<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
MONOLITHIC SYSTEM TECHNOLOGY, INC.
(Exact name of Registrant as specified in our charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 3674 77-0291941
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1020 STEWART DRIVE
SUNNYVALE, CA 94085
(408) 731-1800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
FU-CHIEH HSU, PH.D.
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
MONOLITHIC SYSTEM TECHNOLOGY, INC.
1020 STEWART DRIVE
SUNNYVALE, CA 94085
(408) 731-1800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
ALAN B. KALIN JOHN W. CAMPBELL
DANIEL D. MEYERS JAMES H. LAWS
MAHA H. KHALAF INGRID A. EBERLE
MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP MORRISON & FOERSTER LLP
3150 PORTER DRIVE 425 MARKET STREET
PALO ALTO, CALIFORNIA 94304-1212 SAN FRANCISCO, CALIFORNIA 94105-2482
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common stock.......................................... $50,000,000 $13,200
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee. The estimate is made pursuant to Rule 457(o) of the Securities Act of
1933, as amended.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY OUR 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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<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 securities, and we are not soliciting offers to buy securities, in any
state where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION
DATED , 2000
PROSPECTUS
SHARES
[LOGO]
MONOLITHIC SYSTEM TECHNOLOGY, INC.
COMMON STOCK
This is our initial public offering. We are offering shares of our common
stock. Prior to this offering, there has been no public market for our common
stock. It is currently estimated that the initial public offering price will be
between $ and $ per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. We
have applied for quotation of the common stock on the Nasdaq National Market
under the symbol "MOSY."
INVESTING IN OUR COMMON STOCK INVOLVES 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 OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT MOSYS
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
------------------------------------------------------------------------------------------------------
Total $ $ $
------------------------------------------------------------------------------------------------------
</TABLE>
We have granted the underwriters a 30-day option to purchase up to an additional
shares of common stock, solely to cover over-allotments.
J.P. MORGAN & CO. WIT SOUNDVIEW
, 2000
<PAGE>
[EDGAR DESCRIPTION OF ARTWORK:]
<TABLE>
<S> <C>
--------------------------------------------------------------------------------------
Comments made about MoSys' 1T-SRAM technology by senior executives and management of
our customers.
[LSI Logic logo] "LSI Logic continues to provide enabling technologies and
CoreWare-Registered Trademark- products to support the
requirements of the high-growth communications market. A
growing demand for the communications market is the
integration of CoreWare-Registered Trademark- library
elements with multi-megabits of high-performance memories in
a single silicon process. MoSys' 1T-SRAM technology provides
a solution for that multi-megabits memory integration."
--------------------------------------------------------------------------------------
[NEC logo] "NEC evaluated and licensed MoSys' embedded 1T-SRAM memory
technology based on its unique combination of performance,
density and power capabilities not available from other SRAM
technologies."
"Our ASIC customers now have an exciting new solution for
SOC designs requiring large quantities of high-performance
embedded memory."
--------------------------------------------------------------------------------------
[Nintendo logo] "The incredible performance of MoSys' 1T-SRAM memory with
the proprietary custom graphics chip designed by ArtX is the
perfect match for IBM's custom, copper-based CPU."
"We will employ this technology to surpass the game
experience offered by any competing console or personal
computer."
--------------------------------------------------------------------------------------
[Allayer Communications "Allayer evaluated and selected MoSys' 1T-SRAM embedded
logo] memory technology for its unique combination of performance,
density and power capabilities. These 1T-SRAM
characteristics are ideally suited to our communication
applications and are not available from other technologies."
--------------------------------------------------------------------------------------
[Galileo Technology "In order to achieve the next level of integration for our
logo] high-performance data communications products, we needed to
find a memory technology that could meet the stringent
demands of our market. MoSys' 1T-SRAM memory technology
uniquely delivers both the performance and integration
capability required."
--------------------------------------------------------------------------------------
[Pixelworks logo] "Pixelworks' success is based on our ability to design and
deliver highly integrated chips that deliver exceptional
performance. We selected MoSys' 1T-SRAM because it delivers
the exceptional SRAM performance we require and at densities
significantly ahead of any other embedded memory."
--------------------------------------------------------------------------------------
[Virage Logic logo] "1T-SRAM represents a breakthrough in embedded memory
technology for the SOC industry, and we are very excited to
partner with MoSys to provide compilers for this
revolutionary technology."
--------------------------------------------------------------------------------------
[TSMC logo] "Embedded memory is the most pervasive silicon intellectual
property block on our customers' designs and has the largest
economic and performance impact. We are very encouraged by
this progress in making 1T-SRAM technology available to our
customers on our standard 0.18-micron logic process."
--------------------------------------------------------------------------------------
[UMC logo] "MoSys' 1T-SRAM technology provides our system-on-chip
customers with the capability to economically integrate
megabytes of high-performance memory on these
industry-leading processes, addressing a density segment
between the typical densities of our 6T-SRAM and embedded
DRAM technologies."
--------------------------------------------------------------------------------------
</TABLE>
<PAGE>
You should rely only on the information contained or incorporated by reference
in this prospectus. We have not authorized anyone to provide you with
information different from that contained or incorporated by reference in this
prospectus. This prospectus is an offer to sell, or a solicitation of offers to
buy, shares of our 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 our common stock.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 5
Special Note Regarding
Forward-Looking Statements and
Industry Data...................... 17
Use of Proceeds...................... 17
Dividend Policy...................... 17
Capitalization....................... 18
Dilution............................. 19
Selected Financial Data.............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Business............................. 31
Management........................... 41
Related Party Transactions........... 48
Principal Stockholders............... 50
Description of Capital Stock......... 52
Shares Eligible for Future Sale...... 56
Underwriting......................... 58
Legal Matters........................ 60
Experts.............................. 60
Where You Can Find Additional
Information........................ 60
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
------------------------
Our primary web site is www.mosys.com. The information on our web site is not
incorporated by reference into this prospectus.
MOSYS, MULTIBANK and 1T-SRAM are our trademarks. In this prospectus, "MoSys,"
"we," "us" and "our" refer to Monolithic System Technology, Inc. Product names,
trade names and trademarks of other companies are also referred to in this
prospectus.
References to, or quotations of, third parties contained in this prospectus do
not constitute an endorsement by these parties of the purchase of shares of our
common stock.
Until , 2000 (25 days after the date of this prospectus), all dealers
that buy, sell or trade in these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. Dealers
are also obligated to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
i
<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 CAREFULLY READ THE
ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS, BEFORE
YOU DECIDE TO BUY OUR COMMON STOCK.
MONOLITHIC SYSTEM TECHNOLOGY, INC.
We design, develop, license and market memory technologies used by the
semiconductor industry and electronic product manufacturers. We have developed
an innovative embedded-memory technology, called 1T-SRAM, that offers major
advantages over traditional embedded six-transistor static random access memory,
or traditional SRAM. Our patented 1T-SRAM technology offers a combination of
high density, low power consumption, high speed and low cost that other embedded
memory technologies do not match.
Semiconductor companies increasingly integrate multiple functions, such as
microprocessors, memory, analog components and digital signal processors, on a
single integrated circuit. A major challenge in achieving high levels of
integration on integrated circuits is economically incorporating the memory
component. Rather than using stand-alone memory products, semiconductor
companies prefer to embed memory in highly integrated circuits as the ideal
solution to optimize the performance and size of integrated circuits. Integrated
circuit designers today require more embedded memory to achieve high levels of
functionality and performance. Thus, embedded memory also accounts for an
increasing percentage of the area of highly integrated circuits. As a result of
these factors, the memory function is becoming more important in determining the
ultimate silicon area, power consumption, speed and cost parameters of an
integrated circuit. As long as the amount of memory required is relatively
modest, traditional SRAM typically is cost effective. As the amount of required
memory increases, however, designers find it difficult to include traditional
SRAM on the integrated circuit at a reasonable cost.
Our 1T-SRAM technology provides significant advantages over traditional SRAM in
density, power consumption and cost that enable designers to more economically
use a larger amount of embedded memory. In addition, our 1T-SRAM technology
offers the benefits of traditional SRAM, such as high speed, a simple interface
and ease of manufacturability. Instead of the six transistors utilized in a
traditional SRAM memory cell, our 1T-SRAM technology contains only one
transistor and one capacitor in each memory cell. The use of our 1T-SRAM memory
enables designers to achieve greater density and lower costs in their integrated
circuits without sacrificing performance. Embedded memory utilizing our 1T-SRAM
technology typically offers the following advantages -
- it is two to three times denser than traditional SRAM, using 50-70% less
silicon for the same amount of memory;
- it consumes less than one-quarter the power consumed by traditional SRAM
when operating at the same speed;
- it provides speeds equal to or greater than those offered by traditional
SRAM, especially for larger memory sizes;
- it can be implemented without requiring the manufacturer to make any
changes to standard logic manufacturing processes; and
- it uses the simple, standard embedded memory interconnection, or
interface, that designers are accustomed to today.
We license our 1T-SRAM technology on a non-exclusive and worldwide basis to
semiconductor companies and electronic product manufacturers. From our inception
in 1991 until 1998, we focused primarily on the sale of stand-alone memory
products. In the fourth quarter of 1998, we changed our business model to focus
primarily on the licensing of our 1T-SRAM technology. Development of our
stand-alone memory products during the early years of our existence enabled us
to validate critical elements of the 1T-SRAM technology we currently license.
1
<PAGE>
While we generated our historical revenue almost exclusively from the sale of
stand-alone products, we anticipate that licensing revenue will represent the
majority of our future revenue. We generate contract revenue from our licensing
activities that consists of fees paid for engineering development and
engineering support services. Under all our licensing agreements, we will
receive royalties when our licensees manufacture or sell products that
incorporate our technology. We recorded our first contract revenue related to
our 1T-SRAM technology in the quarter ended March 31, 2000.
We have achieved significant momentum in developing our licensing business.
Since the fourth quarter of 1998, we have entered into strategic relationships
to develop or license our 1T-SRAM technology with many companies including
Allayer Communications Corporation, Analog Devices Incorporated, Chartered
Semiconductor Manufacturing Ltd., Galileo Technology, Ltd., Lara
Networks, Inc., Lexra Incorporated, LSI Logic Corporation, Lucent Technologies,
Inc., NEC Corporation, Nintendo Corp., Pixelworks Incorporated, PMC-Sierra
Incorporated, Taiwan Semiconductor Manufacturing Corporation, United
Microelectronics Corporation, Via Technologies Incorporated and Virage Logic
Corporation.
Our goal is to establish our 1T-SRAM technology as the standard for the embedded
memory market by continuing to -
- expand significantly the number of licenses, as well as our co-marketing
relationships with foundries and design companies, to proliferate our
technology;
- target large and growing markets, including today's rapidly growing
communications and consumer electronics sectors;
- work closely with our licensees to gain broad and detailed insight into
their and their customers' current and next-generation technology
requirements in order to identify trends and focus our research and
development efforts on optimizing our technology solution;
- extend our technology leadership so that we can offer even higher-density,
lower-power-consumption, higher-speed and lower-cost memory solutions for
our licensees;
- generate stand-alone memory product revenue, as our stand-alone products
serve to demonstrate the manufacturability of our leading-edge
technologies and keep our research and development efforts focused on
industry requirements; and
- develop our high-margin licensing business into the major source of our
future revenue.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
COMMON STOCK OFFERED........................................ shares
COMMON STOCK TO BE OUTSTANDING AFTER THIS OFFERING.......... shares
USE OF PROCEEDS............................................. We intend to use the net proceeds we
receive from this offering for working
capital and other general corporate
purposes, including expansion of sales
and marketing and research and
development.
PROPOSED NASDAQ NATIONAL MARKET SYMBOL...................... MOSY
</TABLE>
Unless otherwise indicated, the share information in this prospectus is as of
June 30, 2000 and -
- gives effect to our reincorporation in Delaware from California to be
approved and effective prior to this offering;
- reflects the conversion of all outstanding shares of our preferred stock
outstanding as of June 30, 2000 into 12,731,446 shares of common stock,
which will occur automatically upon the closing of this offering;
- reflects the exercise of warrants to purchase 2,881,219 shares of common
stock outstanding as of June 30, 2000, with a weighted average exercise
price of $5.97 per share and the "cashless" exercise of a warrant to
purchase shares of common stock by surrendering shares of common stock
in payment of the exercise price of $8.50 per share, assuming a fair
market value per share of common stock in the offering of $ ;
- excludes 2,316,113 shares of common stock issuable upon exercise of stock
options outstanding as of June 30, 2000, with a weighted average exercise
price of $0.89 per share;
- excludes 5,000,000 shares of common stock reserved for future issuance
under our 2000 employee stock option plan;
- excludes 200,000 shares of common stock reserved for issuance under our
2000 employee stock purchase plan; and
- assumes that the underwriters' over-allotment option will not be
exercised.
We were originally incorporated in the State of California in September 1991. We
will reincorporate in the State of Delaware prior to the effective date of this
offering. Our principal executive offices are located at 1020 Stewart Drive,
Sunnyvale, CA 94085, and our telephone number is (408) 731-1800.
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary financial data for our company. You
should read this information together with our financial statements and the
notes to those statements appearing elsewhere in this prospectus and the
information under "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
IN THOUSANDS, EXCEPT PER SHARE DATA -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue:
Product....................... $ - $23,110 $34,822 $36,281 $15,356 $ 8,145 $ 4,028
Contract...................... - - - - - - 460
------- ------- ------- ------- ------- ------- -------
- 23,110 34,822 36,281 15,356 8,145 4,488
Gross profit.................... - 1,675 5,312 4,389 5,294 2,698 2,269
Loss from operations............ (4,781) (6,796) (1,509) (2,677) (311) (163) (1,041)
Net income (loss)............... (4,457) (7,059) (2,016) (2,322) 142 42 (582)
Net income (loss) per share
Basic......................... $ (0.53) $ (0.78) $ (0.22) $ (0.24) $ 0.01 $ 0.00 $ (0.06)
Diluted....................... $ (0.53) $ (0.78) $ (0.22) $ (0.24) $ 0.01 $ 0.00 $ (0.06)
======= ======= ======= ======= ======= ======= =======
Shares used to compute net income
(loss) per share
Basic......................... 8,376 8,997 9,323 9,626 9,727 9,708 9,856
Diluted....................... 8,376 8,997 9,323 9,626 23,320 22,735 9,856
Pro forma net income (loss) per
share
Basic......................... $ 0.01 $ (0.03)
======= =======
Diluted....................... $ 0.01 $ (0.03)
======= =======
Shares used to compute pro forma
net income (loss) per share
Basic......................... 21,808 22,259
Diluted....................... 23,320 22,259
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
AS OF JUNE 30, 2000
------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
IN THOUSANDS --------- ---------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 19,947 $ 19,947 $
Working capital............................................. 17,254 17,254
Total assets................................................ 23,221 23,221
Deferred revenue............................................ 3,878 3,878
Convertible preferred stock................................. 35,591 -
Stockholders' equity (deficit).............................. (17,761) 17,830
Stockholders' equity (deficit) and preferred stock.......... 17,830 17,830
</TABLE>
The pro forma net income (loss) and net income (loss) per share amounts above
reflect the conversion of 6,582,472 shares of convertible preferred stock in
issue at June 30, 2000 into 12,731,446 shares of common stock upon the
completion of this offering. See note 1 of Notes to Financial Statements for an
explanation of the determination of the number of shares used in computing per
share data.
The pro forma balance sheet amounts above reflect the same conversion of
convertible preferred stock.
The pro forma as adjusted balance sheet amounts above are adjusted to reflect
the receipt of the net proceeds from the sale of shares of common stock
offered hereby at an assumed initial public offering price of $ per
share, the exercise of warrants to purchase 2,881,219 shares of common stock
outstanding as of June 30, 2000 with a weighted average exercise price of $5.97
per share, and the "cashless" exercise of a warrant outstanding as of June 30,
2000 representing the right to acquire shares of common stock, net.
4
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER
INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN OUR STOCK. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION COULD SUFFER SIGNIFICANTLY. IN ANY SUCH CASE, THE MARKET
PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MIGHT LOSE ALL OR PART OF YOUR
INVESTMENT.
OUR SUCCESS DEPENDS UPON THE SEMICONDUCTOR MARKET'S ACCEPTANCE OF OUR 1T-SRAM
TECHNOLOGY.
The future prospects of our business depend on the acceptance by our target
markets of our 1T-SRAM technology for embedded memory applications and any
future technology we might develop. Our technology is intended to allow our
licensees to develop embedded-memory integrated circuits to replace other
embedded-memory applications with different cost and performance parameters. Our
core technology solution utilizes a fundamentally different architecture with
which the industry is not familiar. Therefore, it might prove difficult to
convince product designers of the viability of our embedded memory solution and
to adopt our technology instead of other memory solutions which have proven
effective in their products. In addition, we cannot assure you that our existing
and proposed technology will perform the desired functions, will operate
reliably on a long-term basis or otherwise will be technically successful, or
that it will offer sufficient cost and performance benefits to achieve
widespread market acceptance.
An important part of our strategy to gain market acceptance is to penetrate new
markets by targeting market leaders as licensees of our technology. This
strategy is designed to encourage other participants in those markets to follow
these leaders in adopting our technology. Should a high-profile industry
participant adopt our technology for one or more of its products but fail to
achieve success with those products, other industry participants' perception of
our technology could be adversely affected. Any such event could reduce future
licenses of our technology. Likewise, were a market leader to adopt and achieve
success with a competing technology, our reputation and licensing program could
be adversely affected. Failure of our technology to be adopted as an industry
standard would inhibit our growth and adversely affect our revenue.
OUR EMBEDDED MEMORY TECHNOLOGY IS NEW AND HAS NOT YET BEEN PROVEN IN VOLUME
PRODUCTION OF OUR LICENSEES' INTEGRATED CIRCUITS, AND THE DISCOVERY OF DEFECTS
IN THIS TECHNOLOGY COULD PREVENT US FROM ACHIEVING MARKET ACCEPTANCE.
We entered into our first license of a significant portion of our 1T-SRAM
technology for embedded memory applications in March 1999. Our technology was
silicon verified in the most widely used standard logic manufacturing process
generation in September 1999. While we and our licensees have evaluated and
tested this technology, only one licensee has begun volume manufacture of
products incorporating our technology. Complex technology like ours often
contains errors or defects when first incorporated into customer products. The
discovery of defects or problems regarding the reliability, quality or
compatibility of our technology could require significant expenditures of
capital and resources to fix, significantly delay or hinder market acceptance of
our technology and damage our reputation.
The discovery of a defect in our 1T-SRAM technology could lead our licensees to
seek damages from us. Our standard license terms include provisions waiving
implied warranties regarding our technology and limiting our liability to our
licensees. We also maintain insurance coverage that is intended to protect us
against potential liability for defects in our technology. We cannot be certain,
however, that the waivers or limitations of liability contained in our licensee
contracts will be enforceable, that insurance coverage will continue to be
available on reasonable terms or in amounts sufficient to cover one or more
large claims or that our insurer will not disclaim coverage as to any future
claim. The successful assertion of one or more large claims that exceed
available insurance coverage or changes in our insurance policies, including
premium increases or the imposition of large deductible or co-insurance
requirements, could cause our expenses to increase and could have a material
adverse effect on our cost of operations and financial condition.
5
<PAGE>
OUR EMBEDDED MEMORY TECHNOLOGY MIGHT NOT INTEGRATE AS WELL AS ANTICIPATED WITH
OTHER SEMICONDUCTOR FUNCTIONS, WHICH WOULD SLOW OR PREVENT ADOPTION OF OUR
TECHNOLOGY AND REDUCE OUR REVENUE.
Our 1T-SRAM technology is new and incorporates a fundamentally new architecture.
We and our licensees have conducted computer modeling and testing of integrated
circuits utilizing our technology and we have verified our technology in
production and sale of stand-alone 1T-SRAM integrated circuits. Nevertheless,
detailed aspects of our interface could cause unforeseen problems in the
efficient integration of our technology with other functions of particular
integrated circuits. Any significant compatibility problems with our technology
could reduce the attractiveness of our solution, impede its acceptance in the
industry and reduce our potential revenue.
MARKET ACCEPTANCE OF OUR 1T-SRAM TECHNOLOGY COULD BE SLOWED OR PREVENTED IF THIS
TECHNOLOGY PRESENTS MANUFACTURING DIFFICULTIES OR CONTRIBUTES TO A FAILURE TO
ACHIEVE ACCEPTABLE YIELDS.
Semiconductor manufacturing yield could be adversely affected by difficulties in
adapting our 1T-SRAM technology to our licensee's product design or to the
manufacturing process technology of a particular foundry or semiconductor
manufacturer. Yield problems might not be effectively determined or resolved
until an actual product exists that can be analyzed and tested to identify
process sensitivities relating to the design rules that are used. We cannot
assure you that products utilizing our technology will achieve or maintain
acceptable manufacturing yields. Any weakness in manufacturing yields of
integrated circuits utilizing our technology could adversely impact our revenue
and gross profit.
OUR FAILURE TO CONTINUE TO ENHANCE OUR TECHNOLOGY OR DEVELOP NEW TECHNOLOGY ON A
TIMELY BASIS COULD DIMINISH OUR ABILITY TO ATTRACT AND RETAIN LICENSEES AND
PRODUCT CUSTOMERS.
The existing and potential markets for memory products and technology are
characterized by ever increasing performance requirements, evolving industry
standards, rapid technological change and product obsolescence. These
characteristics lead to frequent new product and technology introductions and
enhancements, shorter product life cycles and changes in consumer demands. The
semiconductor industry might adopt or develop a completely different approach to
utilizing memory for many applications, which could render our existing
technology unmarketable or obsolete. We might not be able to successfully
develop new technology, or adapt our existing technology, to comply with these
innovative standards.
Our future performance depends on a number of factors, including our ability
to -
- identify target markets and relevant emerging technological trends,
including new standards and protocols;
- develop and maintain competitive technology by improving performance and
adding innovative features that differentiate our technology from
alternative technologies;
- enable the incorporation of enhanced technology in our licensees' and
customers' products on a timely basis and at competitive prices; and
- respond effectively to new technological developments or new product
introductions by others.
We cannot assure you that the design and introduction schedules of any additions
and enhancements to our existing and future technology will be met, that this
technology will achieve market acceptance or that we will be able to license
this technology on terms that are favorable to us. Our failure to develop future
technology that achieves market acceptance could adversely affect our results of
operations.
6
<PAGE>
WE DEPEND SUBSTANTIALLY ON OUR CO-MARKETERS TO ASSIST US IN ATTRACTING POTENTIAL
LICENSEES, AND A LOSS OR FAILURE TO INCREASE THE NUMBER OF THESE RELATIONSHIPS
COULD INHIBIT OUR GROWTH AND REDUCE OUR REVENUE.
A significant part of our marketing strategy is dependent upon our co-marketing
agreements with foundries and design companies. These co-marketers have existing
relationships, and continually seek new relationships, with companies in the
markets we target, and have agreed to utilize these relationships to introduce
our technology to potential licensees. If we fail to maintain current
relationships with these co-marketers in order to develop relationships with
others in the semiconductor industry, we might fail to achieve anticipated
growth.
WE HAVE A HISTORY OF OPERATING LOSSES, AND ANY FUTURE PROFITABILITY IS
UNCERTAIN.
We have recorded operating losses in each year since inception. We had an
accumulated deficit of $19.7 million as of June 30, 2000. From our inception
through 1994, we were engaged primarily in research and product development.
From 1995 through the third quarter of 1998, we focused on the sale of
stand-alone memory products. We were profitable in the fourth quarter of 1997
and the first quarter of 1998 under our product sales business model, but,
beginning in the fourth quarter of 1998, we altered our business plan to
concentrate on developing and licensing our 1T-SRAM technology. We may not be
profitable in 2000, and we cannot assure you that we will be profitable on a
quarterly or annual basis in the future.
OUR HISTORICAL FINANCIAL INFORMATION DOES NOT REFLECT THE RECENT CHANGES TO OUR
BUSINESS AND STRATEGY.
The historical financial information included in this prospectus does not
reflect the many significant changes in our revenue structure that have occurred
as a result of changes in our business model. Such historical financial
information also does not reflect changes in our operations and expense
structure that have resulted from this transition. Our profitability in the
fourth quarter of 1997 and the first quarter of 1998 was attained prior to
changing our focus to licensing our 1T-SRAM technology. While we expect to
continue to generate revenue from stand-alone product sales, most of our
stand-alone product sales efforts are now directed at the strategic and limited
sale of our 1T-SRAM stand-alone product, and we do not anticipate that product
revenue will ever reach the levels attained in the past. The absence of
meaningful historical financial information could make it more difficult for
potential investors to evaluate us and our prospects, and could complicate our
efforts to undertake meaningful financial planning.
OUR OPERATING RESULTS MIGHT FLUCTUATE SIGNIFICANTLY AND REMAIN UNCERTAIN, WHICH
COULD NEGATIVELY IMPACT THE VALUE OF YOUR INVESTMENT.
Our results of operations have fluctuated significantly in the past, and our
future quarterly and annual operating results are likely to fluctuate due to a
wide variety of factors, many of which are outside of our control, including -
- market acceptance of our 1T-SRAM and any future technology we might
develop;
- the timing of significant licenses and cancellations or rescheduling of
our licensees' product introductions or project completion dates;
- the timing and announcement of new technology or product introductions by
us and our competitors;
- our failure to anticipate evolving licensee or customer technology
requirements;
- increased expenses associated with new technology introductions or process
changes;
- our lengthy licensing cycle and our licensees' often lengthy product
development cycles;
- seasonal fluctuations in demand for and variability of the life cycles of
our licensees' products;
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- the gain or loss of one or more key licensees or co-marketers; and
- variations in manufacturing yields, increases in materials costs and other
manufacturing risks.
Because of these and other factors, our operating results might not meet the
expectations of public market analysts or investors in any particular quarter.
In such an event, the market price of our common stock could decline.
We cannot accurately forecast all of the above factors or their impact on our
results of operations. In part because of this probable fluctuation, we believe
that period-to-period comparisons are not necessarily meaningful and should not
be relied upon as indicative of future operating results.
OUR LENGTHY LICENSING CYCLE AND OUR LICENSEES' LENGTHY PRODUCT DEVELOPMENT
CYCLES WILL MAKE THE OPERATING RESULTS OF OUR LICENSING BUSINESS DIFFICULT TO
PREDICT.
We anticipate difficulty in accurately predicting the timing and amounts of
revenue generated from licensing our 1T-SRAM technology. The establishment of a
business relationship with a potential licensee is a lengthy process, frequently
spanning a year or more. Following the establishment of the relationship, the
negotiation of licensing terms can be a lengthy process, and a potential
licensee could require an extended evaluation and testing period.
Once a license agreement is executed, the timing and amount of our licensing
revenue from contract revenue and royalties will remain difficult to predict.
Generally, we will recognize contract revenue related to our licensees'
development engineering projects only when the licensee manufactures products
that meet the contract's performance specifications. We will recognize royalty
revenue, if any, when the licensees report to us the manufacture or sale of
products that include our 1T-SRAM technology. The completion of the licensees'
development projects and the commencement of production will be subject to the
licensees' efforts, development risks and other factors outside our control. The
timing and level of our royalties depend on the licensees' ability to market,
produce and ship products incorporating our technology. All of these factors
will prevent us from making predictions of revenue with any certainty.
In addition, none of our licensees is under any obligation to incorporate our
technology in any present or future product or to pursue the manufacture or sale
of any product incorporating our technology. The long development cycle of our
licensees' products increases the risk that, due to changing economic, marketing
or strategic factors, our licensees might discontinue a product line or cancel a
product introduction. A failure by our licensees to market products
incorporating our technology could cause our revenue to decline.
ROYALTY AMOUNTS OWED TO US MIGHT BE DIFFICULT TO VERIFY, AND WE MIGHT FIND IT
DIFFICULT, EXPENSIVE AND TIME-CONSUMING TO ENFORCE OUR LICENSE AGREEMENTS.
The standard terms of our license agreements require our licensees to document
the manufacture and sale of products that incorporate our technology and report
this data to us after the end of each quarter. We must rely to a large extent
upon the accuracy of these reports, as we do not have the capacity to
independently verify this information. Though our standard license terms give us
the right to audit the books and records of any licensee to attempt to verify
the information provided to us in these reports, an audit of a licensee's
records can be expensive and time-consuming, and potentially detrimental to the
business relationship. If we are unable to fully enforce the royalty provisions
of our license agreements, our revenue could decrease and our results of
operations could be adversely affected.
WE EXPECT OUR REVENUE TO BE HIGHLY CONCENTRATED AMONG A SMALL NUMBER OF
LICENSEES AND CUSTOMERS, AND OUR RESULTS OF OPERATIONS COULD BE HARMED IF WE
LOSE AND FAIL TO REPLACE THIS REVENUE.
Through June 30, 2000 we had not recognized any royalty revenue. An examination
of our existing licenses, however, leads us to expect that royalty revenue will
be highly concentrated among a few licensees in the near
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future. In particular, we expect projected revenue from the licenses to Nintendo
to represent a very substantial portion of projected licensing revenue in 2001
and 2002. Nintendo faces intense competitive pressure in the video game market,
which is characterized by extreme volatility, frequent new product introductions
and rapidly shifting consumer preferences. We cannot assure you that Nintendo's
products incorporating our technology will succeed in the marketplace or that we
will receive substantial royalty revenue from Nintendo.
Our product sales also are highly concentrated. Revenue derived from our three
largest customers represented 29.1%, 10.8% and 10.1%, respectively, of our total
revenue in 1998. In 1999, our two largest customers represented 16.4% and 10.9%
of our total revenue, respectively. We expect that a relatively small number of
customers will continue to account for a substantial portion of our product
revenue for the foreseeable future.
As a result of this revenue concentration, our results of operations could be
adversely affected by the decision of a single key licensee or customer to cease
using our technology or products or by a decline in the number of products that
incorporate our technology that are sold by a single licensee or customer or by
a small group of licensees or customers.
OUR REVENUE CONCENTRATION MAY POSE CREDIT RISKS.
We might also face credit risks associated with the concentration of our revenue
among a small number of licenses and customers. As of December 31, 1999, four
customers accounted for 66% of total receivables, each of whom accounted for at
least 11% of the total. As of December 31, 1998, two customers accounted for 41%
of total receivables at year end, each of whom represented at least 12% of the
total. Our failure to collect receivables from any customer that represents a
large percentage of receivables on a timely basis, or at all, could adversely
affect our cash flow or results of operations and might cause our stock price to
fall.
OUR EXISTING PATENTS MIGHT NOT PROVIDE US WITH SUFFICIENT PROTECTION OF OUR
INTELLECTUAL PROPERTY, AND OUR PATENT APPLICATIONS MIGHT NOT RESULT IN THE
ISSUANCE OF PATENTS, EITHER OF WHICH COULD REDUCE THE VALUE OF OUR CORE
TECHNOLOGY AND HARM OUR BUSINESS.
We rely on a combination of patents, trademarks, copyrights, trade secret laws
and confidentiality procedures to protect our intellectual property rights. As
of June 30, 2000, we held 30 patents in the United States, which expire at
various times from 2013 to 2018, and 8 corresponding foreign patents. In
addition, as of June 30, 2000, we had 20 patent applications pending in the
United States and 21 pending foreign applications, and had received notice of
allowance of two of these pending patent applications in the United States. We
cannot assure you that any patents will issue from any of our pending
applications or that any claims allowed from pending applications will be of
sufficient scope or strength, or issue in all countries where our products can
be sold, to provide meaningful protection or any commercial advantage to us.
Also, competitors might be able to design around our patents. Failure of our
patents or patent applications to provide meaningful protection would have a
material adverse effect on our business and results of operations.
WE MIGHT NOT BE ABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD IMPAIR OUR ABILITY TO COMPETE AND ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
Our technology is complex and is intended for use in complicated integrated
circuits. A very large number of new and existing products utilize embedded
memory, and a still larger number of companies manufacture and market these
products. Because of these factors, policing the unauthorized use of our
intellectual property is difficult and expensive. We cannot be certain that we
will be able to detect unauthorized use of our technology or prevent other
parties from designing and marketing unauthorized products based on our
technology. Likewise, we cannot assure you that others will not independently
develop or otherwise acquire the same or substantially equivalent technology as
ours. Although we are not aware of any past or present infringement of our
patents, copyrights or trademarks, or any violation of our trade secrets,
confidentiality procedures or licensing agreements to date, we cannot assure you
that the steps taken by us to protect our proprietary information will be
adequate to prevent misappropriation of our technology. Our inability to protect
adequately our intellectual property would reduce
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significantly the barriers of entry for directly competing technologies and
could reduce the value of our technology solution. Furthermore, we might
initiate claims or litigation against third parties for infringement of our
proprietary rights or to establish the validity of our proprietary rights.
Litigation by us could result in significant expense and divert the efforts of
our technical and management personnel, whether or not such litigation results
in a determination favorable to us.
ANY CLAIM THAT OUR PRODUCTS OR TECHNOLOGY INFRINGE THIRD-PARTY INTELLECTUAL
PROPERTY RIGHTS COULD INCREASE OUR COSTS OF OPERATION AND DISTRACT MANAGEMENT
AND COULD RESULT IN EXPENSIVE SETTLEMENT COSTS OR THE DISCONTINUANCE OF OUR
TECHNOLOGY LICENSING OR PRODUCT OFFERINGS.
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights or positions, which has resulted in often
protracted and expensive litigation. We are not aware of any currently pending
intellectual property litigation or threatened claim against us. However, we or
our licensees might from time to time receive notice of claims that we have
infringed patents or other intellectual property rights owned by others.
Litigation against us could result in significant expense and divert the efforts
of our technical and management personnel, whether or not the litigation results
in a determination adverse to us. In the event of an adverse result in any such
litigation, we could be required to pay substantial damages, cease the licensing
of certain technology or the sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses for the
infringing technology. We cannot assure you that we would be successful in such
development or that such licenses would be available on reasonable terms, or at
all.
IF WE FAIL TO COMPETE EFFECTIVELY IN THE MARKET FOR EMBEDDED MEMORY TECHNOLOGY
AND PRODUCTS, OUR BUSINESS WILL BE ADVERSELY AFFECTED.
Competition in the market for embedded memory technology and products is
intense. Our licensees and prospective licensees can meet their need for
embedded memory with traditional memory solutions with different cost and
performance parameters. To the extent that alternative technologies provide
comparable system performance at lower cost than our 1T-SRAM technology, or do
not require the payment of comparable royalties, our results of operations could
be harmed.
A number of competitive developers of alternative technologies are more
established, benefit from greater market recognition and have substantially
greater financial, development, manufacturing and marketing resources than we
have. These advantages might permit these developers to respond more quickly to
new or emerging technologies and changes in licensee requirements. We cannot
assure you that future competition will not have a material adverse effect on
the adoption of our technology and our market penetration.
WE MIGHT BE UNABLE TO DELIVER OUR CUSTOMIZED MEMORY TECHNOLOGY IN THE TIME FRAME
DEMANDED BY OUR LICENSEES, WHICH COULD DAMAGE OUR REPUTATION AND FUTURE SALES.
A significant number of our licenses requires us to customize our 1T-SRAM
technology within a certain delivery timetable. Not all of the factors relating
to this customization are within our control. We cannot assure you that we will
be able to meet the time requirements under these licenses. Any failure to meet
significant license milestones could damage our reputation in the industry and
harm our ability to attract new licensees and could preclude our receipt of
licensing fees.
FACTORS THAT NEGATIVELY AFFECT THE BUSINESSES OF OUR LICENSEES COULD ADVERSELY
AFFECT OUR BUSINESS.
Because we expect licensing revenue to be the largest source of our future
revenue, factors negatively affecting a significant licensee or group of
licensees could adversely affect our results of operations and financial
condition. We are subject to many risks beyond our control that influence the
success of our licensees, including, for example, the highly competitive
environment in which they operate, the strength of the markets for their
products, their engineering capabilities and their financial and other
resources.
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Likewise, we have no control over the product development, pricing and marketing
strategies of our licensees, which directly affect product sales and the
corresponding royalties payable to us. A decline in sales of our licensees'
royalty-generating products for any reason would reduce our revenue.
Additionally, a claim of infringement against any of our licensees could
severely disrupt the development, marketing and sales of royalty-generating
products by them, which could decrease our revenue and negatively impact our
reputation and market share.
WE INTEND TO GROW RAPIDLY, AND OUR FAILURE TO MANAGE THIS GROWTH COULD HARM OUR
BUSINESS.
Our planned expansion of the development, licensing and marketing of our
technology will require us to implement and improve our operational, financial
and management information systems, procedures and controls on a timely basis
and to expand, train, motivate and manage our work force. Our ability to manage
growth and any future changes effectively will require us to continue to -
- implement and manage new marketing channels to penetrate different and
broader markets;
- manage an increasing number of complex relationships with licensees and
co-marketers and their customers and other third parties;
- improve our operating systems, procedures and financial controls on a
timely basis;
- hire additional key management personnel; and
- expand, train and manage our workforce and, in particular, our software
development, sales, marketing and support organizations.
We cannot assure you that we will adequately manage our growth or meet the
foregoing objectives.
IF WE FAIL TO RETAIN KEY PERSONNEL OR ATTRACT NEEDED MANAGEMENT AND TECHNICAL
PERSONNEL, OUR BUSINESS AND GROWTH COULD BE NEGATIVELY AFFECTED.
Our business has been dependent to a significant degree upon the services of a
small number of executive officers and technical employees, including
Dr. Fu-Chieh Hsu, our Chairman of the Board, President and Chief Executive
Officer, and Dr. Wing-Yu Leung, our Vice President and Chief Technical Officer.
We generally have not entered into employment or noncompetition agreements with
any of our employees. We do not maintain key man life insurance on the lives of
any of our key personnel. The loss of any of these individuals could have a
material adverse effect on our company. In addition, we continue to seek to hire
additional marketing and technical personnel. The competition for qualified
personnel is intense, and our failure to recruit additional key personnel in a
timely manner could adversely affect us. We cannot assure you that we will be
able to continue to attract and retain qualified management, sales and technical
personnel necessary for the development of our business.
A MAJORITY OF OUR PRODUCT REVENUE DERIVES PRIMARILY FROM OUR PROPRIETARY
INTEGRATED CIRCUITS USING THE 1T-SRAM TECHNOLOGY, AND A DECLINE IN DEMAND FOR
THESE PRODUCTS COULD REDUCE OUR REVENUE SUBSTANTIALLY.
Our 1T-SRAM stand-alone products, which currently account for a majority of our
product revenue, have only recently been introduced. Our 1T-SRAM stand-alone
product accounted for approximately 11% and 26% of our revenue in 1998 and 1999,
respectively, and 57% in the first six months of 2000. We anticipate that these
products will continue to account for a majority of our revenue for 2000. As a
result, our revenue and results of operations would be adversely affected if for
any reason we were unsuccessful in selling this product or if the market for
this product declines. We cannot assure you that our stand-alone products will
perform the desired functions, will operate reliably on a long-term basis or
otherwise will be technically successful, that we will be able to manufacture
adequate quantities of any products we develop at commercially acceptable costs
or on a timely basis.
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A DECLINE IN THE AVERAGE SELLING PRICES OF OUR STAND-ALONE PRODUCTS COULD REDUCE
OUR PRODUCT REVENUE AND GROSS PROFIT.
As has been typical in the semiconductor industry, we expect that the average
unit selling prices of our stand-alone products will decline over the course of
their commercial lives, principally due to the supply of competing products,
falling demand from customers and product cycle changes. Declining average
selling prices will adversely affect the gross margins of our stand-alone
products. We might not be able to adjust our costs rapidly or deeply enough to
offset the pricing declines and, as a consequence, our product revenue and gross
profit could fall.
WE CONTRACT THE MANUFACTURE, ASSEMBLY AND TESTING OF OUR PRODUCTS FROM
THIRD-PARTIES THAT WE DO NOT CONTROL, AND A LOSS OF THESE SERVICES COULD HARM
OUR LICENSING BUSINESS AND DECREASE OUR PRODUCT REVENUE.
Our marketing efforts with respect to licensing our 1T-SRAM technology include
the use of our stand-alone 1T-SRAM product to demonstrate the performance and
manufacturability of the underlying technology and to facilitate acceptance of
our technology by potential licensees. A loss of foundry capacity, assembly
services or testing services for our stand-alone products, or any other failure
to produce our 1T-SRAM product, could materially threaten our licensing
business.
We are a fabless semiconductor company, and currently rely on Taiwan
Semiconductor Manufacturing Corporation, or TSMC, in Taiwan for the manufacture
of substantially all of our stand-alone products. If TSMC ceases to provide us
with required production capacity with respect to our stand-alone products, we
cannot assure you that we will be able to enter into manufacturing arrangements
with other foundries on commercially reasonable terms, or that these
arrangements, if established, will result in successful manufacturing of our
products. These arrangements might require us to share control over our
manufacturing process technologies or to relinquish rights to our technology and
might be subject to unilateral termination by the foundries. Even if such
capacity is available from another manufacturer, we would need to qualify the
manufacturer, which process could take six months or longer. We cannot assure
you that we would be able to identify or qualify manufacturing sources that
would be able to produce wafers with acceptable manufacturing yields.
Under the contractual provisions of our supply agreement with TSMC, we are
required to provide forecasts of anticipated purchases and place purchase orders
months in advance of shipment. Forecasts of monthly purchases might not coincide
with our eventual customer requirements. Should our purchases of wafers exceed
customer demand for our products, we could have a significant exposure to high
inventory levels. If we cannot sell the excess inventory or avoid selling it at
a price below cost, we would be required to write down or write off this
inventory, which would adversely affect our financial condition.
All of our semiconductor memory products are assembled and tested by third-party
vendors, primarily in Hong Kong and Taiwan. We have designed and developed
internally our own test software and certain test equipment, which we provide to
our test vendors. Our reliance on independent assembly and testing vendors
involves a number of risks, including reduced control over delivery schedules,
quality assurance and costs. The inability of these third-party contractors to
deliver products of acceptable quality and in a timely manner could result in
the loss of customers and a reduction in our product revenue and could
ultimately harm our licensing business.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY MAY MAKE IT DIFFICULT TO PLAN
OUR BUSINESS AND COULD CAUSE OUR RESULTS OF OPERATIONS TO FLUCTUATE
SUBSTANTIALLY.
The semiconductor industry has historically been characterized by a number of
factors that could adversely affect our business, including -
- rapid technological change;
- cyclical market patterns;
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- significant price erosion;
- fluctuating inventory levels;
- alternating periods of over-capacity and capacity constraints;
- variations in manufacturing costs and yields; and
- significant expenditures for capital equipment and product development.
In addition, the industry has experienced significant economic downturns at
various times, characterized by diminished product demand and accelerated
erosion of product prices. We could experience substantial period-to-period
fluctuations in operating results due to any of these conditions.
INTERNATIONAL LICENSES ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUE, AND OUR
FAILURE TO SUCCESSFULLY ADDRESS THE RISKS ASSOCIATED WITH OUR INTERNATIONAL
OPERATIONS COULD INCREASE OUR COSTS OF OPERATION AND NEGATIVELY IMPACT OUR
REVENUE.
We anticipate that licenses to companies that operate primarily outside the
United States will account for a substantial portion of our licensing revenue in
future periods. Moreover, all of our products are manufactured, assembled and
tested outside of the United States. We are, therefore, subject to many
international risks, including -
- foreign currency exchange fluctuations;
- unanticipated changes in local regulation;
- potentially adverse tax consequences;
- difficulties regarding timing and availability of export and import
licenses;
- political and economic instability; and
- reduced or limited protection of our intellectual property.
The occurrence of any of these risks could have an adverse effect on our
business.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS, DELAWARE LAW OR OUR
RIGHTS PLAN MIGHT DELAY OR PREVENT A CHANGE OF CONTROL TRANSACTION AND DEPRESS
THE MARKET PRICE OF OUR STOCK.
Certain provisions of our certificate of incorporation and bylaws might have the
effect of making it more difficult for a third party to acquire, or discouraging
a third party from attempting to acquire, control of our company. Such
provisions could limit the price that certain investors might be willing to pay
in the future for shares of our common stock. Certain of these provisions
eliminate cumulative voting in the election of directors, eliminate the right of
stockholders to act by written consent without a meeting and establish specific
procedures for director nominations by stockholders and the submission of other
proposals for consideration at stockholder meetings.
We are also subject to certain provisions of Delaware law which could delay or
make more difficult a merger, tender offer or proxy contest involving our
company. In particular, Section 203 of the Delaware General Corporation Law
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years unless certain conditions
are met. Any of these provisions could have the effect of delaying, deferring or
preventing a change in control, including without limitation, discouraging a
proxy contest or making more difficult the acquisition of a substantial block of
our common stock.
Our board of directors might issue up to 20,000,000 shares of preferred stock
without stockholder approval on such terms as the board might determine. The
rights of the holders of common stock will be subject to, and might be adversely
affected by, the rights of the holders of any preferred stock that might be
issued in the future.
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Our board of directors has approved the adoption of a stockholder rights plan,
which will become effective prior to the effectiveness of this offering. This
plan entitles our stockholders to rights to acquire additional shares of our
common stock generally when a third party acquires 15% of our common stock or
commences or announces its intent to commence a tender offer for at least 15% of
our common stock. This plan could delay, deter or prevent an investor from
acquiring us in a transaction that could otherwise result in stockholders
receiving a premium over the market price for their shares of common stock. For
more information, please refer to "Description of Capital Stock - Antitakeover
Effects of Our Stockholder Rights Plan."
A LIMITED NUMBER OF STOCKHOLDERS WILL HAVE THE ABILITY TO INFLUENCE THE OUTCOME
OF DIRECTOR ELECTIONS AND OTHER MATTERS REQUIRING STOCKHOLDER APPROVAL.
Our executive officers, directors and entities affiliated with them will, in the
aggregate, beneficially own approximately % of our common stock following
this offering. These stockholders acting together will have the ability to exert
substantial influence over all matters requiring the approval of our
stockholders, including the election and removal of directors and any proposed
acquisition, consolidation or sale of all or substantially all of our assets. In
addition, they could dictate the management of our business and affairs. The
stockholder rights plan that we will adopt prior to the completion of the
offering will contain a higher threshold ownership before the rights take effect
with respect to additional share acquisitions by Drs. Hsu and Leung, West Coast
Venture Capital Limited, L.P., or West Coast, and DynaTech Capital, LLC, or
DynaTech, as well as their affiliates and associates. This concentration of
ownership could have the effect of delaying, deferring or preventing a change in
control, or impeding an acquisition, consolidation, takeover or other business
combination, which might otherwise involve the payment of a premium for your
shares of our common stock.
WE MIGHT SPEND A SUBSTANTIAL PORTION OF THE NET PROCEEDS IN WAYS WITH WHICH YOU
MIGHT NOT AGREE.
The principal purposes of this offering are to obtain additional capital, create
a public market for our common stock and facilitate future access to public
equity markets. We expect to use the net proceeds from this offering for working
capital and other general corporate purposes. A portion of the proceeds might
also be used to acquire or invest in complementary businesses or products or to
obtain the right to use complementary technologies. There are currently no
negotiations, commitments or agreements with respect to any such transactions,
however. Pending the use of the net proceeds for the above purposes, we intend
to invest such funds in short-term, interest-bearing, investment grade
securities. Accordingly, our management will retain broad discretion as to the
allocation of the net proceeds from this offering and, subject to certain
exceptions, will be able to use and allocate such net proceeds without first
obtaining stockholder approval.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.
As part of our growth strategy, we might consider opportunities to acquire other
businesses or technologies that would complement our current offerings, expand
the breadth of our markets or enhance our technical capabilities. To date, we
have not made any acquisitions, and we are currently not subject to any
agreement or letter of intent with respect to potential acquisitions.
Acquisitions entail a number of risks that could materially and adversely affect
our business and operating results, including -
- problems integrating the acquired employees, operations, technologies or
products with our existing business and products;
- diversion of management's time and attention from our core business;
- difficulties in retaining business relationships with suppliers and
customers of the acquired company;
- risks associated with entering markets in which we lack prior experience;
and
- potential loss of key employees of the acquired company.
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THERE HAS BEEN NO PRIOR TRADING MARKET FOR OUR COMMON STOCK, AND THE POTENTIAL
VOLATILITY OF THE PRICE OF OUR COMMON STOCK COULD NEGATIVELY AFFECT YOUR
INVESTMENT.
Prior to this offering, there has been no public market for our common stock,
and we cannot assure you that an active trading market will develop or be
sustained after this offering. The initial public offering price will be
determined through negotiations between us and the representatives of the
underwriters, and will be based on several factors and might not be indicative
of the market price of our common stock after this offering.
The market price of the shares of our common stock is likely to be highly
volatile and might be significantly affected by factors such as -
- actual or anticipated fluctuations in our operating results;
- product or technology announcements by us or our competitors;
- new contracts entered into by us or our competitors;
- developments with respect to patents or intellectual property rights;
- conditions and trends in the semiconductor and other technology
industries;
- changes in financial estimates by securities analysts; and
- general market conditions.
Recently, the stock market has experienced significant price and volume
fluctuations. Market prices of securities of technology companies, particularly
following an initial public offering, have been highly volatile and frequently
reach levels that bear no relationship to the operating performance of such
companies. These market prices generally are not sustainable and are subject to
wide variations. If our common stock trades to unsustainably high levels
following this offering, it is likely that the market price of our common stock
will thereafter experience a material decline.
In the past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
We could be the target of similar litigation in the future. Securities
litigation could cause us to incur substantial costs, divert management's
attention and resources and harm our financial condition and results of
operations.
THE PRICE OF OUR STOCK COULD DECREASE AS A RESULT OF SHARES BEING SOLD IN THE
MARKET AFTER THE OFFERING.
Sales of a substantial number of shares of common stock in the public market
following this offering could adversely affect the market price of the common
stock prevailing from time to time. The number of shares of common stock
available for sale in the public market is limited by restrictions under the
Securities Act of 1933, as amended, or the Securities Act, and lock-up
agreements executed by certain of our security holders under which such security
holders have agreed not to sell or otherwise dispose of any of their shares
until 180 days after the date of this prospectus without the prior written
consent of the underwriters. In addition to the shares of common stock
offered hereby, assuming no exercise of the underwriters' over-allotment option,
there will be 22,629,281 shares of common stock outstanding as of the date of
this prospectus, all of which are "restricted" shares under the Securities Act.
As a result of the lock-up agreements described above and the provisions of
Rules 144(k), 144 and 701, the restricted shares will be available for sale in
the public market as follows -
- no shares will be eligible for immediate sale on the date of this
prospectus;
- shares will be eligible for sale 90 days after the date of
this prospectus;
- approximately shares will be eligible for sale 180 days after the
date of this prospectus; and
- approximately shares will be eligible for sale approximately one
year from the date of this prospectus.
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After this offering, the holders of approximately 12,731,446 shares of common
stock and rights to acquire shares of common stock will be entitled to
certain demand and piggyback rights with respect to registration of such shares
under the Securities Act. See "Description of Capital Stock - Registration
Rights." If such holders, by exercising their demand registration rights, cause
a large number of securities to be registered and sold in the public market,
such sales could have an adverse effect on the market price for our common
stock. If we were to initiate a registration and include shares held by such
holders pursuant to the exercise of their piggyback registration rights, such
sales might have an adverse effect on our ability to raise capital.
PURCHASERS OF COMMON STOCK IN THIS OFFERING WILL SUFFER IMMEDIATE AND
SUBSTANTIAL DILUTION.
Purchasers of the shares of common stock offered hereby will incur immediate and
substantial dilution of approximately $ per share in the net tangible book
value of common stock from the initial public offering price. Purchasers might
incur additional dilution upon the exercise of outstanding stock options and
warrants. For a more detailed description of this dilution, please see
"Dilution."
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This prospectus contains forward-looking statements which include, without
limitation, statements about the market for our technology, our strategy,
competition and expected financial performance. Our actual results could differ
materially from those expressed or implied by these forward-looking statements
as a result of various factors, including the risk factors described above and
elsewhere in this prospectus. We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
This prospectus contains statistical data regarding the semiconductor industry
that we obtained from industry reports generated by Dataquest Inc. These reports
generally indicate that their information has been obtained from sources
believed to be reliable, but do not guarantee the accuracy and completeness of
their information. Although we believe that the reports are reliable, we have
not independently verified their data.
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock being
sold in this offering are estimated to be $ at an assumed initial
public offering price of $ per share and after deducting the estimated
underwriting discount and offering expenses. Net proceeds will be $
if the underwriters' over-allotment option is exercised in full. We intend to
use the net proceeds for working capital and other general corporate purposes,
including to expand sales and marketing and research and development. We might
also use a portion of the net proceeds for the acquisition of technologies,
businesses or products that are complementary to our business, although no such
acquisitions are planned or being negotiated as of the date of this prospectus,
and no portion of the net proceeds has been allocated for any specific
acquisition. Pending such uses, the net proceeds of this offering will be
invested in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We currently
anticipate that we will retain any future earnings for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
17
<PAGE>
CAPITALIZATION
The following table sets forth -
- our actual capitalization as of June 30, 2000;
- our actual capitalization on a pro forma basis giving effect to the
conversion of all outstanding shares of our preferred stock into
12,731,446 shares of common stock upon the closing of this offering; and
- our pro forma capitalization as adjusted to reflect the sale and issuance
of the shares of common stock in this offering at an assumed
initial public offering price of $ per share, after deducting the
estimated underwriting discount and offering expenses and the application
of the estimated proceeds therefrom; and to reflect the exercise of
warrants to purchase a total of additional shares of common stock.
This information should be read in conjunction with our financial statements and
the notes relating to those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
-----------------------------------
JUNE 30, 2000
-----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
IN THOUSANDS, EXCEPT PER SHARE DATA -------- ---------- -----------
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 19,947 $ 19,947 $
======== ========== ===========
Mandatorily redeemable convertible preferred stock, no par
value; 9,500,000 shares authorized, 6,582,472 shares
issued and outstanding (actual); 9,500,000 shares
authorized, no shares issued and outstanding (pro forma);
20,000,000 shares authorized $0.01 par value, no shares
outstanding (as adjusted)................................. 35,591 -
-------- ---------- -----------
Stockholders' equity:
Common stock, $0.01 par value; 30,000,000 shares
authorized, 9,934,715 shares issued and outstanding
(actual); 30,000,000 shares authorized, 22,666,161
shares issued and outstanding (pro forma); 120,000,000
shares authorized $0.01 par value, shares issued
and outstanding (as adjusted)........................... 99 227
Additional paid-in capital................................ 2,630 38,093
Accumulated deficit....................................... (19,723) (19,723)
Deferred stock compensation............................... (767) (767)
-------- ---------- -----------
Total stockholders' equity (deficit).................... (17,761) 17,830
-------- ---------- -----------
Total capitalization.................................... $ 17,830 $ 17,830
======== ========== ===========
</TABLE>
The actual outstanding share information in this table is based on our shares
outstanding as of June 30, 2000 and excludes -
- 2,316,113 shares of common stock issuable upon exercise of stock options
outstanding as of June 30, 2000, with a weighted average exercise price of
$0.89 per share;
- 2,881,219 shares of common stock issuable upon exercise of warrants
outstanding as of June 30, 2000, with a weighted average exercise price of
$5.97 per share, and shares of common stock issuable upon the
exercise of another warrant outstanding as of June 30, 2000 on a
"cashless" basis;
- 5,000,000 shares of common stock reserved for future issuance under our
2000 employee stock option plan; and
- 200,000 shares of common stock reserved for issuance under our 2000
employee stock purchase plan.
18
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was approximately
$17.8 million, or [$0.79] per share of common stock. Pro forma net tangible book
value per share is determined by dividing our pro forma net tangible book value,
calculated as total pro forma tangible assets less total pro forma liabilities,
by the number of outstanding shares of common stock, after giving affect to the
adjustments indicated below. After giving effect to the sale of
shares of common stock in this offering, based upon an assumed initial public
offering price of $ per share and after deducting the estimated
underwriting discount and offering expenses, our as adjusted pro forma net
tangible book value as of June 30, 2000 would have been $ , or
$ per share. This represents an immediate increase in pro forma net
tangible book value of $ per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $ per share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
---------------
<S> <C> <C>
Initial public offering price per share..................... $
Pro forma net tangible book value per share as of June 30,
2000.................................................... $[0.79]
Pro forma increase in net tangible book value per share
attributable to new investors...........................
------
Pro forma net tangible book value per share after this
offering..................................................
------
Pro forma dilution per share to new investors............... $
======
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of June 30,
2000, the total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by existing
stockholders and by new investors purchasing shares in this offering.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. % $ % $1.61
New investors.........................
---------- ---- -------------- ---- ----------
Total................................. % %
========== ==== ============== ==== ==========
</TABLE>
The foregoing tables give effect to -
- the conversion of all of our outstanding shares of preferred stock
outstanding as of June 30, 2000 into 12,731,446 shares of common stock;
and
- the issuance of 2,881,219 shares of common stock upon the exercise of
warrants outstanding as of June 30, 2000 at a weighted average exercise
price of $5.97 per share, and the "cashless" exercise of an additional
warrant outstanding as of June 30, 2000 representing the right to acquire
shares of common stock, net.
The foregoing tables exclude the issuance of 2,316,113 shares of common stock
upon the exercise of options outstanding as of June 30, 2000 under our 1992
stock option plan and our 1996 stock plan, with a weighted average exercise
price of $0.89 per share.
To the extent that any shares are issued upon exercise of options that are
presently outstanding or granted in the future, there will be further dilution
to new public investors.
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
financial statements and notes related to those statements, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The statement of operations
data for the years ended December 31, 1997, 1998 and 1999 and the balance sheet
data as of December 31, 1998 and 1999 are derived from our financial statements
that have been audited by PricewaterhouseCoopers LLP, independent accountants,
and are included elsewhere in this prospectus. The statement of operations data
for the years ended December 31, 1995 and 1996 and the balance sheet data as of
December 31, 1995, 1996 and 1997 are derived from our financial statements that
have been audited by PricewaterhouseCoopers LLP, independent accountants, and
are not included in this prospectus. The statement of operations data for the
six months ended June 30, 1999 and 2000 and the balance sheet data as of
June 30, 2000 are derived from our unaudited financial statements that have been
prepared on the same basis as the audited financial statements and, in our
opinion, include all adjustments consisting only of normal recurring
adjustments, necessary for a fair presentation of the information set forth
therein. Operating results for the six months ended June 30, 2000 are not
necessarily indicative of the results that could be expected for the year ending
December 31, 2000 or any other future period.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
IN THOUSANDS, EXCEPT PER SHARE DATA -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue:
Product.......................................... $ - $23,110 $34,822 $36,281 $15,356 $8,145 $4,028
Contract......................................... - - - - - - 460
------- ------- ------- ------- ------- ------ ------
- 23,110 34,822 36,281 15,356 8,145 4,488
------- ------- ------- ------- ------- ------ ------
Cost of net revenue:
Product.......................................... - 21,435 29,510 31,892 10,062 5,447 1,952
Contract......................................... - - - - - - 267
------- ------- ------- ------- ------- ------ ------
- 21,435 29,510 31,892 10,062 5,447 2,219
------- ------- ------- ------- ------- ------ ------
Gross profit....................................... - 1,675 5,312 4,389 5,294 2,698 2,269
------- ------- ------- ------- ------- ------ ------
Operating expenses:
Research and development......................... 4,132 4,926 3,596 4,224 3,110 1,647 1,630
Selling, general and administrative.............. 649 3,545 3,225 2,842 2,388 1,194 1,338
Stock-based compensation charge.................. - - - - 107 20 342
------- ------- ------- ------- ------- ------ ------
Total operating expenses....................... 4,781 8,471 6,821 7,066 5,605 2,861 3,310
------- ------- ------- ------- ------- ------ ------
Loss from operations............................... (4,781) (6,796) (1,509) (2,667) (311) (163) (1,041)
Interest expense................................... - (1,022) (1,030) (294) - - -
Interest and other income.......................... 324 759 523 649 520 225 459
Provision for income taxes......................... - - - - (67) (20) -
------- ------- ------- ------- ------- ------ ------
Net income (loss).................................. $(4,457) $(7,059) $(2,016) $(2,322) $ 142 $ 42 $ (582)
======= ======= ======= ======= ======= ====== ======
Net income (loss) per share - basic................ $ (0.53) $ (0.78) $ (0.22) $ (0.24) $ 0.01 $ 0.00 $(0.06)
======= ======= ======= ======= ======= ====== ======
- diluted................... $ (0.53) $ (0.78) $ (0.22) $ (0.24) $ 0.01 $ 0.00 $(0.06)
======= ======= ======= ======= ======= ====== ======
Shares used in computing net income (loss) per
share
- basic.......................................... 8,376 8,997 9,323 9,626 9,727 9,708 9,856
- diluted........................................ 8,376 8,997 9,323 9,626 23,320 22,735 9,856
Pro forma net income (loss) per share
- basic.......................................... $ 0.01 $(0.03)
======= ======
- diluted........................................ $ 0.01 $(0.03)
======= ======
Shares used in computing pro forma net income
(loss) per share
- basic.......................................... 21,808 22,259
- diluted........................................ 23,320 22,259
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------
DECEMBER 31,
---------------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
IN THOUSANDS -------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 5,089 $ 12,109 $ 9,091 $ 9,750 $ 12,720 $ 19,947
Working capital.................................. (24,029) 10,122 3,677 11,387 11,908 17,254
Total assets..................................... 45,091 54,328 49,408 17,932 16,481 23,221
Deferred revenue................................. - - - - 2,045 3,878
Current portion of notes payable................. 29,633 4,988 7,773 - - -
Notes payable, long-term......................... 5,880 36,247 22,540 - - -
Convertible preferred stock...................... 13,933 14,032 22,330 30,391 30,391 35,591
Stockholders' deficit............................ (7,812) (14,077) (15,903) (18,001) (17,666) (17,761)
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We design, develop, license and market memory technologies used by the
semiconductor industry and electronic product manufacturers. We license our
1T-SRAM technology on a non-exclusive and worldwide basis to semiconductor
companies and electronic product manufacturers. From our inception in 1991
through 1998, we focused primarily on the sale of stand-alone products. In the
fourth quarter of 1998, we changed our business model to focus primarily on the
licensing of our 1T-SRAM technology. Development of our stand-alone memory
products during the early years of our existence enabled us to validate critical
elements of the 1T-SRAM technology we currently license.
Sales of our stand-alone memory products grew rapidly, peaking at $36.3 million
in 1998. We achieved profitability on sales of our stand-alone memory products
in the fourth quarter of 1997 and the first quarter of 1998. We determined,
however, that the competition for memory products, volatile pricing and low
margins would limit our profitability in the long term. Consequently, using our
existing memory technology as a foundation, in 1998, we completed initial
development of our innovative, proprietary 1T-SRAM technology to distinguish
ourselves from other memory providers.
Once we had successfully implemented the new technology and demonstrated its
benefits through the manufacture of our stand-alone products, we adopted a new
business model focused on licensing our 1T-SRAM technology. After changing our
business model, we signed our first license agreement for this technology at the
end of the fourth quarter of 1998 and recognized licensing contract revenue for
the first time in the first quarter of 2000. As of July 31, 2000, we had signed
1T-SRAM license agreements with six companies and had signed memoranda of
understanding, each of which requires an up-front payment to us, with seven
additional companies. We recognized our first license revenue from our 1T-SRAM
technology in the first quarter of 2000. Generally, we expect our total sales
cycle, or the period that begins with our initial discussion with a prospective
licensee to our receipt of royalties from the licensee's use of our 1T-SRAM
technology, to run from 18 to 24 months.
We have had a limited operating history and have incurred net losses in every
year of operation until 1999.
REVENUE. We generate our revenue from licensing our technology and selling
stand-alone memory products. Contract revenues from our licensing activities
consist of fees paid for engineering development and engineering support
services. Under all our licensing agreements, we will receive royalties when our
licensees manufacture or sell products that incorporate our technology.
We receive contract fees for providing circuit design, layout and testing
services to a licensee that is embedding our memory technology into its product.
For some licensees, we also provide engineering support services to assist in
the commencement of production of their products. Contract fees range from
several hundred thousand dollars to several million dollars, depending on the
scope and complexity of the development project, the licensee's rights and the
royalty to be paid under the contract. The licensee generally pays contract fees
in installments at the beginning of the contract and upon achieving certain
milestones. For contracts involving performance specifications that we have not
yet met, we defer the recognition of revenue until the licensee manufactures
products that meet the contract performance specifications. Contract fees billed
prior to revenue recognition are recorded as deferred contract revenue. We
recognized contract revenue for the first time in the six-month period ended
June 30, 2000. The recognized revenue of $460,000 arose under two licensing
contract projects that we completed during the period. Deferred contract revenue
at June 30, 2000 was $3.9 million.
Our licensing contracts provide for royalty payments at a stated rate. We
negotiate royalty rates taking into account such factors as the amount of
contract fees to be paid, the anticipated volume of the licensee's sales of
22
<PAGE>
products that utilize our technology and the cost savings to be achieved by the
licensee when using our technology. Our agreements require licensees to report
the manufacture or sale of products that include our technology after the end of
the quarter in which the sale or manufacture occurs. We will recognize royalties
in the quarter in which we receive the licensee's report. We have recorded no
royalties through June 30, 2000.
We anticipate that revenue from our licensing activities will fluctuate from
period to period and that it will be difficult to predict the timing and
magnitude of such revenue. Our license contracts involve long sales cycles,
which make it difficult to predict the timing of signing agreements. These
contracts are also associated with lengthy and complicated engineering
development projects, and so the completion of development and commencement of
production may be difficult for us to predict. Furthermore, substantial amounts
of revenue arising from these contracts will be recognized only when the
licensee manufactures the products meeting the performance specification. We
believe that the amount of licensing contract revenues for any period are not
necessarily indicative of results for any future period. The timing and level of
royalties will likewise be difficult to predict because they are totally
dependent on the licensees' ability to market, produce and ship product that
incorporates our technology. For a discussion of factors that could contribute
to the fluctuation of our revenues, please see "Risk Factors - Our operating
results might fluctuate significantly and remain uncertain, which could
negatively impact the value of your investment," and "Our lengthy licensing
cycle and our licensees' lengthy development cycles will make the operating
results of our licensing business difficult to predict."
Since 1998, we have reduced the development of follow-on versions of our
stand-alone products, which development had been key to our generation of
revenue in preceding periods. Our stand-alone product revenue has declined
accordingly. Moreover, these stand-alone products address specific semiconductor
applications required by our customers and are not intended to be widely
distributed. Product revenue derived from our three largest customers
represented 29.1%, 10.8% and 10.1% of our total revenue in 1998. In 1999, our
two largest customers represented 16.4% and 10.9% of our total revenue. All of
our sales are denominated in U.S. dollars. Our stand-alone products are subject
to competitive pricing pressure that might result in fluctuating gross profits,
which we have experienced in the past.
Product sales are typically on a purchase-order basis, with shipment of product
from one to six months later. Provisions for potential warranty liability and
estimated returns are recorded at the time revenue is recognized.
We procure the manufacture of our stand-alone memory products from TSMC. Our
products are assembled and tested prior to shipment by independent, third-party
contractors. We contract for all of these manufacturing services on a
purchase-order basis and have no long-term commitments for the supply of any of
our stand-alone memory products. If we are unable to obtain manufacturing,
assembly or testing services required to fill our customer orders for these
products, our revenues from these products will decline substantially.
During the next 12 months, our revenue may continue to consist primarily of
stand-alone product sales revenue, with contract and royalty revenue generating
an increasing portion of our revenue. We expect that licensing revenue will
represent the majority of our total revenue in the following years.
COST OF REVENUE. Cost of product revenue consists primarily of costs associated
with the manufacture, assembly and test of our stand-alone memory products by
independent, third-party contractors.
Cost of contract revenue consists primarily of deferred engineering costs
directly related to engineering development projects specified in agreements we
have with licensees of our memory technology. To the extent that the amount of
engineering costs does not exceed the amount of the related contract revenues,
these costs are deferred on a contract-by-contract basis from the time we have
established technological feasibility of the product to be developed under the
contract. This occurs when we have completed all of the activities necessary to
establish that the licensee's product can be produced to meet the performance
specifications when incorporating our technology. Deferred costs are charged to
cost of contract revenue when the related revenue is recognized.
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily
of salaries and related employee expenses, material costs for prototype and test
units and expenses associated with engineering
23
<PAGE>
development software and equipment. Prior to 1998 our research and development
expenses were incurred primarily in support of design, development and
production of stand-alone memory products.
Since changing our business model in 1998, we have devoted our research and
development efforts primarily to developing the 1T-SRAM technology and the
licensing activities required to serve the embedded-memory market. Most of these
efforts have been directly related to projects specified in various licensee
agreements we have with the early adopters of our memory technology. These
projects have included development and design of variations of the 1T-SRAM
technology for use in a number of different wafer manufacturing processes used
by licensees, the development of interface circuitry that enables embedding our
memory on a licensee's integrated circuit, the development and testing of
devices to prove the technological feasibility of embedding our memory designs
in licensees' products and engineering support to assist in commencement of
production of a licensee's products.
We generally record engineering cost as research and development expense in the
period incurred except when the engineering cost is being deferred under a
licensing contract for which technological feasibility has been established.
We intend to focus an increasing percentage of our research and development
efforts on the development of new intellectual property for licensing to
semiconductor companies, electronic product manufacturers and their customers.
The success of our business will depend on our ability to develop these new
technologies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of employee-related expenses,
occupancy costs, sales commissions to independent sales representatives and
professional fees. We pay commissions to our independent sales representatives
on most of our sales of stand-alone memory products. We leverage our licensing
and co-marketing relationships to promote our technology, and currently do not
use sales representatives or distributors in our licensing business.
After the offering, we anticipate an increase in our administrative expenses as
we hire additional staff and incur additional professional fees to address
reporting and similar requirements applicable to a public company. We also
anticipate an increase in our sales and marketing expenses as we increase the
number of personnel devoted to the licensing of our technology.
RESULTS OF OPERATIONS
The table set forth below shows our historical results of operations, expressed
as a percentage of revenue. As we changed our business model in the fourth
quarter of 1998 and have concentrated our efforts on licensing
24
<PAGE>
1T-SRAM technology only since early 1999, these historical results of operations
and the ensuing discussion of them are unlikely to be representative of our
operating results going forward.
<TABLE>
<CAPTION>
-------------------------------------------------
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------------- ----------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenue:
Product....................................... 100.0% 100.0% 100.0% 100.0% 90.0%
Contract...................................... - - - - 10.0
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
Cost of net revenue:
Product....................................... 84.7 87.9 65.5 66.9 43.5
Contract...................................... - - - - 5.9
----- ----- ----- ----- -----
84.7 87.9 65.5 66.9 49.4
----- ----- ----- ----- -----
Gross profit.................................... 15.3 12.1 34.5 33.1 50.6
----- ----- ----- ----- -----
Operating expenses:
Research & development........................ 10.3 11.6 20.3 20.2 36.3
Selling, general and administrative........... 9.3 7.8 15.5 14.7 29.8
Stock-based compensation charge............... - - 0.7 0.2 7.6
----- ----- ----- ----- -----
Total operating expenses.................... 19.6 19.5 36.5 35.1 73.7
----- ----- ----- ----- -----
Loss from operations............................ (4.3) (7.3) (2.0) (2.0) (23.1)
Interest expense................................ (3.0) (0.8) 0.0 0.0 0.0
Interest and other income....................... 1.5 1.8 3.4 2.8 10.2
Provision for income taxes...................... 0.0 0.0 (0.4) (0.2) 0.0
----- ----- ----- ----- -----
Net income (loss)............................... (5.8)% (6.4)% 1.0% 0.5% (12.9)%
===== ===== ===== ===== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
REVENUE. Revenue increased from $34.8 million in 1997 to $36.3 million in 1998,
then decreased to $15.4 million in 1999. From 1997 to 1998 we shipped more units
of stand-alone memory. The decrease in revenue from 1998 to 1999 reflected the
change in our business model to the licensing of our technology and a
corresponding reduction in the number of new product introductions and unit
shipments.
GROSS PROFIT. Gross profit decreased from $5.3 million in 1997 to $4.4 million
in 1998, then increased to $5.3 million in 1999. The decrease in gross profit in
1998 was due to lower average selling prices of stand-alone memories, caused by
an over-supply in the memory market and our product mix which was weighted
towards lower margin memories. The increase from 1998 to 1999 again reflected
our decision to shift to a licensing-based business model and our reduction of
sales of lower margin SGRAM products, together with a recovery in average
selling prices. Also the increase in gross margin in 1999 resulted from the
introduction of our higher-margin 1T-SRAM products.
RESEARCH AND DEVELOPMENT. Research and development expense increased from
$3.6 million in 1997 to $4.2 million in 1998, and then decreased to
$3.1 million in 1999. The increase in research and development expenses from
1997 to 1998 resulted primarily from higher prototype and tooling costs
associated with qualifying additional manufacturing sources for our stand-alone
products. These expenses decreased in 1999 because we had fewer prototype
production runs of new products during the period.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense decreased from $3.2 million in 1997 to $2.8 million in 1998 and
$2.4 million in 1999. The decrease over these three years resulted from a
25
<PAGE>
reduction in commissions paid to independent sales representatives and in
personnel cost due to decreasing product revenue.
INTEREST INCOME AND INTEREST EXPENSE. Interest income reflects interest earned
on average cash and cash equivalents. Interest income was $523,000, $649,000 and
$520,000 in 1997, 1998 and 1999, respectively. The fluctuation in interest
income levels corresponded to differences in average cash balances. Interest
expense consists of interest on debt and capital lease obligations. Interest
expense was $1.0 million, $294,000 and $0 in 1997, 1998 and 1999, respectively.
All interest expense was incurred on $13.1 million of notes issued to entities
controlled by two of our directors and other unrelated parties. Principal of
$6.7 million was converted into Series F preferred stock in 1997. We repaid the
balance of these notes in 1998.
PROVISION FOR INCOME TAXES. We have incurred losses in each year through 1998
and consequently did not provide for federal or state income taxes. In 1999, a
provision of $67,000 was recorded. At December 31, 1999, we had federal net
operating loss carryforwards of approximately $15.0 million that we expect to be
available to reduce future income tax liabilities to the extent permitted under
federal and applicable state income tax laws. The federal net operating loss
carryforwards expire from 2002 to 2019.
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
REVENUE. Total revenue was $8.1 million and $4.5 million in the six months
ended June 30, 1999 and 2000, respectively. Product revenue declined by $4.1
million as we decreased unit shipments of stand-alone memory products,
consistent with our decision to focus our efforts on the embedded-memory market.
During the six-month period ended June 30, 1999 we recognized contract revenue
for the first time, which totaled $460,000.
GROSS PROFIT. Gross profit decreased from $2.7 million in the six-month period
ended June 30, 1999 to $2.3 million in the same period of 2000, due primarily to
the decrease in product revenue. Total gross profit as a percent of total
revenue was 33.2% and 50.6% for the six-month periods ended June 30, 1999 and
2000, respectively. The increase occurred primarily because of higher average
selling prices on our 1T-SRAM stand-alone memory products. In addition, gross
profit for the six months ended June 30, 2000 reflects $267,000 of engineering
costs deferred previously under two licensing contract projects that we
completed during the period.
RESEARCH AND DEVELOPMENT. Research and development expenses were $1.6 million
in each of the six-month periods ended June 30, 1999 and 2000 as we have not yet
been required to add engineering staff to support our licensing activities. In
addition, we recorded approximately $113,000 of engineering expense incurred in
the six-month period ended June 30, 2000 as cost of contract revenue.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $1.2 million and $1.3 million in the six-month periods ended
June 30, 1999 and 2000, respectively. The small increase resulted from the
addition of staff to support the expansion of sales and marketing activities in
licensing our technology.
INTEREST INCOME AND INTEREST EXPENSE. Interest income increased from
approximately $225,000 in the six-month period ended June 30, 1999 to $459,000
in the corresponding period in 2000. This increase resulted from higher average
cash balances in the year 2000 period.
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited results of operations data for the six
quarters ended June 30, 2000. This unaudited information has been prepared on a
basis consistent with our audited financial statements appearing elsewhere in
this prospectus and, in the opinion or our management, includes all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the information for the periods presented. The unaudited quarterly
information should be read in conjunction with the financial statements and
notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
MAR. 31, 1999 JUNE 30, 1999 SEPT. 30, 1999 DEC. 31, 1999 MAR. 31, 2000 JUNE 30, 2000
IN THOUSANDS -------------- -------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Product.................. $ 4,322 $ 3,823 $ 3,767 $ 3,444 $ 1,717 $ 2,311
Contract................. - - - - 60 400
-------------- -------------- -------------- -------------- -------------- --------------
4,322 3,823 3,767 3,444 1,777 2,711
-------------- -------------- -------------- -------------- -------------- --------------
Cost of net revenue:
Product.................. 3,024 2,423 2,449 2,166 761 1,191
Contract................. - - - - 42 225
-------------- -------------- -------------- -------------- -------------- --------------
3,024 2,423 2,449 2,166 803 1,416
-------------- -------------- -------------- -------------- -------------- --------------
Gross profit............. 1,298 1,400 1,318 1,278 974 1,295
-------------- -------------- -------------- -------------- -------------- --------------
Research and development... 792 855 830 633 766 864
Selling, general and
administrative........... 603 591 534 660 673 665
Stock-based compensation
charge................... 1 19 22 65 107 235
-------------- -------------- -------------- -------------- -------------- --------------
Total operating
expenses............... 1,396 1,465 1,386 1,358 1,546 1,764
-------------- -------------- -------------- -------------- -------------- --------------
Loss from operations....... (98) (65) (68) (80) (572) (469)
Interest and other
income................... 107 118 144 151 163 296
Provision for income
taxes.................... (3) (17) (24) (23) -
-------------- -------------- -------------- -------------- -------------- --------------
Net income (loss).......... $ 6 $ 36 $ 52 $ 48 $ (409) $ (173)
============== ============== ============== ============== ============== ==============
<CAPTION>
----------------------------------------------------------------------------------------------------
MAR. 31, 1999 JUNE 30, 1999 SEPT. 30, 1999 DEC. 31, 1999 MAR. 31, 2000 JUNE 30, 2000
-------------- -------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Product.................. 100.0% 100.0% 100.0% 100.0% 96.6% 85.2%
Contract................. - - - - 3.4 14.8
-------------- -------------- -------------- -------------- -------------- --------------
100.0 100.0 100.0 100.0 100.0 100.0
-------------- -------------- -------------- -------------- -------------- --------------
Cost of net revenue:
Product.................. 70.0 63.4 65.0 62.9 42.8 43.9
Contract................. - - - - 2.4 8.3
-------------- -------------- -------------- -------------- -------------- --------------
Cost of revenue............ 70.0 63.4 65.0 62.9 45.2 52.2
-------------- -------------- -------------- -------------- -------------- --------------
Gross profit............. 30.0 36.6 35.0 37.1 54.8 47.8
-------------- -------------- -------------- -------------- -------------- --------------
Research and development... 18.3 22.4 22.0 18.4 43.1 31.9
Selling, general and
administrative........... 14.0 15.5 14.2 19.2 37.9 24.5
Stock-based compensation
charge................... 0.0 0.4 0.6 1.9 6.0 8.7
-------------- -------------- -------------- -------------- -------------- --------------
Total operating
expenses............... 32.3 38.3 36.8 39.4 87.0 65.1
-------------- -------------- -------------- -------------- -------------- --------------
Loss from operations....... (2.3) (1.7) (1.8) (2.3) (32.2) (17.3)
Interest and other
income................... 2.5 3.1 3.8 4.4 9.2 10.9
Provision for income
taxes.................... (0.0) (0.4) (0.6) (0.7) 0.0 0.0
-------------- -------------- -------------- -------------- -------------- --------------
Net income (loss).......... 0.1% 1.0% 1.4% 1.4% (23.0)% (6.4)%
============== ============== ============== ============== ============== ==============
</TABLE>
27
<PAGE>
Revenue generally decreased each quarter during the six-quarter period ended
June 30, 2000, with the most significant decline occurring from the fourth
quarter of 1999 to the first quarter of 2000. This decrease over the six-quarter
period was due to the decline in product revenue and unit shipments of
stand-alone memory products, consistent with the change in our business model to
focusing our efforts on the licensing of embedded-memory technology. In the
second quarter of 2000, revenue increased to $2.7 million due to increased unit
shipments of our 1T-SRAM stand-alone memory products and recording of contract
revenue of $400,000 related to a completed contract.
Cost of revenue generally declined during the six-quarter period ended June 30,
2000, reflecting a decrease in unit shipments of stand-alone memory products.
Gross profit as a percent of revenue ranged from 30.0% to 37.1% during most of
this period, but rose to 54.8% and 47.8% in the first and second quarter of
2000, respectively. The increase in the percentage was due to higher prices
received for 1T-SRAM stand-alone memory products.
Research and development expenses remained generally constant during the
periods, as we shifted engineering resources from product development and
introduction to developing intellectual property and supporting our licensees.
Selling, general and administrative expenses generally have been flat. These
expenses increased moderately in the quarter ending March 31, 2000, despite a
decrease in sales commissions paid during the period because we increased
marketing expenses related to licensing our technology.
Interest income increased each quarter, primarily as our cash position increased
and we ceased paying interest expense following the retirement of all
outstanding indebtedness in 1998.
We believe that quarterly and annual results of operations will be affected by a
variety of factors that could materially and adversely affect revenue, gross
profit and income from operations. Accordingly, and in light of our limited
operating history under our new business model, we believe that period-to-period
comparisons of our results of operations should not be relied upon as an
indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through a combination of
equity and debt financing. In our most recent equity financing, we issued
650,000 shares of Series H preferred stock in May 2000 to two of our licensees,
Galileo Technology, Ltd. and LSI Logic, Inc. with aggregate proceeds to us of
$5.2 million. Including this financing, we have raised $35.6 million through the
issuance of preferred stock, including $6.7 million of indebtedness converted to
preferred stock in 1997. We borrowed an aggregate of $13.1 million through
various debt financings between 1996 and 1998. As of June 30, 2000, we had
repaid in full all amounts due under these loans.
As of June 30, 2000, we had cash and cash equivalents of $19.9 million, an
increase of $7.2 million from cash and cash equivalents held as of December 31,
1999. Our primary capital requirements are to fund working capital needs.
Net cash used in operations was $6.5 million and $1.2 million in 1997 and 1998,
respectively. We generated cash from operations of $3.6 million in 1999. Net
cash used in operations in 1997 consisted primarily of the net operating loss,
increases in accounts receivable and inventory and decreases in balances payable
to related party and accounts payable, offset by an increase in accrued
liabilities. Net cash used in operations in 1998 consisted primarily of the
operating loss and decreases in accounts payable and accrued liabilities offset
by decreases in accounts receivable and inventories. Net cash generated from
operations in 1999 resulted principally from decreases in accounts receivable
and inventory and the deferral of revenues, offset by a decrease in accounts
payable.
Net cash provided by investing activities was $6.1 million in 1997, principally
as a result of releasing restricted cash previously required to be held as
collateral for a line of credit cancelled in that year. Net cash provided by
28
<PAGE>
investing activities was approximately $641,000 in 1998, generated from the
maturity and sale of short-term securities. In 1999, net cash used in investing
activities was approximately $726,000, representing capital expenditure on
property and equipment.
Proceeds from the sales of preferred stock and existing cash were used to repay
$4.2 million of loans in 1997. In 1998, cash generated from the sales of
preferred stock was used to repay outstanding loans totaling $6.9 million from
entities controlled by two of our shareholders.
Our future liquidity and capital requirements are expected to vary from quarter
to quarter, depending on numerous factors, including -
- level and timing of licensing and stand-alone product revenues;
- cost, timing and success of technology development efforts;
- market acceptance of our existing and future technologies and products;
- competing technological and market developments;
- cost of maintaining and enforcing patent claims and intellectual property
rights; and
- variations in manufacturing yields, materials costs and other
manufacturing risks.
We will continue to require substantial working capital to fund our operations.
We expect that the net proceeds of this offering, together with our existing
capital and cash generated from operations, if any, will be sufficient to meet
our capital requirements for the next 12 months. However, we cannot be certain
that we will not require additional financing at some point in time. Should our
cash resources prove inadequate, we might need to raise additional financing
through public or private financing. There can be no assurance that such
additional funding will be available to us on favorable terms, if at all. The
failure to raise capital when needed could have a material, adverse effect on
our business and financial condition. We currently do not have any third-party
indebtedness.
QUANTITATIVE AND QUALITATIVE DISCUSSION OF MARKET INTEREST RATE RISK
We invest primarily in short-term bank money market rate accounts, and also have
investments in short-term, investment-grade corporate securities. These
securities are highly liquid and generally mature within three months or less of
purchase date. We do not use our investments for trading or other speculative
purposes. We do not believe that we have any significant exposure to market risk
related to changes in interest rates, foreign currency exchange rates and equity
prices.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the staff of the Securities and Exchange Commission, or the
SEC, issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition
in Financial Statements." SAB 101 provides interpretive guidance on the
recognition, presentation and disclosure of revenue in financial statements
under certain circumstances. We adopted the provisions of SAB 101 in these
financial statements for all periods presented.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 ("SFAS 133"), "Accounting for Derivatives
and Hedging Activities." SFAS 133 establishes accounting and reporting standards
of derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. In July 1999, the Financial
Accounting Standards Board issued SFAS No. 137 ("SFAS 137"), "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133." SFAS 137 deferred the effective date until the
fiscal year beginning after June 15, 2000. We will adopt SFAS 133 in the quarter
ending March 31, 2001. We have not engaged in hedging activities or invested in
derivative instruments.
29
<PAGE>
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of APB
Opinion No. 25. FIN 44 establishes guidance for the accounting for stock option
grants or modifications to existing stock options awards and is effective for
option grants made after June 30, 2000, but certain conclusions cover specific
events that occur after either December 15, 1998 or January 12, 2000. FIN 44
also establishes guidance for the repricing of stock options and determining
whether a grantee is an employee, for which the guidance was effective after
December 15, 1999 and modifying a fixed option to add a reload feature, for
which the guidance was effective after January 12, 2000. The adoption of certain
of the provisions of FIN 44 prior to June 30, 2000 did not have a material
effect on the financial statements. We do not expect that the adoption of the
remaining provisions to have a material effect on the financial statements.
30
<PAGE>
BUSINESS
COMPANY OVERVIEW
We design, develop, license and market memory technologies used by the
semiconductor industry and electronic product manufacturers. We have developed
an innovative embedded-memory technology, called 1T-SRAM, that offers major
advantages over traditional embedded six transistor SRAM, or traditional SRAM.
Our patented 1T-SRAM technology offers a combination of high density, low power
consumption and high speed at performance and cost levels that other embedded
memory technologies do not match. We license our 1T-SRAM technology on a
non-exclusive and worldwide basis to semiconductor companies and electronic
product manufacturers.
From our inception until 1998, we focused primarily on the development of
innovative memory technologies and the sale of stand-alone memory products.
Development of our stand-alone memory products during the early years of our
existence enabled us to validate critical elements of the 1T-SRAM technology. In
the fourth quarter of 1998, we changed our business model to focus primarily on
the licensing of our 1T-SRAM technology, which we expect will represent a
majority of our future revenue. We generate contract revenues from our licensing
activities which consist of fees paid for engineering development and
engineering support services. Under all our licensing agreements, we will
receive royalties when our licensees manufacture or sell products that
incorporate our technology.
INDUSTRY BACKGROUND
TRENDS IN THE SEMICONDUCTOR INDUSTRY
Electronic products play an increasingly important role in our lives, as
evidenced by the growth of the personal computer, wireless communications,
networking equipment and consumer electronics markets. These markets are
characterized by intensifying competition, rapid innovation, increasing
performance requirements and continuing cost pressures. To manufacture
electronic products that achieve optimal performance and cost levels,
semiconductor companies must produce integrated circuits that offer
higher-performance, greater functionality and lower-cost.
Two important measures of performance are speed and power consumption.
Higher-speed integrated circuits can allow electronic products to operate
faster, enabling the performance of more functions. Reducing the power
consumption of integrated circuits contributes to increased battery life and
reduced heat generation in electronic products. Reduced power consumption also
enables integrated circuit designers to overcome costly design hurdles, such as
meeting the thermal limitations of low-cost packaging materials.
In addition to offering high performance products, semiconductor companies must
produce integrated circuits that are cost effective. High-density integrated
circuits reduce the amount of silicon on the integrated circuit, thus reducing
the size and cost of the integrated circuit. Cost reduction can also be achieved
by simplifying the integrated circuit's manufacturing process and improving
manufacturing yield. Additionally, to avoid the high cost of substantial
redesigns, semiconductor companies can use technology which is scalable, which
means it can be readily incorporated into multiple generations of manufacturing
process technologies.
IMPORTANCE OF INTEGRATION
For decades, the semiconductor industry has continuously increased the value of
integrated circuits by improving their density, power consumption, speed and
cost. The main driver for these improvements has been the success of shrinking
the size of the basic semiconductor building block, or transistor. Transistors
have become small enough to make it economical to combine multiple functions,
such as microprocessors, memory, analog components and digital signal
processors, on a single integrated circuit, in what is commonly referred to as
System-on-a-Chip, or SOC. Highly integrated circuits such as SOCs often offer
advantages in density, power consumption, speed and cost that cannot be matched
using separate, discrete integrated circuits. SOCs are essential for most
electronic products, such as cellular phones, video game consoles, networking
equipment and
31
<PAGE>
Internet appliances, to achieve desired performance at a reasonable cost.
According to Dataquest, Inc., a technology market research company, the SOC
market is projected to grow from more than $14 billion in 1999 to over
$58 billion by 2004, representing a compound annual growth rate of approximately
33%.
IMPORTANCE OF EMBEDDED MEMORY
Historically, semiconductor companies implemented memory in separate integrated
circuits. Rather than using separate memory circuits, semiconductor companies
today are embedding memory on highly integrated circuits, in order to optimize
performance and size. The increasing sophistication of electronic products is
driving a rapid increase in the amount of memory required. According to
Dataquest, in 2000 the percentage of silicon area of a typical SOC occupied by
memory is 32% and is expected to rise significantly over the next five years. We
believe this percentage will exceed 70% by 2003.
The high cost of incorporating the memory component represents a major challenge
to achieving high levels of integration. Embedded memory accounts for an
increasing percentage of the size of a highly integrated circuit and is often
the slowest or rate limiting function in the circuit. Not only must integrated
circuits contain a larger amount of embedded memory, this memory must be dense
enough to be economically attractive and must offer sufficiently high speed and
low power consumption. Embedded memory has become a crucial design consideration
for determining the overall cost and performance of highly integrated circuits
and the growing number of electronic products in which they are incorporated.
TRADITIONAL SRAM
The most widely used embedded memory today utilizes traditional SRAM technology,
and has the following characteristics -
- it operates at the same high speeds as other functions of the integrated
circuit;
- its simple and familiar interface allows for quick design into an
integrated circuit with less risk that the design will not function
according to specification; and
- it utilizes the standard logic manufacturing process that is both
economical and the most widely available.
As memory requirements increase, however, traditional SRAM becomes relatively
more expensive compared to the total cost of the integrated circuit.
Specifically, traditional SRAM has the following drawbacks that can lead to
higher cost -
- it requires a substantial amount of silicon area because of its low
density; and
- it consumes a significant amount of power when operating at high speeds.
To overcome the density limitations of traditional SRAM, some manufacturers have
utilized embedded dynamic random access memory, or embedded DRAM. While embedded
DRAM is denser than traditional SRAM, it is typically ten times slower.
Manufacturing embedded DRAM also requires additional process steps and results
in low yields, which translate into increased manufacturing time and cost.
Additionally, because of its complex interface requirements, embedded DRAM is
more difficult to incorporate on integrated circuits, leading to a higher risk
of failure. As integrated circuit designers have experimented with embedded
DRAM, they have discovered that these limitations of embedded DRAM preclude its
use in almost all applications. Therefore, traditional SRAM continues to be the
most widely used technology for embedded memory.
One of the major challenges for the semiconductor industry today is to find an
embedded memory solution that combines high density, low power consumption, high
speed and low cost.
SOLUTION
We have developed an innovative memory architecture, 1T-SRAM memory, which
provides major advantages over traditional SRAM in density, power consumption
and cost, thus making it more economical for designers to
32
<PAGE>
incorporate large amounts of embedded memory in their designs. In addition,
1T-SRAM technology offers all of the benefits of traditional SRAM, such as high
speed, simple interface and ease of manufacturability. Its core architecture is
already production proven in millions of our stand-alone memory products and
offers integrated circuit designers the following characteristics compared to
traditional SRAM -
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
PARAMETERS TYPICAL CHARACTERISTICS OF 1T-SRAM TECHNOLOGY VS. TRADITIONAL SRAM
--------------------- ------------------------------------------------------------------
<S> <C>
Density Two to three times denser, using 50-70% less silicon for the same
amount of memory
Power Consumption Consumes less than one-quarter the power when operating at the
same speed
Speed Provides speeds equal to or greater than those offered by
traditional SRAM especially for larger memory sizes
</TABLE>
Our 1T-SRAM technology can achieve these advantages while utilizing standard
logic manufacturing processes and the simple, standard SRAM interface that
designers are accustomed to today.
HIGH DENSITY
Embedded memory utilizing our 1T-SRAM technology is typically two to three times
denser than traditional SRAM. Increased density enables manufacturers of
electronic products, such as cellular phones and video game consoles, to
incorporate additional functionality into a single integrated circuit, resulting
in overall cost savings. Semiconductor designers can take advantage of the high
density of 1T-SRAM technology and embed large quantities of high-performance
memory and other components that in the past might not have been feasible.
LOW POWER CONSUMPTION
Embedded memory utilizing our 1T-SRAM technology typically consumes less than
one-quarter the power and generates less heat than traditional SRAM when
operating at the same speed. This feature facilitates longer battery life and
reliable operation using lower-cost packaging.
HIGH SPEED
Embedded memory utilizing our 1T-SRAM technology typically provides speeds equal
to or greater than the speeds of traditional SRAM, especially for larger memory
sizes. Our 1T-SRAM memory can sustain random access cycle times of less than
three nanoseconds. In today's 0.18-micron manufacturing process technology, our
1T-SRAM technology can operate with a random access frequency in excess of 300
megahertz for multi-megabit memory.
MANUFACTURING PROCESS INDEPENDENCE
We have been able to implement our technology without requiring the manufacturer
to make any significant changes to either standard logic or alternative
manufacturing processes. 1T-SRAM's portability or the ease with which it can be
implemented in different semiconductor manufacturing facilities, has been
silicon-proven at TSMC, UMC and Chartered, the world's three largest independent
foundries. 1T-SRAM's scalability, or the ease with which it can be implemented
in different generations of manufacturing processes, has already been silicon-
proven in 0.25-micron, 0.18-micron and 0.15-micron process generations. We
expect our technology to continue to scale readily to future process
generations. This portability and scalability provides for wide availability,
inexpensive implementation and quick product time to market for our licensees.
SIMPLICITY OF INTERFACE
Our 1T-SRAM technology utilizes the simple, standard SRAM interface that
designers are accustomed to today. Our use of this standard high-performance
interface minimizes design time, thus optimizing time to market for our
licensees. This simple interface also helps minimize the risk that integrated
circuit designs will not operate according to specifications.
33
<PAGE>
STRATEGY AND BUSINESS MODEL
Our goal is to establish our 1T-SRAM technology as the standard for the embedded
memory market. We intend to achieve this goal by licensing our technology on a
non-exclusive and worldwide basis to semiconductor companies and electronic
product manufacturers.
The following are integral aspects of our strategy and business model.
PROLIFERATE TECHNOLOGY THROUGH A DIVERSE DISTRIBUTION STRATEGY
Our solution offers performance features and cost benefits that existing
embedded memory solutions do not provide. We have strategic relationships with
many companies, including Allayer Communications, Analog Devices, Chartered,
Galileo Technology, Lara Networks, Lexra, LSI Logic, Lucent, NEC, Nintendo,
Pixelworks, PMC-Sierra, TSMC, UMC, Via Technologies and Virage Logic. We license
our technology to semiconductor companies who incorporate our technology into
integrated circuits that they then sell to customers. We also license our
technology to electronic product manufacturers, who then require their suppliers
to adopt our technology. In addition, we engage in co-marketing activities with
foundries and design companies to promote our technology to a wide base of
customers. We believe that these distribution channels will broaden the
acceptance and availability of our technology in the industry. Because our
technology is becoming available through an increasing number of channels, it is
less likely that customers will be required to alter their procurement practices
in order to acquire our technology. We intend to continue to expand
significantly this base of strategic relationships to further proliferate our
technology.
TARGET LARGE AND GROWING MARKETS
Although our 1T-SRAM technology is applicable to many markets, we presently
focus on the rapidly growing communications and consumer electronics sectors.
These sectors increasingly require embedded memory solutions with higher
density, lower power consumption, higher speeds and lower cost. We will also
focus over the longer term on other markets that are projected to achieve
strong, long-term growth.
WORK CLOSELY WITH OUR LICENSEES AND CO-MARKETERS TO DELIVER OPTIMAL TECHNOLOGY
SOLUTIONS
We intend to continue to work closely with our licensees and co-marketers to
gain broad and detailed insight into their own and their customers' current and
next-generation technology requirements. This insight helps us identify trends
and focus our development efforts on optimizing our technology solution,
resulting in shorter product time to market and lower costs.
EXTEND TECHNOLOGY LEADERSHIP
Our goal is to continue to enhance our 1T-SRAM architecture and increase our
share of the embedded memory market. We will continue to develop our technology
in order to offer even higher-density, lower-power-consumption, higher-speed and
lower-cost designs for our licensees. We will continue to invest heavily in
research and development to develop related embedded memory technologies.
LEVERAGE STAND-ALONE PRODUCT LINE TO DEMONSTRATE LEADING-EDGE TECHNOLOGY
Stand-alone product revenue has constituted a majority of our historical
revenue. We expect to continue to generate stand-alone product revenue, as these
products serve to demonstrate the manufacturability of our leading-edge
technologies. Our direct involvement in these products also helps to keep our
research and development efforts focused on delivering leading-edge technologies
and meeting industry requirements.
34
<PAGE>
FOCUS ON HIGHER-MARGIN LICENSING MODEL
Our intellectual property licensing revenue consists of contract revenue and
royalties. This licensing revenue typically produces higher gross margins than
can be achieved with our stand-alone memory products. We intend to focus on our
intellectual property licenses as the major source of our future revenue.
STRATEGIC RELATIONSHIPS
We offer our technology on a non-exclusive and worldwide basis to semiconductor
companies, electronic product manufacturers, foundries and design companies. An
important element of our strategy is to offer our technology broadly in order to
establish 1T-SRAM technology as the standard in the embedded memory market. Our
licensees and co-marketers act as important indirect channels to promote our
technology.
The following table lists our current 1T-SRAM technology relationships, in
reverse chronological order.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
COMPANY DATE APPLICATION
------------------------------ ------- -----------------------------------------------------
<S> <C> <C>
Lucent........................ Q3 2000 Communications
Lara Networks................. Q2 2000 Application specific memory
PMC-Sierra.................... Q2 2000 Communications
Via Technologies.............. Q2 2000 Application specific standard products (ASSPs)
LSI Logic..................... Q1 2000 Communications, application specific integrated
circuits (ASICs) and ASSPs
Allayer Communications........ Q4 1999 Communications
Galileo Technology............ Q4 1999 Communications
NEC........................... Q4 1999 Custom application specific memory
Pixelworks.................... Q4 1999 Imaging
NEC........................... Q3 1999 Custom application specific memory
Nintendo...................... Q3 1999 Video game consoles
NEC........................... Q1 1999 ASICs
Analog Devices................ Q4 1998 Digital signal processors
</TABLE>
The following table illustrates our current co-marketing relationships, in
reverse chronological order.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
COMPANY DATE APPLICATION
------------------------------ ------- -----------------------------------------------------
<S> <C> <C>
Chartered..................... Q2 2000 Prove technology on Chartered's logic processes
UMC........................... Q2 2000 Port technology to UMC's standard logic processes
TSMC / Virage Logic........... Q3 1999 MoSys and Virage Logic to co-develop compilers for
TSMC's standard logic processes
Lexra......................... Q2 1999 Joint marketing of processor cores with 1T-SRAM
TSMC.......................... Q1 1999 Port technology to TSMC's standard logic processes
</TABLE>
RESEARCH AND DEVELOPMENT
Our ability to compete in the future will depend on improving our technology to
meet the market's increasingly demanding performance and cost requirements. We
have assembled a team of highly skilled engineers whose activities are focused
on developing even higher-density, lower-power-consumption, higher-speed and
lower-cost 1T-SRAM designs. We expect to continue to focus our research and
development efforts on extending our 1T-SRAM technology and developing new
memory technologies. We will also continue our focus on porting our technology
to additional semiconductor manufacturing facilities and scaling our technology
to new generations of manufacturing process technologies.
35
<PAGE>
As of June 30, 2000, we employed 22 engineers, representing 59% of our
employees, with specific expertise in circuit design and layout and in a variety
of manufacturing processes. For the years ended 1997, 1998 and 1999, research
and development expenditures totaled approximately $3.6 million, $4.2 million
and $3.4 million, respectively. During the first six months of 2000, our
research and development expenditures were approximately $1.6 million.
TECHNOLOGY
Our innovative 1T-SRAM technology includes many new and proprietary
architectural features. Development of our stand-alone memory products during
the early years of our existence was critical to validating elements of the
1T-SRAM technology we license today. This technology combines the high density
advantages of DRAM with the high performance and utility of SRAM. Underlying
this architecture are several distinct pieces of proprietary technology.
SINGLE-TRANSISTOR MEMORY CELL
The high density of 1T-SRAM stems from the use of a single-transistor, or 1T,
storage cell for each bit of information, which is similar to DRAM. Our 1T
storage cell using one transistor and one capacitor represents a very
significant improvement in density over the six-transistor storage cells used by
traditional SRAM.
The following diagrams illustrate the difference between the traditional SRAM
storage cell and our 1T-SRAM storage cell. The diagrams are drawn to scale, but
not to actual size.
[EDGAR REPRESENTATION OF PRINTED GRAPHIC]
[THE GRAPHIC ON THE LEFT, LABELED "SIX TRANSISTOR STORAGE CELL SCHEMATIC",
ILLUSTRATES THE BASIC STRUCTURE OF A SIX TRANSISTOR SRAM MEMORY CELL. THE
ILLUSTRATION SHOWS WORD LINES AND BIT LINES CONNECTED BY SIX TRANSISTORS, WHICH
ARE REPRESENTED BY THEIR NORMAL ELECTRICAL SCHEMATIC SYMBOLS. THE GRAPHIC ON THE
RIGHT, LABELED "1T-SRAM STORAGE CELL SCHEMATIC", ILLUSTRATES THE BASIC STRUCTURE
FOR A 1T-SRAM MEMORY CELL. THIS ILLUSTRATION SHOWS A WORD LINE AND BIT LINE
CONNECTED BY ONE TRANSISTOR, AGAIN REPRESENTED BY ITS NORMAL ELECTRICAL
SCHEMATIC SYMBOL.]
[UNDERNEATH EACH OF THE SCHEMATICS, THERE IS A SQUARE THAT REPRESENTS THE AREA
OF THE MEMORY CELL. THE SIX TRANSISTOR SRAM SQUARE IS SIGNIFICANTLY LARGER THAN
THE 1T-SRAM SQUARE.]
MULTIBANK TECHNOLOGY
The high speed and low power consumption of 1T-SRAM are enabled by our MultiBank
technology, as illustrated below. This technology efficiently partitions the
memory into many, typically hundreds, of fast, small sub-blocks of memory, or
banks, that can operate independently over high-speed data buses. Only one small
bank containing
36
<PAGE>
the required memory data must be active for each access to the memory.
Therefore, the remaining banks can stay in a low-power, standby mode, reducing
the overall power consumption of the memory.
[EDGAR REPRESENTATION OF PRINTED GRAPHIC]
[GRAPHIC DEPICTS MOSYS' MULTIBANK PARTITIONING TECHNOLOGY USED IN 1T-SRAM. IT
CONSISTS OF MANY ROWS AND COLUMNS REPRESENTING BANK CELLS, WITH TWO-WAY
HORIZONTAL ARROWS REPRESENTING HIGH SPEED DATA BUSES CROSSING THROUGH THE BANKS
AND TERMINATING AT A RECTANGULAR COLUMN ON THE RIGHT, LABELED "SRAM INTERFACE".]
STANDARD SRAM INTERFACE
Our architecture incorporates all of the circuitry required to present the
simple high performance interface to which integrated circuit designers are
accustomed. Our 1T-SRAM technology appears to the rest of the integrated circuit
and the designer as if it were traditional SRAM.
ABILITY TO USE STANDARD LOGIC MANUFACTURING PROCESS
Another key area of innovation in our 1T-SRAM memory technology is the ability
to use a standard logic manufacturing process. This is advantageous because
standard logic is the most widely available process. As many of the other
functions on an integrated circuit are implemented in a standard logic process,
the ability to implement 1T-SRAM memories using the same process saves time and
costs for the manufacturer. Other embedded memory technologies do not achieve
the same density and performance using the standard logic process.
LICENSED TECHNOLOGY AND STAND-ALONE PRODUCTS
We license the 1T-SRAM technology in the form of customized memory designs and
memory compilers. Compilers are software programs that translate required memory
design parameters into actual physical circuit designs. We also make and sell
stand-alone memory products based on our 1T-SRAM technology.
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<PAGE>
LICENSED MEMORY DESIGNS
We offer standard memory designs and generate customized memory designs to meet
a specific customer's design parameters. We also offer a variety of options for
interface and power management. Our licensed memory designs can be ported to the
manufacturing processes of leading foundries and semiconductor manufacturers.
The table below details the variety of specifications of our customized memory
designs.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
PROCESS GENERATION 0.25-MICRON 0.18-MICRON 0.15-MICRON
------------------------------------------------- -------------- ------------- -------------
<S> <C> <C> <C>
Silicon Verification............................. September 1999 January 2000 May 2000
Typical Macro Size............................... 1-16 megabits 1-32 megabits 1-48 megabits
Random Access Speed.............................. 100-250 MHz 100-350 MHz 100-400 MHz
</TABLE>
MEMORY COMPILERS AND COMPILED MEMORY SOLUTIONS
In January 2000, we announced 1T-SRAM compilers for TSMC's 0.18-micron and
0.15-micron standard logic processes as part of a joint development agreement
with Virage Logic. Under this agreement, we will license these compilers to
enable our licensees and their customers to automatically generate and configure
1T-SRAM designs. In addition to licensing the 1T-SRAM compilers, companies will
be able to license standard 1T-SRAM pre-compiled memory designs from us. We
expect to develop additional 1T-SRAM compilers for other processes at TSMC and
other foundries.
STAND-ALONE MEMORY PRODUCTS
We offer a range of stand-alone memory products that utilize the 1T-SRAM
technology and offer high performance and low power consumption but are cost
competitive with other commercially available memory products. We have developed
these 1T-SRAM products in a number of configurations, bit densities and clock
speeds to support specific targeted products. We sell our products mostly to
suppliers of communications equipment, such as Accton Technology Corporation,
Cisco Systems, Inc., Cobalt Networks, Foundry Networks, Integral Technologies,
International Business Machines Corporation, Lucent and Maxtek Technology
Company, Ltd. In addition to these existing stand-alone memory products, we are
currently developing new products based on the 1T-SRAM technology for our
customers.
We also sell a limited number of stand-alone memory products based on some of
our earlier technologies to customers who have incorporated these integrated
circuits into their existing product lines.
INTELLECTUAL PROPERTY
We regard our patents, copyrights, trademarks, trade secrets and similar
intellectual property as critical to our success, and rely on a combination of
patent, trademark, copyright, and trade secret laws to protect our proprietary
rights. As of June 30, 2000, we held 30 U.S. patents on various aspects of our
technology, with expiration dates ranging from 2013 to 2018. Our 1T-SRAM
technology incorporates technology covered by seven patents. We currently have
20 pending U.S. patent applications, and have received notices of allowance with
respect to two of these applications. We also hold eight foreign patents with
expiration dates ranging from 2009 to 2019, and 21 pending foreign patent
applications. There can be no assurance that others will not independently
develop similar or competing technology or design around any patents that may be
issued to us, or that we will be able to be able to enforce our patents against
infringement.
The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. While we have not received formal
notice of any infringement of the rights of any third party, questions of
infringement in the semiconductor field involve highly technical and subjective
analyses. Litigation may be necessary in the future to enforce our patents and
other intellectual property rights, to protect our trade secrets, to determine
the validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity, and there can be no assurance that we
would prevail in any future litigation. Any such litigation,
38
<PAGE>
whether or not determined in our favor or settled by us, would be costly and
would divert the efforts and attention to our management and technical personnel
from normal business operations, which would have a material adverse effect on
our business, financial condition and results of operations. Adverse
determinations in litigation could result in the loss of our proprietary rights,
subject us to significant liabilities, require us to seek licenses from third
parties or prevent us from licensing our technology, any of which could have a
material adverse effect on our business, financial condition and results of
operations. Moreover, the laws of certain foreign countries in which our
technology is or may in the future be licensed may not protect our intellectual
property rights to the same extent as the laws of the United States, thus
increasing the possibility of infringement of our intellectual property.
SALES AND MARKETING
We market our technology to semiconductor companies, electronic product
manufacturers, foundries and design companies. An important element of our
strategy is to offer our 1T-SRAM technology broadly in order to establish it as
the standard in the embedded memory market. In order to focus our sales and
marketing resources, we generally enter into a license when the licensee has
identified an initial product that will utilize our technology. The licensee can
then incorporate the technology into additional products under the terms of the
original license.
Our licensees and co-marketers act as distribution channels by incorporating our
technology into their integrated circuits or manufacturing processes. Our
licensees include semiconductor manufacturers, fabless semiconductor companies
and electronic product manufacturers. Our co-marketers include foundries,
intellectual property companies and design service companies, as they all can
help proliferate our technology to semiconductor manufacturers and fabless
semiconductor companies. Semiconductor manufacturers and fabless semiconductor
companies can also use our technology for their customers, electronic product
manufacturers. They introduce our technology to their customers, who in turn
could incorporate our technology into their future product specifications. These
distribution channels reduce our need to build a large, internal sales force.
Below is an illustration of our sales and marketing channels:
[EDGAR REPRESENTATION OF PRINTED GRAPHIC]
[SALES CHANNEL STRUCTURE DIAGRAM]
[GRAPHIC DEPICTS OUR SALES CHANNEL STRUCTURE. THE MOSYS LOGO, LOCATED AT THE
TOP OF THE DIAGRAM, HAS ARROWS POINTING TO THREE SALES CHANNELS, REPRESENTED
BY THREE BOXES LABELED "FOUNDRIES AND IP/DESIGN SERVICE COMPANIES",
"SEMICONDUCTOR MANUFACTURERS" AND "FABLESS SEMICONDUCTOR COMPANIES". THESE
THREE BOXES HEAD VERTICAL COLUMNS ACROSS THE PAGE, FROM LEFT TO THE RIGHT.
THE LEFT BOX LABELED "FOUNDRIES AND IP/DESIGN SERVICE COMPANIES" HAS LOGOS
FOR TSMC, UMC AND VIRAGE LOGIC UNDER IT, AND ARROWS POINTING TOWARD THE OTHER
TWO COLUMNS. THE MIDDLE BOX LABELED "SEMICONDUCTOR MANUFACTURERS" HAS LOGOS
FOR LSI LOGIC AND NEC UNDER IT, AND ARROWS POINTED TOWARD THE COLUMN LABELED
"FABLESS SEMICONDUCTOR COMPANIES". THE RIGHT BOX LABELED "FABLESS
SEMICONDUCTOR COMPANIES" HAS LOGOS FOR ALLAYER COMMUNICATIONS, GALILEO AND
PIXELWORKS BELOW IT. THE MOSYS LOGO AND THE THREE SALES CHANNEL COLUMNS ALSO
POINT TO A BOX AT THE BOTTOM OF THE PAGE, TITLED "ELECTRONIC PRODUCT
MANUFACTURERS".]
Our sales and marketing efforts also include technical support for our licensees
and customers, publishing articles in trade and research journals and
participation in trade shows and other traditional marketing activities. As of
June 30, 2000, our sales and marketing staff included eight people, with six
based in our corporate
39
<PAGE>
headquarters in Sunnyvale, California, one based in our sales office in Melrose,
Massachusetts and one based in Helsinki, Finland. We also have 17 stand-alone
product representatives in North America and Asia.
COMPETITION
In order to remain competitive, we believe we must continue to provide
higher-density, lower-power-consumption, higher-speed and lower-cost technology
solutions to the semiconductor industry and electronic product manufacturers. We
believe that the principal competitive factors in our industry are -
- density and cost;
- power consumption;
- speed;
- portability to different manufacturing processes;
- scalability to different manufacturing process generations;
- interface requirements; and
- the ease with which technology can be customized for and incorporated into
customers' products.
Our customers and prospective customers can meet their current needs for
embedded memory using other memory solutions with different cost and performance
parameters. Many companies provide these solutions, including several which are
much larger and have greater access to financial, technical and other resources.
We believe that our 1T-SRAM technology offers a high degree of overall
performance improvement over traditional SRAM. We have spent significant time
and resources in developing our 1T-SRAM memory architecture. We believe that
many of the companies offering other solutions could seek to license our
technology because the cost of a license from us would be lower than the cost
and time required to independently develop a directly competing technology.
MANUFACTURING
We have designed the architecture of our 1T-SRAM technology so that our
licensees can manufacture it in standard logic process as well as other widely
used embedded memory processes.
For our stand-alone memory products, we implement a fabless manufacturing
strategy by using relationships with independent foundries. Today, we rely
predominantly upon TSMC for our stand-alone product manufacturing. We also use
domestic and offshore subcontractors for assembly, testing and packaging.
Assembly and test services provided by these subcontractors comply with the
requirements of ISO-9000.
EMPLOYEES
As of June 30, 2000, we had 37 full time employees, consisting of 22 in research
and development, eight in sales and marketing, four in finance and
administration and three in operations management. We believe our future success
will depend, in part, on our ability to continue to attract and retain qualified
technical and management personnel, particularly highly skilled design engineers
involved in new product development, for whom competition is intense. Our
employees are not represented by any collective bargaining unit and we have not
experienced any work stoppage. We believe that our employee relations are good.
FACILITIES
Our principal administrative, sales, marketing, support and research and
development functions are located in a leased facility in Sunnyvale, California.
We currently occupy approximately 19,500 square feet of space in the Sunnyvale
facility, the lease for which extends through June 2005. We hold an option to
extend our lease for three additional years. We believe that our existing
facility is adequate to meet our current needs.
LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings.
40
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors and
executive officers of our company as of July 31, 2000.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
NAME AGE POSITION
------------------------------------- -------- ------------------------------------------------------------
<S> <C> <C>
Fu-Chieh Hsu......................... 44 Chairman of the Board, President and Chief Executive Officer
Wing-Yu Leung........................ 45 Executive Vice President and Chief Technical Officer,
Director and Secretary
Mark-Eric Jones...................... 45 Vice President and General Manager - Intellectual Property
F. Judson Mitchell................... 64 Vice President, Finance & Administration, Chief Financial
Officer
Andre Hassan......................... 40 General Manager - Discrete Products
Carl E. Berg(1)(2)................... 61 Director
Denny R. S. Ko(1)(2)................. 60 Director
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee.
FU-CHIEH HSU has served as our Chairman of the Board since September 1991 and as
our President and Chief Executive Officer since April 1992. Dr. Hsu also served
as our Chief Financial Officer from April 1992 until May 1996. Prior to joining
our company, Dr. Hsu was the President and Chairman of the Board of Myson
Technology, Inc., a developer of high performance semiconductor products from
August 1990 to August 1991. From May 1985 to August 1990, Dr. Hsu served as Vice
President and Chief Technology Officer of Integrated Device Technology, Inc., or
IDT, a developer of high performance semiconductor products and modules.
Dr. Hsu holds a B.S. in electrical engineering from National Taiwan University
and an M.S. and Ph.D. in electrical engineering from the University of
California at Berkeley.
WING-YU LEUNG has served as our Vice President, Engineering and Chief Technical
Officer and as a member of our board of directors since April 1992. Dr. Leung
also served as our Secretary from April 1992 until May 1996 and again since
May 1997. Prior to joining our company, Dr. Leung served as a technology
consultant to several high technology companies, including Rambus, Inc., or
Rambus, a developer of a high-speed chip-to-chip interface technology. Prior to
that time, Dr. Leung served as a member of the technical staff of Rambus, and as
a senior engineering manager at IDT, where he managed and participated in
circuit design activities. Dr. Leung holds a B.S. in electrical engineering from
the University of Maryland, an M.S. in electrical engineering from the
University of Illinois and a Ph.D. in electrical engineering and computer
science from the University of California at Berkeley.
MARK-ERIC JONES has served as our Vice President and General Manager -
Intellectual Property since October 1998. Prior to joining our company,
Mr. Jones served as Director, Intellectual Property Division of Mentor Graphics
Corporation., a developer of EDA tools and provider of intellectual property
from January 1996 to September 1998. Mr. Jones founded 3SOFT, Inc., a developer
of intellectual property and served as its President and Chief Executive Officer
from May 1976 to January 1996. Mr. Jones holds a M.A. from Trinity College,
University of Cambridge, United Kingdom.
F. JUDSON MITCHELL has served as our Vice President of Finance and
Administration and Chief Financial Officer since July 2000. Prior to joining our
company, Mr. Mitchell served as Vice President and Chief Financial Officer of
Wavespan, Inc., a manufacturer of microwave radio links from November 1997 until
December 1999. Prior to that time, Mr. Mitchell served as a financial consultant
to high technology companies. Mr. Mitchell also served as Vice President and
Chief Financial Officer of the DSP Group from August 1993 until September 1995.
Mr. Mitchell has also served as Chief Financial Officer of Adaptec, Inc., IXYS
Corporation and Finnigan
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<PAGE>
Corporation. Mr. Mitchell holds a B.S. in Mechanical Engineering and an A.B. in
Liberal Arts from Columbia College in New York and an M.B.A. from the Stanford
Graduate School of Business.
ANDRE HASSAN has served as our General Manager - Discrete Products since
January 1999. Prior to this, Mr. Hassan was Director of Marketing from
February 1996 to December 1998. Prior to joining our company, Mr. Hassan served
as Strategic Marketing Manager for S3, Inc., a developer of semiconductor
multimedia products from June 1994 to January 1996. Mr. Hassan holds a B.S. in
electrical engineering from Worcester Polytechnic Institute.
CARL E. BERG has served as a member of our Board of Directors since
September 1992. Since 1997, Mr. Berg has served as the Chairman of the Board and
Chief Executive Officer of Mission West Properties, Inc., a real estate
investment trust. Mr. Berg is also the President of the sole General Partner of
West Coast Venture Capital Ltd. Mr. Berg has been actively engaged in the
ownership, development and management of industrial real estate and in venture
capital investment for over 30 years. He currently serves as a member of the
board of directors for IDT, Valence Technology, Inc., a developer of advanced
rechargeable battery technology, and Videonics, Inc., a developer of
post-production video equipment. Mr. Berg holds a B.A. in business from the
University of New Mexico.
DENNY R. S. KO has served as a Member of our Board of Directors since May 1994.
Dr. Ko has been managing general partner of DynaFund Ventures, a venture capital
firm, since August 1997. Dr. Ko also serves as Chairman of the Board of Dynamic
Technologies, Inc., a technical research, engineering and consulting company,
which he founded in 1976. Dr. Ko holds a B.S. in mechanical engineering from
National Taiwan University, an M.S. in aeronautical sciences from the University
of California at Berkeley and a Ph.D. in aeronautics and applied mathematics
from the California Institute of Technology.
DIRECTOR COMPENSATION
Members of our board of directors do not receive compensation for their services
as directors. Under our 1996 stock plan we have authorized the grant of options
to purchase 10,000 shares of our common stock in each of the fiscal years 1997
through 2000 to our two non-employee directors. Each of these grants vests at a
rate of 1/12th of the shares each month in the fiscal year.
Our 2000 employee stock option plan provides that options will be granted to our
non-employee directors pursuant to an automatic, nondiscretionary grant
mechanism. Beginning with the 2001 annual meeting, each non-employee director
will receive automatically a grant of an option to purchase 10,000 shares of our
common stock at the first meeting of our board of directors after each annual
meeting of stockholders. Each option will be granted at the fair market value of
the common stock on the date of grant. The options granted to non-employee
directors will vest at a rate of 1/12th of the shares each month following the
date of grant. No additional options will be granted to our non-employee
directors in any year for which the director has already been granted options in
a like or greater number.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee is responsible for determining salaries, incentives
and other forms of compensation for directors, officers and other employees, and
administers our incentive compensation and benefit plans. The compensation
committee consists of Carl Berg and Denny Ko. Dr. Hsu participates in all
discussions and decisions regarding salaries and incentive compensation for all
of our employees and consultants, except that he is excluded from discussions
regarding his own salary and incentive compensation. During 1999, none of our
executive officers served as a member of the board of directors or compensation
committee of any entity that had one or more of its executive officers serving
as a member of our board of directors or compensation committee.
42
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth in summary form information concerning the
compensation of our Chief Executive Officer and our other executive officers,
referred to in this prospectus as the named executive officers, whose salary and
bonus for 1999 exceeded $100,000 and who were serving as officers as of the end
of 1999. Mr. Voll resigned in July 2000.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------- -----------------------------
NAME SALARY SECURITIES UNDERLYING OPTIONS
------------------------------------------------------------ -------------------- -----------------------------
<S> <C> <C>
Fu-Chieh Hsu................................................ $ 210,000 35,000
Wing-Yu Leung............................................... 175,002 30,000
Mark-Eric Jones............................................. 170,000 -
Mark Voll................................................... 130,000 15,000
Andre Hassan................................................ 110,539 60,000
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants made
to each of the named executive officers in 1999. Each stock option was awarded
under our 1996 stock plan and vests in 12 equal installments from the
executive's respective vesting commencement date or dates. The per share
purchase price of all of these options represents our board of directors'
determination of the fair market value of our common stock on the grant date.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES EXERCISE ---------------------
NAME GRANTED IN 1999 PRICE EXPIRATION DATE 5% 10%
-------------------------------- ---------- ---------- -------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fu-Chieh Hsu.................... 35,000 6.3% $ 1.00 May 17, 2009 $22,011 $55,781
Wing-Yu Leung................... 30,000 5.4 1.00 May 17, 2009 18,867 47,812
Mark-Eric Jones................. - - - - - -
Mark Voll....................... 15,000 2.7 1.00 May 17, 2009 9,433 23,906
Andre Hassan.................... 60,000 10.8 1.00 May 17, 2009 37,734 95,625
</TABLE>
The percentage of total options granted is based upon options to purchase an
aggregate of 554,000 shares of common stock granted during the fiscal year ended
December 31, 1999 to our employees, including the named executive officers and
outside directors.
Amounts described under the heading "Potential Realizable Value at Assumed
Annual Rates of Stock Price Appreciation for Option Term" were calculated by
assuming that the market price of our common stock appreciates 5% and 10% each
year from the date of grant of the options until the expiration of the options.
These assumed annual rates of appreciation were used in compliance with the
rules of the Securities and Exchange Commission and are not intended to forecast
future price appreciation of our common stock. The actual value realized from
the options could be substantially higher or lower than the values reported
above, depending upon the future appreciation or depreciation of the common
stock during the option period and the timing of the exercise of the options.
Unless the executive officer remains employed until he vests in the option
shares and the market price of the common stock appreciates over the option
term, no value will be realized from the option grants made to the executive
officers.
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<PAGE>
The grants to Drs. Hsu and Leung have a vesting commencement date of July 1,
2002. We made four grants to Mr. Hassan in 1999, in the amounts of 6,000 shares,
19,000 shares, 25,000 shares and 10,000 shares. The vesting commencement dates
for these grants are February 12, 1999, 2000, 2001 and 2002, respectively. The
grant of an option to purchase 15,000 shares to Mr. Voll had a vesting
commencement date of April 6, 2002. Due to Mr. Voll's resignation in July 2000,
this option has lapsed without exercise.
FISCAL YEAR END OPTION AND VALUES
None of our named executive officers exercised stock options in the fiscal year
ended December 31, 1999. The following table sets forth information concerning
the number and value of unexercised options held by each of our named executive
officers on December 31, 1999. The value of "in-the-money" options represents
the positive spread between the exercise price of the options and the fair
market value of our common stock. There was no public market for our common
stock as of December 31, 1999. Accordingly, for the purpose of this table only,
the fair market value on December 31, 1999 is deemed to be the initial public
offering price of $ per share.
Pursuant to the option agreements regarding these grants, option holders may
elect to exercise all or any part of their vested and unvested options at any
time. Any shares of common stock received by the optionee on exercise of
unvested options become subject to our right of repurchase pursuant to a
restricted stock purchase agreement. The number of shares so obtained that are
subject to our right of repurchase decreases over time in accordance with the
vesting schedule applicable to the unvested options exercised. Accordingly, all
options granted to the named executive officers under the 1996 plan are deemed
to be exercisable for the purpose of the following table.
<TABLE>
<CAPTION>
----------------------------------------------------------------
NUMBER OF SHARES OF COMMON
STOCK UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR END OPTIONS AT YEAR END
---------------------------- ---------------------------------
<S> <C> <C>
Fu-Chieh Hsu...................................... 140,500 $
Wing-Yu Leung..................................... 100,000
Mark-Eric Jones................................... 350,000
Mark Voll......................................... 165,000
Andre Hassan...................................... 201,000
</TABLE>
Of the options to purchase 165,000 shares granted to Mr. Voll, options to
purchase shares remained exercisable at July 31, 2000.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION
Our bylaws provide that we will indemnify our directors and executive officers
and may indemnify our other officers, employees and other agents to the fullest
extent permitted by Delaware law. Our bylaws allow us to enter into
indemnification agreements with our directors and officers and to purchase
insurance for any person whom we are required or permitted to indemnify. We are
presently in the process of obtaining a policy of directors' and officers'
liability insurance that insures these people against the cost of defense,
settlement or payment of a judgment under certain circumstances.
We intend to enter into agreements with our directors and executive officers
regarding indemnification. Under these agreements, we will indemnify them
against amounts actually and reasonably incurred in connection with an actual or
threatened proceeding if they are made a party because of their role as a
director or officer. We will be obligated to pay these amounts only if the
officer or director acted in good faith and in a manner that he reasonably
believed to be in or not opposed to our best interest. With respect to any
criminal proceeding, we are obligated to pay these amounts only if the officer
or director had no reasonable cause to believe his conduct was unlawful.
44
<PAGE>
In addition, our certificate of incorporation filed in connection with this
offering provides that the liability of our directors for monetary damages shall
be eliminated to the fullest extent permissible under Delaware law. This
provision does not eliminate a director's duty of care. Each director will
continue to be subject to liability for -
- breaches of the director's duty of loyalty to us;
- acts or omissions not in good faith or involving intentional misconduct or
knowing violations of law;
- acts or omissions that the director believes to be contrary to the best
interests of our company or our stockholders;
- any transaction from which the director derived an improper personal
benefit;
- improper transactions between the director and our company;
- improper distributions to stockholders; and
- improper loans to directors and officers.
There is no pending litigation or proceeding involving any of our directors or
officers for which indemnification is being sought, nor are we aware of any
threatened claim that could result in indemnification of any director or
officer.
BENEFIT PLANS
2000 EMPLOYEE STOCK OPTION PLAN
Our 2000 employee stock option plan, or our 2000 plan, has been adopted by our
board of directors and will be approved by our stockholders in connection with
our reincorporation in the state of Delaware.
A total of 5,000,000 shares of common stock have been reserved for issuance
under the 2000 plan. In addition, the 2000 plan provides for an annual increase
in the number of shares reserved under the plan on January 1 of each year, equal
to the lesser of 500,000 shares, two percent of our outstanding shares of common
stock on such date or a lesser amount determined by the board of directors. The
2000 plan provides for grants to employees, including officers and employee
directors, of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, or the code, and for grants of
nonstatutory stock options to employees, including officers and employee
directors, and to consultants. The purpose of the 2000 plan is to attract and
retain the best available personnel and to encourage stock ownership by
employees, officers, and consultants in order to give them a greater personal
stake in our success. The 2000 plan is administered by the board of directors or
by a committee appointed by the board, which identifies optionees and determines
the terms of options granted, including the exercise price, number of shares
subject to the option and the timing and terms of exercise.
The term of options granted under the 2000 plan may not exceed ten years. The
term of all incentive stock options granted to an optionee who, at the time of
grant, owns stock representing more than 10% of the voting power of all classes
of our stock may not exceed five years. Generally, 25% of the options granted
under the 2000 plan will vest and become exercisable on the first anniversary of
the date of grant, and 1/48th of the options will vest and become exercisable
each month thereafter.
The exercise price of incentive stock options granted under the 2000 plan must
be at least equal to the fair market value of the shares on the date of grant.
The exercise price of nonstatutory stock options granted under the 2000 plan
will be determined by the board of directors, but in no event will be less than
85% of the fair market value of the common stock on the date of grant. The
exercise price of any incentive stock option or nonstatutory stock option
granted to a ten-percent stockholder must equal at least 110% of the fair market
value of the common stock on the date of grant.
45
<PAGE>
1996 STOCK PLAN
Our 1996 stock plan, or the 1996 plan, was adopted by the board of directors of
our California predecessor and approved by its shareholders in May 1996. The
1996 plan will be assumed in connection with our Delaware reincorporation prior
to the effectiveness of this offering. As of June 30, 2000, options to purchase
1,967,813 shares of common stock were outstanding under the 1996 plan. After
this offering, we do not intend to make additional option grants under the 1996
plan.
The terms of the 1996 plan are generally consistent with the terms of the 2000
plan described above. In making grants under the 1996 plan, the board of
directors gave all optionees the right to exercise their options, including
unvested options, immediately, subject to the optionee's execution and delivery
of a restricted stock purchase agreement. This agreement gives us the right to
repurchase all shares obtained by an optionee from the early exercise of
unvested options upon the termination of the optionee's employment or consulting
relationship with our company. The repurchase price of these shares in that
event is equal to the exercise price of the underlying option. Our repurchase
right lapses as to these shares according to the vesting schedule applicable to
the underlying option. As of June 30, 2000, no shares obtained by exercise of
unvested options under the 1996 plan were outstanding and subject to our right
of repurchase.
1992 STOCK OPTION PLAN
Our 1992 stock option plan, or the 1992 plan, was adopted by the board of
directors of our California predecessor and approved by its shareholders in
August 1992. No options have been granted under the 1992 plan since 1996. The
1992 plan will be assumed in connection with our Delaware reincorporation prior
to the effectiveness of this offering. As of June 30, 2000, options to purchase
348,300 shares of our common stock were outstanding under the 1992 plan. As was
done under the 1996 plan, the board of directors gave all optionees under the
1992 plan the right to exercise all options immediately, including unvested
options, subject to the optionee's execution and delivery of a restricted stock
purchase agreement. As of June 30, 2000, no shares obtained by exercise of
unvested options under the 1992 plan were outstanding and subject to our right
of repurchase.
The terms of the 1992 plan are generally consistent with the terms of the 2000
plan. The 1992 plan gave the board full discretion in establishing the vesting
schedule of options granted under it. All outstanding options granted under the
1992 plan have fully vested as of June 30, 2000.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 employee stock purchase plan, or the purchase plan, has been adopted by
the board of directors and will be approved by our stockholders in connection
with our Delaware reincorporation. A total of 200,000 shares of common stock
will be reserved for issuance under the purchase plan. In addition, the purchase
plan provides for an annual increase in the number of shares reserved under the
plan on January 1 of each year, equal to the lesser of 100,000 shares, one
percent of our outstanding shares of common stock on such date or a lesser
amount determined by the board of directors. The purchase plan, which is
intended to qualify under Section 423 of the code, will be administered by the
board of directors or a committee appointed by the board of directors.
Employees, including officers and employee directors but excluding 5%
stockholders, are eligible to participate if they are customarily employed for
at least 20 hours per week and for more than five months in any calendar year.
The purchase plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 10% of an employee's compensation.
Employees will be permitted to invest a maximum of $25,000 in any offering
period.
The purchase plan will be implemented in a series of overlapping offering
periods, each to be approximately 12 months in duration. The initial offering
period under the purchase plan will begin on the pricing date of this offering
and expires on the third enrollment date, which is the first day of the third
offering period. Offering periods begin on the first trading day on or after
January 1 and July 1 of each year and end on the last trading
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day in the period ending twelve months later. Each participant will be granted
an option on the first day of the offering period, and such option will be
automatically exercised on the last day of each offering period. The purchase
price of the common stock under the purchase plan will be equal to 85% of the
lesser of the fair market value per share of common stock on the start date of
the offering period or on the date on which the option is exercised. Employees
may end their participation in an offering period at any time during that
period, and participation ends automatically on termination of employment with
us. The purchase plan will terminate in June 2010, unless sooner terminated by
the board of directors.
As of the date of this prospectus, no shares have been issued under the purchase
plan.
401(k) PLAN
We have adopted a tax-qualified employee savings and retirement plan, referred
to in this prospectus as the 401(k) plan. All full-time employees who are at
least 21 years old are eligible to participate as of their date of hire.
Eligible employees may elect to defer between one percent and fifteen percent of
their compensation in the 401(k) plan, subject to the statutorily prescribed
annual limit. We may make matching contributions on behalf of all participants
in the 401(k) plan in an amount determined by our board of directors. We also
may make discretionary profit-sharing contributions in amounts determined by the
board of directors, subject to statutory limitations on contributions made by
employees and employers under such plans. Employees must complete a minimum of
500 hours of service during a year to be eligible for profit-sharing
contributions.
Matching contributions and all earnings on these contributions are subject to a
vesting schedule, providing for ratable vesting in equal annual installments
over five years. All other contributions and earnings are fully vested at all
times. Employees may borrow from the 401(k) plan, and may request withdrawal
from their account in the case of hardship or on attainment of age 59 1/2.
The 401(k) plan is intended to qualify under Sections 401 and 501 of the
Internal Revenue Code of 1986, as amended, so that contributions by employees or
by us to the 401(k) plan, and income earned on plan contributions, are not
taxable to employees until withdrawn from the 401(k) plan, and so that
contributions by us, if any, will be deductible by us when made. The trustee
under the 401(k) plan, at the direction of each participant, invests the assets
of the 401(k) plan in any of a number of investment options.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
We currently have confidentiality and invention assignment agreement in place
with the named executive officers. We do not, however, have any compensatory
plan or arrangement with the named executive officers that is activated upon the
resignation, termination or retirement of any of these executive officer or upon
a change in control of our company.
The employment offer letter between us and our Chief Financial Officer, F.
Judson Mitchell, provides for the immediate vesting of all stock options granted
to Mr. Mitchell, which are exercisable for an aggregate of 250,000 shares of
common stock, upon the termination of Mr. Mitchell's employment without cause in
connection with or within 12 months following a change of control of our
company. In addition, the letter provides that Mr. Mitchell will receive a
severance payment of one fourth of his annual salary if he is terminated at any
time without cause. The letter defines cause to mean an intentional, material
act of fraud or dishonesty in connection with his employment, his conviction of
a felony, his willful act injurious to us or his willful failure to perform
substantially his duties.
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RELATED PARTY TRANSACTIONS
FINANCING TRANSACTIONS
In 1996, we entered into note and warrant purchase agreements with two of our
directors, Denny Ko and Carl Berg, certain preferred stockholders and other
unrelated parties, pursuant to which we borrowed an aggregate of $13.1 million.
The notes had an interest rate of 8.25% per annum and a maturity date of
May 31, 1998. Each noteholder received a warrant to purchase a number of shares
of our common stock determined by dividing half the principal amount of the note
by the exercise price of the warrant at the time of subscription. The exercise
price ranged from $6.50 to $8.50. These warrants had an expiration date of
May 31, 1998.
In June 1997, upon cancellation of the note and warrant purchase agreements,
$6,703,200 of the principal was converted into Series F preferred stock at a
conversion price of $5.50 per share. In connection with this conversion, all of
the outstanding warrants held by the noteholders were exchanged for new
warrants. We issued 196,037 shares of Series F preferred stock and a warrant to
purchase 196,037 shares of common stock to West Coast; 588,848 shares of
Series F preferred stock and a warrant to purchase 588,848 shares of common
stock to DynaTech Capital; and 51,012 shares of Series F preferred stock and a
warrant to purchase 51,012 shares of common stock to Denny Ko. Carl Berg is the
President and sole general partner of West Coast. Denny Ko is the managing
general partner of DynaFund Ventures and the Chairman of the Board of DynaTech
Capital.
In May 1998, we repaid the remaining principal balance of $6,418,000 and the
accrued interest owed under the notes.
TRANSACTIONS WITH M-ONE
In 1993, we formed M-One Technology Corporation, or M-One, as a wholly-owned
subsidiary incorporated under the laws of the Republic of China. The intended
business activities of M-One were to manufacture and sell our products under two
licenses from us. We contributed $1.5 million in cash to M-One in connection
with its formation. Subsequently, M-One paid us $700,000 in cash for the license
of some of our technology.
In 1994, we spun off M-One to our stockholders. As a result, our principal
stockholders, including Drs. Hsu and Leung, became the principal stockholders of
M-One. We assumed responsibility for the intended business activities, including
the production and sale of its products, and liabilities of M-One in 1995. Due
to continued operating losses, significant accumulated deficits and difficult
market conditions, M-One ceased its operations in 1997 and terminated all of its
employees.
In October 1995 and April 1996, Tseng Labs, Inc. loaned M-One $1.5 million and
$5.0 million, respectively, in order to secure M-One's obligation to make
available to it certain of our products that M-One was manufacturing. We
guaranteed M-One's obligations under these loans, and in connection with the
$5.0 million April 1996 loan, we granted Tseng Labs a conversion right that
would permit it to purchase up to $2.5 million of our common stock at a per
share price of $6.50 prior to April 22, 1997, and $8.50 thereafter. In
March 1997, we repaid in full the loans owed to Tseng Labs and the corresponding
conversion right held by Tseng Labs was terminated.
LOANS TO EXECUTIVE OFFICERS
On January 13, 1995 and June 13, 1995, in connection with the formation of
M-One, we made loans in the form of secured, full-recourse promissory notes,
each with an annual interest rate of 7% per year compounded annually, for the
principal amounts of $125,375 and $130,000, respectively, to Fu-Chieh Hsu and
Wing-Yu Leung. These loans each had a maturity date of the fifth anniversary of
the date of issuance. In December 1997, Drs. Hsu and Leung repaid in full their
respective notes.
TRANSACTIONS WITH TSMC
We and M-One entered into an option agreement with TSMC in November 1995 to
secure manufacturing capacity of TSMC. Pursuant to the option agreement, we
issued two promissory notes to TSMC, one in the amount of
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$29.4 million with a maturity date of November 1996 and one in the amount of
$5.9 million with a maturity date of June 1997.
On September 23, 1996, we amended the agreement. Under the terms of this
amendment, the promissory notes referenced above were canceled and we issued to
TSMC six new promissory notes totaling $23.4 million with varying due dates
ranging from 1997 through 2000. These notes did not bear interest until they
became due, at which date a rate of 10% per annum was to be applied on any
unpaid amounts. We paid $840,000 to TSMC in 1997 in accordance with the amended
agreement. In connection with this amendment, we issued TSMC a warrant to
purchase 3,392,310 shares of our common stock at $6.50 per share.
On January 1, 1998, we again amended the option agreement to cancel the
promissory notes signed under the 1996 amendment. We issued to TSMC five new
promissory notes totaling $22.5 million with due dates ranging from
November 1998 through June 2001. The other terms of the original agreement
remained substantially the same.
On August 6, 1998, we and TSMC terminated the option agreement, as amended,
including all obligations and rights of the parties under the agreement and all
warrants to purchase our common stock held by TSMC. In connection with this
termination, we issued to TSMC a warrant to purchase 1,200,000 shares of our
common stock at an exercise price of $6.50. TSMC may exercise this warrant any
time prior to August 6, 2002.
In March 1999, we entered in a development and promotion agreement with TSMC.
This agreement required us to develop a demonstration macro for TSMC's
0.25-micron standard logic process. We completed our obligations under this
agreement in the first quarter of 2000, for which TSMC paid us $60,000.
In October 1999, we signed a memorandum of understanding, or MOU, with TSMC and
Virage Logic. The MOU sets the parameters for a future agreement requiring us to
develop a compiler for TSMC's 0.18-micron and 0.15-micron standard logic
manufacturing processes in conjunction with Virage Logic. In connection with the
development of the compiler, TSMC has agreed to pay $250,000 to us.
In addition to the above agreements, we have paid TSMC $13.4 million, $24.1
million, $7.8 million and $1.5 million in fiscal 1997, 1998, 1999 and the first
six months of 2000, respectively, for the purchase of wafers.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership of
common stock as of July 31, 2000 for -
- each person known to our management to beneficially own more than 5% of
our outstanding common stock,
- each of our directors,
- each of the named executive officers, and
- all executive officers and directors as a group.
Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934, and includes all shares over which the
beneficial owner exercises voting or investment power. Options and warrants to
purchase common stock that are presently exercisable or exercisable within
60 days of July 31, 2000 and are included in the total number of shares
beneficially owned for the person holding those options or warrants are
considered outstanding for the purpose of calculating percentage ownership of
the particular holder. Except as otherwise indicated, and subject to community
property laws where applicable, we believe, based on information provided by
these persons, that the persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
PERCENT OWNERSHIP
NUMBER OF SHARES --------------------------------
NAME AND ADDRESS OF PRINCIPAL STOCKHOLDERS BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
------------------------------------------------------------ ------------------ --------------- --------------
<S> <C> <C> <C>
FIVE-PERCENT STOCKHOLDERS
West Coast Venture Capital Limited, L.P.(1)................. 3,068,839 13.4% %
c/o Carl E. Berg
10050 Bandley Drive
Cupertino, CA 95014
Integrated Device Technology................................ 2,602,500 11.5
c/o Alan F. Krock
2975 Stender Way
Santa Clara, CA 95054
DynaTech Capital, LLC(2).................................... 2,647,696 11.4
c/o Denny Ko
21311 Hawthorne Blvd.
Suite 300
Torrance, CA 90503
Taiwan Semiconductor Manufacturing Co. Ltd.(3).............. 1,200,000 5.0
c/o Julian Kuo
No. 121, Park Ave. 3
Science-Based Industrial Park
Hsincho, Taiwan
OFFICERS AND DIRECTORS
Fu-Chieh Hsu(4)............................................. 4,105,000 18.0
Wing-Yu Leung(5)............................................ 3,955,000 17.4
F. Judson Mitchell(6)....................................... 250,000 1.1
Mark-Eric Jones(7).......................................... 350,000 1.5
Andre Hassan(8)............................................. 201,000 0.9
Carl E. Berg(9)............................................. 3,128,839 13.8
Denny Ko(10)................................................ 2,758,708 11.8
All directors and executive officers as a group
(7 persons)(11)........................................... 14,748,547 59.8% %
</TABLE>
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(1) Includes a warrant to purchase 196,037 shares of our common stock issued in
connection with our issuance of Series F preferred stock in November 1997.
(2) Includes a warrant to purchase 588,848 shares of our common stock granted
in connection with our issuance of Series F Preferred Stock in
November 1997.
(3) Represents a currently exercisable warrant to purchase 1,200,000 shares of
our common stock, granted in connection with the termination of an option
agreement and the surrender of other outstanding warrants.
(4) Includes options to purchase 140,500 shares of common stock which are
presently exercisable or will become exercisable within 60 days after
July 31, 2000. Also includes 480,000 shares of common stock held by
Dr. Hsu as trustee for trusts established for the benefit of Dr. Hsu's
children and 40,000 shares of common stock held directly by such children.
(5) Includes options to purchase 100,000 shares of common stock which are
presently exercisable or will become exercisable within 60 days after
July 31, 2000. Also includes 600,000 shares of common stock held by
Dr. Leung as trustee of trusts established for the benefit of Dr. Leung's
children.
(6) Represents options to purchase 250,000 shares of common stock which are
presently exercisable or will become exercisable within 60 days after
July 31, 2000.
(7) Represents options to purchase 350,000 shares of common stock which are
presently exercisable or will become exercisable within 60 days after
July 31, 2000.
(8) Represents options to purchase 201,000 shares of common stock which are
presently exercisable or will become exercisable within 60 days after
July 31, 2000.
(9) Includes options to purchase 60,000 shares of common stock which are
presently exercisable or will become exercisable within 60 days after
July 31, 2000. Also includes 2,872,802 shares issued to West Coast and
warrants to purchase 196,037 shares of common stock. Mr. Berg is a director
and the President of West Coast Venture Capital, Inc., the sole general
partner of West Coast. As such, he may be deemed to own beneficially all
shares owned by West Coast. Mr. Berg also is a limited partner of West
Coast. Mr. Berg disclaims beneficial ownership of all shares held by West
Coast except to the extent of his pecuniary interest therein. Mr. Berg is a
director of IDT, and disclaims beneficial ownership of all shares held by
IDT. Excludes 5,000 shares owned by Mr. Berg's wife and 5,000 shares owned
by Mr. Berg's daughter, as to which he disclaims beneficial ownership.
(10) Includes options to purchase 60,000 shares of common stock which are
presently exercisable or will become exercisable within 60 days after
July 31, 2000. Includes 51,012 shares issuable to Mr. Ko upon exercise of
outstanding warrants to purchase common stock. Also includes 2,058,848
shares held by DynaTech Capital and an additional 588,848 shares issuable
to DynaTech Capital upon exercise of outstanding warrants to purchase
common stock.
(11) Includes options to purchase 1,161,500 shares of common stock which are
presently exercisable or will become exercisable within 60 days after
July 31, 2000 and warrants to purchase 835,897 shares of ccommon stock
which are presently exercisable.
Unless indicated otherwise, the address of each person listed in the table is
c/o Monolithic System Technology, Inc., 1020 Stewart Drive, Sunnyvale,
California 94086.
Under the terms of their respective stock option agreements, all vested and
unvested options held by our officers and directors can be exercised
immediately. Shares obtained on exercise of unvested options are subject to our
right of repurchase at cost. Shares are released from this right of repurchase
according to the corresponding option vesting schedule.
The percentage of beneficial ownership before the offering is based on
22,676,161 shares, consisting of 9,944,715 shares of common stock outstanding as
of July 31, 2000 and 12,731,446 shares issuable upon conversion of all shares of
preferred stock outstanding as of July 31, 2000. The percentage of beneficial
ownership after the offering is based on shares, including shares
sold by us in this offering.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The following description of our capital stock and provisions of our certificate
of incorporation and bylaws is a summary only and not a complete description.
The descriptions of the common stock and preferred stock reflect changes to our
capital structure that will occur on the effectiveness of our reincorporation in
Delaware, which occur prior to this offering, including the automatic conversion
of all outstanding preferred stock into common stock.
Upon completion of the offering, our authorized capital stock will consist of
120,000,000 shares of common stock, par value $0.01 per share, and 20,000,000
shares of preferred stock, par value $0.01 per share.
COMMON STOCK
As of June 30, 2000, 9,934,715 shares of our common stock were outstanding and
held of record by 77 stockholders. Each holder of our common stock is entitled
to -
- one vote per share on all matters submitted to a vote of the stockholders;
- dividends as may be declared by our board of directors out of funds
legally available for that purpose, subject to the rights of any preferred
stock that may be outstanding; and
- his, her or its pro rata share in any distribution of our assets after
payment or providing for the payment of liabilities and the liquidation
preference of any outstanding preferred stock in the event of liquidation.
Holders of common stock have no cumulative voting rights, redemption rights or
preemptive rights to purchase or subscribe for any shares of our common stock or
other securities. All of the outstanding shares of common stock are fully paid
and nonassessable. As of June 30, 2000, options to purchase 2,316,113 shares of
our common stock were outstanding, at a weighted average exercise price of $0.89
per share.
COMMON STOCK PURCHASE WARRANTS
As of June 30, 2000, warrants to purchase 3,481,219 shares of our common stock
were issued and outstanding, as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------
NUMBER OF SHARES
OF COMMON STOCK EXERCISE PRICE EXPIRATION DATE
--------------------- -------------- ---------------
<C> <C> <S>
1,514,552 $ 5.50 April 2001
166,667 $ 6.50 January 2002
1,200,000 $ 6.50 August 2002
600,000 $ 8.50 June 2001
---------------------
3,481,219
</TABLE>
The warrant to purchase 600,000 shares of common stock may be exercised on a
"cashless" basis by surrendering shares of common stock in payment of the
exercise price.
PREFERRED STOCK
As of June 30, 2000, 6,582,472 shares of preferred stock were outstanding. As of
the closing of this offering, all shares of preferred stock outstanding will
convert automatically into 12,731,446 shares of common stock, and no shares of
preferred stock will remain outstanding.
Prior to the completion of the offering, we intend to designate shares of
our preferred stock as Series AA preferred stock for issuance pursuant to the
exercise of rights under our rights plan. For more information on the rights
plan, see the discussion below. We have no current intention to issue any other
shares of preferred stock.
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Our board of directors has the authority, subject to any limitations prescribed
by Delaware law, to issue shares of preferred stock in one or more series and to
fix and determine the relative rights and preferences of the shares constituting
any series to be established, without any further vote or action by the
stockholders. Any shares of preferred stock so issued may have priority over the
common stock with respect to dividend, liquidation and other rights.
The board of directors may authorize the issuance of preferred stock with voting
or conversion rights that could adversely affect the voting power or other
rights of the holders of our common stock. Although the issuance of preferred
stock could provide us with flexibility in connection with possible acquisitions
and other corporate purposes, under some circumstances, it could have the effect
of delaying, deferring or preventing a change of control.
ANTITAKEOVER EFFECTS OF PROVISIONS OF OUR AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND BYLAWS AND OF DELAWARE LAW
Certain provisions of our charter documents and Delaware law could have an
anti-takeover effect and could delay, discourage or prevent a tender offer or
takeover attempt that a stockholder might consider to be in its best interests,
including attempts that might otherwise result in a premium being paid over the
market price of our common stock.
CERTIFICATE OF INCORPORATION AND BYLAWS. Upon completion of this offering, our
certificate of incorporation will provide that stockholders can take action only
at a duly called annual or special meeting of the stockholders and not by
written consent. At the same time, our bylaws will provide that special meetings
of stockholders may be called only by our chairman of the board, the president,
any officer at the request in writing of a majority of the directors or by the
holders of at least 25% of our outstanding shares. These provisions could delay
consideration of a stockholder proposal until the next annual meeting.
Our bylaws will provide for an advance notice procedure for the nomination,
other than by or at the direction of our board of directors, of candidates for
election as directors, as well as for other stockholder proposals to be
considered at annual meetings of stockholders.
DELAWARE TAKEOVER STATUTE. We will be subject to the provisions of Section 203
of the Delaware law. In general, this statute prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date that the person became
an interested stockholder unless, subject to exceptions, the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner.
Prior to the offering, each stockholder which is an interested stockholder
became an interested stockholder in a transaction approved by our board of
directors. Therefore, Section 203 would not impose any restriction on a business
combination between us and any of our existing interested stockholders. However,
the restrictions of Section 203 would apply to a business combination between us
and any of our other stockholders who in the future become interested
stockholders in a transaction not approved by our board of directors, unless the
business combination involving such stockholder is approved in advance by the
board of directors.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the stockholder.
Generally, an "interested stockholder" is a person who, together with affiliates
and associates, owns, or within three years prior, did own, 15% or more of the
corporation's voting stock. These provisions may have the effect of delaying,
deferring or preventing a change in control of our company without further
action by the stockholders.
ANTITAKEOVER EFFECTS OF OUR RIGHTS PLAN
We intend to adopt a rights plan under which we will issue, prior to the
completion of this offering, as a dividend on each outstanding share of common
stock one right to purchase one one-thousandth of a share of our Series AA
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preferred stock, $0.01 par value per share, or the preferred shares, at a price
of $ per one one-thousandth of a preferred share, subject to adjustment.
The rights will not be exercisable until the distribution date, which will be
defined as the date that is the earlier of -
- 10 days after a public announcement that a person or group of affiliated
or associated persons have acquired beneficial ownership of 15% or more of
the outstanding shares of common stock, other than a person or such a
group that obtains the prior written approval of the board of directors or
holders of grandfathered stock, as defined below, which person or group is
referred to as an acquiring person, or
- 10 business days, or such later date as may be determined by action of the
board of directors prior to such time as any person or group becomes an
acquiring person, after the commencement of, or announcement of an
intention to make, a tender offer or exchange offer the consummation of
which would result in the beneficial ownership by a person or group of 15%
or more of such outstanding shares of common stock, unless our board of
directors has approved the offer.
Holders of grandfathered stock are subject to higher ownership thresholds prior
to triggering a distribution date through their ownership of shares of our
common stock. They are Fu-Chieh Hsu, Wing-Yu Leung, West Coast and Dynatech
Capital, and their respective affiliates and associates. Their share ownership
must reach [20%] rather than 15% as set forth above, and beneficial owners of
their grandfathered stock must beneficially own 1% more than such grandfathered
stockholder, rather than 15% as set forth above, before a distribution date
would be deemed to occur.
The rights agreement will provide that, until the distribution date, the rights
will be transferred only with the shares of common stock, including the shares
of common stock sold in the offering. Until the distribution date or earlier
redemption or expiration of the rights, new common stock certificates issued
after the record date or upon transfer or new issuance of shares of common stock
will contain a notation incorporating the rights agreement by reference and the
surrender for transfer of any certificates for shares of common stock
outstanding as of the record date, even without such notation, will also
constitute the transfer of the rights associated with the shares of common stock
represented by such certificate.
The rights will expire on , 2010, unless the rights are earlier
redeemed or exchanged by us, in each case as described below.
In the event the rights become exercisable, the plan will require that proper
provision shall be made so that each holder of a right will thereafter have the
right to receive upon exercise that number of shares of our common stock having
a market value of two times the exercise price of the right, and rights
beneficially owned by an acquiring person will automatically become void. The
plan also will provide that if we are acquired in a merger or other business
combination transaction or 50% or more of our consolidated assets or earning
power are sold after the distribution date, proper provision will be made so
that each holder of a right will thereafter have the right to receive, upon the
exercise of the right at the then current exercise price of the right, that
number of shares of common stock of the acquiring company which at the time of
such transaction will have a market value of two times the exercise price of the
right.
The plan also will include provisions that permit our board of directors to -
- exchange the rights, other than rights owned by an acquiring person which
have become void, in whole or in part, at an exchange ratio of one share
of common stock, or one one-thousandth of a preferred share, per right,
subject to adjustment at any time after a person becomes an acquiring
person and before the acquiring person acquires 50% or more of the
outstanding shares of common stock;
- redeem the rights, in whole, but not in part, at a price of $0.01 per
right at any time after a person or group becomes an acquiring person;
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- reinstate the rights of redemption, if prior to completion of certain
recapitalizations, mergers or other business combinations, an acquiring
person reduces its beneficial ownership to less than 15% of the
outstanding shares of common stock in transactions that do not involve us;
and
- amend the terms of the rights without the consent of the holders of the
rights under certain circumstances, except that once a person or group
becomes an acquiring person, no such amendment may adversely affect the
interests of the holders of the rights.
Until a right is exercised, the holder of a right will not, by reason of being
such a holder, have rights as a stockholder of our company, including, without
limitation, the right to vote or to receive dividends. The distribution of the
rights will not be taxable to our stockholders, but stockholders may, depending
on the circumstances, recognize taxable income if the rights become exercisable
or upon the commencement of certain events thereafter.
Preferred shares purchasable upon exercise of the rights will not be redeemable.
Each preferred share will be entitled to a minimum preferential dividend payment
of 1,000 times the dividend declared on each share of common stock. In the event
of liquidation, the holders of the preferred shares will be entitled to a
preferential liquidation payment equal to 1,000 times the payment made per share
of common stock. Each preferred share will have 1,000 votes, voting together
with the common stock, plus accrued and unpaid dividends. Finally, in the event
of any merger, consolidation or other transaction in which shares of common
stock are exchanged, each preferred share will be entitled to receive 1,000
times the amount received per share of common stock. These rights will be
protected by customary antidilution provisions. Because of the nature of the
preferred shares' dividend, liquidation and voting rights, the value of the one
one-thousandth interest in a preferred share purchasable upon exercise of each
right should approximate the value of one share of common stock.
The rights plan is intended to protect and maximize the value of our outstanding
equity interests in the event of an unsolicited attempt by an acquiror to take
over our company, in a manner or on terms not approved by the board of
directors. The rights are not intended to prevent a takeover of our company and
will not do so.
REGISTRATION RIGHTS
After this offering, the holders of approximately 12,731,446 shares of common
stock and rights to acquire shares of common stock subject to
outstanding warrants as of June 30, 2000 and their permitted transferees will be
entitled, upon expiration of lockup agreements with the underwriters, to
exercise certain rights with respect to the registration of their shares under
the Securities Act. Under the terms of an agreement between us and these
stockholders, the holders of these shares may require, on two occasions, that we
use our best efforts to register these shares for public resale; provided,
however, that the anticipated gross offering price of the sale of such shares
must exceed $2.0 million before we will be required to undertake such
registration. In addition, if we propose to register any of our securities under
the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, these stockholders are entitled
to notice of such registration and to include their shares, at our expense, in
that registration. These stockholders may also require us, on no more than three
occasions, to file, at our expense, a registration statement on Form S-3 under
the Securities Act with respect to their shares, when use of such form becomes
available to us. All registration rights are subject to certain conditions and
limitations, including the right of the underwriters of an offering to limit the
number of shares to be included in such registration. In addition, we need not
effect a registration within six months following a previous registration, or
within six months following any offering of securities for our account made
subsequent to this offering, or after such time as all of these stockholders may
sell under Rule 144 in a three-month period all shares of common stock to which
such registration rights apply.
TRANSFER AGENT
The transfer agent and registrar for the common stock is [ ].
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our stock in the public market
following the offering, then the market price of our stock could fall. After the
offering, shares of our common stock will be outstanding, assuming
no exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants. Of those shares, the shares sold in
the offering will be freely tradable, except for any shares purchased by our
"affiliates," as defined in Rule 144 under the Securities Act. The remaining
shares are "restricted securities," as defined in Rule 144, and may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rule 144 or Rule 701, which rules are summarized below.
The following table depicts securities eligible for future sale:
<TABLE>
<S> <C>
Total shares outstanding....................................
----------
Total restricted securities.................................
----------
Shares that are freely tradable after the date of this
prospectus under Rule 144(k), subject to the 180-day
lockup agreement..........................................
----------
Shares that are freely tradable 90 days after the date of
this prospectus under Rule 144 or Rule 701, subject to the
180-day lockup agreement..................................
----------
Shares that are freely tradable 180 days after the date of
this prospectus under Rule 144 (subject, in some cases, to
volume limitations), under Rule 144(k) or pursuant to a
registration statement to register for resale shares of
common stock issued on exercise of stock options..........
----------
</TABLE>
LOCKUP AGREEMENTS. All of our officers and directors and all of our
stockholders owning more than 1% of our outstanding securities prior to the
offering have signed lockup agreements pursuant to which they have agreed not to
sell any shares of common stock, or any securities convertible into or
exercisable or exchangeable for common stock, for 180 days after the offering
without the prior written consent of J.P. Morgan Securities Inc. J.P. Morgan
Securities Inc. may, in its sole discretion, release all or any portion of the
shares subject to the lockup agreements.
RULE 144. In general, Rule 144 provides that any person who has beneficially
owned shares for at least one year, including an affiliate, is generally
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the shares of common stock then outstanding,
which will be approximately shares immediately after the offering,
and the reported average weekly trading volume of the common stock during the
four calendar weeks immediately preceding the date on which notice of the sale
is sent to the SEC. Sales under Rule 144 are subject to manner of sale
restrictions, notice requirements and availability of current public information
concerning us.
RULE 144(k). A person who is not our affiliate and who has not been our
affiliate within three months prior to the sale generally may sell shares
without regard to the limitations of Rule 144, provided that the person has held
the shares for at least one year. Under Rule 144(k), a person who is not deemed
to have been our affiliate at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell the shares without complying with the manner of sale,
public information, volume limitation or notice provisions of Rule 144.
RULE 701. Any of our employees, directors, officers or consultants holding
shares purchased pursuant to a written compensatory plan or contract, including
options, entered into prior to the offering is entitled to rely on the resale
provisions of Rule 701, which permit nonaffiliates to sell shares without having
to comply with the public information, holding period, volume limitation or
notice requirements of Rule 144 and permit affiliates to sell their Rule 701
shares without having to comply with the holding period restrictions of
Rule 144, in each case beginning 90 days after the date of this prospectus.
56
<PAGE>
STOCK PLANS. Following the offering, we intend to file a registration statement
on Form S-8 under the Securities Act covering shares of common stock
reserved for issuance under the 1992 plan, the 1996 plan, the 2000 plan and the
2000 employee stock purchase plan. Upon expiration of the lockup agreements, at
least shares of common stock will be subject to vested options,
based on options outstanding as of June 30, 2000. The registration statement is
expected to be filed and become effective prior to expiration of the lockup
agreements; accordingly, shares registered under the registration statement will
be available for sale in the open market.
REGISTRATION RIGHTS. After this offering, the holders of approximately
12,731,446 shares of our common stock and holders of warrants to purchase
shares of our common stock, or their transferees, will be entitled to
certain rights with respect to the registration of those shares under the
Securities Act. After any registration of these shares, these shares will become
freely tradable without restriction under the Securities Act. These sales could
have a material adverse effect on the trading price of our common stock.
57
<PAGE>
UNDERWRITING
The underwriters named below, for whom J.P. Morgan Securities Inc. and Wit
SoundView Corporation are acting as representatives, have severally agreed,
subject to the terms and conditions set forth in the underwriting agreement
between us and the underwriters, to purchase from us, and we have agreed to sell
to the underwriters, the respective number of shares of common stock set forth
opposite their names below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
J.P. Morgan Securities Inc..................................
Wit SoundView Corporation...................................
-------------
Total.......................................................
=============
</TABLE>
The nature of the underwriters' obligations under the underwriting agreement is
such that all of the common stock being offered, excluding shares covered by the
over-allotment option granted to the underwriters, must be purchased if any are
purchased.
The representatives of the underwriters have advised us that the several
underwriters propose to offer the common stock to the public initially at the
public offering price set forth on the cover page of this prospectus and may
offer the common stock to selected dealers at this price less a concession not
to exceed $ per share. The underwriters may allow, and these dealers may
reallow, a concession to other dealers not to exceed $ per share. After the
initial public offering of the common stock, the public offering price and other
selling terms may be changed by the representatives.
We have granted the underwriters an option, exercisable for 30 days from the
date of this prospectus, to purchase up to additional shares of common
stock at the same price per share to be paid by the underwriters for the other
shares offered hereby. If the underwriters purchase any such additional shares
pursuant to the option, each of the underwriters will be committed to purchase
such additional shares in approximately the same proportion as shown in the
above table. The underwriters may exercise the option only to cover
over-allotments, if any, made in connection with the distribution of the common
stock offered in this prospectus.
The underwriters have reserved for sale, at the initial public offering price,
shares of the common stock for some of our directors, officers, employees,
friends and family who, after receiving a preliminary prospectus and a letter
explaining our directed share program, have expressed a non-binding interest in
purchasing shares of common stock in the offering. These persons are expected to
purchase, in the aggregate, not more than percent of the common stock offered
in the offering. The number of shares available for sale to the general public
in the offering will be reduced to the extent these persons purchase reserved
shares. Any reserved shares not so purchased will be offered to the general
public on the same basis as the other shares offered by this prospectus.
The following table shows the per share and total underwriting discounts to be
paid to the underwriters by us. These amounts are shown assuming both no
exercise and full exercise of the underwriters' over-allotment option.
<TABLE>
<CAPTION>
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share:.................................................. $ $
----------- ------------
Total:...................................................... $ $
=========== ============
</TABLE>
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect thereof.
We estimate that the total expenses of this offering, excluding underwriting
discounts, will be $ . We will be responsible for all of these expenses.
58
<PAGE>
In connection with this offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may overallot this offering, creating a syndicate
short position. In addition, the underwriters may bid for, and purchase, shares
of common stock in the open market to cover syndicate shorts or to stabilize the
price of the common stock. Finally, the underwriting syndicate may reclaim
selling concessions allowed for distributing shares of common stock in this
offering, if the syndicate repurchases previously distributed common stock in
syndicate covering transactions, in stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the shares of
common stock above independent market levels. The underwriters are not required
to engage in these activities, and may end any of these activities at any time.
There has been no public market for the common stock prior to this offering. We
and the underwriters negotiated the initial offering price. In determining the
price, we and the underwriters considered a number of factors in addition to
prevailing market conditions, including:
- the history of and prospects for our industry and for technology companies
generally;
- an assessment of our management;
- our present operations;
- our historical results of operations'
- the trend of our revenues and earnings; and
- our earnings prospects.
We and the underwriters considered these and other relevant factors in relation
to the price of similar securities of generally comparable companies. Neither we
nor the underwriters can assure investors that an active trading market will
develop for the common stock, or that the common stock will trade in the public
market at or above the initial offering price.
We and our executive officers, directors and certain stockholders have agreed,
with limited exceptions, that, during the period beginning from the date of this
prospectus and continuing and including the date 180 days after the date of this
prospectus, none of us will, directly or indirectly offer, sell, offer to sell,
contract to sell or otherwise dispose of any shares of common stock or any of
our securities which are substantially similar to the common stock, including
but not limited to any securities that are convertible into or exchangeable for,
or that represent the right to receive, common stock or any such substantially
similar securities or enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, the economic consequence of
ownership of common stock or any securities substantially similar to the common
stock, other than pursuant to employee benefits plans existing on the date of
this prospectus, without the prior written consent of J.P. Morgan
Securities Inc.
It is expected that delivery of the shares will be made to investors on or about
, 2000.
We have applied to have our common stock quoted on the Nasdaq National Market
under the symbol MOSY.
From time to time in the ordinary course of their respective businesses, members
of the underwriters and their affiliates have engaged in and may in the future
engage in commercial and/or investment banking transactions with us and our
affiliates.
A prospectus in electronic format is being made available on Internet web sites
maintained by Wit SoundView Corporation's affiliate, Wit Capital Corporation,
and may be made available on web sites maintained by other underwriters. In
addition, other dealers purchasing shares from Wit SoundView in this offering
have agreed to make a prospectus in electronic format available on web sites
maintained by each of these dealers. Other than the prospectus in electronic
format, the information on any underwriter's web site and any information
contained in any other web site maintained by an underwriter is not part of the
prospectus or the registration statement of
59
<PAGE>
which this prospectus forms a part, has not been approved and/or endorsed by us
or any underwriter in its capacity as underwriter and should not be relied upon
by investors.
Other than the prospectus in electronic format, the information contained on any
underwriter's web site and any information contained on any other web site
maintained by an underwriter is not part of this prospectus or the registration
statement of which this prospectus forms a part, has not been approved or
endorsed by us or any underwriter in its capacity as an underwriter and should
not be relied upon by investors.
LEGAL MATTERS
The validity of the common stock being offered hereby will be passed upon for us
by McCutchen, Doyle, Brown & Enersen, LLP, Palo Alto, California. Morrison &
Foerster LLP, San Francisco, California, is acting as counsel for the
underwriters in connection with certain legal matters relating to the shares of
common stock offered by this prospectus.
EXPERTS
Our financial statements as of December 31, 1998 and 1999 and for each of the
three years in the period ended December 31, 1999 included in this prospectus
have been 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 a registration statement on Form S-1 with respect to
the common stock in this offering. This prospectus, which constitutes a part of
the registration statement, does not contain all the information set forth in
the registration statement. For further information about us and the shares of
common stock to be sold in the offering, please refer to the registration
statement and the exhibits and schedules thereto.
The registration statement and exhibits may be inspected, without charge, and
copies may be obtained at prescribed rates, at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The registration statement and other information filed with the
SEC is also available at the web site maintained by the SEC at
http://www.sec.gov.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and will file
periodic reports, proxy statements and other information with the SEC. These
reports, proxy and information statements and other information may also be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C. 20006.
60
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
INDEX TO 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' Equity............. F-5
Consolidated Statements of Cash Flow........................ 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 Monolithic System Technology, Inc.
The reincorporation of Monolithic Systems Technology, Inc., in the State of
Delaware, described in Note 13 to the financial statements, has not yet been
consummated. When it has been consummated, we will be in a position to furnish
the following report:
"In our opinion, the accompanying balance sheets and the related
statements of operations, of stockholders' equity (deficit) and of cash
flows present fairly, in all material respects, the financial position
of Monolithic System Technology, Inc. at December 31, 1998 and 1999, and
the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in
the United States which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above."
PricewaterhouseCoopers LLP
San Jose, California
August 3, 2000
F-2
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
----------------------------------------------------
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY (DEFICIT)
------------------- JUNE 30, AT JUNE 30,
1998 1999 2000 2000
-------- -------- ----------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,750 $ 12,720 $ 19,947
Accounts receivable, net.................................. 2,654 1,591 1,122
Inventories............................................... 4,442 1,049 1,238
Prepaid expenses and other current assets................. 83 304 338
-------- -------- -----------
Total current assets.................................... 16,929 15,664 22,645
Property and equipment, net................................. 953 778 547
Other assets................................................ 50 39 29
-------- -------- -----------
Total assets............................................ $ 17,932 $ 16,481 $ 23,221
======== ======== ===========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 4,484 $ 647 $ 396
Accrued expenses and other liabilities.................... 1,058 1,064 1,117
Deferred revenue.......................................... - 2,045 3,878
-------- -------- -----------
Total current liabilities............................... 5,542 3,756 5,391
-------- -------- -----------
Commitments and contingencies (Note 12)
Mandatorily redeemable convertible preferred stock, $0.01
par value; 9,500 shares authorized; 5,932 shares in 1998
and 5,932 shares in 1999 and 6,582 (unaudited) shares at
June 30, 2000 and none (unaudited) at June 30, 2000 (pro
forma) issued and outstanding............................. 30,391 30,391 35,591 $ -
-------- -------- -----------
Stockholders' equity (deficit):
Common Stock, $0.01 par value; 30,000 shares authorized;
9,697 shares in 1998 and 9,804 shares in 1999 and 9,935
(unaudited) shares at June 30, 2000 and 22,666
(unaudited) shares at June 30, 2000 (pro forma) issued
and outstanding......................................... 97 98 99 227
Additional paid-in capital................................ 1,185 2,098 2,630 38,093
Accumulated deficit....................................... (19,283) (19,141) (19,723) (19,723)
Deferred stock-based compensation......................... - (721) (767) (767)
-------- -------- ----------- --------------
Total stockholders' equity (deficit).................... (18,001) (17,666) (17,761) $ 17,830
-------- -------- ----------- ==============
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' equity
(deficit)........................................... $ 17,932 $ 16,481 $ 23,221
======== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
---------------------------------------------
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------------- ---------------
1997 1998 1999 1999 2000
------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue:
Product................................................. $34,822 $36,281 $15,356 $8,145 $4,028
Contract................................................ - - - - 460
------- ------- ------- ------ ------
$34,822 $36,281 $15,356 $8,145 $4,488
Cost of net revenue:
Product................................................. 29,510 31,892 10,062 5,447 1,952
Contract................................................ - - - - 267
------- ------- ------- ------ ------
29,510 31,892 10,062 5,447 2,219
------- ------- ------- ------ ------
Gross profit.............................................. 5,312 4,389 5,294 2,698 2,269
------- ------- ------- ------ ------
Operating expenses:
Research and development................................ 3,596 4,224 3,110 1,647 1,630
Selling, general and administrative..................... 3,225 2,842 2,388 1,194 1,338
Stock-based compensation charge(*)...................... - - 107 20 342
------- ------- ------- ------ ------
Total operating expenses.............................. 6,821 7,066 5,605 2,861 3,310
------- ------- ------- ------ ------
Loss from operations...................................... (1,509) (2,677) (311) (163) (1,041)
Interest expense.......................................... (1,030) (294) - - -
Interest and other income................................. 523 649 520 225 459
------- ------- ------- ------ ------
Income (loss) before income taxes......................... (2,016) (2,322) 209 62 (582)
Provision for income taxes................................ - - (67) (20) -
------- ------- ------- ------ ------
Net income (loss)......................................... $(2,016) $(2,322) $ 142 $ 42 $ (582)
======= ======= ======= ====== ======
Net income (loss) per share:
Basic................................................... $ (0.22) $ (0.24) $ 0.01 $ 0.00 $(0.06)
======= ======= ======= ====== ======
Diluted................................................. $ (0.22) $ (0.24) $ 0.01 $ 0.00 $(0.06)
======= ======= ======= ====== ======
Shares used in computing net income (loss) per share:
Basic................................................... 9,323 9,626 9,727 9,708 9,856
Diluted................................................. 9,323 9,626 23,320 22,735 9,856
Pro forma net income (loss) per share:
Basic................................................... $ 0.01 $(0.03)
======= ======
Diluted................................................. $ 0.01 $(0.03)
======= ======
Shares used in computing pro forma net income (loss) per
share:
Basic................................................... 21,808 22,259
Diluted................................................. 23,320 22,259
(*) Stock-based compensation in operating expenses:
Research and development.............................. $ - $ - $ 56 $ 11 $ 152
Selling, general and administrative................... - - 51 9 190
------- ------- ------- ------ ------
$ - $ - $ 107 $ 20 $ 342
======= ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL DEFERRED DEFERRED
------------------- PAID-IN WARRANT STOCK-BASED ACCUMULATED
SHARES AMOUNT CAPITAL COST COMPENSATION DEFICIT TOTAL
-------- -------- ---------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996......... 9,216 $ 92 $ 1,113 $ (337) $ - $ (14,945) $(14,077)
Issuance of Common Stock upon
exercise of options................ 209 2 27 - - - 29
Amortization of warrants............. - - - 161 - - 161
Net loss............................. - - - - - (2,016) (2,016)
-------- -------- --------- -------- ------------- ------------ --------
Balance at December 31, 1997......... 9,425 94 1,140 (176) - (16,961) (15,903)
Issuance of Common Stock upon
exercise of options................ 272 3 31 - - - 34
Issuance of common stock warrant..... - - 14 - - - 14
Amortization of warrants............. - - - 176 - - 176
Net loss............................. - - - - - (2,322) (2,322)
-------- -------- --------- -------- ------------- ------------ --------
Balance at December 31, 1998......... 9,697 97 1,185 - - (19,283) (18,001)
Issuance of Common Stock upon
exercise of options................ 107 1 64 - - - 65
Stock options granted in exchange of
services........................... - - 21 - - - 21
Deferred stock-based compensation.... - - 828 - (828) - -
Amortization of deferred stock-based
compensation....................... - - - - 107 - 107
Net loss............................. - - - - - 142 142
-------- -------- --------- -------- ------------- ------------ --------
Balance at December 31, 1999......... 9,804 98 2,098 - (721) (19,141) (17,666)
Issuance of Common Stock upon
exercise of options (unaudited).... 131 1 122 - - - 123
Deferred stock-based compensation
(unaudited)........................ - - 410 - (410) - -
Amortization of deferred stock-based
compensation (unaudited)........... - - - - 364 - 364
Net loss (unaudited)................. - - - - - (582) (582)
-------- -------- --------- -------- ------------- ------------ --------
Balance at June 30, 2000
(unaudited)........................ 9,935 $ 99 $ 2,630 $ - $ (767) $ (19,723) $(17,761)
======== ======== ========= ======== ============= ============ ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
---------------------------- -----------------
1997 1998 1999 1999 2000
------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit (loss)..................................... $(2,016) $ (2,322) $ 142 $ 42 $ (582)
Adjustments to reconcile net profit (loss) to net cash
used in operating activities:
Depreciation and amortization....................... 1,027 1,031 901 460 268
Issuance of stock options for services.............. - - 21 - -
Warrant costs....................................... 161 190 - - -
Amortization of deferred stock-based compensation... - - 107 20 364
Changes in current assets and liabilities:
Accounts receivable............................... (5,074) 4,016 1,063 938 469
Inventories....................................... (873) 2,709 3,393 2,847 (189)
Prepaid expenses and other assets................. 749 257 (210) (37) (24)
Deferred revenue.................................. - - 2,045 1,640 1,833
Payable to related party.......................... (1,035) 91 - - -
Accounts payable.................................. (1,497) (3,776) (3,837) (4,228) (251)
Accrued expenses and other liabilities............ 2,062 (3,350) 6 303 53
------- -------- ------- ------- -------
Net cash provided by (used in) operating
activities.................................... (6,496) (1,154) 3,631 1,985 1,941
------- -------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................... (828) (134) (726) (198) (37)
Release of restricted cash held as collateral for line
of credit........................................... 6,136 - - - -
Maturity and sale of short-term investments........... 765 775 - - -
------- -------- ------- ------- -------
Net cash provided by (used in) investing
activities.................................... 6,073 641 (726) (198) (37)
------- -------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable............................ (4,219) (6,923) - - -
Proceeds from issuance of convertible preferred
stock............................................... 1,595 8,061 - - 5,200
Proceeds from issuance of common stock................ 29 34 65 27 123
------- -------- ------- ------- -------
Net cash provided by (used in) financing
activities.................................... (2,595) 1,172 65 27 5,323
------- -------- ------- ------- -------
Net increase/(decrease) in cash and cash equivalents.... (3,018) 659 2,970 1,814 7,227
Cash and cash equivalents at beginning of period........ 12,109 9,091 9,750 9,750 12,720
------- -------- ------- ------- -------
Cash and cash equivalents at end of period.............. $ 9,091 $ 9,750 $12,720 $11,564 $19,947
======= ======== ======= ======= =======
SUPPLEMENTAL DISCLOSURE:
Interest paid......................................... $ 151 $ 160 $ - $ - $ -
======= ======== ======= ======= =======
SUPPLEMENTAL DISCLOSURE FOR NON-CASH FINANCING
AND INVESTING ACTIVITIES:
Reduction of obligations under notes payable in
connection with termination of capacity
commitments......................................... $ - $(22,540) $ - $ - $ -
======= ======== ======= ======= =======
Reduction of other long-term assets in connection with
termination of capacity commitments................. $ - $ 22,540 $ - $ - $ -
======= ======== ======= ======= =======
Issuance of convertible preferred stock upon
conversion of debt.................................. $ 6,703 $ - $ - $ - $ -
======= ======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Monolithic System Technology, Inc. (the "Company") was incorporated in
California on September 16, 1991 to design, develop and market high performance
semiconductor memory products and technologies used by the semiconductor
industry and electronic product manufacturers.
The Company has developed an innovative embedded-memory technology, called
1T-SRAM, which the Company licenses on a non-exclusive and worldwide basis to
semiconductor companies and electronic product manufacturers. From its inception
in 1991 through 1998, the Company focused primarily on the sale of stand-alone
memory products. In the fourth quarter of 1998, the Company changed its business
model to focus primarily on the licensing of its 1T-SRAM technology.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
REPORTING PERIODS
The Company operates and reports financial results on a 52-53 week fiscal year.
In 1997, 1998 and 1999, the fiscal years ended on January 4, 1998, January 3,
1999 and January 2, 2000, respectively. For convenience, the Company has
presented its fiscal year as ending on December 31 for all periods. The
six-month periods presented ended on July 4, 1999 and July 2, 2000. For
convenience, the Company has presented the six-month period as ending on
June 30 in both years.
INTERIM RESULTS (UNAUDITED)
The interim financial statements as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000 are unaudited. In the opinion of management, these
interim financial statements have been prepared on the same basis as the audited
financial statements and reflect all adjustments, consisting only of normal,
recurring adjustments necessary for the fair presentation of the results of
interim periods. The financial data and other information disclosed in these
notes to the financial statements for the related periods are unaudited. The
results of the interim periods are not necessarily indicative of the results to
be expected for future periods.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investment instruments with a maturity
of three months or less when purchased. The fair value of these investment
instruments approximated their costs at the respective balance sheet dates.
INVENTORIES
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market.
F-7
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is generally computed
using the straight-line method over the estimated useful lives of the assets,
generally 3 years.
The Company evaluates the recoverability of its long-lived assets in accordance
with Statement of Financial Accounting Standards ("SFAS No. 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS No. 121 requires recognition of impairment of long-lived assets in the
event the net book value of such assets exceeds the future undiscounted cash
flows attributable to such assets. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the fair value of the long-lived
asset. Fair value is determined primarily using the anticipated cash flows
discounted at a rate commensurate with the risk involved. Losses on long-lived
assets to be disposed of are determined in a similar manner, except that fair
values are reduced for the cost of disposal. No losses from impairment have been
recognized in the financial statements.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment to customers. Provisions
for potential warranty liability and estimated returns are recorded at the time
revenue is recognized.
Contract revenues from licensing activities consist of fees paid for engineering
development and engineering support services. For contracts involving
performance specifications that the Company has not yet met, the Company defers
the recognition of revenue until the licensee manufactures products that meet
the contract performance specifications. Fees billed prior to revenue
recognition are recorded as deferred contract revenue.
Licensing contracts provide for royalty payments at a stated rate. Agreements
require licensees to report the manufacture or sale of products that include the
Company's technology after the end of the quarter in which the sale or
manufacture occurs. The Company will recognize royalties in the quarter in which
the licensee's report is received.
COST OF REVENUE
Cost of product revenue consists primarily of costs associated with the
manufacture, assembly and test of the Company's stand-alone memory products by
independent, third-party contractors.
Cost of contract revenue consists primarily of deferred engineering costs
directly related to development projects specified in agreements we have with
licensees of our memory technology. To the extent that the amount of engineering
costs does not exceed the amount of the related contract revenue, these costs
are deferred on a contract-by-contract basis from the time the Company has
established technological feasibility of the product to be developed under the
contract. This occurs when the Company has completed all of the activities
necessary to establish that the licensee's product can be produced to meet the
performance specifications when incorporating the Company's technology. Deferred
costs are charged to cost of contract revenue when the related revenue is
recognized.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. The Company has not
capitalized any software development costs to date and is in compliance with
Statement of Financial Accounting Standards No. 86 ("SFAS
F-8
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
No. 86"), "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." Capitalization of software development costs begins upon
the establishment of technological feasibility of the product. After
technological feasibility is established, material software development costs
are capitalized. The capitalized cost is then amortized on a straight-line basis
over the estimated product life, or on the ratio of current revenues to total
projected product revenues, whichever is greater. To date, the period between
achieving technological feasibility, which the Company has defined as the
establishment of a working model which typically occurs when beta testing
commences, and the general availability of such software has been short, and as
such, software development costs qualifying for capitalization have been
insignificant.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in accordance
with the provisions of APB No. 25 ("APB No. 25"), "Accounting for Stock Issued
to Employees" and complies with the disclosure provisions of Statement of
Financial Accounting Standard No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." Under APB No. 25, compensation cost is, in general,
recognized based on the excess, if any, of the fair market value of the
Company's stock on the date of grant over the amount an employee must pay to
acquire the stock. Equity instruments issued to non-employees are accounted for
in accordance with the provision of SFAS No. 123 and Emerging Issues Task Force
96-18. Deferred stock-based compensation is being amortized using the graded
vesting method in accordance with Financial Accounting Standards Board
Interpretation No. 28 ("FIN No. 28") over the vesting period of each respective
option, which is generally four years. Under the graded vesting method, each
option grant is separated into portions based on its vesting terms which results
in acceleration of amortization expense for the overall award.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) for
the period by the weighted-average number of shares of common stock outstanding
during the period. Diluted 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 and potential common equivalent shares outstanding during the
period. The calculation of diluted net loss per share excludes potential common
shares if the effect is anti-dilutive. Potential common shares are composed of
incremental shares of common stock issuable upon the exercise of stock options
and warrants and common stock issuable upon conversion of preferred stock.
PRO FORMA BALANCE SHEET INFORMATION (UNAUDITED)
Immediately prior to the effective date of the Company's initial public
offering, the Company's outstanding convertible preferred stock will
automatically convert into common stock. The pro forma effects of this
transaction are unaudited and have been reflected in the accompanying pro forma
stockholders' equity (deficit) as of June 30, 2000.
PRO FORMA NET INCOME (LOSS) PER SHARE (UNAUDITED)
Pro forma net income (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 conversion of the Company's
convertible preferred stock into the Company's common stock effective upon the
closing of the Company's initial public offering, as if such conversion occurred
at January 1, 1999 or at date of original
F-9
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
issuance, if later. The calculation of pro forma diluted net income (loss) per
share excludes incremental common stock issuable upon the exercise of stock
options and warrants as the effect would be anti-dilutive.
INCOME TAXES
The Company accounts for deferred income taxes under the liability approach
whereby the expected future tax consequences of temporary differences between
the book and tax basis of assets and liabilities are recognized as deferred tax
assets and liabilities. A valuation allowance is established for any deferred
tax assets for which realization is uncertain.
COMPREHENSIVE INCOME
Financial Accounting Standards Statement No. 130 "Reporting Comprehensive
Income"("SFAS No. 130") requires the disclosure of comprehensive income, defined
as all changes in equity during a period except for investments by owners and
distributions to owners. For the three years ended December 31,1999 and the
six months ended June 30, 2000, the Company did not have comprehensive income
other than net income.
SEGMENT REPORTING
Financial Accounting Standards Board Statement No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS No. 131") requires
that companies report separately in the financial statements certain financial
and descriptive information about operating segments profit or loss, certain
specific revenue and expense items and segment assets. The Company operates in
one segment, using one measurement of profitability for its business. The
Company has sales outside the United States which are described in Note 11. All
long-lived assets are maintained in the United States.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 133 ("SFAS No. 133"), "Accounting for
Derivatives and Hedging Activities." This statement establishes accounting and
reporting standards of derivative instruments and requires recognition of all
derivatives as assets or liabilities in the balance sheet and measurement of
those instruments at fair value. The statement is effective for fiscal years
beginning after June 15, 2000. The Company will adopt the standard no later than
the first quarter of fiscal year 2001 and management does not expect a material
impact on the Company's financial statements.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides interpretive guidance on the recognition,
presentation and disclosure of revenue in financial statements under certain
circumstances. The Company adopted the provisions of SAB 101 in these financial
statements for all periods presented.
In March 2000, the FASB issued Interpretation No. 44 ("FIN No. 44"), "Accounting
for Certain Transactions Involving Stock Compensation - an interpretation of APB
Opinion No. 25." FIN No. 44 establishes guidance for the accounting for stock
option grants or modifications to existing stock option awards and is effective
for option grants made after June 30, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998 or January 12, 2000.
FIN 44 also establishes guidance for the repricing of stock options and
determining whether a grantee is an employee, for which the guidance was
effective after December 15, 1999
F-10
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
and modifying a fixed option to add a reload feature, for which guidance was
effective after January 12, 2000. The Company does not expect the adoption of
certain of the provisions of FIN No. 44 prior to June 30, 2000 to have a
material effect on the financial statements. The Company does not expect the
adoption of certain of the provisions of FIN No. 44 prior to June 30, 2000 to
have a material effect on the financial statements. The Company does not expect
the adoption of the remaining provisions to have a material effect on the
financial statements.
NOTE 2 - RELATED PARTY TRANSACTIONS:
M-ONE
In 1994, the Company completed the spin-off of a majority of its equity interest
in M-One Technology Corporation ("M-One"), a subsidiary in Taiwan through a
stock distribution of M-One's shares and sold its remaining interest in M-One.
Responsibility for the intended business activities of M-One were assumed by the
Company in 1995. The Company then became directly responsible for the production
and sale of its products. Due to continued operating losses and significant
accumulated deficits and difficult market conditions, M-One ceased its
operations in early 1997 and terminated all of its employees. As of
December 31, 1997, M-One had no assets and the Company had accrued certain
liabilities related to the obligations of M-One. As of March 31, 2000, the
Company had filed papers with the appropriate authorities in Taiwan to terminate
M-One's existence.
FINANCING TRANSACTIONS
In 1996, the Company entered into note and warrant purchase agreements with two
directors, certain preferred stockholders and other unrelated parties, borrowing
an aggregate of $13.1 million. The notes had an interest rate of 8.25% per annum
and a maturity date of May 31, 1998. Each agreement holder received a warrant to
purchase a number of common stock shares determined by dividing half the
principal amount of the note signed by the holder by the exercise price of the
warrant at the time of subscription. The exercise price ranged from $6.50 to
$8.50. These warrants had an expiration date of May 31, 1998. The Company
estimated the fair market value of the warrants was $141,000, using the
Black-Scholes method. The following assumptions were applied when estimating the
fair value of these warrants: dividend yield of 0%, risk-free rate of 6.18%,
term of 2 years and volatility of 40%. The value of the warrants was amortized
as interest expense over the term of the note. Amortization of these warrants
amounted to $37,000 in 1996.
In June 1997, upon cancellation of the note and warrant purchase agreements,
$6.7 million of the principal was converted into Series F preferred stock at a
conversion price of $5.50 per share. In connection with this conversion, all of
the outstanding warrants held by the noteholders were exchanged for new
warrants. The Company estimated the fair value of the new warrants was $136,000
(Note 8), which approximates the value of the old warrant. The Company continued
to amortize the remaining deferred warrant cost as interest expense. Interest
expense for the years ended December 31, 1997 and 1998 amounted to $54,000 and
$46,000 respectively.
In May 1998, the Company repaid the remaining balance of $6.4 million and the
accrued interest owed under the notes.
F-11
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - WAFER FOUNDRY AGREEMENT:
Under the terms of a 1996 agreement with the Company's foundry to ensure that
the Company would be supplied with a certain minimum number of wafers, the
Company signed six promissory notes totaling $23,380,000 with varying due dates
ranging from 1997 through 2000. The notes did not bear interest until they
became due, at which date a rate of 10% per annum was applied on any unpaid
amounts. The Company paid $840,000 in 1997 in accordance with the agreement.
Upon recording the notes, the Company recorded an asset in the same amount
representing its right to future wafer production.
In connection with this agreement, the Company issued a warrant to the foundry
to purchase 3,392,310 shares of the Company's common stock at a price of $6.50
per share. The Company determined the value of the warrant was $237,000 using
the Black-Scholes method. The following assumptions were applied when estimating
the fair value of these warrants: dividend yield of 0%, risk-free rate of 6.18%,
term of 2.17 years and volatility of 40%. The value of the warrant was amortized
over the period of benefit of the agreement. Amortization expense amounted to
$100,000 during the year ended December 31, 1997.
On January 1, 1998 (prior to the close of fiscal 1997), the agreement was
amended. The terms of this amendment canceled the promissory notes and the
Company signed five new promissory notes totaling $22,540,000 with due dates
ranging from November 1999 through June 2001. The other terms of the original
agreement remained substantially the same.
On August 6, 1998, the amended agreement with the foundry was terminated. The
terms of the termination canceled the existing promissory notes totaling
$22,540,000 and the right to future wafer production. Accordingly, the amount of
the notes and corresponding asset in the same amount representing the right to
future production was reversed.
In conjunction with the termination of the foundry agreement, the Company issued
a new warrant to the foundry to purchase 1,200,000 shares of the Company's
common stock at the price of $6.50 per share to replace the old warrant
agreement with the foundry. The new warrant expires in November 2002. The fair
value of the new warrant was determined to be $127,000 based on the
Black-Scholes method. This amount was expensed immediately in 1998 because the
warrant related to the termination of the agreement.
F-12
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - DETAILS OF BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
-------------------------------
DECEMBER 31,
----------------- JUNE 30,
1998 1999 2000
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS:
Cash...................................................... $ 1,466 $ 1,720 $ 656
Certificates of deposit and commercial paper.............. 8,284 11,000 19,291
------- ------- ---------
$ 9,750 $12,720 $ 19,947
======= ======= =========
ACCOUNTS RECEIVABLE:
Trade accounts receivable................................. $ 2,954 $ 1,790 $ 1,322
Less: Allowance for doubtful accounts..................... (300) (199) (200)
------- ------- ---------
$ 2,654 $ 1,591 $ 1,122
======= ======= =========
INVENTORIES:
Work-in-progress.......................................... $ 2,740 $ 728 $ 1,080
Finished goods............................................ 1,702 321 158
------- ------- ---------
$ 4,442 $ 1,049 $ 1,238
======= ======= =========
PREPAID EXPENSES AND OTHER CURRENT COSTS:
Deferred costs of contract revenue........................ $ - $ 184 $ -
Prepaid expenses and other assets......................... 83 120 338
------- ------- ---------
$ 83 $ 304 $ 338
======= ======= =========
PROPERTY AND EQUIPMENT:
Equipment, fixtures and fittings.......................... $ 2,376 $ 2,559 $ 2,553
Software.................................................. 1,150 1,369 1,412
------- ------- ---------
3,526 3,928 3,965
Less: Accumulated depreciation and amortization........... (2,573) (3,150) (3,418)
------- ------- ---------
$ 953 $ 778 $ 547
======= ======= =========
ACCRUED EXPENSES AND OTHER LIABILITIES:
Sales return reserve...................................... $ 200 $ 293 $ 255
Accrued wages and employee benefits....................... 164 212 394
Assembly costs............................................ 301 179 220
Professional fees......................................... 54 63 36
Other..................................................... 339 317 212
------- ------- ---------
$ 1,058 $ 1,064 $ 1,117
======= ======= =========
</TABLE>
F-13
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - INCOME TAXES:
The provision for income taxes consist of the following (in thousands):
<TABLE>
<CAPTION>
------------------------------
YEAR ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current portion:
U.S. federal.............................................. $ - $ - $ 65
State..................................................... - - 2
-------- -------- --------
- - 67
Deferred.................................................... - - -
-------- -------- --------
$ - $ - $ 67
======== ======== ========
</TABLE>
No current provision or benefit for federal and state income taxes was provided
for the years ended December 31, 1997 and 1998 as the Company incurred net
operating losses for income tax purposes. No deferred provision or benefit for
income taxes has been recorded as the Company is in a net deferred tax asset
position for which a full valuation allowance has been provided due to the
uncertainty as to the realization.
Deferred tax assets consist of the following (in thousands):
<TABLE>
<CAPTION>
-----------------
DECEMBER 31,
-----------------
1998 1999
------- -------
<S> <C> <C>
DEFERRED TAX ASSETS:
Federal and state loss carryforwards...................... $ 4,819 $ 4,555
Inventory................................................. 96 363
Reserves and accruals..................................... 234 293
Depreciation and amortization............................. - 404
Research and development credit carryforwards............. 897 1,139
------- -------
6,046 6,754
Less: Valuation allowance................................... (6,046) (6,754)
------- -------
Net deferred tax asset...................................... $ - $ -
======= =======
</TABLE>
As of December 31, 1999, the Company had net operating loss carryforwards of
approximately $15,000,000 and $9,000,000 for federal and state income tax
purposes, respectively. These losses are available to reduce taxable income and
expire from 2002 through 2019. Because of certain changes in the ownership of
the Company in December 1996, there is an annual limitation of approximately
$774,000 on the use of approximately $10,000,000 net operating loss
carryforwards pursuant to Section 382 of the Internal Revenue Code.
F-14
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - NET INCOME (LOSS) PER SHARE:
The following table sets forth the computation of basic and diluted net income
(loss) per share for the periods indicated (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
-----------------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)............................ $(2,016) $(2,322) $ 142 $ 42 $ (582)
======= ======= ======= ======= =======
Denominator:
Shares used in computing net income (loss)
per share:
Basic...................................... 9,323 9,626 9,727 9,708 9,856
======= ======= ======= ======= =======
Diluted.................................... 9,323 9,626 23,320 22,735 9,856
======= ======= ======= ======= =======
Net income (loss) per share:
Basic........................................ $ (0.22) $ (0.24) $ 0.01 $ 0.00 $ (0.06)
======= ======= ======= ======= =======
Diluted...................................... $ (0.22) $ (0.24) $ 0.01 $ 0.00 $ (0.06)
======= ======= ======= ======= =======
Antidilutive securities including options,
warrants, convertible preferred stock not
included in net loss per share calculation... 18,741 17,515 - - 18,201
======= ======= ======= ======= =======
Pro forma:
Shares used above............................ 9,727 9,856
Pro forma adjustment to reflect weighted
average effect of the assumed conversion of
convertible preferred stock................ 12,081 12,403
------- -------
Shares used in computing pro forma net income
(loss) per share attributable to common
stockholders
Basic........................................ 21,808 22,259
======= =======
Diluted...................................... 23,320 22,259
======= =======
Pro forma net income (loss) per share
attributable to common stockholders
Basic........................................ $ 0.01 $ (0.03)
======= =======
Diluted...................................... $ 0.01 $ (0.03)
======= =======
</TABLE>
F-15
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - MANDATORILY REDEEMABLE PREFERRED STOCK:
The Company is authorized to issue 9,500,000 shares of Preferred Stock, which
had been designated Series A through H as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
CONVERSION
SERIES RATIO PRICE PER SHARE SHARES AMOUNT
------------------------------------------------------------ ---------- --------------- -------- -------
<S> <C> <C> <C> <C>
A........................................................... 1 to 3 $ 1.00 500 $ 500
B........................................................... 1 to 3 2.00 1,000 2,000
C........................................................... 1 to 3 5.00 1,010 5,050
D........................................................... 1 to 3 7.50 300 2,250
E........................................................... 1 to 3 16.00 264 4,232
F........................................................... 1 to 1 5.50 1,225 6,703
F-1......................................................... 1 to 1 5.50 290 1,595
G........................................................... 1 to 1 6.00 1,343 8,061
-------- -------
Balance at December 31, 1998 and 1999....................... 5,932 30,391
H (unaudited)............................................... 1 to 1 $ 8.00 650 5,200
-------- -------
Balance at June 30, 2000 (unaudited)........................ 6,582 $35,591
</TABLE>
<TABLE>
<CAPTION>
------------------
SHARES AMOUNT
-------- -------
<S> <C> <C>
Balance at December 31, 1996................................ 3,074 $14,032
Issuance of Series F Preferred Shares....................... 1,225 6,703
Issuance of Series F-1 Preferred Shares..................... 290 1,595
-------- -------
Balance at December 31, 1997................................ 4,589 22,330
Issuance of Series G Preferred Shares....................... 1,343 8,061
-------- -------
Balance at December 31, 1998 and 1999....................... 5,932 30,391
Issuance of Series H Preferred Shares (unaudited)........... 650 5,200
-------- -------
Balance at June 30, 2000 (unaudited)........................ 6,582 $35,591
======== =======
</TABLE>
The rights, preferences, privileges and restrictions with respect to the
Company's Preferred Stock are as follows:
CONVERSION
Each issued share of Series A, B, C, D and E Preferred Stock is convertible, at
the option of the holder, into three shares of Common Stock. Each issued share
of Series F, F-1, G and H Preferred Stock is convertible, at the option of the
holder, into one share of Common Stock. All issued Preferred Stock will be
automatically converted at the close of a public offering of the Company's
Common Stock at a price not less than $8.00 per share and an aggregate offering
price to the public of not less than $7,500,000. The conversion price of the
Series A, B, C, D, E, F, F-1, G and H Preferred Stock is $0.33, $0.67, $1.67,
$2.50, $5.33, $5.50, $5.50, $6.00 and $8.00 per share, respectively. A total of
12,730,000 shares of Common Stock have been reserved for issuance upon the
conversion of the Preferred Stock.
F-16
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - MANDATORILY REDEEMABLE PREFERRED STOCK: (CONTINUED)
REDEMPTION
Convertible Preferred Stock is redeemable upon a change in control or sale of
substantially all of the assets of the Company at a redemption price equal to
the liquidation preferences as described below.
DIVIDENDS
Holders of Series A, B, C, D, E, F, F-1, G and H Preferred Stock are entitled to
receive non-cumulative dividends at the annual rate of $0.10, $0.20, $0.50,
$0.75, $1.60, $0.55, $0.57, $0.59 and $0.80 per share, respectively, if and when
declared by the Board of Directors. Such dividends are payable in preference to
any dividends for Common Stock declared by the Board of Directors.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company, the
holders of Series A, B, C, D, E, F, F-I, G and H Preferred Stock are entitled to
a distribution in preference to holders of Common Stock, at an amount up to
their respective original issue price, plus any declared but unpaid dividends. A
merger, acquisition, sale of voting control or sale of substantially all of the
assets of the Company, in which the shareholders of the Company do not own a
majority (50% or more) of the outstanding shares of the surviving corporation is
deemed to be a liquidation.
VOTING
The holders of Series A, B, C, D, E, F, F-1, G and H Preferred Stock have one
vote for each share of Common Stock into which such shares may be converted.
SERIES F AND F-1 PREFERRED STOCK
In conjunction with the issuance of Series F and F-1 Preferred Stock in 1997,
the Company issued warrants to purchase 1,515,000 shares of its Common Stock at
$5.50 per share. The warrants are exercisable immediately and expire in
April 2001. As of December 31, 1999, no warrants were exercised.
F-17
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - COMMON STOCK WARRANTS:
The following table summarizes the activity of outstanding warrants (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
WARRANTS
EXERCISE EXERCISABLE AT
COMMON STOCK PRICE PER EACH YEAR
UNDER WARRANTS SHARE END
-------------- -------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1996............................ 5,386 $6.50-$8.50 4,786
Granted to Series F and F-1 Preferred Stockholders.......... 1,515 $5.50
Cancelled warrants, previously granted to credit
providers................................................. (865) $6.50
------------
Outstanding at December 31, 1997............................ 6,036 $5.50-$8.50 5,636
Granted to a foundry........................................ 1,200 $6.50
Granted to a Company's advisor.............................. 167 $6.50
Expired and cancelled warrants, previously granted to a
foundry and credit providers.............................. (3,921) $6.50
------------
Outstanding at December 31, 1998, December 31, 1999 and
June 30, 2000 (unaudited)................................. 3,482 $5.50-$8.50 3,482
============
</TABLE>
The following table summarizes the outstanding warrants as of December 31, 1999
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
FAIR MARKET
COMMON EXERCISE VALUE OF THE
STOCK UNDER PRICE WARRANT AT
DESCRIPTION OF WARRANTS ISSUANCE DATE WARRANTS PER SHARE ISSUANCE DATE EXPIRATION DATE
-------------------------------------- ------------- ------------ --------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Warrant, permitting cashless
exercises, issued for marketing
purposes............................ June 1996 600 $ 8.50 $ 258 June 2001
Warrant issuance in connection with
Series F and F-1 Convertible
Preferred Stock financing (Note 2).. November 1997 1,515 $ 5.50 $ 136 April 2001
Warrant issued to an advisor.......... March 1998 167 $ 6.50 $ 14 January 2002
Warrant issued to a foundry in
connection with termination of a
capacity agreement (Note 3)......... August 1998 1,200 $ 6.50 $ 127 November 2002
------------
Total outstanding and exercisable at
December 31, 1999 and June 30, 2000
(unaudited)......................... 3,482
============
</TABLE>
The following assumptions were applied when estimating the fair value of the
above warrants using the Black-Scholes option pricing model: dividend yield of
0%, risk-free interest rate of 5.45%-5.84%, terms of 3.5 years to 4.25 years and
volatility of 40%-60%.
F-18
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMON STOCK OPTIONS:
COMMON STOCK OPTION PLANS
The 1992 Stock Option Plan (the "1992 Plan") authorizes the Board of Directors
to grant incentive stock options and nonqualified stock options to employees,
directors and consultants for up to 3,300,000 shares of Common Stock. Under the
1992 Plan, incentive stock options are to be granted at a price not less than
100% of the fair value of the stock at the date of grant, as determined by the
Board of Directors. Nonqualified stock options are to be granted at a price not
less than 85% of the fair value of the stock at the date of grant, as determined
by the Board of Directors. Options generally vest over a four year period and
are exercisable for a maximum period of ten years after the date of grant. The
1992 Plan was terminated in 1996 and no further options were granted under the
plan.
In 1996, the Company adopted the 1996 Stock Plan (the "1996 Plan") which
authorizes the Board of Directors to grant incentive stock options and
nonqualified stock options to employees, directors and consultants for up to
2,500,000 shares of Common Stock. The option terms under the 1996 Plan are
substantially the same as the 1992 Plan except that options granted under the
1996 Plan may be exercised immediately. Common Stock purchased pursuant to the
exercise of an unvested option is subject to re-purchase by the Company, at the
exercise price, under certain conditions. There were no shares of common stock
subject to repurchase at 1997, 1998 and 1999. Options generally vest over a four
year period and are exercisable for a maximum period of ten years after the date
of grant. In March 1997, the Company canceled 918,500 options representing all
unexercised options with exercise prices greater than $1.00, and immediately
reissued the options with an exercise price of $1.00.
F-19
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMON STOCK OPTIONS: (CONTINUED)
A summary of activity under the 1992 and 1996 Plans is as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
-------------------------------------------
OPTIONS OUTSTANDING
--------------------
NUMBER
AVAILABLE OF EXERCISE WEIGHTED
FOR GRANT SHARES PRICE AVERAGE
--------- ------ ----------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1996......................... 1,695 2,337 $0.33-$2.75 $ 1.20
Granted.............................................. (1,524) 1,524 $1.00 $ 1.00
Cancelled............................................ 1,685 (1,685) $0.07-$2.75 $ 1.75
Exercised............................................ - (209) $0.33-$1.00 $ 0.16
--------- ------
Balance at December 31, 1997......................... 1,856 1,967 $0.33-$1.00 $ 0.69
Authorized........................................... 600 -
Granted.............................................. (915) 915 $1.00 $ 1.00
Cancelled............................................ 658 (658) $0.33-$1.00 $ 0.89
Exercised............................................ - (272) $0.33-$1.00 $ 0.11
Terminated under 1992 Plan........................... (621) - -
--------- ------
Balance at December 31, 1998......................... 1,578 1,952 $0.03-$1.00 $ 0.85
Granted.............................................. (557) 557 $1.00 $ 1.00
Cancelled............................................ 161 (161) $0.50-$1.00 $ 0.99
Exercised............................................ - (106) $0.03-$1.00 $ 0.63
Terminated under 1992 Plan........................... (13) - -
--------- ------
Balance at December 31, 1999......................... 1,169 2,242 $0.03-$1.00 $ 0.88
Granted (unaudited).................................. (408) 408 $4.00-8.00 $ 7.83
Cancelled (unaudited)................................ 203 (203) $1.00-$6.00 $ 1.32
Exercised (unaudited)................................ - (131) $0.17-$1.00 $ 0.94
--------- ------
Balance at June 30, 2000 (unaudited)................. 964 2,316 $0.03-$4.00 $ 0.89
========= ======
</TABLE>
Information relating to stock options outstanding at December 31, 1999 is as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ ------------------------------
WEIGHTED AVERAGE
NUMBER REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------------------- ----------- --------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.03-$0.50................ 279 3.22 $ 0.07 279 $ 0.07
$0.83...................... 3 5.85 $ 0.83 3 $ 0.83
$1.00...................... 1,960 8.31 $ 1.00 625 $ 1.00
----------- -----------
2,242 907
=========== ===========
</TABLE>
F-20
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMON STOCK OPTIONS: (CONTINUED)
APB NO. 25 DEFERRED COMPENSATION COST TO EMPLOYEES
During the year ended December 31, 1999 and the six months ended June 30, 2000,
the Company recorded deferred compensation of approximately $828,000 and
$410,000, respectively. This deferred compensation represents the difference
between the grant price and the fair value for financial statement reporting
purposes of the Company's common stock options granted during this period.
Deferred compensation expense is being amortized using the graded vesting
method, in accordance with SFAS No. 123 and FASB Interpretation No. 28, over the
vesting period of each respective option, generally four years. Under the graded
vesting method, each option grant is separated into portions based on their
vesting terms which results in acceleration of amortization expense for the
overall award. The accelerated amortization pattern results in expensing
approximately 52% of the total award in year 1, 27% in year 2, 15% in year 3 and
6% in year 4.
Deferred compensation expense was allocated among the associated expense
categories as follows (in thousands):
<TABLE>
<CAPTION>
---------------------------
SIX MONTHS
YEARS ENDED ENDED JUNE
DECEMBER 31, 30,
------------- -----------
1998 1999 1999 2000
----- ----- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Cost of contract revenue.................................... $ - $ - $ - $ 22
Research and development.................................... - 56 11 152
Selling, general and administrative......................... - 51 9 190
---- ---- ---- ----
$ - $107 $ 20 $342
---- ---- ---- ----
$ - $107 $ 20 $364
==== ==== ==== ====
</TABLE>
SFAS NO. 123 PRO FORMA DISCLOSURES
Had compensation cost for the Company's option plans been determined based on
the fair value at the grant dates, as prescribed in SFAS 123, the Company's net
income (loss) would have been as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
-----------------------------------------------
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss):
As reported.................................... $(2,016) $(2,322) $ 142 $ 42 $ (582)
======= ======= ======= ======= =======
Pro forma...................................... $(2,351) $(2,491) $ (34) $ (46) $ (934)
======= ======= ======= ======= =======
Pro forma net income (loss) per share
Basic and diluted............................ $ (0.26) $ (0.26) $ (0.00) $ (0.00) $ (0.09)
======= ======= ======= ======= =======
</TABLE>
The fair value of each grant is estimated on the date of grant using the
Black-Scholes method with the following assumptions used for grants during the
applicable period: dividend yield of 0% for all periods: risk-free interest
F-21
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMON STOCK OPTIONS: (CONTINUED)
rates of 6.5%, 5.0% and 6.0% for options granted during 1997, 1998 and 1999,
respectively; a weighted average expected option life of five years for all
periods; and a volatility factor of 0% for all periods. The weighted average
fair value of options granted during 1997, 1998 and 1999 was $0.45, $1.00 and
$1.87, respectively.
NOTE 10 - EMPLOYEE BENEFITS:
RETIREMENT SAVINGS PLAN
Effective January 1997, the Company adopted the MoSys 401(k) Plan (the "Savings
Plan") which qualifies as a thrift plan under Section 401(k) of the Internal
Revenue Code. All full-time employees who are at least 21 years old are eligible
to participate in the Savings Plan at the time of hire. Participants may
contribute up to 15% of their earnings to the Savings Plan. A discretionary
matching amount may be made by the Company. The Company did not make any
contributions in the years ended December 31, 1997, 1998 and 1999.
NOTE 11 - BUSINESS SEGMENTS, CONCENTRATION OF CREDIT RISK AND SIGNIFICANT
CUSTOMERS:
The Company operates in a single industry segment. This industry segment is
characterized by rapid technological change and significant competition.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. Cash and cash equivalents are deposited with high
credit quality institutions.
The Company sells its products and technology to customers in the Far East,
North America and Europe (in thousands).
<TABLE>
<CAPTION>
-----------------------------------------------
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States.................................... $10,592 $18,454 $ 6,156 $3,315 $3,011
Japan............................................ 980 2,209 1,156 927 510
Taiwan........................................... 22,859 15,365 7,614 3,725 847
Europe........................................... 391 253 433 178 120
------- ------- ------- ------ ------
Total............................................ $34,822 $36,281 $15,359 $8,145 $4,488
======= ======= ======= ====== ======
</TABLE>
One customer accounted for 12% of net sales in fiscal 1997. Three customers
accounted for 29%, 11% and 10% of net sales in fiscal 1998. Two customers
accounted for 16% and 11% of net sales in fiscal 1999. One customer accounted
for 48% of gross accounts receivable at December 31, 1997. Two customers
accounted for 33% (unaudited) and 13% (unaudited) of net sales in the six months
ended June 30, 2000. Two customers accounted for 29% and 12% of gross accounts
receivable at December 31, 1998. Four customers accounted for 28%, 14%, 13% and
11% of gross accounts receivable at December 31, 1999. Three customers accounted
for 47% (unaudited), 13% (unaudited) and 11% (unaudited) of gross accounts
receivable at June 30, 2000. The Company performs ongoing credit evaluations of
its customers' financial condition and maintains an allowance for uncollectible
accounts receivable based upon the expected collectibility of all accounts
receivable. Write off
F-22
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - BUSINESS SEGMENTS, CONCENTRATION OF CREDIT RISK AND SIGNIFICANT
CUSTOMERS: (CONTINUED)
accounts receivable were $0, $0, $161,000 and $0 (unaudited) in years ended
December 31, 1997,1998 and 1999 and the six months ended June 30, 2000,
respectively.
NOTE 12 - OTHER COMMITMENTS AND CONTINGENCIES:
The Company leases its facility and certain equipment under non-cancelable
operating leases which expire in 2001. The leases provide for monthly payments
and are being charged to operations ratably over the lease terms. In addition to
the minimum lease payments, the Company is responsible for property taxes,
insurance and certain other operating costs.
Future minimum lease payments under non-cancelable operating leases as of
December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
YEAR ENDING DECEMBER 31, OPERATING LEASES
------------------------------------------------------------ ----------------
<S> <C>
2000........................................................ $ 149
2001........................................................ 134
-------------
Total minimum payments...................................... $ 283
=============
</TABLE>
Rent expense under operating leases totaled $367,000, $138,000, $134,000 and
$70,000 (unaudited) for the years ended December 31, 1997,1998 and 1999 and the
period ended June 30, 2000, respectively.
In the normal course of business, the Company from time to time may receive and
make inquiries with regard to possible patent infringement. Management believes
that it is unlikely that the outcome of these patent infringement inquiries
would have a material adverse effect on the Company's financial position or
results of operations.
NOTE 13 - SUBSEQUENT EVENTS:
On July 27, 2000, the Board of Directors authorized the reincorporation of the
Company in the State of Delaware subject to shareholder approval at a
forthcoming special meeting of shareholders.
Following the reincorporation, the Company is authorized to issued 120,000,000
shares of $0.01 par value common stock and 20,000,000 shares of $0.01 par value
preferred stock. The Board of Directors has the authority to issued the
undesignated preferred stock in one or more series and to fix the rights,
preferences, privileges and restriction thereof.
BENEFIT PLANS
2000 EMPLOYEE STOCK OPTION PLAN
The Company's 2000 employee stock option plan ("2000 plan") will be adopted in
connection with its reincorporation in the state of Delaware.
A total of 5,000,000 shares of common stock have been reserved for issuance
under the 2000 plan. In addition, the 2000 plan provides for an annual increase
in the number of shares reserved under the plan on January 1 of each year, equal
to the lesser of 500,000 shares, two percent of the Company's outstanding shares
of common
F-23
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - SUBSEQUENT EVENTS: (CONTINUED)
stock on such date or a lesser amount determined by the board of directors. The
2000 plan provides for grants to employees, including officers and employee
directors, of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, or the code, and for grants of
nonstatutory stock options to employees, including officers and employee
directors, and to consultants. The purpose of the 2000 plan is to attract and
retain the best available personnel and to encourage stock ownership by
employees, officers and consultants in order to give them a greater personal
stake in the Company's success. The 2000 plan is administered by the board of
directors or by a committee appointed by the board, which identifies optionees
and determines the terms of options granted, including the exercise price,
number of shares subject to the option and the timing and terms of exercise.
The term of options granted under the 2000 plan may not exceed ten years. The
term of all incentive stock options granted to an optionee who, at the time of
grant, owns stock representing more than 10% of the voting power of all classes
of the Company's stock may not exceed five years. Generally, 25% of the options
granted under the 2000 plan will vest and become exercisable on the first
anniversary of the date of grant, and 1/48th of the options will vest and become
exercisable each month thereafter.
The exercise price of incentive stock options granted under the 2000 plan must
be at least equal to the fair market value of the shares on the date of grant.
The exercise price of nonstatutory stock options granted under the 2000 plan
will be determined by the board of directors, but in no event will be less than
85% of the fair market value of the common stock on the date of grant. The
exercise price of any incentive stock option or nonstatutory stock option
granted to a ten-percent stockholder must equal at least 110% of the fair market
value of the common stock on the date of grant.
2000 EMPLOYEE STOCK PURCHASE PLAN
The Company's 2000 employee stock purchase plan will be adopted in connection
with its Delaware reincorporation. A total of 200,000 shares of common stock
will be reserved for issuance under the purchase plan. In addition, the purchase
plan provides for an annual increase in the number of shares reserved under the
plan on January 1 of each year, equal to the lesser of 100,000 shares, one
percent of the Company's outstanding shares of common stock on such date or a
lesser amount determined by the board of directors. The purchase plan, which is
intended to qualify under Section 423 of the code, will be administered by the
board of directors or a committee appointed by the board of directors.
Employees, including officers and employee directors but excluding 5%
stockholders, are eligible to participate if they are customarily employed for
at least 20 hours per week and for more than five months in any calendar year.
The purchase plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 10% of an employee's compensation.
Employees will be permitted to invest a maximum of $25,000 in any offering
period.
The purchase plan will be implemented in a series of overlapping offering
periods, each to be approximately 12 months in duration. The initial offering
period under the purchase plan will begin on the pricing date of this offering
and expires on the third enrollment date, which is the first day of the third
offering period. Offering periods will begin on the first trading day on or
after January 1 and July 1 of each year and end on the last trading day in the
period ending twelve months later. Each participant will be granted an option on
the first day of the offering period, and such option will be automatically
exercised on the last day of each offering period. The purchase price of the
common stock under the purchase plan will be equal to 85% of the lesser of the
fair market value per share of common stock on the start date of the offering
period or on the date on which the
F-24
<PAGE>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - SUBSEQUENT EVENTS: (CONTINUED)
option is exercised. Employees may end their participation in an offering period
at any time during that period, and participation ends automatically on
termination of employment with the Company. The purchase plan will terminate in
June 2010, unless sooner terminated by the board of directors.
As of the date of this report, no shares have been issued under the purchase
plan.
F-25
<PAGE>
[back inside cover]
A picture of an integrated circuit that incorporates the MoSys 1T-SRAM
technology, which is positioned on two sections of the integrated circuit. Each
block of 1T-SRAM is highlighted by a black rectangular border. Above the picture
the title reads "An example of an integrated circuit incorporating MoSys'
1T-SRAM technology." Below the picture, a caption reads "The 1T-SRAM blocks
occupy over 30% of the integrated circuit area."
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses payable by the Company (the
"Registrant") in connection with the offering of the securities being
registered, other than the underwriting discounts and commissions. All of the
amounts shown are estimates except for the SEC registration fee, and the NASD
filing fee and the Nasdaq National Market filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $13,200
NASD filing fee*............................................
Nasdaq National Market filing fee*..........................
Blue Sky fees and expenses..................................
Printing and engraving expenses*............................
Legal fees and expenses*....................................
Accounting fees and expenses*...............................
Transfer agent and registrar fees and expenses*.............
Directors' and Officers' insurance premiums*................
Miscellaneous expenses*.....................................
-------
Total*...................................................... $
=======
</TABLE>
* To be added by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") authorizes a
court to award, or a corporation's board of directors to grant, indemnity to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act").
As permitted by the DGCL, the Registrant's bylaws provide that the Registrant
shall indemnify its directors and officers, and may indemnify its employees and
other agents, to the fullest extend permitted by law. The bylaws also permit the
Registrant 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. The
Registrant intends to obtain officer and director liability insurance with
respect to liabilities arising out of certain matters, including matters arising
under the Securities Act.
The Registrant also has entered into agreements with certain of its directors
and executive officers and intends to enter into agreements with its remaining
officers and directors that, among other things, indemnify them for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by them in any action or proceeding, including any action by or in the
right of the Registrant, arising out of such person's services as a director or
officer of the Registrant, any subsidiary of the Registrant or any other company
or enterprise to which the person provides services at the request of the
Registrant.
Reference is made to Section 7 of the Underwriting Agreement, a copy of which is
filed as Exhibit 1.1 hereto, which provides for indemnification by the
Underwriters of the directors and officers of the Registrant who sign the
registration statement against certain liabilities, including those arising
under the Securities Act, in certain circumstances.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since May 31, 1997, the Registrant has issued and sold the following
unregistered securities. None of these sales involved an underwriter, finder or
other agent or the payment of any selling commission to any person.
1. From May 31, 1997 to May 5, 2000 the Registrant issued and sold 673,319
shares of common stock to employees and consultants at prices ranging from
$0.03 to $1.00 per share upon exercise of stock options pursuant to the
Registrant's 1992 Stock Option Plan and 1996 stock plan, for an aggregate
purchase price of approximately $215,000.
2. In November 30, 1997, the Registrant issued and sold an aggregate of 290,000
shares of Series F-1 preferred stock to three investors for an aggregate
purchase price of $1,595,000 and issued warrants to such investors to
acquire an aggregate of 290,000 shares of common stock at a per share
exercise price of $5.50.
3. On March 7, 1998, the Registrant issued warrants to Wei Yen to acquire an
aggregate of 166,667 shares of common stock at a per share exercise price of
$5.50.
4. On April 30, 1998, the Registrant issued and sold an aggregate of 1,343,433
shares of Series G preferred stock to six investors for an aggregate
purchase price of $1,343,433.
5. On November 2, 1998, pursuant to the termination of a previous agreement and
warrants, the Registrant issued warrants to TSMC to acquire an aggregate of
1,200,000 shares of common stock at a per share exercise price of $6.50.
6. On May 13, 2000 the Registrant issued and sold an aggregate of 650,000
Shares of Series H preferred stock to two investors for an aggregate
purchase price of $5,200,000 pursuant to a written agreement dated April 4,
2000.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Regulation S under the Securities Act,
Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or
Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions
providing the offering and sale of Securities outside the United States,
transactions by an issuer not involving a public offering or transactions
pursuant to compensatory benefit plans and contracts relating to compensation as
provided under such Rule 701. The purchasers of securities in each such
transaction represented their intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof, and appropriate legends were affixed to the share certificates and
instruments issued in such transactions.
ITEM 16. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Merger Agreement regarding the Registrant's reincorporation
in Delaware
3.1 Amended and Restated Articles of Incorporation of the
Registrant
3.2 Bylaws of the Registrant, as amended
3.3* Restated Certificate of Incorporation of the Registrant, to
be in effect on the Registrant's reincorporation in Delaware
3.4 Bylaws of the Registrant, to be in effect on the
Registrant's reincorporation in Delaware
4.1* Specimen common stock certificate
4.2 Third Amended and Restated Investor Rights Agreement dated
September 27, 1997
4.3* Rights Agreement, to be in effect on the Registrant's
reincorporation in Delaware
5.1* Opinion of McCutchen, Doyle, Brown & Enersen, LLP
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.1 Form of Indemnity Agreement between the Registrant and each
of its directors and executive officers
10.2 1992 Stock Option Plan and form of Option Agreement
thereunder
10.3 1996 Stock Plan and form of Option Agreement thereunder
10.4 Form of Restricted Stock Purchase Agreement
10.5 2000 Employee Stock Option Plan and form of Option Agreement
thereunder
10.6 2000 Employee Stock Purchase Plan and form of Subscription
Agreement thereunder
10.7 Standard Industrial Lease, dated September 24, 1996, between
the Registrant and McCandless Properties
10.8 First Amendment to Lease, dated June 30, 2000, between the
Registrant and McCandless Properties
10.9+ Agreement between Nintendo Co., Ltd. and the Registrant
dated August 31, 1999
10.10+ License Agreement between NEC Corporation and the Registrant
dated January 31, 1999
10.11+ License Agreement between NEC Corporation and the Registrant
dated December 17, 1999
10.12 Employment Agreement between Registrant and F. Judson
Mitchell dated July 17, 2000
23.1 Consent of PricewaterhouseCoopers, LLP Independent
Accountants
23.2* Consent of McCutchen, Doyle, Brown & Enersen, LLP (included
in Exhibit 5.1)
24.1 Powers of Attorney (see page II-4)
27.1 Financial Data Schedule
</TABLE>
* To be supplied by amendment
+ Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters at
the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer of controlling person in connection with the securities being
registered hereunder, the Registrant 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 of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-3
<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 our behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, State of California, on the 4th day of August, 2000.
<TABLE>
<S> <C> <C>
MONOLITHIC SYSTEM TECHNOLOGY, INC.
By /s/ FU-CHIEH HSU
-----------------------------------------
Fu-Chieh Hsu
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Fu-Chieh Hsu and F. Judson Mitchell, and
each one of them, acting individually and without the other, as his or her
attorney-in-fact, each with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Registration Statement
(including post-effective amendments), 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 exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or his substitute or substitutes may do or cause
to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
SIGNATURE TITLE DATE
------------------------------------------------ ----------------------------------- ---------------
<C> <S> <C>
/s/ FU-CHIEH HSU Chairman of the Board, President
-------------------------------------- and Chief Executive Officer August 4, 2000
Fu-Chieh Hsu (Principal Executive Officer)
/s/ F. JUDSON MITCHELL Vice President, Finance and Chief
-------------------------------------- Financial Officer (Principal August 4, 2000
F. Judson Mitchell Financial and Accounting Officer)
/s/ CARL E. BERG
-------------------------------------- Director August 4, 2000
Carl E. Berg
/s/ DENNY R. S. KO
-------------------------------------- Director August 4, 2000
Denny R. S. Ko
/s/ WING-YU LEUNG
-------------------------------------- Director August 4, 2000
Wing-Yu Leung
</TABLE>
II-4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
Monolithic System Technology, Inc.
Our audits of the financial statements referred to in our report dated
August 3, 2000 appearing in this Registration Statement on Form S-1 also
included an audit of the financial statement schedule listed in Item 14(a)(2) of
such Registration Statement. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statement.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
August 3, 2000
S-1
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING CHARGED TO CREDITED TO AT END OF
DESCRIPTION OF PERIOD EXPENSES EXPENSES PERIOD
----------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts receivable:
Fiscal year ended December 31, 1997............... $147 $153 $ -- $300
Fiscal year ended December 31, 1998............... 300 -- -- 300
Fiscal year ended December 31, 1999............... 300 60 (161) 199
Six months ended June 30, 2000.................... 199 103 -- 200
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Merger Agreement regarding the Registrant's reincorporation
in Delaware
3.1 Amended and Restated Articles of Incorporation of the
Registrant
3.2 Bylaws of the Registrant, as amended
3.3* Certificate of Incorporation of the Registrant, to be in
effect on the Registrant's reincorporation in Delaware
3.4 Bylaws of the Registrant, to be in effect on the
Registrant's reincorporation in Delaware
4.1* Specimen common stock certificate
4.2 Third Amended and Restated Investor Rights Agreement dated
September 27, 1997
4.3* Rights Agreement, to be in effect on the Registrant's
reincorporation in Delaware
5.1* Opinion of McCutchen, Doyle, Brown & Enersen, LLP
10.1 Form of Indemnity Agreement between the Registrant and each
of its directors and executive officers
10.2 1992 Stock Option Plan and form of Option Agreement
thereunder
10.3 1996 Stock Plan and form of Option Agreement thereunder
10.4 Form of Restricted Stock Purchase Agreement
10.5 2000 Employee Stock Option Plan and form of Option Agreement
thereunder
10.6 2000 Employee Stock Purchase Plan and form of Subscription
Agreement thereunder
10.7 Standard Industrial Lease, dated September 24, 1996, between
the Registrant and McCandless Properties
10.8 First Amendment to Lease, dated June 30, 2000, between the
Registrant and McCandless Properties
10.9+ Agreement between Nintendo Co., Ltd. and the Registrant
dated August 31, 1999
10.10+ License Agreement between NEC Corporation and the Registrant
dated January 31, 1999
10.11+ License Agreement between NEC Corporation and the Registrant
dated December 17, 1999
10.12 Employment Agreement between Registrant and Judson Mitchell
dated July 17, 2000
23.1 Consent of PricewaterhouseCoopers, LLP Independent
Accountants
23.2* Consent of McCutchen, Doyle, Brown & Enersen, LLP (included
in Exhibit 5.1)
24.1 Powers of Attorney (see page II-4)
27.1 Financial Data Schedule
</TABLE>
* To be supplied by amendment
+ Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
