that our expertise in wireless technologies
and our customer-oriented approach to product development enable us to develop
cost-effective, high-quality products. We offer products as individual
components, allowing consumers to create customized networks, or in kits, each
of which provides an integrated hardware and software solution.
We believe that our solution offers the following advantages:
. Broad array of interoperable products and applications. The products we
offer are compatible with most widely used home and small office
electronic and electric systems, allowing consumers to network their
existing devices.
. Use of multiple networking technologies. The products we offer employ a
variety of networking technologies, including wireless, powerline,
phoneline and infrared, enabling us to design products using the
technologies best suited to achieve a specific function.
. Convenient and scalable wireless networking solutions. Our wireless
products allow consumers to implement networking solutions without the
need for additional telephone jacks, electrical outlets or wiring, thus
expanding the opportunities for configuring the home or small office
network.
1
<PAGE>
. Cost-effective products that are easy to install and operate. By
reducing the cost and complexity typically associated with home and
small office networking products and technology, we offer consumers the
opportunity to easily and affordably network their homes and small
offices.
Our objective is to be the leading provider of affordable networking
solutions for homes and small businesses. Our strategy to accomplish this
objective includes the following key elements:
. Capitalize on our technology platform. We intend to leverage our
technology platform by continuing to design, develop and market new
networking technologies and products that extend our broadband
capabilities.
. Expand OEM and other strategic relationships. By capitalizing on X10
Ltd.'s collaborative relationships with OEMs, we seek to expand our
market reach and thereby accelerate consumer acceptance of our broadband
home and small office networking technologies.
. Cross-sell products to new and existing customers. We seek to address
the home and small office networking market by promoting our broadband
products, which we believe can appeal to a broad consumer base. We then
seek to further penetrate the market by selling to those same customers
additional control products that extend the utility of their home or
small office networks.
. Provide a compelling value proposition. We seek to accommodate the mass
markets by offering a compelling value proposition centered around high
performance and affordability.
. Capitalize on our relationship with X10 Ltd. We believe that our
relationship with X10 Ltd. and its affiliates provides us with a number
of strategic advantages, including low-cost manufacturing as well as
marketing and product development.
. Leverage and expand professional contractor relationships. We seek to
increase sales of the products we offer and meet the professional
installation needs of a segment of our customers by increasing the
number of contractors in our referral service.
. Build international presence. We intend to leverage our technology
platform to address significant market opportunities for our products
outside the U.S. by expanding into international markets.
Our Relationship with X10 Ltd. and its Affiliates
We were operated and financed for approximately two years as a division of
X-10 (USA) Inc., a wholly owned subsidiary of X10 Ltd. X10 Ltd. is a Bermuda
corporation based in Hong Kong which, together with its affiliates, designs and
manufactures home control and entertainment and security technology products.
X-10 (USA), based in New Jersey, provides sales, marketing and product
distribution services for X10 Ltd. in the U.S. Since we were incorporated as a
separate company in July 1999, we have continued to maintain close business
relationships with X10 Ltd. and its affiliates. We have entered into agreements
with X10 Ltd. under which it provides manufacturing and product development
services to us, licenses to us rights to the X10 brand and markets our products
to OEMs. Similarly, we have entered into agreements with X-10 (USA) under which
it provides order fulfillment services and sells X10-branded products to
retailers and other resellers in the western hemisphere. We seek to capitalize
on these relationships with X10 Ltd. and its affiliates to expand sales, reduce
product costs, speed product development, manage inventory and obtain
fulfillment services.
2
<PAGE>
Corporate Information
We were incorporated in Delaware on July 29, 1999. Our principal executive
offices are located at 15200 52nd Avenue South, Seattle, Washington 98188. Our
telephone number is (206) 241-3283. Information contained on our web site does
not constitute part of this prospectus.
THE OFFERING
<TABLE>
<C> <S>
Common stock being offered................. shares
Common stock outstanding after this
offering.................................. shares
Use of proceeds............................ We plan to use the net proceeds
of this offering for general
corporate purposes, including
sales and marketing, research and
development, capital expenditures
and working capital.
Proposed Nasdaq National Market symbol..... XTEN
</TABLE>
Common stock outstanding after this offering is based on the number of
shares outstanding as of March 31, 2000, excluding:
. shares of common stock issuable upon exercise of stock options
outstanding as of March 31, 2000, at a weighted average exercise price
of $ per share;
. shares of common stock available for future grant of options under
our 1999 Stock Plan as of March 31, 2000, which plan will be terminated
effective upon completion of this offering; and
. shares of common stock available for future issuance under our 2000
Equity Incentive Plan and our 2000 Employee Stock Purchase Plan.
Except as otherwise noted, all information in this prospectus assumes:
. no exercise of the underwriters' over-allotment option;
. the -for- split of our outstanding common stock to be
effected prior to completion of this offering; and
. no exercise of outstanding stock options.
X-10(R), X10(R) and our stylized logo are registered U.S. trademarks of X10
Ltd. We hold a perpetual, exclusive and worldwide license to these trademarks.
VideoSENDER(TM), DVD Anywhere(TM), Big Picture(TM), Xcam(TM), Xcam2(TM), XRay
Vision(TM), ScanCam(TM), MP3 Anywhere(TM), ActiveHome(TM), IR Commander(TM),
Protector Plus(TM) and Monitor Plus(TM) are trademarks we either own or license
from X10 Ltd. All trademarks, service marks and trade names of other companies
appearing in this prospectus are the property of their respective holders.
3
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
July 1, 1997 Year Ended Ended
(inception) to December 31, March 31,
December 31, --------------- ---------------
1997 1998 1999 1999 2000
-------------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues.................. $134 $2,997 $15,893 $2,745 $ 6,207
Gross profit.................. 78 1,854 6,913 1,501 2,281
Total operating expenses...... 349 3,685 12,511 2,526 5,626
Net loss...................... (271) (1,831) (5,596) (1,025) (3,334)
Basic and diluted net loss per
common share................. $ (0.17)
=======
Weighted average shares used
to compute basic and diluted
net loss per common share.... 20,050
=======
Pro forma basic and diluted
net loss per common share.... $ (0.28)
=======
Weighted average shares used
to compute pro forma basic
and diluted net loss per
common share................. 20,050
=======
</TABLE>
See note 1 of notes to the financial statements for information concerning
the calculation of pro forma basic and diluted net loss per common share.
The following table presents summary balance sheet data as of March 31,
2000, on an actual basis and as adjusted to reflect the application of the
estimated net proceeds of the sale of shares of our common stock in this
offering at an assumed initial public offering price of $ per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses.
<TABLE>
<CAPTION>
March 31, 2000
--------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................................. $ 1,187 $
Working capital (deficit).................................. (5,293)
Total assets............................................... 1,439
Total stockholders' equity (net deficit)................... (5,212)
</TABLE>
We were operated and financed for approximately two years as a division of
X-10 (USA) Inc. We were incorporated as a separate company in July 1999. On
October 1, 1999, X10 Ltd. and X-10 (USA) contributed technology and other
intellectual property and net assets to us. Through September 30, 1999, our
summary statement of operations and balance sheet data are derived from the
historic books and records of X10 Ltd. and include cost allocations from X10
Ltd. and X-10 (USA).
4
<PAGE>
RISK FACTORS
An investment in our shares involves a high degree of risk. You should
consider carefully the following risks, in addition to the other information
presented in this prospectus, before purchasing our common stock. The risks and
uncertainties described below are not the only ones we face. Any of the
following risks, as well as any other risks that we have not yet identified or
that we currently believe to be immaterial, could materially and adversely
affect our business, results of operations and financial condition. In that
case, the trading price of our common stock could decline and you could lose
all or part of your investment.
Risks Related to Our Business
Our limited operating history makes forecasting future results difficult.
We began operations in July 1997 as a division of X-10 (USA), a wholly owned
subsidiary of X10 Ltd., to focus on establishing an Internet sales presence. On
October 1, 1999, X10 Ltd. and X-10 (USA) contributed technology and other
intellectual property and net assets to us and, subsequently, we shifted our
focus to designing, developing and selling broadband wireless home and small
office networking products. The historical financial information contained in
this prospectus contains allocations between X-10 (USA) and us for
administrative and other expenses. These allocations may not be indicative of
the levels of expenses that would have resulted had we been operating as an
independent, stand-alone company or of future expense levels. We have a very
limited operating history, particularly with respect to those aspects of our
operations other than Internet sales. As a result, you must consider our
prospects in light of the risks and uncertainties frequently encountered by
companies in their early stages of development, particularly companies in new
and rapidly evolving markets, such as networking for homes and small offices.
You must consider our limited operating history in evaluating our ability to:
. successfully execute our business and marketing strategy;
. expand and enhance our technology and product offerings;
. further penetrate the market for home and small office networking
products;
. expand our distribution channels to OEMs, used in this prospectus to
refer to original equipment manufacturers and other resellers that sell
customized, bundled or private-label versions of the products we offer,
and traditional retailers and other resellers;
. develop strategic relationships independent of X10 Ltd.; and
. attract, integrate, retain and motivate qualified personnel.
If we are not successful in achieving these goals, our business will be
adversely affected.
We have a history of losses and we expect future losses. We cannot assure you
that we will achieve or maintain profitability.
We have incurred losses since we commenced operations in July 1997. We
incurred losses of $271,000 in 1997, $1.8 million in 1998, $5.6 million in 1999
and $3.3 million in the three months ended March 31, 2000. As of March 31,
2000, we had an accumulated deficit of $5.5 million. We expect to continue to
incur net losses for the foreseeable future, and we cannot assure you that we
will ever be able to achieve or sustain profitability. Furthermore, we
currently intend to use the net proceeds of this offering for general corporate
purposes, including sales and marketing, research and development, capital
expenditures and working capital. Historically, we have relied on X10 Ltd. to
provide financing for our operations; however, X10 Ltd. will not continue to be
a source of liquidity for us following this offering. We may not generate a
sufficient level of revenue to offset these expenditures or be able to adjust
spending in a timely manner to respond to any unanticipated decline or
shortfall in revenue. If revenue grows slower than we anticipate, if gross
margins decline or if operating expenditures exceed our expectations, we may
continue to experience significant losses on a quarterly and annual basis.
5
<PAGE>
Our quarterly results of operations vary significantly, which may cause our
stock price to fluctuate.
Our quarterly results of operations have varied significantly in the past
and are likely to vary significantly in the future as a result of a number of
factors, many of which are outside of our control. Accordingly, quarter-to-
quarter comparisons may not be indicative of future performance. Our future
operating results may fall below the expectations of securities analysts or
investors, which would likely cause the trading price of our common stock to
decline.
Factors that may cause quarterly results of operations to fluctuate include:
. the rate of market acceptance of the products we offer;
. timing and variability of sales cycles;
. seasonal fluctuations including fluctuations due to the holiday season;
. changes in gross margin of our product offerings;
. the variability of our expenses;
. our ability to anticipate consumer demand for networking products for
homes and small offices;
. variations in the mix of products sold;
. introductions of new products by us or by our competitors;
. price competition;
. the timing and effectiveness of promotions and sales programs;
. the effects of any future acquisitions of technologies or businesses and
related integration activities;
. our ability to attract visitors to our web site, convert visitors to
customers, encourage repeat purchases and maintain customer
satisfaction;
. technical difficulties, system downtimes and overall Internet
performance;
. the need for regulatory approvals of our products and the speed with
which they are obtained;
. product life cycles;
. disruptions in service by common carriers due to strikes or other
occurrences; and
. general economic conditions, as well as economic conditions specific to
the markets we serve.
As part of our strategy, we will seek to establish new OEM relationships,
either indirectly through X10 Ltd. or directly, which may expose us to sales
cycle variability caused by potentially lengthy evaluation, testing and
acceptance procedures. Significant delays or cancellations, especially with
respect to larger orders, arising from customer acceptance reviews, budgetary
constraints or otherwise could adversely affect our quarterly financial
results.
We derive a substantial portion of our net revenues from sales of kits
featuring a single product that may become obsolete or could be duplicated by
competitors.
In the first quarter of 2000, 53.7% of our gross revenues were derived from
sales of kits that feature our Xcam wireless camera. Competitors may introduce
products similar to ours, based on more advanced technology, lower cost or
additional features, including improved speed and reliability, reduced product
size and greater ease of installation and use. If sales of these kits were to
decline significantly, our business and results of operations would be harmed.
6
<PAGE>
If we fail to expand existing indirect distribution channels, such as OEMs, or
to develop new ones, our business could suffer.
From inception through the three months ended March 31, 2000, we had no
revenues attributable to OEM sales and approximately $529,000 in revenues
attributable to sales to retailers. Part of our strategy is to expand our OEM
relationships indirectly through X10 Ltd., to increase sales of the products we
sell to retailers through X-10 (USA) and to originate OEM, retailer and other
strategic relationships independently. If we fail to expand our indirect OEM
and other reseller relationships or to develop and cultivate these strategic
relationships independently, or if these OEMs and other resellers are not
successful in their sales efforts, our sales may decrease, our operating
results may suffer and we would not be able to execute our strategy
effectively. In addition, many of our resellers also offer products that
compete with the products we sell. Furthermore, we cannot assure you that any
existing or new OEMs or resellers in other distribution channels with which we,
X10 Ltd. or X-10 (USA) enter into agreements will market products effectively
or continue to devote the resources necessary to provide us with effective
sales, marketing and technical support. If we were unable to establish
effective distribution channels, our ability to grow and increase our net
revenues would be adversely affected.
If we fail to recruit a sufficient number of contractors to install the
products we offer, our strategy and results of operations could be adversely
affected.
Our strategy includes developing a network of independent contractors to act
as resellers and to provide installation services for end users of the products
we offer. To implement this strategy, we will need to enlist a sufficient
number of experienced contractors. Currently, we depend on X-10 (USA) to
recruit and train contractors to act as resellers. If we or X-10 (USA) are
unable to recruit a sufficient number of contractors, we may not be able to
achieve our strategic objective, and our business and results of operations
could be adversely affected.
If the technology and intellectual property we own or license were inadequately
protected, our business and reputation could be harmed and we could lose
customers.
The steps we take to protect the intellectual property rights that we own or
license may be inadequate. We seek to protect our intellectual property under
laws governing copyrights, trademarks, patents and trade secrets, as well as
confidentiality and invention assignment agreements with our employees. X10
Ltd. and X-10 (USA) have access to and knowledge of nearly all of our trade
secrets and confidential information and, under our intercompany agreements
with them, they are required to keep confidential only written information that
we specifically identify. As a result, it is possible that X10 Ltd. and X-10
(USA) may use or disclose our confidential information in ways that could harm
us. In addition, few of X10 Ltd.'s employees have executed confidentiality or
invention assignment agreements, which may harm our ability to establish and
protect our intellectual property rights in the future. Furthermore, the laws
of some foreign countries in which we do business do not protect intellectual
property and other proprietary rights to the same extent as the laws of the
U.S., which may make it difficult to effectively protect our intellectual
property rights in those jurisdictions.
We have six pending U.S. patent applications relating to our technology, and
X10 Ltd. has one pending patent application relating to technology we license
from it. Nevertheless, it is possible that:
. these pending applications may not result in the issuance of any
patents;
. if issued, one or more of the patents could be challenged successfully
by one or more third parties, which could result in our loss of the
right to prevent others from exploiting the technology claimed in these
patents;
. if issued, our ability to rely on one or more of the patents to offer
products could be prevented if one or more third parties prevail in an
interference action in the U.S. Patent and Trademark Office and thereby
obtain priority of invention for the subject matter claimed in any
issued patents; and
7
<PAGE>
. current and future competitors could devise new competitive technologies
that are not covered by the patent applications.
Intellectual property or related claims against us could be costly and could
impair our business.
Other parties may assert direct, indirect or contributory copyright,
trademark or other intellectual property infringement or contractual claims or
unfair competition claims against us. The law in many of these areas is
uncertain and we cannot predict whether third parties will assert claims of
infringement against us, whether our customers will operate our products in
accordance with applicable laws or agreements or whether any future claims will
harm our business. If we are forced to defend against any claims, whether or
not they are meritorious or are ultimately determined in our favor, we may face
costly litigation and diversion of managerial personnel. In the event of a
dispute, we may have to pay damages, develop non-infringing technology or enter
into royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on terms acceptable to us, if at all.
The markets in which we compete are subject to rapid technological change,
requiring us to continually design and introduce new products. If we do not
address these technological changes, our products will become obsolete,
impairing our ability to compete and adversely affecting our business.
The market for networking products for homes and small offices is
characterized by rapid technological developments, frequent enhancements to
existing products, new product introductions, changes in customer requirements
and evolving industry standards. To remain competitive, we need to introduce,
in a timely manner, products that incorporate or are compatible with these
emerging technological developments in our market. We may have only a limited
amount of time to penetrate certain markets, and we cannot assure you that we
will be successful in achieving widespread acceptance of our products before
competitors offer products and services similar or superior to our products.
Any delays in product introductions could adversely affect our ability to
compete and our results of operations. In addition, when we announce new
products or product enhancements that have the potential to replace or shorten
the life cycle of our existing products, customers may defer purchasing our
products.
The market for home networking products is dependent in large part on
product interoperability, speed and reliability of audio/video and data
transmission, ease of installation and use, and product size and simplicity. To
remain competitive, we must develop or gain access to new technologies to
enhance product performance and functionality, regularly introduce new products
or upgrade existing products to ensure that the products we offer do not become
obsolete and remain competitive. If we do not address these technological
challenges, our business and results of operations will be adversely affected.
We intend to expand into foreign markets, which exposes us to a number of
risks.
As a component of our business strategy, we intend to expand into foreign
markets. Our ability to expand internationally is subject to a number of risks,
including:
. our ability to customize products for local markets and foreign
languages;
. foreign laws and business practices favoring local competitors;
. our dependence on local staff and vendors;
. compliance with multiple, conflicting and changing foreign governmental
laws and regulations, including communications, tax and import/export
laws and regulations;
. longer sales and collection cycles;
. possible delays and greater difficulty in accounts receivable
collection;
. import and export restrictions and tariffs;
. currency exchange rate fluctuations;
8
<PAGE>
. language barriers;
. difficulties in enforcing contracts and other legal rights;
. economic and political instability; and
. uncertainty regarding protection and enforcement of intellectual
property rights.
If we are unable to successfully manage the risks associated with our
international operations, our business and results of operations could be
harmed.
Manufacturing or design defects in the products we offer could harm our
reputation and business.
Any defects or deficiencies in the products we offer could reduce the
functionality, effectiveness or marketability of these products. These defects
or deficiencies could cause product orders to be canceled or delayed, reduce
our net revenues, render products obsolete or subject us to excessive returns
or product warranty or liability claims. In that event, we would be required to
devote substantial financial and other resources, for a significant period of
time, to designing, developing and manufacturing new products without defects
or deficiencies. We cannot assure you that we will be successful in addressing
any manufacturing or design defects or in designing and developing new products
in a timely manner, if at all. Any defects or deficiencies in the products we
offer, individually or in the aggregate, could harm our reputation, business
and results of operations.
Our manufacturer may experience shortages of supply of components for the
products we offer, which could involve substantial cost and delay and reduce
the availability of these products.
X10 Ltd., together with its affiliates, purchases some of the component
parts used to manufacture the products we offer, including the complementary
metal oxide semiconductor, or CMOS, color image sensors used in our XCams, from
single source vendors. Our manufacturer's reliance on these single source
vendors involves risks, including the possibility of shortages of key component
parts and reduced control over delivery schedules, manufacturing capability,
quality and costs. In addition, some key components require long delivery
times. In the past, we have experienced delays because key component parts have
been unavailable to our manufacturer. If our manufacturer is unable to obtain
components, then we may need to reconfigure our products, which could involve
substantial cost and delay and limit availability of the products we offer. Any
of these events could adversely affect our results of operations and harm our
business.
The average selling prices of products we offer may decrease, which may affect
our gross margin.
The average selling prices for products we offer may be lower than expected
as a result of competitive pricing pressures, promotional programs and
customers that negotiate price reductions in exchange for volume orders or
longer-term purchase commitments. We expect to experience pricing pressure in
the future and anticipate that the average selling prices and gross margins for
the products we offer will decrease over the product life cycles. We cannot
assure you that we will be successful in developing and introducing on a timely
basis new products with enhanced features that can be sold at higher gross
margins, nor can we assure you that we will be able to offset any future
declines in average selling prices with cost reductions.
We may have to reduce or cease operations if we are unable to obtain the
funding necessary to meet our working capital requirements.
X10 Ltd. will not be a continued source of liquidity for us following this
offering. We believe that the net proceeds of this offering, together with our
available funds, will be sufficient to meet our capital requirements for at
least the next 12 months. However, if the net proceeds of this offering and our
existing sources of cash and cash flow are insufficient to support the expenses
of our operations and the expansion of our business, we may need to issue
additional equity or debt to finance our operations. If we are unable to
generate sufficient cash flow from operations or obtain funds through
additional financing, we may have to reduce some or all of
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our research and development and sales and marketing efforts or cease
operations. Our funding requirements depend on several factors, including the
rate of market acceptance of the products we offer, our ability to expand our
customer base and the growth of our sales and marketing capabilities. If our
funding requirements vary from our current plans, we may require additional
financing sooner than we have anticipated. If we issue additional stock to
raise capital, your percentage ownership would be reduced. Additional financing
may not be available on terms favorable to us, if at all.
Our success depends on our retention of key personnel.
Our success depends to a significant degree upon the continued contributions
of our key management and engineering personnel, many of whom would be
difficult to replace. Our future success also depends on these personnel
effectively working together. If we lose the services of any of our key
personnel, especially the services of George Stevenson, chairman of our board
of directors and our chief executive officer, it may harm our business and
results of operations. We do not have employment contracts or maintain "key
person" life insurance policies on any of our key personnel.
If we fail to recruit qualified engineering and technical personnel, our
business could be harmed.
We devote, and will continue to devote, substantial resources to attracting
high-quality engineering and technical personnel. Competition for qualified
personnel is intense, particularly in high-technology centers such as the
Pacific Northwest. In making employment decisions, particularly in high-
technology industries, job candidates often consider the value of stock options
they may receive in connection with their employment. If the value of our
common stock decreases, it could impair our recruiting or retention efforts. If
we do not succeed in attracting new personnel or retaining and motivating our
current personnel, our business could be harmed.
We have experienced significant growth in our business in recent periods and
any inability to manage this growth and any future growth could harm our
business.
Our historical growth has placed, and any further growth likely will
continue to place, a significant strain on our management, operations,
administrative resources, software and systems. To be successful, we will need
to continue to implement management information systems and improve our
operating, administrative, financial and accounting systems and controls. We
also will need to train new employees and maintain close coordination among our
executive management, operations, customer acquisition and retention and
customer service organizations. These processes are time consuming and
expensive, increase management responsibilities and divert management
attention. Any failure to manage our growth effectively could harm our business
and results of operations.
Our reliance on manufacturing in the People's Republic of China exposes us to
potential import restrictions, duties or disruptions in trade.
All of the products we offer are manufactured and assembled for us by X10
Ltd. and its affiliates in China. As a result, our operations could be
adversely affected by the disruption of trade with China or any other foreign
country where the products we offer may be manufactured in the future. Also,
these products may become subject to significant import duties, tariffs or
restrictions, which would adversely affect our business and results of
operations. Similarly, any adverse political, social or economic developments
in China or other foreign countries where these products may be manufactured
could adversely affect our business and results of operations.
Failure to successfully promote and maintain the X10 brand could adversely
affect our business.
Our ability to develop and maintain awareness of the X10 brand is important
in order to expand our sales and achieve widespread acceptance of the products
we offer. Due in part to the emerging nature of the home and small office
networking market, the substantial resources available to many of our
competitors and our competitors' existing brand recognition, we may have only a
limited opportunity to achieve and maintain a
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significant market share. The importance of brand recognition will increase as
competition in our market increases. Our ability to successfully promote and
maintain the X10 brand will depend on a number of factors, including:
. the effectiveness of our sales and marketing efforts;
. our ability to continue offering high-quality, affordable products;
. the adequacy of our customer support and technical assistance;
. the reliability of independent contractor services;
. the absence of product defects, safety issues or recalls; and
. the absence of any negative publicity related to the products we offer.
If our planned marketing efforts are ineffective, we may need to increase our
financial commitment to creating and maintaining brand awareness, which could
divert financial and management resources from other aspects of our business or
cause our operating expenses to increase disproportionately to our revenues. If
we are unable to promote the X10 brand successfully, customer awareness could
decrease and sales of the products we offer could decline.
We depend on third parties to pack and ship our customer orders. Any problems
with these third parties could impair our results of operations and harm our
reputation.
One component of our strategy is to outsource our fulfillment needs.
Currently, X-10 (USA) fulfills all of our Internet customer orders using United
Parcel Service, the United States Postal Service and other third-party
shippers. Therefore, we are subject to the risk that labor shortages, strikes,
inclement weather or other factors may limit the ability of these carriers to
meet our shipping needs. Failure of the shippers selected by X-10 (USA) to
deliver products to our customers in a timely manner would damage our
reputation and could adversely affect our operating results. If these third-
party shippers are unable or unwilling to deliver products to our customers, X-
10 (USA) would need to arrange for alternative carriers. X-10 (USA) may be
unable to engage an alternative carrier on a timely basis or upon terms
favorable to us. X-10 (USA)'s third-party shippers may also increase the
charges for their shipping services. If our fulfillment agreement with X-10
(USA) is terminated, we may not be able to outsource our fulfillment needs on
terms favorable to us. Any increase in fulfillment costs would decrease our
operating margin and could adversely affect our results of operations.
There may be potential health and safety risks related to the products we offer
that could negatively affect our business and product sales.
The emission of electromagnetic radiation has been the subject of recent
public concern regarding possible health and safety risks. In addition, the
products we offer could pose potential electrical or fire hazards. Safety
issues relating to the products we offer may arise in the future, which could
adversely affect our business, reputation and results of operations.
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Risks Related to Our Industry
Our success depends in part on the continued growth of broadband access
services. If these services are not widely adopted, our sales will be adversely
affected.
Sales of our products depend on the increased use and widespread adoption of
broadband access services, such as cable, satellite, digital subscriber line,
or DSL, integrated services digital network, or ISDN, and T-1. These broadband
access services typically are more expensive in terms of required equipment and
on-going access charges than the services of dial-up Internet access providers.
Our business and results of operations will be adversely affected if the market
for broadband access services does not grow as anticipated.
The market for home and small office networking products is in an early stage
of development, and the products we offer may not achieve widespread
acceptance.
Our success will depend substantially upon the widespread demand for and
acceptance of home and small office networking products. Demand for recently
introduced products and technologies is subject to a high level of uncertainty.
Factors that may affect widespread acceptance of the products we offer include:
. the level of consumer awareness of home and small office networking
technologies;
. the rate of consumer adoption of broadband access and content;
. the complexity of product installation and maintenance;
. the rate of adoption of standardized technology, especially in the
wireless technology field, which may cause consumer hesitation and
concerns over long-term product interoperability and viability; and
. the rate of data throughput, which may affect the quality of audio/video
transmissions over the Internet.
As a result, we cannot accurately predict the future growth rate or ultimate
size of the networking market for homes and small offices. If the size of the
networking market does not continue to grow, the products we offer may not
achieve widespread acceptance and our business and results of operations could
be harmed.
Emerging industry standards may reduce the demand for our products, which will
harm our business.
Increased acceptance of new industry standards, whether through adoption by
official standards committees or widespread use by consumers, could require us
to redesign our products to remain competitive. For example, the Institute of
Electrical and Electronics Engineers, or IEEE, has adopted standards in the
2.4 GHz frequency band, referred to generally as the 802.11 and 802.11b
standards, and in the 5 GHz band, referred to as the 802.11a standard. Home
networking products based on the 802.11b standard, which currently allows the
fastest data transfer among the 2.4 GHz standards, are becoming increasingly
available from companies such as Apple Computer, Inc., Cisco Systems, Inc.,
Dell Computer Corporation, Lucent Technologies Inc. and 3Com Corporation.
Similarly, other companies are developing products using the 802.11a standard.
In addition to IEEE standards, HomeRF is another prominent wireless networking
standard that is promoted by vendors such as Compaq Computer Corporation, Intel
Corporation, Motorola, Inc. and Proxim, Inc. Protocols or de facto standards,
such as Bluetooth, are also gaining increased acceptance. Widespread adoption
of these or other standards and protocols increases the risk that our products,
which do not conform to these standards or protocols, may become obsolete or
incompatible with products based on these standards or protocols. Noncompliance
with these standards or protocols could deter potential customers from
purchasing our products. Any failure by us to develop and introduce new
products or enhancements based on widely adopted industry standards could harm
our business, competitive position and results of operations.
If we are unable to compete successfully against current and future
competitors, our business would be harmed.
The networking market for homes and small offices is relatively new, rapidly
evolving and intensely competitive, and we expect competition to intensify in
the future. In addition, the relatively low barriers to
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entry in the home and small office networking markets could attract additional
market entrants, many of which may have greater resources than we have or may
be able to achieve greater cost efficiencies than we can. Increased competition
may cause price reductions, reduced gross margins and loss of market share, any
of which could harm our business and results of operations.
We currently or potentially compete with a variety of other companies,
including providers of networking infrastructure for homes and small offices
and companies providing entertainment-oriented broadband communications
products. In addition, many of our competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, technical, marketing and other resources than we have. Many of these
competitors may also be better able to leverage customer, reseller, supplier
and other relationships. Furthermore, large, well-established or well-financed
entities may join with our competitors, or other companies, to produce home and
small office networking products superior to or more cost-effective than those
we offer.
Compliance with Federal Communications Commission and foreign regulations is
costly, and regulations are constantly changing.
Many aspects of the wireless home and small office networking industry are
subject to both federal and international regulation. From time to time, the
regulatory entities that have jurisdiction over our business adopt new or
modified regulations or take other actions on their own regulatory initiative
or at the request of industry, consumers, other branches of government or in
response to changes in laws. This changing regulatory environment could
adversely affect the nature and extent of products we are able to offer.
Regulatory changes, including changes in the allocation of available license-
free frequency spectrum or technical requirements for its use, could
significantly affect our operations by rendering current products obsolete,
restricting the applications and markets served by our products or increasing
the opportunity for additional competition.
On the federal level, the Federal Communications Commission, or FCC,
regulates our products. We cannot assure you that we will be able to secure
certifications required by the FCC for the products that we intend to deploy in
2000 and thereafter. The need to obtain these certifications could result in
delays or additional costs.
Our wireless products share the license-free 2.4 GHz frequency band with
other users. There are other users in the band that have priority over our use,
and the FCC requires that we not cause harmful interference to those users. In
the event that there is interference between those users and us, those users
can require that we curtail transmissions that create interference. In this
spectrum, we operate on a co-equal basis with other non-priority users and must
accept any interference present in the frequency band. If users of our products
experience excessive interference from licensed users or other non-priority
users, market acceptance of our products could be adversely affected, which
could adversely affect our business and results of operations.
We may desire or, as a result of changes in regulations, be required to seek
to operate in other license-free frequency bands. Redesigning our products to
operate in other frequency bands would be costly and time-consuming, and we
cannot assure you that any redesigned products would receive certifications
required by the FCC or would be commercially viable.
Our products are also subject to regulatory requirements in international
markets. One component of our business strategy is to expand our international
presence and, as a result, we must monitor the development of radio frequency
regulations in certain countries that represent potential markets for our
products. Changes in, or our failure to comply with, applicable international
regulations could adversely affect our ability to implement our strategy, as
well as our business and results of operations. In addition, we may need to
modify our products to meet local rules and regulations.
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Risks Related to Our Dependence on X10 Ltd. and its Affiliates
The rights of our stockholders could be adversely affected because we are
controlled by X10 Ltd. and its stockholders.
Upon completion of this offering, X10 Ltd. and its controlling stockholders
will beneficially own approximately % of the outstanding shares of our
common stock, including % beneficially owned by George Stevenson, X10
Ltd.'s president, and % beneficially owned by Hin Chew Chung, X10 Ltd.'s
chairman. As a result, X10 Ltd. and stockholders and employees of X10 Ltd. will
have the ability to control all matters requiring the vote of our stockholders,
including the election of our directors and our corporate actions. This
concentration of ownership and other rights could result in conflicts of
interest between these stockholders and us, impede our business development
through loss of corporate opportunities or otherwise, or delay or deter others
from initiating a potential merger, takeover or other change in control, even
if these events would benefit our stockholders and us. This concentration of
ownership also could depress the market price of our common stock.
We depend on X10 Ltd., X-10 (USA) and other affiliates of X10 Ltd. to provide
substantially all of our manufacturing and fulfillment services, to sell and
distribute products to OEMs and other resellers and to provide product
development services.
We have entered into a series of intercompany agreements with X10 Ltd. and
X-10 (USA) relating to intellectual property rights, manufacturing, product
development, order fulfillment and sales and distribution to OEMs and other
resellers. Currently, we outsource all of our manufacturing and some of our
research and development services to X10 Ltd. and its affiliates, and they also
market our products to OEMs. Similarly, X-10 (USA) is our sole third-party
provider of order fulfillment services and sells X10-branded products to
retailers. If any of these agreements were to terminate, our ability to
manufacture the products we offer, fulfill customer orders, penetrate the OEM
and retail markets and efficiently perform some aspects of our product
development process would be impaired, product production and delivery would be
delayed, our net revenues would decrease and our costs of operations would
increase, which would have an adverse effect on our business and results of
operations. In general, our only remedy specified under these agreements for
breach or default by X10 Ltd. or its affiliates is termination of the
agreements. In addition, if any of these agreements were terminated, we may not
be able to enter into agreements with other third parties on a timely basis or
on terms favorable to us. As a result, our margins may be reduced or our
business could be harmed.
Our agreements with X10 Ltd. and X-10 (USA) were not the result of arm's
length negotiations and could subject us to less favorable terms than we
otherwise could have obtained from other third parties.
We have entered into a series of agreements with X10 Ltd. and X-10 (USA),
regarding licenses and assignments of technology and products, research and
development, product supply, manufacturing, sales and order fulfillment.
Because X10 Ltd. and X-10 (USA) are controlled by George Stevenson, our chief
executive officer and chairman of our board, and Hin Chew Chung, one of our
directors, these agreements were not the result of arm's length negotiations.
These agreements may, therefore, contain or result in terms less favorable to
us than we otherwise could have obtained from other third parties.
We depend on X10 Ltd. and its affiliates to manufacture the products we offer,
and if X10 Ltd. did not have adequate manufacturing capacity, our business and
results of operations would be adversely affected.
X10 Ltd., together with its affiliates, is currently the sole manufacturer
of our products and has limited excess manufacturing capacity. If X10 Ltd. and
its affiliates:
. do not have adequate capacity at their existing facility to manufacture
products for us on a timely basis;
. experience operational, production or quality assurance difficulties; or
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. experience a catastrophic event at the facility,
we could suffer a reduction or disruption of manufacturing services provided to
us and may be required to seek an alternate manufacturer. We cannot assure you
that we would be able to secure alternative manufacturing services on favorable
terms or a timely basis, if at all. In addition, using alternative
manufacturers could require us to reconfigure our products or otherwise involve
significant delays in product production and delivery or result in quality
control problems.
We depend on X10 Ltd. and X-10 (USA) to sell and deliver the products we offer
to OEMs and other resellers. If they fail to do so effectively, it could harm
our business.
Currently, X10 Ltd. and X-10 (USA) are our virtually exclusive sources of
access to OEMs and other resellers. As a result, substantially all of the
products that we sell to OEMs are offered through X10 Ltd. If either X10 Ltd.
or X-10 (USA) were unable to maintain its existing customer relationships or to
develop new customer relationships, our access to OEMs and other resellers
would decrease and our business would be harmed.
We depend on X10 Ltd. and its affiliates to provide a significant portion of
our product development activities. If they fail to perform these tasks
adequately, it could delay our introduction of new or updated products or
result in the production of inferior products, either of which could harm our
business.
X10 Ltd. and its affiliates provide a significant portion of our product
development activities under the terms of a research and development agreement.
We cannot assure you that they will complete their research and development
services on a timely or cost-effective basis or that, upon completion, the
ultimate design of the requested products will meet our specifications. If X10
Ltd. or its affiliates fails to perform the services X10 Ltd. has agreed to
provide, it could delay or prevent the introduction of products by us or result
in the production of inferior products, either of which could harm our
business. Also, if X10 Ltd. or its affiliates lose key engineering personnel,
they may not be able to provide the services required under the agreement and
our research and development initiatives could be adversely affected.
Our dependence on X10 Ltd. and its affiliates for product development services
may result in a loss of our proprietary rights if X10 Ltd. fails to adequately
protect our intellectual property and confidential information.
We depend on X10 Ltd. and its affiliates for mechanical engineering,
electronic layout and development of prototypes of our products, and X10 Ltd.
and its affiliates have access to our confidential information relating to the
designs and software incorporated into the products we offer. X10 Ltd. and its
affiliates have entered into written proprietary information and inventions
agreements with only a few of their employees and none with other third
parties. In addition, X10 Ltd. and its affiliates have only limited
confidentiality obligations to us. As a result, we cannot assure you that
X10 Ltd. and its affiliates will be able to protect our intellectual property
rights and confidential information from disclosures by their employees or
other third parties or the use of our confidential information by X10 Ltd. or
its affiliates in ways that could harm us.
We depend on X-10 (USA) to fulfill all of our Internet customer orders, and
any problems with order fulfillment could impair our operating results and
harm our reputation.
We rely on X-10 (USA) to fulfill all of our Internet customer orders. We
cannot assure you that X-10 (USA) will fill customers' orders accurately or
that orders will be shipped on a timely basis and in appropriate packaging to
minimize damage to products. We generally bear all costs associated with lost
or damaged shipments. In addition, inaccurate, delayed or damaged shipments
could adversely affect our reputation and business. If our existing fulfillment
arrangement were to be terminated, our business could be disrupted, and we
could incur costs and delays in making alternative arrangements.
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We depend on X10 Ltd. and its affiliates for inventory management.
We have entered into a product supply agreement with X10 Ltd. under which
X10 Ltd. and its affiliates manufacture all of the products we offer and ship
them to X-10 (USA), which acts as warehousing and consignment agent until we
take title to the products. Any failure of X10 Ltd. to maintain sufficient
inventory to meet our needs could cause inventory to be unavailable for
shipments to customers when requested, which could adversely impact our
business and results of operations.
We depend on X-10 (USA) to recruit and train independent contractors to
install the products we offer and, if these contractors are inadequately
trained or otherwise fail to perform, our ability to implement our strategy
and our results of operations could be adversely affected.
We depend on X-10 (USA) to recruit contractors to act as resellers and to
train them to install the products we offer. If X-10 (USA) provides inadequate
training or if the contractors otherwise perform inadequately, customers could
be dissatisfied, we could receive customer complaints and our business and
results of operations could be adversely affected.
Orca Monitoring Services, L.L.C., our affiliate, provides monitoring services
for the products we offer.
Consumers who purchase the monitored home security systems we offer can
select among a number of security companies to provide monitoring services. We
refer customers to Orca Monitoring Services, an affiliate of X10 Ltd. based in
Seattle, Washington, to perform the monitoring. If Orca fails to respond to an
alarm signal or otherwise to perform its duties, we may face potential claims
from customers, which could have an adverse effect on our business and results
of operations. In addition, our general liability insurance policy contains a
coverage exclusion for claims relating to monitoring of home security systems.
Some of the key management personnel on whom we depend are also management
personnel or employees of X10 Ltd. or its affiliates, which could create
conflicts of interest between X10 Ltd. or its affiliates and us.
Our chief executive officer, George Stevenson, is also the founder,
president and a director of X10 Ltd. and is not our employee. Mr. Stevenson's
positions at X10 Ltd. could create real or apparent conflicts of interest in
the event that Mr. Stevenson were faced with decisions that could have
different implications for X10 Ltd. and us. These decisions may relate to
corporate opportunities, corporate strategies, potential acquisitions of
businesses, the intercompany agreements, competition, the issuance or
disposition of securities, the election of new or additional directors and
other matters. Our conflict of interest policy may not address all conflicts
that may arise, and, in any event, it is possible that conflicts may be
resolved in a manner adverse to us. Mr. Stevenson will spend a substantial
part of his professional time and effort on behalf of X10 Ltd. In many
instances, these efforts on behalf of X10 Ltd. will involve activities that
are unrelated, and in some circumstances may be adverse, to our interests. We
have not established any minimum time that Mr. Stevenson will be required to
spend on our behalf. In addition, Hin Chew Chung, one of our directors, is
also chairman of X10 Ltd. Furthermore, James Phillips, our chief technology
officer and one of our directors, is an employee of X-10 (USA) and works for
us on a full-time consulting basis. We cannot assure you that the information
Mr. Phillips learns in his capacity as our chief technology officer will be
kept confidential from X10 Ltd. or X-10 (USA).
We could face potential competition from X10 Ltd.
X10 Ltd. currently has the right to sell products that do not bear the X10
brand and are not based on broadband wireless technology to OEMs worldwide. In
addition, with our consent, X10 Ltd. may sell wireless products to OEMs. X10
Ltd. competes with us indirectly through its resellers. Because we will be
selling the same or similar products, we will need to distinguish our product
offerings and price points from those offered by X10 Ltd. If we fail to do so,
we may not be able to access these sales channels in a meaningful way and our
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business could be harmed. As a result of our various agreements with X10 Ltd.
and X-10 (USA), X10 Ltd. and X-10 (USA) will have access to confidential
information relating to our business, technology and products. They could use
any of this confidential information in a manner that gives them a competitive
advantage. We do not currently have a policy in place that governs the pursuit
or allocation of business opportunities as between us and X10 Ltd. and its
affiliates, except to the extent that the intercompany agreements with X10 Ltd.
and X-10 (USA) restrict X10 Ltd. and its affiliates from selling broadband
wireless products without our consent. Our ability to take advantage of a
specific business opportunity may be affected by X10 Ltd.'s representation on
our board and voting control, as well as our relatively limited resources. As a
result, we may be unable to successfully pursue business opportunities
available to X10 Ltd. and us.
Risks Related to the Internet
Online security risks could seriously harm our retail operations and business
by reducing consumer willingness to purchase our products over the Internet and
by creating potential liability.
In 1999, approximately 98% of our net revenues were derived from sales
conducted over the Internet. The success of our online commerce business
depends, in large part, on consumers' confidence in the privacy of their
activities and the secure transmission of their confidential information.
If third parties were able to penetrate our network security or otherwise
misappropriate users' personal or credit card information, we could be subject
to liability. Our liability could include claims for unauthorized purchases
with credit card information, impersonation or other similar fraud claims as
well as for other misuses of personal information, such as for unauthorized
marketing purposes. These claims could result in costly and time-consuming
litigation, which could adversely affect our business and results of
operations.
In addition, anyone who is able to circumvent our security measures could
cause interruptions in our online retail operations. Recently, several well-
known web sites were targeted by unauthorized persons and experienced short-
term disruptions in service. We cannot assure you we will be able to prevent
similar disruptions of service, which could seriously harm our business.
Our long-term success depends on the development of the Internet and e-
commerce, which is uncertain.
The development of the Internet as a viable commercial marketplace is
subject to a number of risks, including whether potential customers are willing
to shift their purchasing from traditional vendors to online vendors and
whether the telecommunications infrastructure is adequate to support the
Internet as an effective commerce medium. In addition, the increased use of the
Internet as a medium for commerce raises concerns about Internet reliability,
pricing, accessibility and quality of service. If the use of the Internet does
not continue to grow, or grows at a slower rate than we anticipate, or if the
necessary Internet infrastructure or complementary services are not developed
to support effectively the growth that may occur, our business could be harmed.
If we cannot protect our domain names, our ability to successfully build our
brand will be impaired.
We may be unable to acquire or maintain web domain names relating to the X10
brand in the U.S. and other countries in which we may conduct business. As a
result, we may be unable to prevent third parties from acquiring and using
domain names related to the X10 brand. Unauthorized use could damage the X10
brand and our reputation and divert customers from our web sites. The
acquisition and maintenance of domain names generally is regulated by Internet
regulatory bodies. Governing bodies may establish additional top-level domains,
appoint additional domain name registrars or modify the requirements for
holding domain names. If we cannot prevent others from using similar domain
names, we may be unable to successfully protect the X10
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brand, which could adversely affect our business. Furthermore, the relationship
between regulations governing domain names and laws protecting trademarks and
similar proprietary rights is unclear. Therefore, we may be unable to prevent
third parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of our owned or licensed trademarks and other
intellectual property.
Our facilities and systems are vulnerable to natural disasters and other
unexpected problems, and the occurrence of a natural disaster or other
unexpected problem could damage our reputation and the X10 brand and adversely
affect our results of operations.
Substantially all of our computer, communications and information systems as
well as our administrative offices are housed in Seattle, Washington. The
occurrence of an earthquake, fire, flood, volcanic eruption or other natural
disaster or unanticipated problems such as power loss, telecommunications
failure or break-in at our headquarters could cause interruptions or delays in
our business, result in loss of data or render us unable to accept and fulfill
customer orders. We do not currently have a backup system or a formal disaster
recovery plan in place. Our business interruption insurance may not adequately
compensate us for losses that may occur. In addition, the failure to maintain
the data communications capacity required by us, as a result of human error,
natural disaster or other operational disruptions, could result in
interruptions in our service. The occurrence of any or all of these events
could damage our reputation and brand and impair our business.
If we become subject to additional burdens associated with government
regulation of the Internet, our retail sales may decline and our business may
be adversely affected.
Any new legislation could hinder the growth in use of the Internet and other
online services generally and decrease the acceptance of the Internet and other
online services as media of commerce. Laws and regulations directly applicable
to Internet communications, commerce and advertising are becoming more
prevalent. Laws and regulations may be adopted covering issues such as user
privacy, pricing, content and quality of products and services. The laws
governing the Internet are largely unsettled, even in areas where legislation
has been enacted.
The growth and development of e-commerce may prompt calls for more stringent
consumer protection and privacy laws, both in the U.S. and abroad, which may
impose additional burdens on companies conducting business online. For example,
the Federal Trade Commission and state agencies have been investigating various
Internet companies regarding their use of personal information. In addition,
the European Union Directive on the Protection of Personal Data may affect our
ability to expand into Europe if we do not afford adequate privacy to end users
of our sites. We could incur additional expenses or otherwise lose our ability
to expand our database if new regulations regarding the use of personal
information are introduced or if our privacy practices are investigated. We do
not currently have insurance to cover this type of loss. The adoption or
modification of laws or regulations relating to the Internet and other online
services could cause our sales to decline and adversely affect our business.
We may be liable for sales and other taxes that could harm our results of
operations.
We currently collect sales or other similar taxes on goods shipped to
addresses only in the states of Washington and Nevada, which currently account
for a relatively small percentage of our net revenues. Tax authorities in many
states are reviewing the appropriate tax treatment of Internet and catalog
retail companies. Any resulting state tax regulations could subject us to the
assessment of sales and income taxes in other states. Since our products are
available over the Internet in multiple states and in foreign countries, these
jurisdictions may require us to qualify to do business. If we fail to qualify
in a jurisdiction that requires us to do so, we could face expenditures for
taxes and penalties.
The U.S. Congress has enacted legislation, known as the Internet Tax Freedom
Act, limiting the ability of the states to impose taxes on Internet-based
transactions. However, this legislation imposes only a three-year moratorium,
which commenced October 1, 1998 and ends on October 21, 2001. The moratorium
restricts state and local taxes on e-commerce that are discriminatory against
Internet access, unless these taxes were generally
18
<PAGE>
imposed and actually enforced prior to October 1, 1998. The U.S. House of
Representatives has approved an extension of the moratorium to 2006; however,
the U.S. Senate has not yet voted on the bill. It is possible that the tax
moratorium could fail to be renewed prior to October 21, 2001. Failure to renew
this legislation would allow various states to impose taxes on Internet-based
commerce. The imposition of these taxes could harm our business and results of
operations.
In addition, it is possible that the Internal Revenue Service or another
jurisdiction may seek to impose a sales, use or other tax based on our
relationship with X10 Ltd. in any jurisdiction in which X10 Ltd. maintains
operations. We cannot be certain that we would be successful in any challenge
to the imposition of sales or use tax.
We could face liability for publishing or distributing content, and our
business and results of operations could suffer if costs resulting from these
claims are not covered by our insurance or exceed our policy limits.
Our web site currently contains a referral database of independent
contractors that includes ratings based on customer feedback. We also publish
other content on our web site. We may be considered a publisher or distributor
of both our own and third-party content, and parties may download or copy
material from our web site and distribute it to others. These parties may bring
claims against us for defamation, negligence, copyright or trademark
infringement, invasion of privacy and publicity, unfair competition or other
theories based on the nature and content of this material. Our general
liability insurance may not cover claims of this type or may not adequately
cover the costs we could incur in defending potential claims. Our business and
results of operations could suffer if costs resulting from these potential
claims are not covered by our insurance or exceed our policy limits.
Risks Related to our Capital Structure and this Offering
Our management has broad discretion as to how to use the net proceeds of this
offering, and the proceeds may be put to uses that do not improve our results
of operations or increase our market value.
Our management will have considerable discretion in the application of the
net proceeds of this offering, and you will not have the opportunity, as part
of your initial investment decision, to assess whether the proceeds are being
used appropriately. The net proceeds of this offering may be used for corporate
purposes that do not improve our results of operations or increase our market
value. We have no specific plan as to how we will spend the majority of the net
proceeds of this offering. Pending application of the net proceeds, they may be
placed in investments that do not produce income or that lose value.
Provisions of our amended and restated certificate of incorporation and bylaws
could delay, deter or prevent a third party from acquiring us even if doing so
would be beneficial to our stockholders.
Provisions of our amended and restated certificate of incorporation and
bylaws may delay, deter or prevent a change of control, which could adversely
affect the market price of our common stock. These provisions include the
following:
. our board of directors is divided into three classes with staggered
three-year terms;
. our stockholders may not take action by written consent;
. our stockholders may not call special meetings and must comply with
advance notice provisions in order to submit proposals or nominations
for consideration at meetings of stockholders; and
. amendments to specific provisions of our amended and restated
certificate of incorporation and amended and restated bylaws require the
approval of holders of at least 66 2/3% of the voting power of all
outstanding shares.
19
<PAGE>
In addition, under our amended and restated certificate, our board of
directors will have the authority to issue up to 30,000,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by our stockholders. The rights of the holders of our common stock
will be subject to, and may be adversely affected by, the rights of holders of
any preferred stock that we may issue in the future. Our issuance of preferred
stock may delay, deter or prevent a change in control because the terms of the
preferred stock we could issue could have superior voting or other rights that
may be used to prevent a merger, reorganization, sale of substantially all of
our assets, liquidation or other extraordinary corporate transaction without
the approval of the holders of outstanding shares of common stock. Although we
currently have no plans to issue preferred stock, our issuance of preferred
stock could have a dilutive effect on our existing stockholders.
In addition, we are subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law, which will prohibit us from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner.
Also, the laws of the State of Washington, where our principal executive
offices are located, impose restrictions on some transactions between a foreign
corporation and its significant stockholders. Chapter 23B.19 of the Washington
Business Corporation Act prohibits a "target corporation," with some
exceptions, from engaging in particular significant business transactions with
an "acquiring person," which is defined as a person or group of persons that
beneficially owns 10% or more of the voting securities of the target
corporation for a period of five years after the acquiring person's acquisition
of securities, unless a majority of the members of the target corporation's
board of directors approves the transaction or acquisition of shares before its
completion.
The provisions described above could have the effect of delaying,
discouraging or preventing changes in control or other transactions that could
involve premium stock prices or other benefits to our stockholders. These
provisions could discourage a proxy contest or otherwise make it more difficult
to change our management.
The price of our common stock may be volatile.
Prior to this offering, there has been no public market for our stock. An
active public market for our common stock may not develop or be sustained after
the offering. The initial public offering price will be determined by
negotiations between us and the representatives of the underwriters. The market
price of our common stock may decline below the initial public offering price
after this offering.
Fluctuations in market price and volume are particularly common among
securities of high technology companies, including companies that provide home
and small office networking solutions or engage in e-commerce. The market price
of our common stock may fluctuate significantly in response to a number of
factors, some of which are outside of our control, including:
. quarter-to-quarter variations in our operating results;
. changes in market valuations of home and small office networking and e-
commerce companies;
. announcements by us or our competitors relating to significant
contracts, acquisitions, strategic partnerships, joint ventures or
capital commitments;
. departures or additions of key personnel;
. future sales of common stock by us or by our stockholders; and
. changes in earnings estimates by, or failure to meet the expectations
of, securities analysts.
In addition, stock markets and exchanges and, in particular, The Nasdaq
Stock Market have recently experienced extreme price and volume fluctuations,
which have particularly affected the market prices of many
20
<PAGE>
technology and e-commerce companies and which have often been unrelated to the
operating performance of these companies.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
common stock. We may be the target of similar litigation. Securities litigation
could result in substantial costs and divert management's time and attention.
Future sales of our common stock may negatively affect our stock price.
All of the shares sold by us in this offering will be freely tradable.
Following this offering, a large number of other outstanding shares of our
common stock will be available for resale beginning at various points in time
in the future. The market price of our common stock could decline as a result
of sales of a large number of shares of our common stock in the market
following this offering or as a result of the perception that these sales could
occur. These sales also might make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate. Our
directors, executive officers and other stockholders have agreed not to dispose
of any shares of common stock, subject to limited exceptions, for a period of
180 days after the date of this prospectus, without the prior written consent
of Bear, Stearns & Co. Inc., on behalf of the underwriters. Bear, Stearns & Co.
Inc. may, in its sole discretion and at any time without notice, release all or
any portion of the securities subject to lock-up agreements.
You will experience substantial dilution in the value of your shares
immediately following this offering.
The price of the shares being offered is substantially higher than the net
tangible book value per share. If you buy any shares in the offering, you will
incur immediate and substantial dilution in the pro forma net tangible book
value of each share. In addition, if option holders exercise options to
purchase our common stock, you will suffer further dilution.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that address, among
other things:
. our market opportunity;
. potential market acceptance of the products we offer;
. our strategy;
. the timing of our potential funding needs;
. our anticipated use of the proceeds of this offering; and
. competition.
Other statements about our plans, objectives, expectations and intentions
contained in this prospectus may also be forward-looking statements. In some
cases you can identify forward-looking statements by terminology, including
terms such as "believes," "anticipates," "expects," "estimates," "may," "will,"
"should," "could," "plans," "predicts," "potential," "intends" or similar
terms. We cannot assure you of future results, levels of activity, performance
or achievements. The forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause actual results to be
materially different from any future results or events described or expressed
in or implied by the forward-looking statements. These factors include those
identified under "Risk Factors" and elsewhere in this prospectus. We undertake
no obligation to update any of the forward-looking statements after the date of
this prospectus, even if new information becomes available or other events
occur in the future. All forward-looking statements contained in this
prospectus are expressly qualified in their entirety by this cautionary notice.
21
<PAGE>
USE OF PROCEEDS
We anticipate that our net proceeds from the sale of shares of common
stock will be approximately $ million, or $ million if the underwriters
exercise their overallotment option in full, based upon an assumed initial
public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses.
The principal purposes of this offering are to increase our working capital,
to create a public market for our common stock, to facilitate our future access
to the public capital markets and to increase our visibility in the home and
small office networking marketplace. We plan to use the net proceeds of this
offering principally for general corporate purposes, including sales and
marketing, research and development, capital expenditures and working capital.
In addition, we may use a portion of the net proceeds to acquire complementary
products, technologies or businesses or to make strategic investments. We
currently have no agreements with respect to any such acquisitions or
investments. Pending any of these uses, we intend to invest the net proceeds in
short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
we do not anticipate paying any cash dividends on our capital stock in the
future. We currently intend to retain any future earnings for use in our
business. Payments of future dividends, if any, will be at the discretion of
our board of directors and will depend on our results of operations, financial
condition, contractual and legal restrictions and other factors the board of
directors deems relevant.
22
<PAGE>
CAPITALIZATION
The following table shows as of March 31, 2000:
. our actual capitalization; and
. our pro forma capitalization, as adjusted to reflect the application of
the estimated net proceeds from the sale of shares of our common
stock at an assumed initial public offering price of $ per share,
after deducting estimated underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
March 31, 2000
-----------------
As
Actual Adjusted
------- --------
(in thousands,
except share
amounts)
<S> <C> <C>
Stockholders' equity (net deficit):
Preferred stock, par value $0.001 per share; 30,000,000
shares authorized, none outstanding....................... -- --
Common stock, par value $0.001 per share; 100,000,000
shares authorized; shares issued and outstanding...... 20
Unearned compensation...................................... (429)
Additional paid-in capital................................. 671
Retained earnings (deficit)................................ (5,474)
------- ---
Total stockholders' equity (net deficit)................. $(5,212) $
======= ===
</TABLE>
The number of shares issued and outstanding as of March 31, 2000, excludes:
. shares of common stock issuable upon exercise of stock options
outstanding as of March 31, 2000, at a weighted average exercise price
of $ per share;
. shares of common stock available for future grant of options under
our 1999 stock plan as of March 31, 2000, which plan will be terminated
effective upon completion of this offering; and
. shares of common stock available for future issuance under our 2000
equity incentive plan and 2000 employee stock purchase plan.
23
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share
and the net tangible book value per share after this offering. We calculate net
tangible book value per share by dividing the net tangible book value, which is
total assets less intangible assets and total liabilities, by the number of
then-outstanding shares of common stock.
Our pro forma net tangible book value at March 31, 2000, was $ , or $
per share of common stock. After giving effect to the sale of shares of
our common stock in this offering at an assumed initial public offering price
of $ per share, less estimated underwriting discounts and commissions and
estimated offering expenses, our net tangible book value at March 31, 2000,
would have been $ million, or $ per share. This represents an immediate
increase in the net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors. The
following table illustrates this per-share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $
Pro forma net tangible book value per share as of March 31,
2000............................................................ $
Increase per share attributable to new investors.................
Pro forma net tangible book value per share after the offering ....
---
Dilution per share to new investors................................ $
===
</TABLE>
The following table shows, at March 31, 2000, the number of shares of common
stock purchased from us, the total consideration paid and the average price
paid per share by existing stockholders and by new investors purchasing common
stock in this offering.
<TABLE>
<CAPTION>
Shares
Purchased Total Consideration
-------------- --------------------- Average Price
Number Percent Amount Percent Per Share
------ ------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... % $ % $
New investors.............
---- ----- --------- ---------
Total................... 100.0% $ 100.0%
==== ===== ========= =========
</TABLE>
The number of shares of common stock issued and outstanding as of March 31,
2000, excludes:
. shares of common stock issuable upon exercise of stock options
outstanding as of March 31, 2000, at a weighted average exercise price
of $ per share;
. shares of common stock available for future grant of options under
our 1999 Stock Plan as of March 31, 2000, which plan will be terminated
effective upon completion of this offering; and
. shares of common stock available for future issuance under our 2000
Equity Incentive Plan and 2000 Employee Stock Purchase Plan.
To the extent that options or stock purchase rights are exercised, new
investors will experience further dilution.
24
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following selected financial data should be read in conjunction with our
financial statements and related notes, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and other financial
information included elsewhere in this prospectus. The statement of operations
data presented below for the period July 1, 1997 (inception), to December 31,
1997, and for the years ended December 31, 1998 and 1999, and the balance sheet
information at December 31, 1998 and 1999, presented below are derived from our
audited financial statements, which have been audited by Deloitte & Touche llp,
independent public accountants, and together with their related report, are
included elsewhere in this prospectus.
The balance sheet data as of December 31, 1997, are derived from unaudited
financial statements not included in this prospectus. The statement of
operations data for the three months ended March 31, 1999 and 2000, and the
balance sheet data at March 31, 2000, are derived from unaudited financial
statements included elsewhere in this prospectus. In the opinion of management,
these statements have been prepared on the same basis as the audited financial
statements and include all adjustments, which include only normal recurring
adjustments, necessary for a fair presentation of the information for these
periods.
<TABLE>
<CAPTION>
July 1, 1997
(inception) Year Ended Three Months
to December 31, Ended March 31,
December 31, ---------------- ----------------
1997 1998 1999 1999 2000
------------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data(1):
Net revenues.................. $ 134 $ 2,997 $15,893 $ 2,745 $ 6,207
Cost of revenues.............. 56 1,143 8,980 1,244 3,926
----- ------- ------- ------- -------
Gross profit.................. 78 1,854 6,913 1,501 2,281
----- ------- ------- ------- -------
Operating expenses:
Research and development.... 1 71 712 87 208
Sales and marketing......... 43 2,583 8,844 1,903 4,270
General and administrative.. 305 1,031 2,879 536 1,073
Non-cash stock-based
compensation............... -- -- 76 -- 75
----- ------- ------- ------- -------
Total operating expenses.. 349 3,685 12,511 2,526 5,626
----- ------- ------- ------- -------
Interest income............... -- -- 2 -- 11
----- ------- ------- ------- -------
Net loss...................... $(271) $(1,831) $(5,596) $(1,025) $(3,334)
===== ======= ======= ======= =======
Basic and diluted net loss per
common share................. $ (0.17)
=======
Weighted average shares used
to compute basic and diluted
net loss per common share.... 20,050
=======
Pro forma basic and diluted
net loss per common share.... $ (0.28)
=======
Weighted average shares used
to compute pro forma basic
and diluted net loss per
common share................. 20,050
=======
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------- March 31,
1997 1998 1999 2000
---- ----- ------- ---------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents...................... $ -- $ -- $ 1,878 $ 1,187
Working capital (deficit)...................... 74 (759) (2,012) (5,293)
Total assets................................... 101 827 2,070 1,439
Total stockholders' equity (owner's net
deficit)...................................... 74 (759) (1,953) (5,212)
</TABLE>
----------
(1) We were operated and financed for approximately two years as a division of
X-10 (USA). On October 1, 1999, X10 Ltd. and X-10 (USA) contributed
technology and other intellectual property and net assets to us. Through
September 30, 1999, our selected statement of operations and balance sheet
data above are derived from the historic books and records of X10 Ltd. and
include cost allocations from X10 Ltd. and X-10 (USA).
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the related notes contained elsewhere in this prospectus.
Overview
We offer an integrated suite of affordable hardware and software products
that provide networking solutions for homes and small businesses using
broadband wireless, powerline, phoneline and infrared technologies. These
products allow users to access and control home and small office networks
directly from a personal computer or through the use of remote controls, wall-
mounted panels, telephones or the Internet.
We were operated and financed for approximately two years as a division of
X-10 (USA). We were incorporated as a separate company in July 1999. On October
1, 1999, X10 Ltd. and X-10 (USA) contributed and licensed technology and other
intellectual property and net assets to us. Through September 30, 1999, our
statements of operations and balance sheets are derived from the historic books
and records of X10 Ltd. and include cost allocations from X10 Ltd. and X-10
(USA). These costs are not necessarily indicative of the costs that would have
been incurred on a stand-alone basis. Since the commercial launch of our web
site in July 1997, we have continued our operating activities with a focus on
designing and developing broadband wireless products, building sales momentum,
expanding the line of products we offer, building business relationships and
promoting the X10 brand name.
We have worldwide rights to the X10 brand, and we sell X10 products over the
Internet. Under our agreements with X10 Ltd., we receive fees on all wireless
products sold by X10 Ltd. and on powerline products sold by X10 Ltd. to OEMs
that we introduce to X10 Ltd. We also receive fees on all X10-branded products
sold by X-10 (USA) to resellers other than OEMs. Under the terms of our amended
and restated sublicense agreement with X-10 (USA), X-10 (USA) currently may
sell only X10-branded powerline-related products to resellers in the western
hemisphere. We have a contract with X10 Ltd. to supply us with products, and we
have access to the development engineers and manufacturing facilities of X10
Ltd. and its affiliates in Hong Kong and China. X10 Ltd., together with its
affiliates, manufactures the products we sell and ships the products on a
consignment basis to a warehouse designated by us pursuant to a product supply
agreement. We are obligated to purchase the products on the earlier of receipt
of a purchase order from a customer or 120 days from delivery of the products
by X10 Ltd. to the shipper. We have also outsourced to X-10 (USA) the
warehousing, packaging and shipping of products to customers. This structure is
intended to allow us to focus on designing and selling our products while
maintaining an efficient fulfillment process.
All Internet customer orders are processed online and billed to the
customers' credit cards. Generally, we collect cash from credit card sales, net
of a fee charged by the credit card company, in most cases within two days from
the order date. We routinely offer promotional discounts and coupons to
customers. In addition, if a customer is not satisfied with a particular
product we provide, we generally refund all or a portion of the sales price.
We have incurred net losses of approximately $11.0 million from July 1,
1997, our inception date, to March 31, 2000. We believe that we will continue
to incur net losses for the foreseeable future. We have a limited operating
history on which to base an evaluation of our business and prospects. Our
prospects must be considered in light of the risks, expenses and difficulties
typically encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets such as ours. See
"Risk Factors" for a more complete description of the risks we face.
In view of our limited operating history and the rapidly evolving nature of
our business, we believe that period-to-period comparisons of our operating
results may not be indicative of future performance. It is possible that in
some future period our operating results may fall below the expectations of
securities analysts and investors. In that event, the trading price of our
common stock may fall significantly.
Net Revenues. Net revenues consist of product sales, net of allowances for
returns and discounts, and royalty income. We recognize revenues on product
sales when the product is delivered to the customer. We
26
<PAGE>
receive fees from X-10 (USA) equal to 15% of X-10 (USA)'s sales of X10-branded
products, net of trade discounts, allowances, sales tax, freight charges and
returns to resellers other than OEMs. Under our sublicense agreement with
X-10 (USA), we will receive a fee of at least $250,000 per quarter during the
12-month period ended September 30, 2000, $500,000 per quarter during the 12-
month period ended September 30, 2001, $750,000 per quarter during the 12-month
period ended September 30, 2002 and no minimum fee thereafter. During the
three-month period ended March 31, 2000, X-10 (USA) paid us a license fee of
$268,000.
We also receive a variable fee on X10 Ltd.'s sales of wireless products to
OEMs and on X10 Ltd.'s sales of powerline products to OEMs that we introduce to
X10 Ltd. pursuant to a contract manufacturing agreement. Our fee is equal to
the sales price of the products sold by X10 Ltd., which we negotiate with the
OEMs, less costs including materials, labor, overhead and consumables, and less
a manufacturing fee retained by X10 Ltd. This manufacturing fee is equal to 15%
of the net sales price of each product sold until aggregate sales of that
product reach $2,000,000, and 10% of the net sales price of that product
thereafter. We establish the terms of sales by X10 Ltd. of wireless products on
a case-by-case basis. During the three-month period ended March 31, 2000, we
did not receive any fees from X10 Ltd. We also have the right to sell wireless
products directly to OEMs.
Cost of Revenues. Cost of revenues consists primarily of the cost of
products sold to customers. The cost of promotional items provided in
connection with product sales is included in cost of revenues. X10 Ltd. and its
affiliates manufacture the products we sell under our product supply agreement.
We pay X10 Ltd. a fee equal to the costs incurred by X10 Ltd. to produce the
products as well as the cost of shipment to the warehouse.
Research and Development Expenses. Research and development expenses consist
primarily of salaries and related benefits for our technology and product
development personnel and an allocation of related overhead costs. In addition,
we entered into a research and development agreement with X10 Ltd. which
provides for us to obtain product research and development services from X10
Ltd. and its affiliates upon our request and pursuant to our specifications in
exchange for a service fee established by X10 Ltd. on a project-by-project
basis.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of Internet access and hosting charges, fulfillment costs, including shipping
and handling, advertising and promotional expenditures, the cost of promotional
products provided to attract customers, and payroll and related expenses for
personnel engaged in marketing, public relations and customer service
activities. We currently use X-10 (USA) to warehouse, process and ship the
products we sell to our Internet customers pursuant to a fulfillment services
agreement. We pay X-10 (USA) a service fee to ship the products equal to 10% of
our gross receipts for the products we sell, excluding sales and other taxes.
General and Administrative Expenses. General and administrative expenses
consist of payroll and related expenses for executive and administrative
personnel, customer service costs, corporate facility expenses, professional
services, travel and other general corporate expenses.
Income Taxes. We were operated as a division of X-10 (USA) until October 1,
1999. Prior to that date, the results of our operations were included in the
consolidated returns filed by X-10 (USA). There was no provision or benefit for
income taxes allocated to us for any period from inception through October 1,
1999 as the tax allocation process utilized by X10 Ltd. did not allocate tax
benefits to the division.
Since October 1, 1999, we have generated operating loss carryforwards for
federal income tax purposes and will commence filing separate tax returns with
respect to periods subsequent to our incorporation. To the extent that single-
year losses are not utilized to the full amount of the limitation, unused
losses are carried over to subsequent years until the earlier of their
utilization or the expiration of the relevant carryforward period. We have
provided a full valuation allowance on the deferred tax asset, consisting
primarily of these net operating loss carryforwards, because of uncertainty
regarding its realizability. See note 6 of notes to financial statements.
27
<PAGE>
Results of Operations
The following table sets forth the results of our operations, expressed as
percentages of net revenues:
<TABLE>
<CAPTION>
July 1, 1997 Year Ended Three Month
(inception) December Ended March
to 31, 31,
December 31, ------------- -------------
1997 1998 1999 1999 2000
------------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues...................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues.................. 41.8 38.1 56.5 45.3 63.3
------ ----- ----- ----- -----
Gross profit...................... 58.2 61.9 43.5 54.7 36.7
------ ----- ----- ----- -----
Operating expenses:
Research and development......... 0.7 2.4 4.5 3.2 3.3
Sales and marketing.............. 32.1 86.2 55.6 69.3 68.8
General and administrative....... 227.6 34.4 18.1 19.5 17.3
Non-cash stock-based
compensation.................... -- -- 0.5 -- 1.2
------ ----- ----- ----- -----
Total operating expenses........ 260.4 123.0 78.7 92.0 90.6
Interest income................... -- -- -- -- 0.2
------ ----- ----- ----- -----
Net loss.......................... (202.2)% (61.1)% (35.2)% (37.3)% (53.7)%
====== ===== ===== ===== =====
</TABLE>
Fiscal 1997, 1998 and 1999
Net Revenues. Our web site was commercially launched on July 1, 1997. Our
net revenues, including royalty income, increased by $2.9 million, from
$134,000 in 1997 to $3.0 million in 1998, and by $12.9 million to $15.9 million
in 1999. Substantially all of the increases in net revenues from 1997 to 1998
and from 1998 to 1999 were due to increases in the volume of product sales,
including sales of new products. Royalty income, which was derived from our
sublicense agreement with X-10 (USA), was $261,000 for 1999 compared with none
in 1998 and 1997.
Cost of Revenues. Our cost of revenues increased by $1.1 million, from
$56,000 in 1997 to $1.1 million in 1998, and by $7.9 million to $9.0 million in
1999. As a percentage of net revenues, our cost of revenues decreased from
41.8% in 1997 to 38.1% in 1998 and increased to 56.5% in 1999. The increase in
cost of revenues as a percentage of net revenues in 1999 compared with 1998 was
primarily due to a higher level of promotional items sent to customers free of
charge. The increase was partially offset by efficiencies associated with
increased transaction volume, the allocation of fixed costs, such as the
operation of our data center, and license fees beginning in the fourth quarter
of 1999.
Research and Development Expenses. Research and development expenses
increased by $70,000, from $1,000 in 1997 to $71,000 in 1998, and by $641,000
to $712,000 in 1999. The increase in research and development expenses in 1999
was due to expanded development efforts, including increased personnel and
consulting costs.
Sales and Marketing Expenses. Sales and marketing expenses increased by $2.6
million, from $43,000 in 1997 to $2.6 million in 1998, and by $6.2 million to
$8.8 million in 1999. These increases in sales and marketing expenses resulted
primarily from increases in Internet-based advertising expenditures. The
increase in sales and marketing expenses during 1999 also reflected the cost of
our promotional product, which we began providing at no charge in 1999 in order
to attract potential customers. The net expense for this promotional product
was $843,000 in 1999 compared with none in 1998. Sales and marketing expenses
as a percentage of net revenues increased from 32.1% in 1997 to 86.2% in 1998
and then decreased to 55.6% in 1999. The increase in 1998 was primarily due to
higher start-up sales and marketing expenses in 1998 relative to revenues as we
accelerated our marketing efforts.
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Fulfillment and order processing expenses include fulfillment fees charged
by X-10 (USA), and payroll and related expenses for personnel engaged in
customer service, distribution and fulfillment activities. Fulfillment costs
were $380,000 in 1998 compared with $1,508,785 in 1999. The growth in
fulfillment costs was directly related to the increase in order volume.
General and Administrative Expenses. General and administrative expenses
increased by $695,000, from $305,000 in 1997 to $1.0 million in 1998, and by
$1.9 million to $2.9 million in 1999. The increase in 1998 compared with 1997
primarily reflected the full year of operations in 1998 compared with six
months of operations in 1997 and the growth in our operations from 1997 to
1998. The increase in expenses in 1999 compared with 1998 was primarily due to
increases in headcount and occupancy costs, credit card merchant fees and
allocated costs from X-10 (USA). As a percentage of net revenues, general and
administrative costs decreased from 227.6% in 1997 to 34.4% in 1998 and 18.1%
in 1999, primarily as a result of increases in our revenue base.
Non-Cash Stock-Based Compensation. In connection with the issuance of stock
options in October 1999, we recorded unearned compensation in the aggregate
amount of $580,000. This amount represented the difference between the fair
value of our common stock and the exercise price of the stock options at the
date of grant. We are amortizing the unearned compensation over the applicable
vesting period, which is 48 months. Amortization expense was $76,000 for the
year ended December 31, 1999.
Income Taxes. As of December 31, 1999, we had net operating loss
carryforwards of approximately $2.1 million for federal purposes, which will
expire beginning in 2019.
Three Months Ended March 31, 1999 and 2000
Net Revenues. Net revenues, including license fees, increased by $3.4
million, from $2.7 million in the first quarter of 1999 to $6.2 million in the
first quarter of 2000. This increase was primarily due to increases in the
volume of product sales, particularly sales of our new wireless products.
License fees, which were derived from our sublicensing agreement with X-10
(USA), were $268,000 for the first quarter of 2000 compared with none in the
first quarter of 1999.
Cost of Revenues. Our cost of revenues increased by $2.7 million, from $1.2
million in the first quarter of 1999 to $3.9 million in the first quarter of
2000. As a percentage of net revenues, our cost of revenues increased from
45.3% in 1999 to 63.3% in 2000. The increase in cost of revenues as a
percentage of net revenues was primarily due to a higher level of promotional
items sent to customers free of charge, as well as pricing discounts beginning
in the third quarter of 1999, and was partially offset by license fees
beginning in the fourth quarter of 1999.
Research and Development Expenses. Research and development expenses
increased by $121,000, from $87,000 in the first quarter of 1999 to $208,000 in
the comparable period of 2000. The increase in research and development
expenses was due to increased personnel, recruitment and related overhead
costs. We believe our product and technology development efforts are critical
to the success of our strategic objectives and, accordingly, we expect the
level of research and development expenditures to increase in future periods.
Sales and Marketing Expenses. Sales and marketing expenses increased by $2.4
million, from $1.9 million in the first quarter of 1999 to $4.3 million in the
first quarter of 2000. The increase in sales and marketing expenses resulted
primarily from increases in advertising expenditures. We anticipate that, in
future periods, sales and marketing expenses will increase in absolute dollars
as we expand our sales force.
General and Administrative Expenses. General and administrative expenses
increased by $537,000, from $536,000 in the first quarter of 1999 to $1.1
million in the first quarter of 2000. This increase resulted primarily from
increases in headcount and credit card merchant fees. We expect that general
and administrative expenses will increase as we expand our staff and incur
additional costs in anticipation of growth as well as costs associated with
operating as a public company.
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Non-Cash Stock-Based Compensation. Amortization expense was $75,000 for the
first quarter of 2000. There was no amortization expense for the first quarter
of 1999.
Quarterly Results of Operations
Because we have a limited operating history, we believe that period-to-
period comparisons may not be meaningful. Our quarterly results of operations
have varied significantly and may continue to vary significantly in the future
as a result of a number of factors, many of which are outside of our control.
For a discussion of risks relating to our quarterly results of operations, see
"Risk Factors--Our quarterly results of operations vary significantly, which
may cause our stock price to fluctuate."
The following table sets forth our unaudited quarterly statement of
operations data for the eight quarterly periods in 1998 and 1999 and for the
three months ended March 31, 2000. This quarterly information has been derived
from our unaudited financial statements and, in the opinion of management,
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of this information in accordance with
generally accepted accounting principles. The operating results for any quarter
are not necessarily indicative of the operating results for a full year or for
any future period.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Net revenues...................... $ 190 $ 405 $ 706 $1,696
Cost of revenues.................. 92 262 157 632
----- ----- ----- ------
Gross profit...................... 98 143 549 1,064
----- ----- ----- ------
Operating expenses:
Research and development........ 1 1 29 40
Sales and marketing............. 90 412 757 1,324
General and administrative...... 222 216 246 347
----- ----- ----- ------
Total operating expenses...... 313 629 1,032 1,711
----- ----- ----- ------
Net loss.......................... $(215) $(486) $(483) $ (647)
===== ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
March 31, June 30, September 30, December 31, March 31,
1999 1999 1999 1999 2000
--------- -------- ------------- ------------ ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net revenues............ $ 2,745 $ 2,678 $ 4,518 $ 5,952 $ 6,207
Cost of revenues........ 1,244 1,309 2,634 3,793 3,926
------- ------- ------- ------- -------
Gross profit............ 1,501 1,369 1,884 2,159 2,281
------- ------- ------- ------- -------
Operating expenses:
Research and
development.......... 87 153 330 142 208
Sales and marketing... 1,903 2,068 1,713 3,160 4,270
General and
administrative....... 536 553 866 924 1,073
Non-cash stock-based
compensation......... -- -- -- 76 75
------- ------- ------- ------- -------
Total operating
expenses........... 2,526 2,774 2,909 4,302 5,626
------- ------- ------- ------- -------
Loss from operations.... (1,025) (1,405) (1,025) (2,143) (3,345)
Interest income......... -- -- -- 2 11
------- ------- ------- ------- -------
Net loss................ $(1,025) $(1,405) $(1,025) $(2,141) $(3,334)
======= ======= ======= ======= =======
</TABLE>
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<PAGE>
Net Revenues. Our net revenues increased sequentially from $190,000 for the
first quarter of 1998 to $2.7 million for the first quarter of 1999 and
increased sequentially from $2.7 million for the second quarter of 1999 to $6.2
million for the first quarter of 2000. Growth in revenues was attributable to
increased sales of products to new and existing customers. The increase in net
revenues for the third quarter of 1999 was principally due to the introduction
of our new wireless products.
Cost of Revenues. Our cost of revenues increased from $92,000 for the first
quarter of 1998 to $262,000 for the second quarter of 1998, and increased from
$157,000 for the third quarter of 1998 to $3.9 million for the first quarter of
2000. Cost of revenues decreased during the third quarter of 1998 primarily as
a result of changes in product mix. Gross profit fluctuated widely during 1998
primarily due to variations in product sales mix and promotional activities.
Gross profit decreased during 1999 principally due to increased use of
promotional items. We expect to continue to offer promotional items in the
future to attract customers and promote sales.
Operating Expenses. Operating expenses increased sequentially from $313,000
for the first quarter of 1998 to $5.6 million for the first quarter of 2000.
Operating expenses as a percentage of net revenues fluctuated throughout the
period due to changes in the level of advertising and promotional items. Sales
and marketing expenses for the third quarter of 1999 decreased as a percentage
of revenue due to a decline in advertising expenditures and increased for the
fourth quarter of 1999 due to seasonal advertising.
Liquidity and Capital Resources
Historically, we have financed our activities with $4.4 million in capital
contributions from X10 Ltd. However, X10 Ltd. will not continue to be a source
of liquidity for us following this offering. We had an accumulated deficit of
$5.5 million at March 31, 2000. We do not have a credit facility and are not
currently negotiating with any party to obtain a credit facility. As of March
31, 2000, we had $1.2 million in cash and cash equivalents.
We currently anticipate that the net proceeds of this offering, together
with our available funds, will be sufficient to meet our anticipated needs for
working capital and capital expenditures through at least the next 12 months.
We may need to raise additional funds prior to the expiration of this period or
thereafter. If we raise additional funds through the issuance of equity,
equity-related or debt securities, these securities may have rights,
preferences or privileges senior to those of the rights of our common stock,
and our stockholders may experience additional dilution. We cannot be certain
that additional financing will be available to us on acceptable terms when
required, if at all.
Quantitative and Qualitative Disclosures About Market Risk
We have assessed our exposure to certain market risks, including interest
rate risk associated with financial instruments included in cash and cash
equivalents. Due to the short-term nature of these investments and our
investment policies and procedures, we have determined that the risk associated
with interest rate fluctuations related to these financial instruments does not
pose a material risk to us. Currently, all payments we make under our
agreements with X10 Ltd. are in U.S. dollars and, as a result, we do not
anticipate that foreign exchange gains or losses will pose a significant market
risk. We may, however, experience adverse market risks if we incur debt, hold
derivative financial instruments or engage in foreign currency transactions in
the future.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standard, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133, as amended, is
effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of
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<PAGE>
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction and, if it is, the type of hedge transaction. We do not expect that
the adoption of SFAS No. 133 will have a material impact on our financial
statements because we do not currently hold any derivative instruments.
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, or SAB No. 101, which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements. SAB No. 101 is applicable in the quarter ending December
31, 2000, and is not expected to have a significant impact on us.
In October 1999, the SEC identified a list of issues that have arisen in
Internet businesses that the SEC believes should be addressed by the Emerging
Issues Task Force, or EITF, of the FASB or other standard-setting bodies. One
such issue is EITF Issue No. 99-19, Reporting Revenue Gross as a Principal
Versus Net as an Agent. EITF Issue No. 99-19 impacts whether revenues are
presented on a gross or net basis in a company's statement of operations. Based
on our understanding of the consensus reached at the July EITF meeting, we do
not believe that EITF Issue No. 99-19 will impact our presentation of revenues.
While the EITF is in the process of addressing additional issues raised by the
SEC, many of the identified issues have not yet been resolved. Future
resolution of all of the issues identified by the SEC may affect our financial
statements. We are not able to determine the impact on our financial
statements, if any, of such future rule-making.
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BUSINESS
Overview
We offer an integrated suite of affordable hardware and software products
that provide networking solutions for homes and small businesses using
broadband wireless, powerline, phoneline and infrared technologies. These
products allow users to access and control home networks directly from a PC or
through remote controls, wall-mounted panels, telephones or the Internet. We
design and develop broadband wireless products that enable users to receive and
deliver video and audio content throughout the home or small business and to
distribute broadband Internet content from a PC to televisions, stereos and
other electronic entertainment devices within a home or small office network.
In addition, we offer networking solutions based on other technologies that
enable consumers to control security, lighting, heating and air conditioning
systems. We sell these broadband wireless and control products primarily over
the Internet. In addition, we have recently started selling these products,
indirectly through our affiliates, to OEMs, which sell customized, bundled or
private label versions of these products, and to retailers and other resellers.
In July 1997, we began operations as a division of X-10 (USA), a wholly
owned subsidiary of X10 Ltd., a Hong Kong-based company that, together with its
affiliates, designs and manufactures home controls, entertainment and security
technology products. On October 1, 1999, we began operating as a separate
entity, with the objective of building an independent U.S. company focused on
the design, development and sale of broadband wireless products. We have
entered into several agreements with X10 Ltd. and X-10 (USA) relating to the
transfer of technology and other intellectual property rights and net assets,
the manufacture and distribution by them and their affiliates of products
incorporating the technology and intellectual property rights, and the
provision of research and development services to us.
Industry Background
In recent years, there has been a dramatic increase in the availability of
audio, video and other bandwidth-intensive content for delivery to PCs. The
increased availability of this data-rich content, together with the growth in
Internet use in the workplace to access data, streamline communications,
conduct meetings and execute transactions, has driven demand for bandwidth-
intensive applications, such as e-commerce, streaming audio and video and e-
mail, as well as other multimedia and productivity-enhancing services.
Traditionally, high-speed data connections have been achieved using T-1 and
fiber optic lines, both of which can deliver significant amounts of data
rapidly. However, both of these alternatives are costly and, as a result, have
been used primarily by larger businesses and enterprises.
Many consumers accustomed to broadband access at work have come to expect
similar capabilities in their homes. In addition, the proliferation of the
small office environment, coupled with the increasing trend toward
telecommuting, has led to greater demand for broadband access in the home and
small office networking markets. Significant financial, technical and other
resources have been dedicated to providing this broadband service to homes and
small offices through a variety of competing broadband technologies, including
satellite transmission, high-speed digital cable and DSL. According to
International Data Corporation, or IDC, an independent research firm,
installation of broadband access is expected to increase from 2.1 million U.S.
households in 1999 to 21.2 million U.S. households in 2003.
The expansion of home and small office broadband access has provided
consumers with the ability to enjoy a greater range of information and
entertainment to augment their home entertainment experiences. Consumers are
continuing to acquire multiple PCs and entertainment devices enabled for
broadband access. According to IDC, the percentage of U.S. households with two
or more PCs is expected to increase from 14.2% in 1999 to 28.5% in 2004.
Although consumers are continuing to add to the number of PCs and
entertainment devices in their homes and small offices, access to broadband
connections for those PCs and devices has typically been limited. Generally,
broadband services, in contrast to traditional analog cable services, are
delivered to the home and small office through only one connection, or node;
most homes and small offices are not configured to
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distribute broadband services internally, and the relatively high cost of these
services has made the acquisition of multiple broadband access points
prohibitive for many consumers. Similarly, many households have only one
satellite or cable set-top box or one CD or DVD player that is linked to one
audio/video output device, thus limiting the ability to deliver content to
multiple devices in different locations. As a result, consumers are often
frustrated in their desires to enjoy broadband content throughout the home or
small office. Moreover, the functions of PCs and entertainment devices are
converging, enabling these devices to be used for a variety of different
purposes. For example, PCs can be used to download and display film content
from the Internet through "video on demand" or to store and retrieve digital
audio files much like a jukebox, and set-top boxes can enable televisions to
access content through the Internet. To enhance these functions, consumers are
seeking ways to link their PCs with entertainment devices.
The rising demand for broadband access, together with the rapid growth of
multiple PCs and entertainment devices in the home and small office and the
convergence of function of many of these devices, has fueled the need for home
and small office networks that enable communications among electronic and
electric systems that are often centered around a PC. As consumers recognize
the benefits of home and small office networks that can distribute broadband
applications, many are motivated to incorporate into their broadband networks
applications to control their environmental and security systems, electronic
devices and traditional home appliances. IDC projects that the number of U.S.
households with active home networks, which enable communications and mutual
transfers of data between two or more devices, will grow from 2.1 million
households in 1999 to 17.6 million households by 2004. For households with
multiple PCs, the need for shared broadband access to the Internet and other
resources can be even more acute, and IDC projects that 58% of multiple-PC U.S.
households will have installed active home networks by 2004.
This increasing demand for home and small office networking has led a number
of companies to develop different networking technologies designed to address
this need. These technologies rely on wireless, phoneline, powerline and
Ethernet infrastructures to provide interconnectivity. Current development
efforts are focused on wireless technology standards and protocols, such as
802.11, 802.11a, 802.11b, HomeRF and Bluetooth, that operate in the unlicensed
2.4 GHz and 5 GHz frequency bands. Despite the increasing number of
technologies and products targeted at creating effective home and small office
networks, currently available networking solutions suffer from a variety of
constraints, including:
. High Cost. Incorporating currently available networking technologies
into personal computers and home entertainment devices is often costly.
The complexity of many current home and small office networking
solutions and their associated remodeling and installation expenses can
be prohibitive for many consumers.
. Difficult Installation and Use. Many networks are complex and difficult
to implement, frequently involving the addition of new wiring or
telephone jacks and often requiring installation by professional
contractors. Use and maintenance of a complex system can also be
daunting to many consumers.
. Limited Interoperability with Legacy Equipment. Many new networking
technologies may not be interoperable with consumers' existing
entertainment devices and other electronic equipment. As a result, these
legacy products cannot be incorporated into the network and, in some
cases, must be replaced with network-enabled devices.
. Inability to Deliver Broadband Content. Some networking solutions lack
the speed and bandwidth required to distribute broadband content and,
therefore, have limited functionality.
We believe that the limitations of many currently available systems have
created a significant market opportunity for effective home and small office
networking solutions. To address this opportunity, we believe that a home and
small office networking solution should be cost-effective and easy to install
and use, with sufficient capacity to enable broadband delivery. It should also
be interoperable with existing electronic devices and easily scalable, enabling
consumers to incorporate new components and new technologies while preserving
consumers' valuable investments in existing electronic devices.
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The X10 Solution
We offer an integrated suite of hardware and software products that provide
networking solutions for homes and small businesses using a variety of
networking technologies, including broadband wireless, powerline, phoneline and
infrared. These products enable communication between a PC and other electronic
and electric systems, distribute content to multiple audio/video output devices
and control security, lighting, heating and air conditioning systems. For
example, the products we offer enable consumers to deliver broadband multimedia
content received from a single cable connection to televisions located
throughout the home, distribute broadband Internet content from a PC to a
variety of electronic entertainment devices in a home or small office or
control the physical condition of an entire home or small office environment
with a single universal remote control.
We believe that our solution offers the following advantages:
Broad Array of Interoperable Products and Applications. We offer an
integrated product suite of hardware components and software applications that
enable implementation of a fully interoperable network within a home or small
office. These products include wireless broadband products that we design and
develop and X10-branded automation and security products that we have licensed
from X10 Ltd. Our scalable solutions allow consumers to deliver signals to
control networked devices through a PC, universal hand-held remote control,
wall-mounted panels, telephones or the Internet and to distribute content to
multiple audio/video output devices. Because the products we offer are
compatible with most existing, widely used home and small office electronic and
electric systems, they can be readily implemented in almost all homes and small
offices, allowing consumers to capitalize on their prior investments in
technology and electronic and electric systems.
Use of Multiple Networking Technologies. The products we offer employ a
variety of networking technologies, including broadband wireless, powerline,
phoneline and infrared. We design and update the products we offer to be
interoperable among these multiple technologies and believe that many
applications are best implemented through a combination of technologies. For
example, using X10-branded products, a consumer could configure a security
system that detects intruders with a motion sensor, turns on a video camera,
delivers the broadband video content from the camera to the consumer's
television and, with a chime, alerts the consumer to the presence of the
intruders. This system would employ a combination of wireless, powerline and
infrared technologies. This flexibility allows us to design each product using
the technology or combination of technologies best suited to optimize the
product's functions and price/performance characteristics.
Convenient and Scalable Wireless Networking Solutions. A number of the
products we offer are based on technology using the unlicensed 2.4 GHz radio
frequency spectrum. This wireless broadband frequency is available for
receiving and distributing incoming video and audio signals to multiple devices
within a 100-foot radius without requiring direct line-of-sight delivery of
signals. This capability allows output from satellite and cable set-top boxes,
cameras, DVD and CD players and the Internet to be delivered to televisions,
stereos and PCs located in other rooms, although our wireless broadband
communication products do not currently allow data transfers between PCs.
Because our products are interoperable, our customers can easily expand their
home and small office networks over time. Designed for installation principally
by consumers, our wireless solutions can be implemented throughout the home or
small office without the need for additional telephone jacks, electrical
outlets or wiring, thus expanding the opportunities for configuration of the
home or small office network. We believe that the convenience of distributing
broadband multimedia content among many devices throughout the home or small
office will be a key driver in the adoption of home and small office networking
solutions.
Cost-Effective Products that are Easy to Install and Operate. By reducing
the cost and complexity typically associated with home networking products and
technology, we offer consumers the opportunity to easily and affordably network
their homes or small offices. Our product design and engineering expertise,
coupled with our manufacturing relationship with X10 Ltd. in China, allows us
to efficiently produce affordable, high-performance home networking solutions.
We focus our design and production capabilities on
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providing networking solutions that facilitate self-installation and are
compatible with a wide array of existing electronic and electric systems. In
contrast to many other home and small office networking products, our solutions
typically do not require costly rewiring of homes or small offices or the
purchase of expensive network-enabled devices.
Our Strategy
Our objective is to be the leading provider of affordable networking
solutions for homes and small businesses. Our strategy to accomplish this
objective includes the following key elements:
Capitalize on Our Technology Platform. Our technology provides the
foundation for a low-cost, high-performance, interoperable, scalable and
reliable platform for implementing home and small business networking
applications. We design our products using a variety of networking
technologies. We are continually evaluating new and innovative technologies as
they evolve and will endeavor to incorporate new technologies into our products
as appropriate. We intend to leverage our technology platform by continuing to
design, develop and market new broadband networking technologies and products
designed to extend the reach of our current networking solutions and allow us
to address new markets and further penetrate existing markets.
Expand OEM and Other Strategic Relationships. We, together with X10 Ltd.,
intend to continue to develop relationships with OEMs to address new market
opportunities by leveraging the marketing, sales and distribution capabilities
of OEMs. We believe that collaborative relationships with OEMs may open new
distribution channels, such as mass merchants, and otherwise continue to
accelerate the acceptance by consumers of home and small office networking
technologies. We also seek to pursue and expand relationships with leading
developers and marketers of home and small office networking technologies and
leading distributors in existing and new product categories, to establish
strategic relationships with major manufacturers and service providers and to
enter into co-promotion and referral arrangements with other e-commerce
companies.
Cross-sell Products to New and Existing Customers. We believe that a
substantial number of X10-branded products have been sold for use in homes and
small offices worldwide. While virtually all of these products are based on
powerline, phoneline or infrared technologies, our exclusive license from X10
Ltd. to the X10 brand name worldwide provides us the opportunity to address
this installed base of customers. We believe that the combined benefits
resulting from the purchase of multiple products encourage consumers to
purchase additional products to extend the utility of their home or small
office networks. We seek to further penetrate the market by promoting products
that distribute broadband entertainment content throughout the home, which we
believe appeal to a broad consumer base, and subsequently to promote to those
same customers a wider range of automation and control products. We have
dedicated marketing personnel and business development programs that focus on
selling products to our existing base of customers. In 1999, approximately half
of our net revenues were sales to repeat customers. We intend to continue to
market aggressively to existing customers via our web site and customer e-mail
programs. As a corollary benefit, we believe that the market acceptance of
these products evidenced by our retail Internet sales will help to drive
product acceptance by OEMs and retailers.
Provide a Compelling Value Proposition. We believe that the costs associated
with many home and small office networking products are too high for many
consumers. Accordingly, we seek to accommodate the mass markets by offering a
compelling value proposition centered around high performance and
affordability. Our design ingenuity, coupled with our established manufacturing
relationships with X10 Ltd. as well as X10 Ltd.'s procurement relationships,
helps to minimize production costs. Furthermore, we will continue to utilize
customer feedback, typically obtained through our web site, in the design of
next-generation home networking solutions, helping us to reduce costs and to
shorten our products' time to market.
Capitalize on Relationship with X10 Ltd. We believe that our relationship
with our affiliate, X10 Ltd., provides us with a number of strategic
advantages. The products we offer are currently marketed and sold by
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X10 Ltd. and X-10 (USA), which pay us variable fees and license fees on all of
their sales of our products. X10 Ltd., either directly or through its
affiliates, currently provides to us a significant level of product
development, sales and marketing support, as well as all of our manufacturing.
We believe that our relationship with X10 Ltd. allows us to take advantage of
its low-cost manufacturing and component sourcing operations on a priority
basis. In addition, we leverage its efficient, skilled product engineering
capabilities to speed development and reduce costs. We also seek to capitalize
on the long-standing relationships of X10 Ltd. and its affiliates with
strategic OEMs, retailers and other resellers to increase sales of the products
we offer.
Leverage and Expand Professional Contractor Relationships. Although we
believe that a substantial majority of the products we offer are self-installed
by consumers, a segment of our customer base may prefer professional
installation. As a result, we complement our Internet sales by marketing to
independent contractors a broader suite of products than are generally
available to retail customers. These additional products can extend the
functionality of a home or small office network. We have begun to build a
database of independent contractors throughout the U.S., and we currently rely
on X-10 (USA) to recruit and train these contractors. We currently provide a
referral feature on our web site that enables many consumers to select an
independent contractor in their local areas. This system also facilitates
consumer feedback, which we are using to compile a database that aggregates the
performance ratings of our independent contractors. We intend to expand this
network of professional independent contractors by aggressively marketing this
referral service through X-10 (USA) and by targeting geographic areas in which
we currently do not have representation.
Build International Presence. We believe that the demand for increased
access to broadband content is a global phenomenon and that, as a result, there
is a significant market opportunity for the products we offer outside the U.S.
We intend to devote significant resources to adapting these products to comply
with the internal regulations of targeted countries and plan to expand our
distribution presence in strategic markets overseas.
Products
We offer an integrated suite of affordable hardware and software products
that provide networking solutions for homes and small businesses. Our broadband
products include video distribution, color camera broadcasting and audio
distribution products that we design and develop in conjunction with X10 Ltd.
and its affiliates. These products enable users to receive and wirelessly
distribute video and audio throughout the home or small office and distribute
broadband Internet content from a PC or a satellite or cable set-top box to
televisions, stereos and other electronic entertainment devices within a home
or small office network. We also have a license to market and sell automation
and security products that are designed and manufactured by X10 Ltd. Based
primarily on powerline, infrared and phoneline technologies, these products
enable consumers to automate, control and network most electronic devices
within their homes or small offices. The products we offer are sold through
multiple channels, including our web site, retail stores, telephone orders,
independent contractors and strategic OEMs.
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The table below indicates representative products and typical applications
for various categories of broadband wireless and automation/security products:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Representative
Product Category Products Typical Applications
------------------------------------------------------------------------------------
<C> <C> <C> <S>
VideoSENDER Delivers audio and video content
from a video output device to any
television within 100 feet
DVD Delivers wireless DVD signals from
B Video Distribution Anywhere a PC or DVD player to televisions
R or VCRs
O
A
D Big Picture Delivers audio and video signals
B from a PC to a television to enable
A big screen Internet access
N ---------------------------------------------------------------------------------
D
Xcam2 Transmits color video and audio
W signals wirelessly to televisions,
I VCRs and PCs
R
E Color Camera XRay Vision Transmits digital snapshots via the
L Broadcasting Internet to any remote PC
E
S ScanCam Combines Xcam2 features with an
S addressable power supply allowing
users to remotely control the
camera's on/off position and scans
between multiple cameras
----------------------------------------------------------------------------------
MP3 Delivers audio signals wirelessly
Audio Distribution Anywhere from a computer to a stereo or from
a home stereo or similar device to
a remote amplifier
------------------------------------------------------------------------------------
ActiveHome Enables consumers to remotely
control and program home lighting
Automation and appliances
IR Enables consumers to control
Commander electronic equipment from their PCs
C
O
N ---------------------------------------------------------------------------------
T
R Protector Provides security through a system
O Plus of sensors, alarms, controlled
L lights and pre-recorded emergency
Security telephone messages
Monitor Provides all the benefits of
Plus Protector Plus, and enables
connection to a third-party
monitoring service
------------------------------------------------------------------------------------
</TABLE>
The products we offer are designed to be fully interoperable, both within a
product category and across technologies, including wireless, powerline,
phoneline and infrared. We offer products as individual components, allowing
consumers to create customized networks, or in kits, each of which provides an
integrated hardware and software solution. For example, our XCam2 kit includes
a video camera with built-in microphone and transmitter, video receiver and all
necessary power supplies and cables. In addition to the products identified in
the table, we offer a broad array of separate components, such as sensors,
controllers and switches, that can be integrated to create or expand a network.
We believe this flexibility, together with the broad interoperability of the
products we offer, allows us to offer consumers attractive networking solutions
for homes and small offices.
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Broadband Wireless Products
Video Distribution. Our video distribution products allow customers to
deliver video signals from a device, such as a cable or satellite set-top box
or a DVD player, or from a broadband Internet video stream to virtually any
point within the home or small office, including through walls and floors. Our
video distribution products incorporate broadband wireless video transmitters
operating at 2.4 GHz that deliver video signals from the video source to a
wireless video receiver attached to a television, VCR or PC. The wireless
design of the products we offer allows the video signal to be delivered within
approximately a 100-foot radius, permitting viewing in a bedroom, den, living
room or other area of the home or small office. Additionally, our programmable
universal remotes, which utilize both infrared and radio frequency wireless
technologies, allow consumers to control the major functions of various
consumer electronics devices, such as televisions, DVDs, VCRs and PCs,
regardless of their location in the home or small office. Because our video
distribution products enable simultaneous video download from the Internet and
delivery to multiple viewing points in the home, as "video on demand" becomes
more widely accessible through the Internet, our video distribution products
can be employed for that application as well.
Color Camera Broadcasting. Color camera broadcasting in its simplest form
involves the transmission of a video signal from a single wireless camera to a
single display device. Our wireless color camera broadcasting uses a CMOS color
image sensor to transmit an image, which is then delivered at 2.4 GHz over a
distance of up to 100 feet to a video receiver that is connected directly to a
display device, such as a television, for remote viewing. For example, the
color camera system can be used to monitor a swimming pool or a child's bedroom
using picture-in-picture on a regular television. Consumers can also
selectively view real-time video from multiple cameras using a remote control
or automatically scan from camera to camera. When used in conjunction with a
motion sensor, the system selects a designated camera when the sensor detects
motion and can also be configured to activate a lamp to provide illumination
for the camera. Our wireless color cameras can be used to transmit digital
images via the Internet to remote PCs.
Audio Distribution. Our audio distribution products can be used to deliver
multiple formats of audio signals from PCs or home stereos to remote audio
output devices. The utility of our audio distribution products has increased
with the development and acceptance of MP3 and other audio file storage formats
that enable consumers to download music from the Internet to a home computer.
Our audio distribution products deliver the audio signal at 2.4 GHz directly
from a home PC or stereo over a distance of up to approximately 100 feet to a
receiver, such as a stereo system or remote amplifier, anywhere in the home.
The audio source can be controlled using one of our universal remote controls
that transmits wireless signals back to the audio source from the remote
location. This feature allows remote audio program selection and volume
control.
Control Products
Automation. We offer automation networks that provide a decentralized
control system for devices and appliances that are connected to the network.
The home or small office automation network is activated by controllers that
include wired or wireless remote controls or computer interfaces. The control
software for the computer interface makes use of a graphical user interface to
facilitate the development of complex control routines. For example, our
ActiveHome software graphically depicts the control modules that have been
installed around the home or small office and directs the activities of these
modules through control signals originating from the ActiveHome graphical user
interface. As a result, a user can program home routines to run automatically,
such as an evening routine to turn on the security system, dim the lights and
gradually reduce the volume on the radio, and a morning routine to turn on the
television to the consumer's favorite program and start the coffee maker at a
specific time.
Security Systems. We offer centralized security systems that allow multiple
remote sensors to be logged into a central console located in the home or small
office for monitoring. The sensors are low-powered, battery-operated devices
that transmit alarm signals in the event of a change in the status of the
environment that they
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are monitoring. The security systems operate in two modes: stand-alone and
monitored. The stand-alone systems are designed to generate a phone call to a
designated person in the event that a sensor is triggered. The monitored
systems are designed to send an alarm signal to a designated third-party
monitoring service. Additionally, the security systems will transmit signals
over powerlines to operate remote devices, such as sirens and flashing lights
within the home or small office.
Our success will depend upon the widespread demand for and acceptance of
home and small office networking products, as well as the increased use and
adoption of broadband access services. Demand for recently introduced products,
such as the products we offer, is subject to a high level of uncertainty. For a
discussion of risks related to new products, see "Risk Factors--Our success
depends in part on the continued growth of broadband access services. If these
services are not widely adopted, our sales will be adversely affected" and "--
The market for home and small office networking products is in an early stage
of development, and the products we offer may not achieve widespread
acceptance."
Technology
We offer home and small office networking solutions that incorporate
wireless, phoneline, powerline and infrared technologies. Our technology
platforms include wireless applications in the license-free industrial,
scientific and medical, or ISM, band at 2.4 GHz. We have developed software and
wireless technologies that we use in conjunction with the libraries that we
have licensed from X10 Ltd. These libraries consist of designs of application-
specific integrated circuits, or ASICs, and printed circuit boards, or PCBs, as
well as infrared codes. We believe that our access to these libraries enables
us to accelerate product development and introduction. We are currently
developing technology that allows data transfers among PCs.
Wireless Expertise. We believe that our expertise in wireless technologies
and our customer-oriented approach to product development enable us to develop
affordable, high-quality products. Our wireless control signals make use of the
ultra-high-frequency, or UHF, band in the 310 MHz, 315 MHz, 418 MHz and
433.92 MHz ranges where appropriate, which enables us to provide a variety of
solutions and to adapt our products to a number of foreign markets and select
the most appropriate solution for a particular application. Our in-house
expertise in the 2.4 GHz frequency band enables us to develop products
specifically targeted toward broadband delivery of broadcast-quality audio and
video signals.
Software Architecture. Our software engineers have created proprietary
software programs that interoperate with multiple operating systems currently
used in the networking products we offer. We have acquired expertise in
creating Internet-related support applications for Microsoft, Linux, Solaris
and FreeBSD operating systems, which enables us to apply appropriate
technologies in an efficient manner. We target applications for remote, central
and distributed control over electronic and electric devices, as well as the
delivery throughout the home of broadband content retrieved from the Internet.
ASIC, PCB and Infrared Code Libraries. We believe our access to X10 Ltd.'s
libraries of proprietary ASIC and PCB designs and infrared codes significantly
increases our product design flexibility, interoperability, scalability and
speed to market. These libraries have been developed over the course of 20
years by X10 Ltd.'s engineering and design teams. We license these libraries
from X10 Ltd. and have also applied our expertise to the development of
additions to the libraries. The ASIC library covers designs for a broad range
of functions, such as powerline, wireless and infrared transmissions, data
storage and retrieval, input device mapping and conditional processing, that
allow us to rapidly accelerate the design process. Additionally, the PCB
library includes designs for power control devices, UHF devices, super-high-
frequency devices, infrared devices, computer interfaces, remote sensors and
low-power, battery-operated devices, enabling the creation of products with a
diverse range of applications. Furthermore, we can interoperate with our own
devices as well as a wide array of other electronic devices produced by other
manufacturers through the application of exclusively licensed infrared codes
integrated into our wireless products.
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<PAGE>
We will not be competitive unless we continually introduce new products and
product enhancements that address changing industry standards. For a discussion
of risks associated with changing industry standards, see "Risk Factors--
Emerging industry standards may reduce the demand for our products, which will
harm our business."
Sales, Marketing and Customer Support
Sales. Historically, virtually all of our sales have been to retail
customers through the Internet. In the second quarter of 2000, we recognized
our first license fee revenue related to sales to OEMs. These sales have been
memorialized through purchase orders delivered by the OEMs to X10 Ltd., and we
received variable fees in an amount equal to the customers' payments, net of
product costs and X10 Ltd.'s fee. X-10 (USA) originates sales to and enters
into purchase order agreements with traditional retailers, for which we receive
a license fee for sales by X-10 (USA) of X10-branded products.
We supplement our sales personnel and the sales personnel of our affiliates
with technical and product experts working at our headquarters. We believe that
products based on our owned and licensed technologies can address the market
for home and small office networking products outside of the U.S. and intend to
expand to additional foreign markets in the future. Expansion into foreign
markets involves a number of risks. For a discussion of risks associated with
our foreign expansion, see "Risk Factors--We intend to expand into foreign
markets, which exposes us to a number of risks."
Marketing. As part of our marketing program, we seek to increase demand for
the products we offer, expand our corporate and product visibility in the
market and establish cooperative marketing programs. In addition to customer-
specific sales efforts by us and our affiliates, our marketing activities
include operation of our web site, participation in trade shows, e-mail
programs and ongoing communications with our customers and the press. From time
to time, we also offer product rebates and coupons and engage in product
promotions, such as free distribution of a basic system component. These
promotions are designed to generate demand for additional related or upgrade
components. As appropriate, we may enter into cooperative marketing or
development agreements with strategic partners such as key customers,
electronics manufacturers and other home networking companies. Our ability to
develop and maintain awareness of the X10 brand is important to achieving
expansion of our sales efforts and widespread acceptance of the products we
offer. For a discussion of risks associated with our brand, see "Risk Factors--
Failure to successfully promote and maintain the X10 brand could adversely
affect our business."
Customer Support. We believe that consistent, high-quality service and
support is a key factor in attracting and retaining customers. Service and
technical support is coordinated by our customer support organization in
Seattle, Washington. Within our customer support organization, we have created
OEM and retail support teams to address customer support issues unique to these
specific customer groups. Our customer support organization is available via
telephone 24 hours a day, seven days a week. We rely on our affiliate, Orca
Monitoring Services, for our after-hours customer and technical support. This
organization provides customer service, telephone sales, technical support and
order processing. Customers can also access technical information about our
products through our web site. We provide a one-year warranty on all of our
products, both software and hardware. Although we have experienced limited
product warranty claims in the past, these claims could increase in the future.
Customers
Customers who buy products based on our owned and licensed technologies are
divided into four primary groups:
. Internet Customers. To date, virtually all of our product sales have
been to individual consumers via the Internet. Through our web site,
consumers can access a wide range of information about our product
offerings, purchase products, locate independent contractors for
installation services, download software and access support and
technical information.
41
<PAGE>
. OEMs. We leverage X10 Ltd.'s relationships with OEMs, and we receive
fees for products sold by X10 Ltd. that are based on our owned
technologies. One component of our strategy is to develop independent
relationships with OEMs and to sell products to OEMs directly. If we
fail to expand our indirect OEM relationships or to develop and
cultivate OEM and other strategic relationships independently, or if
these OEMs are not successful in their sales efforts, our sales may
decrease and our operating results may suffer. For a discussion of risks
related to distribution channels, see "Risk Factors--If we fail to
expand existing indirect distribution channels, such as OEMs, or to
develop new ones, our business could suffer" and "--We depend on X10
Ltd. and X-10 (USA) to sell and deliver the products we offer to OEMs
and other resellers. If they fail to do so effectively, it could harm
our business."
. Independent Contractors. Some of the products we offer are intended for
sale only to professionally trained contractors. Moreover, some
consumers prefer to engage professional contractors to install the
products we offer. We have begun to develop a referral database on our
web site of independent contractors. We market products to these
contractors, who then act as independent resellers and provide
installation for consumers. For a discussion of risks related to
contractors, see "Risk Factors--If we fail to recruit a sufficient
number of contractors to install the products we offer, our strategy and
results of operations could be adversely affected."
. Retail Royalty Customers. X-10 (USA) sells X10-branded products based on
our licensed technologies to retailers in the U.S. and Canada and pays
to us a license fee based on its net sales of these products. One
component of our strategy is to develop independent relationships with
these customers and to sell products to these customers directly.
Research and Development
We believe that timely development and introduction of new products are
essential to maintaining our competitive position. As a result, we continually
seek to refine, enhance and expand our hardware and software capabilities. We
devote most of our internal research and development resources to our wireless
technologies, control software and hardware and mechanical design. We are
committed to soliciting and understanding customer requirements. Accordingly,
purchasers of products incorporating our owned or licensed technologies are a
principal source of ideas for new products and product refinements and new
market applications for current products. We also work with X10 Ltd. and with
component suppliers to keep abreast of technological advances and to
incorporate new features as they are developed. Key elements of our research
and development strategy include:
. Core Designs. We seek to develop platform architectures and core designs
that permit cost-effective development and flexible upgrades to meet the
needs of multiple applications. These designs emphasize rapid time to
market and cost efficiency.
. Product Line Extensions. We seek to extend existing product lines
through product modifications and enhancements to meet the needs of
customers.
. Use of Industry Standard Components. Our design philosophy emphasizes
the selective use of industry standard hardware and software components
to reduce time to market, decrease the cost of goods and reduce the
risks inherent in new designs.
. New Technologies. We focus significant resources on the evaluation and
incorporation of new technologies and features as they become available.
We are currently developing technology that allows data transfers among
PCs. We cannot assure you that we will be successful in developing this
technology or any related products or that these products will provide
the desired functionality, price/performance characteristics or
otherwise achieve commercial acceptance.
We perform a majority of our research and development activities in our
facilities in Seattle and outsource the detailed development to X10 Ltd. and
its affiliates under our research and development agreement with X10 Ltd.
Research and development expenses were $1,000 in 1997, $71,000 in 1998 and
$712,000 in 1999.
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The market for networking products for homes and small offices is
characterized by rapid technological developments, frequent enhancements to
existing products and new product introductions, changes in customer
requirements and evolving industry standards. To remain competitive we need to
introduce products in a timely manner that incorporate or are compatible with
these changes in our market as they emerge. For a discussion of risks related
to technological changes, see "Risk Factors--The markets in which we compete
are subject to rapid technological change, requiring us to continually design
and introduce new products. If we do not address these technological changes,
our products will become obsolete, impairing our ability to compete and
adversely affecting our business."
Manufacturing
We do not manufacture any of our own products, but instead outsource
manufacturing, assembly, testing and inspection to X10 Ltd. and its affiliates.
X10 Ltd. and its affiliates operate two factories in China and source many of
the raw materials and components used in these products from vendors in China.
We believe that our relationship with X10 Ltd. allows us to manufacture at
lower cost relative to the cost of manufacture in the U.S. Moreover, X10 Ltd.'s
familiarity with our products helps us to more rapidly respond to customer
demands, thereby increasing the flexibility and scalability of our product
manufacturing. We have entered into a 20-year, non-exclusive product supply
agreement with X10 Ltd. covering pricing, shipment and related matters.
Completed products are shipped by X10 Ltd. and its affiliates to X-10 (USA) or
another third party we designate. X-10 (USA) provides warehousing and
consignment at its Las Vegas, Nevada and Closter, New Jersey fulfillment
centers.
X10 Ltd., together with its affiliates, is currently the sole manufacturer
of our products and has limited excess manufacturing capacity. If X10 Ltd. did
not have adequate capacity at its existing facility to manufacture products for
us on a timely basis or suffered operational, production or quality assurance
difficulties, including a catastrophic event, affecting the manufacturing
facility of X10 Ltd. and its affiliates, then there could be a reduction or
disruption of manufacturing services to us. In addition, X10 Ltd.'s reliance on
single source vendors involves risks, including the possibility of shortage of
key component parts and reduced control over delivery schedules, manufacturing
capability, quality and costs. In addition some key components require long
delivery times. We cannot assure you that alternative manufacturing services
will be available to us on favorable terms or a timely basis, if at all. For a
discussion of risks related to manufacturing, see "Risk Factors--We depend on
X10 Ltd. and its affiliates to manufacture the products we offer, and if X10
Ltd. did not have adequate manufacturing capacity, our business and results of
operations would be adversely affected" and "--Our manufacturer may experience
shortages of supply of components for the products we offer, which could
involve substantial cost and delay and reduce the availability of these
products."
Competition
The market for networking solutions for homes and small businesses is
relatively new, rapidly evolving and intensely competitive. The broadband home
and small office networking market has received increased attention in recent
years, and a number of companies have developed competing technologies and
products for this market. In addition, a large number of companies in diverse
industries are either entering or are expected to enter the market in the near
future. We believe the principal factors on which companies compete in this
market are:
. price/performance;
. reliability;
. ease of installation and use;
. degree of product interoperability;
. breadth of product lines and introduction of new products;
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. compatibility with legacy equipment and systems; and
. customer support and technical assistance.
We believe that we compete favorably with respect to these factors. However,
the pace of innovation in the markets for home and small office networks is
rapid, and we cannot assure you that the products we offer will achieve or
maintain competitiveness with available alternatives in the future. Moreover,
increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could seriously harm our results
of operations.
Our current and future competitors include a broad array of public and
private companies, including home and small office network infrastructure
providers, consumer electronics companies and companies that manufacture video
cameras, intelligent appliance manufacturers and entertainment-oriented
broadband communications providers:
Home and small office network infrastructure providers. The wireless home
networking market is characterized by a multiplicity of competing standards and
protocols. We have developed technologies that operate in the 2.4 GHz frequency
band that allow broadband content distribution, other than data transfers
between PCs, and are based on proprietary formats that have not been adopted by
the IEEE. Several associations and industry groups are promoting competing
standards, such as 802.11a for the 5 GHz spectrum, 802.11b for the 2.4 GHz
spectrum, Bluetooth and HomeRF. For example, companies such as Apple,
Cisco Systems, Inc., Lucent, Cabletron Systems, Inc. and 3Com Corporation sell
networking infrastructure products based on the faster 802.11b standard adopted
by the IEEE for the 2.4 GHz spectrum. Other companies are developing products
for the 5 GHz frequency. In addition, other companies, including BreezeCom,
Ltd., Cisco Systems, Inc., Echelon Corporation, Intel, Lucent, Nortel Networks
Corporation, Panja Inc., Proxim, Radio Local Area Networks, Inc. and 3Com,
currently offer or are developing network infrastructures for homes and small
offices. Several of these companies offer products that enable data transfers
between PCs. Furthermore, companies such as Enikia, Inc., Intellon, Inc. and
Tut Systems, Inc. are developing phoneline and powerline products capable of
10 Mbps data transmission speeds. If any of these standards or protocols are
widely adopted and we do not succeed in designing products that are compatible
with those standards on a timely basis or if the compatible products we design
do not achieve market acceptance, our business and results of operations would
be adversely affected. Many of these competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, technical, marketing and other resources than we have.
Entertainment-oriented broadband communications providers. We could face
competition from developers of products such as set-top boxes and services such
as Internet television, including Microsoft Corporation's WebTV. These and
other companies are producing broadband delivery devices that eliminate the PC
as a necessary step in the transmission of broadband content. Broad commercial
acceptance of these devices could adversely affect sales of our PC-based
broadband products and software. Furthermore, we cannot assure you that our
wireless home networking products will be compatible with devices such as WebTV
or Internet-enabled set-top boxes.
Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial,
technical, marketing and other resources than we have. Many of these
competitors can also devote substantially greater technical and financial
resources to product and technology development and may be better able to
leverage OEM and customer bases and other relationships. In addition, large,
well-established or well-financed entities may join with our competitors or
with other companies to produce superior home networking products. Increased
competition could result in price reductions, reduced gross margins and loss of
market share, any of which could adversely affect our business and results of
operations. For a discussion of potential competition with X10 Ltd., see "Risk
Factors--We could face potential competition from X10 Ltd."
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Intellectual Property
Our success and ability to compete is dependent in part upon our proprietary
technology and information. We seek to protect our copyrights, service marks,
trademarks, trade dress and trade secrets through a combination of laws and
contractual restrictions, such as confidentiality agreements. However,
effective trademark, service mark, copyright and trade secret protection may
not be available.
We have six pending U.S. patent applications relating to our technology. X10
Ltd. has one pending patent application related to technology we license from
it. We intend to continue our efforts to identify and protect other new
inventions. While we believe that, if patents are issued as a result of these
pending patent applications, those patents would ultimately help to protect our
business, we cannot assure you that any of these patents will issue, or that
any issued patents will protect our intellectual property. In addition, it is
possible that any issued patents or pending applications could become involved
in an interference or reexamination proceeding. In addition, other parties may
independently develop similar or competing technologies not covered by any
patents that may issue.
Third parties may assert direct, indirect or contributory copyright,
trademark or other intellectual property infringement or contractual claims or
unfair competition claims against us. The law in many of these areas is
uncertain and we cannot predict whether our customers will operate our products
in accordance with applicable laws or agreements or whether any of the claims
will harm our business. Defending against any potential claims could result in
protracted and costly litigation, regardless of the merits of those claims, and
any dispute could require us to pay damages, develop non-infringing technology
or enter into royalty or licensing agreements. We cannot assure you that any
necessary licenses would be available or that, if available, these licenses
could be obtained on commercially reasonable terms. In addition, the steps we
take to protect the intellectual property rights that we own or license may be
inadequate. For discussion of risks related to intellectual property, see "Risk
Factors--If the technology and intellectual property we own or license were
inadequately protected, our business and reputation could be harmed and we
could lose customers" and "--Intellectual property or related claims against us
could be costly and could impair our business."
Governmental Regulation
Many of the products we offer and the home and small office networking
industry in which they are used are subject to federal and international
regulation. In addition, industry and consumer groups may promote and
independently adopt standards and protocols, any of which could achieve wide
acceptance. From time to time, the regulatory entities that have jurisdiction
over our business adopt new or modified regulations or take other actions on
their own regulatory initiatives or at the request of industry, consumers,
other branches of government or in response to changes in laws. This changing
regulatory environment could adversely affect the nature and extent of products
we are able to offer. In addition, the occurrence of regulatory changes,
including changes in the allocation of available license-free frequency
spectrum or technical requirements for its use, could significantly affect our
operations by rendering current products obsolete, restricting the applications
and markets served by our wireless products or increasing the opportunity for
additional competition.
On the federal level, the FCC regulates our products. We cannot assure you
that we will be able to secure the necessary certifications required by the FCC
for the products that we intend to introduce in the future. The need to obtain
these certifications could result in delays or additional costs.
Our wireless products share the license-free 2.4 GHz frequency band with
other users. There are other users in the band that have priority over our use,
and the FCC requires that we not cause harmful interference to those users. In
the event that there is interference between those users and us, those users
can require that we curtail transmissions that create interference. In this
spectrum, we operate on a co-equal basis with other non-priority users and must
accept any interference present in the frequency band. If users of our products
experience excessive interference from licensed users or other non-priority
users, market acceptance of our products could be adversely affected, which
could materially and adversely affect our business and results of operations.
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We may desire or, as a result of changes in regulations, be required to seek
to operate in other license-free frequency bands. Redesigning our products to
operate in other frequency bands could be very expensive and time-consuming,
and we cannot assure you that any redesigned products would receive
certifications required by the FCC or would be commercially viable.
To the extent that our products are sold in markets outside the U.S., our
products are also subject to regulatory requirements in international markets.
One component of our business strategy is to expand our international presence
and, as a result, we must monitor the development of radio frequency
regulations in countries that represent potential markets for our products.
Changes in, or our failure to comply with, applicable international regulations
could materially and adversely affect our ability to implement our strategy, as
well as our business and results of operations.
Employees
As of July 31, 2000, we had 45 employees, including nine in research and
development, two in operations, six in sales and marketing, 18 in customer
service and training and 10 in administration. None of our employees is
represented by a labor union or subject to a collective bargaining agreement.
We have not experienced any work stoppages and consider our employee relations
to be good.
Facilities
We occupy on a month-to-month basis approximately 6,000 square feet of
office space in Seattle, Washington, leased by Orca Monitoring Services, an
affiliate of X10 Ltd. We anticipate our total rental expense will be
approximately $72,000 during fiscal 2000. We anticipate that we will need to
relocate to a larger facility within approximately six months to meet our
anticipated growth needs. We believe, based on current market availability,
that suitable additional space will be available as needed.
Legal Proceedings
We may from time to time be a party to legal proceedings or governmental or
administrative actions.
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MANAGEMENT
Executive Officers and Directors
The following table identifies our executive officers and directors as of
July 31, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
George E. Stevenson..... 57 Chairman of the Board and Chief Executive Officer
Alexander E. Peder...... 40 President and Director
Wade A. Pfeiffer........ 32 Chief Financial Officer
James R.W. Phillips..... 31 Chief Technology Officer and Director
C. Gregory
Amadon(1)(2)........... 48 Director
William T.
Baxter(1)(2)........... 37 Director
Hin Chew Chung.......... 48 Director
</TABLE>
----------
(1) Member of our audit committee.
(2) Member of our compensation committee.
George E. Stevenson has served as our chairman of the board since July 2000
and has served in the capacity of chief executive officer since our inception.
Mr. Stevenson is the founder, president and a director of our affiliate, X10
Ltd., a Hong Kong-based company which, together with its affiliates, designs
and manufactures home controls, entertainment and security technology products.
He has served as the president of X10 Ltd. since 1978 and serves in the
capacity of an officer and director of several of its affiliated companies and
subsidiaries. Mr. Stevenson is not employed by us.
Alexander E. Peder has served in the capacity of president and as a director
since August 1999. From July 1996 to August 1999, Mr. Peder served as president
of retail sales, one of three divisions of X-10 (USA), a wholly owned
subsidiary of X10 Ltd. that provides sales, marketing and product distribution
services for X10 Ltd. in the U.S. From June 1994 to July 1996, Mr. Peder served
as vice president of worldwide sales at Virtual i-O, Inc., a systems
development and manufacturing company. Virtual i-O filed a bankruptcy petition
under Chapter 11 of the U.S. federal bankruptcy laws in February 1997.
Wade A. Pfeiffer has served in the capacity of chief financial officer since
July 1999. Mr. Pfeiffer also served as a director from August 1999 to July
2000. From January to July 1999, Mr. Pfeiffer was director of finance and
operations for Definitive Stock, Inc., an online stock photography agency. From
1986 to 1998, Mr. Pfeiffer served in various positions with Ernst & Young llp,
most recently as a senior manager in the corporate finance division.
James R.W. Phillips has served in the capacity of chief technology officer
since our inception and has served as a director since July 2000. From 1994 to
1998, Mr. Phillips served as director of software engineering at System X-10,
Ltd., a wholly owned subsidiary of X10 Ltd. Mr. Phillips is currently employed
by X-10 (USA) and not by us.
C. Gregory Amadon has served as a director since July 2000. In February
1997, Mr. Amadon founded TeraBeam Networks, Inc., a fiberless optical network
service company and, since December 1997, he has served as its chairman, chief
technology officer and chief development officer. Mr. Amadon was co-founder of
Virtual i-O and served as its chief executive officer from May 1993 to January
1997. Virtual i-O filed a bankruptcy petition under Chapter 11 of the U.S.
federal bankruptcy laws in February 1997.
William T. Baxter has served as a director since July 2000. Mr. Baxter was a
co-founder of BSQUARE Corporation, a software company providing operating
systems and integration software headquartered in Bellevue, Washington, and has
served as its president, chief executive officer and chairman of the board
since its inception in July 1994.
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Hin Chew Chung has served as a director since July 2000. Since 1989, Mr.
Chung has served as chairman of our affiliate, X10 Ltd. Mr. Chung currently
serves as chairman of Zhongli Investment Pte. Ltd., his privately held
investment company based in Singapore.
There are no family relationships among any of our directors or executive
officers.
Mr. Stevenson's and Mr. Chung's positions at X10 Ltd. could create real or
apparent conflicts of interest in the event that they are faced with decisions
that could have different implications for X10 Ltd. and us. These decisions may
relate to corporate opportunities, corporate strategies, potential acquisitions
of businesses, the intercompany agreements, competition, the issuance or
disposition of securities, the election of new or additional directors and
other matters. In addition, James Phillips, our chief technology officer, is an
employee of X-10 (USA) and works for us on a contract basis. We cannot assure
you that the information Mr. Phillips learns in his capacity as our chief
technology officer will be kept confidential from X10 Ltd. or X-10 (USA). For a
discussion of risks related to potential conflicts of interests, see "Risk
Factors--Some of the key management personnel on whom we depend are also
management personnel or employees of X10 Ltd. or its affiliates, which could
create conflicts of interest between X10 Ltd. or its affiliates and us."
Board Composition
Upon completion of this offering, our board will consist of six directors
divided into three classes. At each annual meeting of stockholders, directors
will be elected by the holders of common stock for terms of three years to
succeed the directors whose terms are expiring. We anticipate that upon
completion of this offering, Alexander Peder and James Phillips will serve as
Class I directors with terms expiring in 2001, Hin Chew Chung and Gregory
Amadon will serve as Class II directors with terms expiring in 2002 and William
Baxter and George Stevenson will serve as Class III directors with terms
expiring in 2003. Any additional directorships resulting from an increase in
the number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the directors.
Classification of the board of directors could delay, deter or prevent changes
in our control or management. In addition, our directors may be removed from
the board only for cause. For a discussion of risks related to anti-takeover
measures, see "Risk Factors--Provisions of our amended and restated certificate
of incorporation and bylaws could delay, deter or prevent a third party from
acquiring us even if doing so would be beneficial to our stockholders."
Board Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee meets with our independent auditors as necessary to review
the results of the annual audit. The audit committee also reviews and evaluates
our accounting, auditing and reporting practices, including audit and control
functions, serves as a focal point for communication between non-committee
directors, the independent accountants and our management, and monitors
transactions between us and our affiliates, including X10 Ltd. and X-10 (USA),
our employees, officers and directors, or any of their affiliates. The
compensation committee has authority to set, review and approve the
compensation levels of and policies for officers and employees; propose the
adoption, amendment and termination of employee benefit plans; provide reports
of our compensation policies for our proxy or information statements; and
administer our stock option and stock purchase plans. The board has delegated
authority to our chief executive officer, George Stevenson, to grant options
under the 2000 Equity Incentive Plan within specified limitations to persons
other than our officers or directors. The audit committee is composed of
Gregory Amadon and William Baxter. The compensation committee is composed of
Gregory Amadon and William Baxter.
Compensation Committee Interlocks and Insider Participation
Prior to this offering, our board of directors did not have a compensation
committee and all compensation decisions relating to our executive officers
were made by Mr. Stevenson, our chief executive officer, together with our
board of directors. Upon completion of this offering, it is anticipated that
the compensation committee will make all compensation decisions regarding our
executive officers. During 1999, Mr. Stevenson was a
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member of X10 Ltd.'s board of directors and controlled all compensation-related
decisions. During 1999, Mr. Stevenson purchased shares of our common stock and
X10 Ltd. engaged in a number of transactions with us. For a description of
these transactions, see "Certain Transactions and Business Relationships."
Compensation of Directors
We currently do not provide our directors with cash compensation for their
services as members of our board of directors, although directors are
reimbursed for reasonable expenses incurred in connection with attendance at
board and committee meetings. Directors are eligible to participate in our
stock plans. In July 2000, pursuant to our 1999 Stock Plan, Mr. Baxter and Mr.
Amadon were each granted options, effective upon the date of this prospectus,
to purchase shares of our common stock at an exercise price equal to 70%
of the initial public offering price, which options vest over two years at a
rate of 25% every six months. In addition, for every six months of continuous
service, each of these non-employee directors will be granted options under our
2000 Equity Incentive Plan to purchase shares of our common stock at an
exercise price equal to 100% of the fair market value of our common stock on
the dates of the grants. These options will vest over two years at a rate of
25% every six months.
Executive Compensation
The following table sets forth the compensation awarded, paid, earned or
accrued for services rendered to us in all capacities during 1999 to our chief
executive officer and our other executive officers. We refer to these officers
as our named executive officers in other parts of this prospectus. In
accordance with SEC rules, the compensation described in the table does not
include medical, group life insurance or other benefits that are available
generally to all our salaried employees or perquisites and other personal
benefits that do not exceed the lesser of $50,000 or 10% of the officer's total
salary and bonus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Awards
--------------------------------------- ------------
Securities
Name and Principal Other Annual Underlying
Position Salary ($) Bonus ($) Compensation ($) Options
------------------ ---------- --------- ---------------- ------------
<S> <C> <C> <C> <C>
George E. Stevenson...... -- (1) -- -- (2)
Chief Executive Officer
Alexander E. Peder....... $125,000 -- --
President
Wade A. Pfeiffer......... $ 60,000(3) $10,000 --
Chief Financial Officer
James R.W. Phillips...... $120,000 -- $12,000 (4)
Chief Technology Officer
</TABLE>
----------
(1) Does not include a management service fee of $264,000 paid to Mr.
Stevenson's personal management company by X10 Ltd.
(2) Does not include amounts relating to shares of our common stock
purchased at $ per share by Mr. Stevenson on October 1, 1999, as
described in "Certain Transactions and Business Relationships--Sales of
Securities."
(3) Mr. Pfeiffer has served in the capacity of chief financial officer since
July 1999. His annual salary is $120,000.
(4) Represents the annual cost of an automobile leased by us for Mr. Phillips'
benefit.
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<PAGE>
Option Grants
The following table sets forth information concerning stock options granted
to our named executive officers during 1999.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------
Percent of
Total Potential Realizable Value at
Number of Options Fair Assumed Annual Rates of
Securities Granted to Value Per Stock Price Appreciation for
Underlying Employees Share for Option Term ($)(3)
Options in Fiscal Exercise Date of Expiration ------------------------------
Name Granted (#)(1) Year (%)(2) Price ($) Grant Date 0% 5% 10%
---- -------------- ----------- --------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
George E. Stevenson..... 41.4% 10/1/09
Alexander E. Peder...... 13.8 10/1/09
Wade A. Pfeiffer........ 24.1 10/1/09
James R.W. Phillips..... 13.8 10/1/09
</TABLE>
----------
(1) The options in the table were granted under our 1999 Stock Plan. We have
not granted any stock appreciation rights. All of these options are
nonstatutory stock options, granted at an exercise price below the fair
value per share on the date of grant. Each option vests and becomes
exercisable in 12.5% increments every six months from the date of grant.
(2) We granted options to purchase shares of our common stock to
employees and consultants in 1999.
(3) The potential realizable values are net of exercise price, but before
taxes associated with exercise. Amounts represent hypothetical gains
calculated by assuming that the aggregate fair value on the date of grant
appreciates at the indicated rates, compounded annually, for the entire
term of the option and that the option is exercised and sold on the last
day of its term at the appreciated price. The assumed 0%, 5% and 10% rates
of stock price appreciation are provided in accordance with rules of the
SEC and do not represent our estimate or projection of the future common
stock price. The assumed rate of 0% indicates the fair value on the date
of grant less the exercise price.
Options Exercised and Fiscal Year-End Option Values
The following table sets forth the number of shares underlying options held
by our named executive officers and the value of their unexercised in-the-money
options at fiscal year end, based on an assumed initial public offering price
of $ per share, less the exercise price payable for these shares. None of
our named executive officers exercised options in 1999.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year In-the-Money Options at
Value End (#) Fiscal Year End ($)
Shares Acquired Realized ------------------------- -------------------------
Name on Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- --------------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
George E. Stevenson..... 0 0 0/
Alexander E. Peder...... 0 0 0/
Wade A. Pfeiffer........ 0 0 0/
James R.W. Phillips..... 0 0 0/
</TABLE>
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<PAGE>
Employee Benefit Plans
2000 Equity Incentive Plan
Our 2000 Equity Incentive Plan was adopted by our board of directors in July
2000. It will become effective upon completion of this offering. The incentive
plan provides for the grant of incentive stock options to employees and
nonstatutory stock options, stock bonuses and restricted stock awards to
employees, directors and consultants.
A total of shares of common stock have been authorized for issuance
under the incentive plan. As of the date of this prospectus, no shares or
options have been issued under the incentive plan. Shares subject to options
that have terminated without having been exercised in full become available
again for issuance under the incentive plan. An annual increase in the share
reserve will be added on each January 1st beginning in 2002, equal to the
lowest of:
. shares;
. 5% of the outstanding shares of our common stock on that date; or
. a lesser amount determined by the board of directors.
Our board of directors or a committee thereof will administer the incentive
plan and will determine the terms of options granted, including the exercise
price, the number of shares subject to individual option awards and the vesting
period of options. The exercise price of incentive stock option grants cannot
be lower than 100% of the fair market value on the date of grant and, in the
case of incentive stock options granted to employees who are holders of more
than 10% of our voting power, not less than 110% of the fair market value.
Unless otherwise approved by the board, the exercise price of nonstatutory
stock options may not be less than 85% of the fair market value on the date of
grant. The aggregate fair market value determined at the time of grant of the
shares of common stock for which incentive stock options are exercisable for
the first time by an optionholder during any calendar year may not exceed
$100,000. The term of an incentive stock option or a nonstatutory stock option
cannot exceed 10 years, and the term of an incentive stock option granted to a
holder of more than 10% of our voting power cannot exceed five years. Options
may, but need not, permit early exercise of the option so long as the
optionholder enters into an agreement providing for a repurchase option in our
favor with respect to unvested shares. The terms of stock bonus awards and
restricted stock awards are determined by the board or a committee of the
board. Stock bonus awards and restricted stock awards may, but need not, be
subject to a share repurchase option in our favor in accordance with a vesting
schedule determined by the board. Options and other awards granted under our
incentive plan become exercisable at rates determined by the board.
The incentive plan provides that, if we are acquired in a merger or asset
purchase, or if we dissolve or liquidate or otherwise undergo a change in
control, the successor corporation will assume or substitute an equivalent
option for each outstanding option under the incentive plan. If the successor
corporation refuses to assume or substitute options or awards, however, the
options and awards will become fully vested and exercisable. We may grant
awards that provide for full vesting of an optionholder's options following a
merger or acquisition if the successor corporation terminates the
optionholder's status as an employee or consultant other than for cause within
12 months following such merger or acquisition. These provisions may have the
effect of delaying, deterring or preventing potential changes in our control.
The board of directors may amend the incentive plan at any time, subject in
some instances to stockholder approval, so long as the amendment does not
impair the rights of optionholders without their consent. The incentive plan
will terminate in July 2010, unless terminated earlier in accordance with its
terms.
2000 Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan was adopted by our board of directors
in July 2000. It will become effective upon completion of this offering. The
purchase plan provides our employees with an opportunity to purchase our common
stock through accumulated payroll deductions. A total of shares of common
stock has been authorized for issuance under our purchase plan, none of which
has been issued
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<PAGE>
prior to this offering. An annual increase in the share reserve under the
purchase plan will be added on each January 1, beginning in 2002, equal to the
lowest of:
. shares;
. 1% of the outstanding shares of our common stock on that date; or
. a lesser amount determined by the board of directors.
The purchase plan will be administered by our board of directors or by a
committee appointed by the board of directors. The purchase plan will permit
eligible employees to purchase common stock through payroll deductions of up to
15% of an employee's base compensation during the offering period. The price at
which common stock will be purchased under the purchase plan will be equal to
85% of the fair market value of our common stock on the first day of the
applicable offering period or the last day of the applicable purchase period,
whichever is lower. No employee may purchase more than $25,000 worth of stock,
determined at the fair market value of the shares at the time the right is
granted, in any calendar year. Generally, employees, other than holders of 5%
or more of our common stock, employed by us at least 20 hours per week and five
months per calendar year are eligible to participate in the purchase plan.
Employees eligible on a given enrollment date can participate during that
offering period, provided they remain employed by us for the duration of that
offering period.
Unless the board of directors or its committee determines otherwise, the
purchase plan will be implemented in a series of offering periods, each
approximately 12 months in duration, containing consecutive six-month purchase
periods. The first offering period will commence on the date on which the
registration statement of which this prospectus is a part is declared effective
by the SEC and will terminate on October 31, 2002. If we are acquired and the
acquiring corporation refuses to assume all existing rights, offering and
purchase periods then in progress will be shortened and all rights
automatically exercised.
Employees may end their participation in the offering at any time, and
participation automatically ends on termination of employment. The board of
directors may amend the purchase plan at any time, subject in some instances to
stockholder approval, as long as the amendment does not impair rights of plan
participants without their consent. The purchase plan will terminate in July
2010, unless terminated earlier in accordance with its terms.
1999 Stock Plan
Our 1999 Stock Plan was adopted by our board of directors in October 1999
and subsequently approved by our stockholders. The 1999 plan provides for the
grant of incentive stock options to employees and nonstatutory stock options
and stock purchase rights to our employees, directors and consultants. A total
of shares of common stock has been authorized for issuance under the 1999
plan. Upon completion of this offering, the 1999 plan will terminate and no
additional options will be granted under the 1999 plan. Shares subject to
outstanding options under the 1999 plan will continue to be governed by the
1999 plan. Shares reserved but not granted under the 1999 plan will revert to
the status of authorized, unissued and unreserved shares of our common stock.
As of June 30, 2000, nonstatutory stock options to purchase shares of
common stock were outstanding and shares were available for future grant.
In July 2000, we granted nonstatutory stock options to purchase an aggregate of
shares of common stock to our non-employee directors.
The 1999 plan permits the grant of options to employees, officers, directors
and consultants. Our board of directors or its compensation committee
administers the 1999 plan and has determined the terms of options granted,
including the exercise prices, the number of shares subject to individual
options and the vesting period of the options. Nonstatutory options granted to
employees, consultants or directors have exercise prices as determined by the
administrator. Options granted under our 1999 plan generally become exercisable
in 12.5% increments every six months from the date of grant. The 1999 plan
provides that, in the event we are acquired in a merger or asset purchase, the
successor corporation will assume or substitute an equivalent option for each
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<PAGE>
outstanding option under the 1999 plan. If the successor corporation refuses to
assume or substitute options, all outstanding options under the 1999 plan will
become fully vested and be exercisable for a period of 15 days from the date of
notice that the options or other stock purchase rights will not be assumed by
the successor corporation. The board of directors may amend, suspend or
terminate the 1999 plan at any time as long as the amendment or termination
does not impair the rights of optionholders without their consent.
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<PAGE>
CERTAIN TRANSACTIONS AND BUSINESS RELATIONSHIPS
Sales of Securities
Since our incorporation on July 1, 1999, we have issued and sold securities
in the following transactions to directors, executive officers and holders of
more than 5% of our common stock.
Purchases by George Stevenson and Hin Chew Chung. On October 1, 1999, we
issued 5,050,000 shares of our common stock to George Stevenson, our chief
executive officer and chairman of the board, at a price per share of $0.001,
for an aggregate purchase price of $5,050. On the same date, we issued
5,000,000 shares of our common stock to Hin Chew Chung, one of our directors,
at a price per share of $0.001, for an aggregate purchase price of $5,000. Both
purchases were made pursuant to stock subscription agreements, and each party
paid for his stock with a promissory note, bearing interest at the rate of 7.0%
per year. In May 2000, Mr. Stevenson paid approximately $5,256 to us, and in
May 2000, Mr. Chung paid approximately $5,204 to us, each in full repayment of
the amounts outstanding under their notes.
On October 1, 1999, Mr. Stevenson made gifts of or sold 2,050,000 of his
shares of our common stock to several individuals, including 300,000 shares to
Alexander Peder, our president and a director, 50,000 shares to Wade Pfeiffer,
our chief financial officer, and 300,000 shares to James Phillips, our chief
technology officer and a director. Messrs. Peder, Pfeiffer and Phillips
purchased their shares from Mr. Stevenson at a price per share of $0.40, the
fair market value as of that date based upon an independent valuation, and each
officer paid for his shares with a full recourse promissory note due October 1,
2002, bearing interest at the rate of 7.0% per year. The promissory notes are
secured by a pledge of each officer's purchased shares.
Purchase by X10 Ltd. On October 1, 1999, we issued 10,000,000 shares of our
common stock to X10 Ltd. These shares were issued in consideration of the
assignment to us of intellectual property, the execution and delivery of the
amended and restated bill of sale and assignment, amended and restated license
agreement, and amended and restated product supply agreement and in full
payment of a promissory note in the principal amount of $1,024,300 issued by us
to X-10 (USA) Inc. and assigned by X-10 (USA) to X10 Ltd., its parent company.
The consideration for the shares we issued was determined by our board of
directors to be fair value for the shares. Mr. Stevenson and Mr. Chung are both
directors and significant beneficial owners of shares of X10 Ltd.
Intercompany Relationships
We have entered into a number of agreements and transactions with companies
affiliated with our directors, officers and 5% stockholders. None of these
agreements or transactions was negotiated at arm's length. Currently, X10 Ltd.
and its affiliates are our sole providers of manufacturing and product
development services and market our products to OEMs. Similarly, X-10 (USA) is
our sole provider of order fulfillment services and sole seller of X10-branded
products to retailers and other resellers. None of these agreements requires us
to use X10 Ltd. or X-10 (USA) exclusively. In most cases, the only remedy
specified for breach or default by X10 Ltd. or X-10 (USA) under these
agreements is termination of the agreements. If any of these agreements were to
terminate, our ability to manufacture the products we offer, fulfill customer
orders, penetrate the OEM and reseller markets and efficiently perform some
aspects of our product development process would be impaired, product
production and delivery would be delayed, our net revenues would decrease and
our costs of operations would increase, any of which would adversely effect our
business and results of operations. For a discussion of risks related to the
intercompany agreements, see "Risk Factors--We depend on X10 Ltd., X-10 (USA)
and other affiliates of X10 Ltd. to provide substantially all of our
manufacturing and fulfillment services, to sell and distribute products to OEMs
and other resellers and to provide product development services" and "--Our
agreements with X10 Ltd. and X-10 (USA) were not the result of arm's length
negotiations and could subject us to less favorable terms than we otherwise
could have obtained from other third parties."
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Transactions with X10 Ltd. and its Affiliates
We have entered into the following agreements and transactions with X10
Ltd., one of our significant stockholders. X10 Ltd. is controlled by George
Stevenson, our chief executive officer, chairman of the board and a significant
stockholder, and Hin Chew Chung, one of our directors and a significant
stockholder.
Amended and Restated Bill of Sale and Assignment. We have entered into an
amended and restated bill of sale and assignment under which X10 Ltd. sold and
assigned to us technology and intellectual property relating to our broadband
wireless products as partial consideration for the issuance of
10,000,000 shares of our common stock to X10 Ltd.
Intellectual Property License. We have entered into an amended and restated
license agreement under which X10 Ltd. has granted to us a perpetual right to
use, design, develop, manufacture, market, sell and distribute all existing and
future phoneline, infrared and powerline products owned by X10 Ltd. The
agreement provides that these rights are exclusive to us, on a worldwide basis,
except for sales of non-branded products by X10 Ltd. to OEM customers and other
resellers. We also received the exclusive, perpetual right, on a worldwide
basis, to use the copyrights, trade names, trade dress, trademarks and service
marks owned by X10 Ltd. related to the "X10" mark, in the marketing, sale and
distribution of our products and the products subject to the license. The
license expires on December 31, 2019, unless renewed for subsequent five-year
terms at our option.
Product Supply Relationship. We have entered into an amended and restated
product supply agreement under which X10 Ltd. has agreed to manufacture, at our
direction, broadband wireless and phoneline, infrared and powerline products,
and to ship the products on consignment to a warehouse designated by us,
currently X-10 (USA). We are obligated to purchase the products on the earlier
of receipt of a purchase order from a customer or 120 days from delivery of the
products by X10 Ltd. to the shipper. Under the agreement, we pay X10 Ltd. a fee
for the products equal to X10 Ltd.'s costs to produce the products. This
agreement expires on December 31, 2019, unless renewed for subsequent five-year
terms at our option. In the event of a breach or default by X10 Ltd. under this
agreement, we have a contractual right to setoff any amounts owed by us against
any losses resulting from the breach or default. The total fees paid or payable
by us to X10 Ltd. for these services from inception through December 31, 1997,
were $56,000, for the fiscal year ended December 31, 1998, were $1.1 million,
for the fiscal year ended December 31, 1999, were $10.5 million, and for the
three months ended March 31, 2000, were $4.2 million.
Research and Development Relationship. We have entered into an amended and
restated research and development services agreement with X10 Ltd. under which
X10 Ltd. has agreed, at our direction, to conduct research and development for
the design and production of our wireless products; to submit estimates of
costs required to develop prototypes and manufacture the products; to determine
all necessary or appropriate production standards and licensing requirements;
and to provide specifications for and produce workable prototypes. Under the
agreement, we pay a service fee in connection with the development of each
product as established by X10 Ltd. This agreement expires on December 31, 2019,
unless renewed for subsequent five-year terms at our option. From our inception
through March 31, 2000, we did not pay X10 Ltd. any fees related to research
and development services.
Contract Manufacturing Agreement. We have entered into a contract
manufacturing agreement with X10 Ltd. under which X10 Ltd. will pay to us a
variable fee based on X10 Ltd.'s sales of our wireless products to OEMs and on
sales of powerline products to OEMs that we introduce to X10 Ltd. Under this
agreement, our fee is equal to the net sales price of the products sold by X10
Ltd., less costs and a manufacturing fee retained by X10 Ltd. This
manufacturing fee is equal to 15% of the net sales price of each product sold
until aggregate sales of that product reach $2,000,000 and 10% of the net sales
price of each product thereafter. X10 Ltd. is required to sell the products on
the same terms and conditions that we have previously negotiated. Through March
31, 2000, we have not received any fees from X10 Ltd. under this agreement. In
addition, we also have the right to sell products directly to OEM customers,
for which we pay a fee to X10 Ltd. equal to the actual costs of manufacturing
and shipping the products. This agreement expires April 1, 2005, and will
automatically be renewed for subsequent five-year terms unless terminated by
either party.
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Transactions with X-10 (USA) Inc.
The following agreements and transactions were entered into with X-10 (USA),
a wholly owned subsidiary of X10 Ltd.:
Amended and Restated Asset Purchase Agreement. We have entered into an
amended and restated asset purchase agreement with X-10 (USA) under which X-10
(USA) transferred to us all right and title to specified universal resource
locators, or URLs, domain names and web site names, as well as all customer,
vendor and supplier lists, and sales, product and promotional literature or
aids used in connection with those assets. In exchange, we issued a promissory
note to X-10 (USA) in the principal amount of $1,024,300, which was
subsequently assigned to X10 Ltd. The note was canceled in partial
consideration of our issuance to X10 Ltd. of 10,000,000 shares of our common
stock. We also assumed approximately $1,183,000 of specific liabilities of
X-10 (USA), related to the assets acquired, in consideration of which
X-10 (USA) has issued to us a promissory note in the principal amount of
$1,183,000, payable on or before September 30, 2001, and bearing interest at
the rate of 8.0% per year. The value of the transferred assets was determined
by our board of directors on the basis of an independent valuation obtained in
connection with the sale.
Fulfillment Services Relationship. We have entered into an amended and
restated fulfillment services agreement with X-10 (USA), under which X-10 (USA)
has agreed to warehouse and ship products manufactured for us by X10 Ltd. and
other manufacturers. Under the agreement, X-10 (USA) ships products to our
customers in accordance with fulfillment orders that we submit to X-10 (USA)
from time to time. We pay a fee in connection with these services equal to 10%
of our gross receipts for the products shipped, excluding sales and other
taxes. This agreement expires December 31, 2004, unless renewed for subsequent
five-year terms at our option. Fulfillment service fees paid or payable by us
to X-10 (USA) from inception through December 31, 1997, were $10,000, for the
fiscal year ended December 31, 1998, were $297,000, for the fiscal year ended
December 31, 1999, were $1.1 million, and for the three months ended March 31,
2000, were $740,000.
Amended and Restated Sublicense Agreement. We have entered into an amended
and restated sublicense agreement with X-10 (USA), under which we have granted
X-10 (USA) a non-exclusive sublicense to market, sell and distribute in the
western hemisphere powerline products licensed to us by X10 Ltd., as well as
any new products we select. The sublicense is limited to sales of X10-branded
products to resellers, other than OEMs. Under the agreement, X-10 (USA) pays us
a quarterly royalty of 15% of its net sales of licensed products, or a minimum
license fee, whichever is greater. The minimum license fee is $250,000 per
quarter during the first year of the term, $500,000 per quarter during the
second year of the term and $750,000 per quarter during the third year of the
term. Thereafter, there is no minimum license fee. The sublicense expires on
December 31, 2004, and will be automatically renewed for subsequent five-year
terms unless terminated by either party. License fees earned under this
agreement for the year ended December 31, 1999, were $261,000, and for the
three months ended March 31, 2000, were $268,000.
Transactions with Other Affiliates
Administrative Services Arrangement. Effective October 1, 1999, we entered
into an Administrative Services Agreement with Orca Monitoring Services, a
wholly owned subsidiary of X10 Ltd., under which Orca provides to us telephone
reception services, customer service and technical support after our normal
business hours, as well as general office administration and support. The
agreement expires October 1, 2000, and will be automatically renewed for
subsequent one-year terms unless terminated by mutual agreement of the parties.
We pay a service fee based upon head count, actual usage and an allocation of
floor space under Orca's lease. Administrative services fees paid or payable by
us to Orca from inception through December 31, 1997, were $91,000, for the
fiscal year ended December 31, 1998, were $327,000, for the fiscal year ended
December 31, 1999, were $990,000, and for the three months ended March 31,
2000, were $376,000.
56
<PAGE>
Conflicts of Interest Policy
Upon completion of this offering, our amended and restated bylaws will
provide that, prior to entering into any agreements or transactions with X10
Ltd. or any of its affiliates or subsidiaries that are required to be described
under Item 404 of Regulation S-K under the Securities Act, approval of a
majority of the directors serving on our audit committee must be obtained. In
addition, our agreements with X10 Ltd. and X-10 (USA) provide that, upon
completion of this offering, the approval of a majority of the directors
serving on our audit committee must be obtained to amend the agreements. Our
conflict of interest policy may not address all conflicts that may arise, and,
in any event, it is possible that conflicts may be resolved in a manner adverse
to us. For a description of risks related conflicts of interest, see "Risk
Factors--Some of the key management personnel on whom we depend are also
management personnel or employees of X10 Ltd. or its affiliates, which could
create conflicts of interest between X10 Ltd. or its affiliates and us."
Limitation of Liability and Indemnification Matters
Our amended and restated 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 breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies, such as injunctive relief or rescission.
Our amended and restated 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 amended and restated bylaws covers at least
negligence and gross negligence on the part of indemnified parties. Our amended
and restated 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 that capacity, regardless of whether our amended and restated
bylaws would permit indemnification.
Upon completion of this offering, we intend to enter into agreements to
indemnify our directors and certain officers, in addition to indemnification
provided for in our amended and restated bylaws. These agreements, among other
things, will indemnify our directors and certain officers for certain expenses,
including attorneys' fees, judgments, fines and settlement amounts incurred by
any of these persons in any action or proceeding, including any action by us
arising out of that person's services as our director or officer or that
person's services provided to any other company or enterprise at our request.
We believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and officers. We also intend to maintain
liability insurance for our officers and directors.
57
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides information regarding the beneficial ownership
of our outstanding common stock as of July 31, 2000, and as adjusted to reflect
the sale of common stock offered hereby, as to:
. each person or group known to us to be the beneficial owner of more than
5% of our common stock;
. each of our directors;
. each named executive officer; and
. all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to securities.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
held by that person that are exercisable within 60 days of the date of this
table are deemed outstanding. These shares, however, are not deemed outstanding
for the purpose of computing the percentage ownership of any other person. All
percentages in this table are based on a total of shares of common stock
outstanding on July 31, 2000, and shares of common stock outstanding after
completion of this offering, adjusted in accordance with the rules promulgated
by the SEC. Except as indicated by the footnotes below, we believe, based on
information furnished to us and subject to community property laws where
applicable, that the persons and entities named in the table below have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them. Unless otherwise indicated, the address for each of
the named stockholders is c/o X10 Wireless Technology, Inc., 15200 52nd Avenue
South, Seattle, Washington 98188-2335.
<TABLE>
<CAPTION>
Percentage of
Shares
Beneficially
Number of Owned
Shares -----------------
Beneficially Before After
Name Owned Offering Offering
---- ------------ -------- --------
<S> <C> <C> <C>
George E. Stevenson(1)(2)................... 65.1 % %
Alexander E. Peder(2)....................... 1.7
Wade A. Pfeiffer(2)......................... * *
James R.W. Phillips(2)...................... 1.7
C. Gregory Amadon........................... -- * *
William T. Baxter........................... -- * *
Hin Chew Chung(1)........................... 64.8
X10 Ltd..................................... 49.9
Room 1103-4 Hilder Center
2 Sung Ping Street
Hunghom, Kowloon, Hong Kong
All directors and executive officers as a
group (seven persons)(3)................... 83.3
</TABLE>
----------
* Less than one percent.
(1) Includes shares held of record by X10 Ltd. with respect to which Mr.
Stevenson, as president and a director of X10 Ltd., and Mr. Chung, as
chairman of X10 Ltd., have or share voting and investment power.
(2) Includes shares of common stock subject to outstanding options
exercisable within 60 days of the date of this table as follows:
shares for Mr. Stevenson, shares for Mr. Peder, shares for Mr.
Pfeiffer, and shares for Mr. Phillips.
(3) Includes the information reflected in the notes above, as applicable.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of shares of common stock, $0.001 par value, and shares of preferred
stock, $0.001 par value. Prior to completion of this offering, we will file
with the Delaware Secretary of State an amended and restated certificate of
incorporation, which will become effective upon filing. The following
description is subject to and qualified in its entirety by our amended and
restated certificate of incorporation and amended and restated bylaws, which
are included as exhibits to the registration statement of which this prospectus
forms a part, and by applicable provisions of Delaware law.
Common Stock
As of June 30, 2000, there were shares of common stock outstanding that
were held of record by 35 stockholders. After giving effect to the sale of
common stock in this offering, there will be shares of common stock
outstanding.
The holders of common stock are entitled to one vote per share on all
matters to be submitted to a vote of the stockholders. Subject to preferences
that may be applicable to any outstanding preferred stock, the holders of
common stock are entitled to receive ratably those dividends, if any, that may
be declared from time to time by our board of directors out of funds legally
available for dividends. In the event of the liquidation, dissolution or
winding up of our company, the holders of our 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. Holders
of the common stock do not have cumulative voting, preemptive, conversion or
other subscription rights. No redemption or sinking fund provisions apply to
the common stock. All outstanding shares of common stock are, and the shares of
common stock to be issued upon completion of this offering will be, fully paid
and nonassessable.
Preferred Stock
Pursuant to our amended and restated certificate of incorporation, our board
of directors has the authority, without further action by the stockholders, to
issue preferred stock in one or more series. With respect to each series, the
board has the authority to fix the number of shares, designations, powers,
preferences, privileges, and relative participating, optional or special rights
and the qualifications, limitations or restrictions of the series, including
dividend rights, conversion rights, voting rights, terms of redemption and
liquidation preferences, any or all of which may be greater than the rights of
the common stock. Our board of directors, without stockholder approval, can
issue preferred stock with voting, conversion or other rights that could
adversely affect the voting power and other rights of the holders of common
stock. Preferred stock could thus be issued quickly with terms calculated to
delay, deter or prevent a change in our control or make removal of management
more difficult. Additionally, the issuance of preferred stock may have the
effect of decreasing the market price of our common stock and may adversely
affect the voting and other rights of the holders of common stock. There are no
shares of preferred stock outstanding, and we have no plans to issue any
preferred stock.
Antitakeover Effects of Our Charter Documents, Delaware and Washington Law
Provisions of our amended and restated certificate of incorporation and
amended and restated bylaws may have the effect of delaying, deterring or
preventing a tender offer or other change in control that the stockholders
might consider to be in their best interests, including those changes in
control that might result in a premium over the market price for the shares
held by our stockholders.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Our amended and restated bylaws provide that stockholders seeking
to present proposals before a meeting of stockholders or to nominate candidates
for election as directors at a meeting of stockholders must provide timely
notice in writing. Our amended and restated bylaws also specify requirements as
to the form and content of a
59
<PAGE>
stockholder's notice. These provisions may delay or preclude stockholders from
bringing matters before a meeting of stockholders or from making nominations
for directors at a meeting of stockholders, which could delay or deter takeover
attempts or changes in management.
Classified Board of Directors. Following this offering, our board of
directors will be divided into three classes. The classification of the board
of directors will have the effect of requiring at least two annual stockholder
meetings, instead of one, to replace a majority of the directors, which could
have the effect of delaying or preventing a change in control or management of
our company.
Director Removal and Vacancies. Subject to the rights of the holders of any
outstanding series of preferred stock, our amended and restated certificate of
incorporation provides that all vacancies, including newly created
directorships, may, except as otherwise required by law, be filled only by the
affirmative vote of a majority of directors then in office, even though less
than a quorum. In addition, our amended and restated certificate of
incorporation provides that the board of directors may fix the number of
directors by resolution. The amended and restated certificate also provides
that directors may not be removed without cause.
Stockholder Action By Written Consent; Special Meetings of Stockholders. Our
amended and restated certificate of incorporation provides that all stockholder
action must be effected at a duly called meeting of stockholders and not by
written consent. Further, our amended and restated bylaws provide that special
meetings of stockholders may be called only by the chairman of the board, chief
executive officer or by a majority of the board of directors. These provisions
may lengthen the time required to take stockholder action and, as a result, may
delay, deter or prevent changes in our control or management.
No Cumulative Voting. Our amended and restated certificate of incorporation
does not include a provision for cumulative voting for directors. The absence
of cumulative voting may make it difficult for a minority stockholder to elect
any directors to our board.
Business Combination Statutes. We are subject to the provisions of Section
203 of the Delaware General Corporation Law. Subject to specified exceptions,
Section 203 prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years from the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained this status with the
approval of the board of directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder. Subject to specified exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the corporation's voting stock. This
statute could have the effect of preventing or delaying the completion of
mergers, takeovers or other changes in control and, accordingly, may discourage
attempts to acquire us.
In addition, the laws of the state of Washington, where our principal
executive offices are located, impose restrictions on transactions between
foreign corporations and significant stockholders. Chapter 23B.19 of the
Washington Business Corporation Act generally prohibits a target corporation
from engaging in significant business transactions with a person or group of
persons that beneficially owns 10% or more of the voting securities of the
target corporation, referred to as an "acquiring person," for a period of five
years after the acquiring person's acquisition of securities, unless a majority
of the members of the target corporation's board of directors approves the
transaction or acquisition of shares before its completion. Prohibited
transactions include:
. a merger, share exchange or consolidation with, disposition of assets
to, or issuance or redemption of stock to or from, the acquiring person;
. termination of 5% or more of the employees of the target corporation as
a result of the acquiring person's acquisition of 10% or more of the
shares; and
. allowing the acquiring person to receive any disproportionate benefit as
a stockholder.
60
<PAGE>
After the five-year period, a significant business transaction may take
place so long as it complies with the fair price provisions of the statute or
is approved at an annual or special meeting of stockholders. A target
corporation includes a foreign corporation if the corporation's principal
executive office is located in Washington.
A corporation may not opt out of this statute. If we continue to meet the
definition of a target corporation, Chapter 23B.19 of the Washington Business
Corporation Act may have the effect of delaying, deterring or preventing a
change of control of our company.
Upon completion of this offering, X10 Ltd. and certain of its stockholders
and employees will beneficially own approximately % of the outstanding shares
of our common stock, including % beneficially owned by George Stevenson, our
chief executive officer and chairman of the board and % beneficially owned by
Hin Chew Chung, one of our directors. As a result, X10 Ltd. and stockholders
and employees of X10 Ltd. will have the ability to control all matters
requiring the vote of our stockholders, including the election of our directors
and our corporate actions. This concentration of ownership and other rights
could result in conflicts of interest between these stockholders and us, impede
our business development through loss of corporate opportunities or otherwise,
or delay or deter others from initiating a potential merger, takeover or other
change in control, even if these events would benefit our stockholders and us.
This concentration of ownership may also depress the market price of our common
stock. For a discussion of risks related to concentration of ownership, see
"Risk Factors--The rights of our stockholders could be adversely affected
because we are controlled by X10 Ltd. and its stockholders."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C., Seattle, Washington.
Nasdaq National Market Listing
We have applied to list our common stock on the Nasdaq National Market of
The Nasdaq Stock Market, Inc. under the trading symbol "XTEN."
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. No predictions can be made as to the effect, if any, that market sales
of shares of our common stock from time to time, or the availability of shares
for future sale, may have on the market price for our common stock. Sales of
substantial amounts of common stock, or the perception that such sales could
occur, could adversely affect prevailing market prices for our common stock and
could impair our future ability to obtain capital through an offering of equity
securities.
Based on shares outstanding at July 31, 2000, upon completion of this
offering, we will have shares of common stock outstanding, assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options. Of these outstanding shares, the shares sold in this
offering will be freely tradable without restrictions or further registration
under the Securities Act, unless the shares are purchased by our affiliates as
that term is defined in Rule 144 under the Securities Act.
The remaining shares of common stock outstanding after the offering are
restricted securities as defined in Rule 144. Restricted securities may be sold
in the U.S. public market only if registered or if they qualify for an
exemption from registration under Rule 144, 144(k) or 701 promulgated under the
Securities Act, which are summarized below.
<TABLE>
<CAPTION>
Eligibility of Restricted
Shares for Sale
Days After the Effective Date in U.S. Public Market Comment
----------------------------- ------------------------- ----------------------------
<S> <C> <C>
On effectiveness........ 0 Shares not locked-up and
saleable under Rule 144(k)
180 days................ Lock-up released; shares
saleable under Rule 144,
144(k) and 701
At various times after Shares saleable under
180 days............... Rules 144, 144(k) and 701
</TABLE>
Additionally, of the shares issuable upon exercise of options to
purchase our common stock outstanding as of July 31, 2000, approximately
shares will be vested and eligible for sale 180 days after the date of this
prospectus.
Rule 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus, a person who has beneficially owned
restricted securities for at least one year, including the holding period of
any prior owner other than an affiliate of ours, is entitled to sell a number
of shares within any three-month period that does not exceed the greater of one
percent of the number of shares of our common stock then outstanding, which
will equal approximately shares immediately after the offering, and the
average weekly trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding the filing of a notice on Form 144
with respect to the sale. Sales under Rule 144 are also subject to manner-of-
sale provisions, notice requirements and the availability of current public
information about us. Rule 144 also provides that affiliates that sell shares
of common stock that are not restricted shares must nonetheless comply with the
same restrictions applicable to restricted shares, with the exception of the
holding period requirement.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, may
sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701. Rule 701 provides that the shares of common stock acquired upon
the exercise of currently outstanding options or pursuant to other rights
granted under our stock plans may be resold, to the extent not
62
<PAGE>
subject to lock-up agreements, by persons, other than affiliates, beginning 90
days after the date of this prospectus, subject only to the manner-of-sale
provisions of Rule 144, and by affiliates under Rule 144, without compliance
with its one-year minimum holding period, subject to the manner of sale,
current public information and filing limitations and requirements of Rule 144.
As of July 31, 2000, options to purchase a total of shares of common stock
were outstanding, of which options to purchase shares are exercisable. Of
the total shares issuable pursuant to these options, all are subject to
contractual lock-up agreements with the representatives of the underwriters.
We intend to file one or more registration statements on Form S-8 under the
Securities Act following the offering to register the shares of common stock
that are issuable pursuant to our 1999 plan, incentive plan and purchase plan.
These registration statements are expected to become effective upon filing.
Shares covered by these registration statements will then be eligible for sale
in the public markets, subject to any applicable lock-up agreements and to Rule
144 limitations applicable to affiliates.
Regulation S. In general, Regulation S promulgated under the Securities Act
allows for the resale of otherwise restricted securities outside the U.S.
without registration. As of July 31, 2000, shares of our common stock may
be sold outside the U.S. by stockholders who are not our affiliates in an
"offshore transaction," provided that neither the seller nor any person acting
on the seller's behalf, engages in "directed selling efforts" in the U.S. Under
Regulation S, "directed selling efforts" means any activity undertaken for the
purpose of, or that could reasonably be expected to have the effect of,
conditioning the market in the U.S. for any of the securities being offered. A
number of additional restrictions apply to our stockholders who are our
affiliates, other than by virtue of their status as one of our directors or
officers.
Lock-up Agreements
Our executive officers, directors and all of our stockholders have agreed
not to, among other things, sell or otherwise dispose or transfer the economic
benefit of, directly or indirectly, any shares of common stock, or any security
convertible into or exchangeable or exercisable for common stock, without the
prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days from
the date of this prospectus. However, the lock-up agreement permits gifts to
immediate family members or trusts and other transfers for estate planning
purposes as well as transfers of shares of our common stock purchased on the
open market. Bear, Stearns & Co. Inc. may, in its sole discretion, at any time
and without notice, release for sale in the public market all or any portion of
the shares subject to the lock-up agreements.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement dated
, 2000, between us and the underwriters named below, who are represented
by Bear, Stearns & Co. Inc., Prudential Securities Incorporated, and C.E.
Unterberg, Towbin, each of the underwriters named below has severally agreed to
purchase from us the following respective number of shares of common stock set
forth opposite its name below at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus.
<TABLE>
<CAPTION>
Number
of
Underwriter Shares
----------- ------
<S> <C>
Bear, Stearns & Co. Inc. .............................................
Prudential Securities Incorporated....................................
C.E. Unterberg, Towbin................................................
----
Total...............................................................
====
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of common stock, other than shares of common stock
covered by the over-allotment option described below, if they purchase any of
the shares. Those obligations are subject, however, to various conditions,
including the approval of legal matters by their counsel.
We have agreed to indemnify the underwriters against various liabilities,
including liabilities under the Securities Act, and, where such indemnification
is unavailable, to contribute to payments that the underwriters may be required
to make in respect of such liabilities.
The underwriters propose initially to offer the shares of common stock
directly to the public at the public offering price set forth on the cover page
of this prospectus and to selected dealers at such price less a concession not
to exceed $ per share. The underwriters may allow, and such selected
dealers may re-allow a concession not to exceed $ per share on sales to
other dealers and that after the initial offering of the shares to the public,
the public offering price, concessions and other selling terms may be changed.
We have granted to the underwriters an option to purchase in the aggregate
up to additional shares to be sold in this offering at the public offering
price less the underwriting discount set forth on the cover page of this
prospectus. The underwriters may exercise this option solely to cover
overallotments, if any, made in connection with this offering. The option may
be exercised in whole or in part at any time within 30 days after the date of
this prospectus. To the extent the option is exercised, the underwriters will
be severally committed, subject to several conditions, including the approval
of legal matters by their counsel, to purchase the additional shares of common
stock in proportion to their respective purchase commitments as indicated in
the preceding table.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The following table shows the underwriting discounts and commissions to
be paid to the underwriters by us. Such amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares.
<TABLE>
<CAPTION>
Per Share Total
------------------- -------------------
Without With Without With
Over- Over- Over- Over-
Allotment Allotment Allotment Allotment
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions
payable by us........................ $ $ $ $
</TABLE>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $ . The offering of the
shares is made for delivery, when, as and if accepted by the underwriters and
subject to prior sale and to withdrawal, cancellation or modification of the
offering without notice. The underwriters reserve the right to reject an order
for the purchase of shares in whole or in part.
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<PAGE>
At our request, the underwriters have reserved for sale at the initial
public offering price up to 5% of the number of shares of common stock to be
sold in this offering to persons associated with us, such as associates of some
of our employees and selected employees of companies with which we are
developing or have commercial relationships. The number of shares available for
sale to the general public will be reduced to the extent any reserved shares
are purchased. Any reserved shares not so purchased will be offered by the
underwriters on the same basis as the other shares offered hereby and will not
be subject to resale restrictions.
Our executive officers, directors and all of our stockholders have agreed
not to, among other things, sell or otherwise dispose or transfer the economic
benefit of, directly or indirectly, any shares of common stock, or any security
convertible into or exchangeable or exercisable for common stock, without the
prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days from
the date of this prospectus. However, the lock-up agreement permits gifts to
immediate family members or trusts and other transfers for estate planning
purposes as well as transfers of shares of our common stock purchased on the
open market. Bear, Stearns & Co. Inc. may, in its sole discretion, at any time
and without notice, release for sale in the public market all or any portion of
the shares subject to the lock-up agreements.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price will be determined
through negotiations among us and the representatives of the underwriters. The
primary factors considered in determining the public offering price will be:
. our financial and operating history and condition;
. market valuations of other companies engaged in activities similar to
ours;
. our prospects and prospects for the industry in which we do business in
general;
. our management;
. prevailing equity market conditions; and
. the demand for securities considered comparable to ours.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover 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 us in the offering. The underwriters
may close out any covered short position by either exercising their option to
purchase additional shares or purchasing shares in the open market. Naked short
sales are any sales in excess of the underwriters' option to purchase
additional shares from us. The underwriters must close out any naked short
position by purchasing shares on the open market. 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.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of our
stock and, together with the imposition of the penalty bid, may stabilize,
maintain or otherwise affect the market price of the common stock. As a result,
the price of the common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
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<PAGE>
A prospectus in electronic format may be made available on the web sites
maintained by one or more underwriters. The underwriters may agree to allocate
a number of shares to underwriters for sale to their online brokerage account
holders. Internet distributions will be allocated by the lead managers to
underwriters that may make Internet distributions on the same basis as other
allocations.
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<PAGE>
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for us by Cooley Godward llp, Kirkland, Washington. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Gray Cary Ware & Freidenrich llp, Seattle, Washington.
EXPERTS
The financial statements included in this prospectus have been audited by
Deloitte & Touche llp, independent auditors, as stated in their report
appearing herein and elsewhere in the registration statement, and are included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act that registers the shares of our common stock to be sold in this
offering. The registration statement, including the attached exhibits and
schedules, contains additional relevant information about us and our capital
stock. For further information about us and our common stock, reference is made
to the registration statement and the exhibits and schedules filed with the
registration statement. With respect to statements contained in this prospectus
regarding the contents of any agreement or any other document, in each
instance, reference is made to the copy of the agreement or other document
filed as an exhibit to the registration statement, each statement being
qualified in all respects by such reference. The rules and regulations of the
SEC allow us to omit certain information included in the registration statement
from this document.
For further information with respect to us and our common stock, reference
is made to the registration statement and the exhibits and schedules filed with
the registration statement.
In addition, upon completion of this offering, we will file reports, proxy
statements and other information with the SEC under the Securities Exchange Act
of 1934. You may read and copy this information at the following public
reference rooms of the SEC:
<TABLE>
<S> <C> <C>
Washington, D.C. New York, New York Chicago, Illinois
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, NY 10048 Chicago, IL 60661
</TABLE>
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates. You may obtain information on the operation of
the public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an Internet web site that contains reports, proxy statements and
other information about issuers, like us, who file electronically with the SEC.
The address of that site is http://www.sec.gov.
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................... F-2
Statements of Operations................................................... F-3
Balance Sheets............................................................. F-4
Statements of Changes in Stockholders' Equity (Owner's Net Deficit)........ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
X10 Wireless Technology, Inc.
Seattle, Washington
We have audited the accompanying balance sheets of X10 Wireless Technology,
Inc. (the "Company") as of December 31, 1998 and 1999 and the related
statements of operations, changes in stockholders' equity (owner's net deficit)
and cash flows for the period from July 1, 1997 (inception) to December 31,
1997 and for the years ended December 31, 1998 and 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of X10 Wireless Technology, Inc. at December
31, 1998 and 1999, and the results of its operations and its cash flows for the
period from July 1, 1997 (inception) to December 31, 1997 and for the years
ended December 31, 1998 and 1999, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared from the records
maintained by X10 Ltd. and X-10 (USA) Inc. and may not necessarily be
indicative of the conditions that would have existed or the results of
operations if X10 Wireless Technology, Inc. had been operated as an
unaffiliated entity. Portions of certain expenses represent allocations made
from and applicable to X10 Ltd. and X-10 (USA) Inc. as a whole.
/s/ Deloitte & Touche LLP
Seattle, Washington
July 28, 2000
F-2
<PAGE>
X10 WIRELESS TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the
Period
July 1, 1997
(inception) Year Ended Three Months
to December 31, Ended March 31,
December 31, ---------------- ----------------
1997 1998 1999 1999 2000
------------ ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues.................. $ 134 $ 2,997 $15,893 $ 2,745 $ 6,207
Cost of revenues.............. 56 1,143 8,980 1,244 3,926
----- ------- ------- ------- -------
Gross profit.................. 78 1,854 6,913 1,501 2,281
----- ------- ------- ------- -------
Operating expenses:
Research and development,
excluding $0, $0, $10, $0
and $10, respectively, of
non-cash stock-based
compensation............... 1 71 712 87 208
Sales and marketing,
excluding $0, $0, $10, $0
and $10, respectively, of
non-cash stock-based
compensation............... 43 2,583 8,844 1,903 4,270
General and administrative,
excluding $0, $0, $56, $0
and $56, respectively, of
non-cash stock-based
compensation............... 305 1,031 2,879 536 1,073
Non-cash stock-based
compensation............... -- -- 76 -- 75
----- ------- ------- ------- -------
Total operating expenses.. 349 3,685 12,511 2,526 5,626
----- ------- ------- ------- -------
Loss from operations.......... (271) (1,831) (5,598) (1,025) (3,345)
Interest income............... -- -- 2 -- 11
----- ------- ------- ------- -------
Net loss.................. $(271) $(1,831) $(5,596) $(1,025) $(3,334)
===== ======= ======= ======= =======
Basic and diluted net loss per
common share................. $ (0.17)
=======
Weighted average shares used
to compute basic and diluted
net loss per common share.... 20,050
=======
Pro forma basic and diluted
net loss per common share
(unaudited).................. $ (0.28)
=======
Weighted average shares used
to compute pro forma basic
and diluted net loss per
common share (unaudited)..... 20,050
=======
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
X10 WIRELESS TECHNOLOGY, INC.
BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
---------------- March 31,
1998 1999 2000
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ -- $ 1,878 $ 1,187
Inventory...................................... 112 109 117
Prepaid expenses and other current assets ..... -- 24 54
Due from related parties....................... 715 -- --
------- ------- -------
Total current assets......................... 827 2,011 1,358
Property and equipment, net...................... -- 59 81
------- ------- -------
Total assets................................. $ 827 $ 2,070 $ 1,439
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
(OWNER'S NET DEFICIT)
Current liabilities:
Accounts payable and accrued expenses.......... $ 13 $ 177 $ 960
Accrued advertising expense.................... 1,060 1,865 3,358
Deferred revenue............................... 334 144 99
Sales tax payable.............................. 69 312 407
Allowance for returns.......................... 83 297 305
Accrued payroll and other employee benefits.... 27 54 89
Due to related parties......................... -- 1,174 1,433
------- ------- -------
Total current liabilities.................... 1,586 4,023 6,651
------- ------- -------
Contingencies (Note 5)
Stockholders' equity (owner's net deficit):
Net contribution from X10 Ltd. ................ 1,343 -- --
Accumulated deficit............................ (2,102)
Preferred stock, par value $0.001 per share;
30,000 shares authorized, none outstanding.... -- -- --
Common stock, par value $0.001 per share;
100,000 shares authorized; 20,050 shares
issued and outstanding (March 31, 2000 and
December 31, 1999)............................ -- 20 20
Unearned compensation.......................... -- (504) (429)
Additional paid-in capital..................... -- 671 671
Retained earnings (deficit).................... -- (2,140) (5,474)
------- ------- -------
Total stockholders' equity (owner's net
deficit).................................... (759) (1,953) (5,212)
------- ------- -------
Total liabilities and stockholders' equity
(owner's net deficit)....................... $ 827 $ 2,070 $ 1,439
======= ======= =======
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
X10 WIRELESS TECHNOLOGY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (OWNER'S NET DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Net
Contribution Additional Retained
From Accumulated Common Unearned Paid-in Earnings
Total X10 Ltd. Deficit Stock Compensation Capital (Deficit)
------- ------------ ----------- ------ ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss............................ (271) -- (271) -- -- -- --
Capital contributions from
X10 Ltd............................ 345 345 -- -- -- -- --
------- ------- ------- ---- ----- ---- -------
Balance, December 31, 1997........... 74 345 (271) -- -- -- --
Net loss............................ (1,831) -- (1,831) -- -- -- --
Capital contributions from
X10 Ltd............................ 998 998 -- -- -- -- --
------- ------- ------- ---- ----- ---- -------
Balance, December 31, 1998........... (759) 1,343 (2,102) -- -- -- --
Net loss for the nine months ended
September 30, 1999................. (3,456) -- (3,456) -- -- -- --
Capital contributions from
X10 Ltd............................ 3,073 3,073 -- -- -- -- --
------- ------- ------- ---- ----- ---- -------
Balance, September 30, 1999.......... (1,142) 4,416 (5,558) -- -- -- --
Conversion of X10 Ltd.'s net
investment and additional
contributed net liabilities to
common stock....................... 1,243 (4,416) 5,558 10 -- 91 --
Issuance of common stock, at par.... 10 -- -- 10 -- -- --
Unearned compensation relating to
issuance of stock options.......... -- -- -- -- (580) 580 --
Amortization of unearned
compensation....................... 76 -- -- -- 76 -- --
Net loss for the three months ended
December 31, 1999.................. (2,140) -- -- -- -- -- (2,140)
------- ------- ------- ---- ----- ---- -------
Balance, December 31, 1999........... (1,953) -- -- 20 (504) 671 (2,140)
Amortization of unearned
compensation (unaudited)........... 75 -- -- -- 75 -- --
Net loss (unaudited)................ (3,334) -- -- -- -- -- (3,334)
------- ------- ------- ---- ----- ---- -------
Balance, March 31, 2000 (unaudited).. $(5,212) $ -- $ -- $ 20 $(429) $671 $(5,474)
======= ======= ======= ==== ===== ==== =======
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
X10 WIRELESS TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Period
July 1, 1997 Year Ended Three Months
(inception) to December 31, Ended March 31,
December 31, ---------------- ----------------
1997 1998 1999 1999 2000
-------------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss.................. $(271) $(1,831) $(5,596) $(1,025) $(3,334)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation............. -- -- 5 -- 7
Amortization of unearned
compensation............ -- -- 76 -- 75
Changes in operating
accounts:
Inventory............... (1) (111) 3 64 (8)
Amounts due to/from
related parties........ (99) (615) 3,073 156 259
Other assets............ -- -- (14) -- (30)
Accounts payable and
accrued expenses....... 23 1,228 1,453 532 2,414
Deferred revenue........ 3 331 (191) (232) (45)
----- ------- ------- ------- -------
Total cash used in
operating activities.. (345) (998) (1,191) (505) (662)
----- ------- ------- ------- -------
Investing activities:
Purchases of furniture and
equipment................ -- -- (4) -- (29)
----- ------- ------- ------- -------
Total cash used in
investing activities.. -- -- (4) -- (29)
----- ------- ------- ------- -------
Financing activities:
Net cash contributions
from X10 Ltd. ........... 345 998 3,073 505 --
----- ------- ------- ------- -------
Total cash provided by
financing activities.. 345 998 3,073 505 --
----- ------- ------- ------- -------
Net increase (decrease) in
cash and cash
equivalents............... -- -- 1,878 -- (691)
Cash and cash equivalents,
beginning................. -- -- -- -- 1,878
----- ------- ------- ------- -------
Cash and cash equivalents,
ending.................... $ -- $ -- $ 1,878 $ -- $ 1,187
===== ======= ======= ======= =======
Supplemental disclosure of
non-cash investing and
financing activities:
Issuance of common stock to
X10 Ltd. for certain
agreements and
technology................ $ 1,024
Note receivable for X-10
(USA) liabilities
assumed................... $ 1,183
Issuance of common stock to
individuals for notes
which were paid in May
2000...................... $ 10
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
X10 WIRELESS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. Description of Business and Summary of Significant Accounting Policies
Description of business: X10 Wireless Technology, Inc. (the "Company")
designs and markets an integrated suite of affordable hardware and software
products that provide networking solutions for homes and small businesses using
a variety of networking technologies, including broadband wireless, powerline,
phoneline and infrared. These products allow users to access and control home
networks directly from a personal computer or through remote controls, wall-
mounted panels, telephones or the Internet. The Company designs and develops
broadband wireless products that enable users to receive and deliver video and
audio throughout the home or small business and to distribute broadband
Internet content from a personal computer to televisions, stereos and other
electronic entertainment devices within a home or small office network. In
addition, the Company offers networking solutions based on other technologies
that enable consumers to control security, lighting, heating and air
conditioning systems. The Company has historically sold these broadband
wireless and control products to retail customers and independent contractors
primarily over the Internet.
In July 1997, the Company began operating as a division of X-10 (USA) Inc.
("X-10 (USA)"), a wholly owned subsidiary of X10 Ltd., a Hong Kong-based
company which, together with its affiliates, designs and manufactures home
controls, entertainment and security technology products. On October 1, 1999,
the Company began operating as a separate entity, with the objective of
building an independent U.S. company focused on the design, development and
sale of broadband wireless products. The Company has entered into several
agreements with X10 Ltd. and X-10 (USA) relating to the transfer of technology
and other intellectual property rights and net assets, the manufacture and
distribution by them and their affiliates of products incorporating the
technology and intellectual property rights, and the provision of research and
development services to the Company. See Note 2 for a summary of agreements.
Basis of presentation: The financial statements present the results of
operations, balance sheets, changes in stockholders' equity (owner's net
deficit), and cash flows applicable to the operations of the Company. The
financial statements from July 1, 1997 (inception) to September 30, 1999, are
derived from the historic books and records of X10 Ltd. and X-10 (USA). The
Company did not maintain corporate treasury, legal, tax and other similar
corporate support functions. For purposes of preparing the accompanying
financial statements, certain X10 Ltd. and X-10 (USA) corporate costs were
allocated to the Company using the allocation methods described in Note 3.
Estimates and assumptions: Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, and expenses. Actual results could differ
from those estimates.
Cash and cash equivalents: The Company considers all highly liquid
instruments purchased with original maturities of 90 days or less to be cash
equivalents.
Inventory: Inventory is stated at the lower of cost or market. Inventory
consists of products ordered but not yet shipped to the customer, which
commonly consists of several days. The Company does not stock its own inventory
or maintain warehouse locations. Under terms of the Amended and Restated
Product Supply Agreement discussed in Note 2, the Company provides to X10 Ltd.
a product delivery request specifying product, quantity and delivery date to a
designated warehouse. The Company purchases product, and takes title, at the
earlier of submission of a purchase order to X10 Ltd. or 120 days after
delivery of product by X10 Ltd. to the designated warehouse.
Property and equipment: Property and equipment consists primarily of
computer equipment, which is carried at historical cost, net of accumulated
depreciation. Depreciation expense is recorded using the straight-line method
over the estimated useful lives of the assets, ranging from two to three years.
Accumulated
F-7
<PAGE>
X10 WIRELESS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
depreciation on these assets was $5,000 and $12,000 (unaudited) at December 31,
1999 and March 31, 2000, respectively. No fixed assets were owned prior to
October 1999.
Deferred revenue: Deferred revenue represents product ordered and paid for
by the customer which has not yet been shipped.
Revenue recognition: Net revenues consist of product sales, net of
allowances for product returns and discounts, and royalty income. Revenues from
product sales transactions are recognized upon shipment to the customer. The
Company establishes product pricing, obtains title to the product upon
placement of an order, retains credit and collection risk and is the merchant
of record on credit card transactions. Accordingly, the Company records as
revenue the amount billed to a customer, net of returns, and records as cost of
revenues amounts incurred under the Amended and Restated Product Supply
Agreement described in Note 2.
Vouchers entitling the customer to a reduction in sales price on future
purchases are recognized as a reduction in revenue when exercised by the
customer.
Some of the Company's products include software that is used solely in
connection with operation of the products. The software is not sold or marketed
separately. Once installed, the software is not updated for new versions that
may be developed subsequently. The Company does not provide maintenance or
postcontract customer support. As such, the provisions of American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2,
Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With
Respect to Certain Transactions, have not had a significant impact on the
Company's revenue recognition.
Allowance for sales returns: The Company provides allowances for sales
returns in the period of sale based on historical experience.
Shipping and handling costs: Shipping and handling costs are included in the
statement of operations under the caption sales and marketing.
Research and development: Research and development expenses consist
primarily of payroll and other costs related to development of new technology
and products.
Advertising costs: The Company expenses advertising costs as incurred. There
was no advertising expense in the period from July 1, 1997 (inception) to
December 31, 1997. Advertising expense was $2.0 million and $5.8 million for
the years ended December 31, 1998 and 1999, respectively. Advertising expense
was $1.5 million (unaudited) and $3.1 million (unaudited) for the three months
ended March 31, 1999 and 2000, respectively.
Certain risks and concentrations: The Company's business is subject to other
risks and uncertainties common to growing technology-based companies, including
rapid technological change, growth and commercial acceptance of the Internet,
dependence on third-party technology, new product introductions and other
activities of competitors, dependence on key personnel, international
expansion, and limited operating history.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of its holdings of cash in a
single bank account.
Reliance on a single supplier: The Company relies on a single supplier, X10
Ltd., as its current sole provider of products and a single supplier, X-10
(USA) as its sole provider of fulfillment and shipping services. (See Note 2.)
A disruption in the supply of these services by the current suppliers could
materially harm the business.
F-8
<PAGE>
X10 WIRELESS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income taxes: The Company accounts for income taxes under the liability
method in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes. Under the liability method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to be recovered. Deferred taxes result from differences between the
financial and tax bases of the Company's assets and liabilities and are
adjusted for changes in tax rates and tax laws when changes are enacted.
Valuation allowances are recorded to reduce deferred tax assets when it is more
likely than not that a tax benefit will not be realized by the Company. Prior
to July 1999, the Company was not a separate taxable entity for federal, state,
or local income tax purposes and its operations were included in the
consolidated X-10 (USA) returns. Accordingly, no tax benefit for the Company's
net operating losses for the period of July 1, 1997 (inception) through July,
1999, has been recognized. (See Note 6.)
Stock-based compensation: The Company accounts for stock-based compensation
arrangements in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and complies
with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation.
Net loss per common share: The Company did not operate as a separate entity
for the period from July 1, 1997 (inception) to September 30, 1999. Therefore,
historical earnings per common share have not been presented in the financial
statements for these periods.
Pro forma net loss per common share (unaudited): Pro forma net loss per
share has been computed in accordance with SFAS No. 128, Earnings per Share,
and Securities and Exchange Commission ("SEC") Staff Accounting Bulletin
("SAB") No. 98 to reflect the pro forma effect of the Company's capitalization
for the entire year of 1999. Under the provisions of SFAS No. 128 and SAB No.
98, basic pro forma net loss per share is computed by dividing the net loss for
the period by the weighted average number of common shares outstanding, using
the pro forma effect of the conversion of the owner's net deficit as if the
shares issued to capitalize the Company had been outstanding over the entire
period for which the pro forma net loss per common share was computed. Common
equivalent shares related to stock options have been excluded from the
calculation because their effect was anti-dilutive. As a result, basic and
diluted net loss per common share were the same.
Segment information: The Company has organized and managed its operations in
a single operating segment as a provider of networking solutions for home and
small businesses. Revenues from customers outside of the United States were
less than 10% of net revenues for all periods presented in the accompanying
statements of operations.
Unaudited interim financial statements: The interim financial information
for the three months ended March 31, 1999 and 2000, contained herein is
unaudited but, in the opinion of management, reflects all adjustments which are
necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods presented. All such adjustments are
of a normal, recurring nature. Results of operations for interim periods
presented herein are not necessarily indicative of results of operations for
the entire year.
Internally developed software: Effective for fiscal years beginning after
December 15, 1998, the AICPA issued Statement of Position 98-1 ("SOP 98-1"),
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 requires all costs related to the development of
internal use software other than those incurred during the application
development stage to be expensed as incurred. Costs incurred during the
application development stage are required to be capitalized and amortized over
the estimated useful life of the software. The Company adopted SOP 98-1
beginning January 1, 1999, but has yet to incur significant costs.
F-9
<PAGE>
X10 WIRELESS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Comprehensive income (loss): The Company has no items that would have been
classified as other comprehensive income or loss.
Recent accounting pronouncements: In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if it is, the type of hedge
transaction. The Company does not expect that the adoption of SFAS No. 133 will
have a material impact on its financial statements because it does not
currently hold any derivative instruments.
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements ("SAB No. 101"), which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements. SAB No. 101 is applicable in the quarter ending December
31, 2000, and is not expected to have a significant impact to the Company.
In October 1999, the SEC identified a list of issues that have arisen in
Internet businesses that the SEC believes should be addressed by the Emerging
Issues Task Force ("EITF") of the FASB or other standard setting bodies. One
such issue is EITF Issue No. 99-19, Reporting Revenue Gross as a Principal
Versus Net as an Agent. This EITF Issue impacts whether revenues are presented
on a gross or net basis in a company's statement of operations. Based on the
Company's understanding of the consensus reached at the July EITF meeting, the
Company does not believe that EITF Issue No. 99-19 will impact the Company's
presentation of revenues. While the EITF is in the process of addressing
additional issues raised by the SEC, many of the identified issues have not yet
been resolved. Future resolution of all of the issues identified by the SEC may
affect the Company's financial statements. The Company is not able to determine
the impact on its financial statements, if any, of such future rule-making.
NOTE 2. Formation of the Company
On July 29, 1999, the Company was incorporated in the state of Delaware.
Effective October 1, 1999, the Company issued and sold 10,050,000 shares at par
value to two individuals who beneficially control all of X10 Ltd.'s outstanding
shares. Shares were issued in exchange for notes receivable of $10,050 which
were paid in May 2000.
Effective October 1, 1999, the Company entered into several agreements, and
received certain assets and assumed liabilities from X10 Ltd. and its
subsidiaries. In exchange, the Company issued 10,000,000 shares of common
stock. The assets and liabilities were contributed at historical cost as the
transfer of assets and liabilities was between entities under common control.
Agreements entered into with X10 Ltd. and its direct and indirect subsidiaries
are as follows:
Amended and Restated Bill of Sale and Assignment. Effective October 1, 1999,
the Company entered into an amended and restated bill of sale and assignment
under which X10 Ltd. sold and assigned to the Company the technology and
intellectual property relating to the Company's broadband wireless products as
partial consideration for the issuance of 10,000,000 shares of the Company's
common stock to X10 Ltd.
Amended and Restated License Agreement. Effective October 1, 1999, the
Company entered into an Amended and Restated License Agreement under which X10
Ltd. has granted to the Company a perpetual right to use, design, develop,
manufacture, market, sell and distribute all existing and future powerline-
based products owned by X10 Ltd. The agreement provides that these rights are
exclusive to the Company, on a
F-10
<PAGE>
X10 WIRELESS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
worldwide basis, except for sales of non-branded products by X10 Ltd. to OEM
customers and other resellers. The Company also received the exclusive,
perpetual right, on a worldwide basis, to use the copyrights, trade names,
trade dress, trademarks and service marks owned by X10 Ltd. related to the
"X10" mark, in the marketing, sale and distribution of the Company's products
and the products subject to the license. The license expires on December 31,
2019, unless renewed for subsequent five-year terms at the Company's option.
Product Supply Relationship. Effective October 1, 1999, the Company entered
into an Amended and Restated Product Supply Agreement under which X10 Ltd. has
agreed to manufacture, at the Company's direction, broadband wireless and
phoneline-, infared- and powerline-based products, and to ship the products on
consignment to a warehouse designated by the Company, currently X-10 (USA). The
Company is obligated to purchase the products on the earlier of receipt of a
purchase order from a customer or 120 days from delivery of the products by X10
Ltd. to the shipper. Under the agreement, the Company pays X10 Ltd. a fee for
the products equal to X10 Ltd.'s costs to produce the products. In the event of
a breach or default by X10 Ltd. under this agreement, the Company has a
contractual right to setoff any amounts owed by us against any losses resulting
from the breach or default. This agreement expires on December 31, 2019, unless
renewed for subsequent five-year terms at the Company's option. Product payment
is due 30 days from receipt of invoice, but no earlier than the date of
shipment to the Company's customer.
Research and Development Relationship. Effective October 1, 1999, the
Company entered into an Amended and Restated Research and Development Services
Agreement with X10 Ltd. under which X10 Ltd. has agreed, at the Company's
direction, to conduct research and development for the design and production of
the Company's wireless products; to submit estimates of costs required to
develop prototypes and manufacture the products; to determine all necessary or
appropriate production standards and licensing requirements; and to provide
specifications for and produce workable prototypes. Under the agreement, the
Company pays a service fee in connection with the development of each product
as established by X10 Ltd. This agreement expires on December 31, 2019, unless
renewed for subsequent five-year terms at the Company's option. There have been
no research and development services fees paid under this agreement.
Contract Manufacturing Agreement. Effective October 1, 1999, the Company
entered into a Contract Manufacturing Agreement with X10 Ltd. under which X10
Ltd. will pay to the Company a variable fee based on X10 Ltd.'s sales of the
Company's wireless products to OEMs and sales of powerline products to OEMs
that the Company introduces to X10 Ltd. Under this Agreement, the Company's fee
is equal to the net sales price of the products sold by X10 Ltd., less costs
and a manufacturing fee retained by X10 Ltd. This manufacturing fee is equal to
15% of the net sales price of each product sold until aggregate sales of that
product reach $2,000,000 and 10% of the net sales price of each product
thereafter. X10 Ltd. is required to sell the products on the same terms and
conditions that the Company has previously negotiated. In addition, the Company
has the right to sell products directly to OEM customers, in which the Company
pays a fee to X10 Ltd. equal to the actual costs of manufacturing and shipping
the products. This agreement expires April 1, 2005, and will automatically be
renewed for subsequent five-year terms unless terminated by either party.
Amended and Restated Asset Purchase Agreement. Effective October 1, 1999,
the Company entered into an Amended and Restated Asset Purchase Agreement with
X-10 (USA) under which X-10 (USA) transferred to the Company all right and
title to specified universal resource locators, or URLs, domain names and web
site names, as well as all customer, vendor and supplier lists, and sales,
product and promotional literature or aids used in connection with those
assets. In exchange, the Company issued a promissory note to X-10 (USA) in the
principal amount of $1,024,300, which was subsequently assigned to X10 Ltd. The
note was canceled in partial consideration of the Company's issuance to X10
Ltd. of 10,000,000 shares of the Company's common stock. The Company also
assumed approximately $1,183,000 of specific liabilities of X-10 (USA), related
to the assets acquired, in consideration of which X-10 (USA) has issued to the
Company a
F-11
<PAGE>
X10 WIRELESS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
promissory note in the principal amount of approximately $1,183,000, payable on
or before September 30, 2001, and bearing interest at the rate of 8.0% per
year.
Fulfillment Services Relationship. Effective October 1, 1999, the Company
entered into an Amended and Restated Fulfillment Services Agreement with X-10
(USA), under which X-10 (USA) has agreed to warehouse and ship products
manufactured for the Company by X10 Ltd. and other manufacturers. Under the
agreement, X-10 (USA) ships products to the Company's customers in accordance
with fulfillment orders that the Company submits to X-10 (USA) from time to
time. The Company pays a fee in connection with these services equal to 10% of
the Company's gross receipts for the products shipped, excluding sales and
other taxes. This agreement expires December 31, 2004, unless renewed for
subsequent five-year terms at the Company's option. The fee is due 30 days from
receipt of the invoice from X-10 (USA).
Amended and Restated Sublicense Agreement. Effective October 1, 1999, the
Company entered into an Amended and Restated Sublicense Agreement with X-10
(USA), under which the Company granted X-10 (USA) a non-exclusive sublicense to
market, sell and distribute in the western hemisphere powerline products
licensed to the Company by X10 Ltd., as well as any new products the Company
may select. The sublicense is limited to sales of X10-branded products to
resellers, other than OEMs. Under the agreement, X-10 (USA) pays the Company a
quarterly royalty of 15% of its net sales of licensed products, or a minimum
license fee, whichever is greater. The minimum license fee is $250,000 per
quarter during the first year of the term, $500,000 per quarter during the
second year of the term and $750,000 per quarter during the third year of the
term. Thereafter, there is no minimum license fee. The sublicense expires on
December 31, 2004, and will be automatically renewed for subsequent five-year
terms unless terminated by either party.
Administrative Services Arrangement. Effective October 1, 1999, the Company
entered into an Administrative Services Agreement with Orca Monitoring
Services, L.L.C. ("Orca"), a wholly owned subsidiary of X10 Ltd., under which
Orca provides to the Company telephone reception services, customer service and
technical support after the Company's normal business hours, as well as general
office administration and support. The agreement expires October 1, 2000, and
will be automatically renewed for subsequent one-year terms unless terminated
by mutual agreement of the parties. The Company pays a service fee based upon
head count, actual usage and allocation of floor space. The fee is due 30 days
from receipt of the invoice from Orca.
F-12
<PAGE>
X10 WIRELESS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 3. Related Party Transactions.
Allocated costs: As discussed in Note 1, the financial statements of the
Company reflect certain allocated corporate support costs from X10 Ltd. and X-
10 (USA). Such allocations and charges are based on a percentage of total
corporate costs for the services provided, based on factors such as revenue and
specific level of activity directly related to such costs.
Management believes that the allocation methods used are reasonable and
reflective of the Company's proportionate share of such expenses and are not
materially different from those that would have been incurred on a stand-alone
basis.
The following is a summary of transactions with related parties (dollars in
thousands):
<TABLE>
<CAPTION>
July 1, 1997 Year Ended
(inception) December Three Months
to 31, Ended March 31,
December 31, ----------- ---------------
1997 1998 1999 1999 2000
------------ ----- ----- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue earned under agreements
effective October 1, 1999:
License fees....................... -- -- 261 -- 268
Allocated expenses included in:
Cost of revenues................... 56 1,143 5,187 1,244 --
Research and development........... 1 24 314 11 --
Sales and marketing................ 43 553 2,343 380 --
General and administrative......... 149 575 1,167 310 --
Expenses incurred under agreements
effective October 1, 1999:
Cost of revenues................... -- -- 3,793 3,926
Research and development........... -- -- 85 100
Sales and marketing................ -- -- 1,188 1,111
General and administrative......... -- -- 569 430
Contribution of net liabilities
October 1, 1999..................... -- -- 1,183 -- --
Capital contributions................ 345 998 3,073 505 --
</TABLE>
<TABLE>
<CAPTION>
December 31
------------ March 31,
1998 1999 2000
---- ------- -----------
(unaudited)
<S> <C> <C> <C>
Amounts due (to) from related parties:
Due to X10 Ltd...................................... $ $(1,979) $(2,334)
Due from X-10 (USA)................................. -- 691 900
Due from Orca....................................... 715 114 1
---- ------- -------
Total amounts due (to) from related parties....... $715 $(1,174) $(1,433)
==== ======= =======
</TABLE>
NOTE 4. Employee Benefit Plans
1999 Stock Plan: Effective October 1, 1999, the Company's Board of Directors
adopted the 1999 Stock Plan (the "Plan"), which provides that the Board of
Directors may grant incentive stock options or nonqualified stock options to
employees, directors and consultants. Stock purchase rights may also be granted
under the Plan. The maximum aggregate number of shares subject to option under
the Plan is 3,500,000 shares of common stock. Options generally become
exercisable within a five-year period. Options generally expire ten
F-13
<PAGE>
X10 WIRELESS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
years from the date of grant. On October 1, 1999, the Board of Directors
granted options to acquire 1,450,000 shares, all of which were outstanding as
of December 31, 1999 and March 31, 2000, and there were 2,050,000 shares
available in the Plan as of December 31, 1999 and March 31, 2000 for future
awards.
A summary of stock option activity follows (share amounts in thousands):
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended March 31,
1999 2000
--------------- ---------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
(unaudited)
<S> <C> <C> <C> <C>
Outstanding, beginning....................... -- $ -- 1,450 $0.001
Options issued............................. 1,450 0.001 -- --
Options exercised.......................... -- -- -- --
Options cancelled.......................... -- -- -- --
----- -----
Outstanding, ending.......................... 1,450 $0.001 1,450 $0.001
===== =====
</TABLE>
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
------------------------ ------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Fair Exercise Fair
Shares Price Value Shares Price Value
------ -------- -------- ------ -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Exercise price exceeds
market price............ -- $ -- $ -- -- $ -- $ --
Exercise price equals
market price............ -- -- -- -- -- --
Exercise price is less
than market price....... 1,450 $0.001 $0.40 1,450 $0.001 $0.40
</TABLE>
All of the options granted in October 1999 vest at a rate of 12.5% of the
shares subject to the option every six months and expire in October 2009. As of
March 31, 2000, none of the outstanding options was exercisable.
Fair value disclosures: Under SFAS No. 123, employee stock options are
valued at the grant date using the Black-Scholes valuation model with the
following assumptions for options granted on October 1, 1999: risk-free
interest rate at 6.0%; expected dividend yield of 0%; no volatility; and an
expected life of four years. Related compensation expense is being recognized
ratably over the vesting period. The weighted average fair value of options
granted during 1999 was $0.40 per share. Compensation expense calculated under
SFAS No. 123 is the same as the amount recognized by the Company under APB
Opinion No. 25.
NOTE 5. Contingencies
The Company is subject to various claims which arise in the normal course of
business. In the opinion of management, the ultimate disposition of these
claims will not have a material effect on the financial statements of the
Company.
NOTE 6. Income Taxes
No provision for income taxes has been recorded because the Company has
incurred net losses since its inception and the Company received no benefit for
such losses from the consolidated X10 Ltd. group prior to the Company's
inception.
F-14
<PAGE>
X10 WIRELESS TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The effective tax rate differs from the federal statutory rate as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------------
December 31, March 31,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Tax benefit at statutory rate....................... (34.0)% (34.0)%
Other............................................... 0.4 0.1
Change in valuation allowance....................... 33.6 33.9
----- -----
0.0 % 0.0 %
===== =====
</TABLE>
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax asset such that a full valuation allowance has been
recorded.
Deferred tax assets were comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Net operating loss carryforwards.................... $ 645 $ 1,737
Other............................................... 72 111
----- -------
Gross deferred tax assets........................... 717 1,848
Less: valuation allowance........................... (717) (1,848)
----- -------
Net deferred tax asset.............................. $ -- $ --
===== =======
</TABLE>
The Company generated operating loss carryforwards of approximately $2.1
million and $3.3 million (unaudited) for the three months ended December 31,
1999, and March 31, 2000, respectively. These carryforwards may be used to
offset future federal taxable income and will expire beginning in 2019.
NOTE 7. Subsequent Events
In July 2000, the Company terminated the 1999 Stock Plan, effective as of,
and contingent upon, the effective date of the Company's registration statement
related to an initial public offering of the Company's common stock and adopted
the 2000 Equity Incentive Plan and Employee Stock Purchase Plan.
These plans provide that the Board of Directors may grant incentive stock
options, nonstatutory stock options, restricted stock purchase rights and stock
bonuses to employees, directors and consultants.
In July 2000, the Company issued options for 80,000 shares of common stock
to Board members contingent upon an initial public offering.
F-15
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Prospective investors may rely only on the information contained in this pro-
spectus. Neither X10 Wireless Technology, Inc. nor any underwriter has autho-
rized anyone to provide prospective investors with different or additional in-
formation. This prospectus is not an offer to sell nor is it seeking an offer
to buy these securities in any jurisdiction where the offer or sale is not
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this pro-
spectus or any sale of these securities.
--------------------
TABLE OF CONTENTS
--------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Cautionary Note on Forward-Looking Statements............................ 21
Use of Proceeds.......................................................... 22
Dividend Policy.......................................................... 22
Capitalization........................................................... 23
Dilution................................................................. 24
Selected Financial Data.................................................. 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business................................................................. 33
Management............................................................... 47
Certain Transactions and Business Relationships.......................... 54
Principal Stockholders................................................... 58
Description of Capital Stock............................................. 59
Shares Eligible for Future Sale.......................................... 62
Underwriting............................................................. 64
Legal Matters............................................................ 67
Experts.................................................................. 67
Where You Can Find Additional Information................................ 67
Index to Financial Statements............................................ F-1
</TABLE>
---------------
Until , 2000 (25 days after the date of this prospectus), 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 dealers' obligations to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Shares
[LOGO OF X10]
X10 Wireless
Technology, Inc.
Common Stock
-------------------------
PRELIMINARY PROSPECTUS
-------------------------
Bear, Stearns & Co. Inc.
Prudential Volpe Technology
a unit of Prudential Securities
C.E. Unterberg, Towbin
, 2000
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered.
<TABLE>
<S> <C>
SEC Registration fee................................................ $19,800
NASD fee............................................................ 8,000
Nasdaq National Market initial listing fee.......................... 95,000
Printing and engraving.............................................. *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Blue sky fees and expenses.......................................... *
Transfer agent fees................................................. *
Directors' and officers' Securities Act liability insurance......... *
Miscellaneous....................................................... *
-------
Total............................................................. $ *
=======
</TABLE>
----------
* To be provided by amendment.
ITEM 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to provide indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act. In
addition, our by-laws provide for mandatory indemnification of our directors
and executive officers and permit indemnification of employees and other agents
to the maximum extent permitted by the Delaware General Corporation Law.
We intend to enter into certain indemnity agreements with our directors and
certain of our officers, the form of which is attached as Exhibit 10.1 to this
registration statement. These indemnity agreements will provide our directors
and certain of our officers with indemnification to the maximum extent
permitted by the Delaware General Corporation Law.
The underwriting agreement (Exhibit 1.1 hereto) provides for indemnification
by the underwriters of us and of our executive officers and directors, and by
us of the underwriters, for certain liabilities, including liabilities arising
under the Securities Act, in connection with specified matters.
ITEM 15. Recent Sales of Unregistered Securities
Since our inception, we have issued unregistered securities to a limited
number of persons, as described below. Since October 1, 1999, we have issued
and sold the following unregistered securities:
(1) In October 1999, we issued 5,050,000 shares of common stock to George
Stevenson at an aggregate purchase price of $5,050, or $0.001 per
share. Also in October 1999, Mr. Stevenson made gifts of or sold
2,050,000 of these shares to 10 individuals residing in the U.S. and
foreign countries.
(2) In October 1999, we issued 5,000,000 shares of common stock to Hin
Chew Chung for an aggregate purchase price of $5,000, or $0.001 per
share. Also in October 1999, Mr. Chung made gifts of 2,000,000 of
these shares to 25 individuals all residing outside the U.S.
II-1
<PAGE>
(3) In October 1999, we issued an aggregate of 10,000,000 shares of common
stock to X10 Ltd. in consideration of the assignment to us of
intellectual property, execution and delivery of an Amended and
Restated Bill of Sale and Assignment, Amended and Restated License
Agreement and Amended and Restated Product Supply Agreement, and in
full repayment of a promissory note in the principal amount of
$1,024,300 that we issued to X-10 (USA) and that X-10 (USA)
subsequently assigned to X10 Ltd.
(4) In October 1999, we issued stock options under our 1999 Stock Plan to
our employees and consultants to purchase an aggregate of 1,450,000
shares of common stock with an aggregate exercise price of $1,450, or
$0.001 per share.
(5) In July 2000, we issued stock options under our 1999 Stock Plan to
non-employee directors to purchase an aggregate of 160,000 shares of
common stock at a per share price equal to 70% of the initial public
offering price.
With reference to paragraphs (1) and (2) above, we claimed exemption from
registration for the shares issued to and retained by Mr. Stevenson and Mr.
Chung in reliance on section 4(2) of the Securities Act. We claimed exemption
from registration for shares acquired by the other persons referenced in
paragraphs (1) and (2) above in reliance on section 4(2) of the Securities Act
and Regulation S under the Securities Act. We claimed exemption from
registration for the issuance described in paragraph (3) above in reliance upon
section 4(2) of the Securities Act. We claimed exemption from registration for
the issuances described in paragraphs (4) and (5) above in reliance on Rule 701
under the Securities Act on the basis that they were issued pursuant to written
compensatory benefit plans as provided in Rule 701. In addition, with respect
to the issuances described in paragraphs (4) and (5) above, we claimed that
registration under the Securities Act was not required on the basis that none
of these grants involved a "sale" of securities as defined in section 2(a)(3)
of the Securities Act.
The recipients of securities in each transaction for which exemption was
claimed under section 4(2) of the Securities Act represented their intentions
to acquire the securities for investment only and not with a view to or for
public distribution and appropriate legends were affixed to the securities
issued in such transactions. All recipients had adequate access to information
about us, through their relationships with us. The recipients of securities in
each transaction for which exemption was claimed in reliance on Regulation S
under the Securities Act represented that they were not "U.S. Persons," as
defined in Regulation S, and that they were acquiring the shares for investment
purposes only and not with a view to or for public distribution in the U.S. or
elsewhere. In addition, appropriate legends were affixed to the securities
issued in reliance on Regulation S and we agreed not to register any transfer
of these securities not made in accordance with the provisions of Regulation S,
pursuant to registration under the Securities Act or pursuant to an available
exemption from registration.
ITEM 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation, as currently in
effect
3.2 Form of Amended and Restated Certificate of Incorporation, to be
effective upon completion of this offering
3.3 Bylaws, as amended and currently in effect
3.4 Form of Amended and Restated Bylaws, to be effective upon completion of
this offering
4.1* Specimen Common Stock Certificate
5.1* Opinion of Cooley Godward llp
10.1 Form of Indemnity Agreement between the Company and each of its
directors and certain of its officers
10.2 1999 Stock Plan
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.3 Form of Stock Option Agreement under the 1999 Stock Plan
10.4 2000 Equity Incentive Plan
10.5 Form of Stock Option Agreement under the 2000 Equity Incentive Plan
10.6 2000 Employee Stock Purchase Plan
10.7 Form of 2000 Employee Stock Purchase Plan Offering
10.8 Amended and Restated Asset Purchase Agreement, effective October 1,
1999, between the Company and X-10 (USA) Inc.
10.9 Amended and Restated Bill of Sale and Assignment, effective October 1,
1999, between the Company and X10 Ltd.
10.10 Amended and Restated License Agreement, effective October 1, 1999,
between the Company and X10 Ltd.
10.11 Amended and Restated Sublicense Agreement, effective October 1, 1999,
between the Company and X-10 (USA) Inc.
10.12 Amended and Restated Product Supply Agreement, effective October 1,
1999, between the Company and X10 Ltd.
10.13 Amended and Restated Fulfillment Services Agreement, effective October
1, 1999, between the Company and X-10 (USA) Inc.
10.14 Amended and Restated Research and Development Services Agreement,
effective October 1, 1999, between the Company and X10 Ltd.
10.15 Contract Manufacturing Agreement, effective April 1, 2000, between the
Company and X10 Ltd.
10.16 Administrative Services Agreement, effective October 1, 1999, between
the Company and Orca Monitoring Services, L.L.C.
10.17 Form of Subscription Agreement, effective October 1, 1999, between the
Company and each of Hin Chew Chung and George E. Stevenson
10.18 Amended and Restated Subscription Agreement, effective October 1, 1999,
between the Company and X10 Ltd.
23.1 Consent of Deloitte & Touche llp
23.2* Consent of Cooley Godward llp (included in Exhibit 5.1)
24.1 Power of Attorney (contained on signature page)
27.1 Financial Data Schedule
</TABLE>
----------
* To be supplied by amendment.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
II-3
<PAGE>
ITEM 17. Undertakings
We hereby undertake to provide to the underwriters at the closing specified
in the Underwriting Agreement, certificates in the denominations and registered
in the names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of X10
Wireless Technology pursuant to the provisions referenced in Item 14 of this
registration statement or otherwise, X10 Wireless Technology has been advised
that in the opinion of the SEC this indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against these liabilities (other than the
payment by X10 Wireless Technology of expenses incurred or paid by a director,
officer, or controlling person of X10 Wireless Technology in the successful
defense of any action, suit or proceeding) is asserted by a director, officer
or controlling person in connection with the securities being registered
hereunder, X10 Wireless Technology will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
X10 Wireless Technology hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by X10 Wireless Technology pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act will be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, X10
Wireless Technology, Inc. has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, State of Washington, on the 9th day of August, 2000.
X10 Wireless Technology, Inc.
By: /s/ George E. Stevenson
_________________________________
George E. Stevenson
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints George E. Stevenson and Wade A.
Pfeiffer, his true and lawful attorneys-in-fact and agents each acting alone,
with full power of substitution and resubstitution, for him and in his name,
place and stead in any and all capacities to sign any or all amendments
(including post-effective amendments) to this registration statement, and any
registration statement filed pursuant to Rule 462(b) under the Securities Act
of 1933 in connection with the registration under the Securities Act of 1933 of
equity securities of X10 Wireless Technology, Inc. and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
SEC, granting unto said attorneys-in-fact and agents full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact, or their substitutes, each acting alone, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ George E. Stevenson Chairman of the Board and August 9, 2000
______________________________________ Chief Executive Officer
George E. Stevenson (Principal Executive
Officer)
/s/ Wade A. Pfeiffer Chief Financial Officer August 9, 2000
______________________________________ (Principal Financial and
Wade A. Pfeiffer Accounting Officer)
/s/ C. Gregory Amadon Director August 9, 2000
______________________________________
C. Gregory Amadon
/s/ William T. Baxter Director July 27, 2000
______________________________________
William T. Baxter
/s/ Hin Chew Chung Director August 9, 2000
______________________________________
Hin Chew Chung
/s/ Alexander E. Peder Director August 9, 2000
______________________________________
Alexander E. Peder
/s/ James R.W. Phillips Director August 9, 2000
______________________________________
James R.W. Phillips
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation, as currently in
effect
3.2 Form of Amended and Restated Certificate of Incorporation, to be
effective upon completion of this offering
3.3 Bylaws, as amended and currently in effect
3.4 Form of Amended and Restated Bylaws, to be effective upon completion of
this offering
4.1* Specimen Common Stock Certificate
5.1* Opinion of Cooley Godward llp
10.1 Form of Indemnity Agreement between the Company and each of its
directors and certain of its officers
10.2 1999 Stock Plan
10.3 Form of Stock Option Agreement under the 1999 Stock Plan
10.4 2000 Equity Incentive Plan
10.5 Form of Stock Option Agreement under the 2000 Equity Incentive Plan
10.6 2000 Employee Stock Purchase Plan
10.7 Form of 2000 Employee Stock Purchase Plan Offering
10.8 Amended and Restated Asset Purchase Agreement, effective October 1,
1999, between the Company and X-10 (USA) Inc.
10.9 Amended and Restated Bill of Sale and Assignment, effective October 1,
1999, between the Company and X10 Ltd.
10.10 Amended and Restated License Agreement, effective October 1, 1999,
between the Company and X10 Ltd.
10.11 Amended and Restated Sublicense Agreement, effective October 1, 1999,
between the Company and X-10 (USA) Inc.
10.12 Amended and Restated Product Supply Agreement, effective October 1,
1999, between the Company and X10 Ltd.
10.13 Amended and Restated Fulfillment Services Agreement, effective October
1, 1999, between the Company and X-10 (USA) Inc.
10.14 Amended and Restated Research and Development Services Agreement,
effective October 1, 1999, between the Company and X10 Ltd.
10.15 Contract Manufacturing Agreement, effective April 1, 2000, between the
Company and X10 Ltd.
10.16 Administrative Services Agreement, effective October 1, 1999, between
the Company and Orca Monitoring Services, L.L.C.
10.17 Form of Subscription Agreement, effective October 1, 1999, between the
Company and each of Hin Chew Chung and George E. Stevenson
10.18 Amended and Restated Subscription Agreement, effective October 1, 1999,
between the Company and X10 Ltd.
23.1 Consent of Deloitte & Touche llp
23.2* Consent of Cooley Godward llp (included in Exhibit 5.1)
24.1 Power of Attorney (contained on signature page)
27.1 Financial Data Schedule
</TABLE>
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* To be supplied by amendment.
