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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NO. 000-31259
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INTEGRATED TELECOM EXPRESS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0403748
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 RACE STREET 95126
SAN JOSE, CALIFORNIA (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (408) 513-9200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
(Title of Class)
--------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
Based on the closing sale price of the Common Stock on the Nasdaq National
Market System on March 23, 2001, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $52,045,433.00. Shares of Common
Stock held by each officer and director and by each person known to own 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The registrant had 42,773,446 shares of Common Stock outstanding as of
March 23, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on May 18, 2001 are incorporated herein by reference in
Part III, Items 10, 11, 12, and 13.
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TABLE OF CONTENTS
ITEM NO. PAGE
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PART I
1. Business.................................................... 1
Executive Officers of the Registrant........................ 26
2. Properties.................................................. 28
3. Legal Proceedings........................................... 28
4. Submission of Matters to a Vote of Security Holders......... 28
PART II
5. Market Price for Registrant's Common Equity and Related
Stockholder Matters......................................... 29
6. Selected Financial Data..................................... 30
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 32
7.A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 38
8. Financial Statements and Supplementary Data................. 39
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 59
PART III
10. Directors and Executive Officers of the Registrant.......... 60
11. Executive Compensation...................................... 60
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 60
13. Certain Relationships and Related Transactions.............. 60
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 61
Exhibit Index............................................... 61
Signatures.................................................. 65
As used in this Report on Form 10-K, unless the context otherwise requires,
the terms "we," "us," or "the Company" and "ITeX" refer to Integrated Telecom
Express, Inc., a Delaware corporation.
FORWARD LOOKING STATEMENTS
This Report contains certain forward-looking statements (as such term is
defined in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934) and information relating to us that are based
on the beliefs of our management as well as assumptions made by and information
currently available to our management. These forward-looking statements include
but are not limited to those statements identified in this report with an
asterisk (*) symbol. Additional forward looking statements may be identified by
the words "anticipate", "believe", "expect", "intend", "will" and similar
expressions, as they relate to us or our management.
The forward-looking statements contained herein reflect our judgment as of
the date of this Report with respect to future events, the outcome of which is
subject to certain risks, including the factors set forth under the heading
"Risk Factors" in Item 1 below, which may have a significant impact on our
business, operating results or financial condition. Investors are cautioned that
these forward-looking statements are inherently uncertain. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results or outcomes may vary materially from those described
herein. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of these
forward-looking statements. We undertake no obligation to update these
forward-looking statements. Our stockholders should carefully review the
cautionary statements contained in this Form 10-K, including the "Risk Factors"
set forth in Item 1 below.
PART I
ITEM 1. BUSINESS
GENERAL
We provide integrated circuit and software products to the broadband access
communications equipment industry. Our products include integrated circuits,
software, production designs and test systems that enable communications
equipment manufacturers to provide high-speed, cost-effective asymmetric digital
subscriber line, or ADSL, equipment to communications service providers and
their customers. ADSL technology permits broadband data transmission over copper
telephone lines. We also sell complete network interface cards, or NICs, that
are based on our production designs and use our integrated circuits and
software. Our production designs are complete sets of instructions describing
how to build an ADSL modem with our integrated circuits and software. We sell
our products to manufacturers of both customer premises equipment and service
providers' central office equipment. Our products are standards compliant,
multiple vendor equipment compatible, reliable, expandable and flexible. They
also provide for rapid time-to-market and ease of installation and use. These
products are designed to enhance the delivery of applications such as high-speed
Internet access, electronic commerce, video-on-demand, on-line gaming,
telecommuting and remote access.
We have a limited operating history, and we are not currently profitable. We
expect to continue to incur net losses for the foreseeable future.* In addition,
our revenue has been and will continue to be derived from a limited number of
products and from a limited number of customers.*
INDUSTRY OVERVIEW
LARGE AND GROWING MARKET FOR BROADBAND COMMUNICATION CREATES ACCESS
BOTTLENECK
The Internet has emerged as a widespread commerce, communications and
entertainment medium for consumers and businesses. The volume of data
transmitted across the Internet is growing with the increase in both the amount
and complexity of bandwidth-intensive applications and content such as website
graphics and multimedia video and audio. In addition, the rise in the frequency
and duration of
1
Internet connections has compounded the growth of Internet traffic. As a result,
consumers and businesses increasingly seek high-speed, always-connected and
cost-effective access to the Internet.
Communication technologies continue to evolve rapidly to meet this growing
demand for broadband Internet access. Today, users primarily access the Internet
with an analog modem that establishes a connection through a single copper
telephone line with the telecommunication service provider's central office. The
56 kilobits per second, or Kbps, transmission speed of analog modems is
inadequate for accessing content-rich websites and has created what is referred
to as the last mile bottleneck.
Several technologies have been developed to alleviate the last mile
bottleneck. Many of these, however, suffer from limitations. An integrated
services digital network, or ISDN, connection has a maximum transmission speed
of 128 Kbps, is subject to a per use charge and cannot support simultaneous data
and analog voice traffic over a single copper telephone line. Cable modems
suffer from limited geographical availability and use a shared environment that
is subject to reduced bandwidth per user as the number of users increases.
Broadband wireless systems have been deployed on a limited basis and are
currently expensive, subject to several regulatory requirements and limited by
geography and distance. Satellite communications systems are expensive to deploy
and maintain and require an additional telephone line to support two-way
communication. High-capacity T1/E1 lines can be installed to provide a
high-speed last mile connection, but their high cost and limited availability
have restricted their deployment primarily to large businesses and
organizations.
EMERGENCE OF DIGITAL SUBSCRIBER LINE TECHNOLOGY
Digital subscriber line technology has rapidly emerged as a reliable, easily
deployed and inexpensive broadband access solution for residential and business
customers. Digital subscriber line bandwidth can be priced to meet the needs of
individual customers. Data over a digital subscriber line is transmitted over
existing copper telephone lines making broadband networking across existing last
mile infrastructure for a large number of subscribers practical. In a digital
subscriber line installation, equipment is deployed at each end of the existing
telephone wire enabling broadband transmission. Digital subscriber line
technology provides a dedicated connection between the service provider's
central office and the customer's premises equipment. As a result, service does
not degrade as the number of users increases. The rapid growth in the deployment
of digital subscriber line services may be attributed to an overall increase in
demand for broadband Internet services as well as an increase in competition
among broadband service providers.
Digital subscriber line technologies currently include high bit rate digital
subscriber line; integrated digital subscriber line; symmetric digital
subscriber line; very high bit rate digital subscriber line; and asymmetric
digital subscriber line, or ADSL. High bit rate digital subscriber line
technology is expensive to deploy, does not support analog voice traffic and
provides symmetrical service best used within a business campus environment.
Integrated digital subscriber line technology provides simultaneous two-way
throughput at speeds of only 144 Kbps and does not support analog voice traffic.
Symmetric digital subscriber line technology supports a maximum data
transmission rate of 768 Kbps downstream, or from the central office to the
customer's premises, and upstream, or from the customer's premises to the
central office. However, symmetric digital subscriber line technology cannot
simultaneously carry data and analog voice traffic over a single copper
telephone line. As a result, symmetric digital subscriber line systems have been
deployed primarily to businesses because they are more likely to have multiple
telephone lines. Very high bit rate digital subscriber line technology can
deliver data at a maximum transmission rate of up to 52 Mbps. Deployment of very
high bit rate digital subscriber line systems has been limited because its
maximum effective distance is approximately 4,500 feet.
ADSL technology permits the simultaneous transmission of data and analog
voice traffic over a single copper telephone line and supports a data
transmission speed that is dependent upon the
2
direction of data traffic and distance from the service provider's central
office. ADSL was originally designed for the transmission of video and, as such,
provides greater transmission rates downstream than upstream. ADSL supports data
transmission rates of up to 8 Mbps downstream and up to 1 Mbps upstream and
supports connections at distances of up to 18,000 feet. This downstream
transmission speed of 8 Mbps is over one hundred times faster than the maximum
transmission speed available through an analog modem. We believe that the
majority of Internet users today have greater downstream capacity requirements
than upstream capacity requirements, and therefore ADSL technology is highly
effective in matching communication system capabilities with Internet usage
patterns.
In-Stat estimates that worldwide digital subscriber line subscribers will
increase from 4.5 million in 2000 to 23.3 million in 2004. Digital subscriber
line chipset shipments exceeded 10 million ports in 1999, and more than
quadrupled in 2000. In-Stat further projects that the digital subscriber line
integrated circuit port market will grow an average of 84% per year through
2004, at which time it will surpass 90 million ports. Growth in worldwide ADSL
deployment is due to a number of factors. For example, in South Korea, ADSL
deployment has grown in part as a result of a government initiative to rapidly
expand affordable broadband access to homes and businesses. In the United States
and other countries, the overall increase in demand for bandwidth-intensive
Internet applications as well as the intense competition among service providers
to offer differentiated broadband services in an affordable manner has led to
growth in ADSL deployment.
Because the deployment of ADSL service has occurred only recently, ADSL does
suffer from the following limitations:
- ADSL service is not available in all locations due to the lack or
insufficiency of equipment in the customer's local central office, or the
distance from the local central office to the customer's location;
- some equipment providers' products are not compatible;
- not all telephone lines within ADSL service areas are yet qualified to
support ADSL;
- shortage of telecommunications service provider installers can cause
delays in meeting subscriber demand for new service; and
- limitations in the capacity of the telecommunications infrastructure can
sometimes prevent ADSL connections from transmitting data at committed
rates, if at all.
REQUIREMENTS OF ADSL EQUIPMENT
ADSL equipment is located at both ends of the copper telephone line and
consists of central office ADSL equipment and modems, gateways and routers at
the customer premises. Gateways translate the ADSL data into different
communications protocols and provide a connection between computers on a network
and the wide area network. Routers direct data within the network. ADSL
equipment manufacturers require components such as integrated circuits and
software that comply with industry standards and are compatible with other
vendors' equipment. Beyond these fundamental requirements, these manufacturers
seek to differentiate themselves from competitors by incorporating integrated
circuit and software solutions that are:
- expandable and flexible;
- cost-effective;
- reliable and high-performance; and
- easy to install and use.
3
While communications equipment manufacturers can combine integrated circuit
and software products from multiple sources, we believe that they generally
prefer system-level solutions that are easy to integrate and require minimal
testing and qualification. A system-level solution can streamline the component
and software selection process, reduce development time, assist in production
testing and facilitate end-user installation. We believe that system-level
solutions are becoming increasingly important to ADSL equipment manufacturers as
product life cycles shorten, standards evolve, competition increases and the
demand for broadband access grows.*
THE ITEX SOLUTION
We offer two families of ADSL customer premises and central office equipment
products: Apollo integrated circuits with software, and Scalable ADSL Modem, or
SAM, integrated circuits with software. Our software includes programs that
enable the basic function of our integrated circuits and production designs, and
that provide access to the Internet, permitting equipment utilizing our
solutions to communicate with telecommunication service providers' central
office equipment.
Our production designs and ADSL development and test tool facilitate our
customers' rapid product development. We believe our intellectual property
portfolio and system software and integrated circuit expertise have enabled us
to develop a compelling product roadmap of ADSL broadband access solutions for
residential and business markets. Key benefits of our solution include:
STANDARDS COMPLIANCE AND COMPATIBILITY. Our integrated circuit and software
solutions are compliant with international standards. In addition, our
production designs are compatible with the equipment of all the major
manufacturers including Alcatel Bell N.V., Cisco Systems, Inc., Lucent
Technologies, Inc. and Nokia Corp.
EXPANDABLE AND FLEXIBLE. Our SAM integrated circuit and software solution
provides expandability and flexibility to the ADSL equipment market. Our SAM
products incorporate software programmable integrated circuits, allowing rapid
development of new products and functionality by equipment manufacturers based
upon software upgrades. We believe our SAM products could offer equipment
manufacturers the flexibility necessary to migrate to other broadband digital
subscriber line access equipment markets, such as very high bit rate digital
subscriber line, or VSDL, as demands or industry standards evolve.*
ENABLE RAPID TIME-TO-MARKET. Our customers sell their equipment to service
providers doing business in a highly competitive industry, with rapid product
innovation and short product life cycles. Because our production designs are
standards-compliant and compatible with a broad variety of ADSL equipment,
equipment providers can integrate our products into their systems rapidly. In
addition, our system-level solution reduces the equipment manufacturers' need to
select and integrate products from multiple vendors.
HIGH PERFORMANCE AND RELIABILITY. Service providers require equipment that
is connected to their network to enable them to provide high-performance, stable
and reliable service. Our high-performance production designs have been
demonstrated to allow increased data rates over long distances and maintain
reliable connections even under conditions of relatively high copper telephone
line interference.
EASE OF INSTALLATION, USE AND UPGRADE. Service providers prefer equipment
that is easy to install and use and that supports easy upgrades of service that
will encourage rapid adoption of new services as they become available. Our
Apollo and SAM solutions are designed to facilitate easy installation, operation
and upgrading of ADSL customer premises equipment.
4
THE ITEX STRATEGY
Our objective is to be a leading provider of integrated circuit and software
solutions for equipment manufacturers addressing the digital subscriber line
broadband access market. Key elements of our strategy for achieving this
objective include:
LEVERAGE OUR TECHNOLOGY STRENGTHS. We have invested significant resources
to develop our technology strengths in integrated circuit design, system design,
digital signal processing algorithms and software. We license additional
technology from Alcatel and continue to develop functionality and software
support for use by ADSL equipment manufacturers. In addition, we license a
microprocessor core from ARM Limited to enhance the capabilities of our Apollo
Product Line. We are also devoting substantial resources toward the enhancement
of our proprietary SAM technology. To further improve performance and add
additional product capabilities to SAM, we have licensed embedded processor
cores from MIPS Technologies to be incorporated into the SAM technology. This
technology, which was originally designed for the personal computer market, is
now being adapted for advanced multi-port central office, multi-tenant unit,
multi-dwelling unit and digital loop carrier applications. We have contracted
with a subsidiary of Fujitsu to co-develop an Application Specific Integrated
Circuit, or ASIC. This product will enhance our penetration into these new
markets.*
ENABLE THE RAPID ADOPTION OF ADSL TECHNOLOGY. We believe that ease of use,
compatibility and reduced cost of ownership to service providers and subscribers
will be critical to the continued adoption of ADSL.* We intend to continue
developing production designs that enable communications equipment manufacturers
to reduce the time-to-market of their products.* We believe that providing
production designs to these manufacturers will enable their service provider
customers to deploy ADSL services rapidly.*
STRENGTHEN AND EXPAND OUR RELATIONSHIPS WITH KEY CUSTOMERS AND
SUPPLIERS. We have established customer and supplier relationships with a
number of market and technology leaders within the broadband access market. We
believe that close relationships with our customers enable us to align our
product development with the requirements of equipment manufacturers.* For
example, we have entered into technology license and supply agreements with
Alcatel Bell N.V. and are jointly developing and marketing customer premises
equipment with NEC Corporation. In addition, we believe that maintaining close
relationships with service providers is critical to the future acceptance of our
technology.* We also believe that supplier relationships are critical to the
long-term success of companies in our industry.* Accordingly, we have executed a
term sheet regarding cooperation on technology enhancements with United
Microelectronics Corporation. We have also executed a term sheet with United
Microelectronics Corporation stating that it guarantees us minimum production
capacity through 2003 provided that we use United Microelectronics Corporation
to manufacture substantially all of our integrated circuits. We intend to
strengthen our existing relationships over time and establish new relationships
with equipment manufacturers, service providers and manufacturing partners.*
FURTHER PENETRATE WORLDWIDE MARKETS FOR OUR PRODUCTS. We currently offer
our products to communications equipment manufacturers that serve a number of
key geographic markets, including countries that are early ADSL market adopters
such as South Korea, Singapore and Taiwan. We have also begun to develop
relationships with leading communications equipment manufacturers in other
regions including other countries in Asia, North America and Europe. We intend
to continue to devote substantial resources toward penetrating each of these
markets and developing relationships with the leading ADSL equipment
manufacturers in each market.*
TARGET OTHER HIGH-GROWTH BROADBAND ACCESS MARKET OPPORTUNITIES. We intend
to focus on high-growth broadband access markets that will enable us to leverage
our current technological strengths.* For example, we are developing
technologies to address the future needs of central office equipment, small
5
office and home office networks and other variants of digital subscriber line
technology. We have licensed a real-time operating system and several
communications software packages from Wind River Systems to help us expand into
these new markets.* We will continue to monitor trends in the broadband access
markets and devote resources toward product development in segments that we
believe will experience rapid growth.*
BUILD UPON OUR CORE STRENGTHS THROUGH STRATEGIC INVESTMENTS. We intend to
enhance our technological capabilities and capacity for growth by pursuing
investment opportunities.* This strategy will augment our existing products with
complementary technologies and enhance the breadth and depth of our engineering
talent.* These investments would also help us to access key customers and market
segments that we do not currently address with our existing solutions.
PRODUCTS
We deliver integrated circuit and software products that enable rapid
deployment of ADSL equipment. Our production designs are compatible with
equipment offered by our customers and other vendors. Our integrated circuit and
software products enable transmission speeds of up to 8 Mbps downstream and up
to 1 Mbps upstream. Our products are comprised of highly integrated circuits;
software for most variants of the Microsoft Windows and Linux operating systems
and wide area network protocol support; production designs; and ADSL test
equipment and software. Our production designs are complete sets of instructions
describing how to build an ADSL modem with our integrated circuits and software.
We offer two families of customer premises and central office equipment
products: Apollo integrated circuits with software, and SAM integrated circuits
with software. Each of our products consists of a set of multiple integrated
circuits. The first integrated circuit, used in both of our product families,
receives and transmits ADSL signals across copper telephone lines. Our second
integrated circuit, used only in the Apollo product family, relies upon embedded
digital signal processing to process the digitized ADSL signal. In contrast, our
SAM family uses an optimized application specific integrated circuit and
software-based algorithms to process the digitized ADSL signal.
APOLLO FAMILY
Our Apollo family includes four integrated circuit chipset and software
products, Apollo One, Apollo Two, Apollo Three and Apollo Five, and we are
currently developing three additional Apollo products. The Apollo family
products are compliant with all current ADSL standards and are compatible with
all major equipment vendor products. We promote market acceptance of our Apollo
products in customer premises equipment with our production designs.
6
APOLLO FAMILY
PRODUCTS APPLICATIONS INTRODUCTION DATE
- -------- ------------ -----------------
CURRENT
Apollo One - Central office ADSL access equipment 3rd quarter 1999
- External modems
- Gateways
- Routers
Apollo Two - Communications hardware for personal 3rd quarter 1999
computers
Apollo Three - Communications hardware for personal 4th quarter 2000
computers
Apollo Five - Central office ADSL access equipment 2nd quarter 2000
- External modems
- Gateways
- Routers
FUTURE
Apollo Four - Communications hardware for personal 2nd quarter 2001+
computers
ADSL Netchip - External modems 2nd quarter 2001+
Apollo Six - External modems 2nd quarter 2001+
- Gateways
- Routers
- ------------------------
+ Anticipated introduction date.*
APOLLO ONE AND FIVE. The Apollo One and Five are our integrated circuit and
software products for central office ADSL equipment and stand-alone customer
premises equipment markets. Stand-alone customer premises equipment includes
external modems, gateways and routers. Apollo One and Five incorporate two
integrated circuits. The first integrated circuit receives and transmits ADSL
signals with a demonstrated copper telephone line reach of up to 20,000 feet.
The integrated circuit that receives and transmits ADSL signals also provides
the ability to extract the ADSL signal under poor telephone line conditions and
consolidates several functional blocks commonly found in discrete components in
other ADSL designs. The second integrated circuit of our Apollo One and Five
incorporates digital signal processing and other functions. Because this digital
processing occurs in a single integrated circuit, our Apollo One and Five
products require minimal processing from the host equipment's microprocessor. We
supply a software application programming interface to more easily allow the
customer to write additional differentiated software to run on top of that
provided with the Apollo product. In addition, we have jointly developed
production designs with NEC Corporation and Virata Corporation to promote the
deployment of the Apollo One and Five into external modem, gateway and router
markets.
7
APOLLO TWO AND THREE. Apollo Two and Three are our integrated circuit and
software products for the personal computer communications hardware market. We
offer production designs and complete software running under most Microsoft
Windows operating systems. We also supply software interfaces that manage
Microsoft Windows support for wide area network access. We recently added
support for the Linux Operating System.
FUTURE APOLLO PRODUCTS. We intend to introduce Apollo products with lower
costs, higher integration and expanded capabilities.* The Apollo Four is based
on the Apollo Three and will be introduced in the second quarter of 2001.* The
Apollo Four will feature a more highly integrated circuit that receives and
transmits ADSL signals over copper telephone lines.* In the second quarter of
2001, we also expect to introduce the ADSL Netchip, which will feature an
integrated circuit that incorporates a microprocessor and data interfaces for
local area networks and personal computers.* Our ADSL Netchip will be targeted
at the market for ADSL external modems at the customer's premises.* The Apollo
Six is based on our Apollo Five and features a more highly integrated circuit
design primarily for external modems, gateways and routers.
SAM FAMILY
Our SAM product family includes two integrated circuit and software
products, SAM One and SAM Three, which were developed for the personal computer
Original Equipment Manufacturer and integrated access device markets. We are
currently developing two additional SAM products. SAM is our proprietary ADSL
product that consists of an optimized partitioning of integrated circuitry and
software-based digital signal processing, offering upgradeable, flexible,
low-cost and low power consuming integrated circuit and software products. Our
SAM family products are compliant with all current ADSL standards and are
compatible with major equipment vendor products.
8
SAM FAMILY
PRODUCTS APPLICATIONS INTRODUCTION DATE
- -------- ------------ -----------------
CURRENT
SAM One - Communications hardware for personal 4th quarter 1999
computers
- Motherboards for personal computers
- Integrated access devices
SAM Three - Communications hardware for personal 4th quarter 2000
computers
- Motherboards for personal computers
- Integrated access devices
- PCMCIA cards for notebook computers
FUTURE
SAM Two - Central office ADSL access equipment 3rd quarter 2001+
- Multi-dwelling unit ADSL access equipment
- Multi-tenant unit ADSL access equipment
- Digital loop carrier equipment
- High-end multi-port routers and bridged
external modems
SAM Four - Communications hardware for personal 2nd quarter 2001+
computers
- Motherboards for personal computers
- Integrated access devices
- PCMCIA cards for notebook computers
- ------------------------
+ Anticipated introduction date.*
SAM ONE AND SAM THREE. SAM One and SAM Three use the personal computer host
microprocessor and memory to manage the digital signal processing of the
incoming and outgoing ADSL signals rather than incorporating a digital signal
processor within our integrated circuit. SAM One and SAM Three are
fully-programmable solutions and are targeted primarily at the personal computer
Original Equipment Manufacturer and integrated access device markets. In
November 2000, we introduced SAM Three, which we had previously referred to as
Universal SAM One. It consists of a software upgrade for the SAM One and is
compatible with international ISDN transmission equipment and protocols. SAM
Three will permit operation in geographical regions running ISDN concurrently
with ADSL by providing a solution that overcomes cross talk between ISDN and
ADSL lines that occupy the same loop bundles.
SAM One and SAM Three consist of two integrated circuits. The first
integrated circuit incorporates programmable features allowing it to receive and
transmit ADSL signals with a demonstrated copper telephone line reach from the
central office to the customer's premises of up to 20,000 feet. In addition, SAM
One and SAM Three provide the ability to extract the ADSL signal under poor line
conditions. The second integrated circuit is a low-cost design capable of
handling most of the computationally intensive ADSL functions while reducing
integrated circuit size and power dissipation. SAM software running on the
personal computer host microprocessor includes digital signal processing
algorithms necessary to process the ADSL signal. We offer a production design
incorporating this product that is a robust, field-proven and cost-effective
solution to the end user.
Our SAM One and SAM Three products include a broad set of software support
for Microsoft Windows 98, 98se, me, NT4.0 and 2000. This support handles the
interface from Microsoft Windows to personal computer communications hardware or
motherboards equipped with our SAM One or SAM
9
Three. Additional software manages the Windows support for wide area network
access. Our SAM One and SAM Three host-based software products allow flexible
programming and updates through remote site software download.
FUTURE SAM PRODUCTS. In the second quarter of 2001, we expect to introduce
the SAM Four, which is based on our SAM Three and offers lower power consumption
to enhance support for PCMCIA and notebook applications.* In the future, we also
intend to offer new generations of SAM products that incorporate our proprietary
technology for new market segments.* In the third quarter of 2001, we plan to
introduce SAM Two, the next generation of our proprietary SAM-based products.*
SAM Two will feature multi-port capability targeting the central office,
multi-tenant unit, multi-dwelling unit, and digital loop carrier ADSL equipment
markets.* In addition, SAM Two will support stand-alone high-end routers and
gateways.* Our SAM Two digital integrated circuit is based on our field-proven
SAM One and SAM Three architecture, which minimizes integrated circuit size and
power consumption, incorporates our proprietary signal processing algorithms and
includes an embedded high-performance microprocessor.* The SAM Two architecture
offers high port density, high upgradability and flexibility, and low power
utilization.* It will also support voice over ADSL.*
PRODUCTION DESIGNS, DEVELOPMENT TOOL AND SOFTWARE. We currently provide
production designs to our customers to facilitate the development of their
customer premises equipment. In the future, we intend to provide production
designs that facilitate the development of central office equipment using our
products.* These production designs provide complete solutions that include
detailed printed circuit board layout, component selection and testing
procedures, production software and wide area network access software, easy
installation of software and user guides. These production designs enable our
customers to quickly market a complete ADSL modem with demonstrated
compatibility, low-cost design, high performance and compatibility with the
major Windows operating systems. We also provide software interfaces that enable
the customer to customize their product by adding additional system-level
functionality.
Our development tool enables our customers to achieve faster time-to-market
through laboratory evaluation and initial production testing of their designs as
well as the ability to conduct system diagnostics and performance reporting
capabilities. The development tool simulates a real-world ADSL environment
including the central office ADSL equipment. Our development tool includes a
complete central office ADSL transmission unit, test set-up and all of the
necessary software and diagnostic tools for our customers to diagnose and test
products developed with our integrated circuits.
TECHNOLOGY
We believe that we have a competitive advantage in several key technology
areas: expandable modem products; software; communication and digital signal
processing algorithms; integrated circuit design for electronic signals in
multiple formats; analog and hardware system design capability; and wide area
network and local area network knowledge. Together, these capabilities have
helped enable us to provide system-level products to our customers that are
fully compliant with international communications standards and are compatible
with a broad range of ADSL equipment, and which allow our customers to introduce
their products to the market quickly.
EXPANDABLE MODEM PRODUCTS. Our broad knowledge of application specific
integrated circuit design, computer design and computer operating systems
enables us to build expandable ADSL products. For example, our proprietary SAM
products consist of an optimized balance of hardware and software functions,
offering upgradeable and flexible, low-cost, low power consuming integrated
circuit and software products. Our SAM One and SAM Three products were primarily
developed for the personal computer Original Equipment Manufacturer and
integrated access device markets, and they use the host microprocessor and
shared system memory for flexibility, low-cost, and high-performance. In
addition, our SAM One and SAM Three provide the ability to efficiently utilize
available host
10
processing power, allowing efficient balance between ADSL transmission data
rates and host processor utilization. We expect SAM Two to build on the
expandability of our SAM products by sharing a processor core among several
ports to conduct the ADSL digital signal processing.* The resulting designs will
offer highly flexible and efficient integrated circuit and software products.*
SOFTWARE. Our software engineers have expertise in developing code that
addresses the needs of communications equipment manufacturers and service
providers. Our knowledge of network operation and architectures allows us to
develop software that makes our products compatible with other communications
equipment. In addition, our understanding of various operating systems and
personal computer environments allows us to create software that provides for
simple installation and robust operation. Many of our software engineers have
extensive personal computer operating system expertise. This expertise allows us
to provide software that is compatible with various personal computer platforms
and enables the development of customized software interfaces for our customers.
COMMUNICATION AND DIGITAL SIGNAL PROCESSING ALGORITHMS. Our signal
processing engineers have substantial experience in the process of transmitting
and receiving signals across different physical transport media. Our engineers
also have significant experience developing digital signal processing
algorithms. This expertise has allowed our engineers to design highly efficient
algorithms that enable us to produce high performance, programmable products
operating with low power consumption.
MIXED ANALOG AND DIGITAL INTEGRATED CIRCUIT DESIGN. A mixed analog and
digital integrated circuit is an integrated circuit that uses analog and digital
signals. Our mixed analog and digital designers have substantial experience in
the telecommunications and data communications industry and analog-to-digital
and digital-to-analog signal conversion techniques. This experience has enabled
us to develop highly integrated mixed analog and digital integrated circuits.
Our mixed analog and digital integrated circuits replace multiple discrete
components used in many competing digital subscriber line solutions. Our digital
integrated circuit designers have many years of experience in the areas of high
complexity and high-speed digital integrated circuit development and
integration. All of our integrated circuits are designed and manufactured using
the latest development tools and silicon manufacturing technologies.
ANALOG AND HARDWARE SYSTEM DESIGN CAPABILITY. Our analog and digital
system-level engineers have extensive experience in the development of
telecommunications systems. In addition, our engineers have experience in the
Underwriters Laboratories, Inc. and Federal Communications Commission system
qualification certification processes. We are familiar with the implications of
the interference present in personal computer environments that can impact the
performance of ADSL. Our personal computer communications hardware receives and
transmits ADSL signals with a demonstrated copper telephone line reach from the
central office to the subscriber of up to 20,000 feet.
We combine our analog and hardware system expertise with our experience in
integrated circuit, digital signal processing algorithms and software to develop
products that allow us to offer robust and manufacturable solutions for our
customers. This facilitates rapid time-to-market, superior performance and low
system cost.
WIDE AREA NETWORK AND LOCAL AREA NETWORK KNOWLEDGE. Our engineers have
broad knowledge of both wide area network and local area network environments.
Our engineers are familiar with the evolving requirements for the deployment of
digital subscriber line solutions and also have extensive experience in network
management software. This experience allows us to efficiently integrate the
software and hardware components to create our products.
11
CUSTOMERS
The following customers each purchased over $200,000 of product in the
fiscal year ended December 31, 2000:
CUSTOMERS
ACN Technologies Inc. GVC Corp.
Alcatel Bell N.V. Hyundai Teletek Co., Ltd.
Alcatel Singapore Pte Ltd. ILSSAN ELECOM CORP
Alcatel USA Sourcing L.P. Interlink Systems Co., Ltd.
Archtek Telecom Corp. Intz.com Co., Ltd.
Armitel Co., Ltd. KIRA Information
Askey Computer Corp. MaxTek Technology Co., Ltd.
AVNET ACQUISITION SERVICES Powernet Technologies Corp.
Aztech Systems (H.K.) Ltd. Princeton Technology C&C Corp.
Bo Sung Hi-Net Ltd. Promate Electronic Co., Ltd.
CIS Technology Inc. Samsung Electro-Mechanics (HK)
Creative Technology Score Zap Ind. Co., Ltd.
Daeyu Co., Ltd. Tomis Information & Telecom Co.
D-Link Corporation Turbocomm Tech Inc.
DTS Infocom Co., Ltd. Turbotek Co., Ltd.
Garnet Systems Co., Ltd. Victron, Inc.
For the fiscal year ended December 31, 2000, sales to Victron, Inc. and
Interlink System Co., Ltd. accounted for 11.6% and 11.1% of our revenue. We have
an agreement with Alcatel Bell N.V. to supply Alcatel Bell N.V. with fully
assembled network interface cards. We do not have long-term agreements with any
other customers relating to the sale of our products and generally sell our
products on an order-by-order basis.
As of December 31, 2000, including the customers listed above, we had
achieved a cumulative total of 68 design wins. We recognize a design win after a
company has purchased $15,000 of our Apollo or SAM products.
SALES AND MARKETING
We sell our products through our direct sales, independent sales
representatives and distributors, primarily in Asia and North America. The
majority of our sales and marketing effort has been concentrated in Asia,
especially in South Korea. We offer customer support through internal and field
application engineering personnel and multiple direct and independent sales
representatives worldwide. Our sales and marketing plan is to expand our
customer base in both the customer premises and central office equipment markets
on a worldwide basis.* We also intend to diversify our customer base both
geographically and by product.* We intend to expand our product offering and
continue to develop close relationships with ADSL market leaders to maintain and
grow our market presence.*
We promote our business through extensive participation in industry forums
and standards bodies, such as the DSL Forum, ANSI T1E1.4 and ITU-T; industry
tradeshows; seminars and conferences. In addition, we test our products for
interoperability at the University of New Hampshire's independent
interoperability laboratory. Our ftp site and web site provide product
information and services including software downloads, white papers, design
guides and installation guides. In addition, we conduct global press tours with
market analysts and magazine editors.
12
RESEARCH AND DEVELOPMENT
We believe that the development of products with high levels of integration,
functionality and performance is essential to our growth.* As of December 31,
2000, our engineers and scientists have collectively co-authored 42 ITeX patent
applications with 12 patents granted, and hold 88 advanced degrees, including 16
Ph.D. degrees. During the fiscal year ended December 31, 2000, we increased our
R&D headcount by net 28 engineers and scientists. We plan to increase research
and development headcount in 2001 by net 30 or more.* Research and development
expenses for 1998, 1999 and 2000 were approximately $6.3 million, $8.6 million
and $22.0 million.
OPERATIONS AND MANUFACTURING
We outsource all of our integrated circuit fabrication, packaging and
testing, which allows us to concentrate on product design, marketing and sales,
and support. By outsourcing manufacturing operations, we avoid the significant
capital expenditures associated with integrated circuit process development,
integrated circuit fabrication facilities and packaging and test equipment.
United Microelectronics Corporation fabricates all of our integrated
circuits. United Microelectronics Corporation has multiple manufacturing
facilities, all but one of which are located in Taiwan. Currently, we utilize
two of United Microelectronics Corporation's 10 fabrication facilities, each of
which is capable of manufacturing integrated circuits with line widths to 0.13
microns and is currently qualified to 0.15 microns. Although we have developed a
contingency plan with United Microelectronics Corporation to provide for the
manufacture of our products in the event of a disruption in the operations of
one or more of its fabrication facilities, United Microelectronics Corporation
is under no obligation to provide additional support. If needed, we could shift
our production to these other facilities following qualification of these new
facilities.* We have executed a term sheet with United Microelectronics
Corporation that states that it guarantees us minimum production capacity
through 2003 provided that we use United Microelectronics Corporation to
manufacture substantially all of our integrated circuits during that period.
Finished integrated circuits are transferred directly to packaging and testing
facilities.
We outsource our integrated circuit packaging to Advanced Semiconductor
Engineering, Inc., and Siliconware Precision Industries Co., Ltd., both of which
are located in Taiwan. Testing is outsourced to three companies in Taiwan: ASE
Test, Siliconware Corporation and World-Wide Test Technology, Inc. The majority
of our testing requirements can be handled by all three of those facilities.
We have employees responsible for test and product engineering located in
both the U.S. and Taiwan. In addition, we have a production control group that
interfaces with our outside vendors and monitors yields, placing production
orders and controlling inventory.
INTELLECTUAL PROPERTY
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property laws, nondisclosure agreements and other measures to
protect our proprietary rights. As of March 31, 2001, we owned 12 U.S.-issued
patents and have 22 additional patent applications pending in the U.S. We have
also applied for 8 patents in Japan and Europe. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect
them. We have registered the trademarks ITeX and SAM. All other trademarks or
service marks appearing in this prospectus are trademarks or service marks of
the respective companies that use them.
In April 1998, we entered into an agreement with Alcatel Bell N.V. to
license some of Alcatel's ADSL technology. Our Apollo and SAM families of
products incorporate this technology. This agreement expires in April 2008.
13
In August 1999, we entered into an agreement with United Microelectronics
Corporation through which we were extended certain licenses granted by Texas
Instruments to United Microelectronics Corporation in exchange for royalties,
patent cross licenses and other obligations. This agreement grants us access to
certain technology on favorable terms. If United Microelectronics Corporation
ceases to be our largest stockholder, we would lose rights under this agreement
and consequently we would lose a competitive advantage in the manufacture of our
products. If we lose these rights, we cannot assure you that we could secure
such licenses on reasonable terms, if at all.
From time to time, we may desire or be required to renew or to obtain
licenses from others in order to further develop and market commercially viable
products. These licenses may not be available on reasonable terms, or at all.
Our pending patents may never be issued, and even if they are, these
patents, our existing patents and the patents we license may not provide
sufficiently broad protection to protect our proprietary rights, or they may
prove to be unenforceable. There can be no assurance that any patents issued or
licensed by us will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide us with a competitive advantage. In
addition, our other intellectual property protection measures may not be
sufficient to prevent misappropriation of our technology.
The laws of many foreign countries do not protect our intellectual property
to the same extent as the laws of the United States, and many U.S. companies
have encountered substantial enforcement problems in protecting their
proprietary rights against infringement in such countries, some of which are
countries in which we have sold and continue to sell products. If we fail to
protect our intellectual property, it would be easier for our competitors to
sell competing products.
COMPETITION
We compete with suppliers of integrated circuits to the ADSL market. We
believe that the key competitive factors in this market are: product
capabilities, level of integration, performance and reliability, power
consumption, price, time-to-market, system cost, interoperability, customer
support, reputation and upgradeability. We believe we compete favorably with
respect to each of these factors.
We compete with a number of major domestic and international suppliers of
semiconductors for both digital subscriber line central office and customer
premises equipment. Our principal competitors include Alcatel Microelectronics,
Analog Devices, Inc., Centillium Communications, Inc., Conexant Systems, Inc.,
GlobeSpan, Inc., Lucent Technologies Inc., STMicroelectronics N.V. and Texas
Instruments Incorporated.
Many of our competitors operate their own fabrication facilities and have
longer operating histories and presence in key markets, greater name
recognition, access to larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and other
resources. As a result, our competitors may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products. Current and
potential competitors have established or may establish financial or strategic
relationships among themselves or with existing or potential customers,
resellers or other third parties. Accordingly, new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. In
addition, our competitors may in the future develop technologies that more
effectively address the transmission of digital information through existing
analog infrastructures at lower cost.
Other technologies compete with ADSL to provide broadband last mile access.
These technologies include ISDN, cable modem, broadband wireless, satellite
communication and high capacity T1/E1 lines. We believe that each of these
technologies has limitations and that ADSL competes favorably with each of them.
For example, ISDN offers a maximum transmission speed of 128 Kbps, is subject to
14
a per use charge and cannot support simultaneous analog voice and data traffic
over a copper telephone line. Cable modems suffer from limited geographical
availability and use a shared environment that is subject to reduced bandwidth
per user as the number of users increases. Broadband wireless is expensive to
deploy and limited by geography and distance. Satellite communication is also
expensive to deploy and maintain and requires an additional telephone line to
support two-way communication. Finally, the expense of T1/E1 lines has
restricted their deployment primarily to large businesses and organizations. No
assurances can be given that ADSL will gain or maintain its share of the
broadband last mile access market against these other access technologies.
In addition, ADSL competes with several other digital subscriber line
technologies, including high bit rate digital subscriber line, integrated
digital subscriber line, symmetric digital subscriber line and very high bit
rate digital subscriber line. While some of these technologies offer greater
data transmission rates than ADSL, each suffers from limitations. For example,
high bit rate digital subscriber line technology is expensive to deploy and does
not support analog voice traffic. Integrated digital subscriber line technology
provides transmission speeds of only 144 Kbps and does not support voice
traffic. While symmetric digital subscriber line technology supports a maximum
data transmission rate of 768 Kbps upstream and downstream, it cannot
simultaneously carry analog voice and data traffic over a single copper
telephone line. Very high bit rate digital subscriber line technology can
deliver data at a maximum transmission rate of 52 Mbps but is limited to a
maximum effective distance of 4,500 feet. Although we believe that the current
limitations on these other digital subscriber line technologies make them less
suitable for the broadband last mile access market, technological advances or
new customer requirements may make these other technologies more suitable for
the broadband last mile access market than ADSL.
EMPLOYEES
As of December 31, 2000, we had a total of 156 employees, of whom 106 are
engineers. None of our employees is represented by a labor union. There have
been no work stoppages and we believe that our relationships with our employees
are good.
Our future performance depends on continued good relations with a
substantial percentage of our employees.
Our future growth and success will depend in part on our ability to attract
highly qualified new employees and to maintain low turnover rates.* Competition
for qualified personnel is intense. During the fiscal year ended December 31,
2000, we attracted 60 new employees. In 2001, we plan to continue to expand our
research and development and engineering staff by net 30 or more, particularly
in our Hsin-Chu, Taiwan operation, where we believe that we can hire needed
engineers more easily and more economically than in San Jose, California.*
15
RISK FACTORS
RISKS RELATING TO OUR BUSINESS
You should carefully consider the risks described below and all of the
information contained in this Report. If any of the following risks actually
occur, our business, financial condition and results of operations could be
harmed, the trading price of our common stock could decline, and you may lose
all or part of your investment in our common stock.
WE COMMENCED OPERATIONS AS A SUPPLIER OF INTEGRATED CIRCUIT AND SOFTWARE
SOLUTIONS IN LATE 1997, AND THEREFORE YOU WILL HAVE LIMITED HISTORICAL OPERATING
DATA TO EVALUATE OUR BUSINESS AND WE MAY NOT BE ABLE TO ACCURATELY PROJECT OUR
FUTURE OPERATING RESULTS.
From May 1995 until December 1997, we designed integrated circuits for
personal computers. In December 1997, we sold that business and focused
exclusively on the development of integrated circuit and software solutions for
the broadband access communications equipment industry with an initial emphasis
on products for the asymmetric digital subscriber line, or ADSL, market. We
began shipping products for the ADSL market in volume in the third quarter of
1999. Therefore, we have limited historical operating data that can be used in
evaluating our business and in projecting future operating results.
WE HAVE A HISTORY OF LOSSES, WE EXPECT FUTURE LOSSES AND WE MAY NOT ACHIEVE OR
MAINTAIN PROFITABILITY.
We incurred net losses of $20.1 million during the fiscal year ended
December 31, 2000. As of December 31, 2000, we had an accumulated deficit of
$48.6 million. We anticipate that we will incur net losses for the foreseeable
future, and these losses may be substantial. We may not be able to generate
sufficient revenue to achieve or maintain profitability.
BECAUSE OUR OPERATING RESULTS WILL FLUCTUATE FROM QUARTER TO QUARTER, THE PRICE
OF OUR STOCK MAY DECLINE.
Our operating results have fluctuated in the past and will fluctuate in the
future on a quarterly and an annual basis due to a number of factors, many of
which are outside our control. Our results of operations may fluctuate due to:
- the loss of or decrease in sales to a major customer;
- our failure to attract new customers;
- the timing and size of orders from, and shipments to, our customers;
- changes in the average cost of products;
- changes in the average selling price of products;
- the timing of the introduction of new or enhanced products; and
- the timing and size of expenses, including research and development
expenses.
Accordingly, you should not rely upon period-to-period comparisons as
indications of future performance. Fluctuations in our operating results may
result in a decline in the price of our stock.
16
THE MARKET FOR ADSL INTEGRATED CIRCUIT AND SOFTWARE PRODUCTS IS HIGHLY
COMPETITIVE, AND MANY OF OUR COMPETITORS ARE MORE ESTABLISHED AND HAVE GREATER
RESOURCES THAN WE DO.
The market for ADSL integrated circuit and software products is highly
competitive. Given our limited operating history in developing products for this
market, we may not have the financial resources, technical expertise or
marketing and support capabilities to compete successfully. Our principal
competitors include Alcatel Microelectronics, Analog Devices, Inc., Centillium
Communications, Inc., Conexant Systems, Inc., GlobeSpan, Inc.,
STMicroelectronics N.V. and Texas Instruments Incorporated. These competitors
have longer operating histories and presence in key markets, greater name
recognition, larger installed customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and other
resources than we have. They may be able to introduce new technologies more
rapidly, respond more quickly to changing customer requirements or devote
greater resources to the development, promotion and sale of their products than
we can. Further, some of these competitors have captive manufacturing
operations, and in the event of a manufacturing capacity shortage, these
competitors may be able to obtain products when we are unable to do so. In
addition, we anticipate that new competitors will enter this market as ADSL
becomes more widely deployed.
IF WE FAIL TO ENHANCE OUR EXISTING PRODUCTS OR TO DEVELOP AND INTRODUCE NEW
PRODUCTS THAT MEET CHANGING CUSTOMER REQUIREMENTS AND KEEP PACE WITH
TECHNOLOGICAL DEVELOPMENTS, WE WILL NOT SELL OUR PRODUCTS AND OUR REVENUES WILL
FLUCTUATE OR DECREASE.
The market for broadband access products is characterized by rapidly
changing customer requirements and short product life cycles. Accordingly, our
future success will depend in large part upon our ability to:
- develop and market competitive products that meet our customers' changing
requirements;
- develop innovative features that differentiate our products from those of
our competitors;
- identify and respond to emerging technological trends;
- develop products that interoperate with competitors' products;
- respond effectively to product announcements by others;
- bring products to market on a timely basis; and
- introduce products that have competitive prices.
UNCERTAINTIES IN THE TIMING OF PRODUCT TRANSITIONS MAY ADVERSELY IMPACT OUR
BUSINESS.
In bringing new products to market, we must manage a number of product
transitions, including the current transition from the Apollo 2 to the Apollo 3
chipset. As these product transitions occur, we see declining demand and prices
for older products. Our ability to manage these transitions is affected by
uncertainties which may result in excess inventories of older products,
accelerated price erosion, or shortages of new products. If we fail to
successfully predict the direction and timing of product transitions, our
business could be harmed.
17
IF WE CONTINUE TO RAPIDLY EXPAND OUR OPERATIONS AND IF WE FAIL TO MANAGE GROWTH
EFFECTIVELY, OUR BUSINESS COULD BE HARMED.
We have rapidly expanded our operations, including the number of our
employees and the geographical scope of our activities. We expect that
significant further expansion will be required to address potential growth in
our customer base and market opportunities. If we are unable to manage growth
effectively, we may not be able to take advantage of market opportunities,
develop or enhance our products or our technical capabilities, execute our
business plan or otherwise respond to competitive pressures or unanticipated
requirements. To effectively manage the anticipated growth of our operations, we
believe we must both enhance our internal operational, financial and management
information controls, reporting systems and procedures and also effectively
manage multiple relationships with our customers, suppliers and other third
parties.
We have recently hired many new employees. Failure to properly train and
integrate these new employees into our business may disrupt our operations. We
may also have difficulties successfully identifying and exploiting existing and
potential market opportunities if our staffing is inadequate.
OUR REVENUE HAS BEEN AND WILL CONTINUE TO BE DERIVED FROM A LIMITED NUMBER OF
PRODUCTS. IF ANY OF THESE PRODUCTS FAILS TO GAIN BROADER MARKET ACCEPTANCE, WE
MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUE.
For the fiscal year ended December 31, 1999 and for the fiscal year ended
December 31, 2000, 80.8% and 78.7% of our revenue was derived from sales of our
Apollo Two products. We expect that our Apollo products will continue to
represent a significant portion of our revenue in the foreseeable future.
Therefore, we may not be able to generate sufficient revenue if these products
fail to achieve broader market acceptance.
BECAUSE OUR PRODUCTS ARE USED AS COMPONENTS OF OUR CUSTOMERS' PRODUCTS, IF
COMMUNICATIONS EQUIPMENT MANUFACTURERS ARE NOT ABLE TO OBTAIN THE OTHER
COMPONENTS USED IN THEIR PRODUCTS, SALES OF OUR PRODUCTS WOULD BE HARMED.
Our customers incorporate our products into their equipment together with
products from other suppliers. For example, our Apollo production designs
require electronic components and integrated circuits manufactured by other
companies. Some of these components may be sole-sourced or in limited supply.
Although alternative suppliers may be available, some of their components have
different attributes and may require a modification to our customers' equipment.
Therefore, if our customers are unable to obtain the other required components
for their equipment, they could cancel orders or delay purchases of our
products.
IF UNITED MICROELECTRONICS CORPORATION DOES NOT HAVE SUFFICIENT CAPACITY TO
SATISFY OUR INTEGRATED CIRCUIT REQUIREMENTS, WE COULD EXPERIENCE SUBSTANTIAL
DELAY OR INTERRUPTION IN THE SHIPMENT OF OUR INTEGRATED CIRCUITS OR AN INCREASE
IN COSTS, WHICH WOULD NEGATIVELY AFFECT OUR OPERATING RESULTS.
We do not own or operate a semiconductor fabrication facility and depend on
United Microelectronics Corporation to manufacture all of our integrated
circuits. Most of our products are manufactured at a single facility, which
increases the risk of a disruption in supply. We have executed a term sheet with
United Microelectronics Corporation that states that it guarantees us a minimum
level of production capacity through 2003, provided that we use United
Microelectronics Corporation to manufacture substantially all of our integrated
circuits during this period. Other than this term sheet, we do not have a
long-term silicon wafer supply agreement with United Microelectronics
Corporation
18
that guarantees silicon wafer or product quantities. Furthermore, we do not have
long-term agreements that guarantee silicon wafer prices, delivery or lead
times, as United Microelectronics Corporation manufactures our products on a
purchase order basis. We provide United Microelectronics Corporation with
rolling forecasts of our production requirements; however, the ability of United
Microelectronics Corporation to provide silicon wafers to us is limited by
United Microelectronics Corporation's available capacity. In addition, because
many of United Microelectronics Corporation's customers have greater financial
resources than we do and because many of their customers may have greater
capacity requirements than we do, United Microelectronics Corporation could
choose to prioritize capacity for other customers or reduce or eliminate
deliveries to us on short notice. Accordingly, United Microelectronics
Corporation may not allocate sufficient capacity to satisfy our requirements in
excess of the minimum levels in the term sheet. In addition, the manufacturing
process for our products is highly complex, requiring precise production in a
highly-controlled environment. Changes in the manufacturing processes or the
inadvertent use of defective or contaminated materials in the manufacturing of
our products could harm our silicon wafer supplier's ability to achieve
acceptable manufacturing yields. If our silicon wafer supplier manufactures our
products within its manufacturing specification limits and we do not achieve
acceptable yields as a result of our design, our cost of revenue may increase.
In addition, if our silicon wafer supplier does not manufacture our products
within its manufacturing specification limits, we may have difficulty obtaining
adequate product supplies and product shipments may be delayed. This could
ultimately lead to a loss of sales of our products and harm our business.
OUR DEPENDENCE UPON THIRD PARTIES TO PACKAGE AND TEST SUBSTANTIALLY ALL OF OUR
PRODUCTS REDUCES OUR CONTROL OF PRODUCT DELIVERY SCHEDULES AND QUALITY
ASSURANCE.
Because third parties package and test substantially all of our products, we
do not directly control our product delivery schedules and quality assurance.
This lack of control could result in product shortages and defects, which in
turn could increase our packaging and testing costs or delay product delivery.
We do not have long-term contracts with the companies that package and test our
products and we typically procure services from them on a per order basis.
Therefore, we may not be able to obtain these services on acceptable terms, if
at all. If we are required to find and qualify alternative packagers and
testers, we could experience delays in product shipments or a decline in product
quality.
A MAJORITY OF OUR OUTSOURCED OPERATIONS ARE LOCATED IN TAIWAN, INCREASING THE
RISK THAT A NATURAL DISASTER, LABOR STRIKE, WAR OR POLITICAL UNREST IN THAT
COUNTRY WOULD DISRUPT OUR OPERATIONS.
A majority of our outsourced operations are located in Taiwan. Events out of
our control such as earthquakes, fires, floods or other natural disasters in
Taiwan or political unrest, war, labor strikes or work stoppages in Taiwan would
disrupt our operations. The risk of earthquakes in Taiwan is significant because
of its proximity to major earthquake fault lines. An earthquake like the one
that occurred in Taiwan in September 1999 could cause significant delays in
shipments of our products until we are able to shift our outsourced operation.
In addition, there is currently significant political tension between Taiwan and
China, which could lead to hostilities. If any of these events occur, we may not
be able to obtain alternative capacity. Failure to secure alternative capacity
could cause a delay in the shipment of our products, which would cause our
revenue to fluctuate or decline.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS
Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. We do not
have a detailed disaster recovery plan and do not have backup generators. Our
facility in California is currently subject to electrical blackouts as a
19
consequence of a shortage of available electrical power. In the event these
blackouts continue or increase in severity, they could disrupt the operations of
our California-based operations, including design, research and development,
sales, manufacturing control, logistics, and general and administrative
functions. Any such disruption could delay us from executing on our business
plan, which could damage our reputation, harm our ability to retain existing
customers and to obtain new customers, and could result in lost revenue, any of
which could substantially harm our business and results of operations. In
addition, we do not carry sufficient business interruption insurance to
compensate us for losses that may occur and any losses or damages incurred by us
could have a material adverse effect on our business.
WE DERIVE A SUBSTANTIAL AMOUNT OF OUR REVENUE FROM INTERNATIONAL SOURCES, AND
OUR FAILURE TO ADDRESS THE DIFFICULTIES ASSOCIATED WITH SELLING OUR PRODUCTS
OUTSIDE THE UNITED STATES WOULD CAUSE OUR SALES TO DECLINE.
If we are unable to address difficulties associated with selling our
products outside the United States, such as unexpected changes in regulatory
requirements, longer payment cycles and problems in collecting accounts
receivable and reduced protection for intellectual property rights in foreign
jurisdictions, our sales would decline and our business would be harmed. Many of
these difficulties are outside of our control. A substantial portion of our
revenue is derived from customers located outside the United States. For the
fiscal year ended December 31, 1999, sales to customers in Asia accounted for
50.2% of our revenue, of which our sales to customers in South Korea constituted
12.2% of this revenue. For the fiscal year ended December 31, 2000, sales to
customers in Asia accounted for 75.1% of our revenue, of which sales to
customers in South Korea constituted 59.5% of this revenue. We anticipate that a
substantial portion of our revenue will continue to be derived from Asia,
especially South Korea, for the foreseeable future. We do not have any long-term
commitments from our Asian customers and demand for our products in Asia may not
continue to grow. In addition, use of ADSL technology in South Korea, and thus
the demand for our products in South Korea, is related in part to a
government-sponsored initiative encouraging deployment of ADSL. If alternative
superior technologies are developed, support for the initiative may be
withdrawn, or demand from our customers in South Korea may decrease, and our
business would be harmed.
BECAUSE DEVELOPMENT OF NEW PRODUCTS REQUIRES SUBSTANTIAL TIME AND EXPENSE, WE
MAY NOT BE ABLE TO RECOVER OUR DEVELOPMENT COSTS AND ACHIEVE AN ADEQUATE RETURN
ON INVESTMENT.
The development of new products requires substantial time and expense.
Improvements to existing products or the introduction of new products by us or
our competitors may replace or provide lower cost alternatives to our existing
products or render these products obsolete, unmarketable or inoperable.
Therefore, we may not be able to recover the costs of the development of our
products and achieve an adequate return on investment.
For example, we believe that our next-generation scalable ADSL modem, or SAM
Two, products will form the basis of a future family of ADSL integrated circuit
and software solutions. We have not yet completed development of these products.
Even if we complete development of our new Apollo and SAM products on a
timely basis, these products may not achieve market acceptance and generate
significant revenue. If our future products do not achieve broad market
acceptance, revenue from our existing products could be inadequate to cover our
expenses and our operating results and reputation could be damaged.
20
BECAUSE THE LENGTHY SALES CYCLE OF OUR PRODUCTS MAKES IT DIFFICULT TO ACCURATELY
PREDICT ACTUAL PRODUCT DEMAND, THE VOLUME OF PRODUCT SHIPPED MAY NOT CORRESPOND
WITH OUR PRODUCT FORECASTS. THEREFORE, WE MAY NOT BE ABLE TO RECOUP EXPENSES
INCURRED IN ANTICIPATION OF SALES OF OUR PRODUCTS.
The sales cycle of our products is lengthy and typically involves a detailed
initial technical evaluation of our products by our prospective customers,
followed by the design, manufacturing, testing and qualification of prototypes
incorporating our products. This process generally takes from three to six
months, and may last longer. Our customer purchase agreements generally contain
no minimum purchase requirements and customers typically purchase our products
pursuant to short-term purchase orders that may be canceled without charge.
Given this lengthy sales cycle, it is difficult to accurately predict when and
in what volume sales to a particular customer will occur, if at all.
Therefore, product revenue may not be commensurate with the level of
expenses that we incur preparing for anticipated sales. If our forecasts prove
to be inaccurate, our operating results could be harmed. For example, if we
purchase excess inventory, write-downs or write-offs could result. Conversely,
if we fail to purchase a sufficient supply of some products, revenue
opportunities could be lost and our customer relationships could be harmed.
BECAUSE PRICE COMPETITION, MATURING TECHNOLOGIES AND VOLUME PURCHASES BY LARGE
CUSTOMERS MAY RESULT IN A DECREASE IN THE AVERAGE SELLING PRICE OF OUR PRODUCTS,
THE GROSS MARGINS FOR OUR PRODUCTS MAY DECLINE.
Price competition may harm the gross margins of our products. Furthermore,
we anticipate that average selling prices of ADSL integrated circuits will
continue to decline as product technologies mature. Many of our competitors are
larger institutions with greater resources. Therefore these competitors may be
able to achieve greater economies of scale and may be less vulnerable to price
competition. In addition, we expect that the average selling prices of our
products will decrease in the future due to the volume discounts that are
provided to our large customers. The decline in average selling prices will
generally lead to a commensurate decline in our gross margins for these products
unless manufacturing costs can be reduced at the same or greater rates.
DELAY IN THE DEVELOPMENT OF RETAIL AND PERSONAL COMPUTER ORIGINAL EQUIPMENT
MANUFACTURER SALES CHANNELS FOR ADSL MODEM DISTRIBUTION COULD LIMIT OUR SALES.
Our sales growth will depend in part on the development of retail and
personal computer Original Equipment Manufacturer sales channels. Today, most
telecommunication service providers primarily support ADSL modems that they
provide directly to their subscribers. We believe that telecommunication service
providers will eventually support a more significant number of ADSL modems
purchased as a part of a personal computer, an integrated access device, a
router or gateway product, or separately by subscribers.* Any significant delay
in development of these new channels could limit sales of our products.
IF WE LOSE RIGHTS UNDER OUR AGREEMENT WITH UNITED MICROELECTRONICS CORPORATION,
UNDER WHICH WE WERE EXTENDED CERTAIN LICENSES GRANTED BY THIRD PARTIES TO UNITED
MICROELECTRONICS CORPORATION, WE WOULD LOSE A COMPETITIVE ADVANTAGE AND OUR
BUSINESS WOULD BE HARMED.
In August 1999, we entered into an agreement with United Microelectronics
Corporation under which we were extended certain licenses granted by Texas
Instruments Incorporated to United Microelectronics Corporation in exchange for
royalties, patent cross licenses and other obligations. This agreement grants us
access to certain technology on favorable terms. If United Microelectronics
21
Corporation ceases to be our largest stockholder, we would lose rights under
this agreement and consequently we would lose a competitive advantage in the
manufacture of our products. If we lose these rights, we may not be able to
secure such licenses on reasonable terms, if at all.
THE MEASURES ON WHICH WE RELY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AFFORD
ONLY LIMITED PROTECTIONS.
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property laws, non-disclosure agreements and other measures
to protect our intellectual property. These measures afford only limited
protection, and we cannot be certain that these measures will adequately protect
our intellectual property. Despite our efforts to protect our intellectual
property both under the laws of the United States and under the laws of foreign
countries, unauthorized parties may copy aspects of our products or obtain and
use trade secrets or other information that we regard as proprietary. Our
competitors may also independently develop the same or similar technologies
without violating our intellectual property rights.
BECAUSE OUR INDUSTRY IS CHARACTERIZED BY FREQUENT LITIGATION OVER INTELLECTUAL
PROPERTY RIGHTS, WE MAY BE REQUIRED TO INCUR SUBSTANTIAL EXPENSES AND DIVERT
MANAGEMENT ATTENTION AND RESOURCES IN DEFENDING INTELLECTUAL PROPERTY LITIGATION
AGAINST US.
The industry in which we compete is characterized by numerous allegations of
and lawsuits involving infringement of intellectual property rights. An
infringement claim could be asserted against us in the future. The defense of
any such claim, regardless of its merit, could result in our incurring
substantial expenses and diverting significant management attention and other
resources away from our operations. In the event of an adverse result in any
future litigation or claim, we may be required to:
- pay substantial damages, including treble damages, if we are found to have
willfully infringed the intellectual property of another;
- halt the manufacture, sale and use of infringing products or technology;
- obtain licenses to the infringing technology, which may not be available
on commercially reasonable terms, or at all; or
- expend significant resources to develop non-infringing technology.
WE MAY INCUR SUBSTANTIAL EXPENSES AND DIVERT MANAGEMENT RESOURCES IN PROSECUTING
OTHERS FOR THEIR UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY RIGHTS.
The markets in which we compete are characterized by frequent litigation
regarding patents and other intellectual property rights. We are aware of a
significant number of patents and patent applications relating to aspects of our
technologies filed by, and issued to, third parties. Should any of our
competitors file patent applications or obtain patents that claim inventions
also claimed by us, we may choose to participate in an interference proceeding
to determine the right to a patent for these inventions because if we fail to
enforce and protect our intellectual property rights, our business would be
harmed. Even if the outcome is favorable this proceeding could result in
substantial cost to us and disrupt our business.
22
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS, AND THE LOSS OF, OR A SIGNIFICANT
REDUCTION IN ORDERS FROM, ANY OF THEM COULD HARM OUR OPERATING RESULTS.
If we are not successful in maintaining relationships with our customers and
obtaining new customers, our business and results of operations will suffer. We
sell our products primarily to communications equipment manufacturers. For the
fiscal year ended December 31, 1999, sales to two customers accounted for 44.3%
and 10.9% of our revenue. For the fiscal year ended December 31, 2000, sales to
two customers accounted for 11.6% and 11.1% of our revenue.
Other than Alcatel Bell N.V., we do not have long-term agreements with these
customers relating to the sale of our products, but rather sell our products to
them on an order-by-order basis. We expect to continue to be dependent upon a
relatively small number of customers for a substantial portion of our revenue.
IF WE BECOME SUBJECT TO PRODUCT RETURNS AND PRODUCT LIABILITY CLAIMS RESULTING
FROM DEFECTS IN OUR PRODUCTS, WE MAY FAIL TO ACHIEVE MARKET ACCEPTANCE OF OUR
PRODUCTS AND OUR BUSINESS COULD BE HARMED.
We develop complex products in an evolving marketplace. Despite testing by
us and our customers, software or hardware defects may be found in existing or
new products. These defects could result in a delay in recognition or loss of
revenue, loss of market share or failure to achieve market acceptance.
Additionally, these defects could result in financial or other damages to our
customers, cause us to incur significant warranty, support and repair costs and
divert the attention of our engineering personnel from our product development
efforts. In such circumstances, our customers could also seek and obtain damages
from us for their losses. A product liability claim brought against us, even if
unsuccessful, would likely be time consuming and costly to defend.
WE MAY FAIL TO ATTRACT OR RETAIN KEY PERSONNEL.
Our success depends to a significant degree upon the continued contributions
of our executive management team and our technical, product development,
marketing, sales and customer support personnel. The loss of key persons in
those areas could harm our business. Competition for these people is
particularly intense in Northern California and Taiwan where we primarily
operate. We do not have any life insurance or other insurance covering the loss
of any of our key employees.
Furthermore, we recently restructured our executive management team, which
included the resignations of three of our executive officers, including our
former President and Chief Executive Officer. We are currently searching for a
new President and Chief Executive Officer, and our Chairman of the Board of
Directors is serving as our Interim Chief Executive Officer. If we are unable to
attract and retain a highly skilled executive to serve as our President and
Chief Executive Officer, we may not be able to continue to execute our strategy
or manage our growth, either of which could harm our business and results of
operations. In addition, we have recently assigned new or expanded roles to many
of our current executive officers. If our management team fails to adapt to
these new roles, our business and results of operations could suffer.
RISKS RELATING TO OUR INDUSTRY
THE AVERAGE SELLING PRICES FOR OUR PRODUCTS ARE VOLATILE AND MAY DECLINE DURING
INDUSTRY DOWNTURNS. THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY COULD
CREATE FLUCTUATIONS IN OUR OPERATING RESULTS, AS IT HAS FOR OTHER COMPANIES
OPERATING IN THIS INDUSTRY.
23
The semiconductor industry has historically been cyclical, characterized by
wide fluctuations in product supply and demand. From time to time, the industry
has also experienced significant downturns, often in connection with, or in
anticipation of, maturing product cycles and declines in general economic
conditions. Downturns of this type occurred in 1997 and 1998. These downturns
have been characterized by diminished product demand, production over-capacity
and accelerated decline of average selling prices, and in some cases have lasted
for more than a year. If the semiconductor industry suffers a significant
downturn, our results of operations would be adversely affected.
IF THE ADSL TECHNOLOGY UPON WHICH OUR PRODUCTS ARE BASED DOES NOT ACHIEVE BROAD
MARKET ACCEPTANCE, WE WOULD NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS.
ADSL services compete with many different broadband access technologies
including variants of digital subscriber line, or DSL, and other alternatives.
The introduction of new products or technologies by competitors or market
acceptance of products based on alternative technologies could render our
products less competitive or obsolete. If either of these events occurs, we
would be unable to sustain or grow our business. Competing technologies include:
- other variants of DSL, including high bit rate DSL, integrated DSL,
symmetric DSL and very high bit rate DSL;
- other access solutions provided by telecommunications service providers
such as transmission through initiation of a temporary Internet connection
over an analog modem, integrated services digital networks and high
capacity T1/E1 line services;
- broadband cable technologies;
- broadband wireless technologies; and
- broadband satellite technologies.
If these alternative technologies gain market share at the expense of ADSL,
demand for our products would decrease, and we would be unable to sustain or
grow our business.
CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS, BOTH IN THE U.S. AND
INTERNATIONALLY, COULD CAUSE SALES OF DIGITAL SUBSCRIBER LINE, AND SPECIFICALLY
ADSL, PRODUCTS TO DECLINE OR FAIL TO GROW AS ANTICIPATED.
The jurisdiction of the Federal Communications Commission extends to the
entire U.S. communications industry, including our customers and their products
and services that incorporate our products. Future Federal Communications
Commission regulations affecting the U.S. communications services industry, our
customers or our products may harm our business. For example, Federal
Communications Commission regulatory policies that affect the availability of
data and Internet services may impede our customers' penetration into some
markets or affect the prices that they can charge. The Federal Communications
Commission has, from time to time, considered new policies affecting Internet
services. This may cause sales of our products to decline. We face similar risks
from foreign regulatory agencies. Any delays in our ability to comply with
domestic and foreign regulatory requirements may result in order cancellations
or postponements of product purchases by our customers, which would harm our
business.
OUR STOCK MAY BE THINLY TRADED OR ITS PRICE VOLATILE, WHICH MIGHT MAKE IT
DIFFICULT FOR INVESTORS TO SELL THEIR SHARES.
The stock markets, and in particular the Nasdaq National Market, experience
extreme price and volume fluctuations affecting the market prices of equity
securities of many technology companies. These fluctuations are often unrelated
to the operating performance of the respective companies. We
24
expect that the market price of our common stock will fluctuate due to the
factors described throughout this "Risk Factor" section as well as:
- changes in estimates of our financial performance or changes in
recommendations by securities analysts; and
- changes in market valuations of other integrated circuit companies.
BECAUSE OF LIKELY FLUCTUATIONS IN THE PRICE OF OUR STOCK, WE MAY BE SUBJECT TO
CLASS ACTION LITIGATION, WHICH COULD DISTRACT MANAGEMENT AND RESULT IN
SUBSTANTIAL COSTS.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and resources from our operations and sales of our products, which would have a
negative impact on our business.
THE LARGE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE COULD CAUSE OUR STOCK PRICE
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,
the market price of our common stock could decline. These sales might make it
more difficult for us to sell equity or equity securities in the future at a
time and price that we deem appropriate.
PROVISIONS IN OUR CHARTER DOCUMENTS AND OUR ADOPTION OF A STOCKHOLDER RIGHTS
PLAN MAY MAKE ACQUIRING CONTROL OF OUR COMPANY MORE DIFFICULT FOR A THIRD PARTY,
WHICH COULD HARM OUR STOCK'S MARKET PRICE OR REDUCE ANY PREMIUM OVER MARKET
PRICE THAT AN ACQUIROR MIGHT OTHERWISE PAY.
Our certificate of incorporation and bylaws contain provisions that could
make it harder for a third party to acquire us. These provisions include a
classified board of directors, limitations on actions by our stockholders by
written consent, and eliminating cumulative voting in the election of our
directors. Our board of directors has the right to issue preferred stock without
stockholder approval, which could be used to dilute the stock ownership of a
potential hostile acquirer. In addition, our board of directors adopted a
stockholder rights plan on March 28, 2001, pursuant to which we declared a
dividend of one right for each share of common stock held by stockholders of
record as of May 11, 2001. Unless redeemed by us prior to the time the rights
are exercised, upon the occurrence of certain events, the rights will entitle
the holders to receive upon exercise thereof, shares of our preferred stock, or
shares of an acquiring entity, having a value equal to twice the then-current
exercise price of the right. The issuance of the rights could have the effect of
delaying or preventing a change in control of us. Although we believe these
provisions and the stockholders rights plan provide for an opportunity to
receive a higher bid by requiring potential acquirers to negotiate with our
board of directors, these provisions apply even if the offer may be considered
beneficial by some stockholders.
BECAUSE OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT MAY BE ABLE TO CONTROL
STOCKHOLDER VOTES, THE PREMIUM OVER MARKET PRICE THAT AN ACQUIROR MIGHT
OTHERWISE PAY MAY BE REDUCED AND ANY MERGER OR TAKEOVER MAY BE DELAYED.
As of March 23, 2001, our principal stockholders, executive officers,
directors and their affiliates own or control approximately 43.98% of our common
stock. Accordingly, our principal stockholders,
25
executive officers, directors and their affiliates, as a group, may have the
ability to control the election of a majority of the members of our board of
directors and the outcome of corporate actions requiring stockholder approval.
This concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of us, or may impede a merger, consolidation,
takeover or other business combination involving us. This concentration of
ownership could also adversely affect our stock's market price or lessen any
premium over market price that an acquiror might otherwise pay.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, AND IF WE ARE UNABLE TO
SECURE ADEQUATE FUNDS ON TERMS ACCEPTABLE TO US, WE MAY BE UNABLE TO EXECUTE OUR
BUSINESS PLAN.
If our existing cash balances and cash flows expected from future
operations, are not sufficient to meet our liquidity needs, we will need to
raise additional funds. If adequate funds are not available on acceptable terms
or at all, we may not be able to take advantage of market opportunities, develop
or enhance new products, pursue acquisitions that would complement our existing
product offerings or enhance our technical capabilities, execute our business
plan or otherwise respond to competitive pressures or unanticipated
requirements.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and their ages as of March 31, 2001 are as follows.
NAME AGE POSITION
- ---- -------- --------
Daniel (Wen Chi) Chen........................ 47 Chairman of the Board of Directors and Interim
Chief Executive Officer
Ralph Cognac................................. 57 Executive Vice President and Chief Marketing
Officer
Brian Gillings............................... 53 Senior Vice President, Corporate Strategy and
Product Planning
Timothy A. Rogers............................ 46 Senior Vice President, Chief Financial Officer
Max (Ming Kang) Liu.......................... 42 Vice President, Chief Technical Officer
Jow H. Peng.................................. 48 Vice President, Business Development
Ying Shiau................................... 48 Vice President, Operations
Steve C. H. Lin.............................. 46 Vice President, Taiwan Operations
DANIEL (WEN CHI) CHEN is a co-founder and has served as Chairman of the
Board of Directors since February 1998, and as Interim Chief Executive Officer
since February 2001. Mr. Chen previously served as President and Chief Executive
Officer from May 1995 to April 1998. From February 1995 to April 1996, Mr. Chen
was Vice President of the Computer and Communication division of United
Microelectronics Corporation, a semiconductor manufacturing company and a party
related to us. Mr. Chen received a B.S. in Electrical Engineering from Tamkang
University.
RALPH COGNAC has served as Executive Vice President and Chief Marketing
Officer since March 2000. From October 1999 to March 2000, Mr. Cognac served as
Vice President of Worldwide Sales. From May 1999 to October 1999, Mr. Cognac was
a self-employed consultant. From September 1998 to May 1999, Mr. Cognac was Vice
President of Worldwide Sales for NeoParadigm Labs, Inc., a semiconductor
manufacturing company. From September 1995 to September 1998, Mr. Cognac was
Vice President of Worldwide Sales for Monolithic Systems Semiconductor, Inc., a
semiconductor manufacturing company. Starting in February 1987, Mr. Cognac was a
co-founder and Vice President of Worldwide Sales and Marketing of Synergy
Semiconductor Corporation, a semiconductor company. Mr. Cognac joined Integrated
Device Technology, Inc., a semiconductor manufacturing company, in May 1982 as
the company's first Vice President of Marketing, and assumed
26
responsibility for sales in 1984. Mr. Cognac received a B.S. in Electrical
Engineering and an M.B.A. from Arizona State University.
BRIAN GILLINGS has served as Senior Vice President, Corporate Strategy and
Product Planning since March 2001. He served as Senior Vice President, Corporate
Strategy and Development between March 2000 and March 2001. From July 1999 to
March 2000, Mr. Gillings served as Vice President of Marketing. From April 1999
to July 1999, Mr. Gillings was a self-employed consultant. From April 1998 to
April 1999, Mr. Gillings was the Vice President of Sales and Marketing for
Advanced Communication Devices, Inc., a semiconductor manufacturing company.
From June 1997 to April 1998, Mr. Gillings was a self-employed consultant. From
November 1995 to June 1997, Mr. Gillings was the Vice President of Marketing for
Orbit Semiconductors, Inc., a semiconductor manufacturing company. From
September 1983 to October 1989 Mr. Gillings served as director of business
development at Maxim Integrated Products, Inc., a semiconductor manufacturing
company. Mr. Gillings received a B.S. equivalent in Electrical Engineering from
Harrow Technical College and an M.S. equivalent in Electrical Engineering from
the Polytechnic University of South Bank.
TIMOTHY A. ROGERS has served as Chief Financial Officer since July 1998 and
as a Senior Vice President since January 2001. From February 1992 to
February 1998, Mr. Rogers was Vice President of J.P. Morgan & Co. Incorporated,
an investment bank. From September 1986 to January 1992, Mr. Rogers was a Vice
President of Salomon Brothers Inc., an investment bank. Mr. Rogers also worked
from September 1982 to August 1985 for Bain & Co., a management consulting firm.
Mr. Rogers received an A.B. in Asian Studies from Dartmouth College and an
M.B.A. from Stanford University.
MAX (MING KANG) LIU has served as Vice President, Chief Technical Officer
since February 2001. Dr. Liu served as Vice President, Technology and Advanced
Architecture between June 1999 and February 2001. Dr. Liu served as Vice
President of System Technology from April 1998 to June 1999. Dr. Liu served as
Senior Director from November 1997 to April 1998. Dr. Liu served as Chief
Architect from May 1997 to November 1997. From May 1995 to May 1997, Dr. Liu was
a Manager of Project Development for Quickturn Design Systems, Inc., an
application specific integrated circuit verification company. From 1989 to 1995,
Dr. Liu was an Assistant Professor in the Electrical and Computer Engineering
Department at the University of Arizona, Tucson, Arizona. Dr. Liu received a
B.S. in Electrical Engineering from National Taiwan University and an M.S. and
Ph.D. in Electrical Engineering from the University of California, Berkeley.
JOW H. PENG has served as Vice President, Business Development since
July 1999. From August 1998 to July 1999, Mr. Peng served as Senior Director of
Marketing. From October 1997 to August 1998, Mr. Peng served as Director of
Strategic Planning. From April 1985 to October 1997, Mr. Peng was the lead
member of the technical staff for Pacific Telesis, Inc., a telecommunications
service provider. Mr. Peng received a B.S. in Electrical Engineering from
National Chiao-Tung University and an M.S. in Electrical Engineering from West
Virginia University.
YING SHIAU has served as Vice President, Operations since March 2001.
Mr. Shiau served as Vice President, Manufacturing from June 2000 to March 2001.
From August 1996 to June 2000, Mr. Shiau served as Senior Director of Corporate
Yield Improvement and Fab Outsourcing Operations for Cypress Semiconductor
Corporation, a supplier of integrated circuits. From July 1986 to August 1996,
Mr. Shiau was Manager of Product and Test Operations for Advanced Micro
Devices, Inc., a semiconductor manufacturing company. Mr. Shiau received a B.S.
in Physics from Soochow University in Taipei, Taiwan and an M.S. in Electrical
Engineering from Case Western Reserve University.
STEVE C. H. LIN has served as Vice President, Taiwan Operations since
October 2000. From February 1996 to October 2000, Mr. Lin served as Vice
President of Acer Netxus, Inc., a communications equipment supplier of and a
member of the Acer Group. From July 1990 to February 1996, Mr. Lin served as
Director of the Communication System Division of the Computer &
27
Communication Research lab of the Industrial Technology Research Institute of
Taiwan. From June 1978 to June 1990, Mr. Lin worked at the Electronic
Research & Service Organization of the Industrial Technology Research Institute
of Taiwan. Mr. Lin received a B.S. in Control Engineering degree from National
Chiao Tung University of Taiwan and a Master of Science in Computer Engineering
from the University of Southern California.
ITEM 2. PROPERTIES
We operate our primary executive, sales and marketing, and research and
development activities from our 48,144 square foot headquarters in San Jose,
California, under a lease that expires in February 2011. We operate our Taiwan
based engineering and technical support activities from our 56,160 square foot
office space in Hsin-Chu Science-Based Industrial Park in Taiwan, under a lease
that expires in March 2006. In addition, we lease space in Round Rock, Texas;
Taipei, Taiwan; and Beijing, China.
We believe each facility to be in good operating condition and adequate for
its present use, and that each facility has sufficient capacity to meet its
current and anticipated operating requirements.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become involved in litigation relating to claims
arising from our ordinary course of business. We are not currently a party to
any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security-holders during the fourth
quarter of the fiscal year covered by this report.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since August 18, 2000, the date of our initial public offering, our Common
Stock has traded on the Nasdaq National Market under the symbol ITXI. The
following table sets forth the range of high and low sales prices for our Common
Stock as reported by the National Association of Securities Dealers, Inc. for
the periods indicated:
FISCAL 2000 HIGH LOW
- ----------- -------- --------
3rd Quarter (beginning August 18, 2000)..................... $31.4375 $ 18.25
4th Quarter................................................. $21.4375 $4.3125
As of March 23, 2001, we had approximately 330 stockholders of record.
We have never declared or paid a cash dividend on our Common Stock and do
not anticipate paying any cash dividends in the foreseeable future.* We
currently intend to retain our earnings, if any, for the operation and
development of our business.* The declaration of any future dividends by us is
within the discretion of our Board of Directors and will be dependent on our
earnings, financial condition and capital requirements as well as any other
factors deemed relevant by our Board of Directors.
We received aggregate net proceeds of approximately $109.1 million from the
initial public offering and concurrent private placement of shares of our common
stock on August 18, 2000. As of December 31, 2000, proceeds from our initial
public offering and the concurrent private placement have been used for working
capital and general corporate purposes, including research and development of
new products, sales and marketing efforts and general and administrative
expenses. The remaining net proceeds have been invested in cash, cash
equivalents and short-term investments. The use of the proceeds described above
does not represent a material change in the use of proceeds described in our
Quarterly Report on Form 10-Q as filed with the Securities and Exchange
Commission on November 14, 2000.
CHANGES IN SECURITIES
On March 28, 2001, our Board of Directors adopted a Stockholder Rights Plan
under which we declared a dividend of one right for each share of our
outstanding common stock as of May 11, 2001. Prior to the distribution date
referred to below, the rights will be evidenced by and trade with the
certificates for the common stock. After the distribution date, we will mail
rights certificates to the stockholders and the rights will become transferable
apart from our common stock. The distribution date occurs, and rights will
separate from the common stock and become exercisable, following (a) the tenth
business day (or such later date as may be determined by a majority of the board
of directors) after a person or group acquires beneficial ownership of 15% or
more of the our common stock or (b) the tenth business day (or such later date
as may be determined by a majority of the directors) after a person or group
announces a tender or exchange offer, the consummation of which would result in
ownership by a person or group of 15% or more of our common stock.
After the distribution date, each right will entitle the holder to purchase
for $22.50 a fraction of a share of our preferred stock with economic terms
similar to that of one share of our common stock. We have yet to file a
Certificate of Designation to create this series of preferred stock. In
addition, we intend to enter into a Preferred Stock Rights Agreement with a
Rights Agent that will act as agent for us and the holders of the rights.
As the rights may be redeemed by us prior to the time they are exercised, we
believe the Stockholders Rights Plan will provide for an opportunity to receive
a higher bid by requiring potential acquirers to negotiate with our board of
directors.*
29
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Form 10-K. The selected statement of operations data for each of the three years
ended December 31, 1998, 1999 and 2000 and the selected balance sheet data as of
December 31, 1999 and 2000 are derived from, and qualified by reference to, the
audited financial statements included elsewhere in this Form 10-K. The selected
statement of operations data for each of the two years ended December 31, 1996
and 1997 and the selected balance sheet data as of December 31, 1996, 1997 and
1998 are derived from audited financial statements not included herein.
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ -- $ -- $ -- $ 3,053 $ 54,062
Cost of revenue (including stock-based compensation expense
of [$0], $0, $0, $0, $59 and $800)........................ -- -- -- (2,811) (32,003)
------- ------- ------- -------- --------
Gross profit (loss)......................................... -- -- -- 242 22,059
------- ------- ------- -------- --------
Operating expenses:
Research and development (inclusive of stock-based
compensation expense of zero, $10, $58, $97, and
$7,753)................................................. -- 1,111 6,288 8,556 21,997
Sales and marketing (inclusive of stock-based compensation
expense of zero, zero, $57, $86 and $4,193)............. -- -- 1,182 3,297 11,318
General and administrative (inclusive of stock-based
compensation expense of zero, $26, $111, $81 and
$8,463)................................................. -- 966 2,682 3,166 13,352
--
------- ------- ------- -------- --------
Total operating expenses.................................... -- 2,077 10,152 15,019 46,667
------- ------- ------- -------- --------
Operating loss from continuing operations................... -- (2,077) (10,152) (14,777) (24,608)
Interest and other income, net.............................. -- 809 856 1,069 4,472
------- ------- ------- -------- --------
Loss from continuing operations............................. -- (1,268) (9,296) (13,708) (20,136)
Income (loss) from discontinued operations.................. (62) (2,638) -- -- --
------- ------- ------- -------- --------
Net income (loss)........................................... $ (62) $(3,906) $(9,296) $(13,708) (20,136)
======= ======= ======= ======== ========
Basic and diluted net loss from continuing operations per
share..................................................... $ -- $ (0.06) $ (0.40) $ (0.59) $ (0.66)
Basic and diluted net income (loss) from discontinued
operations per share...................................... -- (0.11) -- -- --
------- ------- ------- -------- --------
Basic and diluted net income (loss) per share............... $ -- $ (0.17) $ (0.40) $ (0.59) $ (0.66)
======= ======= ======= ======== ========
Shares used in computing basic and diluted net income (loss)
per share................................................. 22,750 22,753 23,058 23,148 30,484
======= ======= ======= ======== ========
AS OF DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $23,748 $6,394 $14,423 $38,513 $149,073
Working capital............................................. 23,302 17,758 11,904 37,838 144,016
Total assets................................................ 32,902 20,632 26,652 52,951 181,390
Long-term obligations, net of current portion............... -- -- 4,125 1,500 1,742
Mandatorily redeemable convertible preferred stock.......... -- -- 5,000 45,000 --
Total stockholders' equity (deficit)........................ 25,878 20,249 14,208 1,099 158,424
30
SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA
FISCAL 1999 QUARTER ENDED
------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------------------------------------- -------- -------- ------------ -----------
Net sales......................................... $ 83 $ 213 $ 499 $ 2,258
Gross margin...................................... (249) (171) (133) 795
Income (loss) from operations..................... (3,630) (3,903) (3,292) (3,952)
Net income (loss)................................. (3,476) (3,781) (3,155) (3,296)
Basic and diluted earnings (loss) per share....... $ (0.15) $ (0.16) $ (0.14) $ (0.14)
FISCAL 2000 QUARTER ENDED
------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------------------------------------- -------- -------- ------------ -----------
Net sales......................................... $ 4,115 $10,286 $17,185 $22,476
Gross margin...................................... 1,365 4,505 8,447 7,742
Income (loss) from operations..................... (4,159) (8,221) (6,137) (6,091)
Net income (loss)................................. (3,695) (7,779) (5,183) (3,479)
Basic and diluted earnings (loss) per share....... $ (0.16) $ (0.33) $ (0.16) $ (0.08)
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND
RELATED NOTES.
OVERVIEW
We provide integrated circuit and software products to the broadband access
communications equipment industry. Our products include integrated circuits,
software, production designs and test systems that enable communications
equipment manufacturers to provide high-speed, cost-effective asymmetric digital
subscriber line, or ADSL, equipment to communications service providers and
their customers. Our software includes programs that enable the basic function
of our integrated circuits and reference designs, and that provide access to the
Internet, permitting equipment utilizing our solutions to communicate with
telecommunication service providers' central office equipment.
We were incorporated in California in May 1995 as Integrated Technology
Express, Inc. In early 1996, United Microelectronics Corporation contributed
cash and licensed technology to us in return for an equity interest. Our initial
products included personal computer data interface and other integrated circuits
using analog and digital signals. In early 1997, we began to develop integrated
circuits and software solutions for the ADSL market. In late 1997, we sold our
personal computer-related operations, changed our name to Integrated Telecom
Express, Inc. and focused our product development efforts exclusively on the
ADSL market.
Subsequent to the sale of our personal computer-related business and through
1998, we were a development stage company and had no product revenue. In
April 1998, we licensed certain ADSL technology from Alcatel Bell N.V. to
complement our intellectual property. In the first quarter of 1999, we began
shipping our production designs and development tools for our initial ADSL
products. In the third quarter of 1999, we began volume shipments of these
products and recorded our first significant product revenue. Our production
designs are complete sets of instructions describing how to build an ADSL modem
with our integrated circuits and software. Beginning in the fourth quarter of
1999, we significantly increased our investment in operations, including
research and development and sales and marketing.
We sell our products to manufacturers of customer premises equipment and
telecommunications service providers' central office equipment. Our revenue is
currently derived from sales of our Apollo and SAM product families. Sales of
Apollo Two products represented 80.8% of revenue in the year ended December 31,
1999 and 78.7% of revenue in the year ended December 31, 2000. We are currently
managing the transition from Apollo 2 to Apollo 3. We anticipate declining
demand and prices for Apollo 2 as our customers move their system designs to our
lower-cost Apollo 3 or competing products.* We anticipate that our Apollo and
SAM product families will continue to generate substantially all of our revenue
for the foreseeable future.* To date, we have derived a substantial portion of
our revenue from a limited number of customers and we expect to continue to rely
on a limited number of customers. During the year ended December 31, 1999,
Xpeed, Inc. and Lite-On Communications Corporation accounted for 44.3% and 10.9%
of our revenue. During the year ended December 31, 2000, Victron, Inc. and
Interlink System Co., Ltd. accounted for 11.6% and 11.1% of our revenue.
We have focused our initial sales and marketing efforts on worldwide
communications equipment manufacturers. We currently sell through our direct
sales force, independent sales representatives and distributors. Our sales
personnel are based in Santa Clara, California; Round Rock, Texas, Taipei,
Taiwan and Beijing, China. For the year ended December 31, 1999, sales to
customers in Asia accounted for 50.2% of our revenue, of which our sales to
customers in South Korea constituted 12.2% of our revenue. For the year ended
December 31, 2000, sales to customers in Asia accounted for 75.1%, of which
sales to customers in South Korea constituted 59.5%. We estimate that of our
sales to
32
U.S. communications equipment manufacturers in the year ended December 31, 1999
and the year ended December 31, 2000, approximately 43.3% and 11.6% of these
U.S. sales were ultimately intended for equipment for service providers in the
South Korean market. Combined with direct sales to South Korea during the same
periods, our estimated revenue exposure to the South Korean market during these
periods was 56.5% and 71.2%. We anticipate that a substantial portion of our
revenue will continue to be derived directly or indirectly from Asia, especially
South Korea, for the foreseeable future. All revenue is denominated in U.S.
dollars.
In general, we require approximately six months to achieve volume shipments
of our products after we first contact a customer. This process includes sale of
our turn-key reference design, customer board development, testing, field trials
and qualification by service providers and receipt of volume orders. Sales from
reference designs accounted for less than 10% of revenues for the years ended
December 31, 1999 and 2000. As a result, a significant period of time may elapse
between our sales efforts and our realization of revenue. Our customers are not
obligated by long-term contracts to purchase our products and can generally
cancel or reschedule orders on short notice.
Revenue from product sales other than to distributors is recognized upon
shipment if a signed purchase order exists, the fee is fixed or determinable,
collection of resulting receivables is probable and product returns are
reasonably estimable. Revenue from shipments to distributors with the right of
return are deferred until the distributor resells the inventory. Upon shipment,
we also provide for the estimated costs that may be incurred for product
warranties. We develop and market personal computer network interface cards, or
NICs, to the ADSL market in addition to the sale of integrated circuit and
software products. We outsource the manufacturing of these cards to a
manufacturer in Taiwan, which incorporates our integrated circuits.
We outsource the fabrication, packaging and testing of our integrated
circuits. Therefore, a significant portion of our cost of revenue consists of
payments to our manufacturers. Our cost of revenue also includes expenses
relating to our internal operations as well as the amortization of fees for
licensed technology. In April 1998, we licensed certain technology from Alcatel,
an unrelated third party, to develop, manufacture and distribute products. The
terms of the agreement call for an initial licensing fee of $5 million with
additional royalties payable on sales of products developed at rates ranging
from 2.5% to 6%. Minimum royalties payable pursuant to the agreement total
$3 million, of which the Company has paid $1,250,000. The licensing fee is
amortized over the estimated useful life of seven years with royalties expensed
in the year incurred.
Research and development expenses consist primarily of salaries and related
personnel expenses, prototype development costs, fees paid to outside service
providers and overhead allocated to product development of our integrated
circuits, software and underlying technologies. All research and development
costs are expensed as incurred. Our research and development efforts are
periodically subject to significant, non-recurring costs and fees that can cause
significant variability in our quarterly research and development expenses. We
expect to increase our research and development expenses as we continue to
develop new products and improve our core technologies.*
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in sales, marketing, applications
engineering support and customer service functions, costs associated with
promotional and other marketing expenses. We intend to expand our direct and
indirect sales operations substantially, both domestically and internationally.*
In addition, we expect sales and marketing expenses to increase as we expand our
customer service and support organization.*
General and administrative expenses include personnel and related costs
associated with executive management, finance, accounting, human resources,
information services and facilities.
In connection with the grant of stock options and equity compensation to our
employees, technical advisors and directors, we have recorded deferred
stock-based compensation expense of $21,209 million
33
as of December 31, 2000. Deferred stock-based compensation represents the
difference between the grant price and the deemed fair value of our common stock
options granted during these periods. Deferred stock-based compensation expense
for options granted is being amortized using the graded vesting method, in
accordance with Financial Accounting Standards Board, or FASB, Interpretation
No. 28, over the vesting period of each respective option, which is generally
four years. Under the graded vesting method, each option grant is separated into
portions based on its vesting terms, which results in acceleration of
amortization expense for the overall award. Deferred stock-based compensation
for options granted to non-employees is accounted for in accordance with the
provisions of Statement of Financial Accounting Standards, or SFAS, No. 123 and
Emerging Issues Task Force No. 96-18. Unamortized deferred stock-based
compensation is presented as a reduction of stockholders' equity.
We have recorded no provision for federal or state income taxes for any
period since our inception because we have incurred losses in each period. As of
December 31, 2000, we had net operating loss carryforwards for federal and
California income tax purposes of approximately $16.0 million and $1.8 million,
respectively, available to offset income in future years. The net operating loss
carryforwards will expire at various dates from 2003 through 2013 if they are
not utilized.
We have experienced net losses of approximately $9.3 million, $13.7 and
$20.1 million for the years ended December 31, 1998, 1999 and 2000. Our
accumulated deficit as of December 31, 2000 was $48.6 million. We expect to
continue to incur net losses for the foreseeable future.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our statements of
operations data as percentages of our revenues. Our results of operations are
reported as one reportable business segment.
YEAR ENDED
DECEMBER 31
-------------------
1999 2000
-------- --------
Revenue..................................................... 100% 100%
Cost of revenue............................................. 92 59
Gross profit (loss)......................................... 8 41
Operating expenses:
Research and development.................................. 280 41
Sales and marketing....................................... 108 21
General and administrative................................ 104 25
Total operating expenses................................ 492 87
Operating loss.............................................. (484) (46)
Interest and other income, net.............................. 35 8
Net loss.................................................... (449) (38)
NET REVENUE. Our net revenues were zero, $3.1 million and $54.1 million in
the years 1998, 1999 and 2000. The increase from 1998 to 1999 was primarily
attributable to the commencement of sales of our reference designs and ADSL
development tool during the first half of 1999 and the commencement of volume
sales of our Apollo and SAM products during the second half of 1999. The
increase from 1999 to 2000 was primarily attributable to continued growth in
sales of Apollo Two chipsets, Apollo Two NIC cards, Apollo One chipsets and
Apollo Three chipsets. During 2000, our Apollo Two products accounted for 78.7%
of our net revenue, and all other products individually accounted for less than
10%. Net revenues from customers outside of the United States represented 53.1%
and 82.4% of our revenue in year 1999 and 2000. We expect that net revenue
generated from customers outside of the
34
United States will continue to account for a significant percentage of our net
revenue.* Due to current market conditions, we anticipate that our net revenue
growth will be approximately flat or negative from 2000 to 2001 as unit sales
growth is counterbalanced by declining unit prices in the industry.*
COST OF REVENUE AND GROSS PROFIT. Cost of revenue increased from zero in
1998 to $2.8 million in 1999 and $32.0 million in 2000. This increase from 1998
to 1999 was primarily attributable to the commencement of sales of our
production designs and ADSL development tool and our Apollo and SAM products.
Adding further to the increase was the amortization of our technology licensing
fee from Alcatel and related royalty payments. License fee amortization was
zero, $1.2 million and $1.7 million in 1998, 1999 and 2000. Cost of revenue
included charges associated with stock-based compensation of $0, $0, and
$800,000 in 1998, 1999 and 2000. The increase in our cost of revenue from 1999
to 2000 was primarily attributable to our ramp in net revenue during the period
and to an increase in charges associated with stock-based compensation expenses.
Cost of Revenue in 2000 also includes a $3.3 million charge related to
purchase commitments outstanding as of December 31, 2000. Based on market
conditions at the time the December 31, 2000 financial statements were prepared,
the Company estimated that demand for Apollo 2 products was less than originally
estimated when certain non-cancelable production orders were placed. As a
result, a reserve was established to cover expected future losses related to
these commitments. We expect to establish an additional reserve for these
purchase commitments during the first quarter of fiscal 2001.*
Our gross profit was $242,000 and $22.1 million in 1999 and 2000. Our gross
profit represented 8% and 41% of our revenue in 1999 and 2000. The increase in
gross margin from 1999 to 2000 was primarily attributable to a significant ramp
in our production, which allowed greater economies of scale and reduced impact
of fixed license fee amortization. We expect that our gross margin will decline
from 2000 to 2001 as a result of pricing pressure in the industry and increasing
sales of NICs, which normally have a lower gross margin than chipset sales, as a
percentage of our total revenue.*
RESEARCH AND DEVELOPMENT. Research and development expenses, were
$6.3 million, $8.6 million and $22.0 million in 1998, 1999 and 2000. These
increases were primarily attributable to increases in compensation levels and
payroll related expenses associated with additional personnel. Amortization of
deferred stock-based compensation related to research and development amounted
to $58,000, $97,000 and $7.8 million in 1998, 1999 and 2000. These increases are
primarily attributable to options granted to new and existing employees, as well
as the impact of higher stock prices in 2000. We expect that amortization of
deferred stock-based compensation will decline in absolute terms in 2001 due to
the departure of certain former employees and the recent decline of our stock
price and its effect on the options granted to non-employees*. Research and
development expenditures represented 280% and 41% of revenues in 1999 and 2000.
The decrease in research and development expenditures as a percentage of
revenues in 2000 resulted from our significant revenue growth over the period.
We anticipate that our research and development expenses will increase in
absolute dollars in the future due to planned increases in personnel,
consultants and material costs.* We further anticipate that our research and
development expenses will increase as a percentage of revenue in 2001 as revenue
growth is expected to be approximately flat or negative and absolute research
and development expenses will grow as we seek to maintain our competitiveness by
developing future generations of our products*.
SALES AND MARKETING. Sales and marketing expenses increased from
$1.2 million in 1998 to $3.3 million in 1999 and $11.3 million in 2000. This
increase was primarily attributable to increased compensation expenses and
accrued sales commissions, which are determined as a percentage of revenue as we
began our first volume shipments of products in 1999, and as sales of our
products ramped substantially in 2000. Sales and marketing expenses represented
108% and 21% of revenue in 1999 and 2000. We expect sales and marketing expenses
to increase in both absolute dollars and as a percent of revenue in 2001 as we
continue to moderately expand our sales and marketing personnel to capitalize on
future business opportunities, while revenue growth is expected to be
approximately flat
35
or negative during the same period due to decreasing unit prices in the
industry.* Amortization of deferred stock-based compensation related to sales
and marketing activities amounted to $57,000, $86,000 and $4.2 million in 1998,
1999 and 2000. These increases are primarily attributable to options granted to
new and existing employees, as well as the impact of higher stock prices in
2000. We expect that amortization of deferred stock-based compensation will
decline in absolute terms in 2001 due to the departure of certain former
employees and the recent decline of our stock price and its effect on the
options granted to non-employees*.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$2.7 million, $3.2 million and $13.4 million in 1998, 1999 and 2000. The
increase in general and administrative expense over the period was attributable
to increased compensation levels and an increase in payroll related expenses
associated with additional personnel as we grew the infrastructure to support
our business expansion. General and administrative expenses represented 104% and
25% of revenue in 1999 and 2000. We expect general and administrative expenses
to increase in both absolute dollars and as a percent of revenue in 2001 due
primarily to approximately flat or negative revenue growth and additional
expenses associated with new office space in San Jose, California; Hsin-Chu,
Taiwan; and Beijing, China. Amortization of deferred stock-based compensation
related to general and administrative activities amounted to $111,000, $81,000
and $8.5 million in 1998, 1999 and 2000. We expect that amortization of deferred
stock-based compensation will decline in absolute terms in 2001 due to the
departure of certain former employees and the recent decline of our stock price
and its effect on the options granted to non-employees*.
INTEREST AND OTHER INCOME, NET. Interest and other income, net was
$856,000, $1.1 million and $4.5 million in 1998, 1999 and 2000. The increase in
1999 was primarily due to a non-operating gain of $182,000. The increase in 2000
was primarily attributable to significantly higher cash balances due to our
initial public offering in 2000 and concurrent private placement in August 2000
and Series B preferred stock private placement in November 1999. We anticipate
that interest and other income, net will increase further in 2001 due to higher
average cash balances on hand.* However, interest income is expected to decline
on a quarter to quarter basis due to an anticipated lower level of market
interest rates, and a moderately declining cash balance in a period of
relatively flat revenue growth.*
PROVISION FOR INCOME TAXES. We have recorded significant net operating
losses since inception and therefore did not incur any significant tax
liabilities in 1998, 1999 or 2000. Net deferred tax assets are substantially
derived from research credits and timing differences in depreciation and
amortization expenses. Based on available objective evidence, management
believes it is more likely than not that the net deferred tax assets will not be
fully realizable.* Accordingly, the Company has provided a full valuation
allowance against its net deferred tax assets at December 31, 1999 and
December 31, 2000.
NET LOSS. Net loss was $9.3 million, $13.7 million and $20.1 million in
1998, 1999 and 2000. The increase between 1998 and 1999 was attributable to
higher operating expenses. The increase between 1999 and 2000 was attributable
to continued increases in operating expenses and the amortization of deferred
stock-based compensation offset by gross profit generated from the significant
increase in sales volumes.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations and working capital requirements through the
sale of common and preferred stock, as well as by a limited amount of capital
lease financing. We have also received additional funds from the exercise of
stock options.
Cash and cash equivalents were $14.4 million, $38.5 million and
$149.1 million on December 31, 1998, 1999 and 2000. The increase in cash and
cash equivalents from year-end 1998 to year-end 1999 was primarily due to the
sale of $40.0 million of Series B convertible preferred stock in November
36
1999. The increase in cash and cash equivalents from year-end 1999 to year-end
2000 was primarily due to the net proceeds of our initial public offering in the
amount of $106.1 million and the concurrent private placement of common stock to
NEC Corporation in the amount of approximately $3.0 million in August 2000.
Cash used in operating activities was $7.7 million and $13.3 million in 1998
and 1999. The decrease in operating cash flows was largely attributable to
increases in accounts receivable, inventory and prepaid expenses which
accompanied the commencement of volume sales offset partially by increases in
trade accounts payable. Cash flows provided by operating activities was
$7.9 million in 2000. Operating cashflows were provided primarily by the
Company's net profit before non-cash charges for depreciation, amortization of
$4.2 million and stock-based compensation of $21.2 million and by increases in
accounts payable and accrued expenses. These operating cashflows were somewhat
offset by increases in accounts receivable and inventory resulting from further
increases in sales volumes.
Net cash generated (or used) in investing activities was $10.6 million,
$(3.0) million and $(7.0) million in 1998, 1999 and 2000. During 1998, capital
expenditures of $3.1 million were offset by proceeds from short-term investments
of $11.3 million, sales of assets to Integrated Technology Express, Inc., or
ITE, as part of the sale of our non-DSL business of $1.9 million and proceeds
from notes receivable due from ITE of $432,000. During 1999, capital
expenditures of $3.3 million were offset by sales of assets to ITE of $28,000 as
part of the sale of our non-DSL business and proceeds from notes receivable due
from ITE of $343,000. During 2000, capital expenditures of $7.4 million were
offset by proceeds from notes receivable due from ITE of $363,000.
Cash generated from financing activities was $5.2 million, $40.3 million and
$109.7 million in 1998, 1999 and 2000. The increase in 1999 was primarily due to
the sale of $40.0 million of Series B preferred stock compared with the sale of
$5.0 million of Series A preferred stock in 1998. The increase in 2000 was
primarily due to the completion of our initial public offering of 6,440,000
shares of common stock at $18 per share in August 2000. Net proceeds to us after
underwriter's discounts and other fees amounted to $106.1 million. Net proceeds
of a concurrent private placement of 166,667 shares of common stock at $18 per
share to NEC Corporation amounted to approximately $3.0 million. These proceeds
were partly offset by payments of capital lease obligations.
As of December 31, 2000, we had recorded liabilities for licenses and
capital leases in the amount of $5,657 million. In addition, we have commitments
to pay various royalties to providers of intellectual property based on our
future sales. We have also signed a 10-year lease agreement for our new head
office space in San Jose, California that commits us to pay on average $291,000
per month for the duration of the lease, and a 5 year lease agreement for our
new office space in Hsin-Chu Science-Based Industrial Park in Taiwan that
commits us to pay approximately $65,000 per month for the duration of the lease.
While not yet committed, we anticipate small lease payments for sales office
space in various other planned sales offices, particularly in China.
We believe that our current cash, cash equivalents, and short-term
investments will be sufficient to finance our working capital and capital
expenditures for at least the next 12 months. Our management intends to invest
any cash in excess of current operating requirements in short-term,
interest-bearing investment-grade securities. Our future capital requirements
will depend upon many factors, including revenue growth, management of working
capital, the timing of research and product development efforts and the
expansion of our marketing and sales efforts.
If our existing cash balances and cash flows expected from future operations
are not sufficient to meet our liquidity needs, we will need to raise additional
funds. If adequate funds are not available on acceptable terms or at all, we may
not be able to take advantage of market opportunities, develop or enhance new
products, pursue acquisitions that would complement our existing product
offerings or enhance our technical capabilities, execute our business plan or
otherwise respond to competitive pressures. The issuance of additional equity
securities may dilute our existing stockholders.
37
EFFECTS OF INFLATION
Inflation has not been a material factor affecting our business.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments and
requires recognition of all derivatives as assets or liabilities in the balance
sheet and measurement of those instruments at fair value. The statement is
effective for fiscal years beginning after June 15, 2000. In June 1999, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 137 (SFAS 137), ("Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement
No. 133." In June 2000, the FASB issued SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities--an Amendment of FASB
Statement No. 133." The Company will adopt SFAS 133, as amended by SFAS 137 and
SFAS 138, in the first fiscal quarter of 2001, and does not expect the adoption
to have a material effect on its financial condition or results of operations.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation--an interpretation of APB
Opinion No. 25." FIN 44 clarifies, among other issues (a) the definition of
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a non compensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 was effective July 1,
2000. The adoption of FIN 44 did not have a material effect on the Company's
financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The primary objective of our investment activities is to preserve principal
while concurrently maximizing the income we receive from our investments without
significantly increasing risk. Some of the securities that we may invest in may
be subject to market risk. This means that a change in prevailing interest rates
may cause the principal amount of the investment to fluctuate. For example, if
we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the current
value of the principal amount of our investment will decline. To minimize this
risk in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities and
certificates of deposit, with book value approximating fair value due to short
maturity. In general, money market funds are not subject to market risk because
the interest paid on such funds fluctuates with the prevailing interest rate. As
of December 31, 2000, all of our cash holdings and investments were in money
market funds, bank checking or savings accounts, or bank certificates of
deposit. A hypothetical 100 basis point increase in interest rates would result
in no significant decrease in the fair value of our available-for-sale
securities as of December 31, 2000.
FOREIGN CURRENCY RISK
We do not use foreign currency forward exchange contracts or purchased
currency options to hedge local currency cash flows or for trading purposes. All
sales arrangements with international customers are currently denominated in
U.S. dollars. We have branch operations in Taiwan and a sales office in Beijing,
China, which are subject to currency fluctuations. At the present time, these
foreign offices are limited in their operations and level of investment so the
risk of currency fluctuations related to these offices is not expected to be
material.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTEGRATED TELECOM EXPRESS, INC.
INDEX TO FINANCIAL STATEMENTS
Financial Statements:
Report of Independent Accountants......................... 40
Balance Sheets as of December 31, 2000 and 1999........... 41
Statement of Operations for the years ended December 31,
2000, 1999, and 1998.................................... 42
Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998........................ 43
Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998..................................... 44
Notes to Financial Statements............................. 45
Financial Statement Schedules:
All schedules have been omitted because the required information
is not present or not present in amounts sufficient to require
submission of the schedules or because the information required
is included in the Financial Statements of Notes thereto.
39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Integrated Telecom Express, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Integrated
Telecom Express, Inc. at December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. 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 of America, 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 our opinion.
PricewaterhouseCoopers LLP
San Jose, CA
March 29, 2001
40
INTEGRATED TELECOM EXPRESS, INC.
BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31,
-------------------
1999 2000
-------- --------
ASSETS
Current assets
Cash and cash equivalents................................. $ 38,513 $149,073
Accounts receivable....................................... 1,373 7,630
Receivables from related parties.......................... 555 564
Inventories, net.......................................... 1,893 6,067
Prepaid expenses and other current assets................. 856 1,906
-------- --------
Total current assets.................................... 43,190 165,240
Property and equipment, net................................. 2,140 8,809
Licenses, net............................................... 6,828 6,408
Notes receivable from related parties....................... 793 408
Other assets................................................ 525
-------- --------
TOTAL ASSETS............................................ $ 52,951 $181,390
======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 1,852 $ 8,690
Accrued expenses and other liabilities.................... 875 8,619
Current portion of payable for licenses................... 2,625 2,625
Current portion of obligations under capital leases....... -- 1,290
-------- --------
Total current liabilities............................... 5,352 21,224
Long term liabilities....................................... 1,500 1,742
-------- --------
Total liabilities....................................... 6,852 22,966
-------- --------
Mandatorily redeemable convertible preferred stock $0.002
par value, authorized: 13,500 shares in 1999 and 5,000 in
2000; issued and outstanding: 11,429 shares in 1999 and
zero in 2000.............................................. 45,000 --
-------- --------
Stockholders' equity
Common stock -- $0.001 par value, authorized: 46,100
shares in 1999 and 200,000 in 2000; issued and
outstanding: 23,369 shares in 1999 and 42,709 shares in
2000.................................................... 23 42
Additional paid-in capital................................ 30,745 235,066
Deferred stock-based compensation......................... (1,241) (27,592)
Notes receivable from stockholders........................ -- (528)
Accumulated deficit....................................... (28,428) (48,564)
-------- --------
Stockholders' equity........................................ 1,099 158,424
-------- --------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS' EQUITY.............. $ 52,951 $181,390
======== ========
The accompanying notes are an integral part of these financial statements
41
INTEGRATED TELECOM EXPRESS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Net revenue................................................. $ -- $ 3,053 $ 54,062
Cost of revenue (inclusive of stock-based compensation
expense of $0, $0 and $800)............................... -- (2,811) (32,003)
------- -------- --------
Gross profit................................................ -- 242 22,059
Operating expenses
Research and development (inclusive of stock-based
compensation expense of $58, $97 and $7,753)............ 6,288 8,556 21,997
Sales and marketing (inclusive of stock-based compensation
expense of $57, $86 and $4,192)......................... 1,182 3,297 11,318
General and administrative (inclusive of stock-based
compensation expense of $111, $81 and $8,463)........... 2,682 3,166 13,352
------- -------- --------
Total operating expenses.................................. 10,152 15,019 46,667
------- -------- --------
Loss from operations........................................ (10,152) (14,777) (24,608)
Interest and other income, net.............................. 856 1,069 4,472
------- -------- --------
Net loss.................................................... $(9,296) $(13,708) $(20,136)
======= ======== ========
Basic and diluted net loss per share........................ $ (0.40) $ (0.59) $ (0.66)
======= ======== ========
Shares used in computing basic and diluted net loss per
share..................................................... 23,058 23,148 30,484
======= ======== ========
The accompanying notes are an integral part of these financial statements
42
INTEGRATED TELECOM EXPRESS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
NOTES
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE TOTAL
------------------- PAID-IN STOCK-BASED FROM ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDER DEFICIT EQUITY
-------- -------- ---------- ------------- ----------- ------------ -------------
BALANCE AT DECEMBER 31, 1997...... 22,764 $23 $ 26,113 $ (463) $ -- $ (5,424) $ 20,249
Deemed contribution of captial
related to sale of licenses to
related parties................. 2,853 2,853
Exercise of common stock
options......................... 316 176 176
Deferred compensation related to
stock option grants............. 236 (236) --
Amortization of deferred
stock-based compensation........ 226 226
Net loss.......................... (9,296) (9,296)
------ --- -------- -------- ----- -------- --------
BALANCE AT DECEMBER 31, 1998...... 23,080 23 29,378 (473) -- (14,720) 14,208
Exercise of common stock
options......................... 289 -- 335 -- -- -- 335
Deferred compensation related to
stock option grants............. -- -- 1,032 (1,032) -- -- --
Amortization of deferred
stock-based compensation........ -- -- -- 264 -- -- 264
Net loss.......................... -- -- -- -- -- (13,708) (13,708)
------ --- -------- -------- ----- -------- --------
BALANCE AT DECEMBER 31, 1999...... 23,369 23 30,745 (1,241) -- (28,428) 1,099
Issuance of common stock in
connection with IPO............. 6,607 7 109,085 -- -- -- 109,092
Conversion of convertible
preferred stock in connection
with IPO and private
placement....................... 11,429 11 44,989 -- -- -- 45,000
Exercise of common stock
options......................... 1,304 1 2,687 -- (502) -- 2,186
Deferred compensation related to
stock option grants............. -- -- 47,512 (47,512) -- -- --
Amortization of deferred
stock-based compensation........ -- -- 48 21,161 -- -- 21,209
Accrued interest on notes
receivable from stockholders.... -- -- -- -- (26) -- (26)
Net loss.......................... -- -- -- -- -- (20,136) (20,136)
------ --- -------- -------- ----- -------- --------
BALANCE AT DECEMBER 31, 2000...... 42,709 $42 $235,066 $(27,592) $(528) $(48,564) $158,424
====== === ======== ======== ===== ======== ========
The accompanying notes are an integral part of these financial statements
43
INTEGRATED TELECOM EXPRESS, INC.
STATEMENTS OF CASH FLOW
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Cash flows from operating activities:
Net loss.................................................. $(9,296) $(13,708) $(20,136)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 822 2,193 4,228
Amortization of deferred stock-based compensation....... 226 264 21,209
Changes in operating assets and liabilities:
Accounts receivable................................... -- (1,373) (6,257)
Inventory............................................. -- (1,893) (4,174)
Receivable from related party......................... (339) 121 13
Prepaid expenses and other current assets............. 295 (712) (1,050)
Other assets.......................................... -- 50 (525)
Accounts payable...................................... 193 1,650 6,838
Accrued expenses and other liabilities................ 368 133 7,718
------- -------- --------
Net cash (used in)/provided by operating activities..... (7,731) (13,275) 7,864
------- -------- --------
Cash flow from investing activities:
Purchases of property, equipment and licenses............. (3,143) (3,341) (7,380)
Proceeds from short-term investments, net................. 11,384 -- --
Proceeds from sale of assets to ITE....................... 1,911 28 --
Proceeds from note receivable due from ITE................ 432 343 363
------- -------- --------
Net cash provided by/(used in) investing activities....... 10,584 (2,970) (7,017)
------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net............... 176 335 111,278
Proceeds from issuance of preferred stock, net............ 5,000 40,000 --
Principal payments on capital lease....................... -- -- (1,565)
------- -------- --------
Net cash provided by financing activities................. 5,176 40,335 109,713
------- -------- --------
Net increase in cash and cash equivalents................... 8,029 24,090 110,560
Cash and cash equivalents at beginning of year.............. 6,394 14,423 38,513
------- -------- --------
Cash and cash equivalents at end of year.................... $14,423 $ 38,513 $149,073
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.................................... $ -- -- $ 280
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Sale of assets to ITE for note receivable................. $ 1,931 $ -- $ --
Payable issued for licensing agreements................... $ 6,500 $ -- $ --
Assets purchased under capital leases..................... $ -- $ -- $ 4,598
Conversion of convertible preferred stock into common
stock................................................... $ -- $ -- $ 43,100
Conversion of warrants for convertible preferred stock
into warrants for common stock.......................... $ -- $ -- $ 1,900
Exercise of stock options for notes receivable............ $ -- $ -- $ 502
The accompanying notes are an integral part of these financial statements
44
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Integrated Telecom Express, Inc. ("ITeX" or the "Company", formerly
Integrated Technology Express, Inc.) was incorporated in California in May 1995
and re-incorporated in Delaware in May 1999. The Company designs and sells
integrated circuit and software solutions to the broadband access communications
equipment industry. The Company's products include integrated circuits,
software, turn-key reference designs, network interface cards ("NIC"s) and test
systems that enable communications equipment manufacturers to provide
high-speed, cost-effective asymmetric digital subscriber line, or ADSL,
equipment to communications service providers and their customers. The industry
in which the Company operates is characterized by rapid technological change and
significant volatility of product prices.
United Microelectronics Corporation ("UMC"), a public company in Taiwan,
directly and indirectly owned 47.07% and 25.76% of the Company's outstanding
common stock at December 31, 1999 and 2000, respectively.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist principally of time deposits and money market deposit accounts.
INVENTORIES
Inventories are stated at the lower of cost or market, using the average
cost method.
PROPERTY AND EQUIPMENT
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS No. 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS No. 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the long-lived asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Losses on long-lived assets to be disposed of are determined in a similar
manner, except that fair values are reduced for the cost of disposal. No losses
from impairment have been recognized in the financial statements.
45
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment are stated at cost. Depreciation is generally
computed using the straight-line method over the estimated useful lives of the
assets as follows:
Machinery and equipment.......................... 3-5 years
Software......................................... 3 years
Furniture and equipment.......................... 5-7 years
Leasehold improvements........................... Shorter of the lease term or
the estimated useful life
REVENUE RECOGNITION
Revenue from product sales (other than to distributors with rights of
return) is recognized upon shipment if a signed purchase order exists, the fee
is fixed or determinable, collection of resulting receivables is probable and
product returns are reasonably estimable. Subsequent to the sale of the
products, the Company has no obligation to provide any modification or
customization, upgrades, enhancements or any postcontract customer support.
Revenues from shipments to distributors with rights of return are deferred until
the distributor resells the inventory. Upon shipment, the Company also provides
for the estimated costs that may be incurred for product warranties.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"),"Revenue Recognition in Financial
Statements." SAB 101 provides interpretative guidance on the recognition,
presentation, and disclosure of revenue in financial statements under certain
circumstances. The Company adopted the provisions of SAB 101 in these financial
statements for all periods presented. The adoption of SAB 101 did not have a
material impact on the Company's financial position or results of operations.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. The Company has not
capitalized any software development costs to date and is in compliance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of
software development costs begins upon the establishment of technological
feasibility of the product. After technological feasibility is established,
material software development costs are capitalized. The capitalized cost is
then amortized on a straight-line basis over the estimated product life, or on
the ratio of current revenues to total projected product revenues, whichever is
greater. To date, the period between achieving technological feasibility, and
the general availability of such software has been short, and as such, software
development costs qualifying for capitalization have been insignificant.
ADVERTISING EXPENSES
Advertising expenses are charged to operations when incurred and totaled $0,
$63,000, and $70,000 for the years ended December 31, 1998, 1999 and 2000,
respectively.
46
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in accordance
with the provisions of Accounting Principles Board Opinion No. 25 ("APB
No. 25"), "Accounting for Stock Issued to Employees" and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation cost is, in general, recognized based on the difference, if any,
between the fair market value of the Company's stock on the date of grant and
the amount an employee must pay to acquire the stock. Equity instruments issued
to non-employees are accounted for in accordance with the provisions of SFAS
No. 123 and Emerging Issues Task Force 96-18. Deferred stock-based compensation
is being amortized using the graded vesting method in accordance with Financial
Accounting Standards Board Interpretation No. 28 ("FIN No. 28") over the vesting
period of each respective option, which is generally four years. Under the
graded vesting method, each option grant is separated into portions based on its
vesting terms which results in acceleration of amortization expense for the
overall award.
INCOME TAXES
The Company accounts for income taxes under the liability approach whereby
the expected future tax consequences of temporary differences between the book
and tax basis of assets and liabilities are recognized as deferred tax assets
and liabilities. A valuation allowance is established for any deferred tax
assets for which realization is uncertain.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss attributable
to common stockholders for the period by the weighted average number of shares
of common stock outstanding during the period less any shares subject to
repurchase. Diluted net loss per share is the same as basic net loss per share
for the periods presented because potentially dilutive common shares, composed
of common shares issuable upon the exercise of stock options and warrants and
shares subject to repurchase, are not considered when their effect would be to
increase the net loss per share.
BUSINESS SEGMENTS
The Company operates in one reportable segment, using one measurement of
profitability for its business. The Company has sales and long-lived assets
outside the United States, as further described in Note 11.
COMPREHENSIVE INCOME
Effective January 1, 1999, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in the financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources and does not differ from net losses for
the years ended December 31, 1998, 1999, and 2000 respectively.
47
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and capital lease obligations are carried
at cost, which approximates their fair value because of the short-term maturity
of these instruments or bearing interest at market rates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments and
requires recognition of all derivatives as assets or liabilities in the balance
sheet and measurement of those instruments at fair value. The statement is
effective for fiscal years beginning after June 15, 2000. In June 1999, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 137 (SFAS 137), (Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement
No. 133." In June 2000, the FASB issued SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities--an Amendment of FASB
Statement No. 133." The Company will adopt SFAS 133, as amended by SFAS 137 and
SFAS 138, in the first fiscal quarter of 2001, and does not expect the adoption
to have a material effect on its financial condition or results of operations.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation--an interpretation of APB
Opinion No. 25." FIN 44 clarifies, among other issues (a) the definition of
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a non compensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000.
The adoption of FIN 44 did not have a material effect on the Company's financial
position or results of operations.
2. RELATED PARTY TRANSACTIONS
SHARED FACILITIES, PURCHASE OF PRODUCTS AND SERVICES
In June 1998, the Company sold certain assets, mainly trademarks, licensing
agreements and service contracts, to Integrated Technology Express, Inc. ("ITE")
and its U.S. subsidiary ("ITE-US") for $1,911,000 in cash and $1,931,000 in a
note receivable. The note is due in five equal, annual installments beginning
July 1, 1998 and bears interest at 6% per annum. As ITE and the Company have
certain common stockholders, the excess of $2,853,999 of the sales price over
the net book value of the assets sold was credited to additional paid-in
capital. At December 31, 2000, the current and long-term portions of the note
receivable amounted to $487,000 and $306,000, respectively. Interest income on
these notes was $45,000, $80,000 and $50,000 in 1998, 1999 and 2000
respectively, of which $45,000, $35,000 and $22,000 was accrued at December 31,
1998, 1999 and 2000.
In March 1998, the Company entered into a reimbursement agreement with
ITE-US, a related party, to share facilities and services of administrative
staff and resources. Under the agreement, the parties allocate the costs of the
shared portion of their respective operations, using methods that the Company's
management believes are reasonable. Such allocations are not necessarily
indicative of the
48
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. RELATED PARTY TRANSACTIONS (CONTINUED)
costs that would have been incurred by the Company in transactions with
unrelated third parties. The agreement has no expiration date. The total amounts
the Company billed and was reimbursed by ITE-US were $2,539,000 and $1,936,000
in 1998, $843,000 and $812,000 in 1999, and $383,000 and $514,000 in 2000,
respectively. Amounts billed to ITE-US are principally related to general and
administrative services and are offset against these expenses in the Statement
of Operations. The Company also purchases certain of its finished products from
the same party, which amounted to $746,000 and $4,124,000 for the year ended
December 31, 1999 and 2000, respectively. Additionally, in 1998 ITE-US performed
certain nonrecurring engineering services for the Company in the amount of
$290,000. At December 31, 1998, 1999, and 2000 the net balance due to (from) the
Company was $313,000, $192,000, and $(566,000) respectively.
PURCHASE OF RAW MATERIALS
The Company purchases the wafers for its products from UMC and is dependent
upon UMC as its sole manufacturer of its integrated circuits. For the year ended
December 31, 1999 and 2000, total purchases from UMC amounted to $2,509,000 and
$15,951,000, respectively. At December 31, 1999 and 2000, the net balance due
UMC was $634,000, and $4,111,000, respectively.
STOCKHOLDERS NOTES RECEIVABLE
In May 2000, a director of the Company exercised 80,000 options for common
stock in exchange for two full recourse promissory notes collateralized by
common stock for a total of $262,000. The notes have an interest rate of LIBOR
plus 2%, adjusted on a quarterly basis. Interest and principal mature in
May 2004.
In June 2000, an executive of the Company exercised 80,000 stock options
with an exercise price of $3.00 per share in exchange for a promissory note with
full recourse. The notes have an interest rate of LIBOR plus 2%, adjusted on a
quarterly basis. Interest and principal mature in June 2004.
The total amount of these notes receivable, including accrued interest, of
$528,000, is recorded as an offset to equity.
In 1999, the Company granted its former Chief Executive Officer a loan in
the amount of $462,000 bearing interest of 7.75%. Interest income recognized for
the years ended December 31, 1999 and 2000 was $15,000 and $16,000 respectively.
The loan was repaid in June 2000.
49
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. BALANCE SHEET DETAIL
DECEMBER 31,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
INVENTORY:
Raw materials............................................. $ 119 $ 374
Work in progress.......................................... -- 1,300
Finished goods............................................ 1,774 4,393
------- -------
$ 1,893 $ 6,067
======= =======
PROPERTY AND EQUIPMENT:
Machinery and equipment................................... $ 874 $ 2,188
Software.................................................. 1,912 7,423
Furniture and equipment................................... 994 1,673
Leasehold improvements.................................... 55 1,322
------- -------
3,835 12,606
Less: Accumulated depreciation and amortization........... (1,695) (3,797)
------- -------
$ 2,140 $ 8,809
======= =======
At December 31, 2000, the Company had $4.6 million of property and equipment
under capital leases. The accumulated amortization at December 31, 2000 and
amortization expenses for the year ended December 31, 2000 was $1.2 million.
DECEMBER 31,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
ACCRUED EXPENSES AND OTHER LIABILITIES:
Deferred revenue.......................................... $167 $ 549
Accrued commission and compensation costs................. 600 3,675
Reserve for purchase commitments.......................... -- 3,300
Other accruals............................................ 108 1,095
---- ------
$875 $8,619
==== ======
RESERVE FOR PURCHASE COMMITMENTS: Based on market conditions at the time
the December 31, 2000 financial statements were prepared, the Company estimated
that demand for Apollo 2 products was less than originally estimated when
certain non-cancelable production orders were placed. As a result, a reserve was
established to cover expected future losses related to these commitments.
4. LICENSING AND ROYALTY ARRANGEMENTS
In April 1998, the Company entered into a ten year licensing agreement with
an unrelated party. Under the terms of the agreement, the Company licensed
certain technology to develop, manufacture and distribute products. Initial
payments for the license were $5,000,000. In addition, the Company is obligated
to pay royalties on sales of products including such technology at rates ranging
from 2.5% to 6% with minimum royalties totalling $3,000,000, payable in 1999,
2000, 2001 in the amounts of
50
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LICENSING AND ROYALTY ARRANGEMENTS (CONTINUED)
$500,000, $1,000,000 and $1,500,000, respectively. The Company paid $1,250,000
of the minimum royalty payments through 2000.
The Company has capitalized the $8.0 million cost of this license including
minimum royalties and is amortizing the cost of the license on a straight-line
basis over its estimated useful life of seven years. Minimum royalties are
expensed in the year payable. Total amortization expense, including amortization
of minimum royalties, was $0, $1.2 million and $1.7 million in the year ended
December 31, 1998, 1999 and 2000, respectively.
5. INCOME TAXES
Deferred tax assets consist of the following (in thousands):
YEAR ENDED
DECEMBER 31
-------------------
1999 2000
-------- --------
Deferred tax assets:
Net Operating Loss Carryforwards.......................... $ 8,545 $ 5,571
Research Credit Carryforward.............................. 1,820 2,042
Capitalized R&D........................................... 700 700
Reserves and Accruals..................................... 317 979
Depreciation and Amortization............................. 515 1,001
-------- --------
Gross Deferred Tax Asset.................................... 11,898 10,293
Valuation Allowance......................................... (11,898) (10,293)
-------- --------
Net Deferred Tax Assets..................................... $ -- $ --
======== ========
Based on the available objective evidence, management believes it is more
likely than not that the net deferred tax assets will not be fully realizable.
Accordingly, the Company has provided a full valuation allowance against its net
deferred tax assets at December 31, 1999 and December 31, 2000.
At December 31, 2000, the Company had approximately $16,071,000 of federal
and $1,823,000 of state net operating loss carryforwards available to reduce
future taxable income which will begin to expire in 2013 for federal and 2003
for state tax purposes, respectively. Under the Tax Reform Act of 1986, the
amounts of benefits from net operating loss carryforwards may be impaired or
limited as the Company has incurred a cumulative ownership change of more than
50%, as defined, over a three year period.
51
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss
per share for the period indicated:
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Numerator:
Net loss.................................................... $(9,296) $(13,708) $(20,136)
======= ======== ========
Denominator:
Shares used in computing basic and diluted net loss per
share................................................... 23,058 23,148 30,484
======= ======== ========
Basic and diluted net loss per share attributable to common
stockholders.............................................. $ (0.40) $ (0.59) $ (0.66)
======= ======== ========
Antidilutive securities including options, warrants,
convertible preferred stock and restricted stock rights
not included in loss per shares calculation............... 8,683 19,759 12,982
======= ======== ========
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK.
In October 1998, the Company issued to a third-party 1,428,571 shares of
Series A Convertible Preferred Stock at $3.50 per share. In connection with the
issuance of Series A Convertible Preferred Stock, the Company issued a warrant
to purchase a total of 714,286 shares of convertible preferred stock with an
exercise price of $3.50 per share. The warrant is exercisable at any time until
October 2003.
During October and November 1999, the Company issued to various third
parties 10,000,000 shares of Series B Convertible Preferred Stock at $4.00 per
share. In connection with the issuance of Series B Convertible Preferred Stock,
the Company issued two warrants to purchase a total of 500,000 shares of
convertible preferred stock with an exercise price of $4.00 per share. The
warrants are exercisable at any time until October 2004.
The warrants issued in connection with Series A and Series B Convertible
Preferred Stock were valued at approximately $1.32 and $2.04, respectively.
The convertible preferred stock was converted into common stock upon the
Company's initial public offering in August 2000, and above warrants converted
into warrants exercisable in shares of common stock. The Company has reserved
1,214,286 shares of common stock for the conversion of the outstanding warrants.
52
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
The Company estimated the fair value of each warrant using the Black-Scholes
option pricing model using the following assumptions in addition to the
estimated fair value of the stock and the exercise price:
SERIES A SERIES B
-------- --------
Fair value of preferred stock.............................. $2.88 $4.00
Risk free interest rate.................................... 4.18% 6.03%
Expected life.............................................. term term
Dividend yield............................................. 0% 0%
Expected volatility........................................ 50% 50%
In determining the estimated fair value of the convertible preferred stock,
the Company considered among other things, the sale of similar securities to
outside parties, the relative level of revenues and other operating results, the
absence of a public trading market for the Company's securities and the
competitive nature of the Company's market.
The following table summarizes the activity of convertible preferred stock
and warrants to purchase convertible preferred stock:
SERIES A SERIES B WARRANTS TOTAL
------------------- -------------------- --------- -------------------
SHARES AMOUNT SHARES AMOUNT AMOUNT SHARES AMOUNT
-------- -------- -------- --------- --------- -------- --------
(IN THOUSANDS)
Balances at December 31, 1997...................... -- $ -- -- $ -- $ -- -- $ --
Issuance of preferred stock for cash............... 1,429 4,120 -- -- 880 1,429 5,000
------ ------- ------- -------- ------- ------- --------
Balances at December 31, 1998...................... 1,429 4,120 -- -- 880 1,429 5,000
Issuance of preferred stock for cash............... -- -- 10,000 38,980 1,020 10,000 40,000
------ ------- ------- -------- ------- ------- --------
Balances at December 31, 1999...................... 1,429 4,120 10,000 38,980 1,900 11,429 45,000
Conversion upon initial public offering............ (1,429) (4,120) (10,000) (38,980) (1,900) (11,429) (45,000)
------ ------- ------- -------- ------- ------- --------
Balances at December 31, 2000...................... 0 $ 0 0 $ 0 $ 0 0 $ 0
====== ======= ======= ======== ======= ======= ========
8. STOCK OPTION PLANS
In January 1996, the Company authorized the 1996 Stock Option Plan (the "1996
Plan") under which the board of directors may issue incentive stock options
("ISOs") or nonstatutory stock options ("NSOs") to employees, officers,
directors and consultants of the Company or any parent or subsidiary of the
Company. Under the 1996 Plan, 13,000,000 shares of the Company's common stock
have been reserved for stock options issuance. ISOs and NSOs to purchase shares
of common stock were granted at not less than 100% and 85%, respectively, of the
fair market value of the shares at the date of grant, as determined by the board
of directors, and generally expire six years from the date of grant. Options
which are granted to optionees who own more than 10% of the total combined
voting power of all classes of Company's stock were granted at not less than
110% of the fair market value of the shares at the date of grant, as determined
by the board of directors. The term of options granted to the optionees who own
more than 10% of the total combined voting power of all classes of stock of the
Company is five years from the date of grant or shorter term as provided in the
written option agreement. Options granted under the 1996 Plan generally vest and
become exercisable over four years from the date the option is granted.
53
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS (CONTINUED)
On May 15, 2000, the board of directors adopted the 2000 Stock Incentive
Plan (the "2000 Plan"). The 2000 Plan replaced the 1996 Plan upon the Company's
initial public offering. The 2000 Plan provides for the grant of ISOs as well as
NSOs. The board of directors administers the 2000 Plan and has sole discretion
to grant options to purchase shares of the Company's common stock. The board of
directors determines the term of each option, option price, number of shares for
which each option is granted, whether restrictions will be imposed on the shares
subject to options and the rate at which each option is exercisable. The
exercise price for options granted will be determined by the board of directors,
and for ISOs the exercise price shall not be less than 100% of the fair market
value per share of the underlying common stock on the date granted (110% of fair
market value for ISOs granted to holders of more than 10% of the voting stock of
the Company). The exercise price for NSOs shall not be less than 100% of the
fair market value per share of the underlying common stock on the date granted,
except for options granted pursuant to a merger or other corporate transaction.
The term of the options shall be set forth in the applicable option agreement,
except that in the case of ISOs the option term shall not exceed ten years (five
years for ISOs granted to holders of more than 10% of the total combined voting
power of the Company). The aggregate number of shares of stock that may be
delivered upon the exercise of awards granted shall be 2,500,000 plus an annual
increase to be added on the first day of the Company's fiscal year beginning in
2001, equal to the lesser of (i) 2,500,000 shares, (ii) 4% of the outstanding
shares on such date or (iii) a lesser amount determined by the board.
Activity under the Company's Stock Option Plans is summarized as follows:
OPTIONS OUTSTANDING WEIGHTED
SHARES ------------------------- AVERAGE
AVAILABLE NUMBER EXERCISE EXERCISE
FOR GRANT OF SHARES PRICE PRICE
---------- ---------- ------------ --------
Balance at December 31, 1997.......................... 1,118,925 2,867,600 $ 0.50-$2.55 $1.18
Additional shares reserved.......................... 3,000,000 -- -- --
Options granted..................................... (5,471,500) 5,471,500 2.55-3.00 2.97
Options exercised................................... -- (316,163) 0.50-2.55 0.56
Options canceled.................................... 1,482,344 (1,482,344) 0.50-2.55 1.50
---------- ---------- ------------ -----
Balance at December 31, 1998.......................... 129,769 6,540,593 $ 0.50-3.00 $2.64
Additional shares reserved.......................... 2,000,000 -- -- --
Options granted..................................... (2,080,400) 2,080,400 3.00 3.00
Options exercised................................... -- (289,347) 0.50-2.55 1.16
Options canceled.................................... 1,215,496 (1,215,496) 0.50-3.00 2.79
---------- ---------- ------------ -----
Balance at December 31, 1999.......................... 1,264,865 7,116,150 $ 0.50-3.00 $2.78
Additional shares reserved.......................... 5,515,851 -- -- --
Options granted..................................... (5,729,528) 5,729,528 3.00-23.50 6.43
Options exercised................................... -- (1,304,411) 0.50-4.00 2.02
Options canceled.................................... 965,812 (965,812) 3.00-18.00 7.25
---------- ---------- ------------ -----
Balance at December 31, 2000.......................... 2,017,000 10,575,455 $2.55-$23.50 $4.48
========== ========== ============ =====
54
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- -------------- ----------- ------------ -------- ----------- --------
$2.55............................................ 557,477 3.27 years $ 2.55 446,213 $ 2.55
$3.00............................................ 5,463,230 4.17 years 3.00 2,359,862 3.00
$4.00-$5.00...................................... 3,468,250 5.22 years 4.06 -- --
$6.25-$8.03...................................... 108,000 5.53 years 7.63 -- --
$12-$13.......................................... 269,838 5.49 years 12.58 -- --
$13.13-$13.38.................................... 211,000 5.46 years 13.37 -- --
$14.00-$17.50.................................... 317,660 5.69 years 16.18 -- --
$18.00........................................... 160,000 5.62 years 18.00 100,000 18.00
$23.50........................................... 20,000 5.67 years 23.50 0 --
---------- ---------- ------ --------- ------
$2.55-$23.50..................................... 10,575,455 4.61 years $ 4.48 2,906,075 $ 3.45
========== ========== ====== ========= ======
2000 RESTRICTED STOCK PURCHASE PLAN
On May 15, 2000 the board of directors adopted the 2000 Restricted Stock
Purchase Plan (the "RSPP"). The RSPP provides for the grant of rights to
purchase restricted common stock, subject to certain restrictions, to employees,
directors and consultants and terminates automatically in 2010, unless
terminated sooner. As of December 31, 2000, a total of 1,000,000 shares were
reserved for issuance pursuant the RSPP. The board of directors administers the
RSPP and has sole discretion to grant rights to purchase restricted common
stock. The board of directors determines the term of each grant, including
exercise price and number of shares for each right granted. Pursuant to the
RSPP, each stock purchase right issued under the plan is restricted for a period
of four years from the date of grant. 100% of the restricted shares are released
from restriction on the fourth anniversary of grant; provided, that the shares
may be released early from the restriction subject to satisfaction of a variety
of milestones relating to revenue, gross margin, market capitalization and total
equity raised in initial and secondary public offerings.
In the year ended December 31, 2000, the company granted rights to purchase
760,000 shares of restricted common stock with a weighted average exercise price
of $5.61 and a weighted average fair value of $10.74 per share.
At December 31, 2000, concurrently with the Company's initial public
offering, no additional shares are available for grant.
55
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about rights to purchase
restricted common stock outstanding at December 31, 2000:
RIGHTS OUTSTANDING AND
EXERCISABLE
-------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE
- -------------- ----------- ------------ --------
$4.00....................................................... 580,000 5.3 $ 4.00
$5.00....................................................... 50,000 5.4 $ 5.00
$13.00...................................................... 130,000 5.5 $13.00
------- --- ------
$4.00--$13.00............................................... 760,000 5.4 $ 5.61
======= === ======
2000 EMPLOYEE STOCK PURCHASE PLAN
In May 2000, the Board approved the 2000 Employee Stock Purchase Plan ("ESPP
Plan"). The ESPP Plan permits eligible employees to purchase common stock
through payroll deductions (which cannot exceed 10% of the employee's
compensation) at the lower of 85% of fair market value at the beginning of the
applicable offering period or at the end of each interim period. During fiscal
2000, no shares had been issued under the ESPP Plan and at December 31, 2000
there were 600,000 shares available under this plan. Subsequent to December 31,
2000, the Board of Directors approved an increase to 1,454,173 shares available.
APB NO. 25 COMPENSATION COSTS TO EMPLOYEES
As calculated under APB No. 25, deferred stock-based compensation costs
related to stock options granted to employees amounted to $266,000 through
December 31, 1999 and $48,073,000 through December 31, 2000, of which $71,000,
$51,000, and $19,482,000 was expensed in 1998, 1999, and 2000 respectively.
SFAS NO. 123 COMPENSATION COSTS TO CONSULTANTS
For the years ended December 31, 1998, 1999, and 2000 the Company granted
options of 380,000 shares, zero shares and 312,500 shares respectively for the
Company's common stock, amounting to an aggregate exercise price at
December 31, 1999 of $1,219,000 and $4,552,000 at December 31, 2000 to
consultants and advisors under the 1996 Plan. Certain of these options vest over
periods of up to four years and the Company will be required to record the
change in the fair value of these options at each reporting date prior to
vesting and then finally at the vesting date of the option. The Deferred stock-
based compensation expense balance computed in accordance with SFAS No. 123
related to these options was $313,000, $1,150,000 and $178,000 at December 31,
1998, 1999 and 2000, respectively. Amortization of deferred stock-based
compensation expenses amounted to $155,000, $213,000, and $1,726,000 for the
year ended December 31, 1998, 1999 and 2000 respectively.
56
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS (CONTINUED)
Total compensation expenses for employees, consultants and advisors were
allocated among the associated expense categories as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1999 2000
---------- ---------- ----------
(IN THOUSANDS)
Cost of revenue............................................. $ -- $ -- $ 800
---- ---- -------
Research and development.................................... 58 97 7,753
Sales and marketing......................................... 57 86 4,192
General and administrative.................................. 111 81 8,463
---- ---- -------
Operating expenses.......................................... 226 264 20,408
---- ---- -------
$226 $264 $21,208
==== ==== =======
SFAS NO. 123 PRO FORMA DISCLOSURES
In accordance with the provisions of SFAS No. 123, the fair value of each
option granted to employees was estimated using the following assumptions for
option grants during 1999 and 2000: dividend yield of 0%; expected volatility of
0% for all periods before June 13, 2000 (the date of first filing of the
Registration Statement) and 62% afterwards; risk-free interest rates ranging
from 4.90% to 6.69%; and expected life of five years. The weighted average fair
value of options granted in 1998, 1999 and 2000 was $1.20, $0.74 and $9.99,
respectively.
For purposes of SFAS No. 123 pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. Had
compensation expense for the Company's stock option plan been determined on the
fair value at the grant dates for awards under the Plan consistent with the
method of SFAS No. 123, the Company's net loss would have been increased to the
following approximate pro forma amounts:
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SFAS No. 123 pro forma net loss applicable to common
stockholders.............................................. $(10,704) $(15,963) $(24,413)
SFAS No. 123 pro forma basic and diluted net loss per share
applicable to common stockholders......................... $ (0.46) $ (0.60) $ (0.80)
The pro forma impact of options on the net losses for the year ended
December 31, 1998, 1999, and 2000 is not representative of the effects on net
income (loss) for future years, as future years will include the effects of
options vesting as well as the impact of multiple years of stock option grants.
9. 401 (K) PLAN
The Company's employee savings and retirement plan qualifies under
Section 401(k) of the Internal Revenue Code. Employees may elect to reduce their
current compensation by up to the statutorily prescribed annual limit and have
the amount of such reduction contributed to the 401(k) Plan. The Company
currently does not make matching or additional contributions to the 401(k) Plan
on its employees' behalf.
57
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. The Company limits the amount of deposits to any one
financial institution and financial instrument. The Company invests its excess
cash principally in certificates of deposit and money market accounts with four
financial institutions in the U.S. At times, the balances may exceed federally
insured limits.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
also performs an analysis of the expected collectibility of accounts receivable
and makes an allowance for doubtful accounts receivable when necessary. For the
year ended December 31, 1999, two customers accounted for 44.3% and 10.9% of net
revenues. At December 31, 1999, two customers accounted for 44% and 22% of total
accounts receivable. For the year ended December 31, 2000, two customers
accounted for 11.6% and 11.1% of net revenues. At December 31, 2000, two
customers accounted for 32% and 21% of total accounts receivable.
11. GEOGRAPHIC INFORMATION
The Company operates in a single industry segment. The Company's accounts
receivable are derived from revenues generated from the following geographic
regions:
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1999 2000
---------- ---------- ----------
(IN THOUSANDS)
Korea................................................ $ -- $ 373 $32,189
United States........................................ -- 1,432 9,534
Taiwan............................................... -- 1,109 5,387
Europe............................................... -- 7 3,921
Rest of Asia......................................... -- 132 3,031
---- ------ -------
$ -- $3,053 $54,062
==== ====== =======
Long-term assets of geographic areas are those assets used in the Company's
operations in each area.
1999 2000
-------- --------
(IN THOUSANDS)
Long-term Assets:
USA....................................................... $2,122 $8,545
Taiwan.................................................... 18 264
------ ------
$2,140 $8,809
====== ======
12. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and equipment in California, Texas and
Taiwan under noncancelable operating and capital leases which will expire at
various dates through February 2011. As
58
INTEGRATED TELECOM EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
of December 31, 2000, the following were the future minimum obligations for the
years ended December 31 (in thousands).
OPERATING CAPITAL
LEASES LEASES
--------- --------
2001........................................................ $ 3,173 1,488
2002........................................................ 3,402 1,524
2003........................................................ 3,564 354
2004........................................................ 3,734
2005........................................................ 3,910
2006 and thereafter......................................... 18,319
------- ------
Total minimum lease payments................................ $36,102 3,366
=======
Less: amounts representing interest......................... (334)
------
Present value of minimum obligations........................ 3,032
Less: Current portion....................................... (1,290)
------
$1,742
======
The semiconductor industry has experienced a substantial amount of
litigation regarding patent and other intellectual property rights. From time to
time, we have received and may receive in the future, communications alleging
that our products or our processes may infringe on product or process technology
rights held by others. We may in the future be involved in litigation with
respect to alleged infringement by us of another party's patents. In the future,
we may be involved with litigation to:
- Enforce out patent or other intellectual property rights.
- Protect our trade secrets and know-how.
- Defend against claims of infringement or invalidity.
- Such litigation could result in the future in substantial costs and
diversion of management resources. Such litigation could also result in
payment of substantial damages and/or royalties or prohibitions against
utilization of essential technologies, and could have material adverse
effect on our business, financial condition and results of operations.
13. SUBSEQUENT EVENT
On March 28, 2001, the board of directors adopted a stockholder rights plan,
pursuant to which the Company declared a dividend of one right for each share of
common stock held by stockholders of record as of May 11, 2001. Unless redeemed
by the Company prior to the occurrence of certain events, the rights will
entitle the holders to purchase for $22.50 a fraction of a share of our
preferred stock with economic terms similar to that of one share of our common
stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
59
PART III
Certain information required by Part III is omitted from this Annual Report
on Form 10-K because the Registrant will file a definitive proxy statement
within 120 days after the end of the fiscal year pursuant to Regulation 14A (the
"Proxy Statement") for its Annual Meeting of Stockholders currently scheduled
for May 18, 2001, and the information included in the Proxy Statement is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to directors is
incorporated by reference to the Proxy Statement. The information required by
this Item with respect to executive officers is set forth herein under the
heading "Executive Officers of the Registrant". Information regarding compliance
with Section 16 of the Securities Exchange Act of 1934, as amended, is
incorporated by reference to the information under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item with respect to the compensation of
our executive officers is incorporated by reference to the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Proxy Statement.
60
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. The following documents are filed as part of this Annual Report on
Form 10-K.
1. Financial Statements
The financial statements and financial statement information required by this
Item are included in Item 8 of this report. The Report of the Independent Public
Accountants appears on page 40 of this report.
2. Financial Statement Schedules
See Index to financial statements on page 39 of this report.
3. Exhibits
The following is a list of exhibits. Where so indicated, exhibits that were
previously filed are incorporated by reference.
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
3.1 Fourth Amended and Restated Certificate of Incorporation of
the Registrant (incorporated herein by reference to Exhibit
(3.2) to the Registrant's Registration Statement on Form
S-1, as amended (SEC File No. 333-39128), filed on June 13,
2000).
3.2 Restated Bylaws of the Registrant (incorporated herein by
reference to Exhibit (4.3) to the Registrant's Registration
Statement on Form S-1, as amended (SEC File No. 333-39128),
filed on June 13, 2000).
4.1 Specimen certificate of common stock (incorporated herein by
reference to Exhibit (4.1) to the Registrant's Registration
Statement on Form S-1, as amended (SEC File No. 333-39128),
filed on June 13, 2000).
4.2 Warrant to Purchase Series A Convertible Preferred Stock
dated October 29, 1998, between the Registrant and Intel
Corporation (incorporated herein by reference to Exhibit
(4.4) to the Registrant's Registration Statement on Form
S-1, as amended (SEC File No. 333-39128), filed on June 13,
2000).
4.3 Warrant to Purchase Series B Convertible Preferred Stock
dated October 6, 1999, between the Registrant and Taiwan
Special Opportunities Fund II (incorporated herein by
reference to Exhibit (4.5) to the Registrant's Registration
Statement on Form S-1, as amended (SEC File No. 333-39128),
filed on June 13, 2000).
4.4 Warrant to Purchase Series B Convertible Preferred Stock
dated October 6, 1999, between the Registrant and Hanmore
Investment Corporation (incorporated herein by reference to
Exhibit (4.6) to the Registrant's Registration Statement on
Form S-1, as amended (SEC File No. 333-39128), filed on June
13, 2000).
4.5 First Amended and Restated Stockholders' Agreement dated as
of October 6, 1999, between the Registrant and certain
stockholders of the Registrant (incorporated herein by
reference to Exhibit (4.7) to the Registrant's Registration
Statement on Form S-1, as amended (SEC File No. 333-39128),
filed on June 13, 2000).
10.1 Form of Indemnification Agreement between the Registrant and
each of its directors and officers (incorporated herein by
reference to Exhibit (10.1) to the Registrant's Registration
Statement on Form S-1, as amended (SEC File No. 333-39128),
filed on June 13, 2000).
10.2 Employment, Confidentiality and Invention Assignment
Agreement dated June 28, 1999, between the Registrant and
Richard H. Forte (incorporated herein by reference to
Exhibit (10.2) to the Registrant's Registration Statement on
Form S-1, as amended (SEC File No. 333-39128), filed on June
13, 2000).
61
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
10.3 Employment, Confidentiality and Invention Assignment
Agreement dated March 21, 1997, between the Registrant and
Young Way Liu (incorporated herein by reference to Exhibit
(10.3) to the Registrant's Registration Statement on Form
S-1, as amended (SEC File No. 333-39128), filed on June 13,
2000).
10.4 Employment, Confidentiality and Invention Assignment
Agreement dated May 11, 1998, between the Registrant and
Timothy A. Rogers (incorporated herein by reference to
Exhibit (10.4) to the Registrant's Registration Statement on
Form S-1, as amended (SEC File No. 333-39128), filed on June
13, 2000).
10.5 Timothy A. Rogers Offer Letter dated April 30, 1998
(incorporated herein by reference to Exhibit (10.5) to the
Registrant's Registration Statement on Form S-1, as amended
(SEC File No. 333-39128), filed on June 13, 2000).
10.6 Employment, Confidentiality and Invention Assignment
Agreement between the Registrant and Jow Peng (incorporated
herein by reference to Exhibit (10.6) to the Registrant's
Registration Statement on Form S-1, as amended (SEC File No.
333-39128), filed on June 13, 2000).
10.7 Jow Peng Offer Letter dated August 18, 1997 (incorporated
herein by reference to Exhibit (10.7) to the Registrant's
Registration Statement on Form S-1, as amended (SEC File No.
333-39128), filed on June 13, 2000).
10.8 Employment, Confidentiality and Invention Assignment
Agreement dated June 24, 1998, between the Registrant and
Max (Ming Kang) Liu (incorporated herein by reference to
Exhibit (10.8) to the Registrant's Registration Statement on
Form S-1, as amended (SEC File No. 333-39128), filed on June
13, 2000).
10.9 Max (Ming Kang) Liu Offer Letter dated April 10, 1997
(incorporated herein by reference to Exhibit (10.9) to the
Registrant's Registration Statement on Form S-1, as amended
(SEC File No. 333-39128), filed on June 13, 2000).
10.10 Robert A. Gardner Offer Letter dated September 24, 1999
(incorporated herein by reference to Exhibit (10.10) to the
Registrant's Registration Statement on Form S-1, as amended
(SEC File No. 333-39128), filed on June 13, 2000).
10.10.1 Employment, Confidentiality and Invention Assignment
Agreement dated September 27, 1999, between the Registrant
and Robert M. Gardner (incorporated herein by reference to
Exhibit (10.10.1) to the Registrant's Registration Statement
on Form S-1, as amended (SEC File No. 333-39128), filed on
June 13, 2000).
10.11 Brian Gillings Offer Letter dated July 9, 1999 (incorporated
herein by reference to Exhibit (10.11) to the Registrant's
Registration Statement on Form S-1, as amended (SEC File No.
333-39128), filed on June 13, 2000).
10.11.1 Employment, Confidentiality and Invention Assignment
Agreement dated July 19, 1999, between the Registrant and
Brian Gillings (incorporated herein by reference to Exhibit
(10.11.1) to the Registrant's Registration Statement on Form
S-1, as amended (SEC File No. 333-39128), filed on June 13,
2000).
10.12 Ralph A. Cognac Offer Letter dated October 6, 1999
(incorporated herein by reference to Exhibit (10.12) to the
Registrant's Registration Statement on Form S-1, as amended
(SEC File No. 333-39128), filed on June 13, 2000).
10.12.1 Employment, Confidentiality and Invention Assignment
Agreement dated October 12, 1999, between the Registrant and
Ralph Cognac (incorporated herein by reference to Exhibit
(10.12.1) to the Registrant's Registration Statement on Form
S-1, as amended (SEC File No. 333-39128), filed on June 13,
2000).
10.13 1996 Stock Plan (incorporated herein by reference to Exhibit
(10.13) to the Registrant's Registration Statement on Form
S-1, as amended (SEC File No. 333-39128), filed on June 13,
2000).
62
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
10.14 Amendment to Option Agreements for Certain Individuals under
the 1996 Stock Plan (incorporated herein by reference to
Exhibit (10.14) to the Registrant's Registration Statement
on Form S-1, as amended (SEC File No. 333-39128), filed on
June 13, 2000).
10.15 2000 Restricted Stock Plan (incorporated herein by reference
to Exhibit (10.15) to the Registrant's Registration
Statement on Form S-1, as amended (SEC File No. 333-39128),
filed on June 13, 2000).
10.16 2000 Stock Plan (incorporated herein by reference to Exhibit
(10.16) to the Registrant's Registration Statement on Form
S-1, as amended (SEC File No. 333-39128), filed on June 13,
2000).
10.17 2000 Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit (10.17) to the Registrant's
Registration Statement on Form S-1, as amended (SEC File No.
333-39128), filed on June 13, 2000).
10.18 Sublease Agreement dated September 21, 1997, between the
Registrant and McAffee Associates Inc. (incorporated herein
by reference to Exhibit (10.18) to the Registrant's
Registration Statement on Form S-1, as amended (SEC File No.
333-39128), filed on June 13, 2000).
10.19 Technology Cooperation Agreement dated March 8, 2000,
between the Registrant and United Microelectronics
Corporation (incorporated herein by reference to Exhibit
(10.19) to the Registrant's Registration Statement on Form
S-1, as amended (SEC File No. 333-39128), filed on June 13,
2000).
10.20 Capacity and Loading Agreement dated February 14, 2000,
between the Registrant and United Microelectronics
Corporation (incorporated herein by reference to Exhibit
(10.20) to the Registrant's Registration Statement on Form
S-1, as amended (SEC File No. 333-39128), filed on June 13,
2000).
10.21+ License Agreement dated April 20, 1998, between the
Registrant and Alcatel Bell N.V. (incorporated herein by
reference to Exhibit (10.21) to the Registrant's
Registration Statement on Form S-1, as amended (SEC File No.
333-39128), filed on June 13, 2000).
10.22 Spinoff Agreement dated June 2000 between the Registrant and
United Microelectronics Corporation (incorporated herein by
reference to Exhibit (10.22) to the Registrant's
Registration Statement on Form S-1, as amended (SEC File No.
333-39128), filed on June 13, 2000).
10.23+ Portfolio Cross-License Agreement between Texas Instruments
Incorporated and United Microelectronics Corporation dated
August 6, 1999 (incorporated herein by reference to Exhibit
(10.23) to the Registrant's Registration Statement on Form
S-1, as amended (SEC File No. 333-39128), filed on June 13,
2000).
10.24 Ying Shiau Offer Letter dated June 6, 2000 (incorporated
herein by reference to Exhibit (10.24) to the Registrant's
Registration Statement on Form S-1, as amended (SEC File No.
333-39128), filed on June 13, 2000).
10.25 Employment, Confidentiality and Invention Assignment
Agreement dated June 8, 2000, between the Registrant and
Ying Shiau (incorporated herein by reference to Exhibit
(10.25) to the Registrant's Registration Statement on Form
S-1, as amended (SEC File No. 333-39128), filed on June 13,
2000).
10.26 Lease Agreement dated September 21, 2000, between the
Registrant and Granum Holdings (incorporated herein by
reference to Exhibit (10.1) to the Registrant's Quarterly
Report on Form 10-Q (SEC File No. 000-31259), filed on
November 14, 2000).
10.27 Steve C.H. Lin Offer Letter dated October 23, 2000.
10.28 Employment, Confidentiality and Invention Assignment
Agreement dated June 8, 2000 between the Registrant and
Steve C.H. Lin.
63
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
10.29 Amendment No. 2 to Consent to Sublease dated December 15,
2000, by and among the Registrant, Network Associates Inc.,
and John Arrillaga Survivor's Trust and Richard T. Peery
Separate Property Trust.
10.30 Lease Agreement dated November 27, 2000, between the
Registrant and John Arrillaga Survivor's Trust and
Richard T. Peery Separate Property Trust.
10.31 Factory Building Leasing Contract between the Registrant and
Lian Ce Science & Technology Joint Stock Company, Ltd.
(translation).
10.32++ Technology License Agreement dated May 30, 2000, between the
Registrant and MIPS Technologies, Inc., as amended.
10.33++ Design License Agreement dated September 11, 2000, between
the Registrant and ARM Limited.
10.34++ ARM MicroPack License Agreement dated October 30, 2000,
between the Registrant and ARM Limited.
10.35++ ASIC Development Agreement dated December 7, 2000, by and
among the Registrant, Fujitsu Microelectronics Europe GmbH,
and Fujitsu Microelectronics Inc.
10.36++ Source Code License Agreement dated October 17, 2000,
between the Registrant and Wind River Systems, Inc.
10.37++ Value Added Reseller Agreement dated October 31, 2000,
between the Registrant and Wind River Systems, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
+ Confidential treatment has been granted with respect to portions of this
exhibit.
++ A request for confidential treatment for portions of this agreement has been
submitted to the Commission. Omitted portions have been filed separately
with the Commission.
b. Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal year
covered by this report.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTEGRATED TELECOM EXPRESS, INC.
By: /s/ DANIEL CHEN
------------------------------------------------
Daniel Chen
INTERIM CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
DATE: MARCH 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DANIEL CHEN Interim Chief Executive
------------------------------------ Officer and Chairman of the March 30, 2001
Daniel Chen Board of Directors
Senior Vice President and Chief
/s/ TIMOTHY A. ROGERS Financial Officer
------------------------------------ (Principal Financial and March 30, 2001
Timothy A. Rogers Accounting Officer)
/s/ YOUNG WAY LIU
------------------------------------ Vice Chairman of the Board of March 31, 2001
Young Way Liu Directors
/s/ PETER J. COURTURE
------------------------------------ Secretary and Director March 30, 2001
Peter J. Courture
------------------------------------ Director March , 2001
Terry Gou
/s/ DAVID LAM
------------------------------------ Director March 30, 2001
David Lam
/s/ JOHN CIOFFI
------------------------------------ Director March 30, 2001
John Cioffi
/s/ MICHAEL CALLAHAN
------------------------------------ Director March 30, 2001
Michael Callahan
/s/ SENA REDDY
------------------------------------ Director March 30, 2001
Sena Reddy
65