<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 2000
REGISTRATION NO. 333-45190
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TESSERA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3674 13-3573611
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3099 ORCHARD DRIVE
SAN JOSE, CALIFORNIA 95134
(408) 894-0700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BRUCE M. MCWILLIAMS
CHIEF EXECUTIVE OFFICER
3099 ORCHARD DRIVE
SAN JOSE, CALIFORNIA 95134
(408) 894-0700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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<S> <C>
JOHN B. GOODRICH SCOTT M. STANTON
NORA L. GIBSON ANDREA R. BILLER
THOMAS J. LORR CHRISTIAN WAAGE
WILSON SONSINI GOODRICH & ROSATI GRAY CARY WARE & FREIDENRICH LLP
PROFESSIONAL CORPORATION 4365 EXECUTIVE DRIVE
650 PAGE MILL ROAD SUITE 1600
PALO ALTO, CA 94304 SAN DIEGO, CA 92121
(650) 493-9300 (858) 677-1400
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
REGISTERED BE REGISTERED PER SHARE AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(2)
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Common stock, $0.001 par
value per share........ 7,500,000 $12.00 $90,000,000 $23,760
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) of the Securities Act of 1933.
(2) $26,400 of the Registration Fee was previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed.
We may not sell any of these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 20, 2000
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
This is an initial public offering of common stock by Tessera, Inc. Tessera
is selling 7,500,000 shares of common stock. The estimated offering price will
be between $10 and $12 per share.
------------------
No public market currently exists for our common stock. We have applied for
listing of our common stock on the Nasdaq National Market under the symbol
"TSRA."
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- --------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Tessera, before expenses........................ $ $
</TABLE>
Tessera has granted the underwriters an option for a period of 30 days to
purchase up to 1,125,000 additional shares of our common stock.
------------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CHASE H&Q
UBS WARBURG LLC
NEEDHAM & COMPANY, INC.
WIT SOUNDVIEW
, 2000
<PAGE> 3
[INSIDE FRONT COVER]
[DESCRIPTION OF ARTWORK]
[Left side art:
(Tessera logo) "Providing the Chip-to-System Interface"
Artwork will illustrate the chip-to-system interface by showing a photo
illustration of a semiconductor, integrating into a chip scale package using our
technology, integrating onto a circuit board, and finally inside a cell phone.
There will be a cut out illustration on the phone showing the chip scale package
inside.]
[Right side art:
The following body copy will be on the right side of the inside cover, with
illustrations depicting each major point of copy:
"Establishing Standards for Chip Scale Packaging. Our objective is to
establish our technology as the industry standard by providing the most
advanced, cost-effective chip scale packaging solution with the intellectual
property and services demanded by industry leaders in our target markets."
"Targeting High Growth Markets. We target high growth applications that we
believe represent the greatest immediate need for our technology, including
wireless communications, high performance computing and high bandwidth
networking. These applications demand ever-increasing functionality and
performance and continued miniaturization."
"Serving Leading Customers. Our technology has been adopted by the
semiconductor industry including more than 35 industry leading semiconductor
assemblers, manufacturers and equipment and material providers, such as Intel,
Samsung, Toshiba and Amkor."
"Providing Fundamental Technology. We are a leading provider of proprietary
chip scale packaging technology that addresses fundamental issues in
performance, reliability and size. Our intellectual property portfolio includes
116 issued patents and 169 pending patent applications in the United States for
chip scale packaging."]
["Gatefold. The gatefold will be an illustration with photography showing a
chip scale package using our technology in the center of the page, with the
words "High Performance", "Small Size", and "High Reliability" around the
package. The rest of the page will list our target markets and include
photographs and illustrations of the products that incorporate our technology."
The text and illustrations will include:
Top of page text: "Tessera . . . providing intellectual property for chip
scale packaging to meet the demand for smaller and faster electronic products."
High Bandwidth Networking Devices -- photo of a server with an illustrated
cut-out showing a chip scale package using our technology inside the server.
Game Consoles -- photo of a game console with an illustrated cut-out
showing a chip scale package using our technology inside the game console.
Wireless Phones and Portable Devices -- photo of a wireless phone and a
personal digital assistant with cut-out in each device showing a chip scale
package using our technology inside.
Internet Access -- photo of a personal computer with a cut-out showing a
chip scale package using our technology inside the personal computer.]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Forward Looking Statements.................................. 13
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Consolidated Financial Data........................ 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 25
Management.................................................. 35
Related Party Transactions.................................. 44
Principal Stockholders...................................... 48
Description of Capital Stock................................ 51
Shares Eligible For Future Sale............................. 54
Underwriting................................................ 55
Legal Matters............................................... 58
Experts..................................................... 58
Where You Can Find Additional Information................... 58
</TABLE>
i
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk Factors" and our financial statements
before making an investment decision.
TESSERA, INC.
We provide intellectual property for chip scale packaging to meet the
accelerating demand for performance and miniaturization in wireless
communications, Internet access, computing and consumer electronics. Our
intellectual property, which includes 116 issued patents and 169 pending patents
in the United States as of September 30, 2000, enables the semiconductor
industry to overcome fundamental issues in performance, reliability and size.
The high growth markets for electronic products demand continued innovation
in semiconductor technology. Advancements in semiconductor design and
manufacturing have enabled the number of transistors on a chip to double every
18 months, resulting in improvements in semiconductor performance and size.
Packaging technology has failed to keep pace with these improvements, and has
become a limiting factor in the continued advancement of electronic products.
To address the need for advanced packaging technology, we have developed a
solution that combines our intellectual property with our design and
manufacturing expertise to enable our customers to successfully adopt and
implement our technology. Our patented chip scale packaging technology is
designed to offer the following key benefits:
- Reduced Size. By reducing the size of the package to almost the size of
the chip itself, our proprietary technology enables the semiconductor to
occupy a smaller area on the circuit board, allowing for increased system
miniaturization and functionality.
- Higher Performance. Our technology enables higher system level
performance by allowing shorter electrical paths throughout the system,
resulting in a more rapid transfer of data, voice and multimedia
information.
- Increased Reliability. Our patented technology compensates for the
differing rates of thermal expansion and contraction between the chip and
the circuit board preventing the failure of connections between the chip
and board.
Our objective is to establish our chip scale packaging technology as the
industry standard by providing the most advanced intellectual property and
services. We have licensed our patented technology to over 35 companies,
including leading semiconductor manufacturers, assemblers and material and
equipment suppliers. We have received royalties on more than 350 million
semiconductors packaged using our technology. Our customers include ChipPAC,
EEMS, Intel, IPAC, LG Electronics, OSE, Samsung and Toshiba. Each of these named
customers accounted for more than $250,000 of our revenues for the nine months
ended September 30, 2000. Our technology is incorporated in electronic products,
including wireless handsets, or mobile phones, personal digital assistants,
personal computers, servers and game consoles, from Casio, Compaq, Dell,
Ericsson, Hewlett-Packard, IBM, Motorola, Nokia, Samsung and Sony.
We were incorporated in Delaware in May 1990. Our principal executive
offices are located at 3099 Orchard Drive, San Jose, CA 95134. Our telephone
number is (408) 894-0700.
1
<PAGE> 6
THE OFFERING
Common stock offered by Tessera........... 7,500,000 shares
Common stock to be outstanding after this
offering.................................. 39,056,774 shares
Use of proceeds........................... Working capital and general
corporate purposes.
Proposed Nasdaq National Market Symbol.... TSRA
------------------
The common stock outstanding after the offering is based on the number of
shares outstanding as of September 30, 2000, and does not include:
- 6,918,042 shares of common stock issuable upon the exercise of
outstanding stock options as of September 30, 2000;
- 1,076,934 shares of common stock issuable upon the exercise of
outstanding warrants as of September 30, 2000;
- 1,475,469 shares of common stock available for issuance under our 1999
Stock Plan following this offering; and
- 200,000 additional shares of common stock available for issuance under
our 2000 Employee Stock Purchase Plan following this offering.
------------------------
Unless otherwise noted, all share information in this prospectus:
- reflects the conversion of all outstanding shares of our convertible
preferred stock into 25,544,290 shares of common stock, immediately prior
to the closing of this offering;
- gives effect to a two-for-three reverse stock split of our common stock
and preferred stock effective as of September 1, 2000; and
- assumes no exercise of the underwriter's over-allotment option.
------------------
We operate on a 52-53 week fiscal year which ends on the Sunday nearest to
December 31. Our 52 week fiscal years consist of four equal quarters of 13 weeks
each, and our 53 week fiscal years consist of three 13 week quarters and one 14
week quarter. The financial results for our 53 week fiscal years and our 14 week
fiscal quarters will not be exactly comparable to our 52 week fiscal years and
our 13 week fiscal quarters. For presentation purposes, all fiscal periods
presented or discussed in this prospectus have been presented as ending on the
last day of the nearest calendar month. For example, our 1999 fiscal year ended
on January 2, 2000, but we present our 1999 fiscal year as ending December 31,
1999.
2
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes the consolidated financial data for our
business. You should read this information together with the financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------------- ----------------------
1997 1998 1999 1999 2000
------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues:
License.......................... $ 3,730 $ 4,594 $ 2,925 $ 2,525 $ 2,740
Royalty.......................... 26 630 1,475 642 2,699
Engineering services and other... 1,175 1,435 2,019 2,381 2,858
------- -------- -------- ------- --------
Total revenues................. 4,931 6,659 6,419 5,548 8,297
Gross profit (loss)................... 911 (69) (189) 1,027 3,523
Net loss from continuing operations... (9,140) (12,550) (13,960) (8,762) (21,821)
Net loss.............................. $(9,545) $(13,890) $(17,777) $(9,800) $(21,534)
======= ======== ======== ======= ========
Net loss from continuing operations
per common share, basic and
diluted(1).......................... $ (2.65) $ (2.66) $ (2.96) $ (1.78) $ (5.88)
Net loss per common share, basic and
diluted(1).......................... $ (2.77) $ (2.94) $ (3.77) $ (1.99) $ (5.83)
Shares used in computing basic and
diluted net loss per common share... 3,452 4,724 4,713 4,913 5,328
Pro forma as adjusted net loss per
common share, basic and diluted
(unaudited)......................... $ (0.69) $ (1.03)
Shares used in computing pro forma as
adjusted net loss per common share,
basic and diluted (unaudited)....... 25,760 30,281
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)
-------- --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 570 $ 75,570
Working capital............................................. 23,232 98,232
Total assets................................................ 36,667 111,667
Long-term obligations, less current portion................. 456 456
Mandatorily redeemable cumulative convertible preferred
stock..................................................... 96,155 0
Total stockholders' equity (deficit)........................ $(68,591) $102,564
</TABLE>
-------------------------
(1) Net loss attributable to common stockholders for the period ended September
30, 2000, was reduced by a cumulative preferred stock dividend and a deemed
preferred stock dividend of $7.7 million and $1.9 million, respectively. See
note 1 of the notes to the financial statements for an explanation of the
determination of net loss per common share.
(2) The pro forma as adjusted numbers reflect the automatic conversion of all
shares of mandatorily redeemable cumulative convertible preferred stock into
common stock upon the closing of this offer and the receipt of the net
proceeds from the sale of shares of common stock offered hereby at an
assumed initial public offering price of $11 per share, after deducting the
estimated underwriting discount and estimated offering expenses payable by
us.
3
<PAGE> 8
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially harm our business, operating results and
financial condition and could result in a complete loss of your investment.
RISKS RELATED TO OUR BUSINESS
IF THE SEMICONDUCTOR INDUSTRY DOES NOT CONTINUE TO ADOPT OUR PACKAGING
TECHNOLOGY, OUR REVENUES MAY NOT GROW OR COULD DECLINE AND OUR STOCK PRICE COULD
FALL.
If the semiconductor industry does not continue to adopt our packaging
technology on a widespread basis our growth will be limited, our revenues could
decline, and our stock price could fall. Semiconductor designers and
manufacturers and their customers may not accept our packaging technology as an
alternative to traditional packaging methods in the time frame anticipated by
our business plan, or at all. To date we have focused our efforts on the memory
semiconductor market. To be successful we will need to maintain our market share
and penetrate new markets. The industry may fail to adopt our packaging
technology for any of the following reasons:
- our target markets may find that alternative solutions adequately address
their needs;
- the time and expense required to modify manufacturing lines for the
manufacture of packages using our technology may deter licensees and
customers from selecting and implementing our packaging technology or
adapting it to their manufacturing process;
- the cost of producing packages using our technology may be too high which
could significantly reduce the adoption rate of our packaging technology;
- prospective licensees may not be willing to accept the potential delays
in the early design stages associated with implementing our packaging
technology;
- our licensees' lack of experience with our packaging technology may
result in concerns over the reliability, cost and performance of our
packaging technology relative to other technology; and
- customers may not properly implement our technology, which could damage
our brand name.
FAILURE OF THE SEMICONDUCTOR INDUSTRY TO ADOPT RAMBUS DRAM AND OTHER HIGH
PERFORMANCE DRAM SEMICONDUCTORS COULD ADVERSELY AFFECT THE DEVELOPMENT AND
UTILIZATION OF OUR PACKAGING TECHNOLOGY AND REDUCE OUR REVENUES.
Our chip scale packaging technology has been designated by Rambus as the
reference design package for its Dynamic Random Access Memory, or DRAM chips.
DRAM is a type of memory that is used in a variety of products, including
personal computers and game consoles. We anticipate that royalties from
shipments of Rambus DRAM and other high performance DRAM chips packaged using
our technology will account for a significant percentage of our revenues. If
semiconductor manufacturers do not adopt Rambus DRAM or other high performance
DRAM, our growth will be limited and our revenues could decline. Intel has
announced that in addition to Rambus DRAM, it will make available synchronous
DRAM, a competing type of DRAM, for its next generation Pentium processor.
Further, semiconductor manufacturers who adopt Rambus DRAM or other high
performance DRAM may not adopt our packaging technology. If Rambus DRAM or other
high performance DRAM fails to become an industry standard, our revenues could
be significantly reduced and our competitors may challenge our position in the
packaging market.
4
<PAGE> 9
Various factors may adversely affect utilization of our packaging
technology. For example, the cost of producing packages using our technology may
be too high for high performance DRAM manufacturers which could significantly
reduce the adoption rate of our packaging technology for the associated high
performance DRAM products. Other factors such as delays or shortages of
materials, equipment and the availability of testing services could delay the
adoption of high performance DRAM or our packaging technology. Even if our
package technology is selected for these other products, there could be delays
in the introduction of these products that could materially affect the amount
and timing of any royalty payments that we receive from these products.
WE MAY BE REQUIRED TO UNDERTAKE COSTLY LEGAL PROCEEDINGS TO ENFORCE OR PROTECT
OUR INTELLECTUAL PROPERTY THAT MAY REDUCE REVENUES AND WEAKEN OUR COMPETITIVE
POSITION.
If we fail to protect our intellectual property rights, third parties and
our licensees may be able to use our technology without the payment of royalties
and license fees, which could weaken our competitive position, reduce our
operating profits and increase the likelihood of costly litigation.
Litigation may be necessary 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. Litigation is inherently uncertain and any adverse
decision could limit our ability to offer some of our technology. Whether or not
determined in our favor or settled by us, litigation would be costly and would
divert our managerial, technical, legal and financial resources from normal
business operations, which could have a material adverse effect on our business,
financial condition and results of operations. Additionally, adverse
determinations in litigation could result in a loss of our proprietary rights,
subject us to significant liabilities, require us to seek licenses from third
parties or limit the value of our licensed technology.
We have received notices from third parties in the past, and we believe it
is possible that we or our licensees will receive notices in the future alleging
that products incorporating our technology infringe the rights of those third
parties. Our licensees could become the target of litigation involving our
patents or other intellectual property. Such claims could trigger the
indemnification obligations contained in some of our license agreements and
could result in substantial expense to us. Such litigation could severely
disrupt or shut down the business of our licensees, significantly harm our
relations with our customers and cause the termination or reduction of royalties
and license fees.
Our business may be further harmed if we are forced to pursue enforcement
actions to collect royalties due from our licensees. Any such action may reduce
our royalties or number of licensees and weaken our competitive position in the
market due to retaliatory actions by such licensees.
IF ANY OF OUR FUNDAMENTAL PATENTS ARE FOUND BY A COURT TO BE INVALID OR LIMITED,
IT COULD HAVE A SIGNIFICANT NEGATIVE IMPACT ON OUR BUSINESS AND REVENUE PLANS.
Our patent portfolio contains many key patents which may be particularly
significant to our revenue. If any of these key patents are invalidated, or if
the scope of the claims in any of these key patents is limited by judicial
decision, we could be prevented from licensing our technologies and our
licensees could be prevented from manufacturing and selling the corresponding
packages without obtaining a license to use a third party's patented technology.
5
<PAGE> 10
WE ARE SUBJECT TO CURRENT PENDING LEGAL AND ADMINISTRATIVE PROCEEDINGS THAT
COULD LIMIT OUR ABILITY TO ENFORCE OUR PATENTS.
We are currently subject to the following legal and administrative
proceedings:
- Texas Instruments, Inc. v. Tessera, Inc., Civ. No. 00-2114 CW (N.D.
Cal.). On February 1, 2000, Texas Instruments initiated a declaratory
judgment action against Tessera in U.S. District Court. On March 13,
2000, we filed our answer and counter claim alleging patent infringement.
- Tessera v. Sharp Corporation and Sharp Electronics Corp., Civ. No.
00-20337 JW (N.D. Cal.). On March 28, 2000, Tessera filed a complaint
against Sharp Corporation and Sharp Electronics Corporation alleging
patent infringement.
- In re Certain Semiconductor Chips with Minimized Chip Package Size and
Products Containing Same, ITC Inv. No. 337-TA-432. On March 28, 2000, we
filed a complaint against Sharp Corporation, Sharp Electronics
Corporation and Texas Instruments with the United States International
Trade Commission alleging unlawful import, sale for importation into the
United States, and/or sale within the United States after importation of
certain products that infringe certain of Tessera's issued U.S. patents.
These proceedings are in their preliminary stages, and we cannot predict
their outcome. These types of proceedings are inherently uncertain and we may
not prevail. Texas Instruments and Sharp have advised us of literature that they
believe to be relevant to the validity of our asserted patents. It is possible
that this literature could negatively affect the scope or enforceability of
these patents or of future patents. In fact, it is possible that our asserted
patent claims could be invalidated. A negative outcome in any of these
proceedings could limit our potential future growth and cause us additional
difficulties in enforcing our intellectual property rights against others. We
believe the patents involved in these proceedings are key for certain package
types and may be significant to our future licensing revenue.
Patent litigation and International Trade Commission investigations are
particularly complex and can extend for a protracted time, which can
substantially increase the cost of such proceedings. We have incurred and expect
to continue to incur substantial legal fees and expenses in connection with the
Texas Instruments and Sharp proceedings. It is also possible that the actions
against Texas Instruments and Sharp may lead to the discovery of information
that results in our customers discontinuing royalty or license payments to us or
other parties instituting legal or administrative actions against us. See
"Business -- Legal Proceedings."
OUR ONGOING LITIGATION HAS BEEN COSTLY AND REQUIRES CONTINUED EXPENDITURES THAT
COULD LIMIT OUR GROWTH.
The Texas Instruments and Sharp proceedings have been and will continue to
be costly and time consuming. Legal expenses related to these proceedings are a
significant component of the increase in our selling, general and administrative
expenses for the first nine months of 2000 and we expect these legal expenses to
continue until these proceedings are resolved. In addition these proceedings
have diverted, and are expected to continue to divert, the efforts and attention
of some of our key management, technical, legal and financial resources.
WE DEPEND UPON A FEW MAJOR LICENSEES FOR A SIGNIFICANT PORTION OF OUR REVENUES.
IF WE ARE NOT ABLE TO EXPAND OUR CUSTOMER BASE, WE MAY NOT BE ABLE TO GROW OUR
BUSINESS. ALSO, THE LOSS OF ANY OF OUR MAJOR LICENSEES WOULD CAUSE OUR REVENUES
TO DECLINE.
We derive a large portion of our revenues from a small number of
significant licensees who use our technology to package semiconductors for a
small number of significant customers. For the nine months ended September 30,
2000, EEMS, LG Electronics, IPAC, ChipPAC, Intel and Samsung accounted for 22%,
12%, 12%, 12%, 9% and 7% of our total revenue, respectively. As a result, we
6
<PAGE> 11
must continue to obtain new significant licensees and license new technologies
to increase our revenues and grow our business. Also, the loss of or reduction
in revenues from any of our major licensees would adversely affect our operating
results. Intel has informed us that it intends to use other technologies in
addition to our eBGA solution to package its Flash memory semiconductors. In
addition, Samsung has informed us that it intends to transition away from our
eBGA solution for its SRAM products. If the technologies adopted by Intel and/or
Samsung to replace eBGA do not include our technology, then our operating
results may be adversely affected.
FLUCTUATIONS IN REVENUES AND OPERATING RESULTS MAY CAUSE THE MARKET PRICE OF OUR
COMMON STOCK TO DECLINE.
Historically, our revenues and quarterly operating results have fluctuated
and are likely to do so in the future. Accordingly, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
our future performance. In future periods, our revenues and results of
operations may be below the estimates of public market analysts and investors.
This discrepancy could cause the market price of our common stock to decline.
These fluctuations may be caused by:
- the timing, terms and conditions of our license agreements;
- frequency with which our licensees report their royalties;
- changes in our license fees and royalty rates or the pricing and
licensing policies of our competitors;
- changes in the level of our operating expenses;
- cyclical and seasonal fluctuations in the markets we target.
It is difficult to predict when we will enter into new license agreements.
Delays or deferrals in the decisions to execute license agreements with us by
our customers may also increase as we develop new or enhanced products. Because
we generally recognize a significant portion of the license fee revenues in the
quarter that the license is signed, the timing of signing these license
agreements significantly impacts our quarterly results. Under our typical
license agreements, we also receive ongoing royalty payments. The timing of the
revenue recognition from these royalty payments is dependent upon the individual
terms of each contract. In particular, some of our licensees report their
royalties on a semi-annual basis while others report them on a quarterly basis.
This may cause royalty revenue to fluctuate significantly from quarter to
quarter. Because our revenues vary depending on the mix of revenue, net income
also may fluctuate significantly with changes in royalty and license fee
revenue. Our expense levels in the future will be based, in large part, on our
expectations regarding future revenue and, as a result, net income for any
quarterly period in which material license agreements are delayed could vary
significantly from our budget projections.
WE HAVE INCURRED NET LOSSES SINCE OUR INCEPTION, WE EXPECT TO INCUR LOSSES IN
THE FUTURE, AND WE MAY NOT BE ABLE TO GENERATE SUFFICIENT NET REVENUE IN THE
FUTURE TO ACHIEVE OR SUSTAIN PROFITABILITY.
We have incurred significant net losses since our inception, including
losses of $9.5 million in 1997, $13.9 million in 1998, $17.8 million in 1999 and
$21.5 million in the nine months ended September 30, 2000. At September 30,
2000, we had an accumulated deficit of approximately $86.8 million. To achieve
profitability, we will need to generate and sustain substantially higher revenue
while maintaining reasonable cost and expense levels. We expect to continue to
incur significant operating expenses primarily to support research and
development and expansion of our sales and marketing efforts. These expenditures
may not result in increased revenues or customer growth. We do not know when or
if we will become profitable. If we do achieve profitability, we may not be able
to sustain or increase profitability on a quarterly or an annual basis.
7
<PAGE> 12
IF WE DO NOT EXPAND OUR LICENSABLE TECHNOLOGY PORTFOLIO THROUGH INTERNAL
DEVELOPMENT, ACQUISITIONS OR STRATEGIC RELATIONSHIPS, OUR OPERATING REVENUES
COULD DECLINE, AND WE COULD LOSE OUR COMPETITIVE POSITION.
A significant portion of our revenue is derived from licenses and royalties
from a relatively small number of key technologies, and we anticipate that this
will continue in the future. We must continually devote significant engineering
resources to enable us to develop new package technologies to address the
evolving needs of key markets within the semiconductor industry. We must
introduce these innovations in a timely manner, and the key markets within the
semiconductor industry must adopt them before alternative technologies emerge
that may render such innovations obsolete. Developments in packaging
technologies are inherently complex, require long development cycles and a
substantial investment before we can determine their commercial viability. We
may not be able to develop and market such technology in a timely or
commercially acceptable fashion.
We also expect to continue to expand our licensable technology portfolio
and technical expertise by acquiring technology or developing strategic
relationships with third parties so that we can sub-license their technology to
others.
We may not have the financial resources necessary to fund future
innovations or acquisitions. Moreover, any revenues that we receive from
enhancements or new generations of our package technologies may be less than the
costs of development or acquisition. Furthermore, our acquisitions and research
and development efforts may be futile if we do not accurately predict the future
packaging needs of the semiconductor industry. Our failure to successfully
develop and market these technologies could significantly harm our business,
financial condition and results of future operations.
WE ARE HIGHLY DEPENDENT UPON THE SUCCESS OF OUR LICENSEES, AND ANY FAILURE BY
OUR LICENSEES TO INTRODUCE AND PRODUCE PRODUCTS THAT GAIN MARKET ACCEPTANCE
COULD LIMIT OUR ROYALTY REVENUE GROWTH.
Because we expect a significant portion of our future revenues to be
derived from royalties on shipments by our licensees, our future success depends
upon the ability of our licensees to develop and introduce high volume products
that achieve and sustain market acceptance. The failure of our licensees to
achieve commercial success due to any of the following factors could harm our
business:
- the ability of our licensees to qualify and purchase adequate quantities
of materials and equipment in a timely manner;
- the willingness and ability of materials and equipment suppliers to keep
pace with the advancements in packaging technology;
- the timing and amount of our licensees' investments in manufacturing
process and equipment that support our technology;
- our licensees' effective management of inventory;
- our licensees' control over the quality of package materials and
manufacturing process;
- the commercially reasonable pricing of package materials and the
resulting packages; and
- the commercial success of products using our technology.
OUR MANAGEMENT TEAM, INCLUDING OUR CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL
OFFICER AND CHIEF OPERATING OFFICER, EACH OF WHOM HAS BEEN WITH TESSERA FOR LESS
THAN 18 MONTHS, DOES NOT HAVE A LONG HISTORY WORKING TOGETHER OR FOR US WHICH
COULD HARM OUR BUSINESS AND ITS DEVELOPMENT.
Many of the individuals on the management team have been in their current
positions for a relatively short period of time and do not have a history of
working together or working for
8
<PAGE> 13
Tessera. Our future success will depend to a significant extent on their ability
to effectively work together. These individuals may not continue to work for us
or work well together which could harm our business and its development. The
majority of our key management team, including our chief executive officer,
chief financial officer and chief operating officer, have each been with Tessera
for less than 18 months.
OUR INABILITY TO RETAIN OR ATTRACT KEY PERSONNEL COULD NEGATIVELY AFFECT OUR
BUSINESS.
Our success depends upon the continued contributions of our key management
and other personnel, many of whom would be difficult to replace. The loss of the
services of any of our key management or a significant number of our engineers,
or the decision of any such persons to join a competitor or otherwise compete
directly or indirectly with us, could be disruptive to our development efforts
and existing business relationships and could have a material adverse effect on
our business, operating results and financial condition. None of our employees
are bound by non-competition agreements. In addition, we also plan to add
significant numbers of engineering, marketing and sales staff, and there is no
assurance that we will be able to hire sufficient qualified professionals to
implement our plan. We have experienced, and we expect to continue to
experience, difficulty in hiring and retaining highly skilled engineers with
appropriate qualifications to support our growth and expansion. Competition for
qualified engineers is intense, particularly in the Silicon Valley where we are
located. Further, we must train our new personnel, especially our technical
support personnel, to respond to and support our licensees and customers. If we
fail to do this, it could lead to dissatisfaction among our licensees or
customers, which could slow our growth or result in a loss of business.
ORIGINAL EQUIPMENT MANUFACTURERS MAY SELECT COMPETING TECHNOLOGIES WHICH COULD
REDUCE OUR REVENUES.
Original equipment manufacturers, such as wireless handset manufacturers,
select the packaged chips used in their products. Original equipment
manufacturers may not select our licensed packaging technologies over those of
our competitors if our packaging technologies do not meet their requirements.
Further, there are relatively few original equipment manufacturers in certain
market application areas. A decision to use one of our competitor's technologies
by one such original equipment manufacturer may cause the other original
equipment manufacturers in the same market area to also choose our competitor's
technologies. These decisions could significantly harm our business.
INTENSE COMPETITION IN THE SEMICONDUCTOR PACKAGING INDUSTRY AS EVIDENCED BY MORE
THAN 30 DIFFERENT TYPES OF CHIP SCALE PACKAGES AS WELL AS OTHER COMPETING
PACKAGING FORMATS COULD PREVENT US FROM INCREASING OR SUSTAINING OUR REVENUES
AND ACHIEVING OR SUSTAINING PROFITABILITY.
The semiconductor packaging industry is highly fragmented and intensely
competitive. A number of semiconductor manufacturers and package assemblers are
developing competing technologies. These competitors include many of our
licensees, as well as other companies including Fujitsu, IBM, Micron, Motorola
and NEC. In most cases, these companies are larger than we are and have better
access to financial, technical and other resources.
Chip scale packages are currently a small fraction of all semiconductor
packaging formats, and our technology is one of more than 30 different types of
chip scale packages. To the extent that these alternative technologies provide
comparable system performance at lower cost than our licensed chip scale
packaging technology or do not require the payment of comparable royalties, our
licensees and prospective licensees may adopt and promote these alternative
technologies to their customers. Increased competition could result in pricing
pressures, reduced sales, reduced margins or failure to achieve or maintain
widespread market acceptance, any of which could prevent us from increasing or
sustaining our revenues and achieving or sustaining profitability.
9
<PAGE> 14
OUR REVENUES ARE SUBJECT TO THE VOLATILITY OF THE SEMICONDUCTOR INDUSTRY.
The industry in which we compete and the markets that we serve are highly
volatile. We are dependent on the semiconductor industry, which is characterized
by rapid technological change, short product life cycles, fluctuations in
manufacturing capacity and pricing and margin pressures. Segments of the
semiconductor industry, including the DRAM, computing and consumer electronics
markets, have experienced sudden and unexpected economic downturns in the past.
During these periods, capital spending is commonly curtailed and the number of
design projects often decreases. Our sales are dependent upon capital spending
trends and new design projects, and a substantial portion of our costs are fixed
in the near term. As a result, our future operating results may reflect
substantial fluctuations from period to period as a consequence of these
industry patterns, general economic conditions affecting the timing of orders
from customers and other factors. Any negative factors affecting the
semiconductor industry could significantly harm our business.
WE MUST EXPEND SIGNIFICANT MARKETING RESOURCES IN ORDER TO ENCOURAGE OUR
LICENSEES AND ORIGINAL EQUIPMENT MANUFACTURERS TO ADOPT AND IMPLEMENT OUR
PACKAGING TECHNOLOGY.
We incur significant marketing, sales and service expenses prior to
entering into license agreements with our customers and establishing a royalty
stream from each licensee. Our sales and design cycles range from 6 to 18
months. As such, we may incur significant losses in any particular period before
any associated royalty streams begin.
We employ intensive marketing and sales efforts to educate materials
suppliers, equipment vendors, licensees, prospective licensees and original
equipment manufacturers about the benefits of our technologies and products. In
addition, even if these companies adopt our licensed technologies, they must
devote the resources necessary to fully integrate our technologies and products
into their operations. If our marketing efforts are unsuccessful, then we will
not be able to establish our packaging technology as an industry standard.
THE SERVICES WE PROVIDE TO OUR LICENSEES AND CUSTOMERS ARE COSTLY AND MAY NOT BE
PROFITABLE.
In an effort to increase the speed and breadth with which the semiconductor
industry adopts our technologies, we provide a broad range of services to our
licensees and prototyping customers, including such items as design and
modeling, manufacturing process training, and services to assist licensees in
designing, implementing, upgrading and maintaining their chip scale packaging
assembly lines. We also provide prototyping services for our licensees and
customers. To date, these services have not been profitable, and we cannot be
sure they will become profitable or will result in an increase in our royalty
revenues from our licensees.
WE HAVE SIGNIFICANT RISKS ASSOCIATED WITH THE INTERNATIONAL NATURE OF OUR
BUSINESS WHICH COULD IMPACT BOTH OUR REVENUES AND COST COMPETITIVENESS.
We license our technology to companies operating in many geographic areas.
Increases in the value of the U.S. dollar relative to foreign currencies will
increase the effective cost of license fees, royalties and services to our
licensees. We also license our technology to U.S. companies who are subjected to
currency risks in their foreign operations. The majority of our licensees
operate materials and packaging assembly operations concentrated in Asia. Any
political instability or economic downturn in these regions could disrupt
production and decrease royalties generated by our licensees. Products that
incorporate our technology are used in all geographic areas but are concentrated
in the United States and Europe. Accordingly, any economic downturn in these
markets will impact our revenues.
International demand for our technology is subject to a variety of risks,
including tariffs, import restrictions and other trade barriers, changes in
regulatory requirements, longer accounts receivable payment cycles, adverse tax
consequences, export license requirements, foreign government regulation,
political and economic instability and changes in diplomatic and trade
relationships. In
10
<PAGE> 15
particular, the laws of certain countries in which we currently, or may in the
future license our technology, require significant withholding of taxes on
payments for intellectual property, which we may not be able to offset fully
against our U.S. tax obligations. We are also subject to the further risk of
foreign tax authorities re-characterizing license fees or increasing certain
taxes on such fees or on royalties, which could result in increased tax
withholdings and penalties. Moreover, the laws of certain foreign countries in
which we license, or may in the future license our technology, 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.
FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD HARM OUR BUSINESS.
We are subject to a variety of local, state, federal and foreign
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture our prototype packages and to develop new technologies. Our
failure to comply with current or future regulations could result in the
imposition of substantial fines on us, suspension of production, alteration of
our manufacturing processes or cessation of operations. Compliance with such
regulations could require us to acquire expensive remediation equipment or to
incur other substantial expenses. Any failure by us to control the use,
disposal, removal or storage of, or to adequately restrict the discharge of, or
assist in the cleanup of, hazardous or toxic substances, could subject us to
significant liabilities, including joint and several liability under certain
statues. The imposition of such liabilities could significantly harm our
business, financial condition and results of operations.
RISKS RELATED TO THIS OFFERING
OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS
THAT MAY NOT BE IN THE BEST INTEREST OF OUR OTHER STOCKHOLDERS.
After this offering, our officers, directors and principal stockholders
will together control approximately 38.5% of our outstanding common stock. As a
result, these stockholders, if they act together, will be able to control our
management and affairs and all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
This concentration of ownership may have the effect of delaying or preventing a
change in control and may affect the market price of our common stock. This
concentration of ownership may not be in the best interest of our other
stockholders.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY CAUSE THE
PRICE OF OUR STOCK TO DECLINE.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, in the public market
following this offering, the market price of our common stock could fall. Such
sales also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate. Upon the
closing of this offering, we will have outstanding 39,056,774 shares of common
stock, based upon shares outstanding on September 30, 2000, and assuming no
exercise of outstanding options after September 30, 2000. Of these shares, the
7,500,000 shares sold in this offering will be freely tradable. Of the remaining
shares of common stock outstanding immediately after this offering, 30,870,547
shares will be available for sale in the public market 181 days after the date
of this prospectus when the lock-up agreements between the underwriters and the
stockholders expire. However, some of those sales will be subject to the volume
restrictions imposed by Rule 144 under the federal securities laws on our
affiliates. On occasion, underwriters have removed lock-up restrictions early
and it is possible that our underwriters may remove some or all of these
restrictions earlier than 180 days after the closing of this offering.
11
<PAGE> 16
The remaining outstanding shares will become tradable upon expiration of
various holding periods under Rule 144, subject in some cases to the volume
restrictions of that rule, or earlier and without restrictions if they are
registered under the federal securities laws. After this offering, the holders
of an aggregate of 26,489,923 shares of our common stock and the holders of
warrants to purchase 636,936 additional shares of common stock will have certain
registration rights, including the right to require us to register the sale of
their shares and the right to include their share in public offerings we
undertake in the future.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF THE STOCK
YOU PURCHASE.
The initial public offering price is substantially higher than the prices
paid for our common stock in the past. This is referred to as dilution.
Accordingly, if you purchase common stock in the offering, you will incur
immediate dilution of approximately $8.37 per share in the book value per share
of our common stock from the price you pay for our common stock. The exercise of
outstanding options may result in further dilution.
IF WE RAISE ADDITIONAL CAPITAL THROUGH THE ISSUANCE OF NEW SECURITIES AT A PRICE
LOWER THAN THE INITIAL PUBLIC OFFERING PRICE, YOU WILL INCUR ADDITIONAL
DILUTION.
If we raise additional capital through the issuance of new securities at a
lower price than the initial public offering price, you will be subject to
additional dilution. If we are unable to access the public markets in the
future, or if our performance or prospects decreases, we may need to consummate
a private placement or public offering of our capital stock at a lower price
than the initial public offering price. In addition, any new securities may have
rights, preferences or privileges senior to those securities held by you.
12
<PAGE> 17
FORWARD LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains forward looking statements.
These statements relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors that may cause
our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the forward
looking statements. These risks and other factors include those listed under
"Risk Factors" and elsewhere in this prospectus. In some cases, you can identify
forward looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," "continue" or the negative of these terms or other comparable
terminology. In evaluating these statements, you should specifically consider
various factors, including the risks outlined under "Risk Factors." These
factors may cause our actual results to differ materially from any forward
looking statement. Although we believe that the expectations reflected in the
forward looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
This prospectus contains statistical data regarding the semiconductor
industry that we obtained from industry publications, including reports
generated by Dataquest, the Semiconductor Industry Association, Cahners In-Stat
and Tech Search International. These industry publications generally indicate
that they have obtained their information from sources believed to be reliable,
but do not guarantee the accuracy and completeness of their information.
Although we believe that the publications are reliable, we have not
independently verified their data.
13
<PAGE> 18
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 7,500,000 shares of
common stock we are offering at an assumed initial public offering price of $11
per share will be approximately $75,000,000 million, after deducting the
estimated underwriting discounts and commissions and offering expenses payable
by us, or $86,500,000 million if the underwriters' overallotment is exercised in
full.
The principal purposes of this offering are to obtain additional working
capital, to create a public market for our common stock and to facilitate future
access by us to public markets. We expect to use the net proceeds of this
offering for working capital and general corporate purposes. In addition, we may
use a portion of the net proceeds of this offering for the acquisition of
complementary businesses, products or technologies. While we evaluate these
types of opportunities from time to time, there are currently no agreements with
respect to any specific transaction.
The amounts we actually expend for these categories will vary significantly
depending on a number of factors, including revenue growth, if any, the amount
of cash we generate from operations, changing technologies, shifts in customer
demand and the success of our patent and licensing activities. As a result, we
will retain broad discretion in the allocation and use of the net proceeds of
this offering. Pending the uses described above, we intend to invest the net
proceeds from this offering in short-term, investment grade, interest bearing
securities.
DIVIDEND POLICY
We anticipate that we will retain any earnings to support our operations
and to finance the growth and development of our business. We do not intend to
pay cash dividends for the foreseeable future.
14
<PAGE> 19
CAPITALIZATION
The following table sets forth as of September 30, 2000:
- our actual capitalization; and
- our pro forma as adjusted capitalization reflects the conversion of
outstanding preferred stock into common stock upon completion of this
offering and receipt of the net proceeds from the sale of 7,500,000
shares of our common stock offered hereby at an assumed public offering
price of $11 per share and after deducting the estimated underwriting
discount and offering expenses.
The information below is qualified by, and should be read in conjunction
with, our consolidated financial statements and related notes appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
Long term obligations, less current portion................. $ 456 $ 456
Mandatorily redeemable cumulative convertible preferred
stock,
$0.001 par value; 35,594 shares authorized, 25,083 shares
issued and outstanding, actual; none authorized, none
issued, pro forma as adjusted.......................... 96,155 0
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; none authorized, none
issued, actual; 5,000,000 authorized, none issued, pro
forma as adjusted......................................
Common stock, $0.001 par value; 51,667 shares authorized,
6,012 shares issued and outstanding, actual;
100,000,000 shares authorized, 39,056,744 shares issued
and outstanding, pro forma as adjusted................. 6 39
Additional paid in capital................................ 35,497 206,619
Deferred stock compensation............................... (17,228) (17,228)
Accumulated deficit....................................... (86,792) (86,792)
Accumulated other comprehensive income (loss)............. (74) (74)
-------- --------
Total stockholders' equity (deficit)................... (68,591) 102,564
-------- --------
Total capitalization................................... $ 28,020 $103,020
======== ========
</TABLE>
This table does not include:
- 6,918,042 shares of common stock issuable upon the exercise of
outstanding stock options as of September 30, 2000;
- 1,076,934 shares of common stock issuable upon the exercise of
outstanding warrants as of September 30, 2000;
- 1,475,469 shares of common stock available for issuance under our 1999
Stock Plan following this offering; and
- 200,000 additional shares of common stock available for issuance under
our 2000 Employee Stock Purchase Plan following this offering.
15
<PAGE> 20
DILUTION
Our pro forma net tangible book value as of September 30, 2000, was $27.6
million or $0.87 per share of common stock. Pro forma net tangible book value
per share represents total tangible assets less total liabilities, divided by
the number of outstanding shares of common stock.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of our common stock in this
offering and the net tangible book value per share of our common stock
immediately afterwards. After giving effect to our sale of the 7,500,000 shares
of common stock offered by this prospectus and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our net tangible book value at September 30, 2000 would have been $102.6
million or $2.63 per share. This represents an immediate dilution to new public
investors of $8.37 per share. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share as of
September 30, 2000..................................... $0.87
Increase per share attributable to new public investors... 1.76
-----
Pro forma net tangible book value per share after
offering.................................................. 2.63
------
Dilution per share to new public investors.................. $ 8.37
======
</TABLE>
The following table sets forth on a pro forma basis as of September 30,
2000, the differences between the number of shares of common stock purchased
from us, the total price paid, and the average price per share paid by the
existing stockholders and new public investors, deducting estimated underwriting
discounts and commissions and offering expenses to be paid by us, using an
assumed initial public offering price of $11 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 31,556,774 81% $131,658,000 61% $ 4.17
New public investors.................... 7,500,000 19 82,500,000 39 11.00
---------- --- ------------ --- ------
Total................................. 39,056,774 100% $214,158,000 100%
========== === ============ ===
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to 8,625,000 or 21% of the total
shares of common stock outstanding after this offering.
16
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data are qualified by reference to, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Result of Operations" and the financial statements and
notes thereto and other information contained in this prospectus. The selected
balance sheet data as of December 31, 1998 and 1999 and September 30, 2000 and
selected statements of operations data for the years ended December 31, 1997,
1998 and 1999 and September 30, 2000 have been derived from our audited
financial statements and the notes thereto included elsewhere in this
prospectus. The selected balance sheet data as of December 31, 1995, 1996, and
1997 and selected statements of operations data for the years ended December 31,
1995, and 1996 have been derived from our audited financial statements and notes
thereof not included in this prospectus. The selected statements of operations
data for the nine months ended September 30, 1999 is derived from, and qualified
by reference to the unaudited consolidated financial statements included in this
prospectus and include, in the opinion of our management, all adjustments,
consisting only of normal recurring adjustments, required for a fair
presentation of the information set forth therein. Results for the nine months
ended September 30, 2000 are not necessarily indicative of results that may be
expected for the year ending December 31, 2000.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- -------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
License....................................... $ 50 $ 1,550 $ 3,730 $ 4,594 $ 2,925 $ 2,525 $ 2,740
Royalty....................................... 4 1 26 630 1,475 642 2,699
Engineering services and other................ 286 47 1,175 1,435 2,019 2,381 2,858
------- ------- -------- -------- -------- ------- --------
Total revenues.............................. 340 1,598 4,931 6,659 6,419 5,548 8,297
Cost of Revenues(1)
License Services.............................. -- -- 202 505 1,178 870 1,138
Engineering services and other................ 267 37 3,818 6,223 5,430 3,651 3,636
------- ------- -------- -------- -------- ------- --------
Total cost of revenue.................. 267 37 4,020 6,728 6,608 4,521 4,774
Gross profit (loss)............................. 73 1,561 911 (69) (189) 1,027 3,523
Operating expenses:
Research and development(1)................... 3,218 5,914 8,437 9,057 6,841 5,861 6,454
Selling, general and administrative(1)........ 2,665 2,212 2,607 3,616 5,063 3,481 10,207
Stock compensation expense.................... -- -- 633 578 1,497 257 9,536
------- ------- -------- -------- -------- ------- --------
Total operating expenses.................... 5,883 8,126 11,677 13,251 13,401 9,599 26,197
------- ------- -------- -------- -------- ------- --------
Loss from continuing operations................. (5,810) (6,565) (10,766) (13,320) (13,590) (8,572) (22,674)
Other income (expense), net..................... (61) 129 1,626 770 (370) (190) 853
------- ------- -------- -------- -------- ------- --------
Net loss from continuing operations............. (5,871) (6,436) (9,140) (12,550) (13,960) (8,762) (21,821)
Net loss from discontinued operations........... -- -- (405) (1,340) (1,440) (1,038) --
Recovery (loss) on disposal, including provision
of $1,578 for operating losses during phase
out period.................................... -- -- -- -- (2,377) 287
------- ------- -------- -------- -------- ------- --------
Net loss........................................ $(5,871) $(6,440) $ (9,545) $(13,890) $(17,777) $(9,800) $(21,534)
======= ======= ======== ======== ======== ======= ========
Cumulative preferred stock dividends in
arrears....................................... -- -- -- -- -- -- (7,664)
Deemed preferred stock dividend................. -- -- -- -- -- -- (1,855)
------- ------- -------- -------- -------- ------- --------
Net loss attributable to common stockholders.... (5,871) (6,440) (9,545) (13,890) (17,777) (9,800) (31,053)
Net loss from continuing operations per common
share, basic and diluted(2)................... $ (3.43) $ (3.10) $ (2.65) $ (2.66) $ (2.96) $ (1.78) $ (5.88)
======= ======= ======== ======== ======== ======= ========
Net loss per common share, basic and
diluted(2).................................... $ (3.43) $ (3.10) $ (2.77) $ (2.94) $ (3.77) $ (1.99) $ (5.83)
======= ======= ======== ======== ======== ======= ========
Shares used in computing basic and diluted net
loss per common share(2)...................... 2,173 2,725 3,452 4,724 4,713 4,913 5,328
Pro forma net loss per common share, basic and
diluted (unaudited)(3)........................ $ (0.69) $ (1.03)
======== ========
Shares used in computing pro forma net loss per
common share, basic and diluted
(unaudited)(2)................................ 25,760 30,281
</TABLE>
-------------------------
(1) Excludes amortization of deferred stock compensation expense as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Cost of revenues:
License................................ $ -- $ -- $ 32 $ 29 $ 59 $ 10 $ 393
Engineering services and other......... -- -- 41 37 77 13 510
Research and development.................. -- -- 130 118 243 42 1,729
Selling, general and administrative....... -- -- 430 394 1,118 192 6,904
</TABLE>
17
<PAGE> 22
(2) The diluted net loss per share computation excludes potential shares of
common stock (convertible preferred stock, options to purchase common stock
and warrants to purchase common stock), as their effect would be
antidilutive. See Note 1 of Notes to Consolidated Financial Statements for a
detailed explanation of the determination of the shares used in computing
basic and diluted net loss per share.
(3) Includes the weighted average number of shares resulting from the assumed
conversion of all outstanding shares of convertible preferred stock upon the
effectiveness of the registration statement related to this offering. See
Note 1 of Notes to Consolidated Financial Statements for a detailed
explanation of the determination of the shares used in computing pro forma
net loss per share. The diluted pro forma net loss per share computation
excludes potential shares of common stock (options to purchase common stock
and warrants to purchase common stock).
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998 1999 2000
-------- -------- --------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 1,005 $ 30,757 $ 747 $ 2,189 $ 927 $ 570
Working capital...................................... (382) 35,352 29,578 12,571 1,004 23,232
Total assets......................................... 2,746 42,017 39,203 26,221 16,986 36,667
Long-term obligations, less current portion.......... 217 1,085 1,687 1,299 1,065 456
Mandatorily redeemable cumulative convertible
preferred
stock.............................................. 16,602 59,211 64,565 64,565 64,565 96,155
Total stockholders deficit........................... $(15,695) $(22,032) $ (30,406) $(43,460) $(58,899) $(68,591)
</TABLE>
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<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of our operations should be read in conjunction with the consolidated
financial statements and the notes to those statements included elsewhere in
this prospectus. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those contained in these forward-looking statements as a result of certain
factors, including those discussed in "Risk Factors" and elsewhere in this
prospectus.
OVERVIEW
We provide intellectual property for chip scale packaging to meet the
accelerating demand for performance and miniaturization in wireless
communications, Internet access, computing and consumer electronics products.
Our technology enables the semiconductor industry to overcome fundamental issues
in performance, reliability and size. From our inception in 1990 through 1995,
we engaged principally in research and development related to chip scale
packaging technology. We began generating revenues from licenses of our
intellectual property in 1994, and conducted manufacturing activities beginning
in 1997 to support market acceptance of our technology. We discontinued our
packaging manufacturing activities in 1999 to focus our business on generating
revenues from licenses, royalties and related services. As of September 30,
2000, we had an accumulated deficit of $86.8 million, primarily as a result of
our investment in research, development and infrastructure.
We derive revenues from license fees and royalties based upon our
intellectual property and fees for related services. Our technology licenses
typically have a term of either 15 years, with an optional five-year extension
period, or until the expiration of the last patent covered by the license. Our
technology licenses typically also provide that our customers will pay us
royalties based upon the number of electrical connections on each semiconductor
shipped that is packaged using our technology. Royalty fees are typically based
upon cumulative volume and decline in steps to a base royalty rate equal to half
the original royalty rate as target volumes are achieved. In addition, many of
our license agreements allow the licensee to reduce royalty rates to the base
rate by making a lump sum payment. These buy-downs are classified as license
revenues. Service revenues are primarily derived from training and consulting
services, prototype package development and testing, and qualification services.
We typically recognize the majority of the fees due under the license
agreement as license revenue when the agreement is executed by both parties. We
anticipate that our license revenues will continue to fluctuate from period to
period due to the timing of execution of license agreements. Any remaining fees
due under the license agreement associated with training are recognized as
service revenue. We recognize service revenues as services are performed under
contract accounting principles.
We recognize royalty revenues when our licensees report shipments of
semiconductors packaged using our technology. The timing of these reports is
based upon contractually specified terms. Historically, customers representing a
significant portion of our royalty revenue have reported on a semi-annual basis,
which has contributed to fluctuations in our royalty revenues. Since the
beginning of 1998, our royalty revenues have increased substantially, and we
anticipate that royalty revenues will continue to increase as a percentage of
total revenues as our licensees expand production of products using our
technology.
We derive a significant portion of our revenues from customers located
outside of the United States, and we expect that international revenues will
continue to account for a significant portion of our total revenues in future
periods. International revenues accounted for 56% of total revenues in the nine
months ended September 30, 2000, 58% of total revenues in 1999, 45% of total
revenues in 1998 and 14% of total revenues in 1997. In addition, our customer
base is concentrated, with four
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<PAGE> 24
customers accounting for 58% of total revenues in the nine months ended
September 30, 2000, one customer accounting for 10% of total revenues in 1999,
three customers accounting for 38% of total revenues in 1998 and four customers
accounting for 68% of revenues in 1997.
Cost of revenues primarily consists of payroll and related costs of
training and consulting services, along with costs of materials, supplies and
equipment depreciation. We expect cost of revenues to decline as a percentage of
revenues as royalty revenues increase.
Research and development expenses consist primarily of compensation and
related costs for personnel as well as costs related to patent prosecution,
materials, supplies, equipment depreciation and third party research and
development services. All research and development costs are expensed as
incurred. We believe that a significant level of research and development
expenses will be required for us to remain competitive in the future.
Selling expenses consist primarily of compensation and related costs for
sales and marketing personnel, marketing programs, public relations, promotional
materials, travel and related trade show expenses. General and administrative
expenses consist primarily of compensation and related costs for general
management, information technology, finance and accounting personnel,
professional services, litigation expenses and related fees and expenses. We
anticipate that our selling and general and administrative expenses will
increase in absolute dollars as we hire additional personnel. However, we expect
that as a percentage of revenue, these expenses will decrease over time. In
addition, we expect that litigation expenses will continue to be a material
portion of our general and administrative expenses in future periods because we
anticipate that it may be necessary for us to take legal action to enforce and
protect our intellectual property rights.
In connection with the grant of stock options in 1997, 1999 and the first
nine months of 2000, we recorded an aggregate of $29.5 million in deferred
stock-based compensation within stockholders' equity. These options are
considered compensatory because the fair value of our stock determined for
financial reporting purposes is greater than the fair value determined by the
board of directors on the date of the grant. As of September 30, 2000, we had an
aggregate of $15.0 million of deferred stock-based compensation remaining to be
amortized. This deferred stock-based compensation balance will be amortized as
follows: $2.9 million during the remainder of 2000; $7.2 million during 2001;
$3.5 million during 2002; $1.2 million during 2003; and $180,000 during 2004. We
anticipate that we will record additional stock-based compensation expense
related to options granted subsequent to September 30, 2000. We are amortizing
the deferred compensation on an accelerated basis over the vesting period of the
related options, which is generally four years. The amount of stock-based
compensation amortization actually recognized in future periods could decrease
if options for which accrued but unvested compensation has been recorded are
forfeited.
Stock-based compensation expense related to stock options granted to
non-employees is recognized as services are rendered. At each reporting date, we
revalue the stock-based compensation expense related to unvested non-employee
options using the Black-Scholes option-pricing model. As a result, stock-based
compensation expense will fluctuate with changes in the fair market value of our
common stock. In connection with the grant of stock options to consultants, we
recorded stock-based compensation expense of $313,000 and $1.2 million for the
year ended December 31, 1999 and the nine months ended September 30, 2000. As of
September 30, 2000, assuming no change in the underlying value of our common
stock, we expect to amortize stock-based compensation expense of $619,000 during
the three months ended December 31, 2000; $1.5 million in fiscal 2001; $123,000
in fiscal 2002; $14,000 in fiscal 2003 and $400 in fiscal 2004.
In August 2000, we issued 575,565 shares of Series E-1 mandatorily
redeemable cumulative convertible preferred stock at a price of $9.00 per share,
for proceeds of approximately $5,180,000. The difference between the deemed fair
value of Series E-1 of $12.22 and the price per share of $9.00 will result in a
beneficial conversion feature of approximately $1,855,000. In connection with
the issuance of the Series E-1 preferred stock, we issued a warrant to purchase
16,667 shares of common stock at an exercise price of $9.00 per share. We valued
the warrant at $133,000 using the
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<PAGE> 25
Black Scholes option pricing model. The amount will be recognized immediately as
stock issuance cost.
We anticipate that our operating expenses will increase substantially in
future years as we increase sales and marketing operations, increase research
and development, broaden technical support services and expand international
operations. Accordingly, we expect to incur additional losses for the
foreseeable future. In addition, our limited operating history makes it
difficult for us to predict future operating results and, accordingly, there can
be no assurance that we will achieve or sustain revenue growth or profitability.
In December 1999, we made a decision to sell our manufacturing facility in
Singapore. On April 17, 2000, we entered into an agreement to sell the assets of
our Singapore manufacturing facility for total proceeds of approximately $5.0
million, which approximated the estimated net book value of the assets at that
date. The sale was completed on June 19, 2000. In connection with the decision
to sell these assets, we recorded a loss of $2.4 million, comprised of $1.6
million in losses for the phase-out period January 1, 2000 through the
completion of the sale and $799,000 as an estimated loss on the sale. Included
in the estimated loss on sale are certain costs directly associated with the
decision to dispose of the assets, such as severance and commission fees. Net
assets of $5.1 million relating to the sale are segregated on the December 31,
1999 consolidated balance sheet. The results of operations of our Singapore
manufacturing operations for 1997, 1998 and 1999 have been segregated from
continuing operations and reported as loss from discontinued operations on the
statement of operations.
In September 1999, management determined that $287,000 of the estimated
losses would not be required. The change in estimate stemmed primarily from
lower than expected exit costs in Singapore.
NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS
As of September 30, 2000, we had federal and state net operating losses,
and research and development credit carryforwards of approximately $68.0 million
and $23.0 million, and $7.0 million, respectively. The net operating loss and
research and development credit carryforwards will expire at various dates,
beginning in 2010, if not utilized. Under the provisions of the Internal Revenue
Code of 1986, as amended, substantial changes in our ownership may limit the
amount of net operating loss carryforwards that can be utilized annually in the
future to offset taxable income. A valuation allowance has been established to
fully reserve the potential benefits of these carryforwards in our financial
statements to reflect the uncertainty of future taxable income required to
utilize available tax loss carryforwards and other deferred tax assets.
RESULTS OF OPERATION
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
Revenues. Revenues for the nine months ended September 30, 2000 were $8.3
million as compared to $5.5 million for the nine months ended September 30,
1999, an increase of $2.8 million, or 51%. Royalty revenues increased $2.1
million principally due to the introduction of eBGA packages for DRAM memory and
an increase in shipments of SRAM and Flash memory using eBGA packages. License
revenues increased by $215,000 due to an increase in the number of licenses
entered into during the period, while service revenue increased by $477,000.
Cost of revenues. Cost of revenues for the nine months ended September 30,
2000 increased to $4.8 million, or 58% of revenues, from $4.5 million, or 81% of
revenues for the nine months ended September 30, 1999. The decrease in overall
cost of revenues, as a percentage of revenues, was primarily due to increases in
revenues from royalties. Within cost of revenues, license services increased
$268,000 due to an increase in license service personnel, while engineering
services decreased $15,000.
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<PAGE> 26
Research and development. Research and development expenses were $6.5
million, or 78% of revenues for the nine months ended September 30, 2000 as
compared to $5.9 million, or 106% of revenues, for the nine months ended
September 30, 1999, due primarily to an increase in third party development.
Selling, general and administrative. Selling, general and administrative
expenses increased to $10.2 million, or 123% of revenues, for the nine months
ended September 30, 2000 as compared to $3.5 million, or 63% of revenues, for
the nine months ended September 30, 1999. The increase in expenses was primarily
due to increases in sales, marketing and administrative personnel and litigation
costs related to our action against Texas Instruments and Sharp.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1999
Revenues. Revenues for the year ended December 31, 1999 were $6.4 million
compared to $6.7 million for the year ended December 31, 1998, a decrease of
$240,000, or 4%. Royalty revenue increased $845,000 principally due to an
increase in SRAM and Flash memory packaged using our technology. Service revenue
increased $584,000, while license revenues declined $1.7 million due to a
decrease in the number of license agreements entered into during the period.
Cost of revenues. Cost of revenues, excluding amortization of stock
compensation for the year ended December 31, 1999 decreased to $6.6 million, or
103% of revenues, from $6.7 million, or 101% of revenues, for the year ended
December 31, 1998. The decrease in cost of revenues, as a percentage of sales,
is primarily due to the increase in revenues from royalties. Within cost of
revenues, license services increased $673,000 due to an increase in license
services personnel, while engineering services declined $793,000 due to
restructuring activities in September 1998 to focus on the intellectual property
business model.
Research and development. Research and development expenses decreased to
$6.8 million, or 107% of revenues, for the year ended December 31, 1999 compared
to $9.1 million, or 136% of revenues, for the year ended December 31, 1998. The
decline was due to completion of certain projects in 1999 as well as
restructuring activities in September 1998.
Selling, general and administrative. Selling, general and administrative
expenses increased to $5.1 million, or 79% of revenues, for the year ended
December 31, 1999 from $3.6 million, or 54% of revenues, for the year ended
December 31, 1998. The increase in expenses was primarily due to an increase in
sales, marketing and administrative personnel.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998
Revenues. Revenues for the year ended December 31, 1998 were $6.7 million
compared to $4.9 million for the year ended December 31, 1997, an increase of
$1.7 million or 35%. Royalty revenues increased $604,000 due to the introduction
of SRAM and Flash memory packaged using our technology. License revenues
increased $864,000 and service revenues increased $260,000, due to an increase
in the number of license agreements entered into during the period.
Cost of revenues. Cost of revenues, excluding amortization of stock
compensation for the year ended December 31, 1998 was $6.7 million, or 101% of
revenues, compared to $4.0 million, or 82% of revenues, for the year ended
December 31, 1997. The increase in cost of engineering services was primarily
due to an increase in engineering services personnel of $2.4 million, while cost
of license services increased $303,000 due to an increase in license services
personnel.
Research and development. Research and development expenses were $9.1
million, or 136% of revenues, for the year ended December 31, 1998 compared to
$8.4 million, or 171% of revenues, for the year ended December 31, 1997. The
increase was primarily due to increased research and development personnel.
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Selling, general and administrative. Selling, general and administrative
expenses increased to $3.6 million, or 54% of revenues, for the year ended
December 31, 1998 from $2.6 million, or 53% of revenue, for the year ended
December 31, 1997. The increase was due to an increase in sales and
administrative personnel.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
sale of equity securities. We have received a total of approximately $98.1
million from private offerings of our equity securities. As of September 30,
2000, we had $27.3 million in cash and cash equivalents and short-term
investments.
Cash used in operating activities was $12.1 million for the nine months
ended September 30, 2000, $6.4 million in 1999, $11.2 million in 1998 and $9.8
million in 1997. Cash used in operating activities in the nine months ended
September 30, 2000 reflected a net loss of $21.5 million, primarily offset by
non-cash charges of $11.4 million. In 1999, cash used in operating activities
reflected a net loss of $13.9 million, partially offset by non-cash charges of
$7.5 million, and the accrued loss on discontinued operations of $2.3 million.
In 1998, cash used in operating activities reflected a net loss of $12.6
million. In 1997, cash used in operating activities reflected a loss of $9.1
million, partially offset by non-cash charges of $2.9 million and decreases in
accrued expenses.
Cash used in investing activities was $20.4 million for the nine months
ended September 30, 2000, and $27.3 million for 1997. Cash provided by investing
activities was $6.4 million in 1999 and $12.4 million in 1998. In the nine
months ended September 30, 2000 and in 1997, cash used in investing activities
was primarily due to the investment of excess cash balances in the purchase of
short-term marketable securities and the purchase of computer equipment. Cash
provided from investing activities in 1999 and 1998 was primarily due to the
sale of short-term investments partially offset by the purchase of computer
hardware, software and other equipment.
Cash provided by financing activities was $32.2 million for the nine months
ended September 30, 2000, $269,000 in 1998 and $7.2 million in 1997. Cash used
by financing activities during 1999 was $1.3 million. Cash provided by financing
activities in the nine months ended September 30, 2000 was primarily related to
the sale of our Series E preferred stock. Cash used in financing activities in
1999 was primarily due to repayment of debt. Cash provided by financing
activities in 1997 was primarily due to the sale of Series D preferred stock.
We expect to experience growth in our operating expenses, particularly in
research and development and selling, general and administrative expenses, for
the foreseeable future in order to execute our business strategy. As a result,
we anticipate that operating expenses, as well as planned capital expenditures,
will constitute a material use of our cash resources. In addition, we may
utilize cash resources to fund acquisitions of, or investments in, complementary
businesses.
We believe that our existing cash and cash equivalents will be sufficient
to meet our anticipated cash needs for at least the next 12 months and the net
proceeds of this offering will enable us to meet our needs beyond that time. If
our capital resources are insufficient to satisfy our liquidity requirements, we
may seek to sell additional equity securities or debt securities or obtain debt
financing. We have not made arrangements to obtain additional financing and
there is no assurance that financing, if required, will be available in amounts
or on terms acceptable to us, if at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS No. 133,") as amended by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB No. 133" and SFAS No. 138 "Accounting for Certain
Derivative Instruments and Hedging Activities." SFAS 133 requires that all
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<PAGE> 28
derivative financial instruments be recorded on the balance sheet at their fair
market value. Changes in the fair market value of derivatives are recorded each
period in current earnings (loss) or comprehensive income (loss), depending on
whether a derivative is designed as part of a hedge transaction, and if so, the
type of hedge transaction. Substantially all of our revenues and the majority of
its costs are denominated in U.S. dollars, and to date, we have not entered into
any derivative contracts. The effective date of SFAS 133, as amended by SFAS 137
and SFAS 138, is for fiscal years beginning after June 15, 2000.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements",
("SAB 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. We have complied with the
provisions of SAB 101 for all periods presented.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB
25" ("FIN 44"). This interpretation clarifies the definition of an employee for
purposes of applying Opinion 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of a previously fixed stock option plan or award; and
the accounting for an exchange of stock compensation awards in business
combinations. FIN 44 is effective July 1, 2000; however certain conclusions in
this interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. The
adoption of certain of the provisions of FIN 44 prior to June 30, 2000 did not
have a material effect on the financial statements. The Company does not expect
that the adoption of the remaining provisions will have a material effect on the
financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of our revenues are earned in U.S. dollars. Operating
expenses incurred by our foreign operations are denominated in local currencies.
Accordingly, we are subject to exposure from fluctuations in foreign currency
exchange rates. To date, the effect of changes in foreign currency exchange
rates on our financial position and operating results have not been material. We
currently do not use financial instruments to hedge foreign currency risks. We
intend to assess the use of financial instruments to hedge currency exposures on
an ongoing basis.
The primary objective of our investment activities is to preserve principal
while maximizing the income we receive from our investments without
significantly increasing risk of loss. Some of the securities that we may invest
in the future may be subject to market risk for changes in interest rates. To
mitigate this risk, we plan to maintain a portfolio of cash equivalents and
short-term investments in a variety of securities, which may include commercial
paper, money market funds, government and non-government debt securities.
Currently, we are exposed to minimal market risks. We manage the sensitivity of
our results of operations to these risks by maintaining a conservative
portfolio, which is comprised solely of highly-rated, short-term investments. We
do not hold or issue derivative, derivative commodity instruments or other
financial instruments for trading purposes.
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<PAGE> 29
BUSINESS
We own or have rights to trademarks or tradenames that we use in
conjunction with the sale of our products and services. "Tessera," the Tessera
logo, "(LOGO)BGA," and "Micro BGA" are our registered trademarks. "WAVE" is our
unregistered trademark. This prospectus also makes reference to trademarks of
other companies.
OVERVIEW
We provide intellectual property for chip scale packaging to meet the
accelerating demand for performance and miniaturization in wireless
communications, Internet access, computing and consumer electronics products.
Our technology enables the semiconductor industry to overcome fundamental issues
in performance, reliability and size. As of September 30, 2000, our intellectual
property portfolio included 116 issued patents and 169 pending patent
applications in the United States.
Our technology enables our customers to produce chip scale packages that
are almost as small as the actual chip. By reducing the size of the package, our
proprietary technology enables the semiconductor to occupy a smaller area on the
circuit board, allowing for increased system miniaturization and functionality.
In addition, our technology enables higher system level performance by
shortening electrical paths throughout the system. Thus, our chip scale
packaging technology effectively addresses the demands of semiconductors used in
applications such as wireless handsets, personal computers, game consoles, and
other communications and Internet access devices. Tech Search International
estimates that the total market for chip scale packaging will grow from 1.8
billion units in 1999 to 7.3 billion units in 2003, representing a compounded
annual growth rate of 42%.
INDUSTRY BACKGROUND
Semiconductors are essential components of an increasingly wide variety of
products addressing high growth markets, including wireless communications,
Internet access, computing and consumer electronics. Products in these markets
require semiconductors with ever increasing performance, higher reliability and
smaller size. According to the Semiconductor Industry Association, an
independent market research firm, the worldwide semiconductor market is expected
to grow from $149.4 billion in 1999 to $312.3 billion in 2003, representing a
compounded annual growth rate of approximately 20%.
Disaggregation of the Semiconductor Industry
Historically, most semiconductor companies were vertically integrated and
designed, manufactured, packaged, and tested their semiconductors in-house using
proprietary equipment and tools. As the cost and skills required for designing
and manufacturing complex semiconductors has increased, the semiconductor
industry has become disaggregated with companies concentrating on one or more
individual stages in the semiconductor production process. As a result, the
semiconductor industry today includes fabless semiconductor companies that
design and market semiconductors manufactured by others, foundries that
manufacture semiconductors designed by others and companies that package and
test semiconductors designed and manufactured by others.
Emergence of a New Class of Intellectual Property Companies
While specialization has enabled greater efficiencies and has increased
technical innovation in semiconductor manufacturing, it has also created a need
for industry standards. This has created an opportunity for companies to develop
key intellectual property which can be broadly licensed to help establish
standards and increase the rate of adoption of new technology. As a result of
disaggregation, a new class of intellectual property companies has emerged that
addresses a broad cross-section of the semiconductor design and manufacturing
process and can meet the significant
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challenges facing the entire semiconductor industry. One such challenge
currently facing the semiconductor industry is the limitations of traditional
packaging technology.
The Limits of Traditional Semiconductor Packaging
The semiconductor package is the physical and electrical interface between
the chip and the system in which it operates. The package must protect the chip
from breakage, contamination and stress induced by continual heating and
cooling. Semiconductor packaging has traditionally been divided into two major
categories: leaded packages and ball grid array packages.
Leaded Packages. The first leaded packages were introduced in the 1960s and
major improvements occurred in the 1980s. Traditional leaded packages have metal
leads that extend
outward from the perimeter of the package to
mechanically and electrically connect the
semiconductor to the circuit board, enabling
communication between the semiconductor and the
system. A greater number of leads extending from the
package allows for integration of more functions on
the semiconductor. However, the maximum number of
leads is constrained by the length of the package perimeter. In addition, the
long leads lengthen the electrical signal path, slowing the speed of the
packaged semiconductor, thereby limiting overall system performance.
[GRAPHIC]
Ball Grid Array Packages. To overcome the limitations of traditional leaded
packages, the industry developed the ball grid array which replaces the leads
extending from the edge of the package with an array
of conductive balls on the underside of the package.
By moving the connections underneath the package, ball
grid array technology increases the number of
connections available while reducing the area occupied
on the circuit board. The shorter connections of a
ball grid array package improves the performance of
the semiconductor. However, due to the size and
location of the conductive balls required for reliable
communication between the semiconductor and the
system, traditional ball grid array packages do not allow for a significant
reduction in the total size of the semiconductor. The resulting size of the
overall package, which is significantly larger than the chip itself, is a
limiting factor in the performance of the semiconductor.
[GRAPHIC]
Due to these size and performance limitations, leaded packages and
traditional ball grid array packages are not well suited for continued
advancement in electronic products requiring improved performance, higher
reliability and smaller size. To date, most advances in semiconductor technology
have been in chip design and wafer processing or fabrication. While the number
of transistors on a semiconductor of given size has doubled approximately every
18 months, improving performance and reducing manufacturing costs, most
semiconductors continue to be packaged with technology introduced in the 1980s.
Historically, system performance and size requirements could be met using this
existing packaging technology. However, recent advances in design and process
technology cannot be realized without innovation in packaging technology. For
semiconductors to continue to achieve ever increasing levels of performance and
density, packaging technology must advance as well.
OUR SOLUTION
We are a leading provider of intellectual property for chip scale packaging
that addresses fundamental issues in semiconductor and system performance,
reliability and size. Our patented technology enables our customers to produce
semiconductors that meet the demands of the wireless communications, Internet
access, computing and consumer electronics markets. Our solution combines our
intellectual property with our design and manufacturing expertise to enable
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our customers to successfully adopt and implement our technology. To establish
our chip scale packaging technology as an industry standard, we have promoted
the development of the infrastructure required to support our technology. Over
the last ten years, over 100 semiconductor manufacturers, assemblers, and
equipment and material suppliers have invested in the development of this
infrastructure. Our patented chip scale packaging technology is designed to
offer the following key benefits which cannot be achieved by traditional
packaging technologies:
Reduced Size. Our technology enables our customers to produce chip scale
packages that are as small as the actual chip. By reducing the size of the
package, our proprietary technology enables the semiconductor to occupy a
smaller area on the circuit board, allowing for increased system miniaturization
and functionality. Semiconductors packaged with our technology are therefore
particularly well suited for portable electronic products such as wireless
handsets and laptop computers, where consumers demand an increasing number of
functions from ever-smaller products.
Higher Performance. Our technology enables higher performance through
shorter lead lengths and reduction in electrical interference between adjacent
leads. The shorter lead lengths result in improved signal quality and allow a
more rapid transfer of information between the semiconductor and the system. As
a result of its superior performance, our technology has been adopted for
advanced, high speed memory used in high performance personal computers, 3-D
game consoles and high-bandwidth communications applications.
Increased Reliability. Overcoming the reliability problems caused by
thermal expansion has been the biggest technical challenge to the development of
reliable chip scale packaging technology. Our technology relieves mechanical
stress, compensating for the differing rates of thermal expansion and
contraction between the chip and the circuit board. As a result, our technology
provides high reliability without the increased package size or cost of
additional materials required by competing solutions.
OUR STRATEGY
Our objective is to establish our technology as the industry standard by
providing the most advanced, cost-effective chip scale packaging solution with
the intellectual property and services demanded by the industry leaders in our
target markets. To achieve broad industry standardization, our strategy includes
the following key elements:
Further Penetrate High Growth Memory Markets. High growth electronic
applications include wireless communications, high performance computing and
high bandwidth networking. These applications demand ever-increasing
functionality and performance and continued miniaturization. They are also the
primary applications for semiconductor memory, such as Flash, SRAM and DRAM. We
believe these trends are driving the industry to adopt our chip scale packaging
technology. In wireless communications, our technology has been incorporated by
three of the world's leading suppliers of Flash memory. In high performance
computing and high bandwidth networking, our technology has been selected as the
reference package for Rambus DRAM, and is currently being used by Toshiba, among
others. We intend to use our strong market position in semiconductor memory to
establish our technology as the industry standard.
Extend our Technology into New Applications. We believe there is
significant opportunity for our chip scale packaging technology to be applied to
other semiconductors requiring high performance or small size. We intend to
build on the established infrastructure for our technology and our relationships
with leading semiconductor and electronics companies to expand the adoption of
our chip scale packaging technology for other applications, including digital
signal processors, application specific integrated circuits, graphics
controllers and radio frequency semiconductors.
Continue to Invest in Research and Development to Maintain Technology
Leadership. We will continue to develop innovative solutions for the
chip-to-system interface. To meet growing market
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demands for chip scale packaging, we are continuing to invest in research and
development on additional package solutions, including compliant fine pitch ball
grid array, or FBGA, stacked chip scale packaging and wide area vertical
expansion, or WAVE, technology.
Capitalize on Our Intellectual Property Business Model. Our strategy is to
broadly license our intellectual property and to work with industry leading
semiconductor and electronics companies to expand the infrastructure to support
our chip scale packaging technology. We intend to capitalize on this
infrastructure to establish our chip scale packaging technology as an industry
standard. We generate revenue through technology licenses, royalty payments and
service fees. We collect royalties on a per electrical connection basis, which
we believe reduces our exposure to fluctuating semiconductor unit prices. We
expect royalties to represent an increasing percentage of our total revenue.
Offer a Broad Range of Services to Promote Adoption of Our Technology. We
intend to use our service business to drive demand for semiconductors
incorporating our chip scale packaging technology and ensure the necessary
infrastructure is in place to produce packages based on our chip scale packaging
technology. We currently offer semiconductor manufacturers and original
equipment manufacturers a range of package design and prototype manufacturing
services to aid them in developing chip scale packaging solutions that meet
their product design requirements. We also offer training and consulting to our
assembly licensees for installation and upgrade of their chip scale packaging
assembly lines, which we believe allows for rapid and cost-effective
implementation of chip scale packaging solutions. In addition, we promote the
development of what we believe is a broad and cost-competitive material and
equipment infrastructure for our core technology by offering qualification and
testing services to the assembly infrastructure.
Leverage Infrastructure to Expand Technology Offering. We intend to
capitalize on the broad infrastructure for our technology by licensing packaging
technology from third parties and sub-licensing it to our customers. We will
support the adoption of these technologies by providing technical training,
consulting and licensee services. To date, we have developed a relationship with
Toshiba to sub-license a high volume packaging process based on our intellectual
property to further penetrate the DRAM market.
PRODUCT APPLICATIONS
Our chip scale packaging technology addresses the performance, reliability
and size requirements of semiconductors used in applications such as wireless
handsets, personal computers, game consoles, and other communications and
Internet access devices. These products employ a broad range of semiconductors,
which perform different functions. Our technology development and marketing
activities currently focus on memory semiconductors including Flash memory, DRAM
and SRAM. In addition, we intend to apply our technology to non-memory
semiconductors including digital signal processors, application-specific
integrated circuits, graphics accelerators, microprocessors, microcontrollers
and radio frequency semiconductors.
Our chip scale packaging technology addresses needs of the following
semiconductor applications:
Flash Memory. Flash memory can store substantial amounts of data even
during a loss of power, which occurs when a device is turned off. Flash is used
in many products that are under constant pressure to become smaller and lighter
while simultaneously increasing performance, integrating features, reducing cost
and maintaining reliability. Increasing demand for products such as wireless
handsets, MP3 players, digital cameras and personal digital assistants is
driving unit growth for Flash memory. As a result, Flash is the fastest growing
segment of the memory market. Cahners InStat Group, an independent market
research firm, estimates that the market for Flash memory will grow from 1.2
billion units in 1999 to 3.9 billion units in 2003, representing a compounded
annual growth rate of 33%. Our chip scale packaging technology addresses the
size
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<PAGE> 33
and reliability requirements of Flash memory used in products such as wireless
handsets and other portable devices.
DRAM. DRAM is the most widely used form of memory and is incorporated in a
wide variety of applications. Synchronous DRAM, a type of DRAM where data is
synchronized to an externally-supplied clock, is currently the dominant form of
DRAM, but the accelerating performance demands of advanced applications cannot
be met by this architecture. Applications that process large amounts of
multimedia, graphics, audio and video information in real time, including
personal computers, workstations, network devices and game consoles, are driving
demand for increased memory bandwidth and require higher performance DRAM.
Double-Data-Rate Synchronous DRAM and Rambus DRAM are higher performance DRAM
architectures which were introduced to meet these increasing performance
requirements. Our chip scale packaging technology is currently used in high
performance DRAMs.
SRAM. SRAM is a type of semiconductor memory offering significantly higher
performance than DRAM and therefore requires faster access times and higher
speed interconnect. However, SRAM is more costly than DRAM and therefore is used
in specialized applications supporting microprocessors and digital signal
processors in wireless handsets, personal computers, servers and workstations.
One of the high growth applications for SRAM ideally suited for our technology
is wireless handsets. Dataquest estimates the market for SRAM incorporated in
wireless handsets to grow from $615.0 million in 1999 to $1.8 billion in 2003,
representing a compounded annual growth rate of 31%. Our chip scale packaging
technology is used to minimize the size of the SRAM footprint and to improve
performance.
Digital Signal Processors. Digital signal processors are highly specialized
microprocessors which are used in a broad variety of applications such as
wireless handsets, digital cameras and broadband and networking communications
products. As digital signal processors used in wireless handsets are typically
large and complex, the resulting packages must be highly reliable. Our
technology provides not only small size and high performance, but the
reliability necessary for this application. We are currently working with
wireless handset manufacturers to tailor our technology to their need for
continued miniaturization.
Other Applications. Other semiconductors that we intend to target include
application specific integrated circuits, graphics controllers, microprocessors,
microcontrollers and radio frequency integrated circuits. Some of these
semiconductors, such as application specific integrated circuits and graphics
controllers, interface with new high performance DRAMs and will therefore
require significant improvement in communications bandwidth and performance in
the future to meet overall system and memory bandwidth requirements. Other
semiconductors, such as radio frequency semiconductors, operate at very high
speeds and are used extensively in wireless and portable devices, and therefore
require a small, high performance package.
OUR TECHNOLOGY
Our technology portfolio consists of patents and expertise that relate to
virtually all aspects of chip scale packaging, including concepts, design,
processes, materials, equipment and other complementary areas. We offer our
technology to our licensees and customers primarily in the form of patent and
process licenses, as well as value added services. We believe that our chip
scale packaging technology enables our customers and licensees to produce
packages that meet the performance, size, reliability and cost demands of key
target markets.
A fundamental problem facing the semiconductor industry is that the
semiconductor and the circuit board expand and contract at different rates when
in operation, causing stress. This stress can cause the conductive balls to
detach or break. This problem becomes more significant as semiconductor packages
decrease in size. We patented fundamental technology which solves this problem
by allowing the chip scale package elements to move relative to one another. One
of the ways to achieve this is by placing a compliant layer between the chip and
the package to absorb
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<PAGE> 34
stress caused by these different rates of thermal expansion. Our technology
accommodates this stress within the package itself -- enabling a highly reliable
package almost as small as the chip itself.
We have licensed our portfolio of patents for the manufacture of
semiconductors using (mu)BGA technology, Wire-Bonded (mu)BGA technology, FBGA
technology and stacked chip scale packaging technology. We also offer services
such as prototype design and manufacturing and assembly line consulting to
promote adoption of our technology. Our (mu)BGA technology enables high
performance packages, the size of the chip itself, and has been widely adopted
for memory applications. Although FBGAs are somewhat larger than (mu)BGAs and do
not offer the highest performance, they offer greater system design flexibility
and use the existing ball grid array wire bond infrastructure. FBGAs have been
adopted for use in Flash memory and digital signal processors for wireless
handsets. Stacked chip scale packaging is a relatively new technology that
vertically stacks chips into one package, enabling a small size for wireless and
hand-held applications. WAVE technology is a new process that allows array bond
connections between the package and the entire area of the chip, unlike other
chip scale packages which are limited to connections on the perimeter or center
of the chip. We have signed a license and joint development agreement with
Mitsui High-tec for the future production of semiconductors packaged with WAVE
technology.
<TABLE>
<CAPTION>
------------------------------
----------------------------------------------------------------------------------------------
TECHNOLOGY OFFERING: FEATURES: APPLICATIONS:
----------------------------------------------------------------------------------------------
<S> <C> <C>
(mu)BGA Technology Small, high performance DRAM, SRAM, Flash
[GRAPHIC]
----------------------------------------------------------------------------------------------
Wire-Bonded (mu)BGA Small, high performance, uses DRAM
Technology existing wirebond
[GRAPHIC] infrastructure
----------------------------------------------------------------------------------------------
FBGA Technology Allows for system design Flash, SRAM, digital signal
flexibility, uses existing processor, application
[GRAPHIC] wirebond infrastructure specific integrated circuit,
radio frequency semiconductor
----------------------------------------------------------------------------------------------
Stacked Chip Scale Package Vertical stacking of chips Flash, SRAM, digital signal
Technology reduces circuit board surface processor, application
area used specific integrated circuit
[GRAPHIC]
----------------------------------------------------------------------------------------------
WAVE Technology Allows for system design Application specific
flexibility, supports integrated circuit, high-speed
semiconductors with a high SRAM, digital signal
[GRAPHIC] number of electrical processor, microprocessor
connections
----------------------------------------------------------------------------------------------
</TABLE>
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OUR SERVICES
We provide a broad range of services to licensees, customers and potential
customers to increase demand for our technology and develop a cost-competitive
assembly, equipment and material infrastructure. These services take the
following forms:
Engineering Services. Our engineering services group provides prototype
design and assembly, as well as test and failure analysis services to a broad
range of customers and potential customers. Engineering services are primarily
targeted at semiconductor manufacturers and original equipment manufacturers to
provide solutions to specific design issues and problems and promote demand for
our technology.
Licensee Services. Our expertise in chip scale packaging enables us to
provide training and consulting services to assist licensees in designing,
implementing, upgrading and maintaining their chip scale packaging assembly
lines allowing for rapid and cost-effective implementation of our technology,
which we believe enables our licensees to quickly bring products to market.
Infrastructure Services. We offer testing and qualification services to
material and equipment providers to promote the development of what we believe
is a broad and cost-competitive infrastructure for our chip scale packaging
technology.
CUSTOMERS
Our chip scale packaging technology impacts every stage of the
semiconductor production process, from packaging materials and equipment to
semiconductor design, manufacturing and assembly. As a result of the broad
adoption of our technology, we have a strong customer base to whom we license
our chip scale packaging technology on a non-exclusive basis. The following list
includes all current licensees of our intellectual property:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
SEMICONDUCTOR SEMICONDUCTOR SEMICONDUCTOR
MANUFACTURERS ASSEMBLERS MATERIAL SUPPLIERS
<S> <C> <C>
----------------------------------------------------------------------------------------------
AMD ASE 3M
Hitachi Amkor COMPEQ
Hyundai Electronics ChipMOS Dow Corning
Infineon Technologies ChipPAC Flexera
Intel EEMS Hitachi
LG Semicon Hitachi Cable LG Micron
Samsung Electronics IPAC Hitachi Cable
Sharp Meicer Semiconductor Mitsui & Co
Sony Mitsui High-tec North Corp.
ST Microelectronics OSE Read-Rite
Toshiba Payton Technology Samsung Aerospace
Shinko Electric Samsung Electro-Mechanics
SPIL Shinko Electric
----------------------------------------------------------------------------------------------
</TABLE>
In 1999, Intel accounted for 10% of our total revenue. For the nine months
ended September 30, 2000, EEMS, LG Electronics, IPAC and ChipPAC accounted for
22%, 12%, 12% and 12% of our revenues, respectively. In addition, for the nine
months ended September 30, 2000, our top five royalty customers, ChipPAC, Intel,
Samsung, Toshiba and Hitachi Cable, accounted for 12%, 9%, 7%, 3% and 1%, our
revenues, respectively.
In addition to our licensees, there are a number of customers, such as
Atmel, IBM and Rambus, who utilize our services to develop or qualify products
based on our technology. For example, we provide services to Rambus to ensure
that Rambus DRAMs packaged using our technology meet
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<PAGE> 36
reliability and performance specifications. The companies who assemble Rambus
DRAM based on our technology are required to obtain a license and pay us
royalties.
SALES AND MARKETING
Our sales personnel are responsible for developing relationships and
penetrating key markets of the semiconductor industry. We employ direct sales
and field applications personnel to provide technical and operational support to
our customers, worldwide. Our direct sales force operates primarily out of our
headquarters in San Jose, California, with additional personnel in Dallas, Texas
and Tokyo, Japan. We also utilize agents of independent companies to represent
us and Taiwan. Our sales personnel are focused on developing new licensees,
supporting existing licensees and working with customers and potential customers
to develop new semiconductor applications for our chip scale packaging
technology.
Our marketing efforts include product and technical marketing, corporate
and marketing communications and strategic marketing and business development
functions. Our sales and marketing efforts are focused on increasing market
awareness and acceptance of our technology and helping to define solutions to
meet next-generation market needs. As of September 30, 2000, we had 16 employees
involved in sales and marketing.
ENGINEERING AND RESEARCH AND DEVELOPMENT
Our future success will depend on our ability to develop new proprietary
technologies and enhance our existing technology to meet competitive challenges
and changing market requirements. We have made and continue to make considerable
investments in research and development. The complexity of chip scale packaging
technology requires expertise in advanced packaging techniques, manufacturing
processes, materials, design, simulation, testing, quality and reliability. We
believe that the multi-disciplinary expertise of our engineers and scientists
will enable us to continue to provide continued industry leadership in chip
scale packaging technology.
As of September 30, 2000, our engineering and research and development
group consisted of 49 individuals. These employees are focused on the following
objectives:
Product Development. Our product development group is responsible for
package design and manufacturing process development to meet key customer and
market requirements.
Advanced Research. Our advanced research group assesses and develops new
technology that either improves upon existing technology or enables chip scale
packaging technology to target new applications.
Product Engineering. Our product engineering group is primarily focused on
providing test, reliability and training support for licensees and product
development programs.
INTELLECTUAL PROPERTY
Our future success and competitive position depend upon our continued
ability to develop and protect proprietary technologies. To protect our
intellectual property, we rely on a combination of patents, copyrights, trade
secrets and trademarks. We also attempt to protect our trade secrets and other
proprietary information through agreements with licensees, customers, potential
customers and partners, proprietary information agreements with employees and
consultants and other security measures.
Our patents address advanced packaging architectures and processes and
complementary technologies for packaging equipment, tools, materials,
multi-layer substrates, test sockets and thermal solutions. We have made and
continue to make considerable investments in expanding and defending our patent
portfolio. We also acquire intellectual property that complements our existing
technology for sublicense to our customers.
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As of September 30, 2000, our intellectual property portfolio included 116
issued U.S. patents, 13 issued international patents and 169 additional pending
U.S. patent applications. We also have international patent applications pending
in China, Europe, Japan, South Korea and Taiwan under the Patent Cooperation
Treaty. Our patents have expiration dates ranging from January 25, 2009 to
October 29, 2018. We continually file new patent applications for new
developments in our technology. As of September 30, 2000, we had nine U.S.
trademark registrations and 24 international trademarks and had 25 domestic and
international trademark applications pending.
COMPETITION
The semiconductor packaging industry is highly fragmented and intensely
competitive. A number of semiconductor manufacturers and package assemblers are
developing competing technologies. Examples of these technologies include the
following:
- Flip chip. With flip chip technology, the chip is connected directly to
the circuit board with an underfill material between the chip and the
board.
- Stacked chip. In a stacked chip package, multiple chips are vertically
stacked within one package.
- Chip-on-board. In a chip-on-board solution, the chip is connected
directly to a small circuit board which is then attached to the main
circuit board.
Our competitors include many of our current licensees, as well as other
companies including Fujitsu, IBM, Micron, Motorola and NEC. In most cases, these
companies are larger than we are and have better access to financial, technical
and other resources.
We believe the principal competitive factors in our market include proven
technology, performance, reliability, size, available infrastructure, cost and
customer service. We believe we compete favorably with respect to each of these
factors.
EMPLOYEES
As of September 30, 2000, we employed 113 individuals. Our future success
will largely depend on our ability to attract, retain and motivate highly
qualified technical and management personnel. Our employees are not represented
by any collective bargaining agreements. We believe relations with our employees
are good.
FACILITIES
We lease approximately 51,000 square feet in one building in San Jose,
California for our principal engineering, marketing, prototype manufacturing and
administrative operations. The lease expires on March 31, 2005. We believe our
existing facilities are adequate for our current needs.
LEGAL PROCEEDINGS
We are involved in two separate but related patent litigation actions in
the Northern District of California against Texas Instruments and Sharp.
Further, we filed a complaint with the United States International Trade
Commission, and the ITC has since instituted a joint investigation into Texas
Instruments' and Sharp's trade practices based upon their potential infringement
of our patents. The following information is as of September 30, 2000:
Texas Instruments, Inc. v. Tessera, Inc., Civ. No. 00-2114CW (N.D. Cal.)
On February 1, 2000, Texas Instruments initiated a declaratory judgment
action against us in the U.S. District Court for the Central District of
California seeking a declaratory judgment that: it has not breached the license
agreement it entered into with us in 1996; it owes us no royalties under the
license agreement; we improperly terminated the license agreement before proving
an
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<PAGE> 38
actual material breach of the agreement; its MicroStar BGA semiconductor chip
package does not infringe our U.S. Patents Nos. 5,852,326, 5,679,977 and
5,347,159; and these three Tessera patents are invalid. Texas Instruments also
seeks to recover its costs and attorney's fees incurred in the action.
On March 13, 2000, we filed an answer in which we deny Texas Instruments'
allegations, including its allegations that any of our patents are invalid. We
also filed a counterclaim in which we allege that Texas Instruments has breached
the license agreement by, among other things, failing to pay us royalties for
the use of our U.S. Patents 5,852,326 and 5,679,977. Further, we allege that
certain Texas Instruments' packages having a face up chip orientation infringe
these patents. We further seek to recover damages, up to treble the amount of
actual damages, together with attorney's fees and costs. We also seek to enjoin
Texas Instruments from infringing these patents in the future.
On May 2, 2000, the Central District of California denied Texas
Instruments' request for a preliminary injunction prohibiting us from pursuing
the ITC investigation, described below. Texas Instruments has appealed this
denial to the U.S. Court of Appeals for the Federal Circuit. On June 2, 2000,
the Central District of California granted our motion for a change of venue to
the Northern District of California. Discovery is ongoing and the trial is
currently set for September 10, 2001.
Tessera, Inc. v. Sharp Corporation and Sharp Electronics Corporation, Civ. No.
00-20337 JW (N.D. Cal.)
On March 28, 2000, we filed a complaint against Sharp in the U.S. District
Court for the Northern District of California, alleging that certain Sharp
packages having a face up chip orientation infringe our U.S. Patents 5,852,326
and 5,679,977. We seek monetary damages of up to treble the amount of actual
damages sustained by us due to Sharp's alleged infringement, together with
attorney's fees and costs. We also seek a permanent injunction prohibiting Sharp
from infringing our asserted patents in the future. On May 17, 2000, before
Sharp responded to our complaint, the court stayed the action pending resolution
of the ITC investigation.
In re Certain Semiconductor Chips with Minimized Chip Package Size and Products
Containing Same, ITC Inv. No. 337-TA-432
Also on March 28, 2000, we filed a complaint against Sharp and Texas
Instruments with the ITC. In our ITC complaint, we allege that Sharp and Texas
Instruments unlawfully import into the U.S., sell for importation in to the
U.S., and/or sell within the U.S. after importation certain semiconductor
packages having a face up chip orientation that infringe our U.S. Patents
5,852,326 and 5,679,977. We seek a permanent exclusion order and a permanent
cease and desist order regarding the allegedly infringing packages and original
equipment manufacturer products that contain them. On April 27, 2000, the ITC
instituted an investigation.
On May 17, 2000, Texas Instruments moved for a summary determination in the
ITC requesting the ITC to terminate its investigation of Texas Instruments. We
opposed this motion. On August 9, 2000, the judge issued an order denying Texas
Instruments' motion. On August 7, 2000 and August 21, 2000, Texas Instruments
filed two additional motions for summary determination on the issues of
non-infringement and whether a particular U.S. patent is prior art to our
asserted patents, respectively. We will file oppositions to these motions by
September 18, 2000. Discovery is ongoing in this investigation and a hearing
before an administrative law judge is scheduled to begin on January 23, 2001.
From time to time, we may be involved in other litigation involving claims
arising out of our operations in the normal course of business.
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<PAGE> 39
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors as well as their ages and positions as of September 30,
2000:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Robert A. Young(1)............ 58 Chairman of the Board and Director
Bruce M. McWilliams........... 44 Chief Executive Officer, President and Director
Steve G. Vogel................ 49 Chief Financial Officer and Vice President
Rajeeva Lahri................. 44 Chief Operating Officer and Senior Vice President
Stephen A. Tobak.............. 43 Senior Vice President, Marketing and Sales
Christopher M. Pickett........ 34 Vice President and General Counsel
Gary Catlin................... 59 Vice President, Licensee Services
Michael W. Warner............. 60 Vice President, Engineering
Patricia M. Cloherty(1)(2).... 58 Director
Philip S. Dauber(2)........... 59 Director
Borje Ekholm(1)............... 37 Director
D. James Guzy(1).............. 64 Director
Rein Narma(2)................. 77 Director
John W. Smith................. 57 Director
</TABLE>
-------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Robert A. Young has served as a member of our board of directors since 1991
and has served as Chairman of the Board since 1996. Mr. Young has served as
Chief Executive Officer of Curl Corporation, an Internet infrastructure software
company since 1997. From 1986 to 1997, Mr. Young was a Managing Director at
Dillon, Read & Co. Inc., an investment bank. He received a B.S. in Chemistry
from the University of Delaware and a Ph.D. in Physical Chemistry from the
Massachusetts Institute of Technology.
Bruce M. McWilliams has served as President, Chief Executive Officer and as
a member of our board of directors since May 1999. From December 1998 to May
1999 he was Chairman, and from November 1996 to December 1998, President and
Chief Executive Officer of S-Vision, a silicon chip-based display company which
he co-founded. From January 1995 to November 1996, Mr. McWilliams served as a
Senior Vice President at Flextronics International, an electronic manufacturing
services company. From February 1989 to January 1995, Mr. McWilliams served as
President of nCHIP Inc., an advanced packaging manufacturer, which he co-founded
and which was acquired by Flextronics. He received a B.S., an M.S. and a Ph.D.
in Physics from Carnegie Mellon University.
Steve G. Vogel has served as Vice President and Chief Financial Officer
since April 2000. From February 1999 to March 2000, he served as Chief Financial
Officer and Vice President of Finance at iLogistix, an integrated supply chain
management company. From 1994 to 1998, Mr. Vogel was Chief Financial Officer,
Vice President and General Counsel for Microbank Software, a banking software
developer. Mr. Vogel received an M.B.A. from the Wharton School at the
University of Pennsylvania, as well as a B.A. in psychology and an M.B.A. from
Lehigh University. An attorney at law in Arizona, New Jersey and New York, he
received a J.D., from Arizona State University, and an LL.M. in corporation law
from the New York University School of Law. He is a C.P.A. and C.M.A.
Rajeeva Lahri has served as our Chief Operating Officer and Senior Vice
President since August 2000. From June 1999 to August 2000, Mr. Lahri served as
Senior Vice President and Deputy Chief
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<PAGE> 40
Technical Officer at Philips Semiconductors, a semiconductor company. From April
1995 to June 1999, Mr. Lahri served as Senior Vice President of Corporate
Technology and Customer Engineering at VLSI Technology, a designer and
manufacturer of semiconductors. From 1986 to 1995, he served as Director of
Technology Development for the Fairchild division of National Semiconductor
Corporation, a semiconductor company. He received a Ph.D. in Electrical
Engineering from the State University of New York at Buffalo and an M.S. in
Physics and an M.Tech. in Solid State Electronics from the Indian Institute of
Technology in Kanpur, India.
Stephen A. Tobak has served as our Senior Vice President of Marketing and
Sales since October 1999. From December 1997 to September 1999 he was Vice
President of Corporate Marketing and Communications at National Semiconductor
Corporation, a semiconductor company. He was Vice President of Corporate and
Channel Marketing at Cyrix Corporation, a microprocessor manufacturer, from 1995
to 1997, and Director of Corporate Marketing at Opti, Inc., a core logic
designer and manufacturer, from 1993 to 1995. He received a B.S. in Physics and
an M.S. in Electrical Engineering from the State University of New York at Stony
Brook.
Christopher M. Pickett has served as our Vice President and General Counsel
since February 1999. Mr. Pickett served as our Director of Intellectual Property
from December 1995 to February 1999 and as our In-House Patent Counsel from
August 1994 to December 1995. Mr. Pickett is a member of the California Bar and
the U.S. Patent Bar. He received a B.S. in Electrical Engineering from
California Polytechnic State University, San Luis Obispo and a J.D. from the
University of San Francisco.
Gary M. Catlin has served as our Vice President of Licensee Services since
February 2000. From December 1998 to February 2000, he was Vice President of
Equipment Sales and Service for Silicon Coast, Inc., a manufacturer's
representative. From 1996 through 1998, Mr. Catlin was Vice President, Business
Development of Shinkawa, Ltd., a capital equipment manufacturer. From July 1990
to December 1996 he was with the Alphatec Group, a packaging and electronics
company, where most recently he was Vice President of Technology. He is a member
of the Meptech Advisory Board and the technology advisory board of the
Semiconductor Assembly Council. He received a B.A. in Physics, Mathematics, and
Industrial Engineering from James Millikin University.
Michael W. Warner has served as our Vice President, Engineering since
November 1994. From 1993 to 1994, he was Vice President of Engineering for
Toshiba America, a computer disk manufacturer. In 1992, Mr. Warner co-founded
Disk Drive Technology, a developer of disk drives. Mr. Warner received a B.S. in
Mechanical Engineering from San Jose State University.
Patricia M. Cloherty has served as a member our board of directors from
1992 to 1994, and since August 1996 to the present. Ms. Cloherty is Special
Limited Partner of Patricof & Co. Ventures, Inc., a venture capital investment
firm, with which she was associated from 1970 to 1977 and from 1988 to the
present. She serves on the boards of directors of Webley Systems Inc., Diversa
Corporation, Mojave Therapeutics, Inc. and Lexicon Genetics, Inc. In addition,
Ms. Cloherty is Chairman of the U.S. Russia Investment Fund, a program of the
U.S. State Department. She received a B.A. from San Francisco College for Women
and an M.I.A. and an M.A. from Columbia University.
Philip S. Dauber has served as a member of our board of directors since
August 1999. Mr. Dauber is an independent consultant who has acted as interim
executive and board member for various high technology companies since 1988. He
was acting President of IQI, a research and development company, from February
1997 to August 1997. Mr. Dauber was Chief Operating Officer of Hal Computer
Systems, a server reseller, from February 1991 to August 1992 and Chief
Executive Officer of nCHIP Inc., a supplier of multi-chip module packaging
provider, from February 1989 to December 1990. He serves on the Board of
Directors of SAGA Systems. He received a B.S.E. in Electrical Engineering and an
M.A. and Ph.D. in Communications Sciences from the University of Michigan.
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Borje Ekholm has served as a member of our board of directors since May
1999. Since January 1998 he has been Head of New Investments at Investor AB and
President at Investor Growth Capital Inc., a subsidiary of Investor AB, a
venture capital firm. From January 1995 to December 1997, he was President of
Novare Kapital AB, a subsidiary of Investor AB. He currently serves on the
boards of directors of AB Chalmersinvest, FR FastighetsRenting and Novare
Kapital AB. He received an M.S. in Electrical Engineering from Kungliga Tekniska
Hogskolan and an M.B.A. from INSEAD, Fontainebleau, France.
D. James Guzy has served as a member of our board of directors since June
2000. Since 1969, he has served as President of the Arbor Company, a limited
partnership involved in the electronics and computer industry. Mr. Guzy is
Chairman of SRC Computer Corporation, a developer of super-computer systems, and
Chairman of the board of PLX Technology, Inc, a supplier of high speed
interconnect silicon and software. Mr. Guzy is also a director of Intel, Cirrus
Logic, Micro Component Technology, Novellus Systems, Davis Selected Group of
Mutual Funds, and Alliance Capital Management Technology Fund. Mr. Guzy received
a B.S. from the University of Minnesota and an M.S. from Stanford University.
Rein Narma has served as a member of our board of directors since June
1991. Mr. Narma has been Vice Chairman of Contec LP, a provider of products and
services to the broadband communications industry, since October 1998 after
serving as its Chief Executive Officer from July 1993 to October 1998. From 1969
to 1990, Mr. Narma held various executive positions with General Instrument
Corporation, including Executive Vice President and Advisor to the Chairman from
1984 to 1990. Mr. Narma received a B.S. in Electrical Engineering from the
Technical University of Tallinn, Estonia.
John W. Smith has served as a member of our board of directors since June
1993. He was also our President and Chief Executive Officer from July 1993 to
May 1999 and our acting Chief Technical Officer from June 1999 to June 2000.
From February 1991 until June 1993, Mr. Smith served as the President and Chief
Executive Officer of Nonvolatile Electronics, Inc., a memory products company.
He received a B.S. in Chemical Engineering from Louisiana Polytechnic University
and an M.S. in Management and Administrative Sciences from the University of
Texas at Dallas.
BOARD OF DIRECTORS
Our board of directors currently consists of eight directors. There are no
family relationships between any of our directors or executive officers.
The board of directors is divided into three classes. The term of office
and directors constituting each class is as follows:
<TABLE>
<CAPTION>
CLASS DIRECTORS TERM OF OFFICE
----- --------- --------------
<S> <C> <C>
Class I Rein Narma - expires at the annual meeting of stockholders in 2001
John W. Smith and at each third succeeding annual meeting thereafter
Class II Patricia M. - expires at the annual meeting of stockholders in 2002
Cloherty and at each third succeeding annual meeting thereafter
Philip S. Dauber
Borje Ekholm
Class III D. James Guzy - expires at the annual meeting of stockholders in 2003
Bruce M. McWilliams and at each third succeeding annual meeting thereafter
Robert A. Young
</TABLE>
The classification of directors has the effect of making it more difficult
to change the composition of the board of directors.
37
<PAGE> 42
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has a compensation committee and an audit committee.
Our compensation committee consists of Messrs. Dauber and Narma and Ms.
Cloherty. The compensation committee makes recommendations regarding our various
incentive compensation and benefit plans and determines salaries for our
executive officers and incentive compensation for our employees and consultants.
Our audit committee consists of Messrs. Young, Ekholm and Guzy and Ms. Cloherty.
The audit committee makes recommendations to the board of directors regarding
the selection of our independent auditors, reviews the results and scope of the
audit and other services provided by our independent auditors and reviews and
evaluates our control functions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. None of
the members of our compensation committee has at any time been an officer or
employee of Tessera. No interlocking relationships exists between our board of
directors or compensation committee of any other entity, nor has any
interlocking relationship ever existed in the past.
DIRECTOR COMPENSATION
Outside members of our board of directors receive $2,000 for each board
meeting attended and an additional $500 for each committee meeting attended. In
addition, we reimburse them for their travel expenses. Members of the board, who
are also our employees, do not receive any compensation as directors.
Each outside member of our board of directors also receives an option to
purchase 20,000 shares of our common stock upon initially becoming a board
member, and receives an additional option to purchase 5,000 shares on each
anniversary date in accordance with an automatic grant provision approved by the
board of directors. The initial option vests over a period of four years with
25% of the shares subject to the option vesting on the first anniversary of the
grant and the remainder vesting in equal monthly increments. The subsequent
grant vests over four months in equal monthly increments.
38
<PAGE> 43
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to each person that
served as chief executive officer during fiscal year 1999 and to the four other
most highly compensated executive officers who earned more than $100,000 during
fiscal year 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SHARES
UNDERLYING
STOCK
NAME AND PRINCIPAL POSITION SALARY OPTIONS
--------------------------- -------- ----------
<S> <C> <C>
Bruce M. McWilliams(1)...................................... $127,385 1,433,333
President and Chief Executive Officer
Christopher M. Pickett...................................... 142,469 133,332
Vice President and General Counsel
Michael W. Warner........................................... 177,154 33,333
Vice President, Engineering
John W. Smith(1)............................................ 213,000 --
Director and former President and Chief Executive Officer
Thomas H. Di Stefano(2)..................................... 161,034 --
Former Vice President and Chief Technical Officer
</TABLE>
-------------------------
(1) Mr. McWilliams became our President and Chief Executive Officer in June
1999. Mr. Smith was our President and Chief Executive Officer during the
portion of fiscal 1999 prior to Mr. McWilliams' election. All information in
this section relates to compensation paid to Mr. Smith for services rendered
during the period from January through May as President and Chief Executive
Officer and from June through December as Chief Technical Officer, and to
Mr. McWilliams for services rendered during the period from June through
December.
(2) Mr. Di Stefano, a founder of the Company, was our Vice President and Chief
Technical Officer from January to September of 1999. Information in this
section relates to compensation paid to Mr. Di Stefano for services rendered
during this period.
39
<PAGE> 44
OPTION GRANTS DURING LAST FISCAL YEAR
In fiscal year 1999, we granted options to purchase an aggregate of
3,243,233 shares to employees, directors and consultants. All options were
granted under our 1999 Stock Plan with exercise prices equal to the fair market
value on the date of grant, as determined in good faith by our board of
directors.
The following table sets forth certain information with respect to stock
options granted to the individuals named in the above summary compensation table
during fiscal year 1999, including the potential realizable value of the grants
at the end of the ten-year term of the options, assuming that the fair market
value of our common stock appreciates from the midpoint of the estimated
offering price to the public at assumed rates of stock appreciation of 5% and
10%, compounded annually over the remaining option terms. These assumed rates of
appreciation comply with the rules of the Securities and Exchange Commission and
do not represent our estimate of future stock prices. Actual gains, if any, on
stock option exercises will be dependent on the future performance of our common
stock.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SHARES TOTAL OPTIONS CURRENT VALUE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE BASED ON AN OPTION TERM
OPTIONS EMPLOYEES PRICE EXPIRATION ASSUMED OFFERING -------------------------
NAME GRANTED IN 1999 PER SHARE DATE PRICE OF $11 5% 10%
---- ---------- ------------- --------- ---------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Bruce M. McWilliams........ 1,433,333 44% $1.50 10/8/09 $13,616,664 $23,324,240 $38,100,183
Christopher M. Pickett..... 66,666 2% 1.50 10/8/09 633,327 1,084,838 1,772,084
66,666 2% 4.50 2/15/09 433,329 846,921 1,456,834
Michael W. Warner.......... 33,333 1% 1.50 10/8/09 316,664 542,419 886,042
John W. Smith.............. 0 -- -- -- -- -- --
Thomas H. Di Stefano....... 0 -- -- -- -- -- --
</TABLE>
AGGREGATE OPTION EXERCISES DURING LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth for the individuals named in the above
summary compensation table their option exercises for fiscal year 1999, and
exercisable and unexercisable options held by them as of fiscal year-end 1999.
The value of unexercised in-the-money options is based on the midpoint of
the estimated offering price to the public of $11 per share less the exercise
price per share, multiplied by the number of shares issued upon exercise of the
option. All options were granted under our stock option plans at exercise prices
equal to the fair market value on the date of grant, as determined in good faith
by our board of directors.
40
<PAGE> 45
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED FISCAL YEAR-END AT FISCAL YEAR END
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bruce M. McWilliams..... 0 -- 1,433,333(1) 0 $13,616,664 $ 0
Christopher M.
Pickett............... 0 -- 39,000 13,000 370,500 123,500
0 -- 10,000(2) 0 87,500 --
0 -- 66,666(3) 0 433,329 --
0 -- 0 66,666 -- 433,329
0 -- 66,666(4) 0 633,327 --
Michael W. Warner....... 0 -- 213,333 0 2,314,663 --
0 -- 40,000 13,333 380,000 126,664
0 -- 33,333(5) 0 316,664 --
John W. Smith........... 0 -- 256,944 76,389 2,440,968 725,696
Thomas H. DiStefano..... 113,333 $1,076,664 0 0 -- --
</TABLE>
-------------------------
(1) Includes 1,433,333 shares that were immediately exercisable, none of which
were vested at fiscal year-end.
(2) Includes 10,000 shares that were immediately exercisable, 4,375 shares of
which were vested at fiscal year-end.
(3) Includes 66,666 shares that were immediately exercisable, 26,388 shares of
which were vested at fiscal year-end.
(4) Includes 66,666 shares that were immediately exercisable, 2,778 shares of
which were vested at fiscal year-end.
(5) Includes 33,333 shares that were immediately exercisable, 1,389 shares of
which were vested at fiscal year-end.
EMPLOYEE BENEFIT PLANS
1996 STOCK PLAN
Our 1996 Stock Plan was adopted by our board of directors and our
stockholders in December 1996. No options have been issued under the 1996 Plan
since our board of directors adopted the 1999 Stock Plan in February 1999.
Options to purchase a total of 3,442,378 shares of common stock were issued
under the 1996 Plan.
1999 STOCK PLAN
Our 1999 Stock Plan was adopted by our board of directors in February 1999,
and our stockholders approved the plan in May 1999. Our 1999 Plan provides for
the grant of incentive stock options, which may provide for preferential tax
treatment, to our employees, and for the grant of nonstatutory stock options and
stock purchase rights to our employees, directors and consultants.
An aggregate of 7,000,000 shares of our common stock may be issued under
our 1999 Plan. The number of shares reserved for issuance under our 1999 Plan
will increase annually on the first day of each fiscal year of each calendar
year beginning in 2001, by an amount equal to the lesser of 5% of the
outstanding shares of our common stock on the first day of the year, 2,000,000
shares or such lesser amount as our board of directors may determine.
Our board of directors or a committee of our board administers the 1999
Plan. The committee may consist of two or more "outside directors" to satisfy
certain tax and securities requirements. The administrator has the power to
determine the terms of the options or stock purchase rights granted, including
the exercise price, the number of shares subject to each option or stock
41
<PAGE> 46
purchase right, the exercisability of the options and the form of consideration
payable upon exercise. The administrator determines the exercise price of
options granted under our stock option plan, but with respect to incentive stock
options, the exercise price must at least be equal to the fair market value of
our common stock on the date of grant. Additionally, the term of an incentive
stock option may not exceed ten years. The administrator determines the term of
all other options. No optionee may be granted an option to purchase more than
700,000 shares in any fiscal year. In connection with his or her initial
service, an optionee may be granted an additional option to purchase up to
700,000 shares of our common stock. After termination of one of our employees,
directors or consultants, he or she may exercise his or her option for the
period of time stated in the option agreement. If termination is due to death or
disability, the option will generally remain exercisable for twelve months
following such termination. In all other cases, the option will generally remain
exercisable for three months. However, an option may never be exercised later
than the expiration of its term.
The administrator determines the exercise price of stock purchase rights
granted under our 1999 Plan. Unless the administrator determines otherwise, the
restricted stock purchase agreement will grant us a repurchase option that we
may exercise upon the voluntary or involuntary termination of the purchaser's
service with us for any reason (including death or disability). The purchase
price for shares we repurchase will generally be the original price paid by the
purchaser. The administrator determines the rate at which our repurchase option
will lapse.
Our 1999 Plan generally does not allow for the transfer of options or stock
purchase rights and only the optionee may exercise an option and stock purchase
right during his or her lifetime. Our stock option plan provides that in the
event of our merger with or into another corporation or a sale of substantially
all of our assets, the successor corporation may assume or substitute for each
option or stock purchase right. If the outstanding options or stock purchase
rights are not assumed or substituted for, all outstanding options and stock
purchase rights will fully vest and become exercisable as to all stock subject
to options and stock purchase rights, including shares which would not otherwise
be vested or exercisable and then will terminate prior to the closing of such
merger or sale of assets. Our stock option plan will automatically terminate in
2009, unless we terminate it sooner.
2000 EMPLOYEE STOCK PURCHASE PLAN
Concurrently with this offering, we intend to establish an employee stock
purchase plan. A total of 200,000 shares of our common stock will be made
available for sale under this plan. In addition, our plan provides for annual
increases in the number of shares available for issuance under the employee
stock purchase plan on the first day of each fiscal year, beginning in 2001,
equal to the lesser of 1% of the outstanding shares of our common stock on the
first day of the calendar year, 200,000 shares, or such other lesser amount as
may be determined by our board of directors. Our board of directors or a
committee of our board administers the plan. Our board of directors or its
committee has full and exclusive authority to interpret the terms of the plan
and determine eligibility. All of our employees are eligible to participate if
they are customarily employed by us or any participating subsidiary for at least
20 hours per week and more than five months in any calendar year. However, an
employee may not be granted an option to purchase stock under the plan if such
employee:
- immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
- whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.
Our plan is intended to qualify for preferential tax treatment and contains
approximately six month offering periods. The offering periods generally start
on the first trading day on or after November 15 and May 14 of each year, except
for the first such offering period which will
42
<PAGE> 47
commence on the first trading day on or after the effective date of this
offering and will end on the last trading day on or before May 14, 2001.
The plan permits participants to purchase common stock through payroll
deductions of up to 10% of their eligible compensation which includes a
participant's base straight time gross earnings and commissions but excluding
all other compensation paid to our employees. A participant may purchase no more
than 2,000 shares during any six month offering period.
Amounts deducted and accumulated by the participant are used to purchase
shares of our common stock at the end of each six month offering period. The
price is 85% of the lower of the fair market value of our common stock on the
enrollment date or the exercise date. Participants may end their participation
at any time during an offering period, and will be paid their payroll deductions
to date. Participation ends automatically upon termination of employment with
us.
A participant may not transfer rights granted under our employee stock
purchase plan other than by will, the laws of descent and distribution or as
otherwise provided under the plan.
Our plan will terminate in 2010. However, our board of directors has the
authority to amend or terminate our plan, except that, subject to certain
exceptions described in the plan, no such action may adversely affect any
outstanding rights to purchase stock under our plan.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- permit indemnification;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether our bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses, judgments, fines and settlement amounts
incurred by any such person in any action or proceeding arising out of such
person's services as a director or executive officer or at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
43
<PAGE> 48
RELATED PARTY TRANSACTIONS
Other than the compensation arrangements described under "Management" and
the transactions described below, there has not been within the last the last
three fiscal years or this fiscal year, nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party:
- in which the amount involved exceeds $60,000; and
- in which any director, executive officer or holder of more than 5% of our
capital stock or any member of their immediate family had or will have a
direct or indirect material interest.
We believe that each of the transactions described below were on terms no
less favorable than could have been obtained from unaffiliated third parties.
All future transactions between us and any director or executive officer will be
subject to approval be a majority of the disinterested members of our board of
directors.
CONSULTING ARRANGEMENTS
Thomas H. Di Stefano, a founder of Tessera, held various key technical and
operating roles including, President, CTO, and Vice President of Marketing, and
served on the Tessera Board of Directors from its inception until September
1999. Mr. Di Stefano is currently President of Decision Track, LLC, a consulting
firm serving the advanced semiconductor packaging industry. We have engaged Mr.
Di Stefano and his firm to assist us in our ongoing efforts to reduce the cost
of our chip scale packages through materials development, process enhancements
and other activities. Compensation under the agreement with Mr. Di Stefano
includes a warrant to purchase 220,000 shares of common stock at an exercise
price of $4.50 with an exercise period of two years and a $5,000 retainer per
month plus reimbursement of expenses.
Philip S. Dauber, a member of our Board of Directors, was engaged as a
consultant and receives cash of approximately $5,000 each month for his
consulting services. In his capacity as a consultant, he has been granted an
option to purchase 226,666 shares of our common stock. The option vests monthly
over three years beginning June 1, 1999, subject to Mr. Dauber's continued
relationship with Tessera. In the event Mr. Dauber is terminated by us for
reasons other than cause, an additional one-third of this option will
immediately vest.
John W. Smith, a member of our Board of Directors, was engaged as a
consultant and currently receives cash of approximately $3,000 each month for
his regular consulting services and $1,200 per day for special additional
services. In addition, under the consulting agreement, an option to purchase
333,333 shares of common stock originally granted to Mr. Smith as an employee
continues to vest during his term as a director or consultant.
PREFERRED STOCK
Since December 1, 1996, we have sold our preferred stock in private
transactions as follows:
- 1,199,999 shares of our Series D preferred stock at a price of $7.50 per
share in December 1996;
- 4,309,173 shares of our Series D preferred stock at a price of $7.50 per
share in February 1997;
- 2,739 shares of our Series D preferred stock at a price of $7.50 per
share in December 1998;
- 81,634 shares of our Series D preferred stock at a price of $7.50 per
share in April 1997;
- 3,255,304 shares of our Series E preferred stock at a price of $7.50 per
share in January 2000;
44
<PAGE> 49
- 666,666 shares of our Series E preferred stock at a price of $7.50 per
share in February 2000; and
- 575,562 shares of our Series E-1 preferred stock at a price of $9.00 per
share in August 2000.
We issued these securities pursuant to purchase agreements under which we
made representations, warranties and covenants, and provided the purchasers with
registration rights and information rights, among other privileges. Our current
officers, directors, holders of more than 5% of our capital stock and our
founder/consultant participated in the foregoing transactions as follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
SHARES OF SHARES OF SHARES OF
NAME OF PURCHASER SERIES D SERIES E SERIES E-1
----------------- --------- --------- ----------
<S> <C> <C> <C>
5% STOCKHOLDERS:
Entities affiliated with Patricof Ventures.................. 894,537 130,867 --
Entities affiliated with Concord Partners................... 313,592 106,666 --
Investor Investments AB..................................... 4,020,820 266,664 --
DIRECTORS AND EXECUTIVE OFFICERS:
Robert A. Young............................................. 5,122 -- --
Patricia M. Cloherty........................................ -- 66,666 --
D. James Guzy............................................... -- -- 277,778(1)
Rein Narma.................................................. 2,108 -- --
John W. Smith............................................... 1,232 -- --
</TABLE>
-------------------------
(1) Consists of 277,778 shares that are held of record by Arbor Company. Mr.
Guzy is President of the Arbor Company and accordingly has voting or
investment power with respect to the 277,778 shares held of record by the
Arbor Company.
45
<PAGE> 50
OPTION GRANTS
Since December 1, 1996, we have granted options to purchase our common
stock to our current directors, executive officers and founder/consultant as
follows:
<TABLE>
<CAPTION>
DATE OF NUMBER OF EXERCISE PRICE
NAME GRANT OPTIONS PER SHARE
---- -------- --------- --------------
<S> <C> <C> <C>
Robert A. Young............................................ 12/2/96 40,000 $1.50
12/2/97 10,000 $4.50
5/19/98 90,000 $4.50
12/15/98 10,000 $4.50
12/27/99 10,000 $1.50
Patricia M. Cloherty....................................... 12/2/96 40,000 $1.50
12/2/97 10,000 $4.50
12/15/98 10,000 $4.50
12/27/99 10,000 $1.50
Philip S. Dauber........................................... 10/8/99 266,666 $1.50
8/8/00 10,000 $4.50
Borje Ekholm............................................... 4/19/99 40,000 $4.50
3/27/00 10,000 $1.50
D. James Guzy.............................................. 5/2/00 40,000 $2.25
Rein Narma................................................. 12/2/96 40,000 $1.50
12/2/97 10,000 $4.50
12/15/98 10,000 $4.50
12/27/99 10,000 $1.50
John W. Smith.............................................. 12/2/96 333,333 $1.50
Thomas H. Di Stefano....................................... 12/2/96 333,333 $1.50
Bruce M. McWilliams........................................ 10/8/99 1,433,333 $1.50
6/6/00 233,333 $2.63
Rajeeva Lahri.............................................. 8/1/00 516,666 $3.38
Stephen A. Tobak........................................... 10/8/99 466,666 $1.50
Gary M. Catlin............................................. 3/27/00 100,000 $1.50
8/8/00 33,333 $4.50
Christopher M. Pickett..................................... 12/3/96 52,000 $1.50
10/6/97 10,000 $2.25
6/2/98 66,666 $4.50
2/15/99 66,666 $4.50
10/8/99 66,666 $1.50
3/27/00 66,666 $1.50
8/29/00 66,666 $6.12
Steve G. Vogel............................................. 4/6/00 333,333 $1.50
Michael W. Warner.......................................... 12/3/96 53,333 $1.50
10/8/99 33,333 $1.50
3/27/00 33,333 $1.50
</TABLE>
WARRANTS
On August 29, 2000, in connection with entering into a consulting agreement
with Thomas H. Di Stefano, we granted Mr. Di Stefano a warrant to purchase
220,000 shares of our common stock at an exercise price of $4.50 per share.
46
<PAGE> 51
OFFERS OF EMPLOYMENT
Rajeeva Lahri, our Chief Operating Officer and Senior Vice President, is
party to an employment offer letter with us dated July 14, 2000. Pursuant to his
offer letter, if Mr. Lahri's employment is terminated or his duties
substantially reduced following a change of control of our company, he will be
entitled to six months' severance, and the vesting of his stock options will
accelerate by twelve months.
Mr. Stephen A. Tobak, our Senior Vice President of Marketing and Business
Development, is party to an employment offer letter with us dated September 17,
2000. Pursuant to the offer letter, if Mr. Tobak's employment is terminated
following a change of control of our company, he will be entitled to one year's
severance.
Mr. Steve G. Vogel, our Vice President of Finance and Administration and
Chief Financial Officer, is party to an employment offer letter with us dated
March 21, 2000. Pursuant to the offer letter, if Mr. Vogel's employment is
terminated without cause, he will be entitled to three months' severance. If Mr.
Vogel's employment is terminated following a change of control, then in addition
to three months' severance, the vesting of his stock options will accelerate by
twelve months.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with each of our directors
and executive officers. Such indemnification agreements will require us to
indemnify our directors and executive officers to the fullest extent permitted
by Delaware General Corporation Law.
47
<PAGE> 52
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us with respect
to the beneficial ownership of our common stock as of September 30, 2000, and as
adjusted to reflect the sale of common stock offered hereby, for:
- each stockholder known by us to beneficially own more than 5% of our
common stock;
- each of our directors and executive officers; and
- all directors and executive officers as a group.
As of September 30, 2000 there were 31,556,774 shares of our common stock
outstanding, assuming that all outstanding preferred stock has been converted to
common stock. Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission. Shares of common stock subject to
options or warrants currently exercisable or exercisable within 60 days of
September 30, 2000 are deemed to be outstanding for the purpose of computing the
percentage ownership of the person holding such securities and for the purpose
of computing the percentage ownership of any group of which the holder is a
member, but are not deemed outstanding for the purpose of computing the
percentage of any other person. Except as indicated by footnote and subject to
the community property laws where applicable, based upon the information
furnished by such persons, the persons named in this table have sole voting and
investment power with respect to all shares beneficially owned by them. The
address for those individuals for which an address is not otherwise indicated is
Tessera, Inc., 3099 Orchard Drive, San Jose, CA 95134.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED
SHARES ---------------------------
BENEFICIALLY BEFORE AFTER
NAME OR GROUP OF BENEFICIAL OWNERS OWNED THE OFFERING THE OFFERING
---------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
5% STOCKHOLDERS:
Funds Managed by Patricof & Co. Ventures, Inc.(1)....... 7,629,897 24.1% 19.5%
445 Park Avenue
New York, NY 10022
Entities affiliated with Concord Partners(2)............ 4,661,658 14.8 11.9
Ticonderoga Capital 20 William Street, Suite G40
Wellesley, MA 02481
Investor Investments AB(3).............................. 5,087,484 16.1 13.0
S-103-32
Arsenalsgatan 8C
Stockholm, Sweden
DIRECTORS AND EXECUTIVE OFFICERS:
Robert A. Young(4)...................................... 4,166,197 13.2 10.7
Bruce M. McWilliams(5).................................. 1,457,638 4.4 3.6
John W. Smith(6)........................................ 1,060,544 3.3 2.7
Rejeeva Lahri........................................... -- -- --
Stephen A. Tobak(7)..................................... 466,666 1.5 1.2
Christopher M. Pickett(8)............................... 315,578 1.0 *
Steve G. Vogel.......................................... -- -- --
Michael W. Warner(9).................................... 332,221 1.0 *
D. James Guzy(10)....................................... 277,778 * *
Philip S. Dauber(11).................................... 247,291 * *
Patricia M. Cloherty(12)................................ 7,679,563 24.3 19.7
Rein Narma(13).......................................... 141,365 * *
</TABLE>
48
<PAGE> 53
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED
SHARES ---------------------------
BENEFICIALLY BEFORE AFTER
NAME OR GROUP OF BENEFICIAL OWNERS OWNED THE OFFERING THE OFFERING
---------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Gary M. Catlin(14)...................................... 110,415 * *
Borje Ekholm(15)........................................ 50,000 * *
All directors and officers as a group (14
persons)(4 - 16)...................................... 16,322,256 46.8 38.5
</TABLE>
-------------------------
* Represents less than 1% of our outstanding capital stock.
(1) Includes (i) 4,396,188 shares held by APA Excelsior III, L.P., (ii) 476,287
shares held by APA Excelsior IV, L.P., (iii) 217,191 shares held by CIN
Venture Nominees Ltd., (iv) 84,048 held by Coutts & Co. (Cayman) Ltd.,
Custodian for APA Excelsior IV/Offshore, L.P., (iv) 1,697,826 shares held
by Royal Bank of Canada Trust Company (Jersey) Limited, Custodian to APA
Excelsior III/Offshore Limited Partnership, (v) 640,080 shares held by The
P/A Fund, L.P., (vi) 9,111 shares held by Patricof Private Investment Club,
L.P., (vii) 30,000 shares underlying stock options that are immediately
exercisable held by Ms. Cloherty on behalf of Patricof & Co. Ventures,
Inc., 14,376 shares of which will have vested within 60 days of September
30, 2000, and (vii) 79,166 shares underlying non-early exercise stock
options held by Ms. Cloherty on behalf of Patricof & Co. Ventures, Inc.
that will have vested within 60 days of September 30, 2000. Ms. Cloherty, a
director of Tessera, is Special Limited Partner of Patricof & Co. Ventures,
Inc. Ms. Cloherty disclaims beneficial ownership of the shares held by or
controlled by Patricof & Co. Ventures, Inc. entities except to the extent
of her pecuniary interest therein.
(2) Includes (i) 3,735,920 shares held by Concord Partners II, L.P. and (ii)
925,738 shares held by Dillon, Read & Co., Inc. as agent on behalf of
others, all shares of which are voted in the same manner as the shares held
by Concord Partners II, L.P. unless the individual owners for whom the
shares are held as agent provide alternative instructions.
(3) Includes (i) 266,664 shares held by Investor AB and (ii) 4,820,820 shares
held by Investor Investments AB.
(4) Includes (i) 100,281 shares held directly by Mr. Young, (ii) 160,000 shares
held by Mr. Young which were acquired pursuant to the early exercise of
stock options, 143,542 shares of which will have vested within 60 days of
September 30, 2000, (iii) 40,000 shares held by Mr. Young acquired pursuant
to the exercise of a non-early exercise stock option and (iv) 129,996
shares held by Dillon, Read & Co., Inc. as agent for the benefit of Mr.
Young. Also includes (i) 3,735,920 shares held by Concord Partners II, L.P.
Robert A. Young, a director of Tessera, is a general partner of Venture
Associates II, L.P., the general partner of Concord Partners, II, L.P. Mr.
Young disclaims beneficial ownership of the shares held by Concord Partners
II, L.P. except to the extent of his pecuniary interest therein.
(5) Includes (i) 1,433,333 shares underlying a stock option that is immediately
exercisable, of which 66,666 vested shares have already been exercised and
are held by Mr. McWilliams and an additional 440,972 shares of which will
have vested within 60 days of September 30, 2000 and (ii) 24,305 shares
underlying a non-early exercise stock option that will have vested within
60 days of September 30, 2000.
(6) Includes (i) 734,156 shares held by Mr. Smith, 705,193 shares of which were
acquired pursuant to the exercise of a non-early exercise stock option and
(ii) 326,338 shares underlying non-early exercise stock options that will
have vested within 60 days of September 30, 2000.
(7) Includes 466,666 shares underlying a stock option that is immediately
exercisable, 126,388 shares of which will have vested within 60 days of
September 30, 2000.
(8) Includes (i) 209,998 shares underlying stock options that are immediately
exercisable, 77,289 shares of which will have vested within 60 days of
September 30, 2000, (ii) 84,248 shares underlying non-early exercise stock
options that will have vested within 60 days of
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<PAGE> 54
September 30, 2000 and (iii) 21,332 shares held by Mr. Pickett acquired
pursuant to the exercise of a non-early exercise stock option.
(9) Includes (i) 66,666 shares underlying stock options that are immediately
exercisable, 15,278 shares of which will have vested within 60 days of
September 30, 2000 and (ii) 265,555 shares underlying non-early exercise
stock options which will have vested within 60 days of September 30, 2000.
(10) Includes 277,778 shares held by Arbor Company. Mr. Guzy, a director of
Tessera, is president of Arbor Company and disclaims beneficial ownership
of the shares held by or controlled by Arbor Company except to the extent
of his pecuniary interest therein
(11) Includes (i) 246,666 shares held by Mr. Dauber, all of which were acquired
pursuant to the early exercise of a stock option, 105,932 shares of which
will have vested within 60 days of September 30, 2000 and (ii) 625 shares
underlying a non-early exercise stock option that will have vested within
60 days of September 30, 2000.
(12) Includes 66,666 shares held directly by Ms. Cloherty. Also includes (i)
4,396,188 shares held by APA Excelsior III, L.P., (ii) 476,287 shares held
by APA Excelsior IV, L.P., (iii) 217,191 shares held by CIN Venture
Nominees Ltd., (iv) 84,048 held by Coutts & Co. (Cayman) Ltd., Custodian
for APA Excelsior IV/Offshore, L.P., (iv) 1,697,826 shares held by Royal
Bank of Canada Trust Company (Jersey) Limited, Custodian to APA Excelsior
III/Offshore Limited Partnership, (v) 640,080 shares held by The P/A Fund,
L.P., (vi) 9,111 shares held by Patricof Private Investment Club, L.P.,
(vii) 30,000 shares underlying stock options that are immediately
exercisable held by Ms. Cloherty on behalf of Patricof & Co. Ventures,
Inc., 14,376 shares of which will have vested within 60 days of September
30, 2000, and (vii) 79,166 shares underlying non-early exercise stock
options held by Ms. Cloherty on behalf of Patricof & Co. Ventures, Inc.
that will have vested within 60 days of September 30, 2000. Ms. Cloherty, a
director of Tessera, is Special Limited Partner of Patricof & Co. Ventures,
Inc. Ms. Cloherty disclaims beneficial ownership of the shares held by or
controlled by Patricof & Co. Ventures, Inc. entities except to the extent
of her pecuniary interest therein.
(13) Includes (i) 32,199 shares held by Mr. Narma, (ii) 70,833 additional shares
held by Mr. Narma which were acquired pursuant to the exercise of non-early
exercise stock options, (iii) 30,000 shares underlying stock options that
are immediately exercisable, 14,376 shares of which will have vested within
60 days of September 30, 2000 and (iv) 8,333 shares underlying a non-early
exercise stock option that will have vested within 60 days of September 30,
2000.
(14) Includes (i) 99,999 shares underlying stock options that are immediately
exercisable, none of which will have vested within 60 days of September 30,
2000 and (ii) 10,416 shares underlying a non-early exercise stock option
that will have vested within 60 days of September 30, 2000.
(15) Includes 50,000 shares underlying stock options that are immediately
exercisable, 15,833 shares of which will have vested within 60 days of
September 30, 2000.
(16) Includes (i) an aggregate of 2,477,188 shares underlying stock options that
are immediately exercisable, 704,512 shares of which will have vested
within 60 days of September 30, 2000 and (ii) 798,986 shares underlying
non-early exercise stock options that will have vested within 60 days of
September 30, 2000. Also includes shares held in the aggregate by certain
funds under the management of Patricof & Co. Ventures, Inc. and certain
funds under the management of Venture Associates II, L.P. Ms. Cloherty and
Mr. Young disclaim beneficial ownership of the shares held by the entities
or funds with which they are affiliated, except to the extent of any
individual pecuniary interest in such entity or fund.
50
<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
We will file our amended and restated certificate of incorporation
immediately upon the completion of this offering. The following description of
our capital stock is intended as a summary only. You should read the full text
of our amended and restated certificate of incorporation and bylaws, which were
filed as exhibits to the registration statement of which this prospectus is a
part.
GENERAL
Upon the completion of this offering, we will be authorized to issue
100,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value.
COMMON STOCK
As of September 30, 2000, assuming the conversion of all outstanding shares
of preferred stock into common stock, there were 31,556,774 shares of common
stock outstanding held of record by 224 stockholders. There will be 39,056,774
shares of common stock outstanding after giving effect to the sale of our common
stock in this offering (40,181,774 shares if the underwriters exercise their
over-allotment option full). As of September 30, 2000, there were outstanding
options to purchase a total of 6,918,042 shares of our common stock.
The holders of our common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. In the event of our liquidation, dissolution or winding up, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred stock,
if any preferred stock is then outstanding. The holders of common stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock.
PREFERRED STOCK
Upon the closing of this offering, our board of directors will be
authorized, without action by the stockholders, to designate and issue 5,000,000
shares of preferred stock in one or more series and to designate the rights,
preferences and privileges of each series, which may be greater than the rights
of the common stock. It is not possible to state the actual effect of the
issuance of any shares of preferred stock upon the rights of holders of the
common stock until the board of directors determines the specific rights of the
holders of such preferred stock. However, the effects might include, among other
things:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in control of us without further action
by the stockholders.
The purpose of authorizing the board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The board's ability to issue preferred
stock will provide flexibility in connection with possible acquisitions and
other corporate purposes and could make it more difficult for a third party to
acquire, or could discourage a third party from acquiring, a majority of our
outstanding voting stock. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of common
stock.
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<PAGE> 56
Upon the closing of this offering no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.
WARRANTS
As of September 30, 2000, we had outstanding warrants to purchase 732,017
shares of our common stock of exercise prices ranging from $0.15 to $9.00 per
share, or a weighted average exercise price of $4.21 per share. These warrants
expire on dates ranging from November 24, 2000 to July 1, 2005. We also had
outstanding warrants to purchase 219,999 shares of our Series B preferred stock
of an exercise price of $0.99 per share, all of which expire on May 24, 2003 and
which will be exercisable for an aggregate of 249,997 shares of our common stock
upon the completion of our initial public offering. We also had outstanding
warrants to purchase 88,254 shares of our Series C preferred stock at an
exercise price of $7.50 per share. These warrants expire on dates ranging from
December 31, 2001 to May 5, 2009. Finally, we had outstanding warrants to
purchase 6,666 shares of our Series E preferred stock at an exercise price of
$7.50 per share, expiring on December 15, 2009.
REGISTRATION RIGHTS
The holders of 26,489,923 shares of common stock and the holders of
warrants to purchase 636,936 shares of common stock will be entitled to rights
with respect to the registration of these shares under the Securities Act
pursuant to two registration rights agreements. 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, the
registration rights holders are entitled to notice of such registration and are
entitled to include shares of common stock. Additionally, under our registration
rights agreements, holders of registration rights are entitled to demand
registration rights pursuant to which they may require us to file a registration
statement under the Securities Act at our expense. Under one of our registration
rights agreement we are required to use our best efforts to effect any such
registration within 45 days, and under the second registration rights agreement
the demand must be for an underwritten offering and we are required to use our
commercially reasonable efforts to effect any such registration as soon as
practicable. Registration rights under both agreements are subject to the right
of the underwriters of an offering to limit the number of shares included in
such registration. Under the first registration rights agreement we are not
required to effect a requested registration within 60 days following an offering
of our securities initiated by us or unless at least a minimum number of shares
are to be registered. Under the second registration rights agreement we are not
required to effect a requested registration within 90 days following an offering
of our securities initiated by us, after we have effected two such registrations
and all shares registered pursuant thereto have been sold or, no more than once
during any 12-month period, if the registration would interfere with an
unforeseen securities or business transaction. Further, under both agreements
holders may require us to file registration statements on Form S-3 at our
expense.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE AND BYLAWS AND DELAWARE LAW
Provisions of Delaware law and our certificate of incorporation and bylaws
could make the following more difficult:
- the acquisition of us by means of a tender offer;
- acquisition of us by means of a proxy contest or otherwise; or
- the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of us to first
negotiate with our board. We believe that the benefits of increased
52
<PAGE> 57
protection of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweigh the
disadvantages of discouraging such proposals because negotiation of such
proposals could result in an improvement of their terms.
Election and Removal of Directors. Upon closing of our offering, our board
of directors will be divided into three classes. The directors in each class
will serve for a three-year term, one class being elected each year by our
stockholders. This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us because it generally makes it more difficult for
stockholders to replace a majority of the directors.
Stockholder Meetings. Under our certificate of incorporation, only the
board of directors, the chairman of the board and the chief executive officer
may call special meetings of stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.
Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless the "business combination"
or the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. Generally, an "interested stockholder" is
a person who, together with affiliates and associates, owns or within three
years prior to the determination of interested stockholder status, did own, 15%
or more of a corporation's voting stock. The existence of this provision may
have an anti-takeover effect with respect to transactions not approved in
advance by the board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held by
stockholders.
Elimination of Stockholder Action By Written Consent. Our certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting at any time when we have 500 or more record stockholders.
Elimination of Cumulative Voting. Our certificate of incorporation and
bylaws do not provide for cumulative voting in the election of directors.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of us. These and other provisions may have the effect
of deterring hostile takeovers or delaying changes in control or management of
us.
Amendment of Charter Provisions. The amendment of any of the above
provisions would require approval by holders of at least 66 2/3% of the
outstanding common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.
NASDAQ NATIONAL MARKET LISTING
We have applied for the listing of our shares on The Nasdaq Stock Market's
National Market under the symbol "TSRA."
53
<PAGE> 58
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market
following the offering could cause the prevailing market price of our common
stock to fall and impede our ability to raise equity capital at a time and on
terms favorable to us.
Upon completion of the offering, we will have outstanding an aggregate of
39,056,774 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or outstanding
warrants after September 30, 2000. Of these outstanding shares the 7,500,000
shares sold in the offering will be freely tradable without restriction or
further registration under the Securities Act of 1933, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act of
1933. The remaining 31,556,774 shares of common stock outstanding upon
completion of the offering and held by existing stockholders will be "restricted
securities" as that term is defined in Rule 144 under the Securities Act of
1933. Restricted shares may be sold in the public market only if registered or
if they qualify for an exemption from registration under Rules 144, 144(k) or
701 promulgated under the Securities Act of 1933, which rules are summarized
below, or another exemption. Sales of the restricted shares in the public
market, or the availability of such shares for sale, could adversely affect the
market price of the common stock.
All officers, directors and certain other holders of common stock have
entered into contractual "lock-up" agreements providing that they will not
offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of shares of common stock owned by them or that could be purchased by
them through the exercise of options or warrants for a period of 180 days after
the date of this prospectus without the prior written consent of Chase
Securities Inc. As a result of these contractual restrictions, notwithstanding
possible earlier eligibility for sale under the provisions of Rules 144, 144(k)
and 701, additional shares will be available beginning 181 days after the
effective date of the offering, subject in some cases to certain volume
limitations.
Of the remaining restricted shares:
- 178,336 shares are subject to our repurchase option in the event of
termination of employment; and
- 686,227 shares will not be eligible for sale pursuant to Rule 144
notwithstanding the expiration of the lock-up agreements 180 days after
the offering.
Beginning 181 days after the date of prospectus, approximately 2,889,775
additional shares subject to vested options will be available for sale subject
to compliance with Rule 701 and upon the expiration of agreement not to sell
such shares entered into between the underwriters and such stockholders. Any
shares subject to lock-up agreements may be released at any time without notice
by the underwriters.
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<PAGE> 59
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Chase Securities Inc.,
UBS Warburg LLC, Needham & Company, Inc. and Wit SoundView Corporation, have
severally agreed to purchase from us the following numbers of shares of common
stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Chase Securities Inc........................................
UBS Warburg LLC.............................................
Needham & Company, Inc......................................
Wit SoundView Corporation...................................
---------
Total..................................................... 7,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are conditioned on the absence of any material adverse change in
our business and the receipt of certificates, opinions and letters from us, and
our counsel. The underwriters are committed to purchase all shares of common
stock offered in this prospectus if any shares are purchased.
The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and to dealers at the public offering price less a concession not in
excess of $ per share. The underwriters may allow and the dealers may
re-allow a concession not in excess of $ per share to other dealers. After
the public offering of the shares, the underwriters may change the offering
price and other selling terms. The representatives of the underwriters have
informed us that the underwriters do not intend to confirm discretionary sales
in excess of % of the shares of common stock offered by this prospectus.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to 1,125,000 additional
shares of common stock at the public offering price, less the underwriting
discount set forth on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each underwriter will have a firm commitment
to purchase a number of shares that approximately reflects the same percentage
of total shares the underwriter purchased in the above table. We will be
obligated to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise this option only to cover over-
allotments made in connection with the sale of common stock offered in this
prospectus.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us. The underwriting discount
was determined based on an arms' length negotiation between the representatives
of the underwriters and Tessera. These amounts are shown assuming both no
exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares.
<TABLE>
<CAPTION>
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
EXERCISE EXERCISE
-------------- --------------
<S> <C> <C>
Per share...................................... $ $
Total.......................................... $ $
</TABLE>
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<PAGE> 60
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ . The
offering of the shares is made for delivery when, as and if accepted by the
underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act, and to contribute to payments the
underwriters may be required to make in respect of those liabilities.
Our directors, executive officers and most of the holders of our common
stock and options to purchase common stock have agreed pursuant to "lock-up"
agreements that they will not offer, sell, contract to sell, pledge, grant any
option to sell, or otherwise dispose of, directly or indirectly, any shares of
common stock or securities convertible or exchangeable for common stock, or
warrants or other rights to purchase common stock for a period of 180 days after
the date of this prospectus without the prior written consent of Chase
Securities Inc. All other stockholders and option holders are subject to
contractual agreements with Tessera obligating them to abide by substantially
identical restrictions, and we have agreed with the underwriters that we will
not release any of our stock holders from such restrictions without the prior
written consent of Chase Securities Inc. We have agreed that we will not,
without the prior written consent of Chase Securities Inc., offer, sell or
otherwise dispose of any shares of common stock, options or warrants to acquire
shares of common stock or securities, exchangeable for or convertible into
shares of common stock during the 180-day period following the date of this
prospectus, except that we may issue shares upon the exercise of options granted
prior to the date of this prospectus and may grant additional options under our
stock plans.
At our request, the underwriters have reserved up to 375,000 shares of
common stock to be sold in the offering and offered for sale, at the public
offering price, to our directors, officers, employees, business associates such
as customers and suppliers and persons related to, or affiliated with the
foregoing persons. The number of shares available for sale to the general public
in the offering will be reduced to the extent these persons purchase the
reserved shares. Any reserved shares not so purchased will be offered to the
general public on the same basis as other shares offered by this prospectus.
During the course of the offering, the underwriters may create a syndicate
short position by making short sales of our common stock. Short sales occur when
the underwriters sell a greater number of shares of our common stock than they
are required to purchase in the offering. Short sales may be either covered or
naked. Covered short sales are sales made in an amount not greater than the
underwriters' over-allotment option to purchase additional shares from us in the
offering. Naked short sales are sales in excess of the over-allotment option.
The representatives have advised us that, pursuant to Regulation M under the
Securities Act, some persons participating in the offering may engage in
transactions that have the effect of stabilizing or maintaining the market price
of our common stock at a level above that which might otherwise prevail in the
open market. These transactions include syndicate covering transactions,
stabilizing bids or the imposition of penalty bids. The representatives have
advised us that these transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
A syndicate covering transaction is a bid for, or the purchase of, our
common stock on behalf of the underwriters to reduce a syndicate short position.
If the underwriters create a syndicate short position, they may choose to reduce
or cover this position by either exercising all of part of the over-allotment
option to purchase additional shares from us or by engaging in syndicate
covering transactions. The underwriters may close out any covered short position
by either exercising their over-allotment option or purchasing shares in the
open market. However, they must close out any naked short position by purchasing
shares in the open market. In determining the source of shares to close out the
covered short position, the underwriters will consider, among
56
<PAGE> 61
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option.
A stabilizing bid is a bid for or the purchase of shares of common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price of
our common stock. A penalty bid is an arrangement that permits the
representatives to reclaim the selling concession from an underwriter or a
syndicate member if the representatives purchase the shares allotted to such
underwriter or syndicate member in a syndicate covering transaction. The
representatives reclaim the selling concession because the shares they purchase
from an underwriter or a syndicate member would not have effectively placed.
We had an agreement with Warburg Dillon Read LLC, the predecessor to UBS
Warburg LLC, that expired on March 31, 2000 under which they provided financial
advisory services us. UBS Warburg LLC directly owns 26,529 shares of common
stock and holds 925,738 shares of common stock as agent on behalf of others.
Lexington Partners IV, L.P., an affiliate of UBS Warburg LLC, owns 25,733 shares
of common stock. Dillon Read, Inc., another affiliate of UBS Warburg LLC, is a
50% owner of Venture Associates II, L.P. which is the general partner of Concord
Partners II, L.P. which is one of Tessera's significant shareholders. Dillon
Read, Inc. does not have voting or dispositive power over the shares of our
stock owned by Concord Partners II, L.P. All such shares were purchased during
Tessera's prior private equity financings and assume the conversion of all
shares of preferred stock into shares of common stock.
In connection with the closing of our private placement of Series E
preferred stock in February 2000, Warburg Dillon Read LLC received a warrant to
purchase 235,320 shares of our common stock at a purchase price of $7.50 per
share and a cash fee of approximately $1,764,000. Further, in connection with
the closing of our private placement of Series E-1 preferred stock in August
2000, Warburg Dillon Read LLC received a warrant to purchase 16,666 shares of
our common stock at a purchase price of $9.00 per share and is entitled to
receive a cash fee of approximately $150,000. In our February 2000 private
placement of Series E preferred stock and our August 2000 private placement of
Series E-1 preferred stock, an affiliate of Chase H&Q purchased 6,666 shares for
$49,995 and 518 shares for $4,662, respectively.
Before this offering, there was no public market for the common stock. The
initial public offering price for the common stock will be determined by
negotiations between ourselves and the representatives. Among the factors to be
considered in determining the initial public offering price will be prevailing
market and economic conditions, our revenue and earnings, market valuations of
other companies engaged in activities similar to ours, estimates of our business
potential and prospects, the present state of our business operations, our
management and other factors deemed relevant.
A prospectus in electronic format is being made available on an Internet
web site maintained by Wit SoundView's affiliate, Wit Capital Corporation. 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.
57
<PAGE> 62
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Gray Cary Ware & Freidenrich LLP, San Diego,
California. As of September 30, 2000, a certain investment partnership and
members of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
beneficially owned an aggregate of 19,999 shares of our common stock.
EXPERTS
The financial statements as of December 31, 1998, 1999 and September 30,
2000 and for each of the three years in the period ended December 31, 1999 and
the nine month period ended September 30, 2000 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC in Washington, D.C. a Registration Statement on
Form S-1 under the Securities Act with respect to the common stock offered in
this prospectus. This prospectus, filed as part of the registration statement,
does not contain all of the information set forth in the registration statement
and its exhibits and schedules, portions of which have been omitted as permitted
by the rules and regulations of the SEC. For further information about us and
the common stock, we refer you to the registration statement and to its exhibits
and schedules. Statements in this prospectus about the contents of any contract,
agreement or other document are not necessarily complete and, in each instance,
we refer you to the copy of such contract, agreement or document filed as an
exhibit to the registration statement, and each such statement being qualified
in all respects by reference to the document to which it refers. Anyone may
inspect the registration statement and its exhibits and schedules without charge
at the public reference facilities the SEC maintains at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the SEC located at 7 World
Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for
further information about the public reference rooms. You may obtain copies of
all or any part of these materials from the SEC upon payment to the SEC of
prescribed fees. You may also inspect these reports and other information
without charge at a web site maintained by the SEC. The address of this site is
http://www.sec.gov.
Upon completion of this offering we will become subject to the
informational requirements of the Exchange Act and, in accordance therewith,
file reports, proxy statements and other information with the SEC. You will be
able to inspect and copy these reports, proxy statements and other information
at the public reference facilities maintained by the SEC and at the SEC's
regional offices at the addresses noted above. You also will be able to obtain
copies of this material from the Public Reference Section of the SEC as
described above, or inspect them without charge at the SEC's web site. We have
applied to have our common stock quoted on the Nasdaq National Market. Upon
completion of this offering, you will be able to inspect reports, proxy and
information statements and other information concerning us at the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C.
2006.
58
<PAGE> 63
TESSERA, 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' Deficit............ F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 64
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Tessera, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
Tessera, Inc. and its subsidiary (the "Company") at December 31, 1998 and 1999
and September 30, 2000 and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1999 and the nine
month period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
October 15, 2000
F-2
<PAGE> 65
TESSERA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
-------------------- SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000 2000
-------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,189 $ 927 $ 570
Restricted cash........................................... 1,000 1,000 --
Short-term investments.................................... 11,267 1,963 26,820
Accounts receivable, net of allowance for doubtful
accounts of $80, $80 and $80............................ 693 1,931 3,065
Prepaid expenses and other current assets................. 1,239 379 1,424
Net current assets of discontinued operations............. -- 5,059
-------- -------- --------
Total current assets.................................... 16,388 11,259 31,879
Property and equipment, net................................. 9,504 5,646 4,686
Security deposits and other long-term assets................ 329 81 102
-------- -------- --------
Total assets............................................ $ 26,221 $ 16,986 $ 36,667
======== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE CUMULATIVE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,253 $ 3,409 $ 1,807
Accrued liabilities....................................... 786 1,744 4,179
Accrued loss on discontinued operations................... -- 2,377 491
Deferred revenue.......................................... 95 1,260 1,796
Current portion of debt................................... 1,452 1,091 --
Current portion of capital lease obligations.............. 231 374 374
-------- -------- --------
Total current liabilities............................... 3,817 10,255 8,647
Long-term portion of debt................................... 1,299 271 --
Long-term portion of capital lease obligations.............. -- 794 456
-------- -------- --------
Total liabilities....................................... 5,116 11,320 9,103
-------- -------- --------
Commitments and contingencies (Note 9)
Mandatorily redeemable cumulative convertible preferred
stock, $0.001 par value; 31,593,572 shares authorized;
20,585,399 shares issued and outstanding in 1998 and 1999;
35,593,571 shares authorized; 25,082,843 shares issued and
outstanding at September 30, 2000 and none issued and
outstanding pro forma..................................... 64,565 64,565 96,155
Stockholders' (deficit) equity:
Common stock, $0.001 par value; 43,000,000 shares
authorized, 4,869,769 and 5,332,733 shares issued and
outstanding in 1998 and 1999, respectively; 51,666,666
shares authorized; 6,012,484 shares issued and
outstanding at September 30, 2000 and 39,056,774 shares
issued and outstanding pro forma........................ 5 5 6 39
Additional paid-in capital................................ 2,726 11,485 35,497 206,619
Deferred stock-based compensation......................... (550) (7,126) (17,228) (17,228)
Accumulated deficit....................................... (45,626) (63,403) (86,792) (86,792)
Accumulated other comprehensive (loss) income............. (15) 140 (74) (74)
-------- -------- -------- --------
Total stockholders' (deficit) equity.................... (43,460) (58,899) (68,591) $102,564
-------- -------- -------- ========
Total liabilities, mandatorily redeemable cumulative
convertible preferred stock and stockholders'
(deficit) equity...................................... $ 26,221 $ 16,986 $ 36,667
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 66
TESSERA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ----------------------
1997 1998 1999 1999 2000
-------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License................................................ $ 3,730 $ 4,594 $ 2,925 $ 2,525 $ 2,740
Royalty................................................ 26 630 1,475 642 2,699
Engineering services and other......................... 1,175 1,435 2,019 2,381 2,858
-------- -------- -------- ------- --------
Total revenues....................................... 4,931 6,659 6,419 5,548 8,297
-------- -------- -------- ------- --------
Cost of revenues*:
License................................................ 202 505 1,178 870 1,138
Engineering services and other......................... 3,818 6,223 5,430 3,651 3,636
-------- -------- -------- ------- --------
Cost of revenues*........................................ 4,020 6,728 6,608 4,521 4,774
-------- -------- -------- ------- --------
Gross profit (loss)...................................... 911 (69) (189) 1,027 3,523
Operating expenses:
Research and development*.............................. 8,437 9,057 6,841 5,861 6,454
Selling, general and administrative*................... 2,607 3,616 5,063 3,481 10,207
Stock compensation expense............................. 633 578 1,497 257 9,536
-------- -------- -------- ------- --------
Total operating expenses............................. 11,677 13,251 13,401 9,599 26,197
-------- -------- -------- ------- --------
Loss from continuing operations.......................... (10,766) (13,320) (13,590) (8,572) (22,674)
Other income (expense):
Interest income........................................ 1,906 1,236 496 420 1,232
Interest expense....................................... (278) (367) (444) (331) (208)
Other.................................................. (2) (99) (422) (279) (171)
-------- -------- -------- ------- --------
Total other income (expense)......................... 1,626 770 (370) (190) 853
-------- -------- -------- ------- --------
Net loss from continuing operations...................... (9,140) (12,550) (13,960) (8,762) (21,821)
Discontinued operations (Note 11):
Loss from discontinued operations before income
taxes................................................ (370) (1,263) (1,384) (983)
Provision for income taxes............................... (35) (77) (56) (55) --
-------- -------- -------- ------- --------
Net (loss) income from discontinued operations........... (405) (1,340) (1,440) (1,038)
Recovery (loss) on disposal, including provision of
$1,578 for operating losses during phase out
period............................................... -- -- (2,377) -- 287
Net loss................................................. $ (9,545) $(13,890) $(17,777) $(9,800) $(21,534)
Cumulative preferred stock dividends in arrears.......... -- -- -- -- (7,664)
Deemed preferred stock dividend.......................... -- -- -- -- (1,855)
-------- -------- -------- ------- --------
Net loss attributable to common stockholders............. (9,545) (13,890) (17,777) (9,800) (31,053)
Basic and diluted net loss per share attributable to
common stockholders (Note 1):
Net loss from continuing operations, basic and
diluted.............................................. $ (2.65) $ (2.66) $ (2.96) $ (1.78) $ (5.88)
======== ======== ======== ======= ========
Net loss per common share, basic and diluted........... $ (2.77) $ (2.94) $ (3.77) $ (1.99) $ (5.83)
======== ======== ======== ======= ========
Shares used in per share calculations.................. 3,452 4,724 4,713 4,913 5,328
======== ======== ======== ======= ========
Pro forma net loss per common share (unaudited):
Pro forma net loss per common share, basic and
diluted.............................................. $ (0.69) $ (1.03)
======== ========
Shares used in per share calculations.................. 25,760 30,281
======== ========
-------------------------
* Excludes amortization of deferred stock compensation
expense as follows:
Cost of revenues:
License.............................................. $ 32 $ 29 $ 59 $ 10 $ 393
Engineering services and other....................... 41 37 77 13 510
Research and development............................. 130 118 243 42 1,729
Selling, general and administrative.................. 430 394 1,118 192 6,904
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 67
TESSERA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTE ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE OTHER
--------------- PAID-IN STOCK-BASED FROM ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION OFFICER DEFICIT (LOSS) INCOME TOTAL
------ ------ ---------- ------------ ---------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996........................ 2,925 $ 3 $ 262 $ -- $(106) $(22,191) $ -- $(22,032)
Issuance of common stock in
connection with exercise of
stock options and
warrants.................... 1,658 2 861 -- -- -- -- 863
Return of capital............. -- -- (280) -- -- -- -- (280)
Foreign currency translation
adjustments................. -- -- -- -- -- -- (45) (45)
Deferred stock-based
compensation................ -- -- 1,761 (1,761) -- -- -- --
Amortization of deferred
stock-based compensation.... -- -- -- 633 -- -- -- 633
Net loss...................... -- -- -- -- -- (9,545) -- (9,545)
----- --- ------- -------- ----- -------- ----- --------
Balance at December 31,
1997........................ 4,583 5 2,604 (1,128) (106) (31,736) (45) (30,406)
Issuance of common stock in
connection with exercise of
stock options and
warrants.................... 286 -- 122 -- -- -- -- 122
Foreign currency translation
adjustments................. -- -- -- -- -- -- 30 30
Collection of note receivable
from officer................ -- -- -- -- 106 -- -- 106
Amortization of deferred
stock-based compensation.... -- -- -- 578 -- -- -- 578
Net loss...................... -- -- -- -- -- (13,890) -- (13,890)
----- --- ------- -------- ----- -------- ----- --------
Balance at December 31,
1998........................ 4,869 5 2,726 (550) -- (45,626) (15) (43,460)
Issuance of common stock in
connection with exercise of
stock options and
warrants.................... 485 -- 736 -- -- -- -- 736
Unrealized gains on available
for sale securities......... -- -- -- -- -- -- 146 146
Foreign currency translation
adjustments................. -- -- -- -- -- -- 9 9
Deferred stock-based
compensation expense........ -- -- 8,073 (8,073) -- -- -- --
Amortization of deferred
stock-based compensation.... -- -- -- 1,497 -- -- -- 1,497
Repurchase of stock........... (22) -- (50) -- -- -- -- (50)
Net loss...................... -- -- -- -- -- (17,777) -- (17,777)
----- --- ------- -------- ----- -------- ----- --------
Balance at December 31,
1999........................ 5,332 5 11,485 (7,126) -- (63,403) 140 (58,899)
Issuance of warrants in
connection with the issuance
of Series E-1 preferred
stock....................... 133 133
Issuance of common stock in
connection with exercise of
stock options and
warrants.................... 634 1 2,170 -- -- -- -- 2,171
Unrealized gains on available
for sale securities......... -- -- -- -- -- -- 39 39
Foreign currency translation
adjustments................. -- -- -- -- -- -- (253) (253)
Deferred stock-based
compensation................ -- -- 19,638 (19,638) -- -- -- --
Amortization of deferred
stock-based compensation.... -- -- -- 9,536 -- -- -- 9,536
Common stock issued for
services.................... 40 -- 216 -- -- -- -- 216
Deemed preferred stock
dividend.................... -- -- 1,855 -- -- (1,855) -- --
Net loss...................... -- -- -- -- -- (21,534) -- (21,534)
----- --- ------- -------- ----- -------- ----- --------
Balance at September 30,
2000........................ 6,006 $ 6 $35,497 $(17,228) $ -- $(86,792) $ (74) $(68,591)
===== === ======= ======== ===== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 68
TESSERA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ----------------------
1997 1998 1999 1999 2000
------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss from operations.................................. $(9,545) $(13,890) $(17,777) $(9,800) $(21,534)
Adjustments to reconcile loss to net cash used in
operating activities:
Depreciation and amortization........................... 1,376 2,355 3,236 2,124 2,097
Loss on disposal of fixed assets........................ -- -- 255 72
Stock compensation expense.............................. 633 578 1,497 257 9,536
Common stock issued for services........................ -- -- -- -- 216
Unrealized gain/loss & foreign translation.............. -- -- -- 15 (214)
Loss on disposal of discontinued operations............. -- -- -- -- (287)
Changes in operating assets and liabilities:
Accounts receivable..................................... (474) (184) (1,238) (1,552) (1,134)
Prepaid expenses, security deposits and other assets.... (799) (130) 952 449 (1,066)
Accounts payable........................................ (1,251) (178) 2,315 728 (1,196)
Accrued expenses........................................ 221 113 799 781 2,434
Accrued loss on discontinued operations................. -- -- 2,377 -- (1,599)
Deferred revenue........................................ -- 95 1,165 5 536
------- -------- -------- ------- --------
Net cash used in operating activities................. (9,839) (11,241) (6,419) (6,993) (12,139)
------- -------- -------- ------- --------
Cash flows from investing activities:
Proceeds from disposal of discontinued operations......... -- -- -- -- 4,385
Purchases of property and equipment....................... (4,690) (5,900) (2,885) (2,325) (940)
(Purchases) sales of short-term investments............... (21,654) 18,314 9,304 7,439 (24,857)
Decrease (increase) in restricted cash.................... (1,000) -- -- -- 1,000
------- -------- -------- ------- --------
Net cash (used in) provided by investing activities... (27,344) 12,414 6,419 5,114 (20,412)
------- -------- -------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of debt............................ 1,956 1,538 -- 1,496 --
Repayment of debt......................................... (275) (1,127) (1,389) (1,076) (1,362)
Repayment of capital lease obligations.................... (444) (370) (559) (429) (338)
Proceeds from issuance of mandatorily redeemable
cumulative convertible preferred stock and associated
warrants................................................ 12,026 -- -- -- 34,596
Proceeds from exercise of stock options and warrants...... 863 122 736 137 2,171
Proceeds for warrants for issuance of Series E Preferred
Stock................................................... -- -- -- -- 133
Stock issuance costs...................................... (6,673) -- -- -- (3,006)
Return of capital......................................... (280) -- -- -- --
Repurchase of stock options............................... -- -- (50) -- --
Proceeds from repayment of note receivable from officer... -- 106 -- -- --
------- -------- -------- ------- --------
Net cash provided by (used in) financing activities... 7,173 269 (1,262) 128 32,194
------- -------- -------- ------- --------
Net (decrease) increase in cash and cash equivalents........ (30,010) 1,442 (1,262) (1,751) (357)
------- -------- -------- ------- --------
Cash and cash equivalents at beginning of period............ 30,757 747 2,189 2,189 927
------- -------- -------- ------- --------
Cash and cash equivalents at end of period.................. $ 747 $ 2,189 $ 927 $ 438 $ 570
======= ======== ======== ======= ========
Supplemental information:
Assets acquired under capital lease obligations and notes
payable................................................. $ -- $ -- $ 1,496 $ 1,496 $ --
Conversion of declared dividend into Series D mandatorily
redeemable cumulative convertible preferred stock....... $ 6,340 $ -- $ -- $ -- $ --
Interest paid............................................. $ 278 $ 367 $ 444 $ 331 $ 259
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 69
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Tessera, Inc. ("Tessera" or the "Company") was incorporated in the state of
Delaware on May 10, 1990 and is headquartered in San Jose, California. The
Company provides proprietary chip scale packaging technology that addresses the
demand for performance and miniaturization in wireless communications, Internet
access, computers and consumer electronics.
In connection with Tessera's movement towards becoming an intellectual
property company, two dispositions were made. On February 26, 1999, the
tradeshow portion of ChipScale International was sold for proceeds of $50,000 in
cash. Tessera also sold its Singapore manufacturing facility, operated by
Tessera Technology Pte. Ltd., on June 19, 2000, in an asset sale. This
transaction is further described in Note 11, Discontinued Operations.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries: Tessera Technology Pte. Ltd., which was
incorporated in the Republic of Singapore; and Tessera Subsidiary, Inc., Tessera
Laboratories, Inc., and ChipScale International, Inc., which were dissolved
during fiscal year 1999. All significant intercompany balances and transactions
have been eliminated in consolidation.
In 1997, the Company changed its reporting period from a 12-month year
ending December 31 to a calendar year of 52 or 53 weeks ending on the Sunday
closest to December 31. The 52 week fiscal years consist of four equal quarters
of 13 weeks each and the 53 week fiscal years consist of three 13 week quarters
and one 14 week quarter. The financial results for the 53 week fiscal years and
the 14 week fiscal quarters will not be exactly comparable to the 52 week fiscal
years and the 13 week fiscal quarters. The nine month period ends on the Sunday
closest to September 30. For presentation purposes, the periods included in the
financial statements and notes have been presented as ending on the last day of
the nearest calendar month.
Results of the interim periods presented are not necessarily indicative of
the results to be expected for the full year.
Certain reclassifications have been made to conform prior year's data to
the current presentation. These reclassifications had no effect on reported
earnings.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL INFORMATION
The interim financial information for the nine month period ended September
30, 1999 is unaudited and has been prepared on the same basis as the audited
consolidated financial statements. The data disclosed in the financial
statements at September 30, 1999 and for the period ended September 30, 1999 are
unaudited. In the opinion of management, such unaudited information includes all
adjustments (consisting of normally recurring adjustments) necessary for the
fair presentation of the interim information.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
F-7
<PAGE> 70
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INITIAL PUBLIC OFFERING
On August 29, 2000, the Board of Directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission to sell shares of its common stock to the public. If the initial
public offering is completed under the terms presently anticipated, all
outstanding shares of mandatorily redeemable cumulative convertible preferred
stock will automatically convert into 25,544,290 (unaudited) shares of common
stock. Unaudited pro forma stockholders' equity adjusted for the assumed
conversion of preferred stock is set forth on the balance sheets.
On August 29, 2000, the Company's Board of Directors authorized a 3-for-2
reverse split of its common stock effective on September 1, 2000 upon
shareholder approval. The accompanying financial statements have been adjusted
to retroactively reflect the stock split.
FOREIGN CURRENCY TRANSLATION
The accounts of Tessera Technology Pte. Ltd., a foreign subsidiary which
uses the local currency as its functional currency, are translated into U.S.
dollars using year-end exchange rates for assets and liabilities, historical
exchange rates for equity and average exchange rates during the period for
revenues and expenses. The gains or losses resulting from translation are
excluded from results of operations and are accumulated as a separate component
of comprehensive income (loss).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts for cash and cash equivalents, short-term investments,
accounts receivable, prepaid expenses and other current assets, accounts
payable, and accrued expenses approximate their respective fair values because
of the short-term maturity of these items. The carrying value of the Company's
debt approximates fair value because of prevailing interest rates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less from the date of purchase to be cash equivalents.
SHORT-TERM INVESTMENTS
Marketable short-term investments are accounted for as available-for-sale.
At December 31, 1998, 1999 and September 30, 2000, short-term investments
consist primarily of money market funds and commercial paper instruments. These
investments are recorded at fair value, which approximates cost, with unrealized
gains and losses, net of related taxes, reported as other comprehensive income
(loss). In 1998, unrealized gains and losses were insignificant. Unrealized
gains for the year ended December 31, 1999 and the nine months ended September
30, 2000 are $146,000 and $39,000, respectively. Realized gains and losses for
the sale of available-for-sale securities are determined on a specific
identification basis
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents,
short-term investments and accounts receivable.
F-8
<PAGE> 71
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company invests primarily in money market funds and high quality
commercial paper instruments. Cash equivalents are maintained with high quality
institutions, the composition and maturities of which are regularly monitored by
management. The Company short-term investments at September 30, 2000 consist of
mutual funds invested mainly in U.S. Government debt securities. The Company has
classified all short-term investments as available-for-sale. The Company
believes that the concentration of credit risk in its trade receivables is
substantially mitigated by the Company's evaluation process, relatively short
collection terms and the high level of credit worthiness of its customers. The
Company performs ongoing credit evaluations of its customers' financial
condition and limits the amount of credit extended when deemed necessary but
generally requires no collateral.
The following table sets forth sales to customers comprising 10% or more of
the Company's total revenues from continuing operations for the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, NINE MONTHS ENDED
-------------------- SEPTEMBER 30,
CUSTOMER 1997 1998 1999 2000
-------- ---- ---- ---- -----------------
<S> <C> <C> <C> <C>
A............................................ 22% -- -- --
B............................................ 19% -- -- --
C............................................ 17% -- -- --
D............................................ 10% -- -- --
E............................................ -- 15% -- --
F............................................ -- 13% -- --
G............................................ -- 10% -- --
H............................................ -- -- 10% --
I............................................ -- -- -- 22%
J............................................ -- -- -- 12%
K............................................ -- -- -- 12%
L............................................ -- -- -- 12%
</TABLE>
The Company's accounts receivable are concentrated with three customers at
December 31, 1998, representing 37%, 29% and 18% of aggregate gross receivables;
three customers at December 31, 1999, representing 27%, 25% and 14% of aggregate
gross receivables, and five customers at September 30, 2000, representing 19%,
19%, 18%, 15% and 11% of aggregate gross receivables.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives, generally three to five
years. Leasehold improvements are amortized over the shorter of the estimated
useful life or the remaining term of the lease. Equipment held under capital
lease is stated at the lower of the fair market value of the related asset or
the present value of the minimum lease payments and is amortized on a
straight-line basis over the shorter of the estimated useful life of the related
assets or the term of the lease. Repair and maintenance costs are charged to
expense as incurred.
When property and equipment is sold or scrapped, the cost of the asset and
the related accumulated depreciation or amortization is removed from the
accounts and the resulting gain or loss on disposal is included in income or
loss.
F-9
<PAGE> 72
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG-LIVED ASSETS
The Company accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121,"Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"), which was issued in March 1995. SFAS No. 121 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the book value of the asset may not be recoverable.
The Company evaluates at each balance sheet date whether events and
circumstances have occurred that indicate possible impairment. In accordance
with SFAS No. 121, the Company uses an estimate of the future undiscounted net
cash flows of the related asset or asset grouping over the remaining life in
measuring whether the assets are recoverable. No losses from impairment have
been recognized in the financial statements.
INCOME TAXES
The Company accounts for its income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined on the basis of
the difference between income tax bases of assets and liabilities and their
respective financial reporting amounts at enacted tax rates in effect for the
periods in which the differences are expected to reverse. A valuation allowance
has been established to reduce deferred tax assets to the amounts expected to be
realized.
REVENUE RECOGNITION
Licensing revenue is recognized at the time the license agreement is
executed by both parties. Any associated training pursuant to the license
agreement is recognized as the services are performed. Royalty revenue is
recognized when shipments of semiconductors packaged using the Company's
technology are reported by the Company's licensees. Service revenues are
recognized using the contract method of accounting. The contracts specify
milestones to be met and the payments associated with meeting each milestone.
Revenue is recognized on the acknowledgement by the customer that milestones are
met. Deferred revenue arises when payments are received in advance of completion
of the milestone. Revenues are only recognized upon completion of the milestone.
STOCK-BASED COMPENSATION
The Company's employee stock option plan is accounted for in accordance
with Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Expense associated with stock-based compensation is
amortized on an accelerated basis over the vesting period of the individual
award consistent with the method described in Financial Accounting Standards
Board Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans an interpretation of APB Opinions No. 15
and 25" ("FIN 28").
The Company accounts for stock issued to non-employees in accordance with
the provisions of SFAS 123 and Emerging Issues Task Force Consensus No. 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF 96-18").
Under SFAS 123 and EITF 96-18, stock option awards issued to non-employees are
accounted for at fair value using the Black-Scholes option pricing model. The
Company believes that the fair value of the stock options are more reliably
measured than the fair value of the services received. The fair value of each
non-employee stock award is
F-10
<PAGE> 73
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
remeasured at each period end until a commitment date is reached, which is
generally the vesting date.
COMPREHENSIVE INCOME (LOSS)
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income." This statement requires companies to classify
items of other comprehensive income by their nature in the financial statements
and display the accumulated balance of other comprehensive income separately
from accumulated deficit and additional paid-in-capital in the equity section of
the balance sheet. For all periods presented, the primary differences between
the Company's net loss and comprehensive income (loss), arise from unrealized
gains and losses on the Company's short-term investments and foreign currency
translation adjustments.
NET LOSS PER SHARE
The Company reports both basic net loss per common share, which is based
upon the weighted average number of common shares outstanding excluding
contingently issuable or returnable shares, and diluted net loss per common
share, which is based on the weighted average number of common shares
outstanding and dilutive potential common shares outstanding.
The following table sets forth the computation of basic and diluted net
loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ----------------------
1997 1998 1999 1999 2000
------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss from continuing operations....... $(9,140) $(12,550) $(13,960) $(8,762) $(21,821)
Plus: Cumulative preferred stock dividends
in arrears............................. -- -- -- -- (7,664)
Deemed preferred stock dividend........... -- -- -- -- (1,855)
------- -------- -------- ------- --------
Net loss from continuing operations
attributable to common
stockholders...................... (9,140) (12,550) (13,960) (8,762) (31,340)
Net loss from discontinued operations..... (405) (1,340) (1,440) (1,038) --
Recovery (Loss) on disposal of
discontinued operations, net of tax.... -- -- (2,377) -- 287
------- -------- -------- ------- --------
Net loss attributable to common
stockholders...................... $(9,545) $(13,890) $(17,777) $(9,800) $(31,053)
Denominator:
Weighted-average common shares
outstanding............................ 3,583 4,772 4,945 4,926 5,505
Less: Unvested common shares subject to
repurchase............................. (131) (48) (232) (13) (177)
------- -------- -------- ------- --------
Total shares......................... 3,452 4,724 4,713 4,913 5,328
------- -------- -------- ------- --------
Net loss from continuing operations
attributable to common stockholders per
common share, basic and diluted........ $ (2.65) $ (2.66) $ (2.96) $ (1.78) $ (5.88)
Net loss from discontinued operations per
common share, basic and diluted........ $ (0.12) $ (0.28) $ (0.31) $ (0.21) $ --
</TABLE>
F-11
<PAGE> 74
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ----------------------
1997 1998 1999 1999 2000
------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Recovery (loss) on disposal of
discontinued operations per common
share, basic and diluted............... $ -- $ -- $ (0.50) $ -- $ 0.05
------- -------- -------- ------- --------
Net loss per common share, basic and
diluted................................ $ (2.77) $ (2.94) $ (3.77) $ (1.99) $ (5.83)
------- -------- -------- ------- --------
</TABLE>
The following table sets forth potential common stock that are not included
in the diluted net loss per common share calculation above because to do so
would be anti-dilutive for the periods presented (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ---------------------
1997 1998 1999 1999 2000
------ ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Mandatorily redeemable cumulative
convertible preferred stock (assuming
conversion, using appropriate conversion
ratio, to common shares)................. 21,046 21,046 21,046 21,046 25,544
Mandatorily redeemable cumulative
convertible preferred stock warrants
(assuming conversion, using appropriate
conversion ratio, to common shares)...... 317 317 338 338 345
Common stock warrants...................... 770 637 637 637 732
Employee stock options..................... 3,273 3,126 5,211 4,299 6,918
</TABLE>
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per common share for the year ended December 31, 1999
and for the nine months ended September 30, 2000 is computed using the weighted
average number of common shares outstanding, including conversion of the
Company's Series A, Series B, Series C, Series D, Series E and Series E-1
mandatorily redeemable cumulative convertible preferred stock outstanding into
shares of the Company's common stock effective upon the closing of the Company's
initial public offering ("IPO") as if such conversion occurred on January 1,
1999 or at the date of original issuance, if later.
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
Effective upon the closing of an IPO, the outstanding Series A, Series B,
Series C, Series D, Series E and Series E-1 mandatorily redeemable cumulative
convertible preferred stock will automatically convert into an aggregate of
25,544,290 shares of common stock, as long as the aggregate net proceeds from
the IPO are at least $10,000,000 at a price per share of at least $9.00
("Qualified Public Offering"). The pro forma effect of this transaction is
unaudited and has been reflected in the presentation of pro forma stockholders'
equity as of September 30, 2000.
F-12
<PAGE> 75
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS 133"), as
amended by Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133" ("SFAS 137") and Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities" ("SFAS 138"). SFAS 133 requires that all derivative
financial instruments be recorded on the balance sheet at their fair market
value. Changes in the fair market value of derivatives are recorded each period
in current earnings (loss) or comprehensive income (loss), depending on whether
a derivative is designed as part of a hedge transaction, and if so, the type of
hedge transaction. Substantially all of the Company's revenues and the majority
of its costs are denominated in U.S. dollars, and to date, the Company has not
entered into any derivative contracts. The effective date of SFAS 133, as
amended by SFAS 137 and SFAS 138, is for fiscal years beginning after June 15,
2000.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which provides guidance on the recognition, presentation and disclosure
of revenue in financial statements. The Company has complied with the provisions
of SAB 101 for all periods presented.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB
25" ("FIN 44"). This interpretation clarifies the definition of an employee for
purposes of applying Opinion 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of a previously fixed stock option plan or award; and
the accounting for an exchange of stock compensation awards in business
combinations. FIN 44 is effective July 1, 2000; however certain conclusions in
this interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. The
adoption of certain of the provisions of FIN 44 prior to June 30, 2000 did not
have a material effect on the financial statements. The Company does not expect
that the adoption of the remaining provisions will have a material effect on the
financial statements.
NOTE 2 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1998 1999 2000
------- -------- -------------
<S> <C> <C> <C>
Furniture and equipment.................................. $12,562 $ 11,045 $ 11,859
Leasehold equipment...................................... 2,680 2,189 2,349
------- -------- --------
15,242 13,234 14,208
Less: Accumulated depreciation and amortization.......... (5,738) (7,588) (9,522)
------- -------- --------
$ 9,504 $ 5,646 $ 4,686
======= ======== ========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1997, 1998 and 1999 amounted to $1,376,000 $2,355,000 and $3,236,000
respectively, and $2,097,000 for the nine months ended September 30, 2000.
F-13
<PAGE> 76
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1998 1999 2000
---- ------ -------------
<S> <C> <C> <C>
Employee compensation and benefits.......................... $411 $ 537 $1,101
Legal fees.................................................. -- 159 2,688
Loss contracts.............................................. 20 800 80
Other....................................................... 355 248 310
---- ------ ------
$786 $1,744 $4,179
==== ====== ======
</TABLE>
NOTE 3 -- DEBT
In February 1996, the Company borrowed $761,000 under an equipment loan
agreement. Borrowings under the agreement are repayable in monthly payments of
$22,000 over 42 months and bear interest at 11.00%. The Company had outstanding
borrowings under the agreement totaling $287,000 at December 31, 1998. In 1999,
this loan was repaid.
In September 1997, the Company entered into an equipment loan agreement to
borrow up to $3,500,000. Borrowings under the agreement are repayable monthly
with interest over 36 months and bear interest at LIBOR (5.09% at December 31,
1998, 5.80% at December 31, 1999 and 6.80% at September 30, 2000). The Company
has an option to change the interest structure into fixed rates. At December 31,
1998, 1999 and at September 30, 2000, the Company had net borrowings totaling
$2,464,000, $1,362,000 and $0, respectively, under the agreement. At December
31, 1998, 1999 and at September 30, 2000, no new funding was available in
connection with this loan. The Company holds an irrevocable standby letter of
credit in the amount of $1,000,000, which is included in restricted cash, as
additional collateral for this agreement. This lending agreement was paid in
full on August 31, 2000 and the related letter of credit was released on
September 8, 2000.
NOTE 4 -- MANDATORILY REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Company has authorized 35,593,571 shares of preferred stock, designated
in series. A summary of mandatorily redeemable convertible preferred stock
("Preferred Stock") at September 30, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
SHARES PROCEEDS
------------------------- NET OF LIQUIDATION
AUTHORIZED OUTSTANDING ISSUANCE COSTS AMOUNT
---------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Series A................................ 4,000 1,897 $ 1,423 $ 1,423
Series B................................ 8,000 7,534 8,472 8,476
Series C................................ 10,000 5,560 20,741 20,850
Series D................................ 5,594 5,594 33,929 41,952
Series E................................ 4,000 3,922 26,523 29,415
Series E-1.............................. 666 576 5,067 5,180
Serial Preferred...................... 3,333 0 -- --
------ ------ ------- --------
35,593 25,083 $96,155 $107,296
====== ====== ======= ========
</TABLE>
In February 1997, the Company issued 667,700 shares of Series D Preferred
Stock at a price of $7.50 per share for aggregate proceeds of $5,000,000.
F-14
<PAGE> 77
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On February 17, 1997, all shares of Original Series E Preferred Stock
previously issued were converted into the same number of shares of Series D
Preferred Stock. Original Series E Preferred Stock was retired by making a
filing to the Delaware Secretary of State in June 1997.
During the nine months ended September 30, 2000, the Company issued
3,922,000 shares of Series E Preferred Stock at a price of $7.50 per share.
In August 2000, the Company issued 577,000 shares of Series E-1 Preferred
Stock ("Series E-1") at a price of $9.00 per share, for proceeds of
approximately $5,180,000. The difference between the deemed fair value of Series
E-1 of $12.22 and the price per share of $9.00 was considered to be a beneficial
conversion feature ("BCF") analogous to a dividend to the preferred stockholders
as prescribed under the provisions of EITF 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios. Due to the conversion rights, the deemed fair value of the
Series D preferred stock was based on the mid-point of the range of share prices
anticipated for the proposed initial public offering of the Company's common
stock. The value of the BCF of $1,855,000 was recognized immediately as a charge
to net loss attributable to common stockholders at the date of issuance as the
preferred stockholders have the right to immediately convert their preferred
shares at their option
The Preferred Stock has the following rights and characteristics:
VOTING
Each share of the Series A, Series B, Series C, Series D, Series E and
Series E-1 Preferred Stock has voting rights equal to that of common stock on an
as if converted basis.
In January 2000, the Board amended the Articles of Incorporation such that
the Company may not authorize any additional class or series of shares of stock
(except serial preferred stock) without the approval of the holders of at least
66 2/3% of the then outstanding shares of Series A, Series B, Series C, Series
D, Series E Preferred Stock.
DIVIDENDS
In December 1996, the stockholders approved an amendment to the Articles of
Incorporation. Under the amended Articles of Incorporation, the accumulation of
quarterly dividends for all series of Preferred Stock is suspended for three
years starting from December 27, 1996. Accordingly, the holders of Series A,
Series B, Series C, Series D, Series E and Series E-1 Preferred Stock are
entitled to cumulative quarterly dividends beginning December 28, 1999 at a rate
of 10% per annum, and payable only when and if declared by the Board of
Directors. Unpaid dividends are not payable upon a Qualified Public Offering.
In February 1997, the Company declared a dividend on its Series A, Series
B, and Series C Preferred Stock, representing the cumulative accrued dividend as
of December 26, 1996 and amounting to $6,620,000. Stockholders exercised their
option to convert $6,340,000 of the declared dividend into Series D Preferred
Stock at a per share price of $7.50. The remaining $280,000 of dividends, which
was a return of invested capital, was paid in cash during 1997.
At September 30, 2000, accumulated dividends in arrears for all series of
Preferred Stock amounted to $7,664,000.
LIQUIDATION
In the event of liquidation, the holders of the Series E and Series E-1
Preferred Stock are entitled to receive their original issuance price of $7.50
and $9.00 per share, respectively, plus an
F-15
<PAGE> 78
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amount equal to all declared but unpaid dividends, prior and in preference to
any distribution to the holders of Series A, Series B, Series C, Series D and
common stock. In the event of liquidation, the holders of the Series A, B, C, D
Preferred Stock are entitled to receive their original issuance prices of $0.75,
$1.125, $3.75 and $7.50 per share, respectively, plus an amount equal to all
declared but unpaid dividends, prior and in preference to any distribution to
the holders of common stock.
A sale of all or substantially all of the Company's assets and merger or
consolidation of the Company with another entity or entities is treated as a
liquidation, dissolution or winding up unless following such transaction, the
Company's stockholders immediately before such transaction directly or
indirectly own, in the aggregate, more than 50% of the total voting power of the
surviving or acquiring entity or entities. This stock is therefore considered
mandatorily redeemable. If, upon the occurrence of such an event, the assets to
be distributed among the holders of Preferred Stock shall be insufficient to pay
the full preferential amounts to all holders of Preferred Stock, then the
Company's entire remaining assets, or proceeds thereof, legally available for
distribution shall be distributed ratably among the holders of Preferred Stock
in proportion to the full preferential amount each holder is entitled to
receive.
CONVERSION
Each share of Series A, B, C, D, E and E-1 is convertible at the option of
the holder into one share of common stock, with the exception of 3,384,127
shares of Series B preferred stock which are convertible into 1.1363637 shares
of common stock.
All issued and outstanding shares of Series A, B, C, D, E and E-1 Preferred
Stock shall automatically convert upon the consummation of a Qualified Public
Offering.
Shares of common stock reserved for issuance upon conversion of the
Preferred Stock aggregated 21,046,758 at December 31, 1998 and 1999 and
25,544,290 at September 30, 2000.
The Company has entered into two registration rights agreements. The first
agreement is with the holders of Series A, Series B and Series C Preferred
Stock, certain warrants and certain common stock. The second agreement is with
the holders of Series D, Series E and Series E-1 Preferred Stock and certain
warrants. In general, both agreements provide "piggyback" registration rights on
the Company's primary offerings, demand registration rights under certain
circumstances and certain rights to demand registration on Form S-3. Certain of
these registration rights terminate when the shares can be sold under Rule
144(k). In addition, the Company has agreed to pay many of the expenses
associated with the exercise of these registration rights, and both agreements
contain restrictions on the transfer of these registration rights.
NOTE 5 -- PREFERRED AND COMMON STOCK WARRANTS
During 1997, warrants to purchase 278,000; 681,000; 184,000; and 49,000
shares of common stock at exercise prices of $0.14; $0.15; $0.38; and $1.10,
respectively, were exercised.
Additionally, warrants to purchase 67,000 shares of Series B Preferred
Stock at an exercise price of $1.125 were exercised during 1997.
During 1998, warrants to purchase 133,000 shares of common stock at an
exercise price of $0.375 were exercised.
During the nine months ended September 30, 2000, the Company issued
warrants, in connection with an existing lease arrangement, to purchase 6,666
shares of Series E Preferred Stock at an exercise price of $7.50 per share. The
fair value of these warrants was determined to be $50,000 based on the
Black-Scholes option pricing model. This amount has been included as part of
F-16
<PAGE> 79
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
other expenses. In addition, warrants to purchase 60,000 and 336,000 shares of
common stock at an exercise price of $0.375 per share were exercised and
expired, respectively.
In connection with the issuance of Series E Preferred Stock, the Company
issued warrants to purchase 235,320 shares of common stock at an exercise price
of $7.50 per share. The warrants expire in 2005 or 24 months following a
Qualified Public Offering. The warrants include rights and provisions similar to
those granted to the holders of Series E Preferred Stock. The Company determined
the fair value of the warrants to be $876,000, based on the Black-Scholes option
pricing model and the amount has been recognized immediately as stock issuance
costs.
On July 1, 2000, the Company issued warrants to purchase 16,666 shares of
the Company's common stock at an exercise price of $9.00 per share in connection
with the issuance of Series E-1 Preferred Stock. The Company determined the fair
value of the warrants to be $133,000 using the Black-Scholes option pricing
model. The fair value of the warrants has been recognized immediately as stock
issuance costs.
At September 30, 2000, the Company has reserved 314,919 and 732,017 shares
of Preferred Stock and common stock, respectively, for the exercise of warrants.
NOTE 6 -- STOCK OPTIONS
THE 1991 PLAN
In November 1991, the Company adopted a stock option plan (the "1991
Plan"). Under the 1991 Plan, the Company's employees, consultants, and directors
may be granted options to purchase the Company's common stock at exercise prices
not less than 85% of the fair value of the Company's common stock on the date
the option is granted. All options granted to date have been granted at fair
value. Options granted expire ten years from the date of grant and are generally
exercisable beginning not less than one year after the date of grant. As of
December 31, 1998, no further options were granted from this plan.
The 1991 Plan permits the granting of stock appreciation rights ("SAR") in
connection with any option granted thereunder. In lieu of exercising a stock
option, SAR holders are entitled, upon exercise of a SAR, to receive cash or
common shares or a combination thereof in an amount equal to the excess of the
market value of such vested shares on the date of exercise over the option
price. There were no SARs granted as of December 31, 1999 and September 30,
2000.
On August 29, 2000, the Board of Directors terminated the Company's 1991
Plan, effective concurrently with the closing of the offering.
THE 1996 PLAN
In December 1996, the Company adopted the 1996 Stock Plan (the "1996
Plan"). Under the 1996 Plan, incentive stock options may be granted to the
Company's employees at an exercise price of no less than 100% of the fair value
on the date of grant, and nonstatutory stock options may be granted to the
Company's employees, directors, and consultants at an exercise price of no less
than 85% of the fair value. In both cases, when the optionees own stock
representing more than 10% of the voting power of all classes of stock of the
Company, the exercise price shall be no less than 110% of the fair value on the
date of grant. For options granted with an exercise price below fair market
value, a stock-based compensation charge has been determined. Options granted
expire ten years from the date of grant. Options are exercisable at the date of
grant and generally vest over a four year period. Shares issued in connection
with the exercise of unvested options are subject to
F-17
<PAGE> 80
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
repurchase by the Company until such options would have vested. The 1996 Plan
provides for acceleration of vesting upon the occurrence of a merger or
acquisition.
On August 29, 2000, the Board of Directors terminated the Company's 1996
Plan, effective concurrently with the closing of the offering.
THE DIRECTORS' PLAN
On December 3, 1996, the stockholders approved the Non-Discretionary
Directors' Stock Plan (the "Directors' Plan") that provided for the initial
issuance of options to purchase 40,000 shares of common stock to each director
of the Company. Such options were to be granted with an exercise price equal to
the fair value of the Company's common stock at the date of grant. For options
granted below fair value, a stock-based compensation charge has been determined.
The options vest over four years, 25% of which is exercisable on the anniversary
date of the grant and the remaining balance monthly thereafter. On each
anniversary date thereafter, each nonemployee director will also be granted
10,000 shares that vest in four years and are exercisable on a monthly-prorated
basis.
THE 1999 PLAN
In February 1999, the Company adopted the 1999 Stock Plan ("1999 Plan"),
which was approved by the stockholders in May 1999. The terms of the 1999 Plan
are similar to the terms of the 1996 Plan with the exception of accelerated
vesting at the time of merger or acquisition, which was eliminated under the
1999 Plan.
On August 29, 2000, the Board of Directors reserved an aggregate of
7,000,000 shares of the Company's common stock for issuance under the 1999 Plan.
F-18
<PAGE> 81
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of all option activity is presented below (number of shares in
thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES OPTIONS OPTIONS PRICE
AVAILABLE OUTSTANDING PER SHARE
--------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996.................... 1,758 2,899 $0.93
Options granted............................... (1,030) 1,030 $2.27
Options exercised............................. -- (467) $0.68
Options canceled.............................. 189 (189) $0.84
------ ----- -----
Balance at December 31, 1997.................... 917 3,273 $1.40
Options granted............................... (568) 568 $4.35
Options exercised............................. -- (160) $0.51
Options canceled.............................. 555 (555) $1.76
------ ----- -----
Balance at December 31, 1998.................... 904 3,126 $1.92
Additional shares authorized.................. 3,667
Options granted............................... (3,277) 3,277 $2.13
Options exercised............................. -- (485) $1.50
Options canceled.............................. 92 (707) $2.70
------ ----- -----
Balance at December 31, 1999.................... 1,386 5,211 $1.98
Additional shares authorized.................. 1,200
Options granted............................... (2,449) 2,449 $2.46
Options exercised............................. -- (574) $2.03
Options canceled.............................. 110 (168) $2.79
------ ----- -----
Balance at September 30, 2000................... 247 6,918 $2.13
====== ===== =====
</TABLE>
At September 30, 2000, only the cancellations under the 1999 Plan are
recorded as available for grant. Based on a Board of Directors decision,
cancellations under the 1991 and 1996 Plans are not considered available for
grant.
As of September 30, 2000, a total of 2,151,500 shares under the option
plans were vested at prices ranging from $0.15 to $6.20. The weighted average
fair value of option grants, as defined by SFAS 123, in 1997 and 1998 was $2.01
and $1.17, respectively. During the first nine months of fiscal 2000, 2,449,000
options were granted with exercise prices ranging from of $1.50 to $7.20 which
was below the $7.20 to $11.00 fair value range of the underlying common stock.
The weighted average fair value of these option grants, as defined by SFAS 123,
was $2.13. Additionally, 1,051,000 options were granted in 1999 with exercise
prices equal to the fair value of the underlying common stock. The weighted
average fair value of these option grants was $1.00.
F-19
<PAGE> 82
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable under all plans at September 30, 2000 (number of shares in
thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------- OPTIONS VESTED
WEIGHTED --------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES: OF SHARES LIFE (IN YEARS) PRICE OF SHARES PRICE
------------------------- --------- --------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.15 -- $0.53...................... 327 4.28 $0.20 327 $0.20
$1.50............................... 3,868 8.43 $1.50 1,158 $1.50
$1.65 -- $4.50...................... 2,647 8.73 $3.32 665 $3.05
$6.12 -- $7.20...................... 76 9.91 $6.26 2 $6.12
----- ---- ----- ----- -----
$0.15 -- $7.20...................... 6,918 8.35 $2.13 2,152 $1.79
===== ==== ===== ===== =====
</TABLE>
STOCK-BASED COMPENSATION
During fiscal 1996 and 1997, the Company issued 2,945,000 options to
employees at exercise prices below the fair market value of the underlying
common stock at the date of grant, resulting in $1,761,000 of compensation
expense to be amortized over the vesting period of four years. The Company
recognized related compensation expense of $633,000 during fiscal 1997; $578,000
during fiscal 1998; $343,000 during fiscal 1999; and $159,000 during the first
nine months of fiscal 2000. The Company expects to amortize $20,000 during the
three months ended December 31, 2000 and the remaining $28,000 during fiscal
2001. The exercise prices of all other options granted during these years were
at the fair value of the common stock as determined by management at the date of
grant.
During fiscal 1999, the Company issued 2,262,000 options to employees and
external directors at exercise prices below fair value of the Company's common
stock, resulting in $6,696,000 of compensation expense to be amortized over the
vesting period of four years. The Company recognized compensation expense of
$841,000 during the year ended December 31, 1999 and $3,076,000 during the nine
months ended September 30, 2000. The Company expects to amortize $540,000 during
the three months ended December 31, 2000; $1,437,000 during fiscal 2001;
$662,000 during fiscal 2002; and $140,000 during fiscal 2003. The exercise
prices of all other options granted during fiscal 1999 were at the fair value of
the common stock as determined by management at the date of grant.
During the nine months ended September 30, 2000, the company issued
2,410,000 options to employees and external directors at exercise prices below
fair value of the Company's common stock, resulting in $17,245,000 of
compensation expense to be amortized over the vesting period of four years.
During the nine months ended September 30, 2000, the Company recognized
compensation expense of $5,098,000. The Company expects to amortize $2,340,000
during the three months ended December 31, 2000; $5,732,000 during fiscal 2001;
$2,832,000 during fiscal 2002; $1,063,000 during fiscal 2003; and $180,000
during fiscal 2004.
Stock-based compensation expense related to stock options granted to
non-employees is recognized as services are rendered. At each reporting date,
the Company revalues the stock-based compensation expense related to unvested
non-employee options using the Black-Scholes option-pricing model. As a result,
stock-based compensation expense will fluctuate with changes in the fair market
value of the Company's common stock. In connection with the grant of stock
options to consultants, the Company recorded stock-based compensation expense of
$313,000 and $1,203,000
F-20
<PAGE> 83
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for the year ended December 31, 1999 and the nine months ended September 30,
2000, respectively. As of September 30, 2000, the Company expects to amortize
stock-based compensation expense of $619,000 during the three months ended
December 31, 2000; $1,519,000 in fiscal 2001; $123,000 in fiscal 2002; $14,000
in fiscal 2003; and $400 in fiscal 2004, assuming no change in the underlying
value of the Company's common stock.
CERTAIN PRO FORMA DISCLOSURES
Pro forma information regarding net loss and net loss per common share has
been determined based upon the estimated fair value of options at the date of
grant using the minimum value method as prescribed by SFAS 123 based on the
following assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, NINE MONTHS ENDED
-------------------- SEPTEMBER 30,
1997 1998 1999 2000
---- ---- ---- -----------------
<S> <C> <C> <C> <C>
Expected life (years)........................ 5 5 5 5
Risk-free interest rate...................... 5.3% 5.5% 5.1% 6.1%
Dividend yield............................... 0% 0% 0% 0%
Volatility................................... 0% 0% 0% 0%
</TABLE>
The pro forma effect on net loss for the years ended December 31, 1997,
1998, 1999 and the nine months ended September 30, 2000 is not representative of
the pro forma effect on net income or loss in future years because it does not
take into consideration pro forma compensation expense related to grants made
prior to January 1, 1997. Additionally, the determination of the fair value of
all options granted upon the Company's IPO will include a higher expected
volatility factor and therefore, the above results are not representative of
future periods.
For purposes of pro forma disclosures, the estimated fair value of the
options is assumed to be amortized to expense over the options' vesting period.
The Company's pro forma information for the years ended December 31, 1997, 1998,
1999 and the nine months ended September 30, 2000 is as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------- SEPTEMBER 30,
1997 1998 1999 2000
------- -------- -------- -----------------
<S> <C> <C> <C> <C>
Net loss attributable to common
stockholders
As reported..................... $(9,545) $(13,890) $(17,777) $(31,053)
------- -------- -------- --------
Pro forma....................... $(9,800) $(14,245) $(18,159) $(33,342)
======= ======== ======== ========
Basic and diluted net loss per
common share:
As reported..................... $ (2.77) $ (2.94) $ (3.77) $ (5.83)
------- -------- -------- --------
Pro forma....................... $ (2.84) $ (3.02) $ (3.85) $ (6.26)
======= ======== ======== ========
</TABLE>
NOTE 7 -- NON-MONETARY TRANSACTION
The Company entered into a contract in 1998 with a potential licensee. In
exchange for a standard license, the potential licensee would provide specified
research and development services. Until completion of the services the licensee
could cancel the contract at any time and the license would be returned to the
Company. In September of 1999, the licensee completed all services as
F-21
<PAGE> 84
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
specified under the contract and received a standard license. The Company
recognized at the completion of this contract $1,000,000 in license revenues and
$1,000,000 in research and development expenses in recognition of the standard
license fee.
NOTE 8 -- BENEFIT PLAN
In November 1995, the Company established a 401(k) plan that allows
voluntary contributions by all employees upon their hire date. Eligible
employees may elect to contribute up to the maximum amount allowed under
Internal Revenue Service regulations. The Company does not currently match
employee contributions. The Company recognized expense of approximately $5,000,
$6,000, $10,000 and $5,000 during the years ended December 31, 1997, 1998, 1999
and the nine months ended September 30, 2000, respectively, related to the
401(k) Plan.
NOTE 9 -- INCOME TAXES
No provision for federal or state income taxes has been recorded for the
years ended December 31, 1997, 1998, 1999 and for the nine months ended
September 30, 2000 as the Company incurred net operating losses. The provision
recorded represents foreign taxes payable in Singapore. Deferred tax assets are
related to the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED
-------------------------------- SEPTEMBER 30,
1997 1998 1999 2000
-------- -------- -------- -----------------
<S> <C> <C> <C> <C>
Net operating loss carryforwards..... $ 10,758 $ 15,019 $ 20,589 $ 22,918
Research credits..................... 608 1,088 2,768 3,172
Expenses not currently deductible.... 973 515 503 2,583
Capitalized research and development
costs.............................. -- -- 1,560 1,634
-------- -------- -------- --------
12,339 16,622 25,420 30,307
Less: Valuation allowance............ (12,339) (16,622) (25,420) (30,307)
-------- -------- -------- --------
$ -- $ -- $ -- $ --
</TABLE>
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
These factors include the Company's history of losses, recent increases in
expense levels, the fact that the market in which the Company operates is
intensely competitive and characterized by rapidly changing technology, the lack
of carryback capacity to realize deferred tax assets, and the uncertainty
regarding market acceptance of the Company's products. The Company will continue
to assess the realizability of the deferred tax assets in future periods.
At September 30, 2000, the Company had federal and state net operating loss
carryforwards of approximately $68,000,000 and $23,000,000 respectively. The
difference between the federal and state net operating loss carryforwards is
attributable to the capitalization of research and development expenses for
state purposes only. The operating loss carryforward expires on various dates
beginning in 1999 through 2012, if not utilized.
Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be impaired in certain
circumstances. Events which may cause changes in the Company's tax carryovers
include, but are not limited to, a cumulative ownership change of more than 50%
over a three year period.
F-22
<PAGE> 85
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases equipment under capital leases. Interest rates on
capital leases range from 12% to 33%. At September 30, 2000, future minimum
lease payments are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 155
2001........................................................ 619
2002........................................................ 425
------
Total minimum payments...................................... 1,199
Less amount representing interest........................... 369
------
830
Less: current portion....................................... 374
------
Long-term portion........................................... $ 456
======
</TABLE>
At December 31, 1998, 1999 and September 30, 2000, equipment under capital
leases amounted to $1,235,000, $2,353,000, and $1,496,000, respectively. Related
accumulated amortization at December 31, 1998, 1999 and nine months ended
September 30, 2000 amounted to $1,051,000, $1,336,000 and $872,700,
respectively.
The Company incurred rental expense under all operating leases of
approximately $623,000, $465,000, $462,000, and $400,000 during the years ended
December 31, 1997, 1998, 1999 and the nine months ended September 30, 2000,
respectively.
On February 17, 1999, the Company entered into a sale leaseback
arrangement. The Company contracted to sell assets for net proceeds of
$1,496,000 in cash in exchange for entering into a lease with an initial term of
36 months and with monthly rental payments of $52,000.
The sale leaseback arrangement requires the Company to comply with various
financial covenants, including the maintenance of minimum cash balances. At
December 31, 1999, the Company was not in compliance with the tangible net worth
and minimum cash requirement covenants, but received a waiver from its lender
for the full period of non-compliance. At September 30, 2000, the Company was
not in compliance with the projected revenue covenant, but received a waiver
from its lender for the full period of non-compliance.
CONTINGENCIES
On February 1, 2000, Texas Instruments initiated a declaratory judgment
action against the Company in United States District Court. On March 13, 2000,
the Company filed an answer and counter claim alleging patent infringement.
On March 28, 2000, the Company filed a complaint against Sharp Corporation,
Sharp Electronics Corporation and Texas Instruments with the United States
International Trade Commission alleging unlawful import, sale for importation
into the United States, and/or sale within the United States after importation
of certain products that infringe certain of the Company's issued U.S. patents.
On March 28, 2000, the Company filed a complaint against Sharp Corporation
and Sharp Electronics Corporation alleging patent infringement.
These proceedings are in preliminary stages and the Company cannot predict
their outcome with certainty.
F-23
<PAGE> 86
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- SEGMENT AND GEOGRAPHIC INFORMATION
The Company has adopted Statement of Financial Accounting Standards No. 131
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"). Based on its operating management and financial reporting structure, the
Company has determined that it has one reportable business segment: developing
and licensing of advanced packaging technologies.
The Company's revenues are generated from the following geographic regions
(in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ---------------------
1997 1998 1999 1999 2000
------ ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States...................... $4,248 $3,686 $2,718 $3,124 $3,661
Taiwan............................. -- 389 1,527 850 752
Korea.............................. 500 210 1,268 349 1,592
Japan.............................. 150 1,228 605 536 398
Europe............................. -- 1,016 209 597 1,894
Other.............................. 33 130 92 92 --
------ ------ ------ ------ ------
$4,931 $6,659 $6,419 $5,548 $8,297
====== ====== ====== ====== ======
</TABLE>
NOTE 12 -- DISCONTINUED OPERATIONS
In December 1999, management of the Company put forth into action a plan to
sell Tessera Technology Pte., Ltd. ("TTPL"), its manufacturing facility in
Singapore. On April 17, 2000, a Binding Memorandum of Understanding was signed
to sell the assets of TTPL for total proceeds of approximately $5,000,000, the
estimated net book value of the assets at that date. The sale was completed on
June 19, 2000. In connection with the decision to sell TTPL, the Company
recorded a loss of $2,377,000, comprised of $1,578,000 in losses for the
phase-out period from January 1, 2000 through the completion of the sale and
$799,000 as an estimated loss on sale of TTPL. Included in the estimated loss on
sale are certain costs directly associated with the decision to dispose of the
assets, such as severance and commission fees.
In September 1999, management determined that $287,000 of the estimated
losses would not be required. The change in estimate stemmed primarily from
lower than expected exit costs in Singapore.
Net assets of $5,059,000 relating to the sale were segregated at December
31, 1999. The results of operations of TTPL for fiscal years 1997, 1998, 1999
and the nine months ended September 30, 2000 have been segregated from
continuing operations and reported as loss from discontinued operations.
F-24
<PAGE> 87
TESSERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of operating results of discontinued operations prior to the
phase-out period is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1998 1999
----- ------- -------
<S> <C> <C> <C>
Revenues................................................ $ -- $ -- $ 1,646
Cost of revenues........................................ -- 1,183 3,035
Research and development................................ 375 -- --
Selling, general and administrative..................... -- 86 --
----- ------- -------
Loss from operations.................................... (375) (1,269) (1,389)
Interest income......................................... 5 6 5
----- ------- -------
Loss before income taxes................................ (370) (1,263) (1,384)
Income taxes............................................ (35) (77) (56)
----- ------- -------
Loss from discontinued operations....................... $(405) $(1,340) $(1,440)
===== ======= =======
</TABLE>
NOTE 13 -- RELATED PARTY TRANSACTIONS
In 1997, in connection with the $30,000,000 Series D and Series E offerings
(Note 4), the Company paid fees of $1,350,000 to Dillon, Read & Co., Inc. At
that time, a member of the Company's Board of Directors was a managing director
at Dillon, Read & Co., Inc.
On March 1, 1998, the Company entered into a contract with a member of the
Board of Directors to provide on-going consulting services for a fee of $7,500
per month. In connection with this contract, the Director was granted an option
to purchase 90,000 shares of common stock. The contract was terminated on August
31, 1999.
On June 1, 1999, the Company contracted with another member of the Board of
Directors to provide consulting services for a period of three years for a
monthly fee of $5,000. In connection with this contract, the Director was
granted an option to purchase 227,000 shares of common stock.
On August 29, 2000, the Company issued warrants to purchase 240,000 shares
of the Company's common stock pursuant to a consulting agreement related to a
cost reduction program for Micro BGA packaging effective August 25, 2000 at an
exercise price of $4.50 per share to a former executive of the Company. The
Company determined the value of the warrants to be $1,750,000 using the
Black-Scholes option pricing model which will be amortized over the one year
term of the consulting agreement. This award will be remeasured at each period
end until the commitment date is reached.
NOTE 14 -- SUBSEQUENT EVENTS
On August 29, 2000, the Board of Directors authorized the establishment of
the 2000 Employee Stock Purchase Plan (the "2000 Plan") with 200,000 shares
reserved for issuance. The 2000 Plan is to become effective upon the closing of
a Qualified Public Offering.
F-25
<PAGE> 88
[INSIDE BACK COVER]
[DESCRIPTION OF ARTWORK]
[Logo appears with illustration of semiconductor chip in background.]
<PAGE> 89
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
7,500,000 SHARES
[LOGO]
COMMON STOCK
----------------------
PROSPECTUS
----------------------
CHASE H&Q
UBS WARBURG LLC
NEEDHAM & COMPANY, INC.
WIT SOUNDVIEW
----------------------
, 2000
----------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock.
We have not taken any action in any jurisdiction outside the United States
to permit a public offering of the common stock or possession and distribution
of this prospectus in that jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe any restrictions as to this offering and
the distribution of this prospectus applicable to that jurisdiction.
Until , 2000, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 90
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all fees and expenses payable by us in
connection with the registration of our common stock. All of the amounts shown
are estimates except for the SEC registration fee, NASD filing fee and the
Nasdaq National Market listing fees.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
------------
<S> <C>
SEC Registration Fee........................................ $ 26,400
NASD Filing Fee............................................. 5,000
Nasdaq National Market Listing Fee.......................... 100,000
Printing and Engraving Expenses............................. 200,000
Legal Fees and Expenses..................................... 600,000
Accounting Fees and Expenses................................ 600,000
Transfer Agent and Registrar Fees and Expenses.............. 50,000
Miscellaneous Expenses...................................... 143,600
----------
Total..................................................... $1,725,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Our certificate of incorporation and our bylaws provide for
indemnification of our directors, officers, employees and other agents to the
extent and under the circumstances permitted by the Delaware General Corporation
Law. We have also entered into agreements with our directors and executive
officers that require us among other things to indemnify them against certain
liabilities that may arise by reason of their status or service as directors and
executive officers to the fullest extent permitted by Delaware law. We have also
purchased directors and officers liability insurance, which provides coverage
against certain liabilities including liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Within the past three years, we have issued and sold the following
unregistered securities:
- 1,199,999 shares of our Series D preferred stock at a price of $7.50 per
share in December 1996;
- 4,311,937 shares of our Series D preferred stock at a price of $7.50 per
share in February 1997;
- 81,636 shares of our Series D preferred stock at a price of $7.50 per
share in April 1997;
- 3,255,331 shares of our Series E preferred stock at a price of $7.50 per
share in January 2000;
- 666,666 shares of our Series E preferred stock at a price of $7.50 per
share in February 2000; and
- 575,565 shares of our Series E-1 preferred stock at a price of $9.00 per
share in August 2000.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act and Regulation D promulgated thereunder,
as transactions by an issuer not involving any public
II-1
<PAGE> 91
offering. The recipients of securities in each transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the securities issued in such transactions.
(b) There were no underwritten offerings employed in connection with any of the
transactions set forth in Item 15(a).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Certificate of Incorporation, as in effect upon filing of
the Registration Statement
3.2** Certificate of Incorporation to be in effect upon completion
of the offering
3.3** Bylaws of the Registrant, as in effect upon filing of the
Registration Statement
3.4** Bylaws of the Registrant to be in effect upon completion of
the offering
4.1* Specimen Common Stock Certificate
4.2** First Amended and Restated Registration Rights Agreement
between the Registrant and certain stockholders, dated as of
January 14, 2000
4.3** Registration Rights Agreement, as amended and restated,
between the Registrant and certain stockholders, dated as of
May 15, 1993
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Form of Indemnification Agreement between the Registrant and
each of its Directors and Officers
10.2** 1999 Stock Plan
10.3** Form of 1999 Stock Option Plan Stock Option Agreement
10.4** 2000 Employee Stock Purchase Plan and form of agreements
thereunder
10.5+** Limited TCC License Agreement between Registrant and Amkor
Electronics, Inc., dated as of May 9, 1996
10.6** First Addendum to Limited TCC License Agreement between
Registrant and Amkor Electronics, Inc., dated as of March
10, 1997
10.7+** Second Addendum to Limited TCC License Agreement between
Registrant and Amkor Electronics, Inc., dated as of March 3,
1998
10.8+** Business Agreement between Registrant and EEMS Italia, SpA,
dated as of June 19, 2000
10.9+** Business and Asset Sale and Purchase Agreement between
Tessera Technology Pte. Ltd. and EEMS Singapore Pte. Ltd.
dated June 19, 2000
10.10+** Limited TCC License Agreement between Registrant and Intel
Corporation, dated as of October 22, 1996
10.11+** TCC License Agreement among Registrant and Tessera
Affiliates and Toshiba Corporation, dated as of April 1,
1999
10.12+** First Addendum to Limited TCC License Agreement between
Registrant and Mitsui High-tec, Inc., dated as of December
17, 1996
10.13+** WAVE Package Development and License Agreement between
Registrant and Mitsui High-tec, Inc., dated as of November
4, 1996
10.14+** TCC License Agreement among Registrant and Tessera
Affiliates and EEMS Italia, SpA, dated September 24, 1999
10.15+** TCC License Agreement among Registrant and Tessera
Affiliates and CHIPPAC, Inc., dated December 22, 1998
10.16+** TCC License Agreement between Registrant and Samsung
Electronics Co., Ltd., dated May 17, 1997
10.17+** First Addendum to Limited TCC License Agreement between
Registrant and Samsung Electronics Co., Ltd., dated November
4, 1998
10.18+** TCC Master License Agreement between Registrant and Shinko
Electric Industries Co., Ltd., dated January 20, 1994
</TABLE>
II-2
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.19** Addendum to TCC Master License Agreement between Registrant
and Shinko Electric Industries Co., Ltd., dated November 22,
1994
10.20+** Second Addendum to TCC Master License Agreement between
Registrant and Shinko Electric Industries Co., Ltd., dated
July 13, 1995
10.21+** Third Addendum to TCC Master License Agreement between
Registrant and Shinko Electric Industries Co., Ltd., dated
May 31, 1996
10.22+** Joint Development Agreement between Registrant and Dow
Corning Corporation, dated May 12, 1997
10.23+** Technology License and Technical Assistance Agreement
between Toshiba Corporation and Registrant, dated August 29,
2000
10.24** Lease between PNB Investors and Registrant, dated April 1,
1995
10.25** Employment Offer Letter between Registrant and Steve Tobak,
dated September 17, 1999
10.26** Employment Offer Letter between Registrant and Bruce
McWilliams dated April 26, 1999
10.27** Employment Offer Letter between Registrant and Rejeeva
Lahri, dated July 14, 2000
10.28** Employment Offer Letter between Registrant and Steve G.
Vogel, dated March 21, 2000
10.29+** Limited TCC License Agreement between Registrant and Mitsui
High-tec, Inc., dated July 22, 1996
10.30** Consulting Agreement between Registrant and Philip Dauber,
dated August 30, 2000
10.31** Consulting Agreement between Registrant and John Smith,
dated March 31, 2000
10.32 Consulting Agreement between Registrant and Thomas
DiStefano, dated , 2000
10.33+ TCC License Agreement between Registrant and Integrated
Packaging Assembly Corporation, dated as of April 23, 1998
10.34+ First License Addendum to the TCC License Agreement between
Registrant and Integrated Packaging Assembly Corporation,
dated as of April 26, 2000
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1)
24.1** Power of Attorney (see page II-5)
99.1** Charter for the Audit Committee of the Board of Directors of
Registrant
99.2** Charter of the Compensation Committee of the Board of
Directors of Registrant
</TABLE>
-------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
Certain exhibits, attachments and schedules to the exhibits above have not
been filed herewith. The Registrant will furnish any such exhibits and schedules
supplementally to the Securities and Exchange Commission upon request; provided,
however, the Registrant reserves the right to request confidential treatment for
portions of any such exhibits and schedules so requested.
(b) Financial Statement Schedules:
[to come]
II-3
<PAGE> 93
ITEM 17. UNDERTAKINGS
Indemnification by us for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of Tessera, we have
been advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. If that a claim for indemnification against such
liabilities (other than the payment by Tessera of expenses incurred or paid by a
director, officer or controlling person of Tessera in the successful defense of
any action, suit or proceeding) is asserted by a director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by Tessera is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
We hereby undertake that:
(a) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by Tessera pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Jose, State of California, on the 20th day of October, 2000.
TESSERA, INC.
By: /s/ BRUCE M. MCWILLIAMS
------------------------------------
Bruce M. McWilliams
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-1 has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ BRUCE M. MCWILLIAMS Chief Executive Officer October 20, 2000
--------------------------------------------------- and Director
Bruce M. McWilliams (Principal Executive Officer)
* Vice President and October 20, 2000
--------------------------------------------------- Chief Financial Officer
Steve G. Vogel (Principal Financial and
Accounting Officer)
* Chairman of the Board, Director October 20, 2000
---------------------------------------------------
Robert A. Young
* Director October 20, 2000
---------------------------------------------------
Patricia M. Cloherty
* Director October 20, 2000
---------------------------------------------------
Philip S. Dauber
* Director October 20, 2000
---------------------------------------------------
Borje Ekholm
* Director October 20, 2000
---------------------------------------------------
D. James Guzy
* Director October 20, 2000
---------------------------------------------------
Rein Narma
* Director October 20, 2000
---------------------------------------------------
John W. Smith
</TABLE>
II-5
<PAGE> 95
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Certificate of Incorporation, as in effect upon filing of
the Registration Statement
3.2** Certificate of Incorporation to be in effect upon completion
of the offering
3.3** Bylaws of the Registrant, as in effect upon filing of the
Registration Statement
3.4** Bylaws of the Registrant to be in effect upon completion of
the offering
4.1* Specimen Common Stock Certificate
4.2** First Amended and Restated Registration Rights Agreement
between the Registrant and certain stockholders, dated as of
January 14, 2000
4.3** Registration Rights Agreement, as amended and restated,
between the Registrant and certain stockholders, dated as of
May 15, 1993
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Form of Indemnification Agreement between the Registrant and
each of its Directors and Officers
10.2** 1999 Stock Plan
10.3** Form of 1999 Stock Option Plan Stock Option Agreement
10.4** 2000 Employee Stock Purchase Plan and form of agreements
thereunder
10.5+** Limited TCC License Agreement between Registrant and Amkor
Electronics, Inc., dated as of May 9, 1996
10.6** First Addendum to Limited TCC License Agreement between
Registrant and Amkor Electronics, Inc., dated as of March
10, 1997
10.7+** Second Addendum to Limited TCC License Agreement between
Registrant and Amkor Electronics, Inc., dated as of March 3,
1998
10.8+** Business Agreement between Registrant and EEMS Italia, SpA,
dated as of June 19, 2000
10.9+** Business and Asset Sale and Purchase Agreement between
Tessera Technology Pte. Ltd. and EEMS Singapore Pte. Ltd.
dated June 19, 2000
10.10+** Limited TCC License Agreement between Registrant and Intel
Corporation, dated as of October 22, 1996
10.11+** TCC License Agreement among Registrant and Tessera
Affiliates and Toshiba Corporation, dated as of April 1,
1999
10.12+** First Addendum to Limited TCC License Agreement between
Registrant and Mitsui High-tec, Inc., dated as of December
17, 1996
10.13+** WAVE Package Development and License Agreement between
Registrant and Mitsui High-tec, Inc., dated as of November
4, 1996
10.14+** TCC License Agreement among Registrant and Tessera
Affiliates and EEMS Italia, SpA, dated September 24, 1999
10.15+** TCC License Agreement among Registrant and Tessera
Affiliates and CHIPPAC, Inc., dated December 22, 1998
10.16+** TCC License Agreement between Registrant and Samsung
Electronics Co., Ltd., dated May 17, 1997
10.17+** First Addendum to Limited TCC License Agreement between
Registrant and Samsung Electronics Co., Ltd., dated November
4, 1998
10.18+** TCC Master License Agreement between Registrant and Shinko
Electric Industries Co., Ltd., dated January 20, 1994
10.19** Addendum to TCC Master License Agreement between Registrant
and Shinko Electric Industries Co., Ltd., dated November 22,
1994
10.20+** Second Addendum to TCC Master License Agreement between
Registrant and Shinko Electric Industries Co., Ltd., dated
July 13, 1995
10.21+** Third Addendum to TCC Master License Agreement between
Registrant and Shinko Electric Industries Co., Ltd., dated
May 31, 1996
</TABLE>
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.22+** Joint Development Agreement between Registrant and Dow
Corning Corporation, dated May 12, 1997
10.23+** Technology License and Technical Assistance Agreement
between Toshiba Corporation and Registrant, dated August 29,
2000
10.24** Lease between PNB Investors and Registrant, dated April 1,
1995
10.25** Employment Offer Letter between Registrant and Steve Tobak,
dated September 17, 1999
10.26** Employment Offer Letter between Registrant and Bruce
McWilliams dated April 26, 1999
10.27** Employment Offer Letter between Registrant and Rejeeva
Lahri, dated July 14, 2000
10.28** Employment Offer Letter between Registrant and Steve G.
Vogel, dated March 21, 2000
10.29+** Limited TCC License Agreement between Registrant and Mitsui
High-tec, Inc., dated July 22, 1996
10.30** Consulting Agreement between Registrant and Philip Dauber,
dated August 30, 2000
10.31** Consulting Agreement between Registrant and John Smith,
dated March 31, 2000
10.32 Consulting Agreement between Registrant and Thomas
DiStefano, dated , 2000
10.33+ TCC License Agreement between Registrant and Integrated
Packaging Assembly Corporation, dated as of April 23, 1998
10.34+ First License Addendum to the TCC License Agreement between
Registrant and Integrated Packaging Assembly Corporation,
dated as of April 26, 2000
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1)
24.1** Power of Attorney (see page II-5)
99.1** Charter for the Audit Committee of the Board of Directors of
Registrant
99.2** Charter of the Compensation Committee of the Board of
Directors of Registrant
</TABLE>
-------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
Certain exhibits, attachments and schedules to the exhibits above have not
been filed herewith. The Registrant will furnish any such exhibits and schedules
supplementally to the Securities and Exchange Commission upon request; provided,
however, the Registrant reserves the right to request confidential treatment for
portions of any such exhibits and schedules so requested.
