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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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 Number 000-30649
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CENTILLIUM COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 3661 94-3263530
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification Number)
of incorporation or Classification Code
organization) Number)
47211 Lakeview Boulevard
Fremont, California 94538
(Address of principal executive offices) (Zip Code)
(510) 771-3700
Registrant's telephone number, including area code:
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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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 a 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 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. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 9, 2001, was approximately $485,427,128 based upon the
closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market. Shares of Common Stock held by each executive officer,
director and holder of 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.
On March 9, 2001, approximately 33,915,054 shares of the Registrant's Common
Stock, $0.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant's
definitive proxy statement (the "Proxy Statement") for the Annual Meeting of
Shareholders to be held on June 12, 2001.
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CENTILLIUM COMMUNICATIONS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
No.
----
Cautionary Statement.................................................... 3
PART I
Item 1. Business...................................................... 4
Item 2. Properties.................................................... 16
Item 3. Legal Proceedings............................................. 16
Item 4. Submission of Matters to a Vote of Security Holders........... 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 18
Item 6. Selected Consolidated Financial Data.......................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Risk Factors................... 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 35
Item 8. Financial Statements and Supplementary Data................... 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 56
PART III
Item 10. Directors and Executive Officers of the Registrant............ 57
Item 11. Executive Compensation........................................ 57
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 57
Item 13. Certain Relationships and Related Transactions................ 57
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.......................................................... 58
2
CAUTIONARY STATEMENT
This report contains forward-looking statements which include, but are not
limited to, statements concerning projected revenues, expenses, gross profit
and income, the need for additional capital, market acceptance of our products,
our ability to consummate acquisitions and integrate their operations
successfully, our ability to achieve further product integration, the status of
evolving technologies and their growth potential, and our production capacity.
These forward-looking statements are based on our current expectations,
estimates and projections about our industry, management's beliefs, and certain
assumptions made by us. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," "may," "will" and variations of
these words or similar expressions are intended to identify forward-looking
statements. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances, including any
underlying assumptions, are forward-looking statements. These statements are
not guarantees of future performance and are subject to certain risks,
uncertainties and assumptions that are difficult to predict. Therefore, our
actual results could differ materially and adversely from those expressed in
any forward-looking statements as a result of various factors. The section
entitled "Risk Factors" set forth in Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," of this report,
and similar discussions in our other Securities and Exchange Commission ("SEC")
filings, discuss some of the important risk factors that may affect our
business, results of operations and financial condition. You should carefully
consider those risks, in addition to the other information in this report and
in our other filings with the SEC, before deciding to invest in our company or
to maintain or increase your investment. We undertake no obligation to revise
or update publicly any forward-looking statements for any reason.
3
PART I
ITEM 1. Business
Introduction
Centillium delivers products that enable broadband communications to the
home and business. We provide broadband equipment vendors with system-level
products for the DSL market and are leveraging our core technology and
expertise to develop products for complementary markets which share common
technologies and customers. In the third quarter of 2000, we began shipping
samples of products for the Voice-over-Packet market and we plan to release
products before the end of 2001 that target the premise networking market. We
believe that our core technology and expertise have enabled us to establish a
viable long-term product roadmap within these three complementary markets.
Industry Overview
Growing Demand for High-Speed Network Access Creating Last Mile Bottleneck
The volume of traffic transmitted over communications networks has grown
dramatically in recent years. Consumers are seeking low-cost, high-speed access
to Internet content and other services that require transmission of large
amounts of data such as highly graphical Web sites, audio, video and high-speed
data. Businesses have even greater requirements for high-speed access in order
to implement electronic commerce strategies or Web-based business models and to
provide telecommuting employees with the same capabilities they would
experience at the office.
As more consumers and businesses have begun to rely on the Internet and
communications networks, the demand for access to these networks has
accelerated. As a result, the number of devices and access lines leading into
these networks has undergone dramatic growth. In addition, the demand for
access is increasing as more and more small businesses, self-employed
individuals, and corporate telecommuters regularly access the Internet and
other communications networks. Many users are demanding the same access speeds
from their home offices that they experience at corporate locations.
To meet the demand for high-speed, broadband data transmission, network
access providers continue to upgrade the main transmission channels, or
backbone, of their networks with faster equipment. While this network backbone
is now capable of delivering data at very high speeds, an access bottleneck
continues to exist between the telephone companies' central offices and the
end-users' homes and offices. These copper line connections between the central
office and the end-user are commonly known as the last mile. The last mile
infrastructure was originally designed for low-speed analog voice traffic
rather than high-speed digital data transmission. As a result, access to the
Internet and private communications networks over the copper wire
infrastructure of the last mile has typically been limited to data transmission
rates of up to 56 kilobits per second using standard dial-up analog modems. At
this rate, several minutes may be required to access a media-rich Web site, and
several hours may be required to transfer or download large files.
New Competition Driving Digital Subscriber Line Technologies as a Bottleneck
Solution
The local phone companies have continued to offer higher speed access
services based on older technologies. However, the historical pricing structure
has limited these services to larger businesses and has limited incentives for
phone companies to deploy alternative technologies. The competitive environment
started to change with the passage of the Federal Telecommunications Act of
1996 and was accelerated with the merger of AT&T and TCI. The Federal
Telecommunications Act intensified the competitive environment by requiring
local phone companies to lease portions of their networks, including the last
mile, to other telecommunications service providers. These changes in
competitive structures coincided with the maturation of DSL technology enabling
high bandwidth data networking over the existing last mile of copper
infrastructure. As a result, a number of companies, including Lucent
Technologies, Sumitomo Electric Industries, Copper Mountain Networks, NEC, and
Nortel Networks, have started to build network equipment to support the
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deployment of high-speed access services using DSL technologies to businesses
and residences over the copper infrastructure owned by the local phone
companies. In addition, AT&T has started to offer broadband and interactive
services, including telephone services, over their cable systems. In response
to these competitive pressures, and in an effort to increase revenues and
maintain their existing customer base, local phone companies are now also
committing their resources to deploy DSL services.
DSL enables data transmission speeds of 32 kilobits per second to 52
megabits per second using the existing local loop copper wire infrastructure.
DSL delivers "always on" availability, eliminating the tedious dial-up process
associated with traditional analog modem technologies. DSL equipment is
deployed at each end of the copper wire and the transmission speed depends on
the length and condition of the existing wire as well as the capabilities of
the DSL equipment.
High-Speed Access Driving Demand for New Networking Technologies
As network access providers begin to deploy high-speed data access across
the last mile to businesses and residences, opportunities for additional
networking technologies have emerged. Two of these technologies are Voice-over-
Packet networks, which allows integrated transmission of voice and data, and
premise networking, which enables users to share high bandwidth resources
throughout the home.
Voice-over-Packet Networks
Voice-over-Packet networks technology enables voice signals to be
transmitted over networks originally designed for data transmission. Voice-
over-Packet networks technology compresses voice signals into discrete packets
of data which can be more efficiently transmitted. As a result, multiple voice
channels, as well as data, can be transmitted over a single copper line
previously capable of transmitting only one voice channel.
This technology represents a substantial opportunity for small to medium
sized businesses to significantly reduce their costs for telephone services and
for residences to easily add additional phone numbers. Voice-over- Packet
networks technology allows network access providers to offer both data and
currently more lucrative voice services to these businesses and residences.
According to Dataquest, while North American data services revenues from annual
recurring retail subscriptions are projected to grow at a rate of 26% from 1999
to 2003 and were estimated to be $40 billion in 1999, revenues from
telecommunications services in North America in 1999 were estimated to be $208
billion.
Premise Networking
As high-speed access is more fully deployed, as the price of personal
computers continues to decline and as the availability of network enabled
devices and applications increases, opportunities are emerging for vendors to
offer cost-effective premise networking solutions. Premise networking allows
multiple users to share high bandwidth resources throughout the home and small
business. This provides consumers with cost savings from sharing hardware,
software and high-speed Internet access, allowing a broader range of home
computing applications, and increased convenience. According to Cahners In-Stat
Group, the reasons consumers cited for desiring to own a premise network were:
. Internet access sharing;
. printer sharing;
. file sharing;
. connecting laptop to work;
. premise control;
. multiplayer gaming;
. distributed video; and
. remote monitoring or security.
5
Emerging premise networking technologies include both the Home Phoneline
Networking Association or HPNA standard, which uses the existing telephone
wiring of a premise, and other standards based on wireless technology. Both of
these solutions eliminate the need to add additional network wiring throughout
the home.
The Challenges for Equipment Manufacturers and Network Access Providers
The commitment of equipment manufacturers and network access providers to
solve the access bottleneck and develop the broadband access market has created
a number of opportunities and challenges. As the bandwidth bottleneck eases,
allowing greater data throughput at a lower cost, there is an emerging demand
for new cost- and time-saving technologies, such as Voice-over-Packet networks
and premise networking. However, the challenges of solving the bottleneck and
providing these emerging applications remain significant. These challenges
include the following:
Constantly evolving technology and networking standards. Communications
equipment manufacturers face significant challenges to ensure that their
products interoperate with counterpart products of other manufacturers based on
the same technology. Manufacturers often work together to create
interoperability standards for products based on new technologies. However,
changes in the market landscape or improvements in a given technology can cause
changes to these standards, often requiring existing equipment to be upgraded
or replaced.
Size constraints. The size of the components and systems necessary to enable
DSL is critical for several reasons. DSL equipment must physically fit within
the local telephone company's existing infrastructrure. For example,
residential phone lines often terminate at a digital loop carrier, which is a
fixed size box, holding equipment that aggregates a neighborhood's phone lines
onto a higher speed channel for transmission to the central office. When a
digital loop carrier is upgraded for DSL access, the physical size of the box
limits the amount of DSL capacity which can be installed without replacing the
installed digital loop equipment. In addition, high-speed modems for laptops
and other mobile high-speed access equipment must meet ever smaller size
constraints.
Power constraints. Low power consumption is critical for the addition of new
equipment within existing communications systems. Service providers' equipment
is often limited by a fixed level of available power, and any additions of
equipment must operate efficiently within those limitations. Also, consumers
desire high-speed modems which can be powered directly by their personal
computer or laptop, without the need for external power supplies. This requires
modems to function using low levels of power.
Shorter product life-cycles. The adoption of new communications technologies
is driving the need for more rapid introduction of new communications products.
In this rapidly evolving environment, communications equipment manufacturers
and their suppliers must have the flexibility to respond quickly in order to
maintain market leadership.
To meet these challenges, manufacturers of broadband voice and data
communication equipment require vendors who provide "system-level" products.
System-level products integrate components into a single product that are
typically sold separately, such as digital integrated circuits, combined
digital and analog integrated circuits, and communications software. System-
level products allow equipment manufacturers to reduce the time it takes for
their products to reach the market and to focus their resources on adding
features which differentiate their products from those of their competitors.
Solution
We provide system-level products that enable broadband communications to the
home and business. Our products integrate our programmable digital signal
processor, our mixed-signal semiconductor, our digital semiconductor and our
related software. We currently serve the DSL and Voice-over-Packet markets and
are leveraging our programmable digital signal processor, algorithms and
systems expertise to develop products for complementary markets. We plan to
release products that target the premise networking markets before the end
6
of this year. We believe that this expertise has enabled us to establish a
viable long-term product roadmap within these three complementary markets. Key
features of our solution include:
Flexibility due to programmable digital signal processor. Our products are
designed based on our software-upgradable, proprietary digital signal
processor, which performs the calculations necessary to encode or decode
digital data for transmission over a network. The primary set of processing
instructions, or algorithms, contained in our digital signal processor are
implemented with software, as opposed to hardware that cannot be reprogrammed.
As a result, our solution allows remote upgrades of digital signal processor
algorithms, eliminating the need for costly hardware replacements and ensuring
adaptability to evolving industry standards and flexibility to meet evolving
demand for new features. The in-house expertise we have built while developing
our programmable digital signal processor enables us to quickly offer
customization for each customer's unique requirements throughout the life cycle
of their products.
High level of semiconductor integration reduces size. Our ability to
efficiently combine a number of functions into a single integrated circuit
allows us to eliminate the need for peripheral components such as additional
microprocessors and external memory, which substantially reduces the size of
our customers' products. For example, one of our DSL products supports eight
phone lines, or ports, with just two integrated circuits, fewer than any
currently competing products. This reduced size allows our customers' DSL
infrastructure products to support a greater number of subscriber lines for a
given amount of space at the telephone company's central office and digital
loop carrier equipment. Additionally, we believe our business card-sized DSL
modem is currently the smallest and highest performance product of its type
commercially available. Our Voice-over-Packet products integrate voice
processing and network processing into a highly-integrated simple chip
solution.
Low power consumption. We believe our DSL solution offers the lowest per
port power consumption in the industry. For our DSL modem products, low power
consumption means that the modem can be powered by a desktop or laptop computer
without an external power supply. For our DSL infrastructure products, lower
power consumption allows network access providers to support a greater number
of DSL lines within equipment supported by a fixed amount of available power.
Our products also feature built-in sleep mode and intelligent power management
to ensure operational efficiency.
System-level products deliver fast time-to-market. We believe our products
offer the most complete system-level solutions available to our target
customers. Instead of obtaining integrated circuits, software and algorithms
from different vendors and integrating the components themselves, our customers
can use our solutions to deliver their products with little additional time or
use of engineering resources. This complete solution provides manufacturers
with the competitive edge they need to ensure fast time-to-market while
retaining the flexibility to differentiate their products.
Strategy
Our objective is to be the leading provider of system-level products for
equipment manufacturers serving the broadband communications markets. Key
elements of our strategy include the following:
Target complementary high-growth broadband communications markets. Our
strategy is to focus on complementary, high-growth broadband communications
markets and to develop system-level solutions for applications in those
markets. Our initial products are designed for the DSL infrastructure
equipment, DSL end-user equipment and Voice-over-Packet networks markets. We
are also leveraging our core technologies to design and develop products for
the premise networking markets. By targeting these complementary markets, which
share common technologies and customers, we are able to more effectively
utilize our existing engineering, sales and marketing resources.
Strengthen and expand relationships with strategic customers. We have
established customer relationships with key equipment manufacturers, including
Lucent Technologies, Sumitomo Electric Industries, Copper Mountain Networks,
NEC and Nortel Networks. We have shipped DSL products to each of these
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manufacturers, and have recognized approximately $44.4 million in gross
revenues from sales to this group during the year ended December 31, 2000.
During this period, sales to Lucent Technologies, Sumitomo Electric Industries,
Copper Mountain Networks, NEC and Nortel Networks accounted for 23.9%, 20.0%,
12.2%, 10.2%, and 9.7% of our net revenues, respectively. We do not have long-
term agreements with these customers relating to the sale of our products.
Rather, they purchase our products on an order-by-order basis. These companies
are market and technology leaders within the broadband communications market
and selling products to these companies provides references for our products
which help to secure future sales. Collaborating with these industry leaders
also helps us to enhance our technological capabilities. We believe these
strategic relationships are essential to our continued growth and the further
development and acceptance of our technologies.
Extend technology leadership. We have invested substantial resources to
establish our technology leadership. We believe we were the first company to
deliver a DSL infrastructure product which manages multiple ports and the first
to deliver a set of the two primary semiconductors for a DSL modem which
requires less than one watt of power. An important element of our technological
leadership is our programmable digital signal processor and associated
processing instructions, or algorithms, which are optimized for high bandwidth
communications applications. This core technology can be extended through the
manipulation of algorithms and software to develop multiple communications
products for complementary markets.
Leverage system-level expertise. Many of our system-level engineers have
previous experience as employees of communication equipment manufacturers and
are therefore very familiar with the requirements of, and challenges faced by,
our customers. We combine this system-level engineering expertise with our
expertise in integrated circuit, digital signal processor and software design
to develop products that allow our customers to optimize time-to-market,
performance and systems cost.
Pursue strategic acquisitions. Our strategy is to enhance our growth
capability by pursuing selective acquisitions. This strategy allows us to more
rapidly obtain complementary technologies and engineering talent and to access
key markets and customer relationships. We believe completing selective
acquisitions will be important to remain competitive as a complete solutions
provider to manufacturers of broadband communications equipment.
Products
We currently target the DSL and Voice-Over-Packet network markets with our
DSL infrastructure equipment and end-user equipment products and we are
leveraging our technological expertise by developing products for markets that
are complementary to the DSL market. We have plans to release products before
the end of this year that target premise networking markets.
DSL Products
Each of our DSL products consists of two semiconductor chips--a mixed-signal
chip and a digital chip--and related software. The mixed-signal chip translates
signals between analog and digital formats. Our single mixed-signal chip
replaces the multiple components used in competing solutions. Our digital chip
incorporates our proprietary software programmable digital signal processor,
which provides flexibility for enhancements and upgrades.
The following features are common to each of our DSL products:
. ADSL. Our DSL products are based on a type of DSL technology known as
asymmetrical DSL or ADSL. ADSL technology provides substantially faster
transmission of data from the network to the end-user than from the user
to the network. This tradeoff works to the consumer's advantage in that
most users typically download more data from the network than they send
to the network.
. Full rate ADSL/G.lite. Each of our DSL products is designed for use with
either the full rate ADSL standard or the G.lite standard. G.lite is a
version of ADSL which provides slower transmission speeds than full rate
ADSL but is easier to install at the consumer's premise.
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. Regional transmission standards. Our standard DSL products conform to
transmission standards used throughout most of the world. Our "Universal"
DSL products also conform to the DSL transmission standard most commonly
used in Japan.
. G.SHDSL. Our G.SHDSL product is designed to economically support legacy
and future ITU symmetric standards. G.SHDSL targets the small business
market allowing multiple telephone and data channels, videoconferencing,
remote LAN Access, and leased lines with customer-specific data rates.
Spectrally friendly with other DSLs, it supports symmetric data rates
varying from 192 kbps to 2.360 Mbps across greater distances than other
technologies.
DSL Infrastructure Products
We offer two families of DSL infrastructure products: CopperLite CO and
CopperFlite CO. Our CopperLite products are designed for use with the G.lite
standard and our CopperFlite products are designed for use with both the full
rate ADSL and G.lite standards. We began shipping our CopperLite CO products in
the third quarter of 1999, CopperFlite CO products in the first quarter of 2000
and Universal CopperFlite CO products in the third quarter of 2000.
Our DSL infrastructure products are designed for use in the following types
of DSL equipment:
. DSLAM. A DSL access multiplexer, or DSLAM, aggregates the data traffic
from a substantial number of home telephone lines for transmission
through a data network.
. Central office switch. A central office switch is a device that enables
telephone subscribers to dial and make a connection with any other
subscriber in the telephone network.
. Remote terminal. A remote terminal is a generic name for
telecommunications equipment that is located outside the telephone
company's central office facility.
Introduction
Product Key Features Date
- ------- ------------ ----------------
CopperLite CO........... G.lite 3rd quarter 1999
Supports 8 ports
Universal CopperLite
CO..................... G.lite 3rd quarter 1999
Supports 4 ports
Compatible with Japanese regional transmission standard
CopperFlite CO.......... Full rate ADSL and G.lite 1st quarter 2000
Supports 4 ports
Universal CopperFlite CO
....................... Full rate ADSL and G.lite 3rd quarter 2000
Supports 4 ports
Compatible with Japanese regional transmission standard
CopperFlite Octal CO.... Full rate ADSL and G.Lite 1st half 2001
Supports 8 ports
Universal CopperFlite
Octal CO............... Full rate ADSL and G.Lite 1st half 2001
Supports 8 ports
Compatible with Japanese regional transmission standard
CopperSym CO............ Supports legacy symmetric data rates 2nd half 2002
9
DSL End-User Equipment Products
We offer four families of DSL end-user equipment products: CopperLite CPE,
CopperFlite CPE, Optimizer and Flite Optimizer.
Our CopperLite CPE products are designed for use with the G.lite standard
and our CopperFlite CPE products are designed for use with both the full rate
ADSL and G.lite standards. We began shipping our CopperLite CPE products in
1999, CopperFlite CPE product in the first quarter of 2000 and Universal
CopperFlite CPE products in the third quarter of 2000.
Our CopperLite CPE and CopperFlite CPE products are deployed for use as a
subsystem for devices which distribute network access for multiple appliances.
Examples of these devices include the following:
. Integrated access device / residential gateway. An integrated access
device and a residential gateway combine multiple voice and data channels
for transmission from a home or small business to the telephone company's
central office.
. Set-top box. A set-top box processes transmissions from the traditional
cable television infrastructure and delivers digital signals which can
include voice, video or Internet access.
. Bridge / router. A bridge or router is a device that resides between
network segments and forwards data to its appropriate destination.
Introduction
Product Key Features Date
- ------- ------------ ----------------
CopperLite CPE--UTOPIA.. G.lite 3rd quarter 1999
Universal CopperLite
CPE--UTOPIA ........... G.lite 3rd quarter 1999
Compatible with Japanese regional transmission standard
CopperFlite CPE-- Full rate ADSL and G.lite
UTOPIA................. 3rd quarter 2000
Universal CopperFlite
CPE--UTOPIA ........... Full rate ADSL and G.lite 3rd quarter 2000
Compatible with Japanese regional transmission standard
Line Driver MDU (Multi-
dwelling unit)......... 5V line driver 3rd quarter 2000
Consumes very low power
Short loop applications
CopperSym CPE .......... Support legacy symmetric data rates 2nd half 2002
Our Optimizer products are designed for use with the G.lite standard and our
Flite Optimizer products are designed for use with both the full rate ADSL and
G.lite standards. Both of these products are deployed for use as either an
internal or external modem for a laptop or personal computer. These products
can also be deployed within a set-top box, which is a device that processes
transmissions from the traditional cable television infrastructure and delivers
digital signals which can include voice, video or Internet access.
Introduction
Product Key Features Date
- ------- ------------ ----------------
Optimizer--PCI.......... G.lite 4th quarter 1999
Compatible with dial-up soft modem
Universal Optimizer--PCI
....................... G.lite 1st quarter 2000
Compatible with Japanese regional transmission standard
Compatible with dial-up soft modem
Optimizer--USB.......... G.lite 3rd quarter 1999
Directly powered by user's computer
10
Product Key Features Introduction Date
- ------- ------------ -----------------
Universal Optimizer--USB
....................... G.lite 4th quarter 1999
Compatible with Japanese regional transmission standard
Directly powered by user's computer
Flite Optimizer--PCI.... Full rate ADSL and G.lite 2nd quarter 2000
Compatible with dial-up soft modem
Universal Flite
Optimizer--PCI......... Full rate ADSL and G.lite 3rd quarter 2000
Compatible with Japanese regional transmission standard
Compatible with dial-up soft modem
Flite Optimizer--USB.... Full rate ADSL and G.lite 2nd quarter 2000
Directly powered by user's computer
Universal Flite
Optimizer--USB......... Full rate ADSL and G.lite 3rd quarter 2000
Compatible with Japanese regional transmission standard
Directly powered by user's computer
CPE Line Driver......... 5V line driver 3rd quarter 2000
Consumes very low power
Significantly reduces cost of modem
Voice-over-Packet Network Products
In the third quarter of 2000 we began sampling products which enable voice
transmissions over data networks. Voice-over-Packet networks technology allows
multiple telephone channels to be compressed and transmitted simultaneously
with data over a single copper line which previously carried only one telephone
channel. It also allows voice transmissions to be delivered over networks
originally designed to deliver only data. Today's data networks are based on
efficient, cost effective transmission methodologies. Applying technology which
allows the transmission of voice over the more efficient data networks could
potentially reduce the cost of voice transmissions. These data networks use
several different transmission standards, such as asynchronous transfer mode or
ATM, the Internet protocol, Frame Relay and interworking between network
protocols.
In the third quarter of 2000, we began shipping samples of our first Voice-
over-Packet network products--Entropia CO and Entropia CPE. Entropia CO is
being marketed to manufacturers of broadband infrastructure products for
inclusion in equipment such as DSLAMs and gateways. Entropia CO is positioned
to support current and evolving Voice-over-Packet applications. Entropia CPE is
being marketed for use in voice-enabling equipment installed at small or large
enterprises. Examples of such equipment are an integrated access device, or
IAD, which aggregates multiple voice and data channels from a home or business
for transmission over the data network, and a private branch exchange, or PBX,
which is a computer server that manages telephone calls in medium to large
businesses.
The releases of Entropia products that support the Internet protocol
standards as well as the ATM standard are as follows:
Product Network Protocols Introduction Date
- ------- ------------------------------------------------------- -----------------
Entropia CO............. ATM 3rd quarter 2000
Entropia CPE............ ATM 3rd quarter 2000
Entropia--CO & CPE...... ATM and Internet protocol 1st half 2001
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Premise Networking Products
We plan to offer products for the premise networking market before the end
of 2001. Our first home networking product will consist of a set of two
semiconductors and related software that will be used with a user's home
computer or laptop. Premise networking allows multiple users to share high
bandwidth resources throughout the home. This provides consumers with cost
savings from sharing hardware, software and high-speed Internet access and
allows a broader range of home computing applications as well as increased
convenience. Emerging premise networking technologies include the Home
Phoneline Networking Association or HPNA standard, which uses the existing
telephone wiring of a premise, and other standards based on wireless
technology. These solutions eliminate the need to add additional network wiring
throughout the local premise.
In June 2000, we acquired certain assets from Avio Digital Inc. and entered
into employment agreements with the key employees of Avio Digital. The former
Avio Digital engineers design integrated digital architecture for the home
intended to allow consumers to connect and share entertainment, computing,
broadband Internet, telephony and premise control throughout the entire
premise, over a wide variety of commonly available wiring.
Technology
Our primary competitive advantage is found in our technology expertise in
several key areas. These areas of expertise include our system-level knowledge,
our programmable digital signal processor, our signal processing algorithms,
our digital chip design capability, our mixed-signal chip design capability and
our system-level software. Together, these capabilities have enabled us to
provide system-level communications products which have:
. flexibility due to programmability;
. low power consumption; and
. small size.
System-level knowledge. Most of our system-level engineers have previous
experience as employees of communication equipment manufacturers and are
therefore very familiar with the requirements of and challenges faced by our
customers. We combine this system-level engineering expertise with our
expertise in integrated circuit, digital signal processor, algorithm and
software design to develop products that allow our customers to optimize time-
to-market, performance and systems cost.
Software programmable digital signal processor. A cornerstone of our
technology is our internally developed, software programmable digital signal
processor. A digital signal processor, as it relates to communications
applications, encodes digital data for transmission over bandwidth-limited
media such as copper telephone lines, and recovers the encoded data at the
receiving end. Our software programmable digital signal processor is optimized
for communications applications and provides high processing bandwidth with low
power requirements. This digital signal processor can be programmed for several
different applications such as DSL, Voice-over-Packet networks and premise
networking. We currently use this core technology in every product line that is
being developed within our company. This software programmable digital signal
processor technology gives us the advantage of field programmability and
upgradability of devices for future standards.
Signal processing algorithms. A key component of our continued success is
the expertise that we have developed in communications algorithms.
Communications algorithms are the processes and techniques used to transform a
digital data stream into a specially-conditioned analog signal suitable for
transmission across copper telephone wires. Our signal processing engineers,
many of whom have PhDs, possess a thorough understanding of and practical
experience in the process of transmitting and receiving a digital data stream
in analog form. We also have significant experience developing algorithms which
enable voice compression, echo
12
cancellation and telephony signal processing. This expertise has allowed our
engineers to design highly efficient algorithms which enable us to produce high
performance, re-programmable and low power consuming products.
Digital chip design. We have digital chip design experts with many years of
experience in the area of highly complex, high-speed digital chip development.
We perform both the logic design and the physical layout design for our
products. All of our chips are designed and manufactured using the latest
development tools and silicon process technologies. This design expertise has
enabled us to develop our high performance, low-power-consuming digital chips.
Mixed-signal chip design. Our team of analog engineers has developed
numerous analog circuits for the communications industry and has substantial
experience in signal conversion techniques. This experience has enabled us to
develop our mixed-signal chip. This mixed-signal chip translates signals
between analog and digital formats. We believe our mixed-signal chip contains
the highest level of integration in the industry, replacing the multiple
components used in competing DSL solutions and also supporting multiple
telephone lines for DSL infrastructure products.
System software. Our software engineers have expertise in developing code
that addresses the needs of network equipment manufacturers and service
providers. Our knowledge of network operation and architectures allows us to
write software that ensures that our products are interoperable with
communications equipment vendors' products. In addition, our understanding of
various operating systems and personal computer environments allows us to
create software that provides for simple installation and operation.
Customers
We have sold our products to the broadband access equipment vendors listed
below. We have recognized over $1 million in revenue during the year December
31, 2000 from each of the customers listed.
Market Sectors Company
- -------------- ----------------------------------------------------------
DSL Infrastructure
Equipment.............. Advanced Fibre Communications Medialincs, Co.
Copper Mountain Networks Nortel Networks
Lucent Technologies Sumitomo Electric Industries
NEC
DSL End-User Equipment.. Broadxent, Inc Sumitomo Electric Industries
Medialincs, Co. Xpeed
NEC
In 2000, our largest customers were Lucent Technologies, Sumitomo Electric
Industries, Copper Mountain Networks, NEC and Nortel Networks who accounted for
23.9%, 20.0%, 12.2%, 10.2%, and 9.7% of our net revenues, respectively. While
we are seeking to further diversify our customer base, we cannot assure you
that these efforts will be successful. We do not have formal 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 have achieved many unannounced design wins from several companies. We
count a design win after a company has purchased one of our reference designs,
sampled our products and indicated an interest in purchasing our products.
Sales and Marketing
Our sales and marketing strategy is to achieve design wins with technology
leaders in each of our targeted broadband communications markets by, among
other things, providing superior application and engineering support. We
believe that providing comprehensive product service and support is critical to
shortening our
13
customers' design cycles and maintaining a competitive position in our targeted
markets. We market and sell our products through our direct sales force and
through our independent manufacturers' representatives. Our sales managers are
dedicated to principal customers to promote close cooperation and
communication. Representatives support the sales managers by providing leads,
nurturing customer relationships, closing design wins and securing customer
orders.
We manage a number of marketing programs designed to communicate our
capabilities and benefits to broadband access equipment manufacturers. Our Web
site is an important marketing tool where a wide range of information is
available including product information, white papers, application notes, press
releases and contributed articles. In addition, we participate in industry
trade shows, technical conferences and technology seminars, conduct press tours
and publish technical articles in industry journals.
Backlog
Our sales are made primarily pursuant to standard purchase orders for
delivery of products. Due to industry practice which allows customers to cancel
or change orders with limited advance notice prior to shipment, we believe that
backlog is not a reliable indicator of future revenue levels.
Research and Development
We have assembled a core team of experienced engineers and technologists,
many of whom are leaders in their particular field or discipline. As of
December 31, 2000, we employed 132 engineers in the Research and Development
department. Our employees, including our research and development staff, have
collectively co-authored 169 patents. In addition, 143 of our employees hold a
total of 184 advanced degrees, including 26 PhDs. These employees are involved
in advancing our core technologies, as well as applying these core technologies
to product development activities in our targeted markets.
We believe that the achievement of higher levels of integration,
functionality and performance and the introduction of new products in our
target markets is essential to our growth. As a result, we plan to increase
research and development staffing levels in 2001. Research and development
expense for 2000, 1999 and 1998 was approximately $41.9 million, $13.4 million
and $7.9 million, respectively.
Operations and Manufacturing
We outsource the fabrication, assembly and testing of our semiconductor
devices. This fabless model allows us to focus our resources on the design,
development and marketing of our products. We manage the production of our
chips through our operations and manufacturing services group which is
comprised of six functions. These functions include technology engineering,
analog test engineering, digital test engineering, quality and reliability,
manufacturing, and information systems and facilities.
We source our semiconductor fabrication from some of the world's largest
foundries: Mitsubishi Electric, Taiwan Semiconductor Manufacturing Co. and
United Microelectronics Corporation. Our manufacturing strategy is to qualify
and utilize multiple facilities within a given foundry partner for the
fabrication of a given semiconductor device. This second source strategy seeks
to ensure production and performance consistency, both of which are critical
for our products, while maintaining multiple channels of supply.
The primary vendor for the assembly and testing of our products is ST
Assembly Test Services. We have qualified and utilized other vendors as a
second source for the packaging and testing of our products. Amkor/Anam Group
and Siliconware Precision Industries Company, Limited provide additional
assembly services, and additional testing services are provided by United Test
and Assembly Center Ltd and Advanced Semiconductor Engineering.
14
Competition
Although we produce system-level products, we primarily compete with vendors
of semiconductor devices for the DSL market. We believe that the principal
factors of competition for semiconductor vendors to these markets are product
capabilities, level of integration, performance and reliability, power
consumption, price, time-to-market, system cost, intellectual property,
customer support and reputation. 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 DSL central office and customer premises equipment and
with suppliers of semiconductors for equipment enabling Voice-over-Packet
networks. Our principal competitors that supply semiconductors for the DSL
market include Alcatel Microelectronics, Analog Devices, Conexant Systems,
GlobeSpan, Lucent Microelectronics, STMicroelectronics and Texas Instruments.
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 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, it is possible that new
competitors or alliances among competitors could 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 a lower cost. We cannot
assure you that we will be able to compete successfully against current or
potential competitors, or that competition will not have a material adverse
effect on our business, financial condition and results of operations.
Intellectual Property
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property law, nondisclosure agreements and other protective
measures to protect our proprietary rights. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect
such intellectual property. To date, we have been granted six U.S. patents and
have an additional forty-five U.S. patent applications pending and eight
additional international patent applications pending.
Although we employ a variety of intellectual property in the development and
manufacturing of our products, we believe that none of such intellectual
property is individually critical to our current operations. However, taken as
a whole, we believe our intellectual property rights are significant and that
the loss of all or a substantial portion of such rights could have a material
adverse effect on our results of operations. We cannot assure you that our
intellectual property protection measures will be sufficient to prevent
misappropriation of our technology. In addition, the laws of many foreign
countries do not protect our intellectual properties to the same extent as the
laws of the United States. 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 effectively. We cannot assure you that any
necessary licenses will be available on reasonable terms.
In December 1999 we entered into a license agreement with MIPS Technologies
to use their core processor. The agreement expires in December 2004. For the
year ended December 31, 2000, none of our products shipping in production
quantities used the MIPS core processor; however we plan to ship production
quantities of products that use the MIPS core processor during 2001.
Employees
As of December 31, 2000, we had a total of 273 employees, of whom 234 are
engineers. None of our employees is represented by a labor union. However,
certain of our foreign employees are subject to collective
15
bargaining agreements mandated by local country law. Management does not
anticipate that the results of future negotiations under these collective
bargaining agreements will have a material adverse financial impact on the
Company. We have not experienced any work stoppages, and we consider our
relations with our employees to be good. Our future performance depends in
significant part upon the continued service of our key personnel, none of whom
is bound by an employment agreement requiring service for any definite period
of time. Our future success also depends on our continued ability to attract,
integrate, retain and motivate highly qualified sales, technical and managerial
personnel. Competition for such qualified personnel is intense.
Revenues by Geographic Area
The following is a summary of net revenues by major geographic area:
Years ended December
31,
--------------------
2000 1999 1998
------- ------ -----
North America........................................ $34,451 $ 676 $ --
Japan................................................ 17,301 2,363 637
Asia -- excluding Japan.............................. 4,587 555 115
All Other............................................ 135 150 --
------- ------ -----
Total................................................ $56,474 $3,744 $ 752
======= ====== =====
ITEM 2. Properties
We lease two buildings in Fremont, California that comprise our corporate
headquarters and include our administration, sales and marketing, research and
development, and operations departments. In addition, we have leases for an
engineering design center in Huntsville, Alabama. Internationally, we lease a
design center in France and two in India.
These leases comprise an aggregate of 85,657 square feet and have terms
expiring on or prior to December 2009. We believe that our current facilities,
together with planned expansions, will be adequate for at least the next twelve
months and that additional leased space can be obtained on commercially
reasonable terms if needed.
ITEM 3. Legal Proceedings
While we are not currently a party to any pending litigation, the
semiconductor and telecommunications industries are characterized by
substantial litigation regarding patent and other intellectual property rights.
We have received correspondence, including a proposed licensing agreement,
from Amati Corporation (which was acquired by Texas Instruments) stating that
they believe that they own a number of patents that are required to be
compliant with the American National Standards Institute (ANSI) standard
specifications T1.413 and ITU-T recommended G.991.1/2. These industry standards
are based on the DMT line code. We have introduced products that we believe are
compliant with these industry standards, and we may be required to obtain a
license to these Amati Corporation patents. We are currently evaluating the
patents and proposed licensing terms. If these patents are valid and essential
to the implementation of products that are compliant with this industry
standard, then Amati Corporation may be required to offer us a license on
commercially reasonable, non-discriminatory terms. Because there are currently
no established terms for such a license, we may be unable to agree with Amati
Corporation on acceptable license terms. If these patents are valid, but not
essential to the implementation of products that are compliant with this
industry standard, and they apply to our products and we do not modify our
products so they become non-infringing, then Amati Corporation would not be
obligated to offer us a license on reasonable terms or at all. If we are not
able to agree on license terms and as a result fail to obtain a required
license, then we could be sued and potentially be liable for substantial
monetary damages or have the sale of our products stopped by an injunction.
16
In addition, in October 2000, we received correspondence from Alcatel
requesting to discuss the potential for a non-exclusive license from Alcatel
permitting us to utilize technology covered by Alcatel patents. We expect to
review this request with Alcatel in the first half of 2001 and may be required
to obtain licenses from Alcatel.
Although the ultimate outcome of these matters is not presently
determinable, management believes that the resolution of these matters will not
have a material adverse effect on the Company's financial position and results
of operations. However, depending on the amount and timing of an unfavorable
resolution of these contingent matters, it is possible that the Company's
future results of operation or cash flows could be materially affected in a
particular quarter.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) none
(b) none
(c) none
(d) none
17
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
The Company's Common Stock has traded on the Nasdaq National Market under
the symbol "CTLM" since our initial public offering in May 2000. The following
table sets forth, for the periods indicated, the high and low closing bid
prices for the common stock on the Nasdaq National Market:
Fiscal Year 2000 High Low
---------------- ------- ------
Second Quarter................................................ $ 71.00 $22.88
Third Quarter................................................. $107.00 $63.00
Fourth Quarter................................................ $ 95.75 $14.75
On March 9, 2001 there were approximately 286 record holders of the
Company's Common Stock, and the last reported sale price of the Company's
common stock was $27.125.
Dividend Policy
The Company has never declared or paid cash dividends on shares of its
capital stock. The Company currently intends to retain all of its earnings, if
any, for use in its business and in acquisitions of other businesses, products
or technologies and does not anticipate paying any cash dividends in the
foreseeable future.
18
ITEM 6. Selected Consolidated Financial Data
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Annual Report on Form 10-K.
The selected consolidated statement of operations data for each of the three
fiscal years ended December 31, 2000, 1999 and 1998 and selected consolidated
balance sheet data as of December 31, 2000 and as of December 31, 1999 are
derived from, and qualified by reference to, the audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K. The selected
consolidated statement of operations data for the fiscal year ended December
31, 1997 and selected consolidated balance sheet data as of December 31, 1997
are derived from audited financial statements not included in this Annual
Report.
Period from
Years ended February 21, 1997
--------------------------- (inception) to
2000 1999 1998 December 31, 1997
-------- -------- ------- -----------------
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues.................. $ 56,474 $ 3,744 $ 752 $ 300
Operating loss................ (49,826) (20,781) (9,722) (2,102)
Net loss...................... (45,998) (19,749) (9,256) (1,937)
Deemed dividend on Series B
convertible preferred stock.. -- -- -- (2,800)
Net loss applicable to common
stockholders................. (45,998) (19,749) (9,256) (4,737)
Net loss per share--basic and
diluted...................... (2.00) (2.23) (1.15) (0.59)
Shares used to compute basic
and diluted net loss per
share........................ 22,950 8,842 8,056 8,000
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and
short-term investments....... $ 87,684 $ 28,313 $ 7,926 $13,645
Working capital............... 94,739 26,043 6,686 12,537
Total assets.................. 127,943 35,587 12,010 16,339
Long-term debt and capital
lease obligations, less
current portion.............. 221 549 1,235 630
Total stockholders' equity.... 106,870 30,055 9,259 14,156
See Note 1 of notes to the consolidated financial statements for an
explanation of the determination of the number of shares used in computing per
share data.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations and Risk Factors
Cautionary Statement
You should read the following discussion and analysis in conjunction with
the consolidated financial statements and related notes thereto contained
elsewhere in this report. The information in this report is not a complete
description of our business or the risks associated with an investment in our
common stock. We urge you to carefully review and consider the various
disclosures made by us in this report and in our other reports filed with the
SEC.
The section entitled "Risk Factors" set forth in this report, and similar
discussions in our other SEC filings, discuss some of the important risk
factors that may affect our business, results of operations and financial
condition. You should carefully consider those risks, in addition to the other
information in this report and in our other filings with the SEC, before
deciding to invest in our company or to maintain or increase your investment.
19
Overview
We provide system-level products that enable broadband communications to the
home and business enterprise. We serve the DSL and the Voice-over-Packet
network market. We plan to enter the premise networking markets before the end
of 2001. Our current customers are broadband access equipment vendors who
manufacture DSL equipment for use in the phone companies' communications
infrastructure or DSL modems for Internet or other network access in a home or
small business. Our customers also include Original Equipment Manufacturers
("OEMs") who supply products for data and voice networks.
We were incorporated on February 21, 1997 and commenced operations on April
1, 1997. During the period from February 1997 through June 1999, we were a
development stage company focused on developing our initial products,
recruiting personnel, building our corporate infrastructure and raising
capital, and therefore had no product revenue. In 1999, we began shipping our
CopperLite CO and CopperLite CPE families of products and recorded our first
significant product revenues in the third quarter. We emerged from the
development stage at that time. During 1999 and 2000, we also increased our
investment in research and development, sales and marketing, operations and our
general and administrative infrastructure.
On May 24, 2000 we issued 4.0 million shares of our common stock in a
registered underwritten initial public offering and 600,000 shares of our
common stock in a concurrent private placement at a price of $19.00 per share.
On June 5, 2000, we sold an additional 600,000 shares pursuant to the
underwriters' overallotment option granted in connection with our initial
public offering. Net proceeds from these offerings were $91.5 million and are
being used for general working capital purposes and selected asset purchases.
Our revenues currently are derived from the sale of our DSL and Voice-over-
Packet network products which include the CopperLite CO, CopperLite CPE,
Optimizer, and Entropia families of products. To date, we have generated a
substantial portion of our revenues from a limited number of customers. For the
year ended December 31, 2000, Lucent Technologies, Sumitomo Electric
Industries, Copper Mountain Networks, NEC and Nortel Networks represented
23.9%, 20.0%, 12.2%, 10.2% and 9.7%, of our revenues for such period,
respectively. Our top two customers in 1999 were Sumitomo Electric Industries
and NEC, who accounted for 34.4% and 21.1% of our revenues, respectively.
During 1999 and 1998, we recorded $1.2 million and $.8 million of revenues,
respectively, under best efforts technology development agreements. Revenues
under these agreements represent payments we received for the performance of
contract engineering services. Under these agreements, we generally received
payments upon the completion of contractual milestones. We are not required to
refund any payments under the contracts.
Our policy is to recognize revenue under technology development agreements
when applicable contractual milestones have been met, including deliverables;
in any case, revenue recognized does not exceed the amount that would be
recognized using the percentage of completion method. In this regard, the
timing of technology development revenue depends on the timing of completion of
milestones under individual agreements. Technology development revenue was not
significant after 1999.
We have focused our initial sales and marketing efforts on Asian and North
American communications equipment manufacturers. During the years ended
December 31, 2000, and 1999, 38.7% and 77.9% of our sales, respectively, were
to Asia. We currently sell through our direct sales force in Japan, Singapore
and North America and through our representatives in Korea and Taiwan.
International revenues are denominated solely in U.S. dollars, which reduces
our exposure to foreign currency exchange risks.
Revenues related to product sales are generally recognized when the products
are shipped to the customer, title has transferred and no significant
obligations remain. Allowances are provided for estimated returns at the time
of shipment. In circumstances where we have not shipped the final version of
our product, or when a customer has delayed its acceptance of our product, we
defer recognition of the revenue associated with the given product at the time
of shipment. In addition, we defer technology development revenues when
customers
20
make advance payments and specified milestones under the technology development
contract have not been met. This deferred revenue is recognized when the final
version of the product is delivered, upon acceptance by the customer, or when
the specified milestones have been met. As of December 31, 2000 and 1999, we
had $200,000 and $122,000 of deferred revenue which was comprised primarily of
unearned technology development fees and prepayments from certain customers.
It usually takes more than one year for us to realize volume shipments of
our products after we first contact a customer. We first work with customers to
achieve a design win, which may take six months or longer. Our customers then
complete the design, testing and evaluation of their systems and begin the
marketing process, a period which typically lasts an additional three to six
months or longer. As a result, a significant period of time may elapse between
our sales efforts and our realization of revenues, if any, from volume
purchases of our products by our customers. Our customers are not obligated by
long-term contracts to purchase our products and can generally cancel or
reschedule orders on short notice.
We outsource the fabrication, assembly and testing of our products.
Accordingly, a significant portion of our cost of revenues consists of payments
to our manufacturing partners. Costs of revenues also encompass our internal
manufacturing and operations functions and a portion of our information systems
and facilities costs.
Research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers,
prototype costs related to the fabrication of our silicon chips, and
depreciation associated with software development tools and amortization of
deferred compensation. We expense our research and development costs as they
are incurred. Several components of our research and development effort require
significant expenditures, the timing of which can cause significant quarterly
variability in our expenses. For example, we require a substantial number of
prototypes to build and test our complex products and therefore incur
significant prototype costs. Because our research and development is key to our
future success, we intend to significantly increase our research and
development expenditures in future periods.
Sales and marketing expenses consist primarily of salaries, commissions, and
related expenses for personnel engaged in marketing, sales, customer service
and applications engineering support functions, costs associated with
promotional and other marketing expenses, as well as amortization of deferred
compensation. We intend to expand our direct and indirect sales operations
substantially, both domestically and internationally, in order to increase
market awareness, support customer requirements, and increase orders for our
products. We expect that sales and marketing expenses will increase over the
next year as we hire additional sales and marketing personnel, initiate
additional marketing programs to support our products and establish sales
offices in additional domestic and international locations. We intend to expand
our use of independent manufacturers' representatives. To date, we have entered
into agreements with only a small number of representatives and we believe that
to be successful, we must reach agreement with additional representatives in
several countries. In addition, the complexity of our products and the
applications support necessary for successful interoperability and customer
specific applications requires highly trained customer service and support
personnel. We expect to significantly expand our customer service and support
organization to meet these requirements.
General and administrative expenses consist primarily of salaries and
related expenses for executives, finance, accounting, facilities, information
services, human resources, recruiting expenses, professional fees, other
corporate expenses, and amortization of deferred compensation. In addition,
general and administrative expenses include management's estimate of potential
bad debt expense. We expect general and administrative expenses to increase as
we add personnel and incur additional costs related to the growth of our
business.
In connection with the grant of certain stock options and equity
compensation to our employees, technical advisors and directors, we have
recorded amortization of deferred compensation of $25.6 million, $4.1 million
and $69,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Deferred compensation represents the difference between the grant price and the
deemed fair value of our common stock options granted during these periods.
Deferred compensation expense is being amortized using the graded vesting
21
method, in accordance with Statement of Financial Accounting Standards No. 123
and FASB Interpretation No. 28, over the vesting period of each respective
option, generally four years. Under the graded vesting method, each option
grant is separated into portions based on their vesting terms which results in
acceleration of amortization expense for the overall award. The accelerated
amortization pattern results in expensing approximately 59% of the total award
in year 1, 25% in year 2, 12% in year 3 and 4% in year 4. Unamortized deferred
compensation is presented as a reduction of stockholders' equity. See Note 7 of
notes to consolidated financial statements for more information about the
deferred compensation expense.
We have not reported an operating profit for any year since our
incorporation and have experienced net losses of approximately $46.0 million,
$19.7 million and $9.3 million for the years ended December 31, 2000, 1999 and
1998, respectively.
Results of Operations
The following table sets forth, for the periods presented, certain data from
our consolidated statement of operations expressed as a percentage of total
revenues.
2000 1999 1998
---- ---- ------
Net revenues............................................ 100% 100% 100%
Cost of revenues........................................ 57 83 --
---- ---- ------
Gross profit............................................ 43 17 100
Operating expenses:
Research and development.............................. 74 357 1,052
Sales and marketing................................... 27 102 195
General and administrative............................ 28 113 146
Amortization of goodwill and other acquisition related
intangibles.......................................... 2 -- --
---- ---- ------
Total operating expenses............................ 131 572 1,393
Operating loss.......................................... (88) (555) (1,293)
Interest income......................................... 7 34 77
Interest expense........................................ -- (6) (15)
Income Taxes............................................ -- -- --
---- ---- ------
Net loss................................................ (81)% (527)% (1,231)%
==== ==== ======
Years ended December 31, 2000 and 1999
Net Revenues: Net revenues in 2000 were $56.5 million, compared with $3.7
million in 1999, an increase of 1,408%. The growth in revenue resulted mainly
from increases in volume shipments of our semiconductor products.
Cost of Revenues: Cost of revenues, which reflects costs of product
revenues, was $32.3 million in 2000 and $3.1 million in 1999 resulting in gross
profit as a percentage of revenues of 43% and 17%, respectively. The increase
in gross profit was mainly attributable to the significant increase in the unit
volume of shipments. The increase in gross profit as a percentage of revenues
was driven by cost reductions from our suppliers. Our gross margins in the
future may be affected by competitive pricing strategies and the future
introduction of certain lower margin items. The costs associated with our
technology development revenues are closely related to the costs of our ongoing
research and development activities. Generally, the incremental costs of
providing any deliverables under our technology development arrangements are
not easily distinguishable from the costs of our ongoing activities. The total
incremental costs of our technology development revenues are generally not
significant. All such costs related to technology development revenues for each
of the years ended December 31, 2000 and 1999 have been included in research
and development in our statements of operations.
22
Research and Development Expenses: Research and development expenses in 2000
were $41.9 million, compared to $13.4 million in 1999, an increase of 214%. The
increase was due primarily to additions in engineering personnel, increased
usage of materials necessary to build prototypes, increases in depreciation
resulting from the additional purchases of laboratory equipment and software
development tools and an increase in amortization of deferred compensation.
Sales and Marketing Expenses: Sales and marketing expenses in 2000 were
$15.5 million, compared to $3.8 million in 1999, an increase of 305%. These
increases were due primarily to the addition of personnel, an increase in
marketing activity such as customer visits and attendance at trade shows and an
increase in amortization of deferred compensation.
General and Administrative Expenses: General and administrative expenses in
2000 were $15.9 million, compared to $4.2 million in 1999, an increase of 275%.
These increases were due primarily to the addition of personnel in the
accounting, human resources, information services and facilities functions and
an increase in amortization of deferred compensation. During 2000 and 1999, we
charged $782,000 and $150,000, respectively, to bad debt expense to reserve for
specific aged customer receivable balances and to establish a reserve for
unidentified potential bad debt exposures.
Amortization of Deferred Compensation and Non-Cash Stock
Compensation: Amortization of deferred compensation in 2000 was $25.6 million
compared to $4.1 million in 1999, an increase of $21.5 million. The increase
was attributable to deferred stock compensation recorded in 2000 of $31.1
million related to option grants made to a significant number of new and
existing employees and the use of the graded vesting method, which results in
accelerated amortization of deferred compensation expense in the earlier years
of the awards' expected life. In addition, expenses for 2000 and 1999 include
charges of $2.3 million and $173,000, respectively, for non-cash stock
compensation expense.
The following table details the amount of deferred compensation and non-cash
stock compensation included in expenses.
Expenses Excluding
Amortization of
Deferred Compensation Non-Cash Amortization
and Non-Cash Stock Stock of Deferred Total
Compensation Expense Compensation Compensation Expenses
--------------------- ------------ ------------ --------
For the year ended
December 31, 2000
Cost of revenues........ $30,792 $ -- $ 1,459 $ 32,251
Research and
development............ 28,943 2,214 10,722 41,879
Sales and marketing..... 10,403 19 5,075 15,497
General and
administrative......... 7,392 100 8,354 15,846
------- ------ ------- --------
Total................. $77,530 $2,333 $25,610 $105,473
======= ====== ======= ========
For the year ended
December 31, 1999
Cost of revenues........ $ 2,979 $ -- $ 139 $ 3,118
Research and
development............ 11,440 173 1,744 13,357
Sales and marketing..... 3,002 -- 821 3,823
General and
administrative......... 2,827 -- 1,400 4,227
------- ------ ------- --------
Total................. $20,248 $ 173 $ 4,104 $ 24,525
======= ====== ======= ========
Interest Income: Interest income was $4.2 million in 2000, compared to $1.3
million in 1999, an increase of 227%. This increase was due to higher cash and
cash equivalent balances resulting from our initial public offering in May of
2000.
Interest Expense: Interest expense was $334,000 in 2000, compared to
$242,000 in 1999, an increase of 38%. The increase was due to higher
outstanding balances under our working capital line of credit during 2000.
23
Years Ended December 31, 1999 and 1998
Net Revenues: Net revenues in 1999 were $3.7 million, compared with $752,000
in 1998, an increase of 398%. The increase was attributable to a further
increase in technology development revenue to $1.2 million and the initial
shipments of our products, which began generating revenues in the third quarter
of 1999.
Cost of Revenues: Cost of revenues, which reflects costs of product
revenues, was $3.1 million in 1999. There was no cost of revenues in 1998 as
the costs associated with our technology development revenues are generally not
significant and are included in research and development in our statements of
operations.
Research and Development Expenses: Research and development expenses in 1999
were $13.4 million, compared to $7.9 million in 1998, an increase of 69%. The
increases was due primarily to additions in engineering personnel, increased
usage of materials necessary to build prototypes, increases in depreciation
resulting from the additional purchases of laboratory equipment and software
development tools and an increase in amortization of deferred compensation.
Sales and Marketing Expenses: Sales and marketing expenses in 1999 were $3.8
million, compared to $1.5 million in 1998, an increase of 161%. These increases
were due primarily to the addition of personnel, an increase in marketing
activity such as customer visits and attendance at trade shows and an increase
in amortization of deferred compensation.
General and Administrative Expenses: General and administrative expenses in
1999 were $4.2 million, compared to $1.1 million in 1998, an increase of 286%.
These increases were due primarily to the addition of personnel in the
accounting, human resources, information services and facilities functions and
an increase in amortization of deferred compensation. During 1999, we charged
$150,000 to bad debt expense to establish a reserve for unidentified potential
bad debt exposures. The amount was determined in consideration of the early
stage of our customer relationships.
Amortization of Deferred Compensation and Non-Cash Stock
Compensation. Amortization of deferred compensation in 1999 was $4.1 million
compared to $69,000 in 1998. The increase was attributable to deferred stock
compensation recorded in 1999 of $19.7 million related to option grants made to
a significant number of new and existing employees and the use of the graded
vesting method, which results in accelerated amortization of deferred
compensation expense in the earlier years of the awards expected life. In
addition, expenses for 1999 and 1998 include charges of $173,000 and $15,000,
respectively for non-cash stock compensation expense.
The following table details the amount of deferred compensation and non-cash
stock compensation included in expenses.
Expenses Excluding
Amortization of
Deferred Compensation Non-Cash Amortization
and Non-Cash Stock Stock of Deferred Total
Compensation Expense Compensation Compensation Expenses
--------------------- ------------ ------------ --------
For the year ended
December 31, 1999
Cost of revenues........ $ 2,979 $ -- $ 139 $ 3,118
Research and
development............ 11,440 173 1,744 13,357
Sales and marketing..... 3,002 -- 821 3,823
General and
administrative......... 2,827 -- 1,400 4,227
------- ---- ------ -------
Total................. $20,248 $173 $4,104 $24,525
======= ==== ====== =======
For the year ended
December 31, 1998
Cost of revenues........ $ -- $ -- $ -- $ --
Research and
development............ 7,869 15 29 7,913
Sales and marketing..... 1,461 -- 5 1,466
General and
administrative......... 1,060 -- 35 1,095
------- ---- ------ -------
Total................. $10,390 $ 15 $ 69 $10,474
======= ==== ====== =======
24
Interest Income: Interest income was $1.3 million in 1999, compared to
$582,000 million in 1998, an increase of 119%. These increases were due to
higher cash and cash equivalent balances resulting from successful preferred
stock financings in 1999 and 1998.
Interest Expense: Interest expense increased to $242,000 in 1999 from
$116,000 in 1998 due to higher average outstanding balances under our working
capital line of credit during 1999.
We commenced product shipments and recorded our first related revenue in the
third quarter of 1999. Product revenues increased from the third quarter of
1999 through the fourth quarter of 2000, primarily due to increasing unit sales
and deliveries to additional customers.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of approximately $55.8 million of convertible preferred stock, net of
offering costs, and through our initial public offering on May 24, 2000. Net
proceeds to us as a result of the initial public offering, plus the proceeds
from a concurrent private placement of 600,000 shares, were approximately $91.5
million. We also generated $2.6 million from the exercise of stock options, net
of repurchases, and $801,000 from sales of our stock through our Employee Stock
Purchase Plan.
Net cash used for operations increased to $22.2 million for the year ended
December 31, 2000, from $12.2 million for the year ended December 31, 1999, and
from $7.8 million for the year ended December 31, 1998. The increase in 2000
over 1999 was primarily due to our 2000 net loss of $46.0 million and an
increase in net working capital requirements associated with expanding our
operations, partially offset by depreciation and amortization of $30.2 million.
The increase in 1999 over 1998 was due primarily to our net loss of
$19.7 million in 1999 and increased working capital, partially offset by a
working capital line of credit of $2.0 million and depreciation and
amortization of $6.4 million.
Cash used in investing activities decreased to $3.9 million for the year
ended December 31, 2000, from $23.0 million for the year ended December 31,
1999. The decrease was primarily due to net maturities of short-term
investments, which were subsequently invested in cash and cash equivalents,
partially offset by purchases of property and equipment and the purchase of
intangibles and other long-term assets. The increase to $23.0 million in 1999
from $3.8 million for the year ended December 31, 1998, was due to net
purchases of short-term investments and purchases of property and equipment.
Cash generated from financing activities increased to $94.2 million for the
year ended December 31, 2000 from $35.6 million for the years ending December
31, 1999, and from $4.8 million for the year ended December 31, 1998. The
increase in 2000 over 1999 was primarily the receipt of net proceeds of $94.8
million from the sale of common stock in our initial public offering in May
2000 and from the exercise of stock options and sales of stock through our
Employee Stock Purchase Plan. The increase in 1999 over 1998 was due primarily
to the receipt of $35.6 million from the sale of preferred stock in 1999.
We expect to devote substantial capital resources to continue our research
and development efforts, to hire and expand our sales, support, marketing and
product development organizations, to expand marketing programs, to establish
additional facilities worldwide and to fund other general corporate activities.
We currently anticipate that our current cash, cash equivalents and short-term
investments will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting methods for derivative financial instruments and hedging
activities related to those instruments, as well as other hedging activities.
Because we
25
do not currently hold any derivative instruments and do not engage in hedging
activities, we expect that the adoption of SFAS No. 133 will have no impact on
our financial position, results of operations or cash flows. We will be
required to implement SFAS No. 133 as of January 1, 2001.
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 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. SAB 101, as subsequently amended, was effective for our fiscal year
2000. The adoption of SAB 101 did not have a material impact on our financial
condition or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Implementation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB Opinion No. 25." FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 did not have a material impact on the company's financial
position or results of operations.
26
Risk Factors
You should carefully consider the risks described below and all of the
information contained in this Annual Report on Form 10-K. 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 HAVE A HISTORY OF LOSSES, WE EXPECT FUTURE LOSSES, AND WE MAY NOT ACHIEVE OR
MAINTAIN PROFITABILITY.
We have not reported an operating profit for any year since our
incorporation and have experienced net losses of approximately $46.0 million,
$19.7 million, and $9.3 million for the years ended December 31, 2000, 1999 and
1998, respectively.
A GENERAL ECONOMIC SLOWDOWN, AND A SLOWDOWN IN SPENDING IN THE
TELECOMMUNICATIONS INDUSTRY SPECIFICALLY, MAY NEGATIVELY AFFECT OUR BUSINESS
AND OPERATING RESULTS.
There have been announcements throughout the worldwide telecommunications
industry of current and planned reductions in component inventory levels and
equipment production volumes, and of delays in the build-out of new
infrastructure. Any of these trends, if continued, could result in lower than
expected demand for our products, which could have a material adverse effect on
our revenues and results of operations generally, and cause the market price of
our common stock to decline.
SEVERAL COMPANIES IN THE DSL MARKET HAVE EXPERIENCED SIGNIFICANT BUSINESS
DIFFICULTIES DURING THE PAST YEAR, AND IF THERE IS CONTINUED SOFTNESS IN DEMAND
FOR DSL EQUIPMENT, OUR BUSINESS AND OPERATING RESULTS MAY BE ADVERSELY
AFFECTED.
Since mid-2000, a number of competitive local exchange carriers (CLECs) that
are in the business of installing and providing DSL service have had difficulty
in obtaining sufficient capital to build their infrastructure and to introduce
their services. In January 2000, Northpoint Communications voluntarily filed
for a Chapter 11 bankruptcy. In addition, both Covad Communications and Rhythm
NetConnections have announced plans to significantly scale back their
operations for this year. These companies have reduced their spending on DSL
equipment, which has resulted in lower-than-expected sales volume for DSL
equipment manufacturers such as Copper Mountain Networks and Nortel Networks,
two of our major customers. A continued or further slowdown in sales of DSL
equipment will likely result in a decline or delay in sales orders for our
products, which are components of DSL equipment. Any such decline or delay will
negatively affect our business and operating results.
AN ECONOMIC SLOWDOWN IN JAPAN MAY ADVERSELY AFFECT OUR BUSINESS AND OPERATING
RESULTS.
Sales to customers located in Japan accounted for 30.6% of 2000 net
revenues. Any slowdown in the demand for our customers' equipment may cause our
revenues to decline. Given the risk that Japan may be entering into a
recession, sales to our Japan customers may decline. Moreover, major
fluctuations in currency exchange rates could materially affect our Japan
customers' demand, thereby forcing them to reduce their orders, which could
adversely affect our operating results.
27
WE CONTINUE TO RAPIDLY EXPAND OUR OPERATIONS, AND OUR FAILURE TO MANAGE OUR
GROWTH COULD HARM OUR BUSINESS.
We have rapidly and significantly expanded our operations, including
increasing the number of our employees from 71 in June 1999 to 273 as of
December 31, 2000. This expansion is placing a significant strain on our
managerial, operational and financial resources.
OUR EXECUTIVE OFFICERS AND KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND
THESE OFFICERS AND PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
We depend upon the continuing contributions of our key management, sales,
customer support and product development personnel. The loss of such personnel
could seriously harm us. In addition, we have not obtained key-man life
insurance on any of our executive officers or key employees.
COMPETITION FOR QUALIFIED PERSONNEL IN THE SEMICONDUCTOR AND TELECOMMUNICATIONS
INDUSTRIES IS INTENSE, AND IF WE ARE NOT SUCCESSFUL IN ATTRACTING AND RETAINING
THESE PERSONNEL, WE WILL NOT BE ABLE TO EXECUTE OUR BUSINESS PLAN.
Competition for qualified personnel in the semiconductor and
telecommunications industries is intense, and we may not be successful in
attracting and retaining personnel. Since June of 1999, we added 202 new
employees to our total work force, representing an increase of approximately
285%. We expect to add additional personnel in the near future, including
additional engineers, direct sales and marketing personnel. There may be only a
limited number of people with the requisite skills to serve in those positions,
and it may become increasingly difficult to hire these people. In addition, we
are actively searching for research and development engineers, who are in short
supply. Our business will be harmed if we encounter delays in hiring these
additional engineers. Furthermore, competitors and others have in the past, and
may in the future, attempt to recruit our employees.
WE DEPEND ON THIRD PARTY FOUNDRIES TO MANUFACTURE, ASSEMBLE AND TEST OUR
PRODUCTS AND WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT CAPACITY TO SUPPORT OUR
BUSINESS.
We do not own or operate a semiconductor fabrication facility. We rely on
Mitsubishi Electric, United Microelectronics Corporation and Taiwan
Semiconductor Corporation to manufacture our products. In addition, we
generally do not have contracts with these foundries guaranteeing the
availability of capacity. We may experience delays in the future and we cannot
be sure that we will be able to obtain semiconductors within the time frames
and in the volumes required by us at an affordable cost or at all. Any
disruption in the availability of semiconductors or any problems associated
with the delivery, quality or cost of the fabrication assembly and testing of
our products could significantly hinder our ability to deliver our products to
our customers and would result in a decrease in sales of our products.
WE DEPEND ON SOLE SOURCE SUPPLIERS FOR SEVERAL KEY COMPONENTS OF OUR PRODUCTS.
We obtain certain parts, components and packaging used in the delivery of
our products from sole sources of supply. For example, we obtain certain
semiconductor wafers from Mitsubishi Electric. If we fail to obtain components
in sufficient quantities when required, and are unable to meet customer demand,
our business could be harmed, as our customers would consider purchasing
products from our competitors. We also rely on United Microelectronics
Corporation to manufacture our analog silicon wafers. Developing and
maintaining these strategic relationships with our vendors is critical for us
to be successful. Any of our sole source suppliers may:
. enter into exclusive arrangements with our competitors;
28
. stop selling their products or components to us at commercially
reasonable prices;
. refuse to sell their products or components to us at any price; or
. may be subject to production disruptions such as earthquakes.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND
CALIFORNIA'S CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE
OUR EXPENSES.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the state of California fall below certain
critical levels, California has on some occasions implemented, and may in the
future continue to implement, rolling blackouts throughout California. We
currently do not have backup generators or alternate sources of power in the
event of a blackout, and our current insurance does not provide coverage for
any damages we or our customers may suffer as a result of any interruption in
our power supply. If blackouts interrupt our power supply, we would be
temporarily unable to continue operations at our California facilities. Any
such interruption in our ability to continue operations at our facilities 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.
Furthermore, the deregulation of the energy industry instituted in 1996 by
the California government has caused power prices to increase. Under
deregulation, utilities were encouraged to sell their plants, which
traditionally had produced most of California's power, to independent energy
companies that were expected to compete aggressively on price. Instead, due in
part to a shortage of supply, wholesale prices have skyrocketed over the past
year. If wholesale prices continue to increase, the operating expenses
associated with our facilities located in California will likely increase which
would harm our results of operations.
SALES OF OUR PRODUCTS DEPEND ON THE WIDESPREAD ADOPTION OF BROADBAND ACCESS
SERVICES, ESPECIALLY DSL. IF THE DEMAND FOR BROADBAND ACCESS SERVICE DOES NOT
INCREASE AS EXPECTED, WE MAY NOT BE ABLE TO GENERATE SUBSTANTIAL SALES.
Sales of our products depend on the increased use and widespread adoption of
broadband access services, and DSL services in particular, and the ability of
telecommunications service providers to market and sell broadband access
services. Our business would be harmed, and our results of operations and
financial condition would be adversely affected, if the use of broadband access
services does not increase as anticipated. Certain critical factors will likely
continue to affect the development of the broadband access service market.
These factors include:
. inconsistent quality and reliability of service;
. lack of availability of cost-effective, high-speed service;
. lack of interoperability among multiple vendors' network equipment;
. congestion in service providers' networks; and
. inadequate security.
RAPID CHANGES IN THE MARKET FOR DSL CHIP SETS MAY RENDER OUR CHIP SETS OBSOLETE
OR UNMARKETABLE.
The market for chip sets for DSL products is characterized by:
. intense competition;
29
. rapid technological change;
. frequent new product introductions by our competitors;
. changes in customer demands; and
. evolving industry standards.
Any of these factors could make our products obsolete or unmarketable. To
compete, we must innovate and introduce new products. If we fail to
successfully introduce new products on a timely and cost-effective basis that
meet customer requirements and are compatible with evolving industry standards,
then our business, financial condition and results of operation will be
seriously harmed.
BECAUSE OTHER BROADBAND TECHNOLOGIES MAY COMPETE EFFECTIVELY WITH DSL SERVICES,
OUR PRODUCTS MAY NOT CAPTURE MARKET SHARE.
DSL services are competing with a variety of different broadband data
transmission technologies, including cable modems, satellite and other wireless
technologies. If any technology that is competing with DSL technology is more
reliable, faster, less expensive or has other advantages over DSL technology,
then the demand for our DSL products may decrease.
OUR MARKETS ARE HIGHLY COMPETITIVE AND MANY OF OUR COMPETITORS ARE ESTABLISHED
AND HAVE GREATER RESOURCES THAN WE HAVE.
The market for software and communications semiconductor solutions is
intensely competitive. Given our stage of development, there is a substantial
risk that we will not have the financial resources, technical expertise or
marketing and support capabilities to compete successfully. We believe our
principal competitors include, or will include, Alcatel Microelectronics,
Analog Devices, Conexant Systems, GlobeSpan, Lucent Microelectronics, and Texas
Instruments. In addition, a number of other semiconductor companies, including
IBM and Intel, have announced their intent to enter the market segments
adjacent to or addressed by our products. These competitors have longer
operating histories, greater name recognition, larger installed customer bases
and significantly greater financial, technical and marketing resources than we
have. They may be able to introduce new technologies, respond more quickly to
changing customer requirements or devote greater resources to the development,
promotion and sale of their products than we can. Further, in the event of a
manufacturing capacity shortage, these competitors may be able to manufacture
products when we are unable to do so.
BECAUSE OUR PRODUCTS ARE COMPONENTS OF OTHER EQUIPMENT, IF BROADBAND EQUIPMENT
MANUFACTURERS DO NOT INCORPORATE OUR PRODUCTS IN THEIR EQUIPMENT, WE MAY NOT BE
ABLE TO GENERATE SALES OF OUR PRODUCTS IN VOLUME QUANTITIES.
Our products are not sold directly to the end-user, rather they are
components of other products. As a result, we rely upon equipment manufacturers
to design our products into their equipment. We further rely on this equipment
to be successful. If equipment that incorporates our products is not accepted
in the marketplace, we may not achieve sales of our products in volume
quantities, which would have a negative impact on our results of operations.
BECAUSE MANUFACTURERS OF COMMUNICATIONS EQUIPMENT MAY BE RELUCTANT TO CHANGE
THEIR SOURCES OF COMPONENTS, IF WE DO NOT ACHIEVE DESIGN WINS WITH SUCH
MANUFACTURERS, WE MAY BE UNABLE TO SECURE SALES FROM THESE CUSTOMERS IN THE
FUTURE.
Once a manufacturer of communications equipment has designed a supplier's
semiconductor into its products, the manufacturer may be reluctant to change
its source of semiconductors due to the significant costs
30
associated with qualifying a new supplier. Accordingly, our failure to achieve
design wins with equipment manufacturers which have chosen a competitor's
semiconductor could create barriers to future sales opportunities with these
manufacturers.
A DESIGN WIN FROM A CUSTOMER IS NOT A GUARANTEE OF FUTURE SALES TO THAT
CUSTOMER.
Achieving a design win with a customer does not create a binding commitment
from that customer to purchase our products. Rather, a design win is solely an
expression of interest by potential customers in purchasing our products and is
not supported by binding commitments of any nature. Accordingly, a customer can
choose at any time to discontinue using our products in their designs or
product development efforts. Even if our products are chosen to be incorporated
into a customer's products, we still may not realize significant revenues from
that customer if their products are not commercially successful. Therefore, we
cannot be sure that any design win will result in purchase orders for our
products, or that these purchase orders will not be later canceled. Our
inability to convert design wins into actual sales and any cancellation of a
purchase order could have a negative impact on our financial condition and
results of operations.
WE DEPEND ON A FEW CUSTOMERS AND IF WE LOSE ANY OF THEM OUR SALES AND
OPERATIONS WILL SUFFER.
We sell our DSL products primarily to network equipment manufacturers. Our
top customers in 2000 were Lucent Technologies, Sumitomo Electric Industries,
Copper Mountain Networks, NEC and Nortel Networks accounting for 23.9%, 20.0%,
12.2%, 10.2% and 9.7%, of our revenues, respectively. Our top two customers in
1999 were Sumitomo Electric Industries and NEC, who accounted for 34.4% and
21.1% of our 1999 revenues, respectively. We do not have formal long-term
agreements with these customers, 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 large customers in future periods, although the specific
customers may vary from period to period. If we are not successful in
maintaining relationships with key customers and winning new customers, our
business and results of operations will suffer.
WE DERIVE A SUBSTANTIAL AMOUNT OF OUR REVENUES FROM INTERNATIONAL SOURCES, AND
DIFFICULTIES ASSOCIATED WITH INTERNATIONAL OPERATIONS COULD HARM OUR BUSINESS.
A substantial portion of our revenues have been derived from customers
located outside of the United States. In 2000 and 1999, 38.7% and 77.9% of net
revenues were to customers located in Asia. We may be unable to successfully
overcome the difficulties associated with international operations. These
difficulties include:
. staffing and managing foreign operations;
. changes in regulatory requirements;
. licenses, tariffs and other trade barriers;
. political and economic instability;
. obtaining governmental approvals for products; and
. complying with a wide variety of complex foreign laws and treaties.
OUR FUTURE SUCCESS WILL DEPEND IN PART ON OUR ABILITY TO PROTECT OUR
PROPRIETARY RIGHTS AND THE TECHNOLOGIES USED IN OUR PRINCIPAL PRODUCTS, AND IF
WE DO NOT ENFORCE AND PROTECT OUR INTELLECTUAL PROPERTY, OUR BUSINESS WILL BE
HARMED.
We rely on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality agreements and other contractual provisions to protect
our proprietary rights. However, these measures afford
31
only limited protection. Our failure to adequately protect our proprietary
rights may adversely affect us. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or to
obtain and use trade secrets or other information that we regard as
proprietary.
BECAUSE THE SALES CYCLE FOR OUR PRODUCTS TYPICALLY LASTS UP TO ONE YEAR, AND
MAY BE SUBJECT TO DELAYS, IT IS DIFFICULT TO FORECAST SALES FOR ANY GIVEN
PERIOD.
If we fail to realize forecasted sales for a particular period, our stock
price would likely decline and could decline significantly. 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, construction and testing of prototypes incorporating our products. Only
after these steps are complete will we receive a purchase order from a customer
for volume shipments. This process generally takes from 9 to 12 months, and may
last longer. Given this lengthy sales cycle, it is difficult to accurately
predict when sales to a particular customer will occur. In addition, we may
experience unexpected delays in orders from customers, which may prevent us
from realizing forecasted sales for a particular period. Our products are
typically sold to equipment manufacturers, who incorporate our products in the
products that they in turn sell to consumers or to network service providers.
As a result, any delay by our customers, or by our customers' customers, in the
manufacture or distribution of their products, will result in a delay in
obtaining orders of our products.
BECAUSE OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT MAY HAVE THE ABILITY 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.
Our officers and directors and their affiliates own or control approximately
30.4% of our common stock. Accordingly, our officers and directors and their
affiliates, as a group, may have the ability to control the election of a
majority of the members of our board of directors and the outcome of corporate
actions requiring stockholder approval. This concentration of ownership may
have the effect of delaying, deferring or preventing a change in control of us,
or may impede a merger, consolidation, takeover or other business combination
involving us. This concentration of ownership could also adversely affect our
stock's market price or lessen any premium over market price that an acquirer
might otherwise pay.
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, the market price of our
common stock could fall. These sales also 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.
THIRD-PARTY CLAIMS REGARDING INTELLECTUAL PROPERTY MATTERS COULD CAUSE US TO
STOP SELLING OUR PRODUCTS OR PAY MONETARY DAMAGES.
There is a significant risk that third parties, including current and
potential competitors, will claim that our products, or our customers'
products, infringe on their intellectual property rights. The owners of these
intellectual property rights may bring infringement claims against us. Any such
litigation, whether or not determined in our favor or settled by us, would be
costly and divert the attention of our management and technical personnel.
Inquiries with respect to the coverage of our intellectual property could
develop into litigation. In the event of an adverse ruling for an intellectual
property infringement claim, we could be required to obtain a license or pay
substantial damages or have the sale of our products stopped by an injunction.
In addition, if a customer of our chip sets cannot acquire a required license
on commercially
32
reasonable terms, that customer may choose not to use our chip sets. We have
obligations to indemnify our customers under some circumstances for
infringement of third-party intellectual property rights. From time to time we
receive letters from customers inquiring as to scope of these indemnity
rights. If any claims from third-parties required us to indemnify customers
under our agreements, the costs could be substantial and our business could be
harmed.
WE MAY BE REQUIRED TO OBTAIN LICENSES ON ADVERSE TERMS TO SELL INDUSTRY
STANDARD COMPLIANT CHIP SETS.
We have received correspondence, including a proposed licensing agreement,
from Amati Corporation (which was acquired by Texas Instruments) stating that
they believe that they own a number of patents that are required to be
compliant with the American National Standards Institute (ANSI) standard
specifications T1.413 and ITU-T recommended G.991.1/2. These industry
standards are based on the DMT line code. We have introduced products that we
believe are compliant with these industry standards, and we may be required to
obtain a license to these Amati Corporation patents. We are currently
evaluating the patents and proposed licensing terms. If these patents are
valid and essential to the implementation of products that are compliant with
this industry standard, then Amati Corporation may be required to offer us a
license on commercially reasonable, non-discriminatory terms. Because there
are currently no established terms for such a license, we may be unable to
agree with Amati Corporation on acceptable license terms. If these patents are
valid, but not essential to the implementation of products that are compliant
with this industry standard, and they apply to our products and we do not
modify our products so they become non-infringing, then Amati Corporation
would not be obligated to offer us a license on reasonable terms or at all. If
we are not able to agree on license terms and as a result fail to obtain a
required license, then we could be sued and potentially be liable for
substantial monetary damages or have the sale of our products stopped by an
injunction.
In addition, in October 2000, we received correspondence from Alcatel
requesting to discuss the potential for a non-exclusive license from Alcatel
permitting us to utilize technology covered by Alcatel patents. We expect to
review this request with Alcatel in the first half of year 2001 and may be
required to obtain licenses from Alcatel. It is the opinion of management that
the ultimate resolution of this contingency will not have a material adverse
effect on the financial condition of the Company.
The Company could be subject to claims similar to the Amati Corporation and
Alcatel claims in the future.
IF WE DELIVER PRODUCTS WITH DEFECTS, OUR CREDIBILITY WILL BE HARMED, AND THE
SALES AND MARKET ACCEPTANCE OF OUR PRODUCTS WILL DECREASE.
Our products are complex and have contained errors, defects and bugs when
introduced. If we deliver products with errors, defects or bugs, our
credibility and the market acceptance and sales of our products could be
harmed. Further, if our products contain errors, defects and bugs, then we may
be required to expend significant capital and resources to alleviate such
problems. Defects could also lead to product liability as a result of product
liability lawsuits against us or against our customers. We have agreed to
indemnify our customers in some circumstances against liability from defects
in our products. A successful product liability claim could seriously harm our
business, financial condition and results of operations.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MIGHT NOT BE AVAILABLE OR WHICH,
IF AVAILABLE, COULD BE ON TERMS ADVERSE TO OUR COMMON STOCKHOLDERS.
We expect the net proceeds from our recent public offering will meet our
working capital and capital expenditure needs for at least one year. After
that, we may need to raise additional funds, and we cannot be certain that we
will be able to obtain additional financing on favorable terms, if at all. We
may also require additional capital for the acquisition of businesses,
products and technologies that are complementary to ours. Further, if we issue
equity securities, the ownership percentage of our stockholders would be
reduced, and the
33
new equity securities may have rights, preferences or privileges senior to
those existing holders of our common stock. If we cannot raise needed funds on
acceptable terms, we may not be able to develop or enhance our products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, which could seriously harm our business, operating
results and financial condition.
OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE.
The market price of our common stock has been extremely volatile and will
likely continue to fluctuate significantly in response to the following
factors, some of which are beyond our control:
. variations in our quarterly operating results;
. changes in financial estimates of our revenues and operating results by
securities analysts;
. changes in market valuations of integrated circuit companies;
. announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
. loss or decrease in sales to a major customer or failure to complete
significant transactions;
. loss or reduction in manufacturing capacity from one or more of our key
suppliers;
. additions or departures of key personnel;
. future sales of our common stock;
. stock market price and volume fluctuations attributable to inconsistent
or low trading volume levels of our stock;
. commencement of or involvement in litigation; and
. announcements by us or our competitors of key design wins and product
introductions.
WE MAY MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND ACQUISITIONS INVOLVE
NUMEROUS RISKS.
Our business is highly competitive, and as such, our growth is dependent
upon market growth, our ability to enhance our existing products and our
ability to introduce new products on a timely basis. One of the ways we have
addressed and may continue to address the need to develop new products is
through acquisitions of other companies. Acquisitions involve numerous risks,
including the following:
. difficulties in integration of the operations, technologies, and products
of the acquired companies;
. the risk of diverting management's attention from normal daily operations
of the business;
. potential difficulties in completing projects associated with purchased
in-process research and development;
. risks of entering markets in which we have no or limited direct prior
experience and where competitors in such markets have stronger market
positions; and
. the potential loss of key employees of the acquired company.
Mergers and acquisitions of high-technology companies are inherently risky,
and no assurance can be given that our previous or future acquisitions will be
successful and will not materially adversely affect our business, operating
results or financial condition.
We must also maintain our ability to manage such growth effectively. Failure
to manage growth effectively and successfully integrate acquisitions could harm
our business and operating results.
34
ITEM 7A. Quantitative and Qualitative Disclosures About Market 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. 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 investments
were in money market funds, high quality commercial paper, government and non-
government debt securities and auction rate preferred stock. A hypothetical 100
basis point increase in interest rates would result in an approximate $60,000
decrease in the fair value of our available-for-sale securities as of December
31, 2000. See Note 2 of notes to the consolidated financial statements.
35
ITEM 8. Financial Statements and Supplementary Data
CENTILLIUM COMMUNICATIONS, INC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Financial Statements:
Report of Ernst & Young LLP, Independent Auditors......................... 37
Consolidated Statements of Operations..................................... 38
Consolidated Balance Sheets............................................... 39
Consolidated Statements of Stockholders' Equity........................... 40
Consolidated Statements of Cash Flows..................................... 42
Notes to Consolidated Financial Statements................................ 43
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts............................ 58
36
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Centillium Communications, Inc.
We have audited the accompanying consolidated balance sheets of Centillium
Communications, Inc. as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Centillium Communications, Inc. at December 31, 2000 and 1999, and the
consolidated 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. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
January 22, 2001
37
CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
(In thousands except per share data)
Net product revenues.................. $ 56,324 $ 2,509 $ --
Technology development revenues....... 150 1,235 752
------------ ------------ -----------
Total net revenues................ 56,474 3,744 752
Cost of revenues...................... 32,251 3,118 --
------------ ------------ -----------
Gross profit.......................... 24,223 626 752
Operating expenses:
Research and development............ 41,879 13,357 7,913
Sales and marketing................. 15,497 3,823 1,466
General and administrative.......... 15,846 4,227 1,095
Amortization of goodwill and other
acquisition-related intangibles.... 827 -- --
------------ ------------ -----------
Total operating expenses.......... 74,049 21,407 10,474
------------ ------------ -----------
Operating loss........................ (49,826) (20,781) (9,722)
Interest income....................... 4,170 1,274 582
Interest expense...................... (334) (242) (116)
------------ ------------ -----------
Loss before provision for income
taxes................................ (45,990) (19,749) (9,256)
Provision for income taxes............ 8 -- --
------------ ------------ -----------
Net Loss.............................. $ (45,998) $ (19,749) $ (9,256)
============ ============ ===========
Basic and diluted net loss per share
..................................... $ (2.00) $ (2.23) $ (1.15)
============ ============ ===========
Shares used to compute basic and
diluted net loss per share........... 22,950 8,842 8,056
============ ============ ===========
See accompanying notes.
38
CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
------------------
2000 1999
-------- --------
(In thousands,
except share and
per share data)
ASSETS
Current assets:
Cash and cash equivalents................................ $ 71,240 $ 3,202
Short-term investments................................... 16,444 25,111
Accounts receivable--net of allowance for doubtful
accounts of $932 at December 31, 2000, and $150 at
December 31, 1999....................................... 16,883 915
Inventories.............................................. 9,183 1,211
Other current assets..................................... 1,552 515
-------- --------
Total current assets.................................... 115,302 30,954
Property and equipment, net................................ 8,355 4,531
Goodwill and other intangible assets, net.................. 3,200 --
Other assets............................................... 1,086 102
-------- --------
Total assets.......................................... $127,943 $ 35,587
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Working capital line of credit........................... $ -- $ 2,044
Accounts payable......................................... 13,133 810
Accrued payroll & related expenses....................... 2,578 900
Accrued liabilities...................................... 4,277 325
Accrued taxes............................................ 8 --
Deferred revenue......................................... 200 122
Capital lease obligation--current portion................ -- 160
Current portion of long-term debt--current portion....... 367 550
-------- --------
Total current liabilities............................... 20,563 4,911
Long-term debt............................................. 221 549
Other liabilities.......................................... 289 72
Commitments and contingencies
Stockholders' equity:
Preferred stock; $0.001 par value:
Authorized shares: 10,000,000 at December 31, 2000, none
at December 31, 1999; Issued and outstanding shares:
none at December 31, 2000 and 1999...................... -- --
Convertible preferred stock; $0.001 par value:
Authorized shares: none at December 31, 2000, 15,630,000
at December 31, 1999; Issued and outstanding shares none
at December 31, 2000, 15,450,236 at December 31, 1999,
(aggregate liquidation preference of none at December
31, 2000, $58,332 at December 31, 1999)................. -- 15
Common stock; $0.001 par value:
Authorized shares: 100,000,000 at December 31, 2000,
32,000,000 at December 31, 1999; Issued and outstanding
shares: 33,030,114 at December 31, 2000, 10,318,841 at
December 31, 1999....................................... 33 10
Additional paid in capital................................. 208,520 80,270
Stockholder note receivable................................ (430) (430)
Accumulated other comprehensive income..................... 8 (25)
Deferred compensation...................................... (21,521) (16,043)
Accumulated deficit........................................ (79,740) (33,742)
-------- --------
Total stockholders' equity............................ 106,870 30,055
-------- --------
Total liabilities and stockholders' equity............ $127,943 $ 35,587
======== ========
See accompanying notes.
39
CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible
Preferred Stock Common Stock Additional
------------------- ----------------- Paid-In
Shares Amount Shares Amount Capital
----------- ------ ---------- ------ ----------
(In thousands, except share data)
BALANCE AT DECEMBER 31, 1997.. 6,230,732 $ 7 8,050,000 $ 8 $ 19,624
Cash proceeds from payments
on stockholders' notes
receivable.................. -- -- -- -- --
Noncash issuance of common
stock for services and
other....................... -- -- 29,850 -- 15
Cash proceeds from issuance
of Series B3 convertible
preferred stock, net of
issuance costs.............. 108,750 -- -- -- 434
Issuance of warrants to
purchase Series B3
convertible preferred
stock....................... -- -- -- -- 11
Cash proceeds from exercise
of rights to purchase Series
B1 convertible preferred
stock, net of issuance
costs....................... 1,500,000 1 -- -- 2,998
Exercise of options to
purchase common stock for
cash........................ -- -- 425,750 1 84
Deferred compensation related
to stock option grants...... -- -- -- -- 515
Amortization of deferred
compensation................ -- -- -- -- --
Net loss and comprehensive
net loss.................... -- -- -- -- --
----------- ----- ---------- ----- --------
BALANCE AT DECEMBER 31, 1998.. 7,839,482 8 8,505,600 9 23,681
Noncash issuance of common
stock for services and
other....................... -- -- 97,643 -- 173
Cash proceeds from issuance
of Series C convertible
preferred stock, net of
issuance costs.............. 7,610,754 7 -- -- 35,568
Exercise of options to
purchase common stock for
cash and notes.............. -- -- 1,715,598 1 1,147
Deferred compensation related
to stock option grants...... -- -- -- -- 19,701
Amortization of deferred
compensation................ -- -- -- -- --
Net loss..................... -- -- -- -- --
Unrealized loss on available-
for-sale investments........ -- -- -- -- --
Total comprehensive net
loss........................ -- -- -- -- --
----------- ----- ---------- ----- --------
BALANCE AT DECEMBER 31, 1999.. 15,450,236 15 10,318,841 10 80,270
Noncash issuance of common
stock for services.......... -- -- 53,900 -- 2,333
Exercise of options to
purchase common stock for
cash........................ -- -- 1,939,010 2 2,551
Issuance of shares under
Employee Stock Purchase
Plan........................ -- -- 52,196 -- 801
Deferred compensation related
to stock option grants...... -- -- -- -- 31,088
Amortization of deferred
compensation................ -- -- -- -- --
Conversion of preferred stock
to common stock............. (15,450,236) (15) 15,450,236 15 --
Issuance of common stock for
cash, net of issuance costs
of $7,182................... -- -- 5,200,000 6 91,477
Exercise of warrants to
purchase common stock....... -- -- 15,931 -- --
Net loss..................... -- -- -- -- --
Unrealized gain on available-
for-sale investments........ -- -- -- -- --
----------- ----- ---------- ----- --------
Total comprehensive net
loss........................ -- -- -- -- --
----------- ----- ---------- ----- --------
BALANCE AT DECEMBER 31, 2000.. -- $ -- 33,030,114 $ 33 $208,520
=========== ===== ========== ===== ========
40
CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
Accumulated
Stockholders' Other Total
Deferred Notes Accumulated Comprehensive Stockholders'
Compensation Receivable Deficit Income Equity
------------ ------------- ----------- ------------- -------------
(in thousands, except share data)
BALANCE AT DECEMBER 31,
1997................... $ -- $(746) $ (4,737) $ -- $ 14,156
Cash proceeds from
payments on
stockholders' notes
receivable............. -- 746 -- -- 746
Noncash issuance of
common stock for
services and other..... -- -- -- -- 15
Cash proceeds from
issuance of Series B3
convertible preferred
stock, net of issuance
costs.................. -- -- -- -- 434
Issuance of warrants to
purchase Series B3
convertible preferred
stock.................. -- -- -- -- 11
Cash proceeds from
exercise of rights to
purchase Series B1
convertible preferred
stock, net of issuance
costs.................. -- -- -- -- 2,999
Exercise of options to
purchase common stock
for cash............... -- -- -- -- 85
Deferred compensation
related to stock option
grants................. (515) -- -- -- --
Amortization of deferred
compensation........... 69 -- -- -- 69
Net loss and
comprehensive net
loss................... -- -- (9,256) -- (9,256)
-------- ----- -------- ----- --------
BALANCE AT DECEMBER 31,
1998................... (446) -- (13,993) -- 9,259
Noncash issuance of
common stock for
services and other..... -- -- -- -- 173
Cash proceeds from
issuance of Series C
convertible preferred
stock, net of issuance
costs.................. -- -- -- -- 35,575
Exercise of options to
purchase common stock
for cash and notes..... -- (430) -- -- 718
Deferred compensation
related to stock option
grants................. (19,701) -- -- -- --
Amortization of deferred
compensation........... 4,104 -- -- -- 4,104
Net loss................ -- -- (19,749) -- (19,749)
Unrealized loss on
available-for-sale
investments............ -- -- -- (25) (25)
--------
Total comprehensive net
loss................... -- -- -- -- (19,774)
-------- ----- -------- ----- --------
BALANCE AT DECEMBER 31,
1999................... (16,043) (430) (33,742) (25) 30,055
Noncash issuance of
common stock for
services............... -- -- -- -- 2,333
Exercise of options to
purchase common stock
for cash............... -- -- -- -- 2,553
Employee Stock Purchase
Plan................... -- -- -- -- 801
Deferred compensation
related to stock option
grants................. (31,088) -- -- -- --
Amortization of deferred
compensation........... 25,610 -- -- -- 25,610
Conversion of preferred
stock to common stock.. -- -- -- -- --
Issuance of common stock
for cash, net of
issuance costs of
$7,182................. -- -- -- -- 91,483
Exercise of warrants to
purchase common stock.. -- -- -- -- --
Net loss................ -- -- (45,998) -- (45,998)
Unrealized gain on
available-for-sale
investments............ -- -- -- 33 33
--------
Total comprehensive net
loss................... -- -- -- -- (45,965)
-------- ----- -------- ----- --------
BALANCE AT DECEMBER 31,
2000................... $(21,521) $(430) $(79,740) $ 8 $106,870
======== ===== ======== ===== ========
See accompanying notes.
41
CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
---------------------------
2000 1999 1998
-------- -------- -------
(in thousands)
OPERATING ACTIVITIES
Net loss......................................... $(45,998) $(19,749) $(9,256)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and leasehold amortization
expense........................................ 3,770 2,258 1,231
Amortization of deferred compensation........... 25,610 4,104 69
Issuance of common stock for services and
other.......................................... 2,333 173 15
Amortization of goodwill and other acquisition
related intangibles............................ 827 -- --
Amortization of warrants issued in conjunction
with financings................................ 6 10 6
Changes in operating assets and liabilities:
Accounts receivable.......................... (15,968) (915) --
Inventory.................................... (7,972) (1,211) --
Other current assets......................... (1,037) (258) 95
Other assets................................. 6 (59) 93
Working capital line of credit............... (2,044) 2,044 --
Accounts payable............................. 12,323 682 (482)
Accrued payroll and related expenses......... 1,678 512 201
Accrued liabilities.......................... 3,960 154 109
Deferred revenue............................. 78 47 75
Other liabilities............................ 217 53 19
-------- -------- -------
Net cash used in operating activities....... (22,211) (12,155) (7,825)
INVESTING ACTIVITIES
Purchases of short-term investments............. (29,045) (27,626) (8,837)
Sales and maturities of short-term
investments.................................... 37,745 7,600 7,740
Purchases of property and equipment............. (7,594) (3,005) (2,721)
Purchases of intangibles and other long-term
assets......................................... (5,017) -- --
-------- -------- -------
Net cash provided by (used in) investing
activities................................. (3,911) (23,031) (3,818)
FINANCING ACTIVITIES
Principal payments on capital lease............. (164) (223) (203)
Proceeds from borrowings under long-term debt
obligations.................................... -- -- 1,000
Principal payments on long-term debt
obligations.................................... (513) (498) (234)
Proceeds from issuance of common stock, net of
repurchases.................................... 94,837 718 85
Proceeds from stockholders note receivable...... -- -- 746
Proceeds from issuance of preferred stock....... -- 35,575 3,433
-------- -------- -------
Net cash provided by financing activities... 94,160 35,572 4,827
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents..................................... 68,038 386 (6,816)
Cash and cash equivalents at beginning of
period.......................................... 3,202 2,816 9,632
-------- -------- -------
Cash and cash equivalents at end of period....... $ 71,240 $ 3,202 $ 2,816
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest........................... $ 327 $ 244 $ 111
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
Issuance of warrants in conjunction with debt and
other........................................... $ -- $ -- $ 11
Property and equipment acquired under capital
lease........................................... $ -- $ -- $ 88
Issuance of common stock for note receivable..... $ -- $ 430 $ --
Deferred compensation related to stock option
grants.......................................... $ 31,088 $ 19,701 $ 515
See accompanying notes.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Summary of Significant Accounting Policies Nature of Operations:
Centillium Communications, Inc. (Centillium or the Company) was incorporated
in California on February 21, 1997 for the purpose of developing, producing,
and marketing semiconductor devices for equipment manufacturers serving the
broadband communications markets. The Company has focused initially on
developing products designed for the digital subscriber line (DSL) central
office and customer premises market. In December 1999, the Company
reincorporated in Delaware. Share amounts in the accompanying financial
statements have been restated to retroactively reflect the impact of the
reincorporation.
During the period from February 1997 through June 1999, Centillium was a
development stage company. Operating activities during this period were related
primarily to the design and development of our initial products, building our
corporate infrastructure, establishing relationships with customers and
suppliers, and raising capital. The Company began significant customer
shipments in the third quarter of 1999 and exited the development stage at that
time. Our revenues currently are derived from the sale of our DSL and Voice-
over-Packet network products which include the CopperLite CO, CopperLite CPE,
Optimizer, and Entropia families of products.
On May 24, 2000, we issued 4.0 million shares of our common stock in a
registered underwritten initial public offering and 600,000 shares of our
common stock in a concurrent private placement at a price of $19.00 per share.
On June 5, 2000, we sold an additional 600,000 shares pursuant to the
underwriters' overallotment option granted in connection with our initial
public offering. Net proceeds from these offerings were $91.5 million and are
being used for general working capital purposes and selected asset purchases.
Centillium has incurred significant losses since inception and, as of
December 31, 2000, had an accumulated deficit of $79.7 million including a net
loss for the year ended December 31, 2000 of $46.0 million.
Principles of Consolidation: The consolidated financial statements include
all the accounts of the Company and those of its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition: Revenues related to product sales are generally
recognized when the products are shipped to the customer, title has transferred
and no significant obligations remain. In circumstances where the customer has
delayed its acceptance of our product, we defer recognition of the revenue
until acceptance. Under certain circumstances the Company allows its customers
to return product. A provision is made for estimated product returns. Our
products are warranted to be free from defect for a period of one year. A
provision is made for warranty costs as shipments are made. To date, such costs
have not been material.
The Company has also performed research and product development work under
best efforts technology development agreements. Revenues under technology
development agreements are recognized when applicable contractual milestones
have been met, including deliverables, and in any case, does not exceed the
amount that would be recognized using the percentage-of-completion method. The
costs associated with these development agreements are expensed as incurred and
were included in research and development expenses in the accompanying
statements of operations.
Concentrations of Credit Risk: Financial instruments that potentially
subject the Company to significant concentration of credit risk consist
principally of cash, cash equivalents, short-term investments, and accounts
receivable. The Company places its short-term investments in several high-
credit-quality financial institutions.
43
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is exposed to credit risk in the event of default by these
institutions to the extent of the amount recorded on the balance sheet.
Accounts receivable are billed in U. S. currency derived from revenues earned
from customers primarily located in Japan and the United States. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally does not require collateral, but obtains letters of credit or
prepayments as deemed necessary.
The Company maintains reserves for potential credit losses. Management
judgement is used to estimate the required reserves. Actual results could
differ from those estimates.
Customer Concentrations: The following customers accounted for 10% or more
of total accounts receivable:
December
--------------
2000 1999
------ ------
Sumitomo Electric Industries................................. 30% 35%
Lucent Technologies.......................................... 19% *
NEC.......................................................... 10% 22%
Copper Mountain Networks..................................... * 18%
Avnet, Inc................................................... * 10%
* Represents less than 10% of total accounts receivable.
Cash Equivalents and Short-term Investments: The Company invests its excess
cash in money market accounts and debt instruments and considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents. Cash equivalents are recorded at cost, which
approximates fair value.
Investments with an original maturity at the time of purchase of over three
months and less than one year are classified as short-term investments. Under
the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," management classifies investments as available-for-sale at the
time of purchase and periodically reevaluates such designation. At December 31,
2000 and 1999, all of the Company's investments in debt securities were
classified as available-for-sale, with changes in market value recorded as
unrealized gains and losses in accumulated other comprehensive income until
their disposition. Realized gains and losses and declines in value judged to be
other than temporary on available-for-sale securities are included in interest
income and were insignificant for all periods presented. The cost of securities
sold is based on the specific-identification method.
Inventories: Inventories are stated at the lower of cost (first in, first
out) or market. The components of inventories are as follows (in thousands):
December 31,
--------------
2000 1999
------ ------
Work-in-process.............................................. $5,393 $ 486
Finished goods............................................... 3,790 725
------ ------
$9,183 $1,211
====== ======
Property and Equipment: Property and equipment are carried at cost less
accumulated depreciation. Property and equipment are depreciated for financial
reporting purposes using the straight-line method over the
44
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assets' estimated useful lives of three years. Leasehold improvements are
amortized using the straight-line method over the shorter of the useful lives
of the assets or the terms of the leases. Property and equipment are as follows
(in thousands):
December 31,
----------------
2000 1999
------- -------
Equipment and software..................................... $13,900 $ 7,567
Furniture and fixtures..................................... 657 352
Leasehold improvements..................................... 349 184
Construction in progress................................... 791 --
------- -------
15,697 8,103
Accumulated depreciation and amortization.................. (7,342) (3,572)
------- -------
Property and equipment, net................................ $ 8,355 $ 4,531
======= =======
Software Development Costs: In accordance with Financial Accounting
Standards Board Statement No. 86, "Accounting for Costs of Computer Software to
be Sold, Leased or Otherwise Marketed," costs incurred in the research and
development of the software embedded in our products are expensed as incurred
until technological feasibility has been established. The Company believes its
current process for developing software is essentially completed concurrently
with the establishment of technological feasibility which is evidenced by a
working model which includes the semiconductor device and embedded software;
accordingly, development costs incurred after the establishment of
technological feasibility have not been material and, therefore, have been
expensed.
Advertising Costs: The Company expenses advertising costs as incurred.
Advertising expense was not material for the years ended December 31, 2000,
1999 and 1998.
Goodwill and Other Intangible Assets: Goodwill represents the excess of the
purchase price paid over the fair value of tangible and identifiable intangible
net assets acquired in business acquisitions. Identifiable intangible assets
consist of assembled workforce. In the event that facts and circumstances
indicate that the carrying value of goodwill and intangible assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the fair value associated with the asset would be compared to the
asset's carrying amount to determine if a write-down may be required. No such
impairment has been indicated to date. Goodwill and other intangible assets are
stated net of accumulated amortization and are amortized on a straight-line
basis over their expected useful lives of three years.
2000 1999
------- -------
(In thousands)
Goodwill................................................... $ 1,657 $ --
Other purchased intangibles................................ 2,370 --
------- -------
4,027 --
Less accumulated amortization.............................. (827) --
------- -------
Goodwill and other intangible assets, net.................. $ 3,200 $ --
======= =======
Net Loss Per Share: Basic and diluted net loss per common share is presented
in conformity with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (FAS 128), for all periods presented. Basic and diluted
net loss per share have been computed using the weighted average number of
45
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
shares of common stock outstanding during the period, less shares subject to
repurchase. The following table presents the computation of basic and diluted
net loss per share (in thousands, except per share amounts):
Years ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------
Net loss ..................................... $(45,998) $(19,749) $(9,256)
======== ======== =======
Basic and diluted:
Weighted average shares of common stock
outstanding................................ 24,405 9,363 8,205
Less weighted average shares subject to
repurchase(/1/)............................ 1,455 521 149
-------- -------- -------
Weighted average shares used in computing
basic and diluted net loss per share ...... 22,950 8,842 8,056
======== ======== =======
Basic and diluted net loss per share ......... $ (2.00) $ (2.23) $(1.15)
======== ======== =======
(/1/The)weighted average period over which repurchase options lapse is
approximately 2.2 years, 2.5 years and 2.9 years for the years ended
December 31, 2000, 1999 and 1998, respectively.
The Company has excluded all outstanding warrants, stock options, and shares
subject to repurchase by the Company from the calculation of basic and diluted
net loss per share because these securities are antidilutive for all periods
presented. Options and warrants to purchase 7,809,376, 3,417,007 and 3,385,007
shares of common stock have been excluded for the years ended December 31,
2000, 1999 and 1998.
Stock-based Compensation: As described in Note 7, the Company has elected to
account for its employee stock plans in accordance with Accounting Principles
Board opinion No. 25, "Accounting For Stock Issued to Employees" (APB opinion
No. 25 ), and to adopt the disclosure-only provisions as required under
statement of Financial Accounting Standards No. 123, "Accounting For Stock-
Based Compensation" (FAS 123).
The Company accounts for stock issued to non-employees in accordance with
the provisions of FAS 123 and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services." Direct grants of
shares of common stock are made to certain advisors and consultants to the
Company for past services with no vesting or future performance obligations.
The fair value of such grants is immediately charged to expense in accordance
with EITF 96-18.
New Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS
133 establishes accounting methods for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. The Company will be required to implement FAS 133 as of January 1,
2001. Because the Company does not currently hold any derivative instruments
and does not engage in hedging activities, the Company expects that the
adoption of FAS 133 will have no impact on its financial position or results of
operations.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition and Financial
Statements. SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Companies that have not applied the accounting principles contained
in SAB 101 are required to implement SAB 101 and report a change in their
accounting principle. SAB 101, as subsequently amended, was effective for the
Company in fiscal 2000. The adoption of SAB 101 did not have a material impact
on our financial condition or results of operations.
46
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 2000, the Financial Accounting Standards Board issued FASB
Implementation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modification to the
terms of the previously fixed stock options or awards; and the accounting for
an exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 did not have a material impact on the company's financial
position or results of operations.
Reclassifications: Certain prior year balances have been reclassified to
conform to current year presentation.
47
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2. Cash Equivalents and Short-term Investments
The estimated fair market values of cash equivalents and short-term
investments are based on quoted market prices. Cash equivalents and short-term
investments as of December 31, 2000 and 1999 were as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
December 31, 2000 Cost Gain Loss Value
- ----------------- --------- ---------- ---------- -----------
Cash equivalents:
Money market funds................ $65,125 $ 0 $ 0 $65,125
Corporate debt securities......... 997 0 (1) 996
------- ----- ---- -------
66,122 0 (1) 66,121
------- ----- ---- -------
Short-term investments:
Commercial paper.................. 990 0 0 990
Corporate debt securities......... 1,974 6 0 1,980
Obligations of U.S. government and
affiliated agencies.............. 11,000 3 0 11,003
Auction rate preferred stock and
other............................ 2,000 0 0 2,000
Certificates of deposit........... 471 0 0 471
------- ----- ---- -------
16,435 9 0 16,444
------- ----- ---- -------
Total cash equivalents and
short-term investments......... $82,557 $ 9 $ (1) $82,565
======= ===== ==== =======
December 31, 1999
- -----------------
Cash equivalents:
Money market funds................ $ 970 $ -- $ -- $ 970
Short-term investments:
Commercial paper.................. 7,945 -- (4) 7,941
Corporate debt securities......... 10,997 -- (11) 10,986
Obligations of U.S. government and
affiliated agencies.............. 5,994 -- (10) 5,984
Auction rate preferred stock and
other............................ 200 -- -- 200
------- ----- ---- -------
25,136 -- (25) 25,111
------- ----- ---- -------
Total cash equivalents and
short-term investments......... $26,106 $ -- $(25) $26,081
======= ===== ==== =======
NOTE 3. Working Capital Line of Credit
The Company maintained a revolving credit agreement ("Credit Agreement")
with one of its vendors, Mitsubishi International. The Credit Agreement was
used to provide 90 day extended credit terms to finance wafer inventory
purchases. Borrowings of up to $5,000,000 under the Credit Agreement were
permitted. Under the terms of the Credit Agreement, Mitsubishi International
maintained a security interest in all inventory, cash and investments, and
accounts and notes receivable of the Company. The Credit Agreement was
cancelled on June 30, 2000 and the Company was released from all related
security liens under the Credit Agreement. As of December 31, 2000 and 1999,
zero and $2,044,000, respectively, were the balances outstanding under the
agreement.
NOTE 4. Deferred Revenue
In circumstances where the Company has not shipped the final version of a
product, or when a customer has delayed its acceptance of a product, we defer
recognition of the associated revenue at the time of shipment.
48
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, we defer technology development revenues when customers make
advance payments and specified milestones under the technology development
contract have not been met. This deferred revenue is recognized when the final
version of the product is delivered, upon acceptance by the customer, or when
the specified milestones have been met. As of December 31, 2000 and 1999, we
had $200,000 and $122,000 of deferred revenue which was comprised primarily of
unearned technology development fees and prepayments from certain Customers.
NOTE 5. Long-Term Debt Obligations
In April 1998, the Company entered into an agreement with a bank and a
financial institution which allows the Company to make multiple draws up to
$1,000,000 for the purchase of equipment. The facility bears interest at 7.30%
at December 31, 2000 and 1999.
Draws under the facility are payable via principal and interest payments
made ratably over a forty-two month period from the initial draw date. The
Company had approximately $433,000 and $706,000 outstanding against the
equipment facility as of December 31, 2000 and 1999, respectively, and no
remaining amount was available as the aggregate draw under the facility had
reached $1,000,000 during the year ended 1999. At the end of the equipment
facility's term, the Company is obligated to make an additional payment of
total facility draws multiplied by 15% ($150,000 as of December 31, 2000 and
1999). The Company is recording the additional payment as interest expense over
the life of the related long-term obligation. The Company has accrued
approximately $89,000 and $46,000 relating to this additional payment as of
December 31, 2000 and 1999, respectively.
In conjunction with the equipment facility described above, the Company
issued a warrant to the bank and to the financial institution to purchase 1,800
and 9,450 shares, respectively, of the Company's Series B3 convertible
preferred stock at an exercise price of $4.00 per share. The warrants are
immediately exercisable and will expire at the later of 10 years after the date
of grant or five years after the closing of the Company's initial public
offering. The fair value is not material for reporting purposes. On June 2,
2000, 1,800 of these warrants were exercised.
In September 1997, the Company negotiated a $1,000,000 term loan with a bank
to finance equipment purchases. The term loan bears interest at the bank's
prime rate plus 0.25% per annum (9.75% and 8.75% at December 31, 2000 and 1999,
respectively). The note was payable via monthly interest payments until April
1998 at which time the Company began making thirty-six equal monthly payments
of principal and interest. As of December 31, 2000 and 1999, the Company had
approximately $70,000 and $347,000 outstanding against the term loan,
respectively.
In conjunction with the term loan described above, the Company issued a
warrant for the purchase of 5,000 shares of the Company's Series B3 convertible
preferred stock at an exercise price of $4.00 per share. The warrant was
immediately exercisable and was exercised in full on June 2, 2000. The fair
value is not material for reporting purposes.
Outstanding borrowings under the long-term debt obligations are secured by
all of the Company's assets. The long-term debt obligations contain affirmative
and negative covenants and will, among other things, limit the Company's
ability to incur additional debt, pay cash dividends, or purchase or sell
certain assets. The obligations also require the Company to restrict certain
acquisitions, mergers, consolidations, or similar transactions.
49
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Maturities under the Company's long-term debt obligations at December 31,
2000 are as follows (in thousands):
2001.................................................................... $367
2002.................................................................... $221
NOTE 6. Commitments and Contingencies
The Company leases its primary facilities under operating leases expiring
through November 2005. Additionally, the Company leases certain software under
operating leases expiring through December 2002. Rental expense was
approximately $956,000, $642,000 and $341,000 for the years ended December 31,
2000, 1999 and 1998, respectively.
The Company leased certain equipment under a non-cancelable capital lease
agreement. Equipment under the agreement that was included in property and
equipment was approximately $636,000 at December 31, 2000 and 1999,
respectively. The related accumulated amortization was approximately $636,000
and $440,000 at December 31, 2000 and 1999. Amortization expense related to
assets under capital lease is included with depreciation expense. In addition,
the related equipment secures the capital lease, and the Company is required to
maintain liability and property damage insurance. The lease was terminated in
December, 2000 and no future payments are due under capital leases at December
31, 2000.
In July 1997, the Company issued a warrant in conjunction with the capital
lease agreement mentioned above. The warrant is immediately exercisable and
allows the holder to purchase 10,500 shares of the Company's Series B3
convertible preferred stock at an exercise price of $4.00 per share. The
warrant was exercised on July 11, 2000. The fair value assigned to the warrant
was not material for financial reporting purposes.
Future minimum lease payments under the Company's operating leases at
December 31, 2000 are as follows (in thousands):
2001................................................................ $ 5,669
2002................................................................ 5,985
2003................................................................ 1,687
2004................................................................ 1,029
2005................................................................ 652
Thereafter.......................................................... 68
-------
Total minimum payments............................................ $15,090
=======
The Company does not own or operate a fabrication facility and substantially
all of its wafer requirements are currently supplied by foundries located in
Asia. The Company's purchase obligations to these foundries are based on wafer
supply agreements or non-cancelable purchase orders. As of December 31, 2000,
the Company's non-cancelable purchase obligation is $24 million.
The semiconductor and telecommunications industries are characterized by
substantial litigation regarding patent and other intellectual property rights.
From time to time, the Company receives various inquiries or claims in
connection with these rights and may become party to associated claims. In
certain cases, management has accrued estimates of the amounts it expects to
pay upon resolution of such matters. Should the company not be able to secure
the terms it expects, these estimates may change and will be recognized in the
50
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
period in which they are identified. Although the ultimate outcome of such
inquiries is not presently determinable, management believes that the
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
NOTE 7. Stockholders' Equity
Convertible Preferred Stock: Prior to the initial public offering in May
2000, the Company had authorized 15,630,000 shares of convertible preferred
stock. All issued and outstanding shares of convertible preferred stock were
converted into 15,450,236 shares of common stock upon closing of the initial
public offering.
Common Stock Reserved: Common stock reserved is as follows:
December 31,
--------------------
2000 1999
--------- ----------
Common stock options.................................... 7,799,926 3,390,257
Series B3 convertible preferred stock warrants.......... 9,450 26,750
Convertible preferred stock............................. -- 15,450,236
--------- ----------
7,809,376 18,867,243
========= ==========
In March 1997, the Board of Directors approved a stock option plan that
authorized the grant of options to purchase shares of the Company's common
stock. The plan is administered by the Board of Directors and provides for
incentive stock options or nonqualified stock options to be issued to
employees, directors, and consultants of the Company. Prices for incentive
stock options may not be less than the fair value of the common stock at the
date of grant. Prices for nonqualified stock options may not be less than 85%
of the fair value of the common stock at the date of grant. Options granted
prior to our initial public offering are immediately exercisable and generally
vest over a period of four years from the date of grant. Options granted after
our initial public offering are exercisable when vested and generally vest over
a four-year period. Any unvested stock issued is subject to repurchase by the
Company at the original issuance price upon termination of the option holder's
employment. Unexercised options expire ten years after the date of grant.
Deferred Compensation: During the years ended December 31, 2000, 1999 and
1998, the Company recorded deferred compensation of approximately $31,088,000,
$19,701,000 and $515,000, respectively. This deferred compensation represents
the difference between the grant price and the deemed fair value for financial
statement reporting purposes of the Company's common stock options granted
during these periods. Deferred compensation expense is being amortized using
the graded vesting method, in accordance with FAS 123 and FAS Interpretation
No. 28, over the vesting period of each respective option, generally four
years. Under the graded vesting method, each option grant is separated into
portions based on their vesting terms which results in acceleration of
amortization expense for the overall award. The accelerated amortization
pattern results in expensing approximately 59% of the total award in year 1,
25% in year 2, 12% in year 3 and 4% in year 4.
Deferred compensation expense was allocated among the associated expense
categories as follows (in thousands):
Years ended December
31,
-----------------------
2000 1999 1998
------- ------- -------
Cost of revenues.................................... $ 1,459 $ 139 $ 0
Research and development............................ 10,722 1,744 29
Sales and marketing................................. 5,075 821 5
General and administrative.......................... 8,354 1,400 35
------- ------- -------
$25,610 $ 4,104 $ 69
======= ======= =======
51
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of additional information with respect to the
stock option plan:
Options Outstanding
--------------------------------
Weighted
Options Average
Available Number of Exercise
Range of Exercise Prices for Grant Shares Price
- ------------------------ ---------- ---------- --------
Balance at December 31, 1997.................. 196,500 1,758,500 $ 0.25
Options authorized.......................... 3,430,257 -- $ --
Options granted............................. (2,166,757) 2,166,757 $ 0.40
Options exercised........................... -- (425,750) $ 0.19
Options canceled............................ 141,250 (141,250) $ 0.35
---------- ---------- ------
Balance at December 31, 1998.................. 1,601,250 3,358,257 $ 0.35
Options authorized.......................... 1,500,000 -- $ --
Options granted............................. (2,106,600) 2,106,600 $ 1.80
Options exercised........................... -- (1,719,348) $ 0.67
Options available due to repurchase of
unvested shares............................ 3,750 -- $ 0.40
Options canceled............................ 355,252 (355,252) $ 0.30
---------- ---------- ------
Balance at December 31, 1999.................. 1,353,652 3,390,257 $ 1.09
Options authorized.......................... 5,569,743 -- $ --
Options granted............................. (6,988,263) 6,988,263 $22.45
Options exercised........................... -- (2,044,234) $ 1.40
Options available due to repurchase of
unvested shares............................ 105,224 -- $ --
Options canceled............................ 534,360 (534,360) $14.71
---------- ---------- ------
Balance at December 30, 2000.................. 574,716 7,799,926 $19.22
========== ========== ======
In addition, the following table summarizes information about stock options
that were outstanding and exercisable at December 31, 2000:
Options Outstanding Options Exercisable (1)
------------------------------ ------------------------------
Weighted Weighted
Weighted Average Weighted Average
Average Remaining Average Remaining
Number of Exercise Contractual Number of Exercise Contractual
Range of Exercise Prices Shares Price Life (Years) Shares Price Life (Years)
- ------------------------ --------- -------- ----------- --------- -------- -----------
$ 0.05--$ 1.00......... 452,154 $ 0.50 7.6 103,528 $0.48 7.6
$ 1.01--$ 3.00......... 795,709 $ 2.34 8.8 145,840 $2.35 8.8
$ 3.01--$ 10.00......... 2,136,050 $ 7.51 9.3 10,000 $5.00 9.3
$10.01--$ 30.00......... 3,405,763 $20.14 9.6 -- -- --
$30.01--$ 60.00......... 512,000 $50.43 9.5 -- -- --
$60.01--$100.00......... 498,250 $74.94 9.5 -- -- --
--------- ------ --- ------- ----- ---
$ 0.05--$100.00......... 7,799,926 $19.22 9.3 259,368 $1.71 8.3
========= ====== === ======= ===== ===
- --------
(1)excludes exerciseable shares subject to repurchase.
To provide employees with an opportunity to purchase common stock of the
Company through payroll deductions, the Company established the 2000 Employee
Stock Purchase Plan and initially reserved 500,000 shares of common stock for
issuance to participants. In addition, the plan provides for automatic annual
increases on the first day of each of the Company's fiscal years beginning
January 1, 2001, equal to the lesser of 400,000 shares or 1% of the Company's
outstanding common stock on the date of the annual increase, or a lesser number
of shares determined by the Board of Directors. Under the plan, the Company's
employees,
52
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
subject to certain restrictions, may purchase shares of common stock at the
lesser of 85 percent of the fair market value at either the beginning or end of
each six month offering period. Under the plan, the Company sold 52,196 shares
of common stock in November of 2000.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and
related interpretations in accounting for its employee stock options because,
as discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (FAS 123), requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB Opinion
No. 25, when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The option valuation models used to fair value options under FAS 123 were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected life of the option. Because the Company's employee stock options have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Pro forma information regarding net loss is required by FAS 123, which
requires that the information be determined as if the Company has accounted for
its employee stock-based awards under the fair value method of FAS 123. The
fair value of the options granted in 1999 and 1998 were estimated using the
minimum-value method with the following weighted average assumptions:
The fair value of the options granted in 1999 and 1998 were estimated using
the minimum value method, while the fair value of the options granted in 2000
were estimated using the Black-Scholes method.
Employee Stock
Stock Option Plan Purchase Plan
----------------------------- --------------
2000 1999 1998 2000
--------- --------- --------- --------------
Expected life from vest
date................... 3.0 years 4.0 years 5.0 years 6.0 months
Volatility.............. 128% -- -- 128%
Risk-free interest
rate................... 6.28% 5.50% 5.14% 6.28%
Dividend rate........... -- -- -- --
For purposes of FAS 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-based award plans been determined
on the fair value at the grant dates for awards under the plan consistent with
the method of FAS 123, the Company's net loss would have been increased to the
following approximate FAS 123 pro forma amounts:
Years ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------
FAS 123 Pro forma net loss applicable to
common stockholders.......................... $(70,467) $(20,075) $(9,415)
FAS 123 Pro forma basic and diluted net loss
per share applicable to common shareholders.. $ (3.07) $ (2.27) $ (1.17)
The options' weighted average grant date fair value, which is the value
assigned to the options under FAS 123, was approximately $16.72, $0.36 and
$0.24 for the years ended December 31, 2000, 1999 and 1998, respectively. The
weighted-average fair value of purchase rights granted under the Employee Stock
Purchase Plan in 2000 was $12.54 per share.
53
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The pro forma impact of options on the net losses for the years ended
December 31, 2000, 1999 and 1998 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.
The full effect of FAS 123 will not be fully reflected until fiscal 2001.
Stockholders' Notes Receivable: In November 1999, the Company issued 215,000
shares of common stock in connection with the exercise of an employee stock
option at an exercise price of $2.00 per share in return for a full recourse
note receivable for $430,000. The note bears interest at 6.00% per annum and is
due in October 2004 or earlier upon termination of the employee.
NOTE 8. Income Taxes
The difference between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate of 34% to income
before taxes is explained as follows:
2000 1999 1998
-------- ------- -------
Tax (benefit) at federal statutory rate........... $(15,641) $(6,715) $(3,147)
Loss for which no tax benefit is currently
recognizable..................................... 10,340 6,715 3,147
Unbenefited foreign losses........................ 5,301 -- --
Foreign tax provision............................. 8 -- --
-------- ------- -------
Total tax provision............................... $ 8 $ 0 $ 0
======== ======= =======
As of December 31, 2000, the Company has $36 million of net operating loss
carry forwards for federal and state purposes. The Company also has federal and
state research and development tax credit carryforwards of approximately $1.2
million and $900,000, respectively. The net operating losses and Federal credit
carryforwards will expire at various dates beginning in the years 2005 through
2020, if not utilized.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
tax credit carry forwards before full utilization.
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred taxes consist of the following (in thousands):
Years ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------
Deferred tax liabilities:
Other........................................... $ -- $ (197) $ (182)
Deferred tax assets
Net operating losses............................ 14,655 9,100 4,310
Tax credit carryforwards........................ 1,793 1,296 950
Reserves and accruals........................... 4,482 2,173 142
-------- -------- -------
Total deferred tax assets......................... 20,930 12,569 5,402
Valuation allowance............................... $(20,930) (12,372) (5,220)
-------- -------- -------
Net deferred tax assets........................... -- 197 182
-------- -------- -------
Net deferred taxes................................ $ -- $ -- $ --
======== ======== =======
54
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Based upon the weight of available evidence, which includes the
Company's historical operating performance and the reported cumulative net
losses to date, the Company has provided a full valuation allowance against its
deferred tax assets.
The valuation allowance increased by approximately $8.6 million, $7.2
million and $4.2 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
NOTE 9. Business Segment Information
Through December 31, 2000, the Company's revenues have been primarily
derived from one business segment, the sale of products for the DSL market. The
Company sells primarily to original equipment manufacturers and companies in
the communications industries.
The Chief Executive Officer has been identified as the Chief Operating
Decision Maker (CODM) because he has final authority over resource allocation
decisions and performance assessment. The CODM does not receive discrete
financial information about any individual components.
The following is a summary of net revenues by major geographic area:
Years ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
North America.................................... $ 34,451 $ 676 $ --
Japan............................................ 17,301 2,363 637
Asia--excluding Japan............................ 4,587 555 115
All Other........................................ 135 150
-------- -------- ------
Total $ 56,474 $ 3,744 $ 752
======== ======== ======
The following customers account for 10% or more of net revenues:
Years ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Mitsubishi Electric.............................. * * 60%
NEC.............................................. 10% 21% 10%
Sumitomo Electric Industries..................... 20% 34% 13%
Sungmi Telecom Electronics (Eastel).............. * * 15%
Lucent Technologies.............................. 24% -- --
Copper Mountain Networks......................... 12% -- --
--------
* represents less than 10% of net revenues.
NOTE 10. 401(K) Profit Sharing Plan And Trust
The Company has adopted a 401(k) Profit Sharing Plan and Trust that allows
eligible employees to make contributions subject to certain limitations. The
Company may make discretionary contributions based on profitability as
determined by the Board of Directors. There was no amount contributed by the
Company to the plan for the years ended December 31, 2000, 1999 and 1998.
NOTE 11. Asset Purchase
In June 2000, the Company acquired for cash consideration certain assets
from Avio Digital Inc. and entered into employment agreements with key
employees of Avio Digital Inc. The Company has assigned a portion of the
purchase price to identifiable tangible and intangible assets. Intangible
assets were determined based upon an independent appraiser's valuation. The
excess of the purchase price over the identifiable assets has been recorded as
intangible assets and goodwill in the financial statements as of December 31,
2000.
55
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12. Subsequent Events
On January 5, 2001, the Company closed a definitive agreement to purchase
vEngines, Inc., a California based company with a research and development
facility in India. In connection with the acquisition, Centillium issued an
aggregate of 813,915 shares of its Common Stock in exchange for all outstanding
shares of Engines Preferred and Common Stock and reserved 58,628 additional
shares of Common Stock for issuance upon exercise of outstanding vEngines
employee stock options. The merger transaction will be accounted for under the
purchase method of accounting. The Company expects to record a one-time charge
for purchased in-process research and development expenses related to the
acquisition in its first fiscal quarter, ending March 31, 2001. The total
purchase price of approximately $12.0 million will be allocated to identifiable
assets, purchased in-process research and development and goodwill. The Company
has retained a valuation specialist to assist in the purchase price allocation
and expects to receive a completed report in the first quarter of 2001.
NOTE 13. Quarterly Results of Operations (unaudited)
Summarized quarterly financial information is as follows (in thousands,
except per share data):
Year 2000 Three Months Ended
-------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
-------- -------- -------- -------
Net revenues........................... $ 4,723 $ 9,752 $ 17,658 $24,341
Cost of revenues....................... 3,483 5,963 10,057 12,748
Gross profit........................... 1,240 3,789 7,601 11,593
Operating loss......................... (10,312) (17,364) (12,424) (9,726)
Net loss............................... $(10,058) $(16,783) $(10,932) $(8,225)
Basic and diluted net loss per share... $ (1.03) $ (0.89) $ (0.35) $ (0.26)
Shares used to compute basic and
diluted net loss per share............ 9,808 18,919 31,334 31,738
Year 1999 Three Months Ended
-------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
-------- -------- -------- -------
Net revenues........................... $ 50 $ 655 $ 851 $ 2,188
Cost of revenues....................... -- -- 1,108 2,010
Gross profit........................... 50 655 (257) 178
Operating loss......................... (3,452) (3,755) (5,676) (7,898)
Net loss............................... $ (3,427) $ (3,495) $ (5,185) $(7,642)
Basic and diluted net loss per share... $ (0.42) $ (0.40) $ (0.58) $ (0.81)
Shares used to compute basic and
diluted net loss per share............ 8,227 8,770 8,985 9,381
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
56
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference from the
information under the captions "Information Concerning Solicitation and
Voting," "Election for Directors" and "Section 16(A) Beneficial Ownership
Reporting Compliance" contained in our definitive proxy statement to be filed
no later than April 30 , 2001 in connection with solicitation of proxies for
our annual meeting of stockholders to be held June 12, 2001 (the "Proxy
Statement").
ITEM 11. Executive Compensation
The information required by this item is incorporated by reference from the
information under the captions "Executive Compensation" and "Compensation of
Directors" contained in the Proxy Statement. In addition, Exhibits 10.25
through 10.28 of this report contain recently executed Employer Severance
Agreements and Change in Control Agreements.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the
information under the caption "Certain Transactions" contained in the Proxy
Statement.
57
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
The Financial Statements required by this item are listed on the Index to
Consolidated Financial Statements in Part II, Item 8 of this report.
(a) (2) Financial Statements Schedules
The following financial statement schedule of Centillium Communications,
Inc. for the years ended December 31, 2000, 1999, and 1998 should be read in
conjunction with the Consolidated Financial Statements of Centillium
Communications, Inc.
Schedule II--Valuation and Qualifying Accounts
Allowance For Doubtful Accounts:
Balances at Charged to
Beginning Costs and Deductions-- Balances at
of Period Expenses Write-Offs End of Period
----------- ---------- ------------ -------------
(in thousands)
Year ended December 31,
1998....................... $ -- $ -- $ -- $ --
===== ===== ===== =====
Year ended December 31,
1999....................... $ -- $ 150 $ -- $ 150
===== ===== ===== =====
Year ended December 31,
2000....................... $ 150 $ 782 $ -- $ 932
===== ===== ===== =====
All other schedules have been omitted because they are not applicable or are
not required or the information required to be set forth therein is included in
the Consolidated Financial Statements or Notes thereto.
(a) (3) Exhibits
Exhibit
Number Description of Exhibits
------- -----------------------
3.1* Certificate of Incorporation of the Registrant
4.1* Specimen certificate of common stock
4.2* Bylaws of the Registrant
10.1* Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2** 1997 Stock Plan
10.3** 2000 Employee Stock Purchase Plan
10.4* Second Amended and Restated Investors' Rights Agreement dated as of
April 30, 1999 between the Registrant and the stockholders named
therein
10.5* Lease, dated August 16, 1999, between the Registrant and Renco
Investment Company
10.6* Trade Financing Agreement, dated February 1, 1999, between the
Registrant and Mitsubishi International Corporation
10.7* Cooperation Agreement, dated March 2, 1998, between the Registrant and
Sungmi Telecom Electronics Co., Ltd.
10.8* Cooperation Agreement, dated November 30, 1997, between the Registrant
and Askey Computer Corporation
10.9* Cooperation Agreement, dated October 15, 1997, between the Registrant
and Sumitomo Electric Industries, Ltd.
58
Exhibit
Number Description of Exhibits
------- -----------------------
10.10* Addendum to Cooperation Agreement, dated April 20, 1999, between the
Registrant and Sumitomo Electric Industries, Ltd.
10.11* Cooperation Agreement, dated April 3, 1998, between the Registrant and
NEC Corporation
10.12* Addendum to Cooperation Agreement, dated February 23, 1999, between
the Registrant and NEC Corporation
10.13* Co-Development Agreement, dated October 15, 1997, between the
Registrant and Mitsubishi Electric Corporation
10.14* Addendum to Co-Development Agreement, dated June 21, 1999, between the
Registrant and Mitsubishi Electric Corporation
10.15* Cooperation Agreement, dated August 25, 1997, between the Registrant
and Mitsubishi Electric Corporation
10.16* Wafer Supply Agreement, dated April 22, 1999, between the Registrant
and Mitsubishi Electronics America
10.17* Agreement and Mutual Release dated February 2, 2000 between the
Registrant and A. Travis White
10.18* Offer letter between the Registrant and John W. Luhtala dated November
30, 1999
10.19* Offer letter between the Registrant and Jon S. Sherburne dated August
17, 1999
10.20* Technical Services Consulting Agreement, dated March 19, 1998, between
Registrant and Mitsubishi Corporation
10.21* Foundry Agreement, dated March 7, 2000, between Registrant and United
Microelectronics Corporation
10.22* Assembly and Test Services Agreement, dated February 28, 2000, between
Registrant and ST Assembly and Test Services, Ltd.
10.23** 2001 Nonstatutory Stock Option Plan
10.24 Lease, dated August 28, 2000, between the Registrant and Bedford
Property Industries, Inc.
10.25 Change of Control Severance Agreement between the Registrant and
Surendra Mandava dated December 14, 2000
10.26 Change of Control Severance Agreement between the Registrant and Faraj
Aalaei dated December 14, 2000
10.27 Change of Control Severance Agreement between the Registrant and
Shahin Hedayat dated December 14, 2000
10.28 Change of Control Severance Agreement between the Registrant and
Kamran Elahian dated December 14, 2000
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see signature page)
27.1* Financial Data Schedules
- --------
* Incorporated by reference to the Exhibits filed with the Registration
Statement of Form S-1 (No. 333-30772), declared effective by the Commission
on May 23, 2000.
** Incorporated by reference to the Exhibits filed with the Registration
Statement of Form S-8 (No. 333-56610), filed with the Commission on March 6,
2001.
59
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of the fiscal year ended December 31, 2000.
(c) Exhibits.
The Company hereby files as part of this Form 10-K the Exhibits listed in
Item 14 (a)(3) above.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Fremont, State of California, on March 16, 2001.
Centillium Communications, Inc.
*
By: _________________________________
Faraj Aalaei,
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John W. Luhtala, and each of them, as his true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments to this Report, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming that all said attorneys-in-fact and
agents, or any of them or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
* Chief Executive Officer March 16, 2001
______________________________________ and Director (Principal
Faraj Aalaei Executive Officer)
/s/ John W. Luhtala Vice President and Chief March 16, 2001
______________________________________ Financial Officer
John W. Luhtala (Principal Financial and
Accounting Officer)
/s/ Shahin Hedayat President and Director March 16, 2001
______________________________________
Shahin Hedayat
/s/ Jere Drummond Director March 16, 2001
______________________________________
Jere Drummond
/s/ Kamran Elahian Director March 16, 2001
______________________________________
Kamran Elahian
61
Name Title Date
---- ----- ----
* Director March 16, 2001
______________________________________
Irwin Federman
/s/ Robert C. Hawk Director March 16, 2001
______________________________________
Robert C. Hawk
* Director March 16, 2001
______________________________________
Lip-Bu Tan
/s/ John W. Luhtala March 16, 2001
*By: _________________________________
John W. Luhtala
Attorney-in-fact
62