<PAGE>
As filed with the Securities and Exchange Commission on July 21, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under the Securities Act of 1933
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Xpeed Networks, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3661 94-3298105
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
99 W. Tasman Drive, Suite 110
San Jose, California 95134
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-----------
Michael D. Pak
Chief Executive Officer
99 W. Tasman Drive, Suite 110
San Jose, California 95134
(408) 473-8804
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
<TABLE>
<S> <C>
Thomas C. Klein Scott M. Stanton
Stephen M. Welles Christopher M. Smith
Paul Okada Adam Schwenker
Micheal J. Reagan Gray Cary Ware & Freidenrich LLP
Wilson Sonsini Goodrich & Rosati 4365 Executive Drive
Professional Corporation Suite 1600
650 Page Mill Road San Diego, CA 92121
Palo Alto, CA 94304 (858) 677-1400
(650) 493-9300
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities to be Registered Offering Price(1) Registration Fee
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock, $0.0001 par value per share.................... $50,000,000 $13,200
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) of the Securities Act of 1933.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the 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 an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 21, 2000
PROSPECTUS
Shares
[LOGO OF XPEED NETWORKS, INC.]
Common Stock
This is an initial public offering of common stock by Xpeed Networks, Inc.
Xpeed Networks is selling shares of common stock. The estimated initial
public offering price is between $ and $ per share.
--------
We have applied for listing of our common stock on the Nasdaq National Market
under the symbol XPED.
--------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discounts and commissions.......................... $ $
Proceeds to Xpeed Networks, before expenses..................... $ $
</TABLE>
Xpeed Networks has granted the underwriters an option for a period of 30 days
to purchase up to additional shares of our common stock.
--------
Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page 5.
--------
Neither the Securities and Exchange Commission nor any state securities
commission 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.
CHASE H&Q
DAIN RAUSCHER WESSELS
UBS WARBURG LLC
KAUFMAN BROS., L.P.
, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 5
Forward-Looking Statements................................................ 15
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Consolidated Financial Data...................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 26
Management................................................................ 35
Related Party Transactions................................................ 42
Principal Stockholders.................................................... 44
Description of Capital Stock.............................................. 46
Shares Eligible For Future Sale........................................... 49
Underwriting.............................................................. 51
Legal Matters............................................................. 53
Experts................................................................... 53
Where You Can Find Additional Information................................. 53
Index to Financial Statements............................................. F-1
</TABLE>
Xpeed(TM) and Xpeed Networks(TM) are our unregistered trademarks. Other
service marks, trademarks and trade names referred to in this prospectus are
the property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information that you
should consider before investing in our common stock. You should read the
entire prospectus carefully, including "Risk Factors" and our financial
statements before making an investment decision.
Xpeed Networks, Inc.
We design, market and sell digital subscriber line, or DSL, access devices
for homes and businesses. Our DSL access devices enable network service
providers to cost-effectively deploy broadband network access to end users. We
design our DSL modems, bridges and routers to integrate easily into existing
telephone networks and to simplify installation and maintenance. We sell our
products to network service providers and network equipment vendors. Our
customers include BroadbandNOW, Hanaro Telecom, Interspeed and NorthPoint
Communications.
The volume of data transmitted over communications networks has grown
dramatically as an increasing number of business and residential consumers use
the Internet to access bandwidth-intensive content and services. Increasing
consumer demand for high-speed access and competition resulting from domestic
and foreign telecommunications deregulation are driving the rapid deployment of
DSL services. International Data Corporation, an independent research firm,
estimates that the number of DSL lines in service in the United States will
increase from approximately 510,000 in 1999 to 12.6 million in 2003, and that
the number of DSL lines in service outside the United States will increase from
approximately 140,000 in 1999 to 14.8 million in 2003.
DSL technology enables network service providers to deliver high-speed
access to end users over existing copper telephone wires. To deliver DSL
service, network service providers install access devices at end-users' homes
and businesses. These access devices send and receive digital transmissions to
and from equipment located in the local telephone company's central office
facility.
We believe our products offer the following key benefits:
. Interoperability. Our products support the most common DSL technologies,
computer operating systems and network protocols and standards. Our DSL
access devices are interoperable with network equipment made by Alcatel,
Cisco Systems, Copper Mountain Networks, Lucent Technologies and Nokia.
. Ease of Deployment and Maintenance. Our products are designed to enable
network service providers to deploy DSL service rapidly and cost
effectively. Our proprietary graphical user interface guides the
technician though the installation process, helping to reduce
installation time and errors. Our interface also enables remote trouble-
shooting and maintenance, helping to substantially reduce network
service providers' customer support costs.
. Flexible Architecture. Our proprietary technology, consisting of our
software, integrated circuits and circuit board design, provides us with
a flexible platform upon which we design our products. As a result, we
believe we can rapidly bring new products to market to meet evolving
industry standards and changing customer requirements.
. Broad Product Line. We offer single-user access devices such as internal
and external modems, as well as multi-user access devices such as
bridges and routers. Our product line includes access devices that
support the most common types of DSL service. By addressing the full
range of our customers' DSL access needs, we believe we can simplify
their supply relationships.
1
<PAGE>
Our objective is to become the leading provider of DSL access devices to
network service providers worldwide. To achieve this goal, we intend to do the
following:
. rapidly develop new products and technologies that leverage our flexible
hardware and software architecture;
. expand our domestic and international sales channels;
. continue to leverage our strategic relationships with network service
providers, network equipment vendors and developers of DSL semiconductor
technology;
. offer integrated voice and data broadband access solutions to take
advantage of the anticipated growth in the demand for these products;
and
. pursue strategic acquisitions that complement our technology, products
and distribution strategies.
We were incorporated in California in April 1998 and will complete our
reincorporation into Delaware prior to the completion of this offering. Our
principal offices are located at 99 W. Tasman Drive, Suite 110, San Jose,
California 95134. We maintain a website at www.xpeed.com. Our telephone number
is (408) 473-8804.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by Xpeed
Networks.......................... shares
Common stock to be outstanding
after this offering............... shares
Use of proceeds.................... For general corporate purposes, including
working capital and potential acquisitions.
Proposed Nasdaq National Market
symbol............................ XPED
</TABLE>
--------------------
The total number of outstanding shares of our common stock above is based on
shares outstanding as of June 30, 2000, and does not include:
. shares of common stock issuable upon the exercise of outstanding
stock options as of June 30, 2000 at a weighted average exercise price
per share of $ ;
. shares of common stock issuable upon the exercise of outstanding
warrants as of June 30, 2000 at a weighted average exercise price per
share of $ ;
. shares of common stock available for future grant as of June 30,
2000 under our 1998 Stock Plan; and
. additional shares of common stock available for issuance under our
2000 Employee Stock Purchase Plan immediately following this offering.
--------------------
Unless otherwise noted, all information in this prospectus:
. reflects a for stock split of our common shares occurring prior
to the completion of this offering;
. assumes the completion of our reincorporation into Delaware prior to the
completion of this offering;
. reflects the automatic conversion of all outstanding shares of preferred
stock into shares of common stock upon completion of this offering; and
. assumes no exercise of the underwriters' over-allotment option.
3
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
The pro forma as adjusted consolidated balance sheet data summarized below
reflects the conversion of all our preferred stock into shares of common stock
upon completion of this offering and the application of the net proceeds from
the sale of the shares of common stock at an assumed initial public
offering price of $ per share after deducting the estimated underwriting
discounts and commissions and estimated offering expenses. See Note 1 of the
notes to the consolidated financial statements for an explanation of the
calculation of the weighted average common and common equivalent shares used to
compute net loss per share.
<TABLE>
<CAPTION>
Period from
April 8,
1998 (date
of
inception) Six Months
to Year Ended Ended June 30,
December 31, December 31, -----------------
1998 1999 1999 2000
------------ ------------ ------- --------
<S> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Net revenues.................... $ -- $ 2,411 $ 71 $ 16,708
Operating loss.................. (2,520) (7,852) (1,662) (13,673)
Net loss........................ $(2,529) $(7,812) $(1,643) $(13,322)
Net loss per share--basic and
diluted........................ $ $ $ $
Shares used in calculating net
loss per share.................
Pro forma net loss per share--
basic and
diluted....................... $ $ $ $
Shares used in calculating pro
forma net loss per share.......
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000
---------------------
Pro Forma
Actual As Adjusted
-------- -----------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................... $ 14,251 $
Working capital......................................... 12,667
Total assets............................................ 21,529
Total stockholders' equity (deficit).................... (11,011)
</TABLE>
4
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially harm our business, operating results and
financial condition and could result in a complete loss of your investment.
Risks Related to Our Business
Our limited operating history makes it difficult to evaluate our business and
future prospects.
We commenced operations in April 1998 and did not begin to achieve
meaningful revenues from shipment of our products until the fourth quarter of
1999. We are still in the early stages of our development, which makes it
difficult to evaluate our future prospects, and increases the risk that we will
be unable to build a sustainable business. You should consider our prospects in
light of the risks and difficulties we will encounter as an early stage company
competing in a new and rapidly evolving market. Many of these risks are
described under the sub-headings below. We may not successfully address any or
all of these risks, and we may not be successful in executing our business
plan.
We have a history of losses, we expect future losses, and we may not be able to
achieve or maintain profitability.
We have incurred net losses since our inception and expect future losses.
Accordingly, we may not be able to achieve profitability, and even if we do
become profitable, we may not be able to sustain profitability. We had negative
cash flow from operations of $873,000 in 1998, $4.3 million in 1999, and $4.7
million for the first six months of 2000. As of June 30, 2000, we had an
accumulated deficit of approximately $41.2 million. To achieve profitable
operations on a continuing basis, we must successfully design, develop, market
and distribute our products on a broad commercial basis. We cannot assure you
that we will be able to do so.
We have derived substantially all of our historical revenues from sales of a
single product to a single customer. If this customer reduces or
discontinues purchases of our products, our business would be seriously
harmed.
For the six months ended June 30, 2000, sales to one customer, Hanaro
Telecom, represented approximately 83% of our net revenues. For the year ended
December 31, 1999, sales to Hanaro Telecom represented approximately 97% of our
net revenues. Moreover, these revenues were generated from shipments of one
product to Hanaro Telecom. We do not have any contracts or agreements with
Hanaro other than purchase orders in the ordinary course of business, and
Hanaro is not obligated to continue to purchase our products. Our business and
operating results would be substantially harmed if Hanaro reduces or
discontinues purchases of our products. We expect to continue to be dependent
upon sales to Hanaro for a significant portion of our revenues. If we are not
successful in generating revenues from additional customers and additional
products, will not be able to build a sustainable business.
Our failure to manage our rapidly expanding operations could harm our business.
Since our inception, we have experienced a period of rapid growth and
expansion that has placed a significant strain on our resources. For example,
we have increased the number of our employees from 15 at December 31, 1998 to
83 as of June 30, 2000. Our management team has limited experience managing
rapidly growing companies on a public or private basis. We cannot assure you
that our systems, procedures or controls will be adequate to support the
anticipated growth in our operations.
5
<PAGE>
Competition for qualified technical personnel in our industry is intense, and
we may not be able to hire and retain the people that we need to succeed.
Our success depends upon our ability to attract, train and retain engineers
and other technical personnel to develop our DSL access devices and provide
technical support of our products for our customers. Competition for such
individuals in our region is intense, and we cannot be certain that we will be
successful in recruiting and retaining such personnel. In addition, employees
may leave our company and subsequently compete against us. The loss of the
services of any of our technical personnel, the inability to attract or retain
such personnel in the future or delays in hiring such personnel, particularly
engineers, would harm our business.
The average selling price of our products may decrease rapidly, which may
reduce gross margins or revenues if we are unable to reduce our cost of
goods sold.
The DSL access equipment industry has experienced rapid erosion of average
selling prices due to a number of factors, including competitive pricing
pressures and rapid technological change. We may experience substantial period-
to-period fluctuations in future operating results due to the erosion of our
average selling prices. We anticipate that the average selling prices of our
products will decrease in the future in response to competitive pricing
pressures, increased sales discounts, new product introductions by us or our
competitors or other factors. Therefore, to improve our gross margins, we must
develop and introduce on a timely basis new products and product enhancements
and continually reduce our product costs, particularly the cost of components.
However, we can not be certain when or if cost reductions will occur. Our
failure to achieve cost reductions would cause our revenues and gross margins
to decline, which would harm our operating results.
The loss of the services of one or more of our executive officers or key
employees could harm our business.
Our executive officers and certain key sales, engineering and management
personnel may not remain with us in the future. Our executive officers and key
personnel and in particular Michael Pak, our President, CEO and founder, are
critical to our business and its future success. If we lost the services of one
or more of our executive officers or key employees, we would need to devote
time and resources to finding replacements, and until replacements were found,
we would be operating without the skills or leadership of such personnel. None
of our officers or key employees is bound by agreements for any specific
employment term or covenants not to compete.
Our target market is comprised of a limited number of potential customers.
Because DSL service relies upon existing telephone lines to reach end users,
a substantial majority of potential DSL end-user accounts in the U.S. and in
other countries are controlled by a relatively small number of network service
providers. If we are not successful in developing relationships with these few
network service providers and the network equipment vendors that supply them,
we will not be successful in building a profitable business. In each fiscal
period, we anticipate that the substantial majority of our revenues will be
derived from a small number of customers and that the mix of these customers
will change from period to period. As a result, we must obtain orders from new
significant customers on an ongoing basis to increase our revenues and grow our
business. Moreover, agreements with network service providers and network
equipment vendors are typically non-exclusive and often may be terminated by
either party without cause or notice, and therefore even if we are successful
in initiating relationships with customers, we may not be able to successfully
maintain such relationships.
6
<PAGE>
The sales cycle for our products is long, and our product life cycles tend to
be short. We may incur substantial non-recoverable expenses or devote
significant resources to sales that do not occur when anticipated or at all.
The timing of our sales is difficult to predict because of our reliance on
indirect sales channels and the length and variability of our sales cycle. Our
prospective customers' purchase decisions involve significant time spent
evaluating and testing our products. This evaluation process frequently results
in a lengthy sales process, typically ranging from three to six months or
longer. While our customers are evaluating our products and before they place
an order with us, we may incur substantial expenses and expend significant
management effort. Consequently, if sales forecasted from a specific customer
do not materialize, sales, marketing and product development expenses
associated with such failed effort will not be recovered. In addition, due to
the rapidly changing technology environment in which we operate, product life
cycles tend to be short. Therefore, the resources we devote even to successful
sales and marketing efforts may not generate significant revenues for us, and
from time to time we may need to write off excess and obsolete inventory.
Our international business activities are subject to risks that could
negatively affect our business.
The customer that accounted for approximately 83% of revenues for the first
six months of 2000 and 97% of revenues for the year ended December 31, 1999 is
located in Korea. We expect that sales to customers outside the United States
will continue to account for a substantial portion of our revenues. If we are
unable to successfully overcome the difficulties associated with international
operations, our business will be harmed. These difficulties include:
. currency fluctuations that may have an adverse effect on our business if
they make our products relatively more expensive in foreign countries;
. foreign customer and government preferences for local products;
. compliance with foreign governmental regulation and with U.S. and
foreign laws and treaties relating to the import and export of
telecommunications equipment;
. staffing and managing foreign operations in our highly technical
industry;
. licenses, tariffs and other trade barriers that may be imposed on our
products;
. political and economic instability, especially in the Asia-Pacific
region;
. potentially adverse tax consequences; and
. delays or difficulties collecting accounts receivable from foreign
entities that are not subject to suit in the United States.
To date, our international sales have been denominated solely in U.S.
dollars and, accordingly, we have not been exposed to fluctuations in non-U.S.
currency exchange rates. In the future, a portion of our international sales
may be denominated in currencies other than U.S. dollars, which would expose us
to gains and losses based upon exchange rate fluctuations. Such gains and
losses may contribute to fluctuations in our operating results.
Risks Related to Our Products
We depend on sole source and limited source suppliers for key components of our
products.
We rely on third-party suppliers for semiconductors and other components
which are used in our products, and we have experienced delays or difficulty in
securing components in the past. Key components that we use in our products,
especially semiconductors, may only be available from single sources with which
we do not have long-term contracts. In addition, we obtain certain key
components, including memory and
7
<PAGE>
capacitors, from a limited number of suppliers. If these suppliers experience
increased demand, we may be required to pay higher component prices or may not
be able to meet our customers' demands, either of which could harm our gross
margins or impact our ability to increase our revenues. Furthermore, any of our
key suppliers may:
. enter into exclusive arrangements with our competitors;
. discontinue the manufacture of the components we require;
. stop selling their products or components to us at commercially
reasonable prices, or at all; or
. be subject to production disruptions.
We depend on third parties for the manufacturing, testing and assembly of our
products.
We do not own or operate a manufacturing facility. Rather, we outsource the
manufacturing, assembly and testing of our products. Our contract manufacturers
are currently Victron and Unitek. We will also begin to use SMTC in the second
half of 2000. We currently have contracts with Victron and SMTC which expire in
March 2001 and June 2001, respectively, subject to one year extensions. If any
of our third-party manufacturers experience delays, disruptions, capacity
constraints or quality control problems in their manufacturing operations, then
product shipments to our customers could be delayed, which would negatively
affect our net revenues, competitive position and reputation.
We may in the future need to find new contract manufacturers in order to
increase our volumes or to reduce our costs. We may not be able to find
contract manufacturers that meet our needs, and even if we do, qualifying a new
contract manufacturer and commencing volume production is expensive and time
consuming. If we are required or choose to change contract manufacturers, we
may lose revenues, and our customer relationships may suffer.
We may not be able to successfully manage the manufacture of our products by
our contract manufacturers.
Our business would be harmed if we fail to effectively manage the
manufacture of our products. Because we place orders with our manufacturers
based on our forecasts of expected demand for our products, if we inaccurately
forecast demand, we may be unable to obtain adequate manufacturing capacity or
adequate quantities of components to meet our customers' delivery requirements,
or we may accumulate excess inventories.
We may engage in future acquisitions that dilute our stockholders, cause us to
incur debt and assume contingent liabilities.
As part of our business strategy, we expect to continue to review potential
acquisitions that could complement our current product offerings, augment our
market coverage or enhance our technical capabilities, or that may otherwise
offer growth opportunities. While we have no current agreements or negotiations
underway with respect to any such acquisitions, we may acquire businesses,
products or technologies in the future. In the event of such future
acquisitions, we could issue equity securities that would dilute our current
stockholders' percentage ownership, incur substantial debt, or assume
contingent liabilities. Such actions by us could seriously harm our results of
operations and/or the price of our common stock.
Defects in our products could result in product returns and liability claims,
either of which could harm our business.
Our products are complex and may contain undetected defects, errors or
failures. The occurrence of any defects, errors or failures could result in
delays in installation, product returns and other losses to us or
8
<PAGE>
to our customers or end users. Any of these occurrences could also result in
the loss of or delay in market acceptance of our products, either of which
would harm our business. In addition, any defect or alleged defect could result
in product liability claims against us, which could be expensive, divert the
attention of management from ordinary business activities and harm our
business.
Risks Related to Our Industry
The broadband access device market in which we compete is new and
unpredictable, and if this market does not develop and expand as we
anticipate, then we may not be able to generate sufficient sales to achieve
or maintain profitability.
The market for broadband access services and the related equipment,
including the DSL access equipment that we offer, has only recently begun to
develop and is rapidly evolving. Because this market is new, it is difficult to
predict its potential size or future growth rate. Widespread adoption of high-
speed data transmission products and services is critical to our future
success. Certain critical factors may hinder the development of the broadband
access services market. These factors include:
. inconsistent quality and reliability of service;
. lack of common technology and communication standards and protocols;
. lack of interoperability among multiple vendors' network equipment;
. congestion in network service providers' networks; and
. inadequate security.
We focus exclusively on DSL access devices. If DSL technology does not succeed
as a commercial solution for broadband access, our business may fail.
The growth of the market for our products is dependent upon the broad
acceptance of DSL as a preferred method for high-speed data transmission
services. If the DSL access market fails to develop, develops more slowly than
anticipated or attracts more competitors than we expect, our business,
operating results and financial condition would be harmed. The DSL market,
while rapidly evolving and attracting an increasing number of market
participants, is still at an early stage of development. Potential consumers or
network service providers who have invested substantial resources in their
existing high-speed data transmission systems may be reluctant or slow to adopt
a new technology like DSL. We cannot be certain that DSL products will gain
broader market acceptance or that customers will choose our technology and
products.
The market for high-speed data transmission services has several competing
technologies which offer alternative solutions, including cable modems,
satellite and other wireless technologies. The demand for our products will
decrease if competing technologies are more reliable, faster, less expensive,
or have other advantages over DSL technology. The introduction of new products
by competitors, market acceptance of products based on new or alternative
technologies or the emergence of new industry standards could render our
products less competitive or obsolete. If any of these events occur, we would
be unable to sustain or grow our business.
We will not be able to sell our products if network service providers do not
deploy DSL service in a broad and timely manner.
If network service providers do not increase their deployment of DSL
services rapidly, we would be unable to sell our products as anticipated, if at
all. Factors that hinder deployment include:
. the network service providers' lack of qualified personnel necessary for
the complex installation of DSL service;
9
<PAGE>
. the lack of a proven business model for DSL service providers to
profitably market, sell, install and maintain DSL services;
. cost constraints, such as installation costs and space and power
requirements at the network service providers' central offices;
. the ability of network service providers to raise capital necessary to
fund the expansion of DSL services;
. problems of interoperability among the various DSL network equipment
vendors' products;
. varying and uncertain conditions of the installed copper wire, including
size and length, electrical interference, and crossover interference
with voice and data telecommunications services;
. evolving industry standards for DSL technologies; and
. domestic and foreign government regulation.
Our market is highly competitive and our competitors are more established than
we are and have greater resources than we have.
The market in which we compete is intensely competitive and, as a result, we
will face a variety of significant challenges, including rapid technological
advances, price erosion, frequent new product introductions by our competitors
and evolving industry standards. Our competitors continue to introduce products
with improved price/performance characteristics, and we will have to do the
same to remain competitive.
We compete directly with other providers of DSL access devices including
3Com Corporation, Efficient Networks, Netopia, Ramp Networks, Tut Systems and
Westell Technology. We also compete with network equipment vendors that offer
bundled DSL access solutions that do not include our products, such as Alcatel,
Cisco and Copper Mountain. These companies have longer operating histories,
greater name recognition, larger installed customer bases and significantly
greater financial, technical and marketing resources than we have. These
competitors may also have pre-existing relationships with our customers or
potential customers. As a result, they may be able to introduce new
technologies, respond more quickly to changing customer requirements or devote
greater resources to the development, promotion and sale of their products than
we can. Further, in the event of a manufacturing capacity shortage, these
competitors may be able to manufacture products when we are unable to do so.
Our industry is subject to rapid technological change, and we must keep pace
with the changes to compete successfully. If we do not adapt to changing
customer requirements and emerging industry standards, we may not be able to
sell our products.
The markets for our products are characterized by rapidly changing
technologies, evolving industry standards and the frequent introduction of new
products and enhancements. Our future success depends in a large part on our
ability to enhance our existing products and to introduce new products on a
timely basis to meet changes in customer preferences and evolving industry
standards. We cannot be certain that we will be successful in developing and
marketing new products or product enhancements that respond to such changes in
a timely manner and achieve market acceptance. We also cannot be certain that
we will be able to develop the underlying core technologies necessary to create
new products and enhancements, or that we will be able to license the core
technologies from third parties.
Our industry is significantly affected by the legislative, regulatory and
judicial rules applicable to telecommunications services and the broadband
marketplace.
Changes in existing laws and regulations applicable to our business may not
be favorable to us and may require us to direct time and resources toward legal
and regulatory matters. Since 1996, telecommunications
10
<PAGE>
laws have been in a state of particularly rapid change. If the
Telecommunications Act of 1996 and recent decisions by the Federal
Communications Commission implementing portions of the Act that have opened the
existing telephone network to competition are stayed, reversed or modified by
appellate courts, the growth of the market for our products could be limited.
Government regulations affecting our industry could harm our business.
The jurisdiction of the Federal Communications Commission, or the FCC,
extends to the entire communications industry including our customers and their
products and services that incorporate our products. Future FCC regulations
affecting the broadband access services industry, our customers or our products
may harm our business. For example, FCC regulatory policies that affect the
availability of data and Internet services may impede our customers'
penetration into certain markets or affect the prices that they are able to
charge. In addition, international regulatory bodies are beginning to adopt
standards for the communications industry. Delays caused by our efforts to
comply with regulatory requirements may result in order cancellations or
postponements of product purchases by our customers, which would harm our
business.
Risks Related to Our Intellectual Property
We may not be able to adequately protect our intellectual property.
We believe that our continued success depends on the proprietary technology
contained in our products. We currently rely on a combination of copyrights,
trademarks, trade secret laws and contractual provisions to establish and
protect our intellectual property rights. We cannot be certain that the steps
we take to protect our intellectual property will adequately protect our
proprietary rights, that others will not independently develop or otherwise
acquire equivalent or superior technology or that we can maintain such
technology as trade secrets. In addition, the laws of some of the countries in
which our products are or may be developed, manufactured or sold may not
protect our products and intellectual property rights to the same extent as the
laws of the United States or at all. The failure to adequately protect our
intellectual property rights could harm our business.
Claims that we are infringing upon the intellectual property rights of others
may cause us to become involved in costly and lengthy litigation which could
seriously harm our business.
We believe that our products and technology do not infringe upon the
intellectual property rights of others or upon intellectual property rights
that may be granted to others in the future pursuant to pending applications.
We also believe that we will not be required to obtain licenses of technology
owned by other parties. However, there is always the chance that third parties
may assert infringement claims against us. Any such claims, with or without
merit, could result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements. We cannot be certain
that the necessary licenses will be available or that they can be obtained on
commercially reasonable terms. If we were to fail to obtain such royalty or
licensing agreements in a timely manner and on reasonable terms, our business
would be harmed.
Risks Related to this Offering
Our operating results are likely to fluctuate which may cause our stock price
to decline.
Our operating results are likely to fluctuate significantly from quarter to
quarter. The amount and timing of our operating expenses generally will vary
from quarter to quarter depending on the level of actual and anticipated
business activities. Research and development expenses will vary as we develop
new products. Due to competitive factors in our market, in the past we have
experienced, and we anticipate that
11
<PAGE>
we will continue to experience, decreases in the average selling prices of our
products which could adversely affect gross margins. Due to these and other
factors, our quarterly revenues, expenses and results of operations could vary
significantly in the future, and you should not rely upon period-to-period
comparisons as indications of future performance. Such fluctuations may make
our stock unattractive to investors and result in a decline in the price of our
stock. In addition, it is likely that in some future quarter our operating
results will fall below the expectations of securities analysts and investors.
In this event, the trading price of our common stock may decline significantly.
We may need to raise additional capital in the future, and if we are unable to
secure adequate funds on terms acceptable to us, we may be unable to execute
our business plan.
If the proceeds of this offering, together with our existing cash balances
and cash flow expected from future operations, are not sufficient to meet our
liquidity needs, we will need to raise additional funds. If adequate funds are
not available on acceptable terms or at all, we may not be able to take
advantage of market opportunities, develop or enhance new products, pursue
acquisitions that would complement our existing product offerings or enhance
our technical capabilities, execute our business plan or otherwise respond to
competitive pressures or unanticipated requirements.
A substantial number of our shares of common stock are eligible for future
sale, and the sale of these shares may depress our stock price, even if our
business is doing well.
Upon completion of the offering, we will have approximately shares of
common stock outstanding and shares outstanding if we issue shares upon
exercise of the underwriters' over-allotment option. The shares sold in
this offering will be freely tradeable. The remaining shares of common stock
outstanding after this offering will be available for sale, assuming the
effectiveness of certain lock-up arrangements under which the stockholders have
agreed not to sell or otherwise dispose of their shares of common stock, in the
public market as follows:
<TABLE>
<CAPTION>
Number of Shares Date of Availability for Sale
---------------- -----------------------------
<C> <S>
0 (date of this prospectus)
(90 days after the date of this prospectus)
(after 180 days following the date of this
prospectus); and the remaining shares at
various times thereafter upon the expiration
of one-year holding periods
</TABLE>
If our stockholders sell substantial amounts of common stock in the public
market, including shares issuable upon the exercise of outstanding options, the
market price of our common stock could fall. See "Shares Eligible for Future
Sale" and "Underwriting."
Because the book value per share of our stock is less than the initial offering
price, you will experience immediate dilution.
The estimated initial public offering price is substantially higher than the
current book value per share of our outstanding common stock. As a result,
investors purchasing our common stock in this offering will incur immediate
dilution of approximately $ per share, assuming an initial public offering
price of $ per share, in the book value of our common stock from the price
they pay for our common stock. In addition, we have issued options to acquire
common stock at prices significantly below the estimated initial public
offering price. To the extent these outstanding options are ultimately
exercised, there will be further dilution to investors in this offering. See
"Dilution."
12
<PAGE>
Because of likely fluctuations in the price of our stock we may be subject to
class action litigation, which could distract management and result in
substantial costs.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future.
Securities litigation could result in substantial costs and divert management's
attention and resources from our operations and sales of our products, which
would have a negative impact on our financial condition and results of
operations.
Because our principal stockholders and management will have the ability to
control stockholder votes, the premium over market price that an acquirer
might otherwise pay may be reduced and any merger or takeover may be
delayed.
Immediately following the offering, our officers and directors and their
affiliates will own or control approximately % of our common stock (assuming
no purchases of shares of common stock in this offering by our officers and
directors and their affiliates). Accordingly, our officers, directors and their
affiliates, as a group, may have the ability to control the election of a
majority of the members of our board of directors and the outcome of corporate
actions requiring stockholder approval. This concentration of ownership may
have the effect of delaying, deferring or preventing a change in control of us,
or may impede a merger, consolidation, takeover or other business combination
involving us. This concentration of ownership could also adversely affect our
stock's market price or lessen any premium over market price that an acquirer
might otherwise pay.
Provisions of our charter documents and Delaware law could prevent or delay a
change in our control and may reduce the market price of our common stock.
Certain provisions of our certificate of incorporation and bylaws that will
be in effect upon the consummation of this offering and the provisions of
Delaware law could have the effect of delaying, deferring or preventing our
acquisition which could cause our share price to decline. For example, we have
authorized but unissued shares of preferred stock which could be used to fend
off a takeover attempt, our stockholders may not take actions by written
consent, our stockholders are limited in their ability to make proposals at
stockholder meetings and our directors may be removed only for cause and upon
the affirmative vote of at least 80% of our outstanding voting shares. See
"Description of Capital Stock."
Because we have broad discretion to use the offering proceeds, how we invest
these proceeds may not increase our operating results or market value.
As of the date of this prospectus, we have no specific plans to use the net
proceeds from this offering other than for working capital and general
corporate purposes. Accordingly, our management will have considerable
discretion in the application of the net proceeds, and may apply the net
proceeds in ways which may not increase our operating results or our market
value. See "Use of Proceeds." You will not have the opportunity, as part of
your investment decision, to assess whether the proceeds are being used
appropriately. Pending application of the proceeds, they may be placed in
investments that do not produce income or that lose value.
Because there has been no prior market for our common stock, we cannot be sure
that our stock price will not decline after this offering.
Prior to this offering, you could not buy or sell our common stock on a
public market. The initial public offering price of our common stock will be
determined by negotiation among us and representatives of the underwriters and
may not be indicative of the price that will prevail in the open market after
this offering. In addition, the market price of our shares of common stock may
be highly volatile and could be subject to wide fluctuations. We cannot be
certain that an active trading market for our common stock will develop or be
sustained, or that the price of our stock will not decline after this offering.
13
<PAGE>
Because the Nasdaq stock market is likely to experience extreme price and
volume fluctuations, the price of our stock may decline even if our business
is doing well.
The stock markets, and in particular the Nasdaq stock market, have
experienced extreme price and volume fluctuations that have affected and
continue to affect the market prices of equity securities of many technology
companies. These fluctuations often have been unrelated or disproportionate to
the operating performance of those companies. We also expect that the market
price of our common stock will fluctuate as a result of variations in our
quarterly operating results. These fluctuations may be exaggerated if the
trading volume of our common stock is low. In addition, due to the technology-
intensive and emerging nature of our business, the market price of our common
stock may rise and fall in response to:
. announcements of technological or competitive developments;
. acquisitions or strategic alliances by us or our competitors;
. the gain or loss of a significant customer or order; and
. changes in estimates of our financial performance or changes in
recommendations by securities analysts.
Accordingly, market fluctuations, as well as general economic, political and
market conditions such as recessions, interest rate changes or international
currency fluctuations, may negatively impact the market price of our common
stock.
14
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties, which may include statements about our:
. business strategy;
. financial performance and trends affecting our business;
. plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts; and
. anticipated product release dates.
When used in this prospectus, the words "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions are generally
intended to identify forward-looking statements. In addition, this prospectus
includes statistical data that comes from information published by sources,
including International Data Corporation and Dell'Oro Group, Inc. Because these
forward-looking statements involve risks and uncertainties, actual results
could differ materially from those expressed or implied by these forward-
looking statements for a number of reasons, including those discussed under
"Risk Factors" and elsewhere in this prospectus.
15
<PAGE>
USE OF PROCEEDS
We estimate that we will receive proceeds of $ from the sale of
the shares of common stock in this offering ($ if the underwriters'
over-allotment option is exercised in full) assuming an initial public offering
price of $ per share and after deducting the estimated underwriting
discounts and commissions and our estimated offering expenses.
We plan to use the proceeds for general corporate purposes, including
working capital. We may also use some of the proceeds to acquire other
companies, technology or products that complement our business, although we
have no current plans relating to any of these transactions. Pending these
uses, the net proceeds of this offering will be invested in short-term,
investment grade, interest-bearing securities.
DIVIDEND POLICY
We have not paid any dividends in the past and do not intend to pay cash
dividends on our capital stock for the foreseeable future. Instead, we intend
to retain all earnings for use in the operation and expansion of our business.
Our board of directors will make any future determination of the payment of
dividends based upon various factors then existing, including, but not limited
to, our financial condition, operating results and current and anticipated cash
needs. The payment of dividends may be limited by financing agreements that we
may enter into in the future.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 2000:
. our actual capitalization; and
. our pro forma, as adjusted capitalization to reflect the conversion of
all outstanding shares of preferred stock into common stock, and the
receipt of the net proceeds from the sale of shares of our common
stock offered hereby at an assumed initial public offering price of
$ per share, after deducting the estimated underwriting discounts
and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
June 30, 2000
--------------------
Pro Forma
Actual As Adjusted
------- -----------
(in thousands,
except per share
data)
<S> <C> <C>
Redeemable convertible preferred stock, $0.0001 par value
per share, shares authorized, shares issued
and outstanding, actual, no shares authorized, issued or
outstanding, pro forma as adjusted...................... $25,390 $ --
------- -------
Stockholders' equity (deficit):
Preferred stock, $0.0001 par value per share, no shares
authorized, actual, shares authorized, pro forma
as adjusted, no shares issued or outstanding, actual
or pro forma as adjusted.............................. -- --
Common stock, $0.0001 par value per share, shares
authorized, actual shares authorized, pro forma,
as adjusted;
shares issued and outstanding, actual
shares issued and outstanding pro forma, as adjusted. 0
Additional paid-in capital............................. 44,108
Unearned stock-based compensation...................... (13,890) (13,890)
Accumulated deficit.................................... (41,229) (41,229)
------- -------
Total stockholders' equity (deficit)................. (11,011)
------- -------
Total capitalization................................ $14,379 $
======= =======
</TABLE>
The above table does not include:
. shares issuable upon the exercise of outstanding common stock
options at a weighted average exercise price of $ per share;
. shares issuable upon the exercise of outstanding common stock
warrants at a weighted average exercise price of $ per share; and
. shares available for future issuance under 1998 stock plan.
. shares available for future issuance under 2000 Employee Stock
Purchase Plan.
17
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000, was approximately
$14.4 million, or approximately $ per share of common stock. Pro forma net
tangible book value per share represents the amount of tangible assets less
total liabilities, divided by the shares of common stock outstanding as of
June 30, 2000, assuming the conversion of all outstanding shares of preferred
stock into shares of common stock.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the pro forma as adjusted net tangible book
value per share of our common stock immediately after the offering. After
giving effect to our sale of shares of common stock in this offering at
an assumed public offering price of $ per share and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses, our pro forma as adjusted net tangible book value as of June 30, 2000
would have been approximately $ million, or $ per share. This
represents an immediate increase in pro forma as adjusted net tangible book
value of $ per share to existing stockholders and an immediate dilution in
pro forma as adjusted net tangible book value of $ per share to purchasers
of common stock in this offering.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
Pro forma net tangible book value per share as of June 30, 2000... $
Increase in pro forma net tangible book value per share
attributable to new investors....................................
---
Pro forma as adjusted net tangible book value per share.............
---
Dilution per share to new investors................................. $
===
</TABLE>
The following table sets forth the total consideration paid and the average
price per share paid by the existing stockholders and by new investors, before
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us at an assumed initial public offering price of
$ per share.
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration Average
-------------- -------------- Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ % $ % $
New investors........................
---- ------ ----- ------
Total............................ 100.0% $ 100.0%
==== ====== ===== ======
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to , or % of the total
shares of common stock outstanding after this offering.
In the event that we issue additional shares of common stock in the future,
purchasers of common stock in this offering may experience further dilution. As
of June 30, 2000, there were options outstanding to purchase shares of
common stock at a weighted average exercise price of approximately $ per
share, shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $ per share and
shares of common stock reserved for issuance under our stock option plans and
our employee stock purchase plan.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and
related notes included elsewhere in this prospectus. The selected consolidated
balance sheets data as of December 31, 1998 and 1999 and the selected
consolidated statements of operations data for the period from April 8, 1998
(date of inception) to December 31, 1998 and for the year ended December 31,
1999 have been derived from our audited consolidated financial statements, and
are included elsewhere in this prospectus. The consolidated statements of
operations data for the six months ended June 30, 1999 and 2000 and the
consolidated balance sheet data at June 30, 2000, are derived from unaudited
interim financial statements included elsewhere in this prospectus. The
unaudited condensed consolidated financial statements have been prepared on
substantially the same basis as the audited consolidated financial statements
and, in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
of operations for such periods. Historical results are not necessarily
indicative of the results to be expected in the future, and results of interim
periods are not necessarily indicative of results for the entire year.
<TABLE>
<CAPTION>
Period from
April 8, 1998 Six Months Ended
(date of inception) Year Ended June 30,
to December 31, December 31, -----------------
1998 1999 1999 2000
------------------- ------------ ------- --------
<S> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Net revenues............. $ -- $ 2,411 $ 71 $ 16,708
Cost of revenues......... -- 2,926 64 17,724
------- ------- ------- --------
Gross profit (loss).... -- (515) 7 (1,016)
Operating expenses:
Sales and marketing.... 58 894 279 1,134
Research and
development........... 796 2,604 1,122 3,144
General and
administrative........ 291 1,295 268 736
Stock-based
compensation.......... 1,375 2,544 -- 7,643
------- ------- ------- --------
Total operating
expenses............ 2,520 7,337 1,669 12,657
Operating loss........... (2,520) (7,852) (1,662) (13,673)
Interest income
(expense), net.......... (9) 40 19 351
------- ------- ------- --------
Net loss................. $(2,529) $(7,812) $(1,643) $(13,322)
Accretion of redeemable
convertible preferred
stock to redemption
value................... -- 49 -- --
Deemed dividend.......... -- 2,013 -- 15,553
Net loss available to
common stockholders..... $(2,529) $(9,874) $(1,643) $(28,875)
======= ======= ======= ========
Net loss per share--basic
and diluted............. $ $ $ $
======= ======= ======= ========
Shares used in computing
basic and diluted net
loss per share..........
Pro forma net loss per
share--basic and
diluted................. $ $ $ $
======= ======= ======= ========
Shares used in computing
pro forma basic and
diluted net loss per
share...................
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999 June 30, 2000
------- ------- -------------
<S> <C> <C> <C>
Consolidated Balance Sheets Data:
Cash and cash equivalents..................... $ 109 $ 3,574 $ 14,251
Working capital (deficit)..................... (263) 2,371 12,667
Total assets.................................. 355 7,102 21,529
Total stockholders' deficit................... (1,130) (6,441) (11,011)
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and the related notes included elsewhere in this
prospectus.
Overview
We design, market and sell a broad line of DSL access devices that enable
network service providers to cost-effectively deliver broadband Internet access
to residential and business consumers. We commenced operations in April 1998
and focused our resources on developing DSL access devices. We shipped our
first DSL access device products in March 1999, but we did not commence volume
shipments until the fourth quarter of 1999. Although our revenues have
increased substantially in the two most recent quarters, we have experienced
net losses in each period since inception, and, as of June 30, 2000, we had an
accumulated deficit of $41.2 million.
We derive all of our revenues from sales of our DSL access devices, and we
recognize revenues at the time of shipment. We provide allowances for estimated
returns, uncollectable accounts and warranty costs at the time of revenue
recognition. We sell our products to network service providers and network
equipment vendors. We derived substantially all of our revenues through the six
months ended June 30, 2000 from sales of our X400 product to Hanaro Telecom, a
network service provider in Korea. Accordingly, substantially all of our
revenues have been derived from international sales. Although all of our sales
are denominated in U.S. dollars, currency fluctuations may have an adverse
effect on our business if they make our products relatively more expensive in
foreign jurisdictions. We anticipate that, as we broaden our customer base, the
percentage of our revenues derived from products other than the X400 and from
domestic customers will increase.
Our market is intensely competitive and is characterized by declining prices
due to increased competition and new product introductions. Due to competition
and potential pricing pressures from large customers in the future, we expect
that the average selling prices of our products will decline over time.
Accordingly, to achieve and maintain profitability we must substantially
improve our gross margins by reducing our cost of revenues.
Cost of revenues is comprised principally of contract manufacturing costs as
well as our personnel and other costs related to manufacturing start up
activities. We provide our contract manufacturers with rolling six-month
forecasts of our product needs, and our contract manufacturers place orders
with component suppliers to meet our demands. Our contract manufacturers charge
us for the cost of the components plus a mark-up fee as well as assembly and
test services. We have recently entered into arrangements with certain
component suppliers that we believe will enable us to minimize the effects of
component purchase price variances that have substantially reduced our gross
margins. We anticipate that our cost of revenues as a percentage of net
revenues will decline in each quarter of 2000 due to our arrangements with
component suppliers as well as cost savings that we expect will result from
volume pricing advantages and anticipated product mix changes. We also expect
our gross margin to vary from period to period as the result of many factors,
including declines in average unit selling prices, fluctuations in demand for
our products, the mix of products sold, the timing and size of customer orders,
fluctuations in manufacturing volumes, changes in costs of components and new
product introductions both by us and by our competitors.
Research and development expenses consist primarily of salaries and related
expenses for engineering personnel, fees paid to consultants and outside
service products, depreciation of development and test equipment, prototyping
expenses related to the design, development, testing and enhancements of our
products and the cost of computer support services. We expense all research and
development costs as incurred. From inception, we have incurred significant
expenses to develop our products. We believe that
20
<PAGE>
continued investment in research and development is critical to our strategic
product and cost reduction objectives. Accordingly, we expect to continue to
devote substantial resources to research and development such that these
expenses will increase in absolute dollars.
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in marketing, public relations, sales
and customer support functions, as well as advertising, promotional and trade
show costs and travel expenses. We believe that continued investment in sales
and marketing is critical to the success of our strategy to expand our
relationships, with leading network service providers and network equipment
vendors, to establish and maintain relationships with partners and to expand
our sales. We expect these expenses will increase in absolute dollars as we add
personnel to implement our strategy.
General and administrative expenses include salaries and related expenses
for personnel engaged in finance, human resources, information technology and
administrative functions, as well as fees paid to outside professionals. We
expect that these expenses will increase in future periods in absolute dollars
as we incur additional costs related to the anticipated growth of our business
and our operation as a public company.
In connection with the grant of stock options in 1999 and the first six
months of 2000, we recorded an aggregate of $24.1 million in deferred stock-
based compensation within stockholders' equity. These options were considered
compensatory because the deemed fair value was greater than the exercise prices
determined by the board of directors on the date of grant. As of June 30, 2000,
we had an aggregate of $13.9 million of deferred stock-based compensation
remaining to be amortized. This deferred compensation balance will be amortized
as follows: $4.9 million during the remainder of 2000; $5.6 million during
2001; $2.6 million during 2002; and $800,000 during 2003. We anticipate that we
will record additional stock-based compensation expense related to options
granted subsequent to June 30, 2000. We are amortizing the deferred
compensation on an accelerated basis in accordance with Financial Accounting
Standards Board Interpretation No. 28 over the vesting period of the related
options, which is generally four years. The amount of stock-based compensation
amortization actually recognized in future periods could decrease if options
for which accrued but unvested compensation has been recorded are forfeited.
In the fourth quarter of 1999, we issued shares of Series C preferred
stock for gross proceeds of approximately $2.0 million. The issuance resulted
in a deemed dividend of $2.0 million calculated in accordance with Emerging
Issues Task Force No. 98-5, which resulted in an immediate increase in
additional paid-in capital. In January and February 2000, we issued shares
of Series C preferred stock for gross proceeds of approximately $15.6 million.
The issuance resulted in a deemed dividend of $15.6 million calculated in
accordance with Emerging Issues Task Force No. 98-5, which resulted in an
immediate increase in additional paid-in capital.
In view of the rapidly changing nature of our industry and the substantial
difference in the scope of our business during periods prior to the fourth
quarter of 1999, we believe that period-to-period comparisons of revenue and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. We will not be able to maintain our
historical growth rate, and you must evaluate our business and prospects in
light of risks and challenges described under "Risk Factors" and elsewhere in
this prospectus.
Comparison of Six Months Ended June 30, 2000 and 1999
Net revenues. During the six month period ended June 30, 2000, we shipped
approximately 136,000 units of our access devices and recognized approximately
$16.7 million of revenue compared to approximately $71,000 of revenue for the
first six months of 1999. The revenue increase was primarily due to product
shipments to our largest customer.
21
<PAGE>
Cost of revenues. For the six month period ended June 30, 2000, cost of
revenues was approximately $17.7 million compared to approximately $64,000 for
the first six months of 1999. The increase in cost of revenues reflects the
substantially different levels of operations between the two periods. The
negative gross margins for the first six months of 2000 were the result of
increased component costs due to short lead times on orders we placed to meet
customer demands, manufacturing start-up costs, and high third-party
manufacturing costs due to initial low volume manufacturing. We have entered
into contracts and arrangements that we believe will mitigate these costs on a
going-forward basis.
Sales and marketing. For the six month period ended June 30, 2000, sales and
marketing expenses were approximately $1.1 million compared to approximately
$279,000 for the first six months 1999. This increase relates primarily to
additional headcount-related expenses and additional travel and trade show-
related expenses.
Research and development. For the six months ended June 30, 2000, research
and development expenses were approximately $3.1 million, compared to
approximately $1.1 million during the first six months of 1999. This increase
was primarily due to increased personnel and associated costs, as well as
design and prototype expenses associated with the increased product development
activity during the period.
General and administrative. For the six month period ended June 30, 2000,
general and administrative expenses were approximately $736,000, compared to
expenses of approximately $268,000 for the first six months 1999. This increase
was primarily due to expenses relating to increased headcount and professional
fees.
Interest income (expense), net. Interest income (expense), net consists
primarily of interest earned on cash and cash equivalents offset by
miscellaneous non-operating expenses. Interest and other income, net was
approximately $351,000 for the first six months of 2000, compared to
approximately $19,000 for the first six months of 1999. This increase in
interest and other income (expense), net was related primarily to higher
average cash balances during the six months of 2000 resulting from the sale of
our preferred stock.
Income taxes. From inception through June 30, 2000, we incurred net losses
for federal and state tax purposes and have not recognized any tax provisions
or benefits.
Comparison of Years Ended December 31, 1999 and 1998
Net revenues. During 1999 we shipped approximately 20,000 units of our
access devices and recognized approximately $2.4 million of revenues. We
recognized no revenues for 1998. The revenue increase was due to the
commencement of shipment of our products.
Cost of revenues. For the year ended December 31, 1999, cost of revenues was
approximately $2.9 million. During 1998, there were no costs of revenues, as we
had not commenced shipments of our products during that period.
Sales and marketing. Sales and marketing expenses for 1999 were
approximately $894,000 compared to expenses of approximately $58,000 during
1998. The increase in sales and marketing expenses during 1999 relates
primarily to additional headcount-related expenses and additional travel and
trade show-related expenses.
Research and development. Research and development expenses for 1999 were
approximately $2.6 million compared to expenses of approximately $796,000
during 1998. This increase was due primarily to increased personnel and
associated costs, as well as design and prototype expenses associated with the
increased product development activity during the year.
General and administrative. General and administrative expenses for 1999
were approximately $1.3 million compared to approximately $291,000 for 1998.
This increase is primarily related to headcount and related expenses, and
settlement of a dispute with a distributor in Korea.
22
<PAGE>
Interest income (expense), net. Net interest income was $40,000 for fiscal
year 1999, compared to an expense of $9,000 for 1998. This increase was related
primarily to higher average cash balances during 1999 due to sales of our
preferred stock to investors during the year.
Income taxes. From inception through December 31, 1999, we incurred net
losses for federal and state tax purposes and have not recognized any tax
provisions or benefits. As of December 31, 1999, we had approximately $4.0
million of federal and $6.0 million of state net operating loss carryforwards
available to offset future taxable income which expire in varying amounts
beginning in 2018. Under the Tax Reform Act of 1986, the amounts of and
benefits from net operating loss carryforwards may be impaired or limited in
certain circumstances. Events which cause limitations in the amount of net
operating losses that we may use in any one year include, but are not limited
to, a cumulative ownership change of more than 50% over a three year period.
Quarterly Results of Operations
The following table sets forth, for the periods presented, certain financial
data from Xpeed's consolidated statement of operations. The consolidated
statement of operations data have been derived from our unaudited consolidated
financial statements. In the opinion of management, these statements have been
prepared on substantially the same basis as the audited financial statements
and include all adjustments, necessary for a fair presentation of the financial
information for the periods presented. This information should be read in
conjunction with our financial statements and notes thereto included elsewhere
in this prospectus. We have incurred net losses in each quarter since
inception, and we expect to continue to incur losses for the foreseeable
future.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 1 $ 70 $ 14 $ 2,326 $ 6,557 $10,151
Cost of revenues........ 14 50 8 2,854 7,611 10,113
----- ------- ------- ------- ------- -------
Gross profit (loss)... (13) 20 6 (528) (1,054) 38
Operating expenses:
Sales and marketing... 45 234 231 384 451 683
Research and
development.......... 508 614 648 834 1,367 1,777
General and
administrative....... 95 173 166 861 272 464
Stock-based
compensation......... -- -- 2,168 376 3,039 4,604
----- ------- ------- ------- ------- -------
Total operating
expenses........... 648 1,021 3,213 2,455 5,129 7,528
----- ------- ------- ------- ------- -------
Loss from operations.... (661) (1,001) (3,207) (2,983) (6,183) (7,490)
Interest income
(expense), net......... (5) 24 18 3 159 192
----- ------- ------- ------- ------- -------
Net loss................ $(666) $ (977) $(3,189) $(2,980) $(6,024) $(7,298)
===== ======= ======= ======= ======= =======
</TABLE>
Our net revenues and results of operations have fluctuated significantly
from quarter to quarter in the past, and we expect these fluctuations to
continue in the future.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the sale
of preferred equity securities. Since inception to June 30, 2000, we have
raised approximately $26.1 million (net of transaction expenses) from the sale
of equity securities.
23
<PAGE>
At June 30, 2000, we had cash and cash equivalents of approximately $14.3
million. At June 30, 2000, we did not have a line of credit or other borrowing
facility available.
Cash used in operating activities was $4.7 million for the six months ended
June 30, 2000, $4.3 million in 1999 and $873,000 in 1998. Cash used in
operating activities was primarily due to our net loss and investments in
working capital, such as accounts receivable and inventory, offset by non-cash
stock compensation expense and the increase in accounts payable.
Cash used in investing activities was $870,000 for the six month period
ended June 30, 2000, $813,000 in 1999 and $245,000 in 1998. This use of cash in
investing activities was due to purchases of furniture and equipment related to
additional headcount and the growth of our research and development efforts.
Cash provided by financing activities was $16.3 million for the six month
period ended June 30, 2000, $8.6 million in 1999 and $1.2 million in 1998. This
cash provided by financing activities was primarily related to funds raised in
our preferred equity rounds of financing and proceeds from issuances of common
stock.
Our future capital requirements will depend upon a number of factors,
including the rate of growth of our sales, and expenses in developing current
and future products and marketing these products to our customers. We believe
that our cash and cash equivalents will provide sufficient capital to fund our
operations at least through the next twelve months. We may require additional
capital to fund our operations in future years.
Qualitative and Quantitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to interest rate risk is limited to the exposure related to our
cash and cash equivalents which is tied to market interest rates. As of June
30, 2000, we had cash and cash equivalents of $14.3 million, which consist of
cash and highly liquid short-term investments. We ensure the safety and
preservation of our invested principal funds by investing in high credit
quality securities. Although our short-term investments will decline in value
by an immaterial amount if interest rates increase, any such decline would not
have a material effect on our financial condition or results of operations. We
do not hedge any interest rate exposures.
Foreign Currency Risk
We have not had any significant transactions in foreign currencies, nor did
we have any significant balances that were due or payable in foreign currencies
at June 30, 2000. Therefore, a hypothetical 10.0% change in foreign currency
rates would not have a significant impact on our financial condition and
results at operations. We do not currently hedge any of our foreign currency
exposure.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") FASB issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), which establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
in the statement of financial position, and that the corresponding gains or
losses be reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 is effective for fiscal years beginning after June 15, 2000.
We are assessing the potential impact of this pronouncement on the financial
statements; however, we do not expect any significant impact.
In December 1999, the Securities Exchange Commission ("SEC") issued to Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which outlines the basic criteria that
24
<PAGE>
must be met to recognize revenue and provides guidance for presentation of
revenue and for disclosure related to revenue recognition policies in financial
statements filed with the SEC. In June 2000, the SEC issued SAB 101(B) which
defers the implementation date of SAB 101 to no later than the fourth fiscal
quarter of fiscal years commencing after December 15, 1999. We have evaluated
the provisions of SAB 101 and believe we are in compliance with SAB 101.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation--an Interpretation of APB 25. This
Interpretation clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after
either December 15, 1998, or January 12, 2000. To the extent that this
Interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are recognized on a prospective basis
from July 1, 2000. We have not yet determined the impact, if any, of adopting
this Interpretation.
25
<PAGE>
BUSINESS
Overview
We design, market and sell digital subscriber line, or DSL, access devices.
DSL technology provides high-speed data transmission using the existing copper
wire infrastructure. We believe that we are positioned to become a leading
provider of DSL access devices due to the interoperability of our products with
a broad range of DSL central office equipment, the ease of deployment and
maintenance of our products, our flexible architecture and our broad product
line.
Industry Background
Global deregulation in the telecommunications industry and demand for
Internet access have created a market opportunity for providers of network
services. The enactment of the United States Telecommunications Act of 1996,
along with similar legislation in other countries, has resulted in the
emergence of network service providers that compete with traditional phone
companies to offer voice and data services. The demand for network access is
increasing due to the dramatic growth in the number of Internet users and the
volume of data transmitted. According to International Data Corporation, an
independent market research firm, the number of worldwide Internet users will
increase from 186.2 million in 1999 to 502.5 million in 2003.
Business and residential users are driving the growth in data traffic over
the Internet by accessing bandwidth-intensive content and applications such as
highly graphical Web sites and by downloading audio, video and software files.
In addition, businesses are implementing electronic commerce strategies and
providing employees with the ability to transmit large documents and files from
the office or remote locations. The growing number of users and the increase in
data traffic are driving network service providers to expand and improve
network access.
To address the increased demand for broadband access in this competitive
environment, network service providers are deploying high-speed fiber optic
technology in the core of their networks. However the cost of extending fiber
optic networks from the network core to each individual user can be
prohibitive. As a result, network service providers have typically relied upon
the existing telephone infrastructure to extend network access to the end user.
This access portion of the network which connects the end-user's home or
business to the service provider's core network is known as the "last mile."
Data transmission speeds through the fiber optic core of the network are up to
150,000 times faster than the speed of the fastest analog modem, which often
results in a bottleneck in the last mile.
Network service providers are deploying DSL and other technologies to
overcome the limitations of the last mile. DSL technology delivers high-speed
data transmission over existing copper telephone wires. A DSL connection
requires a DSL access device, such as a modem, located at the end user's
premises and a DSL access multiplexer, or DSLAM, located at the other end of
the copper wire in the service provider's network. DSLAMs aggregate the data
streams received from DSL access devices for transmission over the service
provider's high-speed fiber optic network.
Copper telephone wires reach the vast majority of businesses and residences
in the United States, making DSL technology attractive to network service
providers because it can be widely deployed with minimal infrastructure
upgrades. DSL technology enables the existing copper telephone wires to
transmit data up to 150 times faster than a conventional 56K dial-up modem. In
addition, DSL technology provides the ability to simultaneously transmit
multiple voice channels and data over a single telephone line. These advantages
are driving the deployment of DSL service. International Data Corporation
estimates that the number of DSL lines in service worldwide will increase from
approximately 650,000 in 1999 to 27.3 million in 2003.
26
<PAGE>
To meet the growing demand for DSL service, network service providers must
address a number of challenges in deploying and maintaining DSL service.
Competition and rapid deployment have led to a proliferation of DSL
technologies and standards and protocols implemented by a variety of DSLAM
vendors. To deliver DSL, network service providers must ensure that each DSL
access device fully functions with the DSLAM in the central office. Network
service providers typically use a variety of DSLAMs from multiple DSLAM vendors
within their network. As a result, network service providers require access
devices that can be installed quickly, are easy to maintain and fit seamlessly
into existing networks by interoperating with a wide range of DSLAMs.
Installation of DSL service can be a time consuming and labor-intensive process
involving the dispatch of technicians to deploy equipment at every end-user
location. To compete effectively, network service providers require DSL access
devices that minimize the cost and simplify the deployment and maintenance of
DSL services. In addition, network service providers need DSL access devices
that enable them to rapidly address evolving customer requirements and
technological standards.
The Xpeed Solution
We offer a broad line of DSL access devices that enable network service
providers to cost-effectively deliver broadband Internet access to homes and
businesses. Our products interoperate with most currently available DSLAMs,
have an intuitive user interface and are easily installed and maintained. We
believe our flexible product architecture enables us to bring new products to
market quickly to meet our customers' changing needs and evolving industry
standards.
Interoperability. Our products are designed to support a number of DSL
technologies, computer operating systems and network protocols and standards,
enabling network service providers to integrate our access devices into most
networks. Our DSL access devices are interoperable with central office DSLAMs
made by major manufacturers, including Alcatel, Cisco, Copper Mountain, Lucent
and Nokia. According to Dell'Oro Group, an independent research firm, these
manufacturers accounted for 82.6% of the DSLAM units sold worldwide during
1999.
Ease of Deployment and Maintenance. Our products are designed to enable
network service providers to deploy DSL service rapidly and cost-effectively,
allowing them to quickly build market share in today's competitive environment.
Our proprietary graphical user interface guides the technician though the
installation process, helping to eliminate costly errors and simplifying the
installation. Our software also assesses the maximum transmission speed to
connect with the DSLAM and allows service providers to offer customized
services at the time of deployment or through upgrades. In addition, our
software supports remote diagnostic functions that can reduce maintenance
costs.
Flexible Architecture. Our proprietary technology, consisting of our
software, integrated circuits and circuit board design, provides us with a
flexible platform upon which we design our products. As a result, we believe we
can rapidly bring new products to market that meet our customers' changing
needs and evolving industry standards.
Broad Product Line. We offer a broad range of DSL access devices, including
single-user DSL modems and multi-user DSL bridges and routers for residences
and businesses. Our products are designed to support the three most common DSL
technologies, as well as a number of computer operating systems and network
standards and protocols. In addition, we offer our modem products in both
internal and external format enabling customers to choose the solution that
best fits their needs. By addressing the full range of our customers' DSL
access device needs, we believe we can simplify their supply relationships.
27
<PAGE>
The Xpeed Strategy
Our goal is to become the leading provider of DSL access devices to network
service providers worldwide. The following are the key components of our
strategy:
Rapidly Develop New Products and Technologies. We will continue to rapidly
expand our product offerings, keeping pace with new developments in DSL
technology. We have designed our products with a flexible hardware and software
architecture which we believe will shorten product development cycles. This
enables us to react quickly to market trends, such as emerging DSL standards
and network protocols.
Expand Sales Channels. We intend to meet the increasing global demand for
DSL access devices by expanding our direct sales force and our indirect
domestic and international distribution channels. In particular, we intend to
hire additional experienced sales personnel in the United States to facilitate
our penetration of the regional Bell operating companies and other large
service providers. We intend to continue to build our relationships with
network equipment vendors to gain access to additional network service
providers.
Leverage Strategic Relationships. We believe that establishing and
maintaining relationships with leaders in DSL technology and services is
critical to our success. Accordingly, we have formed strategic relationships
with network service providers such as Hanaro Telecom and Northpoint and
developers of DSL semiconductor technology such as Centillium Communications.
We also work closely with various network equipment vendors such as Cisco and
Lucent. We believe that these relationships increase industry awareness of our
products, extend our sales and distribution capabilities and help us to
anticipate changing industry and technology standards.
Provide Integrated Voice and Data Broadband Access Solutions. We are
developing broadband voice and data integrated access devices to take advantage
of the anticipated growth in the emerging market for integrated voice and data
services. We believe that this market will grow rapidly as network service
providers seek to increase their sales and customer base by delivering multiple
voice and data services over a single copper line. A successful launch of
products for this market will further establish us as a technology leader in
our industry.
Pursue Strategic Acquisitions. We continue to evaluate opportunities to
augment our existing product family and sales channels by acquiring companies
with complementary technologies and skilled personnel. We believe that
expanding our core competencies through acquisitions will strengthen our market
position.
Products
We offer internal modems, external modems, bridges and routers that enable
network service providers to deploy DSL access for business and residential
customers. Our products support the three most common types of DSL: asymmetric
DSL, or ADSL, symmetric DSL or SDSL, and ISDN DSL or IDSL. ADSL is known as
asymmetric because data is received by the end user faster than the end user
transmits data. SDSL is referred to as symmetric because data is received and
transmitted at the same speed. While IDSL is slower than ADSL or SDSL, it
supports data transmission over greater distances.
28
<PAGE>
Internal Modems
Our internal modems can be plugged directly into personal computers running
Windows 95, 98, NT and 2000 operating systems.
<TABLE>
<C> <S> <C>
Product Features Availability
-----------------------------------------------------------------------------
X200 . Supports networks reaching up to Q2 1999
IDSL PCI Modem 36,000 feet at speeds up to 144
kilobits per second.
. Supports Internet Protocol over frame
relay standard.
. Supports Linux operating system for
OEMs.
-----------------------------------------------------------------------------
X300 . Supports data transfer speeds of up to
2.3 megabits per second. Q1 1999
SDSL PCI Modem . Supports Internet Protocol over frame
relay standard.
. Supports Linux operating system for
OEMs.
-----------------------------------------------------------------------------
X400 . Supports data transfer speeds of up to Q4 1999
ADSL PCI Modem 8 megabits per second downstream and
up to 640 kilobits per second
upstream.
. Supports Internet Protocol over
asynchronous transfer mode standard.
. Supports DSL standards for other
countries.
</TABLE>
External Modems
Our external modems can be plugged in directly to the universal serial bus
port that connects to a computer's central processing unit. These modems offer
"plug and play" installation that allows them to be automatically detected and
configured after they are connected. These modems support the Windows 98 and
2000 operating systems.
<TABLE>
<C> <S> <C>
Product Features Availability
-------------------------------------------------------------------------------
X310 . Supports 21 symmetrical speeds from 144 Q1 2000
SDSL USB Modem kilobits per second up to 2.3 megabits
per second.
. Supports Internet Protocol over frame
relay standard.
-------------------------------------------------------------------------------
X410-A . Supports data transfer speeds of up to 6 Q3 2000
ADSL USB Modem megabits per second downstream and up to
640 kilobits per second upstream.
. Supports Internet Protocol over
asynchronous transfer mode standard.
. Supports North American standards.
-------------------------------------------------------------------------------
X411-A . Supports data transfer speeds of up to Q3 2000
ADSL G.Lite USB 1.5 megabits per second downstream and
up to 512 kilobits per second upstream.
Modem . Supports Internet Protocol over
asynchronous transfer mode standard.
. Supports North American standards.
-------------------------------------------------------------------------------
X411-C . Supports transfer speeds of up to 1.5 Q3 2000
ADSL G.Lite USB megabits per second downstream and up to
512 kilobits per second upstream.
Modem . Supports Internet Protocol over
asynchronous transfer mode standard.
. Supports Japanese standards.
</TABLE>
29
<PAGE>
Bridges and Routers
Our Ethernet bridges and routers offer "plug and play" installation that
allows them to be automatically detected and configured after they are
connected. They support 21 symmetrical speeds from 144 kilobits per second to
2.3 megabits per second. Their built-in hub currently enables up to four
personal computers to use a single DSL line.
A bridging access device transports all packet-based data traffic
transparently between local area networks. Our router performs the same
function as our bridge and provides additional functionality such as quality of
service selection and security options.
<TABLE>
<C> <S> <C>
Product Features Availability
-------------------------------------------------------------------------------
X320 . Allows multiple users to connect to a Q1 2000
SDSL Ethernet single Ethernet port for local area
networking.
Bridge . Architecture ensures efficient packet
handling.
. Upgradeable to router with downloadable
software.
-------------------------------------------------------------------------------
X320-R . Offers routing capability using industry
standards. Q3 2000
SDSL Ethernet . Provides security using built-in
firewall.
Router . Can be upgraded to accept new
functionality via Web downloads or
through command line interfaces.
</TABLE>
Products Under Development
<TABLE>
<C> <S> <C>
Expected
Product Features Availability
-------------------------------------------------------------------------------
X420-A . Supports data transfer speeds up to 8 Q4 2000
ADSL Ethernet megabits per second downstream and up to
640 kilobits per second upstream.
Bridge . Offers plug and play via any personal
computer's Ethernet port for easy
installation.
. Supports North American standards.
-------------------------------------------------------------------------------
X320-RA . Supports 21 symmetrical speeds from 144 Q4 2000
SDSL Ethernet kilobits per second to 2.3 megabits per
second.
ATM Router . Interoperates with Internet Protocol
equipment.
. Offers "plug and play" via any personal
computer's Ethernet port for easy
installation.
-------------------------------------------------------------------------------
X320-V . Supports 8, 12 or 16 configurable voice
ports. Q4 2000
Voice over . Provides multiple toll-quality voice
channels.
DSL Router . Standard 19 inch rack and wall mountable
package.
</TABLE>
Technology
We possess a high level of multi-disciplinary technological expertise that
we utilize in designing our products. This expertise includes our application
specific integrated circuit, or ASIC, design capability, our ASIC software
expertise, our integration capability and our ability to use a common systems
architecture to develop a broad line of products. We believe that our expertise
in these technologies provides us with competitive advantages in time-to-
market, cost-effectiveness, interoperability and product functionality. In
addition, our flexible design allows us to quickly adapt our products to
customers' changing needs and evolving industry standards.
30
<PAGE>
ASICs design expertise. Our design expertise enables us to develop
proprietary ASICs that integrate several functions on a single integrated
circuit. This integration results in an efficient and compact design for our
products, and reduces our time to market for subsequent product development.
Our ASICs provide high-speed data interfaces to the personal computer while
significantly reducing host CPU processing time.
Software expertise. Our software design team has experience in developing
applications and advanced protocols to address the requirements of our
customers. Our modular design allows us to build on our proven software
architecture when developing new products, thus reducing the length of our
design process and making the quality assurance process more efficient. Our
flexible architecture also allows us to implement our product functionality
either in embedded software running on the controller for external devices,
such as bridges and routers, or in the device driver software running in the
client's host processor for PCI and USB modems. Our in-depth knowledge of the
connectivity protocols ensures that our products are interoperable with network
equipment vendors' DSLAMs.
We use our expertise in various operating systems and personal computer
environments to develop proprietary software and scripts, significantly
simplifying the installation process and facilitating product configuration by
detecting optimal transmission conditions. Our graphical user interface also
supports advanced configuration options that support customized network
installation. Our user interface also allows the end-user to access detailed
information about the DSL link for diagnostic purposes. In addition, our
advanced interface function allows network service providers to remotely
perform enhanced diagnostics, maintenance and service.
System-level expertise. We have an experienced engineering team that ensures
the system-level integration of our product components. These components
include our proprietary ASICs, off-the-shelf components, printed circuit boards
and software. Our experience and knowledge of the various components and
modular nature of our product, enables our team to quickly re-design our
products to meet changing customer needs and evolving industry standards.
Network interoperability expertise. We have extensive expertise with the
standards and protocols used by the major DSLAM vendors. We have achieved
interoperability with DSLAMs manufactured by Alcatel, Cisco Systems, Copper
Mountain Networks, Lucent Technologies and Nokia. Our software engineering and
quality assurance teams make full use of our advanced interoperability
laboratory equipped with DSLAMs and other complex network equipment from major
manufacturers. By integrating and testing interoperability requirements in the
design phase, we benefit from a short cycle for certification of our products
by DSLAM manufacturers and network service providers.
Customers
We have focused our sales efforts primarily on strategic customers that can
provide us with volume sales and validate us as a leading provider of DSL
access technology. Network service providers purchase products from us to
provide DSL services to residential and business consumers. Network equipment
vendors combine our products with their central office equipment to market
complete DSL access packages to network service providers. The following table
displays our customers who have purchased a minimum of $50,000 of our products
from January 1, 1999 through June 30, 2000:
<TABLE>
<CAPTION>
Network Service Providers Network Equipment Vendors
------------------------- -------------------------
<S> <C>
BroadbandNOW Interspeed
Gallantry Technologies Lucent Technologies
Hanaro Telecom
NorthPoint Communications
</TABLE>
Sales to Hanaro Telecom represented 97% of our revenues for 1999. For the
six months ended June 30, 2000, sales to Hanaro Telecom represented 83% of our
revenues for such period. Hanaro Telecom, Inc. is a
31
<PAGE>
provider of high-speed Internet access, local telephony and multi-media and
data services in Korea. Hanaro's American depositary shares are listed for
trading on the Nasdaq National Market.
Manufacturing, Assembly and Testing
We outsource the manufacture, assembly and testing of our products. This
model allows us to focus our resources on the design, marketing and sales of
our products and to lower our inventory and fixed costs. Currently, Victron,
Inc. manufactures the majority of our product at its facility in Fremont,
California. We also use Unitek, Inc. for the manufacturing of certain of its
product in Fremont, California. We will begin to use SMTC in the second half of
2000. We currently have contracts with Victron and SMTC which expire in March
2001 and June 2001, respectively, subject to one year extensions. We are
currently evaluating additional contract manufacturers to meet our anticipated
requirements and to continue to reduce the manufacturing costs of our products.
All of our contract manufacturers are ISO9002 certified for manufacturing and
design process.
Our contract manufacturers perform comprehensive inspection tests and use
statistical process controls to assure the reliability and quality of our
products. Our engineers develop test procedures that are integrated into the
contract manufacturers' processes. We only accept finished products that meet
our specifications.
We design the applications specific integrated circuits, or ASICs, that are
used in our products. We perform simulation and verification testing on the
ASICs at our facility. Epson Semiconductor manufactures and tests our ASICs
prior to their shipment to our contract manufacturers.
Other than our proprietary ASICs, we use standard parts and components
whenever possible. We currently purchase certain key components from sole-
source suppliers such as Analog Devices, Centillium Communications, Conexant
Systems, ITeX, Samsung Electronics and Siemens/Infineon.
Sales and Marketing
Our direct sales force targets competitive local exchange carriers, regional
Bell operating companies, foreign telephone network service providers and
internet service providers. Our sales and marketing force consists of 19
employees, three of whom are based in Korea and two of whom are based in Japan.
We have sales offices in Korea, Japan, and the United States and we are
strengthening our direct sales force in North America. We have relationships
with leading network equipment vendors that supply DSLAMs to the central
office, such as Cisco, Copper Mountain and Lucent. Our relationships with these
network equipment vendors allow us to make joint sales and marketing calls to
promote our products to network service providers.
We engage in a variety of marketing activities to build customer and
industry awareness of our products. We issue press releases concerning
significant product releases, partnerships and new customers. We participate in
a number of industry trade shows and conduct briefings for members of the
press. Our goal is to continue to increase the brand awareness of our products.
Research and Development
We believe that the future success of our business depends in part on our
ability to continue to enhance existing products and develop new products that
meet market requirements. We continuously review the changes in technology
affecting the telecommunications industry to anticipate the needs of our
customers to deliver products based on current technologies and standards and
protocols.
As of June 30, 2000, our research and development team consisted of 46
engineers. We incurred $796,000 and $2.6 million in research and development
expenses during 1998 and 1999, respectively. For the six months ended June 30,
2000, we incurred research and development expenses of $3.1 million.
32
<PAGE>
Our research and development team leverages our design expertise by
developing products based on our flexible architecture. We have an ASICs
development group focused on hardware development activities to be used on a
number of our products. Our software development team has expertise in data
networking standards protocols and operating systems, device driver
development, and techniques for routing and system management. We also have
design teams devoted to each of our product families.
Our research and development team works to ensure interoperability of our
products with DSLAMs and other networking equipment manufactured by the major
vendors. Following the design phase, our engineers conduct extensive lab
simulations to ensure that our access devices are interoperable with a majority
of the major DSLAM vendors.
Competition
The market for our products is intensely competitive and is characterized by
frequent new product introductions, changing customer preferences and evolving
technology and industry standards. In addition, a number of our competitors and
potential competitors have significantly greater financial and other resources
than us which may enable them to more effectively meet new competitive
opportunities. We compete directly with other providers of DSL access devices
including 3Com, Efficient Networks, Netopia, Ramp Networks, Tut Systems and
Westell. We also compete with network equipment vendors that offer bundled DSL
access solutions that do not include our products, such as Alcatel, Cisco and
Copper Mountain. Furthermore, DSL service is competing with alternative
technologies including cable modem, ISDN, T1/T3, broadband wireless and
satellite solutions.
We believe that the major competitive factors in our markets are:
. product features;
. product interoperability and reliability;
. ease of installation and maintenance;
. strategic alliances;
. breadth of product line;
. availability of product;
. timeliness of new product introductions;
. price and performance; and
. brand recognition.
We believe that we compete favorably with respect to each of these factors.
However, we expect to face increased competition from both current and future
competitors in our markets.
Intellectual Property
Our ability to compete depends on a combination of copyrights, trademarks,
trade secrets, confidentiality procedures and contractual agreements to protect
our proprietary rights. We generally enter into confidentially or license
agreements with our employees, customers, potential customers, and strategic
relationships and limit access to the distribution of our software, hardware
designs and other proprietary information. There can be no assurances that our
intellectual property protection measures will be sufficient to prevent our
technology being misused. Also, the laws of many foreign countries do not
protect our intellectual properties to the same extent as the laws of the
United States.
We rely upon certain software that we license from third parties to perform
key functions in certain of our products. We cannot assure you that these
third-party licenses will continue to be available to us at commercially
reasonable terms.
33
<PAGE>
Backlog
At June 30, 2000, our order backlog was approximately $6.7 million,
substantially all of which is scheduled for delivery to customers during the
quarter ending September 30, 2000. At June 30, 1999 our backlog was not
meaningful. All backlog orders are subject to cancellation or delay by our
customers with limited or no penalty. Therefore, our backlog will not
necessarily result in actual revenues.
Employees
As of June 30, 2000, we employed 83 full-time employees, including 46 in
engineering, 19 in sales and marketing, 11 in manufacturing, and seven in
finance and administration. Most of our employees are located in the United
States with two sales employees located in Korea, and two sales and one
administrative employee located in Japan. None of our employees is represented
by collective bargaining agreements, and management considers relations with
our employees to be good.
Properties
We lease an approximately 23,000 square foot facility in San Jose,
California for executive offices and for administrative, sales and marketing,
and research and development purposes. The lease for this facility expires in
October 2003. Additionally, we have facilities in Japan and Korea for sales and
marketing activities within those countries. We anticipate that we will need
additional space as early as January 2001. We cannot ensure that we will be
able to obtain this additional space at reasonable rates.
Legal Proceedings
We are not party to any material legal proceedings at this time.
34
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding our executive
officers and directors as of June 30, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Michael D. Pak.......... 36 President, Chief Executive Officer and Chairman
Michael F. Mazzoni...... 37 Vice President and Chief Financial Officer
Richard A. D'Sa......... 50 Vice President of Sales and Marketing Worldwide
Bruce F. Young.......... 50 Vice President of Engineering
Dominique Rodriguez..... 48 Vice President of Advanced Technology
Chang Rok Kang(1)....... 49 Director
Tsuyoshi Taira(1)(2).... 61 Director
William Miller(2)....... 74 Director
Yukata Shinto(2)........ 52 Director
</TABLE>
---------------------
(1) Member of the compensation committee
(2) Member of the audit committee
Michael D. Pak has served as our President, Chief Executive Officer and a
member of our board of directors since founding our Company in April 1998. Mr.
Pak also served as our secretary from April 1998 to April 2000. Prior to
joining Xpeed, he was Chief Executive Officer of Synthcom, Inc., a DSL access
device manufacturer, from December 1997 to March 1998. From April 1997 to
November 1997, Mr. Pak was Director of Business Development at Cagent
Technologies, Inc., a 3-D graphic chip manufacturer. From March 1994 to March
1997, he served as Director of Business Development at The 3DO Company, Inc., a
game/set top box manufacturer. Mr. Pak holds a B.S. in Engineering Sciences
from Harvard College.
Michael F. Mazzoni has served as our Chief Financial Officer since January
2000 and our Secretary since April 2000. From January 1998 to January 2000, Mr.
Mazzoni served as Chief Financial Officer of OPTi, Inc., a semiconductor
company. Mr. Mazzoni joined OPTi in October 1993 as Manager, Investor Relations
and served as Corporate Controller from August 1995 until his appointment as
Chief Financial Officer. Mr. Mazzoni holds a B.S. degree in Business
Administration from Providence College.
Richard A. D'Sa has served as our Vice President of Sales and Marketing
Worldwide since January 2000. From February 1999 to January 2000, Mr. D'Sa was
our Vice President Sales, Marketing and Operations Worldwide. Prior to joining
Xpeed, Mr. D'Sa was Director of Sales for ITeX, Inc., a DSL chipset
manufacturer, from March 1998 to February 1999. From October 1997 to March
1998, Mr. D'Sa was Vice President of Marketing at M-Systems, a flash disk
memory company. Mr. D'Sa was also employed at OPTi, Inc., in various management
positions from March 1993 to October 1997. At the time of his departure from
OPTi, Mr. D'Sa was Vice President of Sales. Mr. D'Sa holds a B.S. in
Electronics from the University of North London.
Bruce F. Young has served as our Vice President of Engineering since
December 1999. Prior to joining Xpeed, Mr. Young was Chief Technical Officer,
and Vice President of Engineering at Telmax Communications Corp., a voice and
data equipment company, from June 1994 to December 1999. Mr. Young holds a B.S.
in Computer Science from California State University at Hayward, a M.S. in
Mathematics from University of Washington, and a B.S. in Mathematics from
University of California at Santa Barbara.
35
<PAGE>
Dominique Rodriguez has served as our Vice President of Advanced Technology
since May 2000. From April 1998 through April 2000 he was an independent
consultant serving as our Chief Technical Officer. Prior to that time, Mr.
Rodriguez was Director of Product Marketing at Siliconians, Inc., a
semiconductor company, from November 1996 to February 1998. Mr. Rodriguez was
also Director of Technology Business at Cylink Corporation, a broadband
wireless equipment company, from June 1994 to October 1996. Mr. Rodriguez holds
a M.S. in Computer Systems Architecture from the University of Paris, and a
M.B.A. in Tax Law from the University of Paris.
Chang Rok Kang has served on our board of directors since April 1998. Mr.
Chang is President of Mentors Korea Co., Ltd where he has been employed since
May 1987. Mr Chang also serves on the board of MODU International, China
Prosperity, B29 Entertainment, and Amodu LLC, where he is also a principal.
Tsuyoshi Taira has served on our board of directors since August 1998. Since
1996, Mr. Taira has served as the Chief Executive Officer of Tazan
International Inc. an investment and consulting corporation. Prior to his
present position, Mr. Taira was employed by Sanyo Semiconductor Corporation
from 1986 to 1996, where he served as President from 1986 to 1993 and Chairman
from 1993 to 1996. Mr. Taira is also a director of Tripath Technologies.
Mr. Taira holds a B.S. in Electrical Engineering from Tokyo Metropolitan
University.
William Miller has served on our board of directors since July 1999. Dr.
Miller is the Herbert Hoover Professor Emeritus, Graduate School of Business,
Stanford University and President Emeritus of SRI International. He is also
Professor Emeritus of Computer Science, School of Engineering, Stanford
University. In 1990, Dr. Miller retired after 11 years as President and Chief
Executive Officer of SRI International. Until recently, he served on the board
of directors of Wells Fargo Bank and Co.; Varian Associates; Pacific Gas and
Electric Company; First Interstate Bancorp; and Fireman's Fund Insurance
Company. Dr. Miller currently serves on the boards, Women.com and Inprise
Corporation, both of which are reporting companies as well as on the boards for
the following private companies: Sentius Corporation and Data Digest Inc. Dr.
Miller also serves on the board for a non-profit company, Commerce Net.
Yukata Shinto has served as a member of our board of directors since April
2000. Mr. Shinto has been employed by the SOFTBANK Group as a Chief Operating
Officer since August 1999. During his tenure at SOFTBANK Group he has served as
President and Chief Executive Officer of SpeedNet Inc., a broadband Internet
service carrier, from August 1999 to May 2000. Mr. Shinto is currently the
President and Chief Executive Officer of SOFTBANK Networks Inc., which oversees
SOFTBANK Group's broadband infrastructure business, and Xtage Inc., an xDSL
service company. Prior to joining SOFTBANK, Mr. Shinto was General Director of
the Media Business Division of Mitsui & Co., Ltd. from 1998 to August 1999,
overseeing more than 20 affiliated companies including AOL Japan, and being on
the board of 15 of the companies. From 1995 to 1998, Mr. Shinto was Managing
Director at Japan Digital Broadcasting Service Inc.
Board of Directors
Our board of directors currently consists of five members. Each director
holds office until his term expires or until his successor is duly elected and
qualified.
Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee consists of William Miller, Yukata Shinto and Tsuyoshi
Taira. The audit committee reviews our internal accounting procedures, consults
with and reviews the services provided by our independent accountants and makes
recommendations to the board of directors regarding the selection of
independent accountants. The compensation committee consists of Tsuyoshi Taira
and Chang Rok Kang. The compensation committee reviews and recommends to the
board of directors the salaries, incentive compensation and benefits of our
officers and employees and administers our stock plans and employee benefit
plans.
36
<PAGE>
Compensation Committee Interlocks and Insider Participation
Our board of directors established the compensation committee in May 2000.
No member of our compensation committee has served as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee. Since the formation of the compensation committee, none
of its members has been our officer or employee. Prior to the establishment of
the compensation committee, duties normally associated with that committee were
performed by the entire board of directors. During this period Michael D. Pak
served concurrently as a director and as Xpeed's Chief Executive Officer and
President.
Director Compensation
Effective upon the closing of this offering, our non-employee directors will
be eligible to receive grants of options to purchase our common stock pursuant
to a fixed formula under our 1998 Stock Plan, as amended. Upon the closing of
this offering, each current non-employee director will automatically receive an
option to purchase shares of our common stock. Each individual that becomes a
non-employee director following this offering will be granted an option to
purchase shares of our common stock on the date that such person becomes a
director. The shares subject to each of these options will vest and become
fully exercisable in equal annual installments over a four year period
following the date of grant. Additionally, beginning at our annual meeting of
stockholders to be held in 2001 and at each successive annual stockholder
meeting, each non-employee director who has previously served at least six
consecutive months prior thereto will receive an option to purchase shares of
our common stock. The shares subject to these annual option grants will fully
vest and become fully exercisable on the first anniversary of the date of
grant. The exercise price per share for all options automatically granted to
directors under our 1998 Stock Plan, as amended, will be equal to the market
price of our common stock on the date of grant and will have a ten year term,
but will generally terminate within a specified time following the date the
option holder ceases to be a director or consultant.
Employee directors are eligible to participate in our 2000 Employee Stock
Purchase Plan and to receive discretionary grants under our 1998 Stock Plan, as
amended.
Executive Compensation
The following table sets forth all compensation paid or accrued during the
year ended December 31, 1999 to our President and Chief Executive Officer and
our other most highly compensated officer whose compensation exceeded $100,000
for the year. In accordance with the rules of the SEC, the compensation
described in this table does not include perquisites and other personal
benefits received by the executive officers named in the table below which do
not exceed the lesser of $50,000 or 10% of the total salary and bonus reported
for these officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------------- ------------
Securities
Other Annual Underlying
Name and Principal Position Salary Bonus Compensation Options
--------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Michael D. Pak..................... $175,000 $15,500 $ -- --
President and Chief Executive
Officer
Richard A. D'Sa(1)................. 110,000 20,500 $5,500(2)
Vice President of Sales and
Marketing Worldwide
</TABLE>
---------------------
(1) Richard A. D'Sa was hired in February 1999.
(2) Car allowance of $500 per month.
37
<PAGE>
Option Grants in 1999
The following table sets forth information concerning grants of stock
options to each of the executive officers named in the table above during year
ended December 31, 1999. All options granted to these executive officers in the
last year were granted under the 1998 Stock Plan, as amended. One-eighth of the
shares subject to each option vests and becomes exercisable six months after
the date of grant, and an additional one-forty-eighth of the shares subject to
each option vests each month thereafter. In addition, options granted to each
of the individuals set forth below may be exercised early, provided that such
individual enters into a restricted stock purchase agreement. The shares thus
acquired remain subject to a right of repurchase by the Company. The percent of
the total options set forth below is based on an aggregate of options
granted to employees during our year ended December 31, 1999. All options were
granted at a fair market value as determined by our board of directors on the
date of grant.
Potential realizable value represents hypothetical gains that could be
achieved for the options if exercised at the end of the option term assuming
that the price of our common stock appreciates at 5% and 10% over the option
term. The assumed 5% and 10% rates of stock price appreciation are provided in
accordance with rules of the SEC and do not represent our estimate or
projection of our future common stock price.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Appreciation
Individual Grants for Option Term
--------------------------------------------- --------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees Price Expiration
Name Granted During Period Per Share Date 5% 10%
---- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Pak.......... -- --% $ -- -- $ -- $ --
Richard A. D'Sa......... 27.7% 7/23/09 31,445 79,687
</TABLE>
Option Values at December 31, 1999
The following table sets forth information concerning exercisable and
unexercisable stock options held by the executive officers named in the summary
compensation table at December 31, 1999. The value of unexercised in-the-money
options is based on a value of $ per share, the deemed fair market value of
our common stock as of December 31, 1999, less the exercise price of $0.20 per
share. The options were granted under our 1998 Stock Plan, as amended. These
options vest over four years and otherwise generally conform to the terms of
our 1998 Stock Plan, as amended.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
Name at December 31, 1999 at December 31, 1999
---- ---------------------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
--------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael D. Pak.......... -- -- $ -- $ --
Richard A. D'Sa......... 770,833 2,929,167
</TABLE>
Stock Plans
1998 Stock Plan
Our 1998 Stock Plan was adopted by the board of directors and our
stockholders in May 1998. In December 1998, the 1998 Stock Plan was amended to
increase the number of shares of common stock available for issuance under the
plan from to . In April 2000, the 1998 Stock Plan was amended to
increase the number of shares of common stock available for issuance under the
plan from to .
38
<PAGE>
In May 2000, our board of directors approved amendments to the 1998 Stock
Plan which:
. Provide for the number of shares available for issuance under the plan
to be increased annually, on the first day of the year beginning 2001,
by an additional amount equal to the lesser of million shares, 5% of
the number of outstanding shares of common stock on the date of the
annual increase, or a lesser amount determined by our board of
directors; and
. Provide for the automatic grants of stock options to non-employee
directors. See "Management--Board of Directors--Director Compensation."
We expect our stockholders to approve these amendments in August 2000.
As of June 30, 2000, options to purchase an aggregate of shares were
outstanding, shares of common stock had been purchased pursuant to
exercises of stock options and stock purchase rights and shares were
available for future grant.
Our 1998 Stock Plan provides for the grant of incentive stock options (as
defined in Section 422 of the Internal Revenue Code) to employees and
nonstatutory stock options, stock purchase rights and stock bonus rights to
employees, directors and consultants. This plan may be administered by the
board of directors or a committee appointed by the board. The option
administrator may make final and binding determinations regarding the terms and
conditions of the awards granted, including the exercise price, the number of
shares subject to the award and the exercisability thereof, forms of agreement
for use under the plan and interpretation of plan terms.
The exercise price of incentive stock options granted under the 1998 Stock
Plan must be at least equal to the fair market value of our common stock on the
date of grant. However, for any employee holding more than 10% of the voting
power of all classes of our stock, the exercise price will be no less than 110%
of the fair market value. The exercise price of nonqualified stock options is
determined by the administrator of the plan. However, the exercise price for
nonqualified stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue Code
will be no less than 100% of the fair market value. Options may be granted with
an exercise price that is less than a 100% of the fair market value pursuant to
a merger or other corporate transaction. The maximum term of options granted
under the 1998 Stock Plan is ten years, except that options granted to
officers, directors and consultants owning stock representing more than 10% of
the total voting power of all classes of our stock have a maximum term of five
years.
An optionee whose relationship with us or any related corporation ceases for
any reason, other than death or total and permanent disability, may exercise
options in the three-month period following such cessation, or such other
period of time as determined by the administrator, unless such options
terminate or expire sooner, or for nonstatutory stock options, later, by their
terms. The three-month period is extended to twelve months for terminations due
to death or total and permanent disability. In the event of our merger, sale or
reorganization into another corporation which results in a change of control,
all outstanding options will become fully vested and exercisable for a period
of 15 days from the date of notification by the 1998 Stock Plan administrator
that such options are exercisable. After the 15 day period, any unexercised
options will terminate. The 1998 Stock Plan will terminate in May 2008, unless
sooner terminated by the board of directors.
The board of directors may also grant stock purchase rights under the 1998
Stock Plan. Such grants are made pursuant to a restricted stock purchase
agreement, and the price to be paid for the shares granted thereunder is
determined by the administrator. We are generally granted a repurchase option
exercisable on the voluntary or involuntary termination of the purchaser's
employment with us for any reason, including death or disability. The
repurchase price shall be the original purchase price paid by the purchaser and
may be paid by cancellation of any indebtedness of the purchaser to us. The
repurchase option shall lapse at a rate determined by the administrator. Once
the stock purchase right has been exercised, the purchaser shall have the
rights equivalent to those of a stockholder.
39
<PAGE>
2000 Employee Stock Purchase Plan
Our board of directors adopted our 2000 Employee Stock Purchase Plan in May
2000. This 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 reserved for issuance
under the purchase plan. In addition, the purchase plan provides for annual
increases in the number of shares available for issuance under the purchase
plan on the first day of each fiscal year, beginning with fiscal 2001, equal to
the lesser of 1% of the outstanding shares of common stock on the first day of
the fiscal year or shares or such lesser amount as may be determined by
the board.
The board of directors or a committee appointed by the board administers the
purchase plan. The board or its committee has full and exclusive authority to
construe, interpret and apply the terms of the purchase plan, to determine
eligibility and to adjudicate all disputed claims filed under the Plan.
Employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, an employee may not be granted an
option to purchase stock under the purchase plan if such employee:
. immediately after the grant owns stock possessing five percent or more
of the total combined voting power or value of all classes of our
capital stock, or
. whose rights to purchase stock under all employee stock purchase plans
of ours accrues at a rate which exceeds $25,000 worth of stock for each
calendar year.
The purchase plan, which is intended to qualify under Section 423 of the
United States tax code, contains consecutive six month offering and purchase
periods. The offering periods generally start on the first trading day on or
after May 1 and November 1 of each year, except for the first such offering
period which commences on the first trading day on or after the effective date
of this offering and ends on the last trading day on or before October 31,
2000.
The purchase plan permits participants to purchase common stock through
payroll deductions of up to 10% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions but excludes payments for overtime, shift premium payments,
incentive compensation, incentive payments, bonuses and other compensation. The
maximum number of shares a participant may purchase during a single offering
period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the purchase plan is generally 85% of the lower of the fair
market value of the common stock (i) at the beginning of the offering period or
(ii) at the end of the offering period. Participants may end their
participation at any time during an offering period, and they will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with us.
A participant may not transfer rights granted under the purchase plan other
than by will, the laws of descent and distribution or as otherwise provided
under the purchase plan.
The purchase plan provides that, if we merge with or into another
corporation or a sale of substantially all of our assets, a successor
corporation may assume or substitute for each outstanding purchase right. If
the successor corporation refuses to assume or substitute for the outstanding
purchase rights, the offering period then in progress will be shortened, and a
new exercise date will be set. The new exercise date shall be before the date
of our proposed sale or merger.
40
<PAGE>
The purchase plan will terminate in 2010. However, the board of directors
has the authority to amend or terminate the purchase plan, except that, subject
to some exceptions described in the purchase plan, no such action may adversely
affect any outstanding rights to purchase stock under the purchase plan.
Limitations on Liability and Indemnification
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for the following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors, executive
officers and controller, in addition to indemnification provided for in our
bylaws. These agreements, among other things, provide for indemnification of
our directors and executive officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by or in our rights, arising out
of such person's services as a director or executive officer to us, any of our
subsidiaries or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
41
<PAGE>
RELATED PARTY TRANSACTIONS
Sales of Stock
Since our inception in April 1998, we have issued and sold shares of our
capital stock in private transactions to our executive officers, directors, and
5% stockholders as follows:
. In August 1998, we sold 350,000 shares of our Series A preferred stock
to Chang Rok Kang, one of our directors, at a purchase price of $0.60
per share.
. In August 1998, we sold 416,667 shares of our Series A preferred stock
to Amodu LLC at a purchase price of $0.60 per share. Chang Rok Kang, a
member of our board of directors, is affiliated with Amodu LLC.
. In January 1999, we sold 490,000 shares of our Series B Preferred Stock
to CMI International Holdings at a purchase price of $2.00 per share.
. In January 2000, we sold 666,667 shares of our Series C preferred stock
to SOFTBANK Corp. at a purchase price of $7.50 per share. Yukata Shinto,
a member of our board of directors, is affiliated with SOFTBANK Corp.
. In May 2000, we sold 122,500 shares of our common stock to CMI
International Holdings at a purchase price of $2.00 per share, upon
exercise of a warrant issued to CMI at the time of its purchase of
Series B preferred stock.
Warrant Issuance
In March 1999, in connection with its purchase of Series B preferred stock,
we issued a warrant to CMI International Holdings to purchase 122,500 shares of
our common stock at an exercise price of $2.00 per share. This warrant was
exercised in May 2000.
Option Grants
Since our inception through June 30, 2000, we have granted options to
purchase our common stock to our directors, executive officers and 5%
stockholders as follows:
<TABLE>
<CAPTION>
Date of Number of Exercise Price
Name Grant Shares per Share
---- -------- --------- --------------
<S> <C> <C> <C>
Amodu LLC..................................... 12/29/98 250,000 $0.20
Chang Rok Kang................................ 12/29/98 250,000 $0.20
Tsuyoshi Taira................................ 12/29/98 200,000 $0.20
Richard D'Sa.................................. 7/23/99 250,000 $0.20
Michael Mazzoni............................... 2/7/00 150,000 $1.50
Bruce Young................................... 2/7/00 100,000 $1.50
Yukata Shinto................................. 4/12/00 50,000 $4.00
</TABLE>
Consulting Arrangement
During the period from April 1998 through April 2000, we paid a total of
$252,000 to Tsunami Technologies, an entity controlled by Dominique Rodriguez,
one of our founders, for services rendered to us by Mr. Rodriguez. Mr.
Rodriguez became an employee and executive officer of our company in May 2000.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors
and executive officers. Such indemnification agreements will require us to
indemnify our directors and officers to the fullest extent permitted by
relevant law.
42
<PAGE>
Future Agreements
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us
and our officers, directors, principal shareholders and their affiliates will
be approved by a majority of the board of directors, including a majority of
the independent, disinterested outside directors on the board of directors, and
will be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
Registration Rights Agreements
In connection with our preferred stock financings, we entered into
agreements with our preferred stockholders, including certain of our officers,
directors and 5% stockholders, pursuant to which we granted registration rights
that will continue to apply after completion of this offering. See "Description
of Capital Stock--Registration Rights of Certain Holders."
43
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of June 30, 2000 and as adjusted to reflect
the sale of the shares of common stock in this offering by:
. each person or entity known by us to own more than five percent of our
outstanding stock;
. our chief executive officer, each of the executive officers named in the
summary compensation table and each of our directors; and
. all of our directors and executive officers as a group.
Unless otherwise indicated, the address for each beneficial owner is c/o
Xpeed Networks, Inc., 99 W. Tasman Drive, Suite 110, San Jose, CA 95134.
The beneficial ownership is calculated based on shares of our common
stock outstanding as of June 30, 2000, and shares outstanding
immediately following the completion of this offering. Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes
voting and investment power with respect to the securities. Unless otherwise
indicated, and subject to applicable community property laws, to the best of
our knowledge, the persons named in this table have sole voting and investing
power with respect to all of the shares of common stock held by them. Shares
issuable upon the exercise of options and warrants that are exercisable or
become exercisable within 60 days of June 30, 2000 are considered outstanding
for the purpose of computing percentage ownership of that person, but are not
treated as outstanding for the purpose of computing any other person's
ownership percentage.
<TABLE>
<CAPTION>
Shares Beneficially
Owned
------------------------
Percent Percent
Before After
Name Number Offering Offering
---- ------ -------- --------
<S> <C> <C> <C>
Five Percent Stockholders
SOFTBANK Corp. ..................................... 6.1%
Kakigaracho Chiba Building
First Floor
1-36-7, Nihombashi-Kakigaracho
Chuo-Ku, Tokyo
Amodu Corp. ........................................ 6.1
2880 Zanker Road, Suite 203
San Jose, CA 95134
CMI International Holdings Ltd. .................... 5.6
15th Floor 53 Ming-Chuan W. Rd.
Taipei, Taiwan
Directors and Named Executive Officers
Michael D. Pak(1)................................... 34.3
Chang Rok Kang(2)................................... 5.5
Tsuyoshi Taira...................................... 1.8
Richard A. D'Sa(3).................................. *
William Miller(4)................................... *
Yukata Shinto(3).................................... *
All directors and executive officers as a group (9
persons)........................................... 52.2%
</TABLE>
44
<PAGE>
---------------------
* Less than 1%
(1) Consists of shares of restricted common stock that are subject to a
repurchase option by us that lapses as the shares vest.
(2) Includes shares underlying currently exercisable options to purchase
our common stock.
(3) Consists of shares underlying options that are immediately exercisable
subject to a repurchase option by us which lapses as the shares vest.
(4) Includes shares underlying a warrant.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue up to shares of common stock, $0.0001 par
value and shares of undesignated preferred stock. From time to time, our
board of directors may establish the rights and preferences of the preferred
stock. As of June 30, 2000, shares of common stock were issued and
outstanding and held by 22 stockholders, and shares of preferred stock
were issued and outstanding. The following description of our capital stock is,
by necessity, not complete. We encourage you to refer to our certificate of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and applicable provisions of
Delaware law for a more complete description.
Common Stock
Each holder of common stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that may be applicable to any outstanding
preferred stock, holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared time to time by the board of directors
out of funds legally available for that purpose. See "Dividend Policy." If we
undergo a liquidation, dissolution or winding up, the holders of common stock
are entitled to share in our assets remaining after the payment of liabilities
and the satisfaction of any liquidation preference granted to the holders of
any outstanding shares of preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable. The
rights, preferences and privileges of the holders of common stock are subject
to, and may be adversely affected by the rights of the holders of shares of any
series of preferred stock which we may designate in the future.
Preferred Stock
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may
be greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of this preferred stock. However, the effects
might include, among other things:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; or
. delaying or preventing a change in control of us without further action
by the stockholders.
Upon the closing of this offering, no shares of preferred stock will be
outstanding.
Registration Rights of Certain Holders
The holders of approximately shares of preferred stock have the right to
require us to register their shares with the Securities and Exchange Commission
so that these shares may be publicly resold or to include their shares in any
registration statement we file.
Demand registration rights
At any time 180 days after the closing of this offering, the holders of at
least 50% of the Series B preferred stock have the right to demand on two
separate occasions that we file a registration statement on a
46
<PAGE>
form other than Form S-3 so that they can publicly sell their shares, as long
as the aggregate market value of the shares to be sold under the registration
statement exceeds $5 million. At any time six months after the closing of this
offering, the holders of at least 50% of the Series C preferred stock have the
right to demand on three separate occasions that we file a registration
statement on a form other than Form S-3 so that they can publicly sell their
shares, as long as the aggregate market value of such shares exceeds $5
million. The underwriters of any underwritten offering will have the right to
limit the number of shares to be included in the registration.
If we are eligible to file a registration statement on Form S-3, any holder
of Series B preferred stock or Series C preferred stock has the right to
demand, at any time more than six months following the closing of a
registration, that we file a registration on Form S-3, as long as the aggregate
market value of the shares to be sold under the registration statement exceeds
$1 million. The underwriters of any underwritten offering will have the right
to limit the number of shares to be included in the registration.
Piggyback registration rights
If we register any shares for public sale, any stockholder with registration
rights will have the right to include their shares in the registration. The
underwriters of any underwritten offering will have the right to exclude all
shares held by stockholders with registration rights.
Expenses of registration
We will pay all expenses relating to any demand or piggyback registration.
However, we will not pay for the expenses of any demand registration if the
request is subsequently withdrawn by the holders registering their shares
therein, subject to very limited exceptions with respect to the holders of
Series C preferred stock.
Expiration of registration rights
The registration rights described above will expire with respect to any
holder of shares of Series B preferred stock when that particular holder may
sell all of its shares pursuant to Rule 144 of the Securities Act. The
registration rights of the holders of shares of Series C preferred stock will
expire three years after the completion of this offering, or earlier for any
particular stockholder if that stockholder can resell all of its shares
pursuant to Rule 144 of the Securities Act.
Warrants
As of June 30, 2000 there were outstanding warrants to purchase shares of
common stock. The warrants have a purchase price of $ per share and expire in
February 2001. The holders of any common stock issued upon exercise of the
warrants shall have the same registration rights as the holders of the Series B
preferred stock described in "Description of Capital Stock -- Registration
Rights of Certain Holders."
Anti-takeover Effects of Provisions of Our Charter and Bylaws
Provisions of Delaware law and our certificate of incorporation and bylaws
could make it more difficult to acquire us by means of a tender offer, proxy
contest or otherwise, or to remove our officers and directors. These
provisions, summarized below, are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids. These provisions are
also designed to encourage persons seeking to acquire control of us to first
negotiate with our board. We believe that the benefits of increased protection
of its potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or
47
<PAGE>
restructure us outweighs the disadvantages of discouraging such proposals
because negotiation of such proposals could result in an improvement of their
terms.
Our certificate of incorporation provides that stockholders may act only at
duly called annual or special meetings of stockholders, not by written consent.
Our bylaws further provide that special meetings of our stockholders may be
called only by the President, Chief Executive Officer or Chairman of the board
of directors or a majority of the board of directors.
Our bylaws provide that stockholders seeking to bring business before our
annual meeting of stockholders, or to nominate candidates for election as
directors at our annual meeting of stockholders, must provide timely notice
thereof in writing. The bylaws also specify requirements as to the form and
content of a stockholder's notice. These provisions may preclude stockholders
from bringing matters before our annual meeting of stockholders or from making
nominations for directors at our annual meeting of stockholders.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless the "business combination" or the transaction
in which the person became an interested stockholder is approved in a
prescribed manner. Generally, a "business combination" includes a merger, asset
or stock sale, or other transaction resulting in a financial benefit to the
interested stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns or within three years prior to
the determination of interested stockholder status, did own, 15.0% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Our certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors. The amendment of any of the above
provisions of our Certificate of Incorporation would require approval by
holders of at least two-thirds of the outstanding common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is
.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding shares
of common stock based upon shares outstanding at June 30, 2000, assuming no
exercise of the underwriters' over-allotment option. Excluding the
shares of common stock offered hereby, as of the effective date of the
registration statement, there will be shares of common stock outstanding,
all of which are "restricted" shares under the Securities Act. All restricted
shares are subject to lock-up agreements with the underwriters pursuant to
which the holders of the restricted shares have agreed not to sell, pledge or
otherwise dispose of such shares for a period of 180 days after the date of
this prospectus. Chase Securities Inc. may release the shares subject to the
lock-up agreements in whole or in part at any time with or without notice.
However, Chase Securities Inc. has no current plans to do so.
The following table indicates approximately when the shares of
our common stock that are not being sold in the offering but which will be
outstanding at the time the offering is complete will be eligible for sale into
the public market:
Eligibility of Restricted Shares for Sale in the Public Market
<TABLE>
<S> <C>
At effective date..................................................... 0
180 days after effective date.........................................
----
After 180 days post-effective date....................................
----
</TABLE>
Most of the restricted shares that will become available for sale in the
public market beginning 180 days after the effective date will be subject to
volume and other resale restrictions pursuant to Rule 144 because the holders
are our affiliates. The general provisions of Rule 144 are described below.
In general, under Rule 144, any of our affiliates, or person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for
at least one year, will be entitled to sell in any three-month period a number
of shares that does not exceed the greater of:
. 1% of the then outstanding shares of the common stock, approximately
shares immediately after this offering, or
. the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the SEC.
Sales pursuant to Rule 144 are subject to requirements relating to manner of
sale, notice and availability of current public information about us. A person,
or persons whose shares are aggregated, who is not deemed to have been one of
our affiliates at any time during the 90 days immediately preceding the sale
and who has beneficially owned his or her shares for at least two years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above.
As of June 30, 2000, shares were reserved for issuance under our
amended and restated 1998 equity incentive plan, of which options to purchase
shares were then outstanding and none were then exercisable. We intend to
file, within 180 days after the date of this prospectus, a registration
statement under the Securities Act to register the shares under our 1998
equity incentive plan and the shares of common stock reserved for issuance
under our employee stock purchase plan. Upon registration, all of these shares
will be freely tradable when issued, subject to Rule 144 volume limitations
applicable to affiliates and lock-up agreements.
Lock-Up Agreements
All officers and directors and some of the holders of common stock and
options to purchase common stock have agreed pursuant to "lock-up" agreements
that they will not offer, sell, contract to sell, pledge,
49
<PAGE>
grant any option to sell, or otherwise dispose of, directly or indirectly, any
shares of common stock or securities convertible or exchangeable for common
stock, or warrants or other rights to purchase common stock for a period of 180
days after the date of this prospectus without the prior written consent of
Chase Securities Inc. All other stockholders and option holders are subject to
contractual agreements with Xpeed obligating them to abide by substantially
identical restrictions, and we have agreed with the underwriters that we will
not release any of our stockholders from such restrictions without the prior
written consent of Chase Securities Inc.
50
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Chase Securities Inc.,
Dain Rauscher Incorporated, UBS Warburg LLC and Kaufman Bros., L.P., have
severally agreed to purchase from us the following numbers of shares of common
stock:
<TABLE>
<CAPTION>
Number
of
Name Shares
---- ------
<S> <C>
Chase Securities Inc. ..............................................
Dain Rauscher Incorporated..........................................
UBS Warburg LLC.....................................................
Kaufman Bros., L.P..................................................
----
Total...............................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are conditioned on the absence of any material adverse change in our business
and the receipt of certificates, opinions and letters from us, our counsel and
our independent auditors. The underwriters are committed to purchase all shares
of common stock offered in this prospectus if any shares are purchased.
The underwriters propose 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 dealers at the public offering price less a concession not in
excess of $ per share. The underwriters may allow and the dealers may
reallow a concession not in excess of $ per share to other dealers. After
the public offering of the shares, the underwriters may change the offering
price and other selling terms. The representatives of the underwriters have
informed us that the underwriters do not intend to confirm discretionary sales
in excess of % of the shares of common stock offered by this prospectus.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to additional
shares of common stock at the public offering price, less the underwriting
discount set forth on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each underwriter will have a firm commitment
to purchase a number of shares that approximately reflects the same percentage
of total shares the underwriter purchased in the above table. We will be
obligated to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise this option only to cover over-
allotments made in connection with the sale of common stock offered in this
prospectus.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us. The underwriting discount
will be determined based on an arms' length negotiation between the
representatives of the underwriters and Xpeed. These amounts are shown assuming
both no exercise and full exercise of the underwriters' over-allotment option
to purchase additional shares.
<TABLE>
<CAPTION>
Without With
Over-Allotment Over-Allotment
Exercise Exercise
-------------- --------------
<S> <C> <C>
Per share.................................... $ $
Total........................................ $ $
</TABLE>
51
<PAGE>
We estimate that our share of 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.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act, and to contribute to payments the
underwriters may be required to make in respect of those liabilities.
All officers and directors and some of the holders of common stock and
options to purchase common stock have agreed pursuant to "lock-up" agreements
that they will not offer, sell, contract to sell, pledge, grant any option to
sell, or otherwise dispose of, directly or indirectly, any shares of common
stock or securities convertible or exchangeable for common stock, or warrants
or other rights to purchase common stock for a period of 180 days after the
date of this prospectus without the prior written consent of Chase Securities
Inc. All other stockholders and option holders are subject to contractual
agreements with Xpeed obligating them to abide by substantially identical
restrictions, and we have agreed with the underwriters that we will not release
any of our stockholders from such restrictions without the prior written
consent of Chase Securities Inc. We have agreed that we will not, without the
prior written consent of Chase Securities Inc., offer, sell or otherwise
dispose of any shares of common stock, options or warrants to acquire shares of
common stock or securities exchangeable for or convertible into shares of
common stock during the 180-day period following the date of this prospectus,
except that we may issue shares upon the exercise of options granted prior to
the date of this prospectus and may grant additional options under our stock
plans, provided that, without the prior written consent of Chase Securities
Inc., any additional options shall not be exercisable during the 180-day
period.
At our request, the underwriters have reserved up to shares of common
stock to be sold in the offering and offered for sale, at the public offering
price, to our directors, officers, employees, business associates such as
customers and suppliers and persons related to, or affiliated with the
foregoing persons. The number of shares available for sale to the general
public in the offering will be reduced to the extent these persons purchase the
reserved shares. Any reserved shares not so purchased will be offered to the
general public on the same basis as other shares offered by this prospectus.
Persons participating in this offering may over-allot or effect transactions
that stabilize, maintain or otherwise affect the market price of the common
stock at levels above those that might otherwise prevail in the open market,
including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or the effecting of any purchase for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
Stabilizing, if commenced, may be discontinued at any time.
Before this offering, there was no public market for the common stock. The
initial public offering price for the common stock will be determined by
negotiations between ourselves and the representative of the underwriters.
Among the factors to be considered in determining the initial public offering
price will be prevailing market and economic conditions, our revenue and
earnings, market valuations of other companies engaged in activities similar to
ours, estimates of our business potential and prospects, the present state of
our business operations, our management and other factors deemed relevant.
52
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Gray Cary Ware & Freidenrich LLP, San
Diego, California. As of June 30, 2000, a certain investment partnership and
members of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
beneficially owned an aggregate of 11,666 shares of our common stock.
EXPERTS
The consolidated financial statements as of December 31, 1999, and December
31, 1998, and for the year ended December 31, 1999 and for the period from
April 8, 1998 (date of inception) to December 31, 1998 included in this
Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC in Washington, D.C. a Registration Statement on
Form S-1 under the Securities Act with respect to the common stock offered in
this prospectus. This prospectus, filed as part of the registration statement,
does not contain all of the information set forth in the registration statement
and its exhibits and schedules, portions of which have been omitted as
permitted by the rules and regulations of the SEC. For further information
about us and the common stock, we refer you to the registration statement and
to its exhibits and schedules. Statements in this prospectus about the contents
of any contract, agreement or other document are not necessarily complete and,
in each instance, we refer you to the copy of such contract, agreement or
document filed as an exhibit to the registration statement, and each such
statement being qualified in all respects by reference to the document to which
it refers. Anyone may inspect the registration statement and its exhibits and
schedules without charge at the public reference facilities the SEC maintains
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices
of the SEC located at 7 World Trade Center, Suite 1300, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please
call the SEC at 1-800-SEC-0330 for further information about the public
reference rooms. You may obtain copies of all or any part of these materials
from the SEC upon payment to the SEC of prescribed fees. You may also inspect
these reports and other information without charge at a web site maintained by
the SEC. The address of this site is http://www.sec.gov.
Upon completion of this offering we will become subject to the informational
requirements of the Exchange Act and, in accordance therewith, file reports,
proxy statements and other information with the SEC. You will be able to
inspect and copy these reports, proxy statements and other information at the
public reference facilities maintained by the SEC and at the SEC's regional
offices at the addresses noted above. You also will be able to obtain copies of
this material from the Public Reference Section of the SEC as described above,
or inspect them without charge at the SEC's web site.
53
<PAGE>
XPEED, INC.
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Deficit........................... F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Xpeed, Inc.
The reincorporation and stock split described in Note 10 of the notes to the
consolidated financial statements are not effective at February 18, 2000. When
it is effective, we will be in a position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Xpeed Networks, Inc. (formerly Xpeed, Inc.) at December 31, 1998 and 1999 and
the results of its operations and its cash flows for the year ended December
31, 1999 and for the period from April 8, 1998 (date of inception) to December
31, 1998, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above."
San Jose, California
February 18, 2000
F-2
<PAGE>
XPEED, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
December 31, Stockholders'
------------------------- June 30, Equity
1998 1999 2000 June 30, 2000
----------- ------------ ------------ -------------
(unaudited) (see Note 1)
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents........... $ 109,000 $ 3,574,000 $ 14,251,000
Accounts receivable,
net................... -- 1,206,000 4,171,000
Inventory, net......... -- 262,000 1,207,000
Prepaid expenses and
other................. 18,000 1,035,000 188,000
----------- ------------ ------------
Total current assets. 127,000 6,077,000 19,817,000
Property and equipment,
net.................... 215,000 875,000 1,544,000
Other assets............ 13,000 150,000 168,000
----------- ------------ ------------
Total assets......... $ 355,000 $ 7,102,000 $ 21,529,000
=========== ============ ============
Liabilities and
stockholders' equity
(deficit)
Current liabilities:
Notes payable.......... $ 113,000 $ -- $ --
Accounts payable....... 83,000 3,212,000 6,408,000
Accrued liabilities.... 194,000 494,000 742,000
----------- ------------ ------------
Total current
liabilities......... 390,000 3,706,000 7,150,000
----------- ------------ ------------
Series A Redeemable
Convertible Preferred
Stock; par value
$0.0001
Authorized: None
(unaudited) at June
30, 2000 pro forma,
867,000 at June 30,
2000 (unaudited)......
Issued and
outstanding: 866,667
at December 31, 1998
and 1999, 866,667 at
June 30, 2000
(unaudited) and none
(unaudited) at
June 30, 2000
pro forma.............
Aggregate liquidation
value: $520,000 at
December 31, 1999 and
at June 30, 2000
(unaudited)........... 520,000 520,000 520,000
Series B Redeemable
Convertible Preferred
Stock; par value
$0.0001
Authorized: None
(unaudited) at June
30, 2000 pro forma,
3,000,000 at June 30,
2000 (unaudited)......
Issued and
outstanding: 287,500
at December 31, 1998
and 2,402,443 at
December 31, 1999,
2,402,443 at June 30,
2000 (unaudited) and
none (unaudited) at
June 30, 2000 pro
forma................. 575,000 4,805,000 4,805,000
Aggregate liquidation
value: $4,805,000 at
December 31, 1999 and
at June 30, 2000
(unaudited)...........
Series C Redeemable
Convertible Preferred
Stock; par value
$0.0001
Authorized: None
(unaudited) at June
30, 2000 pro forma,
2,700,000 at June 30,
2000 (unaudited)......
Issued and
outstanding: none at
December 31, 1998 and
601,667 at December
31, 1999, 2,675,432
at June 30, 2000
(unaudited) and none
(unaudited) at June
30, 2000 pro forma....
Aggregate liquidation
value: $4,512,000 at
December 31, 1999 and
$20,065,000 at June
30, 2000 (unaudited).. -- 4,512,000 20,065,000
----------- ------------ ------------
1,095,000 9,837,000 25,390,000
----------- ------------ ------------
Stockholders' equity
(deficit):
Common Stock: $0.0001
par value; 20,000,000
shares authorized;
4,892,625 at December
31, 1998, 4,927,520
at December 31, 1999
and 5,699,048
(unaudited) at June
30, 2000, 11,643,590
(unaudited) at June
30, 2000, pro forma... -- -- -- $ 1,000
Additional paid-in
capital............... 1,402,000 7,501,000 44,108,000 69,497,000
Unearned stock-based
compensation.......... -- (1,588,000) (13,890,000) (13,890,000)
Notes receivable from
stockholders.......... (3,000) -- -- --
Accumulated deficit.... (2,529,000) (12,354,000) (41,229,000) (41,229,000)
----------- ------------ ------------ ------------
Total stockholders'
equity (deficit).... (1,130,000) (6,441,000) (11,011,000) $ 14,379,000
----------- ------------ ------------ ------------
Total liabilities,
redeemable
convertible
preferred stock and
stockholders' equity
(deficit)........... $ 355,000 $ 7,102,000 $ 21,529,000
=========== ============ ============
</TABLE>
Commitments and
contingencies (Note 5)
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
XPEED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
April 8,
1998 (date
of
inception) Six Months Ended
to Year Ended June 30,
December 31, December 31, -------------------------
1998 1999 1999 2000
------------ ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Net revenues............ $ -- $ 2,411,000 $ 71,000 $ 16,708,000
Cost of revenues........ -- 2,926,000 64,000 17,724,000
----------- ----------- ----------- ------------
Gross profit (loss)... -- (515,000) 7,000 (1,016,000)
Operating expenses:
Research and
development.......... 796,000 2,604,000 1,122,000 3,144,000
Sales and marketing... 58,000 894,000 279,000 1,134,000
General and
administrative....... 291,000 1,295,000 268,000 736,000
Stock-based
compensation......... 1,375,000 2,544,000 -- 7,643,000
----------- ----------- ----------- ------------
Total operating
expenses........... 2,520,000 7,337,000 1,669,000 12,657,000
----------- ----------- ----------- ------------
Operating loss.......... (2,520,000) (7,852,000) (1,662,000) (13,673,000)
Interest expense
(income), net.......... 9,000 (40,000) (19,000) (351,000)
----------- ----------- ----------- ------------
Net loss................ (2,529,000) (7,812,000) (1,643,000) (13,322,000)
----------- ----------- ----------- ------------
Accretion of redeemable
convertible preferred
stock to redemption
value.................. -- (49,000) -- --
Deemed dividend related
to issuance of Series C
Redeemable Convertible
Preferred Stock........ -- (2,013,000) -- (15,553,000)
----------- ----------- ----------- ------------
Net loss attributable to
common stockholders.... $(2,529,000) $(9,874,000) $(1,643,000) $(28,875,000)
=========== =========== =========== ============
Basic and diluted net
loss per common share
attributable to common
stockholders........... $ (4.44) $ (4.79) $ (1.11) $ (9.69)
=========== =========== =========== ============
Number of shares used in
calculation of basic
and diluted net loss
per share.............. 569,400 2,062,432 1,483,250 2,980,862
=========== =========== =========== ============
Basic and diluted pro
forma net loss per
share.................. $ (1.59) $ (1.53)
=========== ============
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 4,916,056 8,707,301
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
XPEED, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Notes Total
Common Stock Additional Receivable Stockholders'
------------------ Paid-In from Unearned Accumulated Equity
Shares Amount Capital Shareholders Compensation Loss (Deficit)
---------- ------ ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock
to founders............ 5,000,000 $ -- $ 3,000 $(3,000) $ -- $ -- $ --
Issuance of Common
Stock.................. 890,000 -- 19,000 -- -- -- 19,000
Stock issued in exchange
for services rendered.. 2,625 -- 5,000 -- -- -- 5,000
Stock-based compensation
related to grants of
stock options.......... -- -- 1,375,000 -- -- -- 1,375,000
Repurchase of Common
Stock.................. (1,000,000) -- -- -- -- -- --
Net loss................ -- -- -- -- -- (2,529,000) (2,529,000)
---------- ---- ----------- ------- ------------ ------------ ------------
Balance at December 31,
1998................... 4,892,625 -- 1,402,000 (3,000) -- (2,529,000) (1,130,000)
Repayment of notes
receivable from
shareholders........... -- -- -- 3,000 -- -- 3,000
Issuance of Common Stock
pursuant to exercise of
options................ 34,895 -- 3,000 -- -- -- 3,000
Accretion of Redeemable
Convertible Preferred
Stock to redemption
value.................. -- -- (49,000) -- -- -- (49,000)
Deemed dividend related
to issuance of Series C
Redeemable Convertible
Preferred Stock........ -- -- 2,013,000 -- -- (2,013,000) --
Unearned compensation... -- -- 4,132,000 -- (4,132,000) -- --
Amortization of unearned
compensation........... -- -- -- -- 2,544,000 -- 2,544,000
Net loss................ -- -- -- -- -- (7,812,000) (7,812,000)
---------- ---- ----------- ------- ------------ ------------ ------------
Balance at December 31,
1999................... 4,927,520 -- 7,501,000 -- (1,588,000) (12,354,000) (6,441,000)
Issuance of Common Stock
pursuant to exercise of
options................ 372,384 -- 36,000 -- -- -- 36,000
Common Stock issued in
exchange for services
rendered............... 51,650 -- 378,000 -- -- -- 378,000
Exercise of Common Stock
warrants............... 347,494 -- 695,000 -- -- -- 695,000
Deemed dividend related
to issuance of Series C
Redeemable Convertible
Preferred Stock........ -- -- 15,553,000 -- -- (15,553,000) --
Unearned compensation... -- -- 19,945,000 -- (19,945,000) -- --
Amortization of unearned
compensation........... -- -- -- -- 7,643,000 -- 7,643,000
Net loss................ -- -- -- -- -- (13,322,000) (13,322,000)
---------- ---- ----------- ------- ------------ ------------ ------------
Balance at June 30, 2000
(unaudited)............ 5,699,048 $ -- $44,108,000 $ -- $(13,890,000) $(41,229,000) $(11,011,000)
========== ==== =========== ======= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
XPEED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
April 8,
1998 (date of Six Months Ended June
inception) to Year Ended 30,
December 31, December 31, -------------------------
1998 1999 1999 2000
------------- ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................. $(2,529,000) $(7,812,000) $(1,643,000) $(13,322,000)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........... 30,000 153,000 12,000 201,000
Stock-based
compensation expense... 1,375,000 2,544,000 -- 7,643,000
Issuance of common
stock for services
rendered............... 5,000 -- -- 378,000
Changes in current
assets and
liabilities:
Accounts receivable... -- (1,206,000) (8,000) (2,965,000)
Inventory............. -- (262,000) (320,000) (945,000)
Prepaid expenses and
other current assets. (18,000) (1,017,000) (49,000) 847,000
Other assets.......... (13,000) (134,000) (12,000) (18,000)
Accounts payable...... 83,000 3,129,000 298,000 3,196,000
Accrued liabilities... 194,000 300,000 112,000 248,000
----------- ----------- ----------- ------------
Net cash used in
operating
activities......... (873,000) (4,305,000) (1,610,000) (4,737,000)
----------- ----------- ----------- ------------
Cash flows from investing
activities:
Purchase of property and
equipment............... (245,000) (813,000) (313,000) (870,000)
Purchase of short term
investments............. -- -- (1,100,000) --
----------- ----------- ----------- ------------
Net cash used in
investing
activities......... (245,000) (813,000) (1,413,000) (870,000)
----------- ----------- ----------- ------------
Cash flows from financing
activities:
Proceeds from issuance of
Common Stock............ 22,000 3,000 -- 731,000
Proceeds from issuance of
Series A Convertible
Preferred Stock, net of
issuance costs.......... 520,000 -- -- --
Proceeds from issuance of
Series B Convertible
Preferred Stock, net of
issuance costs......... 575,000 4,189,000 4,214,000 --
Proceeds from issuance of
Series C Convertible
Preferred Stock, net of
issuance costs......... -- 4,504,000 -- 15,553,000
Proceeds from (repayment
of) note payable........ 110,000 (113,000) (113,000) --
----------- ----------- ----------- ------------
Net cash provided by
financing
activities......... 1,227,000 8,583,000 4,101,000 16,284,000
----------- ----------- ----------- ------------
Net increase in cash and
cash equivalents........ 109,000 3,465,000 1,078,000 10,677,000
Cash and cash equivalents
at beginning of year.... -- 109,000 109,000 3,574,000
Cash and cash equivalents
at end of year.......... $ 109,000 $ 3,574,000 $ 1,187,000 $ 14,251,000
=========== =========== =========== ============
Supplemental disclosures
of cash flow
information:
Cash paid for income tax. $ 800 $ 800 $ -- $ --
=========== =========== =========== ============
Cash paid for interest... $ 8,000 $ 4,000 $ -- $ --
=========== =========== =========== ============
Accretion of redeemable
convertible preferred
stock to redemption
value.................. $ -- $ 49,000 $ -- $ --
=========== =========== =========== ============
Unearned compensation
related to stock option
grants.................. $ -- $ 4,132,000 $ -- $ 19,945,000
=========== =========== =========== ============
Deemed dividend related
to issuance of Series C
redeemable convertible
preferred stock......... $ -- $ 2,013,000 $ -- $ 15,553,000
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
XPEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Xpeed, Inc. ("Xpeed" or the "Company") designs, markets and sells digital
subscriber line, or DSL, access devices for homes and businesses. Xpeed's DSL
access devices enable network service providers to cost-effectively deploy
broadband network access to end-users. The Company was incorporated in
California on April 8, 1998.
Interim consolidated financial statements (unaudited)
The financial statements as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 together with the related notes are unaudited but have
been prepared in accordance with generally accepted accounting principles for
interim financial statements and the rules of the Securities and Exchange
Commission and do not include all disclosures required by generally accepted
accounting principles for annual financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation have been included. The results of operations
of any interim period are not necessarily indicative of the results of
operations for the full year.
Basis of consolidation (unaudited)
The consolidated financial statements for the six months ended June 30, 2000
include the accounts of Xpeed, Inc. and its subsidiary in Japan. All
significant intercompany balances and transactions have been eliminated.
Accounts denominated in foreign currencies have been remeasured into the U.S.
dollar, the functional currency. Foreign currency gains and losses from
remeasurement, which have been insignificant, are included in the consolidated
financial statements of operations.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenue from product sales is generally recognized at the time the product
is shipped. Xpeed sells products with FOB shipping point terms. Reserves for
estimated sales returns and allowances are recorded in the same period as the
related revenues. Xpeed does not provide its customers with the right to return
product.
The Company sells products to a customer in Korea through a third party
agent. The Company ships the products FOB shipping point directly to the end-
customer. The agent is responsible for purchase payments to the Company through
letters of credit arrangements. The contract with the agent does not provide
the right to return the product or price protection. The Company recognizes the
revenues at the time the product is shipped.
F-7
<PAGE>
XPEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warranties
The Company's products are generally warrantied for a period of twelve
months from customer receipt. Estimated future costs of repair, replacement or
customer accommodations are accrued at the time revenue is recognized.
Cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
deposits cash and cash equivalents with high credit quality financial
institutions.
Business risk concentration of credit risk
Xpeed currently operates in a single business segment and revenues, from
continuing operations are principally attributable to the sale of DSL access
devices. The market in which Xpeed competes is characterized by rapid
technological advances and changing customer requirements and industry
standards. Any failure by Xpeed to anticipate or to respond adequately to these
changes could have a material adverse effect on Xpeed's business and operating
results.
Financial instruments that potentially subject Xpeed to concentrations of
credit risk consist primarily of temporary cash investments, including money
market accounts. Xpeed places its temporary cash investments with major
financial institutions. Deposits at any point in time may exceed the federally
insured limits. Xpeed performs ongoing credit evaluations of its customers'
financial condition and does not require collateral. The Company's accounts
receivable are derived from revenue earned from customers located in the U.S.
and Asia. Xpeed maintains allowances for potential credit losses and such
losses have been within management's expectations.
As of December 31, 1999 and June 30, 2000 (unaudited), one customer
accounted for 98% and 55% of the aggregate accounts receivable balance,
respectively. A single customer accounted for 97% of aggregate revenues for the
fiscal year ended 1999. For the six months ended June 30, 2000 (unaudited), one
customer accounted for 83% of the aggregate revenues.
Inventory
Inventory includes raw materials and finished goods and is stated at the
lower of cost or market, cost being determined using the first-in, first-out
("FIFO") method. The Company's inventories include high-technology materials
that may be subject to rapid technological obsolescence. While the Company has
programs to minimize the required inventories on hand and considers
technological obsolescence in estimating reserves to reduce recorded amounts to
market value, such estimates could change in the future.
Capitalized software development costs
Software development costs are included in research and development and are
expensed as incurred. After technological feasibility is established, material
software development costs are capitalized. The capitalized cost is then
amortized on a straight-line basis over the estimated product life, or on the
ratio of current revenues to total projected product revenues, whichever is
greater. To date, the period between achieving technological feasibility, which
the Company has defined as coding and testing in accordance with detailed
program designs, and the general availability of such software has been short
and software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs.
F-8
<PAGE>
XPEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Research and development expenditures
Costs related to research, design and development of products are charged to
research and development expense as incurred.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three to seven years, or the lease term of the respective assets.
Income taxes
Xpeed accounts for income taxes in accordance with Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. This statement prescribes the use of the liability
method whereby deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax basis of assets and liabilities
and measured at tax rates that will be in effect when the differences are
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets where it is more likely than not the deferred tax
asset will not be realized.
Advertising
Xpeed expenses advertising costs as they are incurred. The Company did not
incur any advertising costs in 1998 and 1999.
Business segment information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"). FAS 131 establishes standards for the way that public business
enterprises report on information about operating segments in annual financial
statements and interim financial reports. FAS 131 also establishes standards
for related disclosures about products and services, geographic areas and major
customers.
Long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("SFAS 121"). SFAS 121 requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with
the disclosure provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
F-9
<PAGE>
XPEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive loss
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. There was no difference between the
Company's net loss and its total comprehensive loss for 1998 and 1999.
Net loss per share
Xpeed computes net loss per share in accordance with Statement of Financial
Accounting Standards No. 128, Earnings per Share, ("SFAS No. 128"). Under the
provisions of SFAS No. 128, basic net loss per share is computed by dividing
the net loss available to common stockholders for the period by the weighted
average number of common shares outstanding during the period. Diluted net loss
per share is computed by dividing the net loss for the period by the weighted
average number of common and common equivalent shares outstanding during the
period. Options, warrants, mandatorily redeemable preferred stock and
convertible preferred stock were not included in the computation of diluted net
loss per share because the effect would be antidilutive.
A reconciliation of shares used in the calculation of basic and diluted net
loss per share follows:
<TABLE>
<CAPTION>
Period from
April 8,
1998 (date of Six Months
inception) to Year Ended Ended June 30,
December 31, December 31, -------------------------
1998 1999 1999 2000
------------- ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Basic and diluted net
loss per share:
Numerator:
Net loss............. $(2,529,000) $(7,812,000) $(1,643,000) $(13,322,000)
Accretion of
redeemable
convertible
preferred stock to
redemption value.... -- (49,000) -- --
Deemed dividend
related to issuance
of Series C
Redeemable
Convertible
Preferred Stock..... -- (2,013,000) -- (15,553,000)
----------- ----------- ----------- ------------
Net loss attributable
to common
stockholders........ $(2,529,000) $(9,874,000) $(1,643,000) $(28,875,000)
=========== =========== =========== ============
Denominator:
Weighted average
common shares
outstanding......... 2,824,206 4,899,932 4,892,625 5,246,487
Weighted average
unvested common
shares subject to
repurchase.......... (2,254,806) (2,837,500) (3,409,375) (2,265,625)
----------- ----------- ----------- ------------
Denominator for
basic and diluted
calculation....... 569,400 2,062,432 1,483,250 2,980,862
=========== =========== =========== ============
Basic and diluted
net loss per share
attributable to
common
stockholders...... $ (4.44) $ (4.79) $ (1.11) $ (9.69)
=========== =========== =========== ============
Antidilutive securities
including options,
warrants and preferred
stocks not included in
net loss per share
calculations............ 2,300,522 5,951,494 4,715,180 7,866,889
=========== =========== =========== ============
</TABLE>
F-10
<PAGE>
XPEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited pro forma net loss per share and pro forma stockholders' equity
Pro forma net loss per share for the year ended December 31, 1999, and the
six months ended June 30, 2000, is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the conversion
of convertible preferred stock into common stock on an as-if-converted basis.
Pro forma net loss per share is computed using the pro forma weighted average
number of common and common equivalent shares outstanding. Common equivalent
shares, composed of common shares issuable upon the exercise of stock options
and warrants, are not included in pro forma diluted net loss per share as such
shares are antidilutive.
The following table sets forth the computation of pro forma basic and
diluted net loss per share (unaudited):
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June
1999 30, 2000
------------ ------------
<S> <C> <C>
Numerator:
Net loss......................................... $(7,812,000) $(13,322,000)
=========== ============
Denominator:
Shares used in computing basic and diluted net
loss per share.................................. 2,062,432 2,980,862
Adjustment to reflect assumed conversion of all
preferred stock from date of issuance........... 2,853,624 5,726,439
----------- ------------
Shares used in computing pro forma basic and
diluted net loss per share........................ 4,916,056 8,707,301
=========== ============
Basic and diluted pro forma net loss per share. $ (1.59) $ (1.53)
=========== ============
Antidilutive securities including options and
warrants not included in pro forma net loss per
share calculation................................. 1,846,069 1,922,347
=========== ============
</TABLE>
If the offering contemplated by this Prospectus is consummated, all of the
redeemable convertible preferred stock outstanding, as of the closing date will
automatically be converted into an aggregate of 5,944,542 shares of common
stock based on the shares of redeemable convertible preferred stock outstanding
at June 30, 2000. Unaudited pro forma stockholders' equity at June 30, 2000, as
adjusted for the conversion of preferred stock, is disclosed on the balance
sheet.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") FASB issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), which establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
in the statement of financial position, and that the corresponding gains or
losses be reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 is effective for fiscal years beginning after June 15, 2000.
Xpeed is assessing the potential impact of this pronouncement on the financial
statements; however, they do not expect any significant impact.
In December 1999, the Securities Exchange Commission ("SEC") issued to Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which outlines the basic criteria that
F-11
<PAGE>
XPEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
must be met to recognize revenue and provides guidance for presentation of
revenue and for disclosure related to revenue recognition policies in financial
statements filed with the SEC. In June 2000, the SEC issued SAB 101(B) which
defers the implementation date of SAB 101 to no later than the fourth fiscal
quarter of fiscal years commencing after December 15, 1999. The Company has
evaluated the provisions of SAB 101 and believes it is in compliance with them.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of APB
25. This Interpretation clarifies (a) the definition of employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after
either December 15, 1998, or January 12, 2000. To the extent that this
Interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are recognized on a prospective basis
from July 1, 2000. The Company has not yet determined the impact, if any, of
adopting this Interpretation.
F-12
<PAGE>
XPEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
December 31,
-------------------- June 30,
1998 1999 2000
-------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Accounts receivable, net:
Accounts receivable..................... $ -- $1,221,000 $4,196,000
-------- ---------- ----------
Less: Allowance for doubtful accounts... -- (15,000) (25,000)
-------- ---------- ----------
$ -- $1,206,000 $4,171,000
======== ========== ==========
Inventory, net:
Finished goods.......................... $ -- $ 67,000 $ 703,000
Raw materials........................... -- 387,000 997,000
-------- ---------- ----------
-- 454,000 1,700,000
Less: Allowance for obsolete and slow
moving inventory....................... -- (192,000) (493,000)
-------- ---------- ----------
$ -- $ 262,000 $1,207,000
======== ========== ==========
Property and equipment, net:
Computer equipment and software......... $244,000 $ 910,000 $1,718,000
Furniture, fixtures and office
equipment.............................. 1,000 137,000 192,000
Leasehold improvements.................. -- 11,000 18,000
-------- ---------- ----------
245,000 1,058,000 1,928,000
Less: Accumulated depreciation and
amortization........................... (30,000) (183,000) (384,000)
-------- ---------- ----------
$215,000 $ 875,000 $1,544,000
======== ========== ==========
Accrued liabilities:
Payroll and related expenses............ $ 21,000 $ 69,000 $ 141,000
Warranty................................ -- 50,000 282,000
Other................................... 173,000 375,000 319,000
-------- ---------- ----------
$194,000 $ 494,000 $ 742,000
======== ========== ==========
</TABLE>
NOTE 3--INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Period from
April 8, 1998
(date of
inception) to Year Ended
December 31, December 31,
1998 1999
------------- ------------
<S> <C> <C>
Current:
U.S. federal.................................... $ -- $ --
State and local................................. 800 800
---- ----
800 800
---- ----
Deferred:
U.S. federal.................................... $ -- $ --
==== ====
</TABLE>
F-13
<PAGE>
XPEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 450,000 $ 2,392,000
Accruals and reserves.............................. 18,000 37,000
Research credits................................... 40,000 120,000
Depreciation....................................... 24,000 24,000
--------- -----------
532,000 2,573,000
--------- -----------
Less: Valuation allowance.......................... (532,000) (2,573,000)
--------- -----------
$ -- $ --
========= ===========
</TABLE>
Management believes that, based on a number of factors, it is more likely
than not that the deferred tax assets will not be utilized, such that a full
valuation allowance has been recorded.
Xpeed's expected US Federal statutory income tax rate (34%) differ from the
effective tax rate as follows:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
"Expected" income benefit.................................... (34.0)% (34.0)%
Net operating loss not benefited............................. 34 34
------- -------
Effective tax rate......................................... -- % -- %
======= =======
</TABLE>
At December 31, 1999, the Company had approximately $4,005,000 of federal
and $6,005,000 of state net operating loss carryforwards available to offset
future taxable income which expire in varying amounts beginning in 2018. Under
the Tax Reform Act of 1986, the amounts of and benefits from net operating loss
carryforwards may be impaired or limited in certain circumstances. Events which
cause limitations in the amount of net operating losses that the Company may
utilize in any one year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three year period.
NOTE 4--BORROWINGS:
Notes payable
Notes payable consists of amounts payable to shareholders. The notes are
unsecured and bear no interest.
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1998 1999 2000
-------- ---- -----------
(unaudited)
<S> <C> <C> <C>
Short term notes................................... $113,000 $ -- $ --
======== ==== ====
</TABLE>
NOTE 5--COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office space under a noncancelable operating lease which
expires in October 2003. Rent expense for the years ended December 31, 1999 and
1998 was $248,000 and $76,000, respectively. The
F-14
<PAGE>
XPEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
terms of the facility lease provide for rental payments on a graduated scale.
The Company recognizes rent expense on a straight-line basis over the lease
period, and has accrued for rent expense incurred but not paid.
Future minimum lease payments under the noncancelable operating lease,
including lease commitments entered into subsequent to December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Years Ended Operating
December 31, Leases
------------ ----------
<S> <C>
2000............................................................. $ 699,000
2001............................................................. 694,000
2002............................................................. 694,000
2003............................................................. 578,000
----------
Total minimum lease payments................................... $2,665,000
==========
</TABLE>
Litigation
From time to time, Xpeed may be involved in litigation relating to claims
arising out of its ordinary course of business. Management believes that there
are no claims or actions pending or threatened against Xpeed, the ultimate
disposition of which would have a material impact on Xpeed's financial position
or results of operations.
Contract Manufacturers
The Company has entered into a purchase agreement with two manufacturers in
the United States. The contracts provide for manufacturers to supply certain
levels of Xpeed products according to rolling forecasts and purchase orders
provided by Xpeed, Inc. The Company has agreed to make the prompt payment of
all invoices and charges for products manufactured according to the rolling
forecasts and purchase orders.
NOTE 6--CONVERTIBLE PREFERRED STOCK:
The Convertible Preferred Stock comprise the series designated as follows:
<TABLE>
<CAPTION>
Proceeds
Shares Net of
---------------------- Liquidation Issuance
Series Authorized Outstanding Value Costs
------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
A............................... 867,000 866,667 $ 520,000 $ 520,000
B............................... 3,000,000 2,402,443 4,805,000 4,764,000
C............................... 2,000,000 601,667 4,512,000 4,504,000
--------- --------- ----------- -----------
Balance at December 31, 1999.. 5,867,000 3,870,777 9,837,000 9,788,000
--------- --------- ----------- -----------
C (unaudited)................... 700,000 2,073,765 15,553,000 15,553,000
--------- --------- ----------- -----------
Balance at June 30, 2000
(unaudited).................. 6,567,000 5,944,542 $25,390,000 $25,341,000
========= ========= =========== ===========
</TABLE>
F-15
<PAGE>
XPEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The holders of Preferred Stock have various rights and preferences as
follows:
Voting
The holder of each share of Preferred Stock has voting rights equal to an
equivalent number of shares of Common Stock into which it is convertible and
votes together as one class with the Common Stock.
As long as any Series A Preferred Stock, any Series B Preferred Stock or at
least 1,000,001 shares of Series C Preferred Stock remain outstanding, the
Company must obtain approval from a majority of the holders of that series of
Convertible Preferred Stock in order to alter the Articles of Incorporation as
related to that series of Convertible Preferred Stock, change the authorized
number of shares of that series of Convertible Preferred Stock, or create a new
class of stock having preference over or being on parity with that series of
Convertible Preferred Stock.
Dividends
Holders of Series A, B and C Convertible Preferred Stock are entitled to
receive noncumulative dividends at the per annum rate of $0.05, $0.04 and $0.60
per share, respectively, when and if declared by the Board of Directors. The
holders of Series A, B and C Convertible Preferred Stock will also be entitled
to participate in dividends on Common Stock, when and if declared by the Board
of Directors, based on the number of shares of Common Stock held on an as-if
converted basis. No dividends on Convertible Preferred Stock or Common Stock
have been declared by the Board from inception through December 31, 1999.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners
of the Company's Common Stock and Convertible Preferred Stock own less than 50%
of the resulting voting power of the surviving entity, the holders of Series A,
B and C Convertible Preferred Stock are entitled to receive an amount of $0.60,
$2.00 and $7.50 per share, respectively, plus any declared but unpaid dividends
prior to and in preference to any distribution to the holders of Common Stock.
The remaining assets, if any, shall be distributed to the holders of Common
Stock. Should the Company's legally available assets be insufficient to satisfy
the liquidation preferences, the funds available will be distributed ratably
among the holders of the Series A, B and C Convertible Preferred Stock in
proportion to the preferential amount each such holder is otherwise entitled to
receive.
Conversion
Each share of Series A, B and C Convertible Preferred Stock is convertible,
at the option of the holder, into common stock on a one-for-one basis, subject
to certain antidilution provisions. Each share of Series A, B and C Convertible
Preferred Stock automatically converts into the number of shares of Common
Stock into which such shares are convertible at the then effective conversion
ratio upon: (1) the closing of a public offering of Common Stock at a per share
price of at least $10.00 per share with gross proceeds of at least $30,000,000,
(2) a merger, sale of substantially all of the assets or other transactions
which result in a change in control or (3) the consent of the holders of the
majority of Convertible Preferred Stock.
At December 31, 1999, the Company reserved 866,667, 2,402,443 and 601,667
shares of Common Stock for the conversion of Series A, B and C Convertible
Preferred Stock, respectively.
F-16
<PAGE>
XPEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deemed dividend related to issuance of Series C redeemable convertible
preferred stock
In November and December 1999, 601,667 shares of Series C preferred stock
were issued for gross proceeds of approximately $4,512,000. The issuance
resulted in a beneficial conversion feature of $2,013,000 calculated in
accordance with Emerging Issues Task Force No. 98-5, which resulted an
immediate increase in additional paid-in capital. In January and February 2000,
2,073,765 (unaudited) shares of Series C preferred stock were issued for gross
proceeds of approximately $15,553,000 (unaudited). The issuance resulted in a
beneficial conversion feature of $15,553,000 (unaudited) calculated in
accordance with Emerging Issues Task Force No. 98-5, which resulted an
immediate increase in additional paid-in capital.
NOTE 7--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 20,000,000 shares of $0.0001 par value Common Stock.
Common stock subject to repurchase
In 1998, 5,000,000 shares of common stock were issued to the founders of the
Company, which are subject to repurchase. Shares vest over four years from the
issuance date. At December 1998 and 1999, there were 4,142,625 and 2,223,156
shares, respectively, subject to repurchase at the original purchase price of
$0.0006. In December 1998, 1,000,000 shares were repurchased at the original
purchase price.
Warrants for Common Stock
In connection with issuance of Preferred Series B stock, the Company issued
warrants to purchase 600,611 shares of Common Stock for $2.00 per share. Such
warrants are outstanding at December 31, 1999 and expire in February 2001. The
fair value of these warrants is not material to the financial statements.
NOTE 8--STOCK OPTION PLANS:
In April 1998, the Company adopted the 1998 Stock Option Plan (the "Plan").
The Plan provides for the granting of stock options to employees and
consultants of the Company. Options granted under the Plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
("ISO") may be granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may be
granted to Company employees and consultants. The Company has reserved
3,400,000 shares of Common Stock for issuance under the Plan.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a 10% shareholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively. Options are exercisable immediately subject to repurchase options
held by the Company which lapse over a maximum period of four years at such
times and under such conditions as determined by the Board of Directors. To
date, options granted generally vest over four years.
F-17
<PAGE>
XPEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of Xpeed's stock option plans as of December 31,
1998 and 1999, and June 30, 2000 (unaudited) is presented below:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------
Weighted
Average
Exercise
Shares Number Exercise Price Aggregate
Available of Price per per Exercise
for Grant Shares Share Share Price
---------- --------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C>
Options outstanding at
April 8, 1998.......... -- -- -- -- --
Shares reserved under
1998 stock option plan. 3,400,000 -- -- -- --
Granted................ (2,025,000) 2,025,000 $0.001 $0.001 $ 2,000
Exercised.............. -- -- -- -- --
Canceled............... 300,000 (300,000) $0.001 $0.001 --
---------- --------- ------------- ------ ----------
Options outstanding at
December 31, 1998...... 1,675,000 1,725,000 $0.001 $0.001 2,000
Granted................ (903,000) 903,000 $0.200 $0.200 181,000
Exercised.............. -- (35,000) $0.200 $0.200 (7,000)
Canceled............... 131,000 (131,000) $0.200 $0.200 (26,000)
---------- --------- ------------- ------ ----------
Options outstanding at
December 31, 1999...... 903,000 2,462,000 $0.001-$0.200 $0.06 150,000
Additional shares
reserved.............. 1,500,000 -- -- -- --
Granted................ (956,000) 956,000 $1.50-$4.00 $2.74 2,619,000
Exercised.............. -- (9,000) $1.50-$4.00 $2.74 (25,000)
Canceled............... 83,000 (83,000) $1.50-$4.00 $2.74 (227,000)
---------- --------- ------------- ------ ----------
Options outstanding at
June 30, 2000
(unaudited)............ 1,530,000 3,326,000 $0.001-$4.00 $0.76 $2,517,000
========== ========= ============= ====== ==========
</TABLE>
The weighted average fair value of options granted in the period from April
8, 1998 (date of inception) to December 31, 1998 and in the year ended December
31, 1999 was $0.0001 and $0.009, respectively.
The following table summarizes information concerning outstanding and
exercisable options under the plan as of December 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding at Options Exercisable
December 31, 1999 at December 31, 1999
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (Years) Price Outstanding Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.001 567,188 8.61 $0.001 205,209 $0.001
$0.200 1,894,667 9.05 $0.200 1,274,897 $0.200
--------- ---------
2,461,855 1,480,106
========= =========
</TABLE>
F-18
<PAGE>
* Amortization of stock compensation includes:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
------------ ------------
<S> <C> <C>
Cost of revenues:
Subscriptions fees and other services............... $ 4 $ 5
Research and development............................. 31 146
Sales and marketing.................................. 78 120
General and administrative........................... 49 186
---- ----
$162 $457
==== ====
</TABLE>
Per share data
The table below reflects our historical and pro forma net loss per share for
the periods indicated and the weighted average historical and pro forma number
of shares used to calculate net loss per share for the periods. The historical
net loss per share has been calculated on the basis of the weighted average
number of shares of common stock actually outstanding during the periods
indicated. From March 20, 1998 until March 26, 1999, we did not have any shares
of common stock outstanding due to their conversion into preferred stock in
March 1998. We do not believe our historical net loss per share for 1998 and
the three months ended March 31, 1999 are meaningful because they are
substantially greater than they would have been had our common stock been
outstanding during all of 1998 and the first quarter of 1999.
<TABLE>
<CAPTION>
From
February 6, Year Ended Three Months Ended
1996 through December 31, March 31,
December 31, ----------------------- -------------------
1996 1997 1998 1999 1999 2000
------------ ------ ------ ------- ---------- -------
(shares in thousands)
Per Share Data:
<S> <C> <C> <C> <C> <C> <C>
Basic and diluted net
loss per share......... $(1.01) $(0.85) $(8.01) $(48.86) $(2,322.60) $ (2.31)
====== ====== ====== ======= ========== =======
Shares used in
computation of basic
and diluted net loss
per share.............. 487 623 498 262 1 2.364
====== ====== ====== ======= ========== =======
Pro forma basic and
diluted net loss per
share.................. $ (1.24) $ (0.36)
======= =======
Shares used in pro forma
basic and diluted net
loss
per share.............. 10,326 15,135
======= =======
</TABLE>
The pro forma financial data as of March 31, 2000 assumes the conversion of
all of our outstanding shares of preferred stock into common stock upon the
closing of this offering. The pro forma as adjusted data assumes this
conversion and the sale of the 4,000,000 shares of common stock that we are
offering under this prospectus at an assumed initial public offering price of
$11.00 per share and after deducting the underwriting discounts and commissions
and estimated offering expenses.
<TABLE>
<CAPTION>
As of December 31, As of March 31, 2000
---------------------------- ------------------------------
Pro Forma
1996 1997 1998 1999 Actual Pro Forma As Adjusted
---- ------ ------ ------ ------- --------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ 101 518 1,163 14,023 $10,983 $10,983 $50,703
Working capital......... 36 (478) 644 13,325 9,616 9,616 49,336
Total assets............ 140 627 2,436 37,692 33,033 33,033 72,753
Long-term obligations... -- 50 -- 2,240 2,587 2,587 2,587
Convertible preferred
stock.................. 566 568 6,748 34,256 34,316 -- --
Total stockholders'
equity (deficiency).... (493) (1,023) (5,032) (4,286) (8,811) 25,505 65,225
</TABLE>
19
<PAGE>
XPEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--BUSINESS SEGMENT INFORMATION:
The Company has adopted the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about
Segments of an Enterprise and Related Information," effective for fiscal years
beginning after December 31, 1997. SFAS No. 131 supersedes Statement of
Financial Accounting Standards No. 14 ("SFAS No. 14"), "Financial Reporting for
Segments of a Business Enterprise." SFAS No. 131 changes current practice under
SFAS No. 14 by establishing a new framework on which to base segment reporting
and also requires interim reporting of segment information. Management uses one
measurement of profitability for its business. The Company markets its products
to customers in the United States and Asia Pacific. Substantially all of the
Company's assets are located within the United States. Revenue information by
geographic area is as follows:
<TABLE>
<CAPTION>
Year Ended Six Months
Ended Ended
December 31, June 30,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
United States....................................... $ 99,000 $ 2,971,000
Asia Pacific........................................ 2,312,000 13,734,000
Other -- 3,000
---------- -----------
Total............................................. $2,411,000 $16,708,000
========== ===========
</TABLE>
NOTE 10--SUBSEQUENT EVENTS:
Prior to completion of the offering contemplated by this prospectus, the
Company will reincorporate from California into Delaware.
Prior to completion of the offering contemplated by this prospectus, the
Board of Directors of the Company will approve a stock split of the Company's
preferred and common stock.
F-20
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Shares
[LOGO OF XPEED NETWORKS, INC.]
Common Stock
----------------
PROSPECTUS
----------------
CHASE H&Q
DAIN RAUSCHER WESSELS
UBS WARBURG LLC
KAUFMAN BROS., L.P.
----------------
, 2000
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
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
prospectus or of any sale of the common stock.
Until , 2000, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to
deliver a prospectus. This requirement is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all fees and expenses payable by us in
connection with the registration of our common stock. All of the amounts shown
are estimates except for the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
Amount To
Be Paid
---------
<S> <C>
SEC Registration Fee............................................. $ 13,200
NASD Filing Fee.................................................. 5,500
Nasdaq National Market Listing Fee............................... 100,000
Printing and Engraving Expenses.................................. 150,000
Legal Fees and Expenses.......................................... 400,000
Accounting Fees and Expenses..................................... 400,000
Transfer Agent and Registrar Fees and Expenses................... 10,000
Miscellaneous Expenses...........................................
--------
Total.......................................................... $
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Our certificate of incorporation and our bylaws provide for
indemnification of our directors, officers, employees and other agents to the
extent and under the circumstances permitted by the Delaware General
Corporation Law. We have also entered into agreements with our directors and
executive officers that require us among other things to indemnify them against
certain liabilities that may arise by reason of their status or service as
directors and executive officers to the fullest extent permitted by Delaware
law. We have also purchased directors and officers liability insurance, which
provides coverage against certain liabilities including liabilities under the
Securities Act.
Item 15. Recent Sales of Unregistered Securities
(a) Within the past three years, we have issued and sold the following
unregistered securities:
. From April 29, 1998 to March 20, 2000 we sold shares of
unregistered common stock to 14 directors, officers, employees and
contractors at a purchase price ranging from $ to $ per share for
aggregate consideration of $18,850.00;
. From September 15, 1998 to May 17, 2000 we sold an aggregate of
shares of unregistered common stock upon exercise of options to 16
officers and employees at a purchase price ranging from $ to $ per
share for aggregate consideration of $51,733.97;
. On August 18, 1998, we sold shares of unregistered Series A
preferred stock in a private placement at a purchase price of $ per
share for aggregate consideration of $520,000.20;
. From January 15, 1999 to February 28, 1999 we sold shares of
unregistered Series B preferred stock in a private placement at a
purchase price of $ per share for aggregate consideration of
$4,804,886.00;
II-1
<PAGE>
. From December 30, 1999 to May 5, 2000 we sold shares of
unregistered Series C preferred stock in a private placement at a
purchase price of $ per share for aggregate consideration of
$20,062,462.50;
. From January 15, 1999 to April 20, 1999, we issued an aggregate of 31
warrants for the purchase of an aggregate of shares of common
stock at an exercise price per share of $ .
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act, Regulation D promulgated thereunder,
or Rule 701 promulgated under Section 3(b) of the Securities Act, as
transactions by an issuer not involving any public offering or transactions
pursuant to compensatory benefit plans and contracts relating to compensation
as provided under Rule 701. The recipients of securities in each transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the securities issued in such transactions.
All recipients had adequate access to information about us through their
relationship with us.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation, as currently in effect
3.2* Certificate of Incorporation to be in effect upon completion of the
offering
3.3 Bylaws of the registrant as currently in effect
3.4* Bylaws of the registrant to be in effect upon completion of the
offering
4.1* Specimen Common Stock Certificate
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1 Stock Purchase Agreement dated January 15, 1999 among the Registrant
and certain purchasers
10.2 Registration Rights Agreement dated January 19, 1998 among the
Registrant and certain investors
10.3* Form of Indemnification Agreement between the Registrant and each of
its Directors and Officers
10.4* 1998 Stock Plan and form of agreements thereunder
10.5* 2000 Employee Stock Purchase Plan and form of agreements thereunder
10.6 Agent Agreement dated August 1, 1999, between Registrant and Han Kook
Chong Mil Ki Ind. Co., Ltd.
10.7* Product Purchase Agreement dated February 24, 2000, between Registrant
and Centillium Communications, Inc.
10.8 Sublease dated October 1999 between Registrant and Samsung
Semiconductor, Inc.
10.9 Manufacturing and Purchase Agreement dated April 1, 2000 between
Registrant and Victron, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.10 Agreement dated June 7, 2000 between Registrant and SMTC Manufacturing
Corporation
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Wilson Sonsini Goodrich & Rosati (included in exhibit 5.1)
24.1 Power of attorney (see page II-6)
27.1 Financial data schedule
</TABLE>
---------------------
* To be filed by amendment.
(b) Financial Statement Schedules:
II-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Xpeed, Inc.
The reincorporation and stock split described in Note 10 of the notes to the
consolidated financial statements are not effective at February 18, 2000. When
it is effective, we will be in a position to furnish the following report:
"In connection with our audits of the consolidated financial statements of
Xpeed Networks, Inc. (formerly Xpeed, Inc.) as of December 31, 1998 and 1999,
and for the year then ended December 31, 1999 and for the period from April 8,
1998 (date of inception) to December 31, 1998, which consolidated financial
statements are included in the Prospectus, we have also audited the financial
statement schedule listed in Item 16(b) herein. In our opinion, this financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein."
San Jose, California
February 18, 2000
<TABLE>
<CAPTION>
Valuation and Qualifying Accounts
------------------------------------------
Balance at Balance
beginning Additions at end
of year (Deductions) Write-offs of year
---------- ------------ ---------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Period from April 8, 1998
(inception date) to December 31,
1998............................. -- -- -- --
Year ended December 31, 1999...... -- $15,000 -- $15,000
Accrued product warranty
Period from April 8, 1998
(inception date) to December 31,
1998............................. -- -- -- --
Year ended December 31, 1999...... -- 50,000 -- 50,000
Allowance for obsolete and slow
moving inventory
Period from April 8, 1998
(inception date) to December 31,
1998............................. -- -- -- --
Year ended December 31, 1999...... -- 192,000 -- 192,000
</TABLE>
Item 17. Undertakings
Indemnification by us for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of Xpeed, we have
been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. If that a claim for indemnification
against such liabilities (other than the payment by Xpeed of expenses incurred
or paid by a director, officer or controlling person of Xpeed 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, we
will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by Xpeed is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
We hereby undertake that:
(a) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a registration
statement in reliance upon Rule 430A and contained in the form of prospectus
filed by Xpeed pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of the registration statement as of the time it
was declared effective.
II-4
<PAGE>
(b) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Jose, State of California, on the 20th day of July, 2000.
XPEED NETWORKS, INC.
/s/ Michael D. Pak
By: _________________________________
Michael D. Pak
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael Pak and Michael Mazzoni, and each of
them, his attorneys-in-fact, each with the power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, and all post-
effective amendments thereto, and to file the same, with all exhibits thereto
in all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
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 such attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, 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 on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael D. Pak Chief Executive Officer and July 20, 2000
____________________________________ Director (Principal
Michael D. Pak Executive Officer)
/s/ Michael F. Mazzoni Vice President and Chief July 20, 2000
____________________________________ Financial Officer
Michael F. Mazzoni (Principal Financial and
Accounting Officer)
/s/ Chang Rok Kang Director July 20, 2000
____________________________________
Chang Rok Kang
/s/ Tsuyoshi Taira Director July 20, 2000
____________________________________
Tsuyoshi Taira
/s/ William F. Miller Director July 20, 2000
____________________________________
William F. Miller
/s/ Yukata Shinto Director July 20, 2000
____________________________________
Yukata Shinto
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation, as currently in effect
3.2* Certificate of Incorporation to be in effect upon completion of the
offering
3.3 Bylaws of the registrant as currently in effect
3.4* Bylaws of the registrant to be in effect upon completion of the
offering
4.1* Specimen Common Stock Certificate
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1 Stock Purchase Agreement dated January 15, 1999 among the Registrant
and certain purchasers
10.2 Registration Rights Agreement dated January 19, 1998 among the
Registrant and certain investors
10.3* Form of Indemnification Agreement between the Registrant and each of
its Directors and Officers
10.4* 1998 Stock Plan and form of agreements thereunder
10.5* 2000 Employee Stock Purchase Plan and form of agreements thereunder
10.6 Agent Agreement dated August 1, 1999, between Registrant and Han Kook
Chong Mil Ki Ind. Co., Ltd.
10.7* Product Purchase Agreement dated February 24, 2000, between Registrant
and Centillium Communications, Inc.
10.8 Sublease dated October 1999 between Registrant and Samsung
Semiconductor, Inc.
10.9 Manufacturing and Purchase Agreement dated April 1, 2000 between
Registrant and Victron, Inc.
10.10 Agreement dated June 7, 2000 between Registrant and SMTC Manufacturing
Corporation
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Wilson Sonsini Goodrich & Rosati (included in exhibit 5.1)
24.1 Power of attorney (see page II-6)
27.1 Financial data schedule
</TABLE>
---------------------
* To be filed by amendment.
