-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JPUJXsMFb09kMuGDFFXQNp2c8gtfwm9JvHFGHBARw7OpcktKNkL1Tz1/ELP/2mh1 w8liPKsmGmUYAhGdQoKULQ== /in/edgar/work/20000816/0001012870-00-004448/0001012870-00-004448.txt : 20000922 0001012870-00-004448.hdr.sgml : 20000922 ACCESSION NUMBER: 0001012870-00-004448 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20000816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER ACCESS TECHNOLOGY CORP CENTRAL INDEX KEY: 0001120155 STANDARD INDUSTRIAL CLASSIFICATION: [ ] IRS NUMBER: 770302527 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-43866 FILM NUMBER: 703768 BUSINESS ADDRESS: STREET 1: 2403 WALSH AVENUE CITY: SANTA CLARA STATE: CA ZIP: 95051 BUSINESS PHONE: 4087276600 MAIL ADDRESS: STREET 1: 2403 WALSH AVENUE CITY: SANTA CLARA STATE: CA ZIP: 95051 S-1 1 0001.txt FORM S-1 As filed with the Securities and Exchange Commission on August 16, 2000 Registration No. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- COMPUTER ACCESS TECHNOLOGY CORPORATION (Exact Name of Registrant as Specified in its Charter) --------------- California (prior to reincorporation in Delaware) 3825 77-0302527 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
2403 Walsh Avenue, Santa Clara, CA 95051, (408) 727-6600 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------- Dan Wilnai President and Chief Executive Officer Computer Access Technology Corporation 2403 Walsh Avenue, Santa Clara, CA 95051, (408) 727-6600 (Name and address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies to: DONALD J. BOUEY, ESQ. LAIRD H. SIMONS III, ESQ. SHANE M. BYRNE, ESQ. KATHERINE TALLMAN SCHUDA, ESQ. JASON W. KUHNS, ESQ. PAMELA A. SERGEEFF, ESQ. MATTHEW R. GEMELLO, ESQ. FENWICK & WEST LLP MICHELLE C. BRATHWAITE, ESQ. Two Palo Alto Square BROBECK, PHLEGER & HARRISON LLP Palo Alto, California 94306 One Market--Spear Tower (650) 494-0600 San Francisco, California 94105 (415) 442-0900
--------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. --------------- If securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
Proposed Maximum Aggregate Title of Each Class of Securities Offering Price Amount to to be Registered be Registered(1) Amount of Registration Fee - ------------------------------------------------------------------------------------------------- Common Stock, $0.001 par value............ $52,325,000 $13,814 - -------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o). Includes amount subject to the over-allotment option granted to the underwriters. --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell securities, and we are not soliciting offers to buy these + +securities, in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED AUGUST 16, 2000 [COMPUTER ACCESS TECHNOLOGY CORPORATION LOGO] Shares Common Stock Computer Access Technology Corporation is offering shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We have applied for approval for quotation of our common stock on the Nasdaq National Market under the symbol "CATZ." We anticipate that the initial public offering price will be between $ and $ per share. -------------- Investing in our common stock involves risks. See "Risk Factors" beginning on page 8. --------------
Per Share Total ----- ----- Public Offering Price............................................ $ $ Underwriting Discounts and Commissions........................... $ $ Proceeds to Computer Access Technology Corporation............... $ $
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Computer Access Technology Corporation has granted the underwriters a 30- day option to purchase up to an additional shares of common stock to cover over-allotments. -------------- Robertson Stephens CIBC World Markets SG Cowen Needham & Company, Inc. The date of this Prospectus is , 2000. [Artwork] You should rely on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Until , 2000 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. --------------------- TABLE OF CONTENTS
Page ---- Summary.................................................................. 4 Risk Factors............................................................. 8 Note Regarding Forward-Looking Statements................................ 19 Use of Proceeds.......................................................... 19 Dividend Policy.......................................................... 19 Capitalization........................................................... 20 Dilution................................................................. 21 Selected Consolidated Financial Data..................................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 25 Business................................................................. 35 Management............................................................... 48 Related Party Transactions............................................... 60 Principal Stockholders................................................... 62 Description of Capital Stock............................................. 63 Shares Eligible for Future Sale.......................................... 66 Underwriting............................................................. 68 Legal Matters............................................................ 71 Experts.................................................................. 71 Where You Can Find Additional Information................................ 71 Index to Consolidated Financial Statements............................... F-1
--------------------- Our trademarks and service marks include CATC, CATC Trace, CATC Detective, CATC Traffic Generator, CATC HPT, CATC Inspector, CATC UHT, CATC FireInspector, CATC USB4DOS, CATC NetMate, CATC NetMate Plus, CATC Chief, CATC UPT, CATC Merlin and CATC Advisor. Trademarks, trade names and service marks of other companies appearing in this prospectus are the property of the respective holders. Use or display by us of other parties' trade names, trademarks or service marks is not intended to and does not imply a relationship with, or endorsement or sponsorship of our company by, the trade name or trademark owners. 3 SUMMARY This summary highlights some of the information found in greater detail elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors" and our consolidated financial statements and accompanying notes before you decide to buy our common stock. Our Business We are a leading provider of advanced verification systems and connectivity products for existing and emerging digital communications standards such as Universal Serial Bus, or USB, IEEE 1394, or 1394, Bluetooth wireless technology and Ethernet. Our products are used by semiconductor, device, system and software companies at each phase of their products' lifecycles from development through production and market deployment. Our verification systems consist of development and production products that accurately monitor communications traffic and diagnose operational problems to ensure standards compliance and interoperability as well as assist system manufacturers to download software onto new computers. Our connectivity products enable reliable, uninterrupted service for broadband Internet access. Our customers include industry leaders such as 3Com, AT&T, Dell, Intel, Microsoft, Motorola, NEC, Sony, Sun Microsystems and Toshiba. In addition, we sell our products through a network of distributors and value-added resellers including Dynacolor, Enable Engineering, Nohau Electronik and Toyo. We strive to establish and maintain close, long-term relationships with our customers, emphasizing technical excellence, product quality and customer satisfaction. The rise of the Internet and the widespread availability of broadband transmissions has created a growing demand for direct access to information from a variety of digital appliances. Devices such as personal computers, Internet appliances, mobile phones, personal digital assistants and digital cameras, must be interoperable across different data delivery systems. Communication among digital devices, or connectivity, occurs over a variety of physical media, or channels, such as copper wire, fiber optic cable and wireless technologies. Digital devices communicate by sending electronic signals through a channel according to a specified protocol. A protocol is the set of detailed rules that govern both the channel and the device hardware and software, and regulate the manner in which the signals are sent. The channel and the protocol are both typically specified in a formal communications standard. For communication to be successful, each device must recognize and follow the same standard. As the number of devices and communications channels have increased, communications technologies have become more complex, and new standards are emerging to enable interoperability. We have expertise in the USB, USB 2.0, 1394, Bluetooth and Ethernet standards and are actively engaged with our customers throughout their development and production processes. Utilizing our easy to use, color-coded graphical user interface, the CATC Trace, our advanced verification systems generate, capture, filter and analyze high-speed communications traffic, allowing our customers to quickly discover and remedy standards violations, persistent and intermittent errors and flaws and inconsistencies in their product design and production. Our connectivity products allow 4 for simple plug and play installation and incorporate our vertically integrated, proprietary technologies, including an application specific integrated circuit, or ASIC, embedded software and software drivers. By controlling all design elements of our connectivity products, we are able to assure full standards compliance and create products with better functionality, stability and reliability. Our objective is to be the leading provider of advanced verification systems and connectivity products for designers, manufacturers and users of computer, telecommunications and consumer electronic technologies for existing and emerging communications standards. Our strategy includes the following key elements: . Expand our product offerings and establish first mover advantage for emerging communications standards. We introduced the first commercial product for USB developers, our Detective analyzer, the first for Bluetooth developers, our Merlin analyzer, and the first for USB 2.0 developers, our Advisor analyzer. We plan to continue identifying attractive market opportunities in emerging communications standards and being the first to market with innovative products. . Heighten brand awareness by broadening our reputation as an expert in communications standards and extending our expert status to new standards. We intend to continue to increase our participation in communications standards groups and as invited experts at design workshops. . Leverage strategic relationships with leaders in the computer, telecommunications and consumer electronic industries to gain early access to new standards and technologies. This will continue to provide us with early access to specifications before they become widely available or accepted, as well as to product roadmaps and additional market opportunities. . Expand our distribution channels by increasing our marketing and sales forces both domestically and internationally. We also intend to establish relationships with additional distributors and value-added resellers. . Reduce our development time for new products for emerging communications standards. We intend to continue to invest substantial resources in research and development to establish and extend our technological leadership. We also intend to leverage the modular architecture of our hardware and software technology to accelerate the development and introduction of our new products for emerging communications standards. Corporate Information We were incorporated in California in February 1992. We plan to reincorporate in Delaware prior to this offering. Our principal executive offices are located at 2403 Walsh Avenue, Santa Clara, California 95051 and our telephone number is (408) 727-6600. Our web site can be found at catc.com. Information contained in our web site does not constitute a part of this prospectus. 5 The Offering Common stock offered by CATC....................... shares Common stock to be outstanding after the offering.. shares Use of proceeds.................................... For general corporate purposes, including working capital and capital expenditures. See "Use of Proceeds" for more information regarding our planned use of the proceeds from the offering. Proposed Nasdaq National Market symbol............. CATZ
- -------------------- The number of shares of common stock to be outstanding after this offering is based on 11,664,064 shares of common stock outstanding as of June 30, 2000. It does not include: . 1,085,000 shares issuable upon exercise of stock options outstanding as of June 30, 2000 at a weighted average exercise price of $0.58 per share; . 2,765,000 additional shares available for future grant or issuance under our 2000 stock incentive plan, which will become effective on the closing of this offering, including shares available for future grant under our 1994 stock option plan and 2000 stock option/stock issuance plan to be transferred to our 2000 stock incentive plan, which number of shares will be increased annually by an aggregate of 4% of our outstanding shares of common stock; and . 250,000 additional shares available for future grant or issuance under our 2000 employee stock purchase plan, which will become effective on the closing of this offering, which number of shares will be increased annually by an aggregate of 1% of our outstanding shares of common stock. Except as set forth in the financial statements or as otherwise specified in this prospectus, all information in this prospectus: . assumes no exercise of the underwriters' over-allotment option; and . reflects our reincorporation into Delaware prior to this offering. 6 Summary Consolidated Financial Data (in thousands, except share and per share data)
Six Month Year Ended December Period Ended 31, June 30, --------------------- ------------- 1997 1998 1999 1999 2000 ------ ------ ------- ------ ------ Consolidated Statement of Income Data: Revenue.................................... $4,169 $6,771 $12,506 $5,289 $8,782 Gross profit............................... $3,405 $5,334 $ 9,370 $4,052 $6,614 Income from operations..................... $1,424 $1,165 $ 2,884 $1,213 $2,424 Net income................................. $ 924 $ 537 $ 1,262 $ 611 $1,255 Net income per share Basic.................................... $ 0.08 $ 0.05 $ 0.11 $ 0.05 $ 0.11 Diluted.................................. $ 0.08 $ 0.04 $ 0.10 $ 0.05 $ 0.10 Weighted average shares outstanding Basic.................................... 11,429 11,429 11,429 11,429 11,487 Diluted.................................. 11,606 12,063 12,067 12,181 12,406
June 30, 2000 -------------------- Actual As Adjusted ------- ------------ Consolidated Balance Sheet Data: Cash, cash equivalents and short term investments......... $ 6,319 $ -- Working capital........................................... 7,925 Total assets.............................................. 12,018 Total debt................................................ -- Total stockholders' equity................................ 8,269
The as adjusted balance sheet data appearing above gives effect to our receipt of the net proceeds from the sale of shares of common stock at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and our estimated offering expenses. 7 RISK FACTORS Any investment in our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this prospectus, before you decide to buy our common stock. If any of the following risks actually occurs, our business, results of operations and financial condition would likely suffer. In these circumstances, the market price of our common stock could decline and you might lose all or part of the money you paid to buy our common stock. Risks Related to Our Business Our future operating results are unpredictable and are likely to fluctuate from quarter to quarter and, if we fail to meet the expectations of securities analysts or investors, our stock price would likely decline significantly. Our quarterly and annual operating results have fluctuated in the past and are likely to fluctuate significantly in the future due to a number of factors, many of which are wholly or partially outside of our control. Accordingly, we believe that period to period comparisons of our results of operations are not meaningful and should not be relied upon as indications of future performance. Some of the factors that could cause our quarterly or annual operating results to fluctuate include: . the amount and timing of our operating expenses and capital expenditures; . changes in the volume of our product sales and pricing concessions on volume sales; . the timing, reduction, deferral or cancellation of customer orders or purchases; . the gain or loss of customers; . the availability and pricing of competing products and technologies and the resulting effect on sales and pricing of our products; . fluctuations in the cost and availability of raw materials and the cost and availability of manufacturing and assembly capacity; . seasonality in some of our target markets; . the effectiveness of our product cost reduction efforts; . changes in the mix of products we sell; . changes in demand by the end users of our customers' USB and other products; . variability of our customers' product lifecycles; . changes in the average selling prices of our products; and . cancellations, changes or delays of deliveries to us by our manufacturers and suppliers. If our operating results fall below the expectations of securities analysts or investors, the trading price of our common stock would likely decline significantly. 8 If we fail to keep up with rapid technological change and evolving industry standards, our products could become less competitive or obsolete. The markets for our products are characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. Our products may cease to be competitive if we fail to introduce new products or product enhancements that address these changes, meet new customer requirements and support new standards. To continue to introduce new products or product enhancements on a timely basis, we must: . identify emerging technological trends in our target markets, including new communications standards; . accurately define and design new products or product enhancements to meet market needs; . develop or license the underlying core technologies necessary to create new products and product enhancements; and . respond effectively to technological changes and product introductions by others. If we are unable to identify, develop, manufacture, market or support new or enhanced products successfully or on a timely basis, our competitors could gain market share or our new products or product enhancements might not gain market acceptance. Further, we might not be able to respond effectively to product announcements by competitors, technological changes or emerging industry standards. We depend upon widespread market acceptance of our USB products, and our revenue will decline if the market does not continue to accept these products. We currently derive a substantial majority of our revenue from sales of our USB products. Revenue from sales of our USB products accounted for approximately 89.7% of our revenue in the year ended December 31, 1999 and 91.6% of our revenue in the six month period ended June 30, 2000. We expect that revenue from these products will continue to account for a substantial portion of our revenue for the foreseeable future. If the market does not continue to accept our USB products, our revenue will decline significantly. Factors that may affect the market acceptance of our current USB products include the continued growth of the markets for USB compliant devices as well as the performance and pricing of our USB products and the availability, functionality and price of competing products. Companies must also modify their products to support new versions of USB as they are developed, such as USB 2.0. Many of these factors are beyond our control. In addition, in order to maintain widespread market acceptance, we must continue to differentiate ourselves from the competition through our technical expertise, product offerings and brand name recognition. Failure of our USB products to maintain market acceptance could adversely impact our revenue. If we devote resources to developing products for communications standards that ultimately are not widely accepted, our business could be harmed. We have incurred significant expense to develop our products for the Bluetooth wireless technology standard. This standard has not yet gained market acceptance. Furthermore, we may incur significant expenses and dedicate significant time and resources in developing products for other emerging communications standards that may not gain broad acceptance. The failure of a standard to gain widespread acceptance, or our failure to be first to market with products that address a particular standard, would likely harm our business. 9 If we fail to maintain and expand our relationships with the core or promoter companies in our target markets, we may have difficulty developing and marketing our products. It is important to our success to maintain and expand our relationships with companies that are leaders in developing new communications standards in our target markets. We believe that we need to work closely with these core or promoter companies to gain valuable insights into the market demands for new products, to obtain early access to new communications standards as they are developed and to help us design new products. We will need to maintain our relationships with leading technology and infrastructure companies, as well as expand our relationships with leaders in markets that are new for us. Generally, we do not enter into formal contracts that obligate these companies to work or share their technology with us. Industry leaders could choose to work with other companies as they develop new communications standards in the future. If we fail to maintain and expand our industry relationships, we could lose the opportunity for first-mover advantage with respect to emerging standards and it would be more difficult for us to develop and market products that address emerging standards. If our target markets do not accept our products for emerging communications standards, our revenue growth could suffer. Our future growth depends upon our ability to sell advanced verification systems and connectivity products for emerging communications standards such as Bluetooth wireless technology. However, our products may not gain widespread acceptance by customers. The success of our products depends upon volume production of computer, communications and consumer electronic products that use a particular standard and the acceptance of these products by customers. The markets for emerging standards products have only recently begun to develop and are rapidly evolving. As a result, it is difficult to predict their potential size or future growth rate. There is significant uncertainty as to whether these markets ultimately will develop at all or, if they do develop, whether they will develop rapidly. If the markets for a particular emerging communications standard fail to develop or develop more slowly than expected, or if our products do not achieve widespread market acceptance by customers in these markets, our business would be significantly harmed. Delays in the development of new products or product enhancements could harm our operating results and our competitive position. The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and highly skilled engineering and development personnel, as well as accurate anticipation of technological and market trends. We have in the past experienced delays in product development, and delays may occur again in the future. To the extent that we do not introduce the first product for an emerging standard or customers defer or cancel orders with the expectation of a new product or product enhancement release, our operating results could suffer. Product development delays may result from numerous factors, including: . changing product specifications and customer requirements; . difficulties in hiring and retaining necessary technical personnel; . difficulties in allocating engineering resources and overcoming resource limitations; . difficulties with contract manufacturers; . changing market or competitive product requirements; and . unanticipated engineering complexities. 10 If we are unable to meet the design and market introduction schedules for our new products or product enhancements, our operating results may suffer. Variations in our revenue may cause fluctuations in our operating results. We may experience a delay in generating or recognizing revenue for a number of reasons. Historically, we have had little backlog and our revenue in any quarter has depended upon orders booked and shipped in that quarter. Furthermore, our customers may delay scheduled delivery dates and cancel orders without significant penalty. In addition, even if we ship orders, generally accepted accounting principles may require us to defer recognition of revenue from those orders until a later date. Because we budget our operating expenses on anticipated revenue trends and a high percentage of our expenses is fixed in the short term, any delay in generating or recognizing forecasted revenue could have a significant negative impact on our operating results. Shifts in our product mix may result in declines in gross margins. Our gross margins vary among our products, with our gross margins generally being higher on our advanced verification systems than on our connectivity products. Our overall gross margins have fluctuated from period to period as a result of shifts in product mix, the introduction of new products and our ability to reduce product costs. Decreases in average selling prices of our products may reduce gross margins and revenue. The average selling prices of our products may decrease in the future in response to product introductions by us or our competitors, or by other factors, including discounts given on volume purchase orders or pricing pressures. In that event, we would need to continue to develop and introduce on a timely basis new products that incorporate features that can be sold at higher average selling prices. Failure to do so would likely cause our revenue and gross margins to decline. Continued competition in our markets may lead to a reduction in our prices, revenue and market share. The markets for advanced verification and connectivity products for emerging communications standards are highly competitive. We compete with multiple companies in various markets, including 3A International in the markets for products that address the 1394 standard. Any of our competitors may develop technologies that more effectively address our targeted markets at a lower cost. In addition, these competitors may enter into strategic alliances or business combinations that increase their ability to innovate and address our markets. We may also face competition from other equipment manufacturers, such as Finisar, National Instruments, Rhode & Schwartz and Tektronix. Many of these companies have substantially greater financial, technical, marketing and distribution resources and brand name recognition than we have. We expect that more companies, including some of our customers, will enter our markets. If these companies develop products that compete with our products or form alliances with, or acquire companies offering competing products, even if those products do not have capabilities comparable to our products, they would be significant competitors and their activities could cause us to reduce our prices. Increased competition could result in significant price erosion, reduced revenue, lower margins and loss of market share, any of which would significantly harm our business. 11 We depend on contract manufacturers for substantially all of our manufacturing requirements and if these manufacturers fail to provide us with adequate supplies of high-quality products, our competitive position, reputation and business could be harmed. We currently rely on four contract manufacturers for all of our manufacturing requirements except for the final assembly, testing and quality assurance on our lower volume, higher margin products. We do not have long-term contracts with any of these manufacturers. We have experienced delays in product shipments from some of our contract manufacturers in the past, which in turn forced us to delay product shipments to our customers. We may in the future experience similar delays or other problems, such as inferior quality and insufficient quantity of products, any of which could significantly harm our business. Our contract manufacturers may not be able to meet our future requirements for timely delivery of products of sufficient quality and quantity. We intend to introduce new products and product enhancements regularly, which will require that we rapidly achieve volume production by coordinating our efforts with those of our suppliers and contract manufacturers. The inability of our contract manufacturers to provide us with adequate supplies of high quality products or the loss of any of our contract manufacturers would cause a delay in our ability to fulfill orders while we obtain a replacement manufacturer. If we are unable to forecast our supply needs accurately, our costs may increase or we may not be able to ship products in a timely manner. We purchase components used in the manufacture of our products from several key sources. We depend on these sources to deliver necessary components in a timely manner based on twelve-month rolling forecasts that we provide. Lead times for materials and components that we order vary significantly and depend on factors such as specific supplier requirements, contract terms and current market demand for particular components. If we overestimate our component requirements, we may develop excess inventory, which would increase our costs. If we underestimate our component requirements, we may not be able to fulfill customer orders. We depend on sole source suppliers for several key components of our products, and we may lose sales if they fail to meet our needs. We obtain some parts, components and packaging used in our products from sole sources of supply. For example, we obtain field programmable gate array integrated circuits from Altera, ASICs from LSI Logic and micro-controllers from Intel. If suppliers are unable to meet our demand for sole source components at reasonable costs and if we are unable to obtain an alternative source or the price for an alternative source is prohibitive, our ability to maintain timely and cost-effective production of our products would be harmed. In addition, because we rely on purchase orders rather than long-term contracts with our suppliers, including our sole source suppliers, we cannot predict with certainty our ability to obtain components in the longer term. If we are unable to obtain components or receive a smaller allocation of components than is necessary to manufacture products in quantities sufficient to meet demand, customers could choose to purchase competing products. If our distributors and value-added resellers do not actively sell our products, our product sales may decline. We sell a substantial portion of our products through distributors and value- added resellers, including Toyo, our distributor in Japan, which accounted for approximately 18.8% of our revenue in the year ended December 31, 1999 and approximately 12.9% of our revenue in the six month period ended June 30, 2000. 12 Our distributors and resellers generally offer products from multiple manufacturers. Accordingly, there is a risk that these distributors and resellers may give higher priority to selling products from other suppliers and reduce their efforts to sell our products. Our resellers may not market our products effectively or continue to devote the resources necessary to provide us with effective sales, marketing and technical support. Our distributors may on occasion build inventories in anticipation of substantial growth in sales and, if growth does not occur as rapidly as anticipated, may decrease the amount of product ordered from us in subsequent quarters. A slowdown in orders from our distributors could reduce our revenue in any given quarter and give rise to fluctuations in our operating results. In addition, our sales to Toyo are made on the basis of purchase orders rather than a long-term commitment. Our sales to our other distributors are made either by purchase orders or under one year agreements. The loss of any one of our major distributors, or the delay of significant orders from these distributors, could result in decreased revenue. If we are unable to hire and retain additional sales, marketing, engineering and finance personnel, our growth will be impaired. To grow our business successfully and maintain a high level of quality, we will need to recruit, retain and motivate additional highly skilled sales, marketing, engineering and finance personnel. If we are not able to hire and retain a sufficient number of qualified employees, our growth will be impaired. In particular, as a company focused on the development of complex products, we will need to hire additional hardware and software developers and engineers and project managers of various experience levels in order to keep pace with technological change and develop products that meet the needs of rapidly evolving markets. Competition for skilled employees, particularly in the San Francisco Bay Area, is intense. We may have even greater difficulty recruiting potential employees after this offering if prospective employees perceive the equity component of our compensation package to be less valuable after this offering than before this offering. The loss of key management personnel, on whose knowledge, leadership and technical expertise we rely, would harm our ability to execute our business plan. Our success depends heavily upon the continued contributions of our key management personnel, whose knowledge, leadership and technical expertise would be difficult to replace. All of our executive officers and key personnel are employees at will. We maintain no key person insurance on any of our personnel. If we were to lose the services of any of our key personnel, our ability to execute our business plan would be harmed. In addition, employees who leave our company may subsequently compete against us. If we fail to manage our growth effectively, our business could suffer. Our ability to offer products and implement our business plan successfully in a rapidly evolving market requires an effective planning and management process. We increased our headcount by 45.0% in the six month period ended June 30, 2000. This growth may place a significant strain on our management systems, infrastructure and other resources. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures. For example, we intend to migrate our operations to a new enterprise resource planning system that affects almost every facet of our business operations. Typically, these conversions negatively affect a company's near-term ability to conduct business due to problems such as historical data conversion errors, 13 personnel training time associated with the new system, delays in implementation or unforeseen technical problems during conversion. If problems arise during this transition, we could experience delays in or lack of shipping, an inability to support our existing customer base, delays in paying vendors, delays in collecting from customers, an inability to place or receive product orders or other operational problems. If this were to occur, our profitability or financial position could be negatively impacted. If we are not able to manage our growth effectively and efficiently, the quality of our products, our ability to retain key personnel and our operating results could suffer. Our products may contain defects that may cause us to incur significant costs, divert our attention from product development efforts and result in a loss of customers. Highly complex products such as our verification systems and connectivity products frequently contain defects when they are first introduced or as new versions are released. We have in the past experienced these defects and may experience them in the future. If any of our products contain defects or have reliability, quality or compatibility problems, our reputation may be damaged and customers may be reluctant to buy our products. As a result, our ability to retain existing customers or attract new customers could be harmed. In addition, these defects could interrupt or delay sales to our customers. We may have to invest significant capital and other resources to alleviate these problems. If any of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur additional development costs and product recall, repair or replacement costs. These problems may also result in claims against us by our customers or others. In addition, these problems may divert our technical and other resources from other development efforts. If we are unable to expand our direct sales operations and our distributor and value-added reseller channels or successfully manage our expanded sales organization, our ability to increase our revenue will be harmed. Historically, we have relied on a limited direct sales organization, supported by third-party resellers, to sell our products domestically and on third party distributors to sell our products internationally. We intend to develop and expand our direct sales organization in North America and our indirect distribution channels internationally. We may not be able to expand our direct sales organization successfully, and the cost of any expansion may exceed the revenue generated from such expansion. In addition, if we fail to develop relationships with significant distributors or resellers, or if these distributors or resellers are not successful in their sales or marketing efforts, sales of our products may decrease. Any acquisitions that we undertake could be difficult to integrate, disrupt our business, dilute stockholder value and harm our operating results. We expect to review opportunities to buy other businesses or technologies that would complement our current products, expand the breadth of our markets or enhance our technical capabilities, or that might otherwise offer growth opportunities. While we have no current agreements or negotiations underway, we may buy businesses, product lines or technologies in the future. If we make any future acquisitions, we could issue stock that would dilute the percentage ownership of our existing stockholders, incur substantial debt or assume contingent liabilities. To date, we have not acquired any other business or technologies. Potential acquisitions also involve numerous risks, including: . problems in assimilating the purchased operations, technologies or products; 14 . costs or accounting charges associated with the acquisition; . diversion of management's attention from our existing business; . adverse effects on existing business relationships with suppliers and customers; . risks associated with entering markets in which we have little or no prior experience; and . potential loss of key employees of purchased businesses. Economic, political and other risks associated with international sales and operations could adversely affect our sales. Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. We recognized approximately 42.4% of our revenue from sales to international customers in the year ended December 31, 1999 and 33.4% in the six month period ended June 30, 2000. We anticipate that revenue from international operations will continue to represent a substantial portion of our revenue. In addition, several of our manufacturing facilities and suppliers are located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including: . changes in foreign currency exchange rates; . changes in a specific country's or region's political or economic conditions, particularly in emerging markets; . trade protection measures and import or export licensing requirements; . potentially negative consequences from changes in tax laws; . difficulty in staffing and managing widespread operations; . differing labor regulations; . differing protection of intellectual property; and . unexpected changes in regulatory requirements. New accounting pronouncements may cause our operating results to fluctuate. In various areas, including revenue recognition and stock-based compensation, accounting standards and practices continue to evolve. The SEC is preparing to issue interpretive guidance relating to SAB 101, and the FASB continues to address revenue recognition and other related accounting issues. We believe we comply with all of the rules and related guidance as they currently exist. However, any changes to generally accepted accounting principles in these areas would likely affect our results of operations. Our headquarters and our contract manufacturers are located in Northern California, Asia and other areas where natural disasters may occur. Currently, our corporate headquarters and some of our contract manufacturers are located in Northern California and our other contract manufacturers are located in Asia. Northern California and Asia historically have been vulnerable to natural disasters and other risks, such as earthquakes, fires and floods, which at times have disrupted the local economy and posed physical risks to our and our manufacturers' properties. We also maintain facilities in San Diego, California and Netanya, Israel. We presently do not have redundant, multiple site capacity in the event of a natural disaster. 15 Any failure to protect our intellectual property adequately may significantly harm our business. To date, we protect our proprietary processes, software, know-how and other intellectual property and related rights through copyrights, trademarks and maintenance of trade secrets, including entering into confidentiality agreements. Our success and ability to compete depend in part on our proprietary technology. We currently do not have any patents. Although we anticipate filing applications for one or more patents, patents may not issue as a result of these or other patent applications. Any patents that ultimately issue may be successfully challenged by others or invalidated, or may not provide us with a significant competitive advantage. Other parties may breach confidentiality agreements or other protective contracts into which we have entered and we may not be able to enforce our rights in the event of these breaches. We may be required to spend significant resources to monitor and police our intellectual property rights, including pursuing remedies in court. We recently sent letters to two companies demanding that they cease infringing our copyrights. We believe that this matter is in the process of being resolved in our favor. However, in the future, we may not be able to detect infringement and may lose competitive position in our markets before we do so. In addition, competitors may design around our technologies or develop competing technologies. The laws of other countries in which we market our products might offer little or no effective protection of our proprietary technology. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it, which could significantly harm our business. Claims that we infringe third-party intellectual property rights could result in significant expenses or restrictions on our ability to sell our products. Our industry is characterized by uncertain and conflicting intellectual property claims and frequent intellectual property litigation, especially regarding patent rights. We cannot be certain that our products do not and will not infringe issued patents or other intellectual property rights of others. Historically, patent applications in the United States have not been publicly disclosed until the patent is issued, and we may not be aware of filed patent applications that relate to our products or technology. If patents are later issued in connection with these applications, we may be liable for infringement. From time to time, other parties may assert patent, copyright and other intellectual property rights to technologies and in various jurisdictions that are important to our business. Any claims asserting that our products infringe or may infringe proprietary rights of third parties, including claims arising through our contractual indemnification of our customers, regardless of their merit or resolution, would likely be costly and time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us, or at all. Changes in current laws or regulations or the imposition of new laws or regulations could impede the sale of our products. In the United States, our products must comply with various laws or regulations and standards defined by the Federal Communications Commission. Internationally, products that we develop also will be required to comply with regulations established by local authorities in various countries. Failure to comply with regulations established by regulatory authorities or to obtain timely domestic or foreign regulatory approvals or certificates could significantly harm our business. 16 Risks Related to this Offering Our stock price may be volatile and you might not be able to resell your shares at or above the initial public offering price. There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us. This initial public offering price might vary from the market price of our common stock after the offering. If you purchase shares of our common stock, you might not be able to resell those shares at or above the initial public offering price. Many factors could cause the market price of our common stock to rise and fall, including: . changes in market valuations of other technology companies; . changes in financial estimates by securities analysts; . variations in our operating results that cause us to fail to meet analysts' or investors' expectations; . announcements by us or our competitors of significant technical innovations, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; . additions or departures of key personnel; . future sales of equity or debt securities; and . general economic, industry and market conditions. In addition, the stock market, and the stocks of technology companies in particular, have experienced extreme volatility that often has been unrelated or disproportionate to the performance of these companies. Similar market fluctuations in the future might cause our stock price to decline regardless of our performance. In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were to become involved in securities class action litigation, it could result in substantial costs and a diversion of management's attention and resources from our existing business. Because a limited number of existing stockholders will together own a majority of our stock, the voting power of other stockholders, including purchasers in this offering, might be limited. We anticipate that our executive officers, directors, entities affiliated with them and other 5% or greater stockholders will beneficially own approximately % of our outstanding common stock after this offering. As a result, if some of these existing stockholders choose to act together, they will have the ability to control matters submitted to our stockholders for approval, including the election and removal of directors and the approval of any business combinations. These actions might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company, which could harm the market price of our stock. We might be unable to meet our future capital requirements, and if we issue additional equity or debt securities to do so, our stockholders could experience additional dilution. We might be required to seek additional funding to meet our capital requirements, particularly if we elect to acquire complementary businesses, products or technologies. If we are required to raise additional funds, we might not be able to do so on favorable terms, if at all. In addition, if we issue 17 new equity securities, stockholders might experience dilution or the holders of new equity or debt securities might have rights, preferences or privileges senior to those of existing stockholders. If we are unable to raise additional capital on acceptable terms, we might not be able to develop or enhance our products, take advantage of future opportunities, or respond to competition. Substantial future sales of our securities in the public market could depress our stock price. Our current stockholders hold a substantial number of shares, which they will be able to sell in the public market in the near future. Sales of a substantial number of shares of our securities after this offering could cause our stock price to fall. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional securities. You should read "Shares Eligible for Future Sale" for a full discussion of shares that might be sold in the public market in the future. You will experience immediate and substantial dilution in the book value of your shares. If you purchase shares of common stock in this offering, you will experience immediate and substantial dilution of $ per share, based on an assumed initial public offering price of $ per share. This dilution arises because our earlier investors paid substantially less than the initial public offering price when they purchased their shares of common stock. You will experience additional dilution upon the exercise of outstanding stock options to purchase our common stock. As of June 30, 2000, we had options outstanding to purchase 1,085,000 shares of common stock with a weighted average exercise price of $0.58 per share. The provisions of our charter documents might inhibit potential acquisition bids that a stockholder might believe are desirable, and the market price of our common stock could be lower as a result. Provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include: . providing that only one of the three classes of directors is elected each year; . limiting the ability of our stockholders to remove directors without cause; . eliminating the ability of our stockholders to act by written consent; . limiting the ability of our stockholders to call special meetings of stockholders; and . establishing notice requirements for stockholders to nominate directors or submit proposals for consideration at stockholder meetings. In addition, Section 203 of the Delaware General Corporation Law and the terms of our stock option plans may discourage, delay or prevent a change in control. Any of these provisions might prevent the market price of our common stock from increasing in response to actual or rumored takeover attempts. We have broad discretion in how we use the proceeds of this offering, and we might not use these proceeds effectively. Our management has broad discretion in the use of the net proceeds of this offering and could spend the net proceeds in ways that do not yield a favorable return or to which stockholders object. We may use the proceeds to acquire complementary businesses or technologies, although no acquisitions are currently planned. These acquisitions could prove to be unprofitable and harm our business. Until we need to use the net proceeds of this offering, we plan to invest them in short-term, interest-bearing investment grade securities. 18 NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. Forward-looking statements relate to future events or to our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "could," "believe," "estimate," "predict," "potential" or similar expressions. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including factors more fully described in the "Risk Factors" section and elsewhere in this prospectus. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events or results. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur. USE OF PROCEEDS We estimate the net proceeds from the sale of the shares of our common stock in this offering will be $ million, assuming an initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. If the underwriters' overallotment option is exercised in full, we estimate that we will receive approximately $ million in net proceeds from this offering. We intend to use the net proceeds for general corporate purposes, including working capital and capital expenditures. Management will retain broad discretion in the allocation of the net proceeds of the offering. You will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the proceeds. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses, products or services. This would reduce the use of the net proceeds for one or more of the uses indicated above. We currently have no agreements or commitments with respect to any acquisition or investment, and we are not involved in any negotiations with respect to any such transaction. Pending these uses, we will invest the net proceeds of this offering in short-term, interest-bearing investment grade securities. DIVIDEND POLICY We have never declared or paid dividends on our common stock and do not anticipate declaring or paying cash dividends in the foreseeable future. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors our board of directors deems relevant, including our financial condition, operating results, current and anticipated cash needs, plans for expansion and debt covenants. 19 CAPITALIZATION The following table sets forth our capitalization as of June 30, 2000: . on an actual basis; and . on an as adjusted basis giving effect to the sale in this offering of shares of common stock at an assumed initial public offering price of $ per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
June 30, 2000 ----------------- As Actual Adjusted ------- -------- (in thousands) Stockholders' equity: Common stock, $0.001 par value, 100,000,000 shares authorized and 11,664,064 shares issued and outstanding, actual; $0.001 par value, 100,000,000 shares authorized and shares issued and outstanding, as adjusted........... 12 Additional paid-in capital.................................. 5,694 Deferred stock-based compensation........................... (1,442) Retained earnings........................................... 4,005 ------- ---- Total stockholders' equity.............................. 8,269 ------- ---- Total capitalization.................................... $ 8,269 $ ======= ====
This table excludes the following: . 1,085,000 shares issuable upon exercise of stock options outstanding as of June 30, 2000 at a weighted average exercise price of $0.58 per share; . 2,765,000 additional shares available for future grant or issuance under our 2000 stock incentive plan, which will become effective on the closing of this offering, including shares available for grant under our 1994 stock option plan and our 2000 stock option/stock issuance plan, which number of shares will be increased annually by an aggregate of 4% of our outstanding common stock; and . 250,000 additional shares available for future grant or issuance under our 2000 employee stock purchase plan, which will become effective on the closing of this offering, which number of shares will be increased annually by an aggregate of 1% of our outstanding common stock. This table should be read in conjunction with the "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes to our consolidated financial statements appearing elsewhere in this prospectus. 20 DILUTION If you buy shares of our common stock in this offering, your investment will be diluted to the extent of the difference between the public offering price per share of our common stock and the as adjusted net tangible book value per share of our common stock after this offering. Our net tangible book value as of June 30, 2000 was approximately $ million, or approximately $ per share of common stock. Net tangible book value per share represents our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of June 30, 2000. After giving effect to the sale of shares of our common stock, at an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our as adjusted net tangible book value as of June 30, 2000 would have been $ , or $ per share. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate and substantial dilution of $ per share to new investors purchasing shares of common stock in this offering. The following table illustrates this dilution: Assumed initial public offering price per share................... $ Net tangible book value per share as of June 30, 2000........... $ Increase per share attributable to new investors ............... ---- As adjusted net tangible book value per share after the offering.. ---- Net tangible book value dilution per share to new investors....... $ ====
This table excludes all options that will remain outstanding upon completion of this offering. To the extent that any of these options are exercised at an exercise price less than the offering price, there would be further dilution to new investors. For additional information regarding these shares, see "Capitalization," "Management--Benefit Plans," "Description of Capital Stock" and Note 4 of the notes to our consolidated financial statements. Assuming the exercise in full of the underwriters' over-allotment option, our as adjusted net tangible book value as of June 30, 2000 would have been approximately $ per share, representing an immediate increase in net tangible book value of $ per share to our existing stockholders and an immediate and substantial dilution in net tangible book value of $ per share to new investors. The following table sets forth as of June 30, 2000, the total consideration paid and the average price per share paid by existing stockholders and by new investors in this offering at our assumed initial public offering price of $ per share, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
Shares Purchased Total Consideration Average -------------- ---------------------- Price Number Percent Amount Percent Per Share ------ ------- ---------- ---------- --------- Existing stockholders...... % $ % $ New investors.............. --- --- ---------- --------- Total.................... % $ % === === ========== =========
This table excludes the following: . 1,085,000 shares issuable upon exercise of stock options outstanding as of June 30, 2000 at a weighted average exercise price of $0.58 per share; 21 . 2,765,000 additional shares available for future grant or issuance under our 2000 stock incentive plan, which will become effective on the closing of this offering, including shares available for grant under our 1994 stock option plan and our 2000 stock option/stock issuance plan, which number of shares will be increased annually by an aggregate of 4% of our outstanding common stock; and . 250,000 additional shares available for future grant or issuance under our 2000 employee stock purchase plan, which will become effective on the closing of this offering, which number of shares will be increased annually by an aggregate of 1% of our outstanding common stock. 22 SELECTED CONSOLIDATED FINANCIAL DATA You should read the following consolidated financial data in conjunction with our consolidated financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The consolidated statement of income data for the year ended December 31, 1997 to 1999 and the six month period ended June 30, 2000, and the consolidated balance sheet data as of December 31, 1998 to 1999 and June 30, 2000, are derived from the audited consolidated financial statements included in this prospectus. The consolidated statement of income data for the year ended December 31, 1996, and the consolidated balance sheet data as of December 31, 1996 and 1997, are derived from consolidated audited financial statements not included in this prospectus. The consolidated statement of income data for the year ended December 31, 1995 and the six month period ended June 30, 1999, and the consolidated balance sheet data as of December 31, 1995 are unaudited. Our unaudited consolidated financial statements have been prepared by us on a basis consistent with our consolidated audited financial statements and, in management's opinion, include all adjustments consisting only of normal recurring adjustments necessary for a presentation of the consolidated results of operations for these periods. Our historical results are not necessarily indicative of results to be expected for future periods.
Six Month Period Ended Year Ended December 31, June 30, ------------------------------------ ------------- 1995 1996 1997 1998 1999 1999 2000 ------ ------ ------ ------ ------- ------ ------ (in thousands, except per share data) Consolidated Statement of Income Data: Revenue..................... $ 689 $2,258 $4,169 $6,771 $12,506 $5,289 $8,782 Cost of revenue............. 315 395 764 1,437 3,136 1,237 2,168 ------ ------ ------ ------ ------- ------ ------ Gross profit................ 374 1,863 3,405 5,334 9,370 4,052 6,614 Operating expenses: Research and development.. 394 782 1,210 2,572 3,538 1,751 1,882 Sales and marketing....... 273 289 431 800 1,194 572 1,103 General and administrative........... 140 152 340 345 434 171 433 Amortization of deferred stock-based compensation............. -- -- -- 452 1,320 345 772 ------ ------ ------ ------ ------- ------ ------ Total operating expenses............... 807 1,223 1,981 4,169 6,486 2,839 4,190 ------ ------ ------ ------ ------- ------ ------ Income (loss) from operations................. (433) 640 1,424 1,165 2,884 1,213 2,424 Interest income............. 24 18 56 80 138 54 156 ------ ------ ------ ------ ------- ------ ------ Income (loss) before provision for income taxes...................... (409) 658 1,480 1,245 3,022 1,267 2,580 Provision for income taxes.. 2 20 556 708 1,760 656 1,325 ------ ------ ------ ------ ------- ------ ------ Net income (loss)........... $ (411) $ 638 $ 924 $ 537 $ 1,262 $ 611 $1,255 ====== ====== ====== ====== ======= ====== ====== Net income (loss) per share...................... Basic..................... $(0.04) $ 0.06 $ 0.08 $ 0.05 $ 0.11 $ 0.05 $ 0.11 ====== ====== ====== ====== ======= ====== ====== Diluted................... $(0.04) $ 0.06 $ 0.08 $ 0.04 $ 0.10 $ 0.05 $ 0.10 ====== ====== ====== ====== ======= ====== ====== Weighted average shares outstanding................ Basic..................... 11,429 11,429 11,429 11,429 11,429 11,429 11,487 ====== ====== ====== ====== ======= ====== ====== Diluted................... 11,429 11,503 11,606 12,063 12,067 12,181 12,406 ====== ====== ====== ====== ======= ====== ======
23
December 31, June 30, --------------------------------- -------- 1995 1996 1997 1998 1999 2000 ----- ------ ------ ------ ------ -------- (in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and short term investments.................. $ 366 $ 480 $1,816 $2,215 $4,195 $ 6,319 Working capital.................... 412 981 1,883 3,005 5,754 7,925 Total assets....................... 462 1,268 2,727 3,926 7,654 12,018 Total debt......................... -- -- -- -- -- -- Total stockholders' equity......... 409 1,047 1,971 3,202 6,027 8,269
24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and accompanying notes. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as statements of our plans, objectives and intentions. Our actual results may differ materially from those indicated in these forward-looking statements. See "Note Regarding Forward-Looking Statements." Factors that could cause or contribute to these differences include but are not limited to those discussed in "Risk Factors" and elsewhere in this prospectus. Overview We are a leading provider of advanced verification systems and connectivity products for existing and emerging digital communications standards such as USB, 1394, Bluetooth wireless technology and Ethernet. Our products are used by semiconductor, device, system and software companies at each phase of their products' lifecycles from infrastructure development through product development and market deployment. Our verification systems consist of development and production products that accurately monitor communications traffic and diagnose operational problems to ensure standards compliance and interoperability as well as assist system manufacturers to download software onto new computers. Our connectivity products enable reliable, uninterrupted service for broadband Internet access. We currently outsource most of the manufacturing of our verification systems and connectivity products so that we may concentrate our resources on the design, development and marketing of our existing and new products. We were formed in February 1992 and offered our first verification system in 1996 and our first connectivity solution in 1998. Our product offerings have expanded to include a range of analyzers, testers and connectivity products, including FireInspector, our 1394 bus and protocol analyzer; NetMate Plus, a USB connectivity product; UPT, a USB production product; Advisor, our fourth generation USB bus and protocol analyzer; and Merlin, a Bluetooth wireless protocol analyzer. We report our revenue and gross profit in three business segments: development, production and connectivity products. In the year ended December 31, 1999, our revenue from our development products was $6.2 million, from production products was $4.6 million and from connectivity products $1.7 million. In the six month period ended June 30, 2000, our revenue from our development products was $4.0 million, from production products was $2.8 million and from connectivity products was $2.0 million. Historically, we have generated a majority of our revenue across all segments from products that address the USB standard. Revenue from our USB products accounted for approximately 89.7% of our revenue in the year ended December 31, 1999 and 91.6% in the six month period ended June 30, 2000. We sell our products on a purchase order basis. We have adopted Statement of Position, or SOP, 97-2, Software Revenue Recognition. Under SOP 97-2, we recognize revenue to resellers and end users upon shipment provided that there is persuasive evidence of an arrangement, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is probable. When we have shipped products but some elements essential to the functionality of the products have not been completed, revenue and associated cost of revenue are deferred until all remaining elements have been delivered. As a result, our revenue trends are dependent on the timing of delivery of these essential elements. As of June 30, 2000, revenue of $1.7 million had been 25 deferred, which we expect to recognize in the six month period ending December 31, 2000. Our products are typically sold with a one year parts and labor repair warranty. Provisions for warranty costs are recorded at the time products are shipped. Product returns to date have not been significant. We sell our products to technology, infrastructure and application companies through our direct sales force and indirectly through our distributors and value-added resellers. Historically, a significant portion of our revenue has been derived from customers outside of the United States, and we expect this trend to continue. For the six month period ended June 30, 2000, approximately 33.4% of our revenue was derived from international customers, of which 12.9% was derived from customers in Japan, 7.3% was derived from customers in other parts of Asia, and 12.1% was derived from customers in Europe. In the year ended December 31, 1999, approximately 42.4% of our revenue was derived from international customers, of which 18.8% was derived from customers based in Japan, 9.7% was derived from customers based in other parts of Asia, and 12.1% was derived from customers based in Europe. All of our revenue and accounts receivable are denominated in U.S. dollars. Competition, the development of emerging communications standards and technological change have influenced and are likely to continue to influence our quarterly and annual revenue and results of operations. Our product development and marketing strategies are focused on working closely with the promoter companies and communications standard groups to gain early access to new communications standards and technologies, and establishing first mover advantage for our products. We invest significantly in the research and development and marketing of our products for emerging communications standards, often before these standards have gained widespread industry acceptance and in advance of generating substantial revenue related to these investments. Additionally, the rate and timing of customer orders may vary significantly from month to month. Accordingly, if sales of our products do not occur when we expect and we are unable to predict or adjust our estimates on a timely basis, our expenses may increase as a percentage of revenue. Results of Operations The following table presents selected consolidated financial data for the periods indicated as a percentage of total revenue:
Six Month Period Year Ended Ended June December 31, 30, ------------------- ------------ 1997 1998 1999 1999 2000 ----- ----- ----- ----- ----- Consolidated Statement of Income Data: Revenue..................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue............................. 18.3 21.2 25.1 23.4 24.7 ----- ----- ----- ----- ----- Gross profit................................ 81.7 78.8 74.9 76.6 75.3 ----- ----- ----- ----- ----- Operating expenses: Research and development.................. 29.0 38.0 28.3 33.1 21.4 Sales and marketing....................... 10.3 11.8 9.5 10.8 12.6 General and administrative................ 8.2 5.1 3.5 3.2 4.9 Amortization of deferred stock-based compensation............................. -- 6.7 10.5 6.5 8.8 ----- ----- ----- ----- ----- Total operating expenses................ 47.5 61.6 51.8 53.6 47.7 ----- ----- ----- ----- ----- Income from operations...................... 34.2 17.2 23.1 23.0 27.6 Interest income............................. 1.3 1.2 1.1 1.0 1.8 ----- ----- ----- ----- ----- Income before provision for income taxes.... 35.5 18.4 24.2 24.0 29.4 Provision for income taxes.................. 13.3 10.5 14.1 12.4 15.1 ----- ----- ----- ----- ----- Net income.................................. 22.2% 7.9% 10.1% 11.6% 14.3% ===== ===== ===== ===== =====
26 Results of Operations for the Six Month Period Ended June 30, 2000 and 1999 Revenue. Our revenue was $8.8 million in the six month period ended June 30, 2000 and $5.3 million in the six month period ended June 30, 1999, representing an increase of 66.0%. This increase was primarily due to the increases in unit volume shipments to existing customers, expansion of our customer base and growth in our connectivity product segment. This increase was partially offset by deferral of $1.7 million of revenue from our development products. Revenue from international customers represented approximately 33.4% of our revenue in the six month period ended June 30, 2000 and 40.9% of our revenue in the six month period ended June 30, 1999. Revenue from international customers decreased as a percentage of revenue as domestic revenue grew at a faster rate than revenue from international customers. However, revenue dollars from international customers increased 38.3%. We expect that revenue generated from international customers will continue to account for a significant percentage of our revenue. Cost of Revenue and Gross Profit. Cost of revenue consists primarily of costs for the outsourced manufacturing of our products, along with our internal costs for high-level assembly and final testing, and amortization of deferred stock- based compensation related to production personnel. Our gross profit was $6.6 million in the six month period ended June 30, 2000 and $4.1 million in the six month period ended June 30, 1999, representing an increase of 63.2%. This increase was primarily due to revenue growth of 66.0% from 1999 to 2000. Our gross margin was 75.3% in the six month period ended June 30, 2000 and 76.6% in the six month period ended June 30, 1999. This decrease was primarily related to an increase of lower gross margin products in the product mix for the six month period ended June 30, 2000. Without the amortization of deferred stock-based compensation, our gross margin would have been 76.6% for the six month period ended June 30, 2000 and 78.5% for the six month period ended June 30, 1999. Research and Development. Research and development expenses are primarily comprised of salaries and related personnel expenses of employees engaged in research, design and development activities, and also includes related supplies, software license fees for technologies used in research and development, equipment expenses, depreciation and amortization. Our research and development expenses were $1.9 million in the six month period ended June 30, 2000 and $1.8 million in the six month period ended June 30, 1999, representing an increase of 7.5%. This increase was primarily due to an increase in personnel related costs. Research and development expenses represented 21.4% of revenue in the six month period ended June 30, 2000 and 33.1% of revenue in the six month period ended June 30, 1999. The decrease in research and development expenses as a percentage of revenue was due to increased revenue. Our research and development expenses in dollars may increase to support the growth of our business. Sales and Marketing. Sales and marketing expenses are primarily comprised of salaries and related personnel expenses of employees engaged in sales and marketing activities, and also includes expenses related to conferences and trade shows. Our sales and marketing expenses were $1.1 million in the six month period ended June 30, 2000 and $572,000 in the six month period ended June 30, 1999, representing an increase of 92.8%. This increase was primarily due to an increase in sales and marketing personnel and related expenses. Sales and marketing expenses represented 12.6% of revenue in the six month period ended June 30, 2000 and 10.8% of revenue in the six month period ended June 30, 1999. The increase in sales and marketing expenses as a percentage of revenue was primarily due to the deferral of $1.7 million in revenue in the six month period ended June 30, 2000. Our sales and marketing expenses in dollars may increase to support the growth of our business. 27 General and Administrative. General and administrative expenses are primarily comprised of salaries and related personnel expenses of employees engaged in general and administrative activities, and also include expenses related to consultants and professional services. Our general and administrative expenses were $433,000 in the six month period ended June 30, 2000 and $171,000 in the six month period ended June 30, 1999, representing an increase of 153.2%. General and administrative expenses represented 4.9% of revenue in the six month period ended June 30, 2000 and 3.2% of revenue in the six month period ended June 30, 1999. The increases in dollars and as a percentage of revenue resulted from the increase in general and administrative personnel and related expenses and administrative costs. Our general and administrative expenses in dollars and as a percentage of revenue may increase as we incur additional costs as a public company, implement a new enterprise resource planning system and hire additional personnel. Amortization of Deferred Stock-based Compensation. Deferred stock-based compensation is the difference between the deemed fair value of our common stock at the date of grant of options and the exercise price of those options. This amount, net of amortization, is presented as a reduction of stockholders' equity and amortized over the vesting period of the applicable options, generally 48 months, on an accelerated basis. Amortization of deferred stock- based compensation was $884,000 in the six month period ended June 30, 2000, of which $112,000 was included in cost of revenue during that period. Amortization of deferred stock-based compensation was $444,000 in the six month period ended June 30, 1999, of which $99,000 was included in cost of revenue during that period. We had deferred stock-based compensation of $1.4 million as of June 30, 2000 which we expect to be amortized over the next four years. In addition, based on stock option grants to existing employees and new hires subsequent to June 30, 2000, we expect to record additional deferred stock-based compensation of at least $8.8 million in the third quarter of 2000 to be amortized over the next four years. Interest Income. Interest income is comprised of interest earned on invested cash. Interest income was $156,000 and $54,000 in the six month period ended June 30, 2000 and 1999, respectively. This increase resulted from additional excess cash balances and investment of excess cash balances at higher interest rates. Provision for Income Taxes. Our provision for income taxes was $1.3 million in the six month period ended June 30, 2000 and $656,000 in the six month period ended June 30, 1999, representing an increase of 102.0%. This increase relates to an increase in our income before provision for income taxes and before amortization of deferred stock-based compensation. Our effective tax rate was 51.4% in the six month period ended June 30, 2000 and 51.8% in the six month period ended June 30, 1999. The decrease in our effective tax rate relates to permanent non-deductible expenses related to amortization of deferred stock-based compensation. Our effective tax rate after excluding the effect of amortization of deferred stock-based compensation was 38.3% in the six month period ended June 30, 2000 and 38.3% in the six month period ended June 30, 1999. Results of Operations in the Year Ended December 31, 1999, 1998 and 1997 Revenue. Our revenue was $12.5 million in the year ended December 31, 1999, $6.8 million in the year ended December 31, 1998 and $4.2 million in the year ended December 31, 1997. These amounts represent an increase of 84.7% from 1998 to 1999 and 62.4% from 1997 to 1998. The increase in revenue from 1998 to 1999 was primarily due to increases in unit volume shipments to existing customers, expansion of our customer base and growth in our connectivity product segment. The increase in revenue from 1997 to 1998 was primarily due to the growth in our development 28 product and production product segments. Revenue from international customers represented 42.4%, of our revenue in the year ended December 31, 1999, 42.7% of our revenue in the year ended December 31, 1998 and 44.8% of our revenue in the year ended December 31, 1997. Revenue from international customers decreased as a percentage of revenue from 1997 to 1999 as domestic revenue grew at a faster rate than revenue from international customers. Cost of Revenue and Gross Profit. Our gross profit was $9.4 million in the year ended December 31, 1999, $5.3 million in the year ended December 31, 1998 and $3.4 million in the year ended December 31, 1997. These amounts represent increases of 75.7% from 1998 to 1999 and 56.7% from 1997 to 1998. These increases in gross profit dollars were the result of increased unit sales from year to year. Our gross margin was 74.9% in the year ended December 31, 1999, 78.8% in the year ended December 31, 1998 and 81.7% in the year ended December 31, 1997. The decrease in gross margin from 1998 to 1999 was primarily due to a shift in our product mix to lower margin connectivity products as well as pricing discounts given on volume purchase orders. The decrease in gross margin from 1997 to 1998 was due to the amortization of deferred stock-based compensation. Excluding amortization of deferred stock-based compensation, our gross margin would have been 76.9% for the year ended December 31, 1999, 82.4% for the year ended December 31, 1998 and 81.7% for the year ended December 31, 1997. Research and Development. Our research and development expenses were $3.5 million in the year ended December 31, 1999, $2.6 million in the year ended December 31, 1998 and $1.2 million in the year ended December 31, 1997. These amounts represent increases of 37.6% from 1998 to 1999 and 112.6% from 1997 to 1998. Research and development expenses represented 28.3% of revenue in the year ended December 31, 1999, 38.0% of revenue in the year ended December 31, 1998 and 29% of revenue in the year ended December 31, 1997. The increase in dollars in 1999 was primarily due to an increase in personnel related costs. The decrease as a percentage of revenue in 1999 was due to revenue growth of approximately 84.7% over the same period. The increase in dollars and as a percentage of revenue in 1998 resulted from a significant increase in development efforts for products from which anticipated revenue was and will continue to be recognized in subsequent periods. Sales and Marketing. Our sales and marketing expenses were $1.2 million in the year ended December 31, 1999, $800,000 in the year ended December 31, 1998 and $431,000 in the year ended December 31, 1997. These amounts represent increases of 49.3% from 1998 to 1999 and 85.6% from 1997 to 1998. Sales and marketing expenses represented 9.5% of revenue in the year ended December 31, 1999, 11.8% of revenue in the year ended December 31, 1998 and 10.3% of revenue in the year ended December 31, 1997. The increases in dollars in 1999 and 1998, and as a percentage of revenue in 1998, resulted from an increase in personnel related costs and marketing efforts such as compliance workshops, tradeshows and market communications. The decrease as a percentage of revenue in 1999 was due to revenue growth of 84.7% from 1998 to 1999. General and Administrative. Our general and administrative expenses were $434,000 in the year ended December 31, 1999 $345,000 in the year ended December 31, 1998 and $340,000 in the year ended December 31, 1997. These amounts represent an increase of 25.8% from 1998 to 1999 and an increase of 1.5% from 1997 to 1998. General and administrative expenses represented 3.5% of revenue in the year ended December 31, 1999, 5.1% of revenue in the year ended December 31, 1998 and 8.2% of revenue in the year ended December 31, 1997. The increase in dollars in 1999 resulted from the addition of management and administrative personnel and related expenses, including general business costs. The decrease as a percentage of revenue from 1998 to 1999 was 29 primarily due to revenue growth of approximately 84.7% during that period, and the decrease as a percentage of revenue from 1997 to 1998 was primarily due to revenue growth of approximately 62.4% during the period. Amortization of Deferred Stock-based Compensation. Amortization of deferred stock-based compensation was $1.6 million in the year ended December 31, 1999, of which $243,000 was included in cost of revenue during that period. Amortization of deferred stock-based compensation was $694,000 in the year ended December 31, 1998, of which $242,000 was included in cost of revenue during that period. There was no deferred stock-based compensation in 1997. Interest Income. Interest income was $138,000 in the year ended December 31, 1999, $80,000 in the year ended December 31, 1998 and $56,000 in the year ended December 31, 1997. These increases resulted from additional excess cash balances and investment of excess cash balances at higher interest rates. Provision for Income Taxes. Provision for income taxes was $1.8 million in the year ended December 31, 1999, $708,000 in the year ended December 31, 1998 and $556,000 in the year ended December 31, 1997. These amounts represent increases of 148.6% from 1998 to 1999 and 27.3% from 1997 to 1998. Our effective tax rate increased from 56.9% in 1998 to 58.2% in 1999, and from 37.6% in 1997 to 56.9% in 1998 primarily due to an increase in our income before provision for income taxes and before amortization of deferred amortization of deferred stock-based compensation. Our effective tax rate after excluding the effect of stock-based compensation was 38.4% in the year ended December 31, 1999, 36.5% in the year ended December 31, 1998 and 37.6% in the year ended December 31, 1997. 30 Quarterly Results of Operations The following table sets forth our historical unaudited quarterly consolidated statement of income data for the six quarters ended June 30, 2000 as well as such data expressed as a percentage of revenue for each quarter. This quarterly information has been prepared on a basis consistent with our audited consolidated financial statements and, we believe, includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the information shown. Our quarterly operating results have fluctuated and may continue to fluctuate significantly as a result of a variety of factors. Operating results for any quarter are not necessarily indicative of results for any future quarter or for a full year.
Three Month Period Ended ----------------------------------------------------- Dec. Mar. 31, June 30, Sept. 30, 31, Mar. 31, June 30, 1999 1999 1999 1999 2000 2000 -------- -------- --------- ------ -------- -------- (in thousands and as a percentage of revenue) Consolidated Statement of Income Data: Revenue.................. $2,098 $3,191 $3,157 $4,060 $4,338 $4,444 Cost of revenue.......... 381 856 767 1,132 1,005 1,163 ------ ------ ------ ------ ------ ------ Gross profit............. 1,717 2,335 2,390 2,928 3,333 3,281 ------ ------ ------ ------ ------ ------ Operating expenses: Research and development........... 856 895 851 936 937 945 Sales and marketing.... 220 352 325 297 492 611 General and administrative........ 84 87 99 165 170 263 Amortization of deferred stock-based compensation.......... 153 192 209 765 389 383 ------ ------ ------ ------ ------ ------ Total operating expenses............ 1,313 1,526 1,484 2,163 1,988 2,202 ------ ------ ------ ------ ------ ------ Income from operations... 404 809 906 765 1,345 1,079 Interest income.......... 27 27 36 48 67 89 ------ ------ ------ ------ ------ ------ Income before provision for income taxes........ 431 836 942 813 1,412 1,168 Provision for income taxes................... 244 412 466 638 711 614 ------ ------ ------ ------ ------ ------ Net income............... $ 187 $ 424 $ 476 $ 175 $ 701 $ 554 ====== ====== ====== ====== ====== ====== As a Percentage of Revenue: Revenue.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue.......... 18.2 26.8 24.3 27.9 23.2 26.2 ------ ------ ------ ------ ------ ------ Gross profit............. 81.8 73.2 75.7 72.1 76.8 73.8 ------ ------ ------ ------ ------ ------ Operating expenses: Research and development........... 40.8 28.0 27.0 23.1 21.6 21.3 Sales and marketing.... 10.5 11.0 10.3 7.3 11.3 13.7 General and administrative........ 4.0 2.7 3.1 4.1 3.9 5.9 Amortization of deferred stock-based compensation.......... 7.3 6.0 6.6 18.8 9.0 8.6 ------ ------ ------ ------ ------ ------ Total operating expenses............ 62.6 47.8 47.0 53.3 45.8 49.5 ------ ------ ------ ------ ------ ------ Income from operations... 19.3 25.4 28.7 18.8 31.1 24.3 Interest income.......... 1.3 0.8 1.1 1.2 1.5 2.0 ------ ------ ------ ------ ------ ------ Income before provision for income taxes........ 20.5 26.2 29.8 20.0 32.6 26.3 Provision for income taxes................... 11.6 12.9 14.8 15.7 16.4 13.8 ------ ------ ------ ------ ------ ------ Net income............... 8.9% 13.3% 15.0% 4.3% 16.2% 12.5% ====== ====== ====== ====== ====== ======
31 Our revenue increased in each quarter of 1999 and 2000, other than the three month period ended September 30, 1999, primarily as a result of new product releases and increased demand for our existing products from existing and new customers. Revenue increased 50.5% from the three month period ended March 31, 1999 to the three month period ended September 30, 1999, but decreased 1.1% from the three month period ended June 30, 1999 to the three month period ended September 30, 1999, due to a large order and shipment of our production products to a major customer in the three month period ended June 30, 1999. Revenue increased 6.9% from the three month period ended December 31, 1999 to the three month period ended March 31, 2000 and 2.4% from the three month period ended March 31, 2000 to the three month period ended June 30, 2000, primarily due to the deferral of $372,000 of revenue in the three month period ended March 31, 2000 and $1.4 million of revenue in the three month period ended June 30, 2000. We expect to recognize this deferred revenue in the six month period ending December 31, 2000. Gross margins have fluctuated from quarter to quarter primarily due to shifts in our product mix, pricing discounts given on volume purchase orders and amortization of deferred stock-based compensation. Gross profit increased in each of the last three quarters of 1999 and the three month period ended March 31, 2000, primarily due to revenue growth. In the three month period ended December 31, 1999, net income decreased primarily due to an increase in amortization of deferred stock-based compensation. We believe that period to period comparisons of our operating results should not be relied upon as an indication of our future performances. In the past, our results of operations have fluctuated significantly, and we expect similar quarterly fluctuations in the future as a result of a number of factors beyond our control. Among other things, these factors include the rate of growth in the market for our products, changes in the demand for our products, customer buying habits and product volume and mix. Our anticipated research and development, sales and marketing and general and administrative expenses are based, in part, on future projections of revenues. If our operating results fall below the expectations of securities analysts or investors, the trading price of our common stock would likely decline significantly. Liquidity and Capital Resources Our operating cash flow requirements have generally increased reflecting the expanding scope and level of our activities. Since our inception, we have financed our operations primarily through cash flows from operating activities. In the six month period ended June 30, 2000, cash provided by operating activities of $2.3 million primarily consisted of net income of $1.3 million, amortization of deferred stock-based compensation of $884,000 and an increase in deferred revenue of $1.7 million, offset by an increase in accounts receivable of $826,000 and a decrease in accrued expenses of $232,000. Cash used in investing activities of $1.4 million related to purchases of short-term investments of $1.2 million and capital expenditures of $136,000. Cash provided by financing activities of $103,000 related to proceeds received from the exercise of stock options. In 1999, cash provided by operating activities of $2.2 million primarily consisted of net income of $1.3 million and amortization of deferred stock- based compensation of $1.6 million, offset by an increase in accounts receivable of $1.2 million. Cash used in investing activities of $173,000 related to capital expenditures. 32 In 1998, cash provided by operating activities of $552,000 primarily consisted of net income of $537,000 and amortization of deferred stock-based compensation of $694,000, offset by an increase in accounts receivable of $581,000. Cash used in investing activities of $153,000 related to capital expenditures. In 1997, cash provided by operating activities of $1.4 million primarily consisted of net income of $924,000, an increase in accrued expenses of $486,000, and a decrease in accounts receivable of $45,000, offset by an increase in inventories of $186,000. Cash used in investing activities of $58,000 related to capital expenditures. As of June 30, 2000, we had cash, cash equivalents and short-term investments of $6.3 million, working capital of $7.9 million and no debt. At that date, we had no capital lease obligations, and we had future minimum lease payments under our operating lease of $349,000. We believe that the net proceeds from the sale of the common stock in this offering, together with funds generated from operations, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Thereafter, we may find it necessary to obtain additional equity or debt financing. In the event additional financing is required, we may not be able to raise it on acceptable terms or at all. The sale of additional equity or debt securities may result in additional dilution to our stockholders. Quantitative and Qualitative Disclosures About Market Risk The primary objective of our investment activities is to preserve principal while at the same time 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 set at the then-prevailing rate and the prevailing interest rates later rise, the principal amount of our investment will probably 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. As of June 30, 2000, all of our investments were in money market funds, certificates of deposit or high quality commercial paper. 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 a new model for accounting for derivatives and hedging activities and supercedes and amends a number of existing accounting standards. SFAS No. 133 requires that all derivatives be recognized in the balance sheet at their fair market value and the corresponding derivative gains or losses be either reported in the statement of operations or as a deferred item depending on the type of hedge relationship that exists with respect to such derivatives. In July 1999, the Financial Accounting Standards Board issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133. SFAS No. 137 deferred the effective date until fiscal years commencing after June 15, 2000. In June 2000, the FASB issued SFAS 138 Accounting for Certain Derivative Instruments and Certain Hedging Activities--An Amendment of FASB Statement No. 133 which deferred the effective date of SFAS 133 until the quarter ending March 31, 2001. 33 Accordingly, we will adopt SFAS No. 133 in the quarter ending March 31, 2001 and have not determined whether the adoption of this pronouncement will have a material impact on our financial condition or results of operations. In December 1999, the SEC issued SAB No. 101, Revenue Recognition in Financial Statements. SAB 101 summarizes certain areas of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. In June 2000, the SEC issued SAB No. 101B to defer the effective date for implementation of SAB 101 until the fourth quarter of fiscal 2000. We believe that our current revenue recognition policies comply with SAB 101. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation-an interpretation of APB Opinion No. 25. This interpretation clarifies the definition of employee for purposes of applying Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. This interpretation is effective July 1, 2000, but certain conclusions in this interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. We believe that FIN 44 will not have a material effect on our financial position or results of operations. In various areas, including revenue recognition and stock-based compensation, accounting standards and practices continue to evolve. The SEC is preparing to issue interpretive guidance relating to SAB 101, and the FASB continues to address revenue recognition and other related accounting issues. We believe we comply with all of the rules and related guidance as they currently exist. However, any changes to generally accepted accounting principles in these areas would likely affect our results of operations. 34 BUSINESS Overview We are a leading provider of advanced verification systems and connectivity products for existing and emerging digital communications standards. Our products are used by semiconductor, device, system and software companies at each phase of their products' lifecycles from development through production and market deployment. Our verification systems consist of development and production products that accurately monitor communications traffic and diagnose operational problems to ensure standards compliance and interoperability as well as assist system manufacturers to download software onto new computers. Our connectivity products enable reliable, uninterrupted service for broadband Internet access. We have expertise in the USB, USB 2.0, 1394, Bluetooth and Ethernet standards and are actively engaged with our customers throughout their development and production processes. Utilizing our easy to use, color-coded graphical user interface, the CATC Trace, our verification systems generate, capture, filter and analyze high speed communications traffic, allowing our customers to quickly discover and remedy standards violations, persistent and intermittent errors and flaws and inconsistencies in their product design and production. Our connectivity products allow for simple plug and play installation and incorporate our vertically integrated, proprietary technologies, including an ASIC embedded software and software drivers. By controlling all design elements of our connectivity products, we are able to assure full standards compliance and create products with better functionality, stability and reliability. Our customers include industry leaders such as 3Com, AT&T, Dell, Intel, Microsoft, Motorola, NEC, Sony, Sun Microsystems and Toshiba. In addition, we sell our products through a network of distributors and value-added resellers, including Dynacolor, Enable Engineering, Nohau Electronik and Toyo. Industry Background The Demand for Digital Communications is Growing The growth in the demand for digital information has accelerated the need for communications among multiple electronic devices and in various markets, including computers, telecommunications, consumer electronics and others, such as aerospace, automotive, industrial automation, medical instrumentation and robotics. This growing demand centers on widespread, broadband transmissions of digital information, including Internet access, data storage and rich media content. Communication among digital devices, or connectivity, occurs over a variety of physical media, such as copper wire and fiber optic cable, and wireless technologies with rapidly fluctuating frequencies. Computer technology initially provided connectivity only among internal devices, such as the processor, memory and storage and with external peripheral devices, such as the keyboard, mouse and printer. Today, computer technology also enables connectivity among multiple computing devices and across networks, such as local area networks, wide area networks, storage area networks, home area networks, personal area networks and the Internet. Telecommunications technology currently enables connectivity among multiple devices, such as telephones, fax machines, pagers and personal digital assistants. Consumer electronics technology is progressively enabling connectivity among devices, such as Internet appliances, digital cameras, audio systems and televisions. 35 Communications Standards are Becoming Increasingly Complex Digital devices communicate by sending electronic signals through a physical transmission channel according to a specified protocol. A protocol is the set of detailed rules that govern both the channel and the device hardware and software and regulate the manner in which the signals are sent. The channel and the protocol are both typically specified in a formal communications standard. For communication to be successful, each device must recognize and follow the same standard. Early communications standards were relatively simple, typically involving low speed communications between two simple devices connected directly by copper wire. Current standards are increasingly complex, typically involving high speed communications among multiple sophisticated devices indirectly linked to other devices and across various physical media, including copper wire and fiber optics, and wireless technologies with rapidly fluctuating frequencies. As a result, standards that were expressed initially in only a few pages of text may now extend to over a thousand pages. The specifications for these standards are broadly available, which facilitate interoperability of hardware and software products from different manufacturers. A standard is typically introduced by several leading technology and infrastructure companies. These core or promoter companies comprise the nucleus of independent communications standards groups, which are sometimes referred to as implementers' forums, trade associations or special interest groups. These groups assist in the development, implementation and promotion of and compliance with the standards. As commercial interest in a particular standard increases, the communications standards group typically expands to include system and device manufacturers and service providers. The promoter companies typically remain closely associated with the standard throughout its lifecycle. A standard is implemented over a lifecycle that includes three overlapping phases: development, production and market deployment. The development phase covers the development and production of the semiconductors and software, including embedded software, protocol stacks and device drivers, that are the building blocks for products and applications. During the production phase, system and device manufacturers apply these building blocks to construct their unique products and applications. The market deployment phase covers the introduction and sale of products and applications in the marketplace. Similarly, products that use or are associated with a particular standard follow their own unique lifecycle from development through production, deployment and operation. Emerging Standards Promote Digital Communications Many communications standards are emerging to meet the growing demand for digital connectivity in the computer, telecommunications, consumer electronics and other industries. The characteristics of each standard, including its principal uses, physical media, transmission speed and distance covered, vary greatly. Examples of emerging standards include the following: Universal Serial Bus. The Universal Serial Bus standard, or USB, enables low and medium speed connectivity between computers and peripheral devices, including keyboards, mice, printers, scanners, joysticks and cameras, using plug and play technology. USB was introduced in 1995 and replaces the serial, parallel, mouse and keyboard ports. The specifications for the second version of USB, or USB 2.0, were released in April 2000. The promoter group for USB 2.0 consists of Compaq, Hewlett-Packard, Intel, Lucent, Microsoft, NEC and Philips and, as of July 31, 2000, the 36 USB Implementers Forum had over 600 member companies. USB enables connectivity through copper wires at speeds of up to 12 megabits per second, or Mbps, over distances of up to five meters. This speed increases to up to 480 Mbps in USB 2.0. According to Dataquest, an independent market research firm, the number of USB-enabled peripherals is expected to grow from 27 million in 1999 to 494 million by 2003. Dataquest estimates that 95% of personal computers produced in 2003 are expected to be USB 2.0-enabled. IEEE 1394. The IEEE 1394a standard, commonly known as 1394, FireWire or i.Link, enables high speed connectivity among computers, peripheral devices and consumer electronic devices, including audio systems, television sets, digital cameras, video recorders, video players and game consoles. 1394 was introduced in 1987 and was ratified by the Institute of Electrical and Electronics Engineers in 1995. The promoter group includes Apple, Canon, Compaq, IBM, Intel, Microsoft, NEC, Panasonic, Philips, Sony, Sun Microsystems and Yamaha and, as of July 31, 2000, the 1394 Trade Association had over 140 member companies. 1394 enables connectivity through copper wire at speeds of up to 400 Mbps over distances of up to four and one-half meters. This speed increases to up to 3.2 billion bits per second, or Gbps, over distances of up to 100 meters, in the 1394b standard that is currently awaiting ratification. According to Cahners In-Stat Group, an independent market research firm, the number of 1394- enabled personal computers and peripheral devices shipped is expected to grow from nearly eight million in 1999 to over 100 million by 2004. Bluetooth Wireless Technology. The Bluetooth standard, or Bluetooth wireless technology, enables low speed, wireless connectivity among computers, telecommunication devices, such as mobile telephones, and consumer electronics devices, such as personal digital assistants and headphones. Bluetooth wireless technology was introduced in 1998. The promoter group consists of 3Com, Ericsson, IBM, Intel, Lucent, Microsoft, Motorola, Nokia and Toshiba and, as of July 31, 2000, the Bluetooth Special Interest Group had over 1,800 member companies. Bluetooth wireless technology operates through radio waves with rapidly fluctuating frequencies at speeds of up to one Mbps over distances of up to 100 meters. According to Cahners In-Stat Group, the number of Bluetooth- enabled products is expected to grow from under 100,000 in 1999 to 1.4 billion unit shipments in 2005. Other Standards. There are many other emerging communications standards at different stages in their respective lifecycles such as Digital Subscriber Line, or DSL, IEEE 802.11, or wireless Ethernet, IEEE 802.3, or Gigabit Ethernet, and InfiniBand Architecture. Emerging Communications Standards Create Market Needs The emergence of new communications standards creates two primary market needs. Manufacturers need advanced verification systems at each phase of the standard's lifecycle and at each stage of the product lifecycle to accurately monitor communications traffic, assure standard compliance and diagnose operational problems. These verification systems must generate, capture, filter and analyze high speed communications traffic to identify both persistent and intermittent errors and to ensure product quality and interoperability. Manufacturers and service providers also need connectivity products to bridge old and new communications standards. These connectivity products must translate data between standards and transmit this data at full speed without creating bottlenecks. Both verification systems and connectivity products must be easy to use, reliable and flexible. As communications standards become more complex, satisfying these needs requires increasingly advanced expertise. 37 The CATC Solution We are a leading provider of advanced verification systems and connectivity products for existing and emerging digital communications standards. We believe that we have the following competitive advantages: . Expertise in Communications Standards. We have expertise in the USB, USB 2.0, 1394, Bluetooth and Ethernet standards and are actively engaged with our customers throughout their development and production processes. Our customers capitalize on our expertise to reduce development and production times, improve product reliability and ensure interoperability of their products. Our verification systems allow our customers to quickly discover and remedy standards violations, persistent and intermittent errors and flaws and inconsistencies in their product design and production. By working closely with our customers' engineers during their product development, production, deployment and operation, we are able to enhance our systems to meet our customers' specific needs. . Ease of Use. We design our products for ease of use by our customers. Our verification systems include a proprietary graphical user interface, the CATC Trace, that provides an orderly and intuitive representation and analysis of communications traffic, thereby reducing our customers' training and operation time. The CATC Trace also facilitates the sharing of traffic analyses among our customers' engineers. We believe that the CATC Trace is the de facto standard in our markets for viewing digital communications information. In addition, our connectivity products enable quick and easy, plug and play connectivity between USB and Ethernet networks. . Accuracy and Reliability. We design our verification systems to provide our customers with the accuracy and reliability necessary to ensure that their products conform to emerging communications standards. Our product design enables our customers to view and analyze communications traffic accurately without affecting the data flow. This design architecture has been applied and refined over time and, as a result, our products are highly reliable. . Vertically Integrated Technology. Our connectivity products incorporate our vertically integrated, proprietary technologies including an ASIC, embedded software and software drivers. By controlling all design elements, we are able to assure full standards compliance and create products with better functionality, stability and reliability. Strategy Our objective is to be the leading provider of advanced verification systems and connectivity products for designers, manufacturers and users of computer, telecommunications and consumer electronics technologies for existing and emerging communications standards. Our strategy includes the following key elements: . Pursue Emerging Standards. We intend to expand our product offerings to address emerging communications standards. We have traditionally identified attractive opportunities and established a first-mover advantage. For example, we identified the USB, USB 2.0 and Bluetooth standards as significant opportunities and developed verification systems for these standards. We introduced the first commercial verification system for USB developers, our Detective analyzer, the first for Bluetooth developers, our Merlin analyzer, and the first for USB 2.0 developers, our Advisor analyzer. We intend to continue identifying attractive opportunities in emerging standards. 38 . Heighten Brand Awareness. We intend to heighten brand awareness by broadening our reputation as an expert in communications standards and extending our expert status to new standards. We have traditionally been early to market with verification systems for emerging communications standards. By rapidly establishing our expert status with new standards, we achieve brand awareness among the communications standards groups and other manufacturers and developers in our target markets. We plan to expand our role as a regular sponsor of, and presenter at, industry conventions, seminars and trade shows. We also intend to increase our participation in communications standards groups and as invited experts at design workshops. We believe that these steps will increase CATC brand recognition and product acceptance. . Leverage Strategic Relationships. We intend to continue to leverage our strategic relationships to gain early access to emerging communications standards and specifications before they become widely available or accepted, as well as to product roadmaps and additional market opportunities. We will continue to work closely with the promoter companies involved in establishing new communications standards. We intend to enhance our strategic relationships with these companies in the computer, telecommunications and consumer electronics industries. We also plan to develop strategic relationships with promoter companies in other industries. . Expand Distribution Channels. We intend to increase our marketing and sales forces in both domestic and foreign markets. In addition, we plan to pursue relationships with additional distributors and value-added resellers. To date, we have concentrated our efforts primarily in the computer industry. In the future, we intend to expand our marketing and sales efforts in the telecommunications, consumer electronics and other industries. We believe that these strategies will increase the penetration of our products into new and existing markets worldwide. . Reduce Development Time. We intend to continue to leverage the modular architecture of our hardware and software technology to reduce our development time for new products and successive product generations. We also intend to continue investing heavily in research and development to extend our technological leadership. 39 Products We offer advanced design and production verification systems for the USB, USB 2.0, 1394 and Bluetooth standards, as well as production and commercial connectivity products for the USB and Ethernet standards. We currently sell all of the products listed below. Development Products Our development products are advanced verification systems that assist hardware and software manufacturers in the efficient design of reliable and interoperable systems and devices. All of these systems utilize our proprietary graphical user interface, the CATC Trace, which displays communications traffic in searchable, color-coded packets. We believe that the CATC Trace is the de facto standard in our markets for viewing digital communications information. Our development products consist of the following:
Name Type Introduction Date Merlin Wireless protocol analyzer First quarter of 2000 - -------------------------------------------------------------------------------- Advisor Bus and protocol analyzer First quarter of 2000 - -------------------------------------------------------------------------------- Chief Bus and protocol analyzer First quarter of 1999 - -------------------------------------------------------------------------------- FireInspector Bus and protocol analyzer Second quarter of 1998 - -------------------------------------------------------------------------------- Inspector Bus and protocol analyzer First quarter of 1997 - -------------------------------------------------------------------------------- Traffic Generator Host emulator Second quarter of 1996 - -------------------------------------------------------------------------------- Detective Bus and protocol analyzer First quarter of 1996 - --------------------------------------------------------------------------------
Merlin. Merlin, our first generation Bluetooth wireless protocol analyzer, was introduced in the first quarter of 2000. It was the first analyzer for the Bluetooth standard delivered to the market and our first analyzer for wireless communications. Merlin is a non-intrusive design verification system that provides Bluetooth network traffic capture, display and analysis. Advisor USB 2.0. Advisor, our fourth generation USB bus and protocol analyzer, was introduced in the first quarter of 2000. It was the first USB 2.0 analyzer delivered to the market and builds on our growing experience and knowledge of the development community's needs. Advisor captures, displays and analyzes signals transmitted at all three USB speeds, one and one-half, twelve and 480 Mbps, and incorporates dual recording channels and direct cable probing capabilities. USB Chief. Chief, our third generation USB bus and protocol analyzer, was introduced in the first quarter of 1999. It incorporates advanced features, including dual channel recording, advanced triggering with event counting and sequencing capability and automatic class and vendor specific decoding. Chief also incorporates software that operates as a stand-alone viewer and is backward compatible with the capture files from our earlier analyzers, the Detective and Inspector. The Chief Plus version offers an integrated traffic generator capability. FireInspector. FireInspector, our first generation 1394 bus and protocol analyzer, was introduced in the second quarter of 1998. FireInspector was the first of our bus and protocol analyzers to incorporate our proprietary BusEngine technology. All of our subsequently developed analyzers are based on this modular design. The FireInspector Plus version permits simultaneous 1394 bus traffic generation. 40 USB Inspector. Inspector, our second generation USB bus and protocol analyzer, was introduced in the first quarter of 1997. It incorporates an extensive triggering and filtering capability, operates with any Windows-based desktop or portable design computer and provides real time event decoding. The hardware is housed in a separate enclosure that is connected to the design computer through the parallel port. Traffic Generator. Traffic Generator, our first generation USB host emulator, was introduced in the second quarter of 1996. It was the first emulator for USB delivered to the market. Traffic Generator functions as a flexible host that enables both device and hub developers to stress test their designs and observe product behavior under intentionally faulty bus conditions. Traffic Generator is complementary to both our Detective and Inspector products and is either sold separately or bundled with them. USB Detective. Detective, our first generation USB bus and protocol analyzer, was introduced in the first quarter of 1996. It was the first analyzer for USB delivered to the market. Detective is used by both hardware and software developers to identify design and implementation problems by analyzing messages transmitted over the bus. Detective consists of a circuit board that is inserted into the design computer and application software that is loaded onto this computer. Production Products Our production verification systems are also designed to assist hardware and software manufacturers in volume production of reliable devices and systems and software downloads onto new computers. Our production products consist of the following:
Name Type Introduction Date UPT Universal port tester First quarter of 2000 - ----------------------------------------------------------------------------------- EL2 USB/Ethernet link Third quarter of 1999 - ----------------------------------------------------------------------------------- USB4DOS Protocol stack for DOS First quarter of 1999 - ----------------------------------------------------------------------------------- UHT Hub tester First quarter of 1997 - ----------------------------------------------------------------------------------- HPT Host production tester Third quarter of 1996
- -------------------------------------------------------------------------------- UPT. The universal port tester, or UPT, our second generation USB port verification system, was introduced in the first quarter of 2000. UPT is used as a universal verification system on the production line by integrated circuit, circuit board, computer system and hub manufacturers to verify compliance with USB specifications. UPT is capable of verifying up to eight USB host or hub ports in less than 30 seconds. Industrial EL2. EL2, an industrial device that links USB and Ethernet channels, was introduced in the third quarter of 1999. It is used on the production line by computer manufacturers and assembly houses for loading test and data files on newly manufactured systems. We believe that EL2 is the only device available that connects a computer operating under the DOS operating system to an Ethernet network through a USB port. EL2 conforms to both USB and Ethernet specifications and operates at an effective data transfer rate of more than five Mbps. USB4DOS. USB4DOS, a software product for the DOS operating system, was introduced in the first quarter of 1999. It provides USB support under DOS for production line verification and embedded applications. USB4DOS is either sold separately or bundled with our EL2 product. 41 UHT. The universal hub tester, or UHT, our first generation USB hub verification system, was introduced in the first quarter of 1997. It is used on the production line by hub manufacturers to verify compliance with USB specifications and as an engineering tool for debugging and analysis. UHT is also used by the USB Implementers Forum for hub compliance verification and certification. UHT is capable of verifying hubs with up to one upstream and four downstream ports in less than ten seconds. HPT. The host production tester, or HPT, our first generation USB port verification system, was introduced in the third quarter of 1996. HPT is used on the production line by integrated circuit, circuit board and computer system manufacturers to verify compliance with USB specifications. It is capable of verifying compliance in computers with one or two USB ports in less than ten seconds. Connectivity Products Our connectivity products are designed to assist broadband Internet service providers in delivering convenient and dependable service and device manufacturers in producing reliable products. Our connectivity products consist of the following:
Name Type Introduction Date NetMate Plus USB/Ethernet link and hub Fourth quarter of 1999 - -------------------------------------------------------------------------------- USB-EL1210A USB/Ethernet controller ASIC Third quarter of 1999 - -------------------------------------------------------------------------------- NetMate USB/Ethernet link Fourth quarter of 1998 - --------------------------------------------------------------------------------
NetMate Plus. NetMate Plus, an integrated USB hub and connectivity device that links USB and Ethernet channels, was introduced in the fourth quarter of 1999. It provides the ability to connect up to four low or full speed USB devices, in conjunction with an Ethernet network, to any USB enabled desktop or portable computer. NetMate Plus, which conforms to both the USB and Ethernet standards, has a transfer rate of more than six Mbps. USB-EL1210A. USB-EL1210A, a USB Ethernet Controller ASIC, was introduced in the third quarter of 1999. It is a proprietary ASIC that combines the functionality of a USB controller and an Ethernet controller. We use EL1210A in both our EL2 and NetMate products and also sell it for use by other commercial connectivity device manufacturers. NetMate. NetMate, a commercial device that links USB and Ethernet channels, was introduced in the fourth quarter of 1998. It is used primarily for cable and DSL broadband Internet access by suppliers of these services. NetMate provides plug and play connectivity and eliminates the need to insert cards or shut down the system upon connection. NetMate consists of a small hardware device and the associated Windows software that add a standard Ethernet interface to a USB-equipped computer. NetMate has been tested successfully by the Microsoft Windows Hardware Quality Labs to ensure that NetMate meets Microsoft standards for compatibility with the Windows operating systems. 42 Customers Our customers include semiconductor, device, system and software companies and our distributors and value-added resellers. We have recognized at least $25,000 in revenue during the 12-month period ended June 30, 2000 from each of the following customers: 3Com Intel SCI Systems Apple Jabil Circuit Seagate AT&T Logitech Sepoong Belkin Components Lucent Technologies Shaw Communications CAE MediaOne Sierra Technologies Cisco Medtronic Solectron Comcast Cable Merritt Manufacturing Sony Compaq Microsoft Standard Microsystems Dell MicroWare Technology Sun Microsystems Dynacolor Motorola Terayon Enable Engineering NEC Texas Instruments Flash Technology Nohau Elektronik Thomson Consumer Electronics Fujitsu PC Panasonic Toshiba Gateway Philips Toyo Hewlett-Packard Proxim Xircom
Collectively, our top five customers accounted for approximately 42.3% of our revenue in the year ended December 31, 1999, which includes Toyo, our distributor in Japan, which accounted for approximately 18.8% of our revenue in the year ended December 31, 1999 and 12.9% in the six month period ended June 30, 2000. In addition, we recognized approximately 42.4% and 33.4% of our revenue from sales to our international customers in the same periods. Marketing, Sales and Distribution Our marketing efforts focus on developing corporate and product strategies and increasing our brand and product awareness. Our marketing group leads the creation of our strategic corporate direction and develops our product roadmap, including market studies, business potential analysis, competitive positioning, functional requirements and product lifecycle planning. Our brand and product awareness initiatives center on our strategic relationships with the core or promoter companies and also include active participation in communications standards groups, trade shows, compliance workshops and industry conferences. Our marketing group also provides technical and strategic sales support to our direct sales personnel, resellers and international distributors, including in- depth product training, technical manuals, sales tools, pricing, marketing communications, marketing research, trademark administration and other support functions. We intend to continue to focus our marketing efforts on these strategies in the future. Our sales efforts are dedicated to establishing and maintaining long-term customer relationships. This support emphasizes customer satisfaction and includes the expertise and resources necessary for customers to use our products successfully. We provide product documentation, technical information and software bug fixes through our web site. We intend to continue to provide our customers with comprehensive sales and technical support and believe that this is critical to remaining competitive. Our distribution channels include a direct sales force and a network of distributors and value-added resellers. We sell our products in North America through our direct sales force and resellers. 43 Our direct sales force maintains close contact with our customers and provides support to both direct customers and resellers. We sell our products in Asia and Europe through distributors. Our direct sales force also maintains close contact with these distributors, which provide both sales and support in the countries they cover. To date, we have established relationships with distributors and resellers in over 25 countries in Asia and Europe. We are increasingly able to leverage customer satisfaction and our service-oriented approach to gain valuable introductions that have led to additional sales to existing customers and initial sales to new customers. We expect to continue benefiting from this trend in the future. In addition, we intend to expand our distribution efforts by pursuing relationships with additional distributions and resellers in our current markets and with new distributors and resellers in our target markets. Research and Development We believe that our future success depends, to a large extent, upon our ability to develop new products for established and emerging communications standards and to add improved features to our existing products. Our research and development efforts are focused on the development of technology and products that will enhance our position in our target markets. We intend to significantly expand our research and development team in the near future. For example, we have recently established research and development centers in San Diego, California and Netanya, Israel. As of June 30, 2000, we employed 27 people in our research and development organization. Our research and development team is comprised of hardware and software design engineers with expertise in the design and application of computer and communications systems and devices, semiconductor devices, embedded software, software drivers and software applications. Our research and development expenses were approximately $3.5 million in the year ended December 31, 1999, $2.6 million in the year ended December 31, 1998, $1.2 million in the year ended December 31, 1997 and $1.9 million in the six month period ended June 30, 2000. As part of our research and development activities, we are engaged in formal and informal relationships with our customers worldwide as well as special interest groups for emerging communications standards. For example, in the first half of 2000, we participated in three USB and one Bluetooth compliance workshops, one USB 2.0, two Bluetooth and one 1394 Developers Conferences, an Intel Developer Forum, the Microsoft Windows Hardware Engineering Conference and the Applied Computing Conference. Technology We believe that we have a competitive advantage as a result of our knowledge and expertise covering multiple communications standards, computer and software architecture and advanced ASIC and programmable logic design. This expertise is enhanced by our advanced design tools and collaboration among our various design teams. The following is a summary of our technology position: Vertically Integrated Technology. We have a broad, vertically integrated technology base that includes the knowledge and expertise to: . design advanced ASICs; . use programmable logic in the form of microcontrollers and programmable logic devices, or PLDs, in real-time, embedded applications; 44 . design electronic circuit boards and systems; and . design and develop embedded software, software drivers and software applications. This technology base, coupled with the specific experience gained by designing previous generations of our products, enables us to provide reliable, easy to use and cost-effective products. Expertise in Multiple Standards. We have expertise in several communications standards including USB, USB 2.0, 1394, Bluetooth wireless technology and Ethernet and intend to extend our technology base to support additional emerging standards. We believe that our broad technology base allows us to quickly apply the expertise and technology incorporated in our existing product lines to new standards and products. Computer Architecture and Software. We have expertise in computer architecture and software, including all forms of internal and external device connectivity. Our products have a large software content at various levels, from embedded software to software drivers to software applications, and for different devices, computers and operating systems, such as DOS, Windows, Linux and Unix. Our computer architecture and software expertise allow us to bring easy to use, reliable and flexible products to market rapidly. Semiconductor and Programmable Logic Design. Our ability to integrate a complex design into an ASIC results in a product that offers higher performance at lower power levels and lower cost. The combination of programmable logic design techniques and non-volatile, or flash, memory adds flexibility and reliability to our products and allows us to add new features and capabilities to our products. Core Technology for Verification Systems. Our most recent verification systems are based on a common core of software and hardware technology. This technology simplifies and accelerates our development of verification systems for emerging communications standards, thereby reducing our time to market and allowing us to remain an early market mover. Manufacturing We use outside contract manufacturing services for printed circuit board fabrication, assembly and testing. We outsource the manufacture of our lower volume, higher margin products to several facilities located in the Silicon Valley area. Final assembly, testing and quality assurance is conducted at our facility in Santa Clara, California. We outsource the turnkey manufacturing and assembly of our higher volume, lower margin products to several facilities located in Asia. This approach enables us to focus on our design strengths, reduce fixed costs and capital expenditures and provide flexibility in meeting market demand. We do not have long term contracts with any of our contract manufacturers. We design and develop a number of the key components of our products, including our proprietary ASIC, printed circuit boards and mechanical packaging. We also use inspection, testing and statistical process controls to assure product quality and reliability. Although we use standard parts and components for our products where possible, we currently purchase a few key components used in the manufacture of our products from single or limited sources. Our principal single source component suppliers include Altera, LSI Logic and Intel. Generally, purchase commitments with our single or limited source suppliers are on a purchase order basis. Any interruption or delay in the supply of any of these components, or the inability to procure these components from alternate sources at acceptable prices and within a reasonable time, would 45 substantially harm our business. In addition, qualifying additional suppliers can be time-consuming and expensive and may increase the likelihood of errors. Competition Our markets are highly competitive, and we expect competition to intensify in the future. We believe that the principal factors of competition are: . ease of product use; . speed and accuracy of products; . flexibility and programmability of products; . upgradability of products; . local support and service for products; . time to market with new products; and . breadth of product offering. We believe that we compete favorably with respect to each of these factors and have gained significant market share in our target markets as a result. We believe our success has been driven by our vertically integrated technology, ability to generate customer loyalty and ability to anticipate market trends. The markets for advanced verification and connectivity products for emerging communications standards are highly competitive. We compete with multiple companies in various markets including 3A International in the markets for products that address the 1394 standard. Any of our competitors may develop technologies that more effectively address our targeted markets at a lower cost. In addition, these competitors may enter into strategic alliances or business combinations that increase their ability to innovate and address our markets. In addition to these competitors, we may also face competition from other companies with new technologies or products based on emerging communications standards or large companies that may enter our target markets. Any of these or other potential competitors, as well as our existing competitors, may develop or acquire technologies that more effectively address our target markets at a lower cost. In addition, these competitors may enter into strategic alliances or business combinations that increase their ability to innovate and address our markets. Intellectual Property We rely on a combination of copyright, trademark and trade secret laws to protect our intellectual property. While we rely on copyright, trademark and trade secret laws to protect our technology, we believe that factors such as the creativity and technological skills of our personnel, new product developments, frequent product enhancements, reliable customer service and product maintenance are more essential to establishing and maintaining a technology leadership position. We cannot provide any assurance that other companies will not develop technologies that are similar or superior to our technology. Despite our efforts to protect our proprietary rights, existing laws and our contractual arrangements provide only limited protection. Unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of 46 our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Expensive litigation may be necessary in the future to enforce our intellectual property rights. Our failure to enforce and protect our intellectual property rights or any adverse change in the laws protecting intellectual property rights could harm our business. We expect that we will be subject to infringement claims as the number of products and competitors in our markets grows and the functionality of products overlaps. From time to time, we may receive letters from third parties, including some of our competitors, alleging that our products infringe these parties' patent or other intellectual property rights. If any of these claims cannot be resolved through a license or similar arrangement, we could become a party to litigation. The results of any litigation matter are inherently uncertain. In the event of an adverse result in any litigation with third parties that could arise in the future, we could be required to pay substantial damages, including treble damages if we are held to have willfully infringed, to cease the manufacture, use and sale of infringing products, to expend significant resources to develop noninfringing technology, or to obtain licenses to the infringing technology. In addition, lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention from our business. Facilities Our principal executive and administrative offices are located in a leased facility consisting of approximately 14,000 square feet of office space in Santa Clara, California. This lease expires in December 2001 and we have an option to renew the lease for an additional five-year period. We are in the process of opening new facilities in Netanya, Israel, with approximately 3,500 square feet and in San Diego, California, with approximately 3,000 square feet. We believe that our existing facilities are adequate to meet our current and projected needs, or that suitable additional or substitute space will be available as needed. Employees As of June 30, 2000, we had 48 employees and independent contractors who were devoting substantially all of their time to us, and ten additional individuals who have accepted an employment offer. Of these 58 individuals, twelve were in sales and marketing, 27 were in research and development, eleven were in operations and eight were in finance and administration. Our employees are not represented by any collective bargaining unit and we believe our relations with our employees are satisfactory. Legal Proceedings We are not a party to any material legal proceedings. We may, from time to time, become a party to various legal proceedings arising in the ordinary course of business. 47 MANAGEMENT Executive Officers and Directors The following table sets forth, as of July 31, 2000, information regarding our executive officers and directors:
Name Age Position ---- --- -------- Dan Wilnai....................... 58 President, Chief Executive Officer, Secretary and Chairman of the Board of Directors Peretz Tzarnotzky................ 52 Vice President, Chief Technology Officer and Director Dennis Evans..................... 48 Vice President, Chief Financial Officer Albert Lee....................... 57 Vice President, Operations Joseph Mendolia.................. 47 Vice President, Sales and Marketing Shrikumar Chandran............... 50 Vice President, Engineering Philip Pollok.................... 46 Director
Dan Wilnai, one of our co-founders, has served as our President, Chief Executive Officer, Secretary and Chairman of the Board of Directors since our incorporation in February 1992. Prior to founding our company, from February 1985 to February 1992, Mr. Wilnai served as President of Summit Microsystems, a company that focused on the FDDI fiber optic local area network standard. From September 1974 to February 1985, Mr. Wilnai served as a program manager for Fairchild Camera & Instrument Corporation, a developer of high performance microprocessors and board-level products for military and commercial real-time applications. Mr. Wilnai holds a B.S. in Electrical Engineering from the Technion-Israel Institute of Technology. Peretz Tzarnotzky, one of our co-founders, has served as a member of our Board of Directors since our incorporation in February 1992 and our Vice President, Chief Technology Officer since July 2000. Mr. Tzarnotzky also served as our Vice President, Engineering from our incorporation in February 1992 to June 2000. Prior to founding our company, from November 1989 to July 1991, Mr. Tzarnotzky served as a systems engineering group manager at Cadence Design Systems, a developer of design automation products. Mr. Tzarnotzky holds a B.S.C. in Electrical Engineering from Ben-Gurion University of the Negev in Israel. Dennis Evans has served as our Vice President, Chief Financial Officer since May 2000. Prior to joining our company, from March 1997 to May 2000, Mr. Evans served as Vice President, Chief Financial Officer and Secretary of Whisper Communications, Inc., a designer and manufacturer of wireless telemetry systems. From February 1996 to March 1997, Mr. Evans served as the corporate controller of Sherpa Corporation, a developer and distributor of product data management software systems. From September 1993 to December 1995, Mr. Evans was assistant division manager at Space Applications Corporation. Mr. Evans holds a B.S. in Business Administration from California State University, Long Beach. Albert Lee has served as our Vice President, Operations since December 1997. Prior to joining our company, from July 1995 to June 1997, Mr. Lee served as Vice President of Operations with Hine Design, Inc., a designer and manufacturer of robotics systems for the semiconductor equipment industry. From February 1991 to July 1995, Mr. Lee served as the Vice President of Operations at 48 Advanced Molecular Systems, a designer and manufacturer of automated capillary electrophoresis systems. Mr. Lee holds a B.S. in Business Administration from the University of San Francisco. Joseph Mendolia has served as our as Vice President, Sales and Marketing since April 1999. Prior to joining our company, from May 1994 to April 1999, Mr. Mendolia served as Vice President of Sales and Marketing with SciNet, Inc., a designer, manufacturer and distributor of storage networking systems. From March 1992 to May 1994, Mr. Mendolia served as the North American sales manager for Adaptec, Inc., a designer and manufacturer of hardware and software products that enable data to be transferred from a computer to a peripheral or network device. Mr. Mendolia holds a B.S. in Computer Science and Mathematics from Pepperdine University. Shrikumar Chandran has served as our Vice President, Engineering since June 2000. From February 1998 to June 2000, Mr. Chandran served as our Director of Engineering. Prior to joining our company, from July 1997 to February 1998, Mr. Chandran served as Director of Storage Systems Architecture with Storage Dimensions, a designer, manufacturer and distributor of high performance, high capacity data storage and back-up systems. From 1981 to July 1997, Mr. Chandran served in several capacities at Tandem Computers, a designer, manufacturer and distributor of enterprise servers, including, most recently, as section head of ServerNet Adapters and related firmware. Mr. Chandran holds a B.E. in Electrical Engineering from the University of Madras in India, an M.Tech in Control Systems from the Indian Institute of Technology in India and a M.S. in Computer Engineering from Oregon State University. Philip Pollok has served as one of our directors since February 1999. Since January 1999, Mr. Pollok has served as the Senior Vice President and General Manager of Business Line Networking of Philips Semiconductors, a division of Philips Electronics North American Corporation. From February 1998 to October 1998, Mr. Pollok served as the Business Unit Director of Wireless Communications at Mitel Semiconductor, a manufacturer of cellular, GPS, set top box, paging and wireless LAN products. From May 1994 to February 1998, Mr. Pollok served as the Communications Business Unit Director at GEC Plessey Semiconductors, a manufacturer of cellular, paging, wireless LAN and telecommunications products. Mr. Pollok holds a B.S. in Electronic Engineering from the University of Aston in Birmingham in the United Kingdom. Board of Directors We currently have three members and two vacancies on our board of directors. We intend to expand the size of our board to five and elect two additional directors prior to this offering. Each director holds office until his or her term expires or until his or her successor is duly elected and qualified. Upon completion of this offering, our certificate of incorporation and bylaws will provide for a classified board of directors. In accordance with the terms of our certificate of incorporation, our board of directors will be divided into three classes whose terms will expire at different times. The three classes will be comprised of the following directors: . Class I consists of , who will serve until the annual meeting of stockholders to be held in 2001; . Class II consists of and , who will serve until the annual meeting of stockholders to be held in 2002; and . Class III consists of and , who will serve until the annual meeting of stockholders to be held in 2003. 49 At each annual meeting of stockholders, beginning with the 2001 annual meeting, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election or until their successors have been duly elected and qualified. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of an equal number of directors. Committees of the Board of Directors The board of directors has a compensation committee and an audit committee. The compensation committee of our board of directors reviews and makes recommendations to the board of directors regarding all forms of compensation and benefits provided to our officers. In addition, the compensation committee establishes and reviews general policies relating to the compensation and benefits of all our employees. The current members of the compensation committee are Philip Pollok, and . The audit committee of our board of directors reviews and monitors our internal accounting procedures, corporate financial reporting, external and internal audits, fee results and scope of the annual audit and other services provided by our independent accountants and our compliance with legal matters that have a significant impact on our financial reports. The current members of the audit committee are Philip Pollok, and . Compensation Committee Interlocks and Insider Participation The board of directors established its compensation committee in August 2000. Prior to establishing the compensation committee, the board of directors, as a whole, performed the functions delegated to the compensation committee. None of our compensation committee members has been an officer or employee of our company at any time since our formation. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board or our compensation committee. See "Related Party Transactions" for a description of transactions between our company and entities affiliates with members of our compensation committee. Director Compensation Other than expenses in connection with attendance at meetings, we currently do not compensate any non-employee member of our board of directors. Directors who are also employees currently do not receive additional compensation for serving as directors. 50 Executive Compensation The following table sets forth information concerning compensation paid by us during the year ended December 31, 1999 to our Chief Executive Officer and each of our four other executive officers who received salary compensation of more than $100,000 in that year, referred to collectively in this prospectus as the "named executive officers." Mr. Evans joined our company in May 2000 at an annual base salary of $175,000. Summary Compensation Table
Long-term Compensation Annual Compensation Awards ---------------- ------------ Securities Underlying All Other Name and Principal Position Salary Bonus Options (#) Compensation(1) - --------------------------- -------- ------- ------------ --------------- Dan Wilnai....................... $194,441 $60,000 $10,612 President and Chief Executive Officer Albert Lee....................... 144,250 15,000 5,579 Vice President, Operations Peretz Tzarnotzky................ 181,121 54,000 10,612 Vice President, Chief Technology Officer Shrikumar Chandran............... 142,066 14,000 10,411 Vice President, Engineering Joseph Mendolia.................. 116,885 15,000 3,910 Vice President, Marketing
- -------- (1) Consists solely of contributions made to each executive officer's account under our 401(k) profit sharing plan. Option Grants in Last Year The following table sets forth information regarding stock options granted to the named executive officers during the year ended December 31, 1999. All of these options were granted pursuant to our 1994 stock option plan and have a term of ten years from the date of grant.
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term ---------------------------------------------- --------------------- Number of Securities Percentage of Underlying Total Options Options Granted in Exercise Expiration Name Granted (#) Fiscal 1999 Price ($) Date 5% 10% - ---- ----------- ------------- --------- ---------- ---------- ---------- Dan Wilnai.............. -- -- -- -- $ $ Albert Lee.............. 20,000 4.79% 0.75 7/1/09 Peretz Tzarnotzky....... -- -- -- -- Shrikumar Chandran...... 20,000 4.79% 0.75 5/13/09 Joseph Mendolia......... 150,000 35.97% 0.75 4/14/09
In the year ended December 31, 1999, we granted options to purchase a total of 417,000 shares of common stock to our employees, executive officers and directors. Generally, we grant options at an exercise price equal to the fair market value of the underlying common stock on the date of grant, as determined by 51 our board of directors, and the options vest over four years from the date of grant. In determining the fair market value of our common stock, our board of directors considers valuations of comparable companies, valuations reports and analyses prepared by third parties and the lack of liquidity of our securities. Once we become a publicly-held company, the fair market value of our stock will equal its trading market price. In accordance with the rules of the SEC, the above table sets forth the potential realizable value over the ten-year period from the grant date to the expiration date, assuming rates of stock appreciation of 5% and 10%, compounded annually. These amounts do not represent our estimate of future stock price performance. Actual realizable values, if any, of stock options will depend on the future performance of our common stock. We have granted options to purchase shares of our common stock to our executive officers under our 1994 stock option and 2000 stock option/stock issuance plans as described in "Related Party Transactions--Grant of Options." Aggregate Option Exercises in Last Year and Year-End Option Values The following table sets forth information for our named executive officers relating to the number and value of shares of common stock underlying exercisable and unexercisable options held at December 31, 1999. No options or stock appreciation rights were exercised during 1999 and no stock appreciation rights were outstanding as of December 31, 1999. The value of unexercised in-the-money options at December 31, 1999 is based on a value of $ per share, the assumed initial public offering price, less the per share exercise price, multiplied by the number of shares issuable upon exercise of the option. All options were granted under our 1994 stock option plan.
Number of Securities Underlying Value of Unexercised Unexercised Options as In-the-Money Options as of December 31, 1999 (#) of December 31, 1999 ($) ------------------------- ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- Dan Wilnai.................. Albert Lee.................. Peretz Tzarnotzky........... Shrikumar Chandran.......... Joseph Mendolia.............
2000 Stock Incentive Plan Introduction. Our 2000 stock incentive plan is intended to serve as the successor equity incentive program to our 1994 stock option plan and our 2000 stock option/stock issuance plan, also referred to as the predecessor plans. The 2000 stock incentive plan was adopted by our board of directors on August 4, 2000 and is expected to be approved by our stockholders prior to the commencement of this offering. If approved, the 2000 stock incentive plan will become effective when the underwriting agreement for this offering is signed. At that time, all outstanding options under the predecessor plans will be transferred to the 2000 stock incentive plan, and no further option grants will be made under the predecessor plans. The transferred options will continue to be governed by their existing terms, unless our compensation committee decides to extend one or more features of the 2000 stock incentive plan to those options. Except as otherwise noted below, the 52 transferred options have substantially the same terms as will be in effect for grants made under the discretionary option grant program of our 2000 stock incentive plan. Share Reserve. 3,850,000 shares of our common stock have been authorized for issuance under the 2000 stock incentive plan. This share reserve consists of the number of shares we estimate will be carried over from the predecessor plans, including the shares subject to outstanding options thereunder, plus an additional increase of approximately 445,000 shares. The share reserve under our 2000 stock incentive plan will automatically increase on the first trading day in January each calendar year, beginning in calendar year 2001, by an amount equal to four percent of the total number of shares of our common stock outstanding on the last trading day of December in the preceding calendar year, but in no event will this annual increase exceed 2 million shares. In addition, no participant in our 2000 stock incentive plan may be granted stock options, separately exercisable stock appreciation rights, and direct stock issuances for more than 500,000 shares of common stock per calendar year. Equity Incentive Programs. Our 2000 stock incentive plan is divided into five separate components. . The discretionary option grant program, under which eligible individuals may be granted options to purchase shares of common stock at an exercise price not less than the fair market value of those shares on the grant date. . The stock issuance program, under which eligible individuals may be issued shares of our common stock directly, through the purchase of such shares at a price not less than their fair market value at the time of issuance or as a bonus tied to the attainment of performance milestones or the completion of a specified period of service. . The salary investment option grant program, under which our executive officers and other highly compensated employees may be given the opportunity to apply a portion of their base salary to the acquisition of special below-market stock option grants. . The automatic option grant program, under which option grants will automatically be made at periodic intervals to our non-employee board members to purchase shares of common stock at an exercise price equal to the fair market value of those shares on the grant date. . The director fee option grant program, under which our non-employee board members may be given the opportunity to apply a portion of any annual retainer fee otherwise payable to them in cash each year to the acquisition of special below-market option grants. Eligibility. The individuals eligible to participate in our 2000 stock incentive plan include our officers and other employees, our non-employee board members and any consultants that we hire. Administration. The discretionary option grant and stock issuance programs will be administered by our compensation committee. This committee will determine which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when the option grants or stock issuances are to be made, the number of shares subject to each grant or issuance, the status of any granted option as either an incentive stock option or a non-statutory stock option under the federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The 53 compensation committee will also have the exclusive authority to select the executive officers and other highly compensated employees who may participate in the salary investment option grant program if that program is activated for one or more calendar years. Plan Features. Our 2000 stock incentive plan will include the features described below. . The exercise price for any options granted under the plan may be paid in cash or in shares of our common stock valued at fair market value on the exercise date. The option may also be exercised through a same-day sale program without any cash outlay by the optionee. In addition, the plan administrator may provide financial assistance to one or more optionees in the exercise of their outstanding options or the purchase of their unvested shares by allowing such individuals to deliver a full-recourse, interest-bearing promissory note in payment of the exercise price and any associated withholding taxes incurred in connection with such exercise or purchase. . The compensation committee will have the authority to cancel outstanding options under the discretionary option grant program, including options transferred from our predecessor plans, in return for the grant of new options for the same or a different number of option shares with an exercise price per share based upon the fair market value of our common stock on the new grant date. . Stock appreciation rights may be issued under the discretionary option grant program. These rights will provide the holders with the election to surrender their outstanding options for a payment from us equal to the fair market value of the vested shares subject to the surrendered option, less the aggregate exercise price payable for those shares. We may make the payment in cash or in shares of our common stock. None of the outstanding options under our predecessor plans have any stock appreciation rights. Change in Control. The 2000 stock incentive plan will include the change in control provisions that may result in the accelerated vesting of outstanding option grants and stock issuances described below. . If we are acquired by merger or asset sale, each outstanding option under the discretionary option grant program which is not assumed by the successor corporation will become immediately exercisable for all the option shares, and all unvested shares under the discretionary option program and stock issuance program will immediately vest, except to the extent our repurchase rights with respect to those shares are to be assigned to the successor corporation. . The compensation committee will have complete discretion to structure one or more options under the discretionary option grant program so those options will vest as to all the option shares in the event those options are assumed in the acquisition but the optionee's service with us or the acquiring entity is subsequently terminated. The vesting of outstanding shares under the stock issuance program may be accelerated upon similar terms and conditions. . The compensation committee will also have the authority to grant options which will immediately vest in the event we are acquired, whether or not those options are assumed by the successor corporation. . The compensation committee may grant options and structure repurchase rights so that the shares subject to those options or repurchase rights will vest in connection with a successful tender offer for more than 50% of our outstanding voting stock or a change in the majority of 54 our board of directors through one or more contested elections for board membership. Such accelerated vesting may occur either at the time of such transaction or upon the subsequent termination of the individual's service. . The options currently outstanding under our 2000 stock option/stock issuance plan will immediately vest if we are acquired by a merger or sale of substantially all of our assets, unless those options are assumed by the acquiring entity or our repurchase rights with respect to any unvested shares subject to those options are assigned to such entity. However, a number of those options may also contain a special acceleration provision pursuant to which the shares subject to those options will immediately vest upon an involuntary termination of the optionee's employment within 18 months following an acquisition in which the repurchase rights with respect to those shares are assigned to the acquiring entity. . The options currently outstanding under our 1994 stock option plan will be assumed or an equivalent option substituted by an acquiring entity in a merger. Salary Investment Option Grant Program. If the compensation committee decides to activate this program for one or more calendar years, each of our executive officers and other selected highly compensated employees may elect, prior to the start of the calendar year, to reduce his or her base salary for the calendar year by a specified amount not less than $10,000 nor more than $50,000. Each selected individual who makes such a timely election will automatically be granted, on the first trading day in January of the calendar year for which his or her salary reduction is to be in effect, an option to purchase that number of shares of common stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of our common stock on the grant date. The option will be exercisable at a price per share equal to one-third of the fair market value of the option shares on the grant date. As a result, the option will be structured so that the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the amount by which the optionee's salary is reduced under the program. The option will become exercisable in a series of twelve equal monthly installments over the calendar year for which the salary reduction is to be in effect. Automatic Option Grant Program. Each individual who first becomes a non- employee board member at any time after the effective date of this offering will automatically receive an option grant for 20,000 shares of common stock on the date such individual joins the board, provided such individual has not been in our prior employ. In addition, on the date of each annual stockholders' meeting held after the effective date of this offering, each non-employee board member who is to continue to serve as a non-employee board member, including each of our current non-employee board members, will automatically be granted an option to purchase 5,000 shares of common stock, provided such individual has served on the board for at least six months. Each automatic grant will have an exercise price per share equal to the fair market value per share of our common stock on the grant date and will have a term of ten years, subject to earlier termination following the optionee's cessation of board service. The option will be immediately exercisable for all of the option shares; however, we may repurchase, at the exercise price paid per share, any shares purchased under the option that are not vested at the time of the optionee's cessation of board service. The shares subject to each initial 20,000 share automatic option grant will vest in a series of four successive annual installments upon the optionee's completion of each year of board service over the four-year period measured from the grant date. The shares subject to each annual 5,000 share automatic option grant will vest upon the optionee's completion of one year of service on our board of directors measured from the grant date. However, the shares will 55 immediately vest in full upon certain changes in control or ownership or upon the optionee's death or disability while a board member. Director Fee Option Grant Program. If this program is activated in the future, each non-employee board member may elect to apply all or a portion of any cash retainer fee for the year to the acquisition of a below market option grant. The option grant will automatically be made on the first trading day in January in the year for which the retainer fee would otherwise be payable in cash. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date, and the number of shares subject to the option will be determined by dividing the amount of the retainer fee applied to the program by two-thirds of the fair market value per share of our common stock on the grant date. As a result, the option will be structured so that the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the portion of the retainer fee applied to that option. The option will become exercisable in a series of twelve equal monthly installments over the calendar year for which the retainer fee election is in effect. However, the option will become immediately exercisable for all the option shares upon the optionee's death or disability while serving as a board member. Additional Program Features. Our 2000 stock incentive plan will also have the features described below. . Outstanding options under the salary investment, automatic option grant and director fee option grant programs will immediately vest if we are acquired by a merger or asset sale or if there is a successful tender offer for more than 50% of our outstanding voting stock or a change in the majority of our board through one or more contested elections. . Limited stock appreciation rights will automatically be included as part of each grant made under the salary investment option grant program and the automatic and director fee option grant programs, and these rights may also be granted to one or more officers as part of their option grants under the discretionary option grant program. Options with this feature may be surrendered to us upon the successful completion of a hostile tender offer for more than 50% of our outstanding voting stock. In return for the surrendered option, the optionee will be entitled to a cash distribution from us in an amount per surrendered option share based upon the highest price per share of our common stock paid in that tender offer. . The board of directors may amend or modify the 2000 stock incentive plan at any time, subject to any required stockholder approval. The 2000 stock incentive plan will terminate no later than August 3, 2010. 2000 Employee Stock Purchase Plan Introduction. Our 2000 employee stock purchase plan was adopted by the board on August 4, 2000, and is expected to be approved by the stockholders prior to the consummation of this offering. If approved, the plan will become effective immediately upon the signing of the underwriting agreement for this offering. The plan is designed to allow our eligible employees and the eligible employees of any of our future participating subsidiaries to purchase shares of common stock, at semi-annual intervals, with their accumulated payroll deductions. Share Reserve. 250,000 shares of our common stock will initially be reserved for issuance under the plan. The reserve will automatically increase on the first trading day in January of each calendar year, beginning in calendar year 2001, by an amount equal to one percent of the total 56 number of outstanding shares of our common stock on the last trading day in December in the prior calendar year. In no event will any such annual reserve increase exceed 500,000 shares. Offering Periods. The plan will have a series of successive offering periods, each with a maximum duration of 24 months. However, the initial offering period may have a duration in excess of 24 months and will start on the date the underwriting agreement for the offering covered is signed and will end on the last business day in 2002. The next offering period will start on the first business day in 2002, and subsequent offering periods will be set by our compensation committee. Eligible Employees. Individuals scheduled to work more than 20 hours per week for more than five calendar months per year may join an offering period on the start date of that period. However, employees may participate in only one offering period at a time. Payroll Deductions. A participant may contribute up to 15% of his or her cash earnings through payroll deductions, and the accumulated deductions will be applied to the purchase of shares on each semi-annual purchase date. The purchase price per share will be equal to 85% of the fair market value per share on the start date of the offering period in which the participant is enrolled or, if lower, 85% of the fair market value per share on the semi- annual purchase date. Semi-annual purchase dates will occur on the last business day of and each year. However, a participant may not purchase more than 5,000 shares on any purchase date, and not more than 100,000 shares may be purchased in total by all participants on any purchase date. Our compensation committee will have the authority to change these limitations for any subsequent offering period. Reset Feature. If the fair market value per share of our common stock on any purchase date is less than the fair market value per share on the start date of the two-year offering period, then that offering period will automatically terminate, and a new two-year offering period will begin on the next business day. All participants in the terminated offering period will automatically be transferred to the new offering period. Change in Control. Should we be acquired by merger or sale of substantially all of our assets or more than 50% of our voting securities, then all outstanding purchase rights will automatically be exercised immediately prior to the effective date of the acquisition. The purchase price will be equal to 85% of the market value per share on the start date of the offering period in which the participant is enrolled at the time the acquisition occurs or, if lower, 85% of the fair market value per share immediately prior to the acquisition. Plan Provisions. The following provisions will also be in effect under the plan: . The plan will terminate no later than the last business day of 2010. . The board may at any time amend, suspend or discontinue the plan. However, certain amendments may require stockholder approval. 401(k) Profit Sharing Plan In January 1996, we adopted a 401(k) profit sharing plan covering our full- time employees located in the United States. The plan is intended to qualify under Section 401(a) of the Internal Revenue Code, so that contributions to the plan by employees or by us on their behalf and the investment earnings on these contributions, are not taxable to employees until withdrawn from the plan and so that we can deduct our contributions, if any, when made. 57 Pursuant to the plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($10,500 in 2000) and to have the amount of the reduction contributed to the plan. The plan permits, but does not require, that we provide additional matching contributions to the plan on behalf of all participants in the plan. We make contributions to the plan each pay period to all participants in an amount determined by the board of directors. In the year ended December 31, 1999, we contributed $75,493 on behalf of participants in the plan, of which $41,124 was contributed on behalf of our named executive officers. Employment Contracts, Termination of Employment Agreements and Change of Control Arrangements We have entered into employment agreements with Albert Lee, Shrikumar Chandran, Joseph Mendolia and Dennis Evans, each of whom are executive officers of our company. On December 5, 1997, Albert Lee, our Vice President, Operations, entered into an employment agreement with us. The agreement provides for a starting annual salary of $125,000. The agreement also provides for periodic achievement bonuses based on our company's financial performance and on Mr. Lee meeting certain objectives as defined by company management. In connection with his employment, Mr. Lee was granted options to purchase up to 120,000 shares of common stock pursuant to our 1994 stock option plan at a per share exercise price of $0.44. In the event Mr. Lee is involuntarily terminated without cause within twelve months of a change of control, he will be entitled to a lump sum severance payment equal to six months of his base salary. On January 8, 1998, Shrikumar Chandran, our Vice President, Engineering, entered into an employment agreement with us. The agreement provides for a starting annual salary of $130,000. The agreement also provides for periodic achievement bonuses based on our company's financial performance and on Mr. Chandran meeting certain objectives as defined by our company's management. In connection with his employment, Mr. Chandran was granted options to purchase up to 100,000 shares of common stock pursuant to our 1994 stock option plan at a per share exercise price of $0.44. On March 3, 1999, Joseph Mendolia, our Vice President, Sales and Marketing, entered into an employment agreement with us. The agreement provides for a starting annual salary of $100,000. The agreement also provides for periodic achievement bonuses based on our company's financial performance and on Mr. Mendolia meeting certain objectives as defined by our company's management. In connection with his employment, Mr. Mendolia was granted options to purchase up to 150,000 shares of common stock pursuant to our 1994 stock option plan at a per share exercise price of $0.75. In the event Mr. Mendolia is involuntarily terminated without cause within twelve months of a change of control, he will be entitled to a lump sum severance payment equal to six months of his base salary. On May 1, 2000, Dennis Evans, our Vice President, Chief Financial Officer, entered into an employment agreement with us. The agreement provides for a starting annual salary of $175,000. The agreement also provides for periodic achievement bonuses based on our company's financial performance and on Mr. Evans meeting certain objectives as defined by our company's management. In connection with his employment, Mr. Evans was granted options to purchase up to 150,000 shares of common stock, in accordance with our 2000 stock option plan/stock issuance at a per share exercise price of $2.50. In the event Mr. Evans is involuntarily terminated without cause after the 58 first twelve months of his employment or his employment is terminated within twelve months of a change of control, he will be entitled to a lump sum severance payment equal to six months of his base salary. Limitation of Liability and Indemnification Our certificate of incorporation limits the liability of directors to the maximum extent permitted by the Delaware General Corporation Law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for any of the following: . any breach of their duty of loyalty to the corporation or its stockholders; . acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . unlawful payments of dividends or unlawful stock repurchases or redemptions; or . any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our bylaws provide that we shall indemnify our directors and executive officers to the fullest extent permitted under the Delaware General Corporation Law and may indemnify our other officers, employees and other agents to the fullest extent permitted by law. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in this capacity, regardless of whether the bylaws would permit indemnification. Prior to the consummation of the offering, we will obtain an insurance policy covering directors and officers for claims they may otherwise be required to pay or for which we are required to indemnify them. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification. 59 RELATED PARTY TRANSACTIONS Sales of Stock Since our inception in February 1992, we have issued and sold shares of our common stock in private placement transactions as follows: . 1,200,000 shares at a price of $0.0001 per share in February 1992 to Dan Wilnai, the Chairman of our Board of Directors and our President, Chief Executive Officer and Secretary. . 800,000 shares at a price of $0.0001 per share in February 1992 to Peretz Tzarnotzky, a member of our Board of Directors and our Vice President, Chief Technology Officer. . 857,141 shares at a price of $1.16667 per share in March 1994 to Philips Semiconductors. Philip Pollok, a member of our Board of Directors, is a Senior Vice President and General Manager of Business Line Networking at Philips. Grants of Options From our inception in February 1992, we have granted options to purchase our common stock to our directors and executive officers as follows:
Number Grant of Exercise Name Date Shares Price - ---- -------- ------- -------- Shrikumar Chandran.................................... 02/02/98 100,000 $0.44 05/13/99 20,000 0.75 08/04/00 25,000 2.50 Albert Lee............................................ 12/01/97 120,000 0.44 04/01/98 30,000 0.60 07/01/99 20,000 0.75 08/04/00 20,000 2.50 Joseph Mendolia....................................... 04/14/99 150,000 0.75 08/04/00 20,000 2.50 Dennis Evans.......................................... 08/04/00 150,000 $2.50
Transactions with Directors and Officers In May 2000, Albert Lee, our Vice President, Operations, exercised options to purchase 70,000 shares of our common stock and paid an aggregate purchase price of $30,000 for these shares. In May 2000, we loaned $125,000 to Mr. Lee pursuant to a promissory note. The loan is full-recourse and secured by 70,000 shares of our common stock held by Mr. Lee. The note accrues interest at a rate of 6.42% and is due on May 11, 2002 or upon termination of Mr. Lee's employment with our company. As of July 31, 2000, $126,780 remained outstanding on Mr. Lee's loan. We have entered into employment arrangements with our executive officers. See "Management--Employment Contracts, Termination of Employment Agreements and Change of Control Arrangements." We made contributions to our 401(k) profit sharing plan on behalf of several of our executive officers. See "Management--401(k) Profit Sharing Plan." We have entered into an indemnification agreement with each of our directors and executive officers that provide for indemnification beyond what is provided for in our certificate of 60 incorporation and bylaws. The indemnification agreements, among other things, indemnify our directors and executive officers for expenses they may incur as a result of any proceeding against them and against liabilities (other than liabilities arising from intentional or knowing and culpable violations of law) that may arise by reason of their status or service as directors or executive officers of our company or other entities to which they provide service at our request. We believe that these provisions and indemnification agreements are necessary to attract and retain qualified directors and officers. Policy Regarding Transactions with Affiliates We believe that all of the transactions set forth above were made on terms no less favorable to us than could have been otherwise obtained from unaffiliated third parties, other than the interest rate of Mr. Lee's loan as described above. All future transactions with affiliates, including any loans we make to our officers, directors, principal stockholders or other affiliates, will be approved by a majority of our board of directors, including a majority of the independent and disinterested members or, if required by law, a majority of disinterested stockholders, and will be on terms no less favorable to us than we could have obtained from unaffiliated third parties. 61 PRINCIPAL STOCKHOLDERS The table below sets forth information regarding the beneficial ownership of our common stock as of July 31, 2000 and as adjusted for this offering assuming no exercise of the underwriters' overallotment option, by: . each person, group of affiliated persons, or entity who is known by us to own beneficially more than 5% of our outstanding stock; . each of the named executive officers and directors; and . all of our directors and executive officers as a group. Each stockholder's percentage ownership in the following table is based on 11,757,011 shares of common stock outstanding as of July 31, 2000, which includes shares of common stock issuable upon the closing of this offering, and treating as outstanding all options exercisable within 60 days of July 31, 2000 held by the particular stockholder and that are included in the first column. Unless otherwise indicated, the principal address of each of the stockholders below is c/o Computer Access Technology Corporation, 2403 Walsh Avenue, Santa Clara, California 95051. Except as otherwise indicated and subject to applicable community property laws, to the best of our knowledge, the persons named in the table have sole voting and investment power for all of the shares of common stock held by them.
Shares Beneficially Owned ---------------------------- Percent Percent Before After Beneficial Owner Number Offering Offering - ---------------- ---------- -------- -------- 5% Stockholders: Philips Semiconductors(1)........................ 3,428,564 29.16% % Directors and Executive Officers: Dan Wilnai(2).................................... 4,800,000 40.08 Peretz Tzarnotzsky............................... 3,200,000 27.21 Albert Lee(3).................................... 102,082 * * Shrikumar Chandran(4)............................ 72,493 * * Joseph Mendolia(5)............................... 53,125 * * Philip Pollok(6)................................. 3,428,564 29.16 Dennis Evans..................................... -- * * All directors and executive officers as a group (7 persons)..................................... 11,656,264 99.1
- -------- * Less than 1% of the outstanding shares of common stock (1) Philips Semiconductors is a division of Philips Electronics North American Corporation. The business address for Philips Semiconductors is 1109 McKay Dr. M/S 48 San Jose , CA 95131. (2) Mr. Wilnai's shares include an aggregate of 4,480,000 shares held by a family trust of which Mr. Wilnai is a trustee and 320,000 shares held by Mr. Wilnai's family members. (3) Mr. Lee's shares include 32,082 shares subject to options exercisable within 60 days of July 31, 2000. (4) Mr. Chandran's shares include 72,493 shares subject to options exercisable within 60 days of July 31, 2000. (5) Mr. Mendolia's shares include 53,125 shares of common stock subject to options exercisable within 60 days of July 31, 2000. (6) Mr. Pollok's shares include 3,428,564 shares of common stock held by Philips Semiconductors. Mr. Pollok is a Senior Vice President and General Manager of Business Line Networking of Philips Semiconductors and disclaims beneficial ownership of these shares, if any. 62 DESCRIPTION OF CAPITAL STOCK General Our certificate of incorporation authorizes the issuance of up to 100 million shares of common stock, $0.001 par value, and authorizes the issuance of 25 million shares of undesignated preferred stock, $0.001 par value. From time to time, our board of directors may establish the rights and preferences of the preferred stock. As of June 30, 2000, 11,664,064 shares of common stock were issued and outstanding and held by 16 stockholders. Upon the closing of this offering, there will be an aggregate of shares of common stock issued and outstanding. The following description of our capital stock is, by necessity, not complete. We encourage you to refer to our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and applicable provisions of Delaware law for a more complete description. Common Stock Each holder of common stock is entitled to one vote for each share of common stock held on all matters to be voted upon by the stockholders. Subject to preferences that may apply to any outstanding preferred stock that we may issue, the holders of common stock are entitled to receive ratably dividends, if any, that may be declared from time to time by our board of directors out of funds legally available for dividends. In the event of a liquidation, dissolution or winding up of our company, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. Holders of common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock outstanding upon completion of this offering will be fully paid and nonassessable. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by the rights of the holders of shares of any series of preferred stock which we may designate in the future. Preferred Stock Our board of directors has the authority, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, which may be greater than the rights of the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock until our board of directors determines the specific rights of the holders of such preferred stock. However, the effects might include, among other things: . restricting dividends on the common stock; . diluting the voting power of the common stock; . impairing the liquidation rights of the common stock; or . delaying or preventing a change in control of our company without further action by the stockholders. Upon the closing of this offering, no shares of preferred stock will be outstanding, and we have no present plans to issue any shares of preferred stock. Compliance with California Law We are currently subject to Section 2115 of the California General Corporation Law. Section 2115 provides that, regardless of a company's legal domicile, certain provisions of California 63 corporate law will apply to that company if more than 50% of its outstanding voting securities are held of record by persons having addresses in California and the majority of the company's operations occur in California. For example, while we are subject to Section 2115, stockholders may cumulate votes in electing directors. This means that each stockholder may vote the number of votes equal to the number of candidates multiplied by the number of votes to which the stockholder's shares are normally entitled in favor of one candidate. This potentially allows minority stockholders to elect some members of our board of directors. When we are no longer subject to Section 2115, cumulative voting will not be allowed and a holder of 50% or more of our voting stock will be able to control the election of all directors. In addition to this difference, Section 2115 has the following additional effects: . enables removal of directors with or without cause with majority stockholder approval; . places limitations on the distribution of dividends; . extends additional rights to dissenting stockholders in any reorganization, including a merger, sale of assets or exchange of shares; and . provides for information rights and required filings in the event we effect a sale of assets or complete a merger. We anticipate that our common stock will be qualified for trading as a national market security on the Nasdaq National Market and that we will have at least 800 stockholders of record by the record date for our next annual meeting of stockholders. If these two conditions occur, then we will no longer be subject to Section 2115 as of the record date for our next annual meeting of stockholders. Antitakeover Effects of Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws Some provisions of our certificate of incorporation and our bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of our company. These provisions also may have the effect of preventing changes in the management of our company. The provisions, summarized below, are expected to discourage certain types of coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of our company to first negotiate with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire our company outweigh the disadvantages of discouraging these proposals because negotiation of these proposals could result in an improvement of their terms. Undesignated Preferred Stock. Our certificate of incorporation authorizes our board of directors to establish one or more series of undesignated preferred stock, the terms of which can be determined by our board of directors at the time of issuance. Elimination of Stockholder Action by Written Consent. Our certificate of incorporation also provides that all stockholder action must be effected at a duly called meeting of stockholders and not by written consent. Stockholder Meetings. In addition, our certificate of incorporation and bylaws do not permit our stockholders to call a special meeting of stockholders. Only our chief executive officer, president, chairman of the board or a majority of our board of directors are permitted to call a special meeting of stockholders. 64 Election and Removal of Directors. Our certificate of incorporation also provides that our board of directors is divided into three classes, with each director assigned to a class with a term of three years and that the number of directors may only be determined by our board of directors. Requirements for Advance Notification of Stockholder Nominations and Proposals. Our bylaws require that stockholders give advance notice to our secretary of any nominations for director or other business to be brought by stockholders at any stockholders' meeting and that the chairman of the board has the authority to adjourn any meeting called by the stockholders. Amendment of Charter Provisions. Our bylaws also require a supermajority vote of members of our board of directors and/or stockholders to amend certain bylaw provisions. Delaware Antitakeover Law. We are subject to Section 203 of the Delaware General Corporation Law, an antitakeover law. In general, Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless: . prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; . upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by: -- employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or -- persons who are directors and also officers; and . on or subsequent to that date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own 15% or more of a corporation's outstanding voting securities. We expect the existence of this provision to have an antitakeover effect with respect to transactions our board of directors does not approve in advance. We also anticipate that Section 203 may discourage attempts that might result in a premium over the market price for the shares of common stock held by stockholders. Transfer Agent and Registrar The transfer agent and registrar for our common stock is . Listing We have applied to have our common stock listed on the Nasdaq National Market for quotation under the symbol "CATZ." 65 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock in the public market following this offering or the possibility of such sales occurring could adversely affect prevailing market prices for our common stock or could impair our ability to raise capital through an offering of equity securities. After this offering, we will have outstanding shares of common stock, based upon shares outstanding as of June 30, 2000, assuming no exercise of the underwriters' over allotment option and no exercise of outstanding options after June 30, 2000. All of the shares sold in this offering will be freely tradable without restriction under the Securities Act except for any shares purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining 11,757,761 shares of common stock held by existing stockholders are "restricted" shares as that term is defined in Rule 144 under the Securities Act. We issued and sold the restricted shares in private transactions in reliance upon exemptions from registration under the Securities Act. Restricted shares may be sold in the public market only if they are registered under the Securities Act or if they qualify for an exemption from registration, such as Rule 144 or 701 under the Securities Act, which are summarized below. Our officers, directors, employees and other stockholders, who collectively hold an aggregate of 11,757,761 restricted shares, and the underwriters entered into a lock-up agreement in connection with this offering. These lock-up agreements provide that, with limited exceptions, our officers, directors, employees and stockholders have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any of our shares for a period of 180 days after the effective date of this offering. FleetBoston Robertson Stephens Inc. may, in its sole discretion and at any time without prior notice, release all or any portion of the shares subject to these lock-up agreements. We have also entered into an agreement with FleetBoston Robertson Stephens Inc. that we will not offer, sell or otherwise dispose of our common stock until 180 days after the effective date of this offering. Taking into account the lock-up agreements, the number of shares that will be available for sale in the public market under the provisions of Rule 144, 144(k) and 701 will be as follows:
Date of Availability for Number Sale of Shares ------------------------ ---------- At various times between August 15, 2000 and February 11, 2001...... 0 On or after February 12, 2001................... 11,757,761 ----------
Rule 144 In general, under Rule 144 as currently in effect, a person, or group of persons whose shares are required to be aggregated, including any of our affiliates, who has beneficially owned shares for at least one year, including the holding period of any prior owner who is not an affiliate, is entitled to sell within any three month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of: . one percent of the then-outstanding shares of our common stock, which will be approximately shares immediately after this offering; or . the average weekly trading volume in our common stock during the four calendar weeks preceding the date on which notice of such sale is filed with the SEC, subject to restrictions. 66 Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. In addition, a person who is not deemed to have been an affiliate at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner who is not an affiliate, would be entitled to sell these shares under Rule 144(k) without regard to the requirements described above. To the extent that shares were acquired from one of our affiliates, a person's holding period for the purpose of effecting a sale under Rule 144 would commence on the date of transfer from the affiliate. The foregoing summary of Rule 144 is not a complete description. Rule 144(k) Under Rule 144(k), a person who is not one of our affiliates at any time during the three months preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner then an affiliate), is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k)" shares may be sold immediately upon the completion of this offering. Rule 701 In general, under Rule 701 of the Securities Act as currently in effect, each of our employees, consultants or advisors who purchases shares of our common stock from us in connection with a compensatory share plan or other written agreement is eligible to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with some restrictions, including the holding period, contained in Rule 144. The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act of 1934, along with the shares acquired upon exercise of such options (including exercises after the date of this prospectus). Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this prospectus, may be sold by persons other than "affiliates", as defined in Rule 144, subject only to the manner of sale provisions of Rule 144 and by "affiliates" under Rule 144 without compliance with its one year minimum holding period requirement. Stock Options We intend to file a registration statement on Form S-8 under the Securities Act covering the shares of common stock reserved for issuance under our 2000 stock incentive plan and our 2000 employee stock purchase plan. We expect this registration statement to be filed and to become effective as soon as practicable after the effective date of this offering. Shares of common stock issued upon exercise of options under the Form S-8 will be available for sale in the public market, subject to Rule 144 volume limitations applicable to affiliates and subject to the contractual restrictions described above. As of June 30, 2000, options to purchase 1,085,000 shares of common stock were outstanding, of which options to purchase approximately 526,000 shares were then vested and exercisable. Beginning 180 days after the effective date of this offering, approximately shares issuable upon the exercise of vested stock options will become eligible for sale in the public market, if such options are exercised. 67 UNDERWRITING The underwriters named below, acting through their representatives, FleetBoston Robertson Stephens Inc., CIBC World Markets Corp., SG Cowen Securities Corporation and Needham & Company, Inc. have severally agreed with us, subject to the terms and conditions of the underwriting agreement, to purchase from us the number of shares of common stock shown opposite their names below. The underwriters are committed to purchase and pay for all of these shares if any are purchased.
Number of Underwriters Shares ------------ ------ FleetBoston Robertson Stephens Inc. .................................. CIBC World Markets Corp. ............................................. SG Cowen Securities Corporation....................................... Needham & Company, Inc. .............................................. ---- Total............................................................... ====
The representatives of the underwriters have advised us that the underwriters propose to offer the shares of common stock to the public at the public offering price shown on the cover page of this prospectus and to dealers at that price less a concession of not more than $ per share, of which $ may be reallowed to other dealers. After the completion of this offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction will change the amount of proceeds we are to receive as shown on the cover page of this prospectus. The common stock is offered by the underwriters as stated in this prospectus, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. FleetBoston Robertson Stephens Inc. expects to deliver the shares on , 2000. Over-Allotment Option. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to additional shares of common stock at the same price per share as we will receive for the shares that the underwriters have agreed to purchase from us. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage of these additional shares that the number of shares of common stock to be purchased by it shown in the above table bears to the total number of shares offered by this prospectus. If purchased, the additional shares will be sold by the underwriters on the same terms as those on which the shares are being sold. The following table shows the per share and total underwriting discounts and commissions that we are to pay to the underwriters. This information is presented assuming either no exercise or full exercise by the underwriters of their over-allotment option.
Total ------------------- Without With Per Over- Over- Share Allotment Allotment ----- --------- --------- Public offering price.............................. $ $ $ Underwriting discounts and commissions............. $ $ $ Proceeds, before expenses, to us................... $ $ $
Expenses of this Offering. The expenses of this offering are estimated at approximately $ million and are payable entirely by us. 68 Indemnity. The underwriting agreement contains covenants of indemnity among the underwriters and us against civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. Lock-Up Agreements. Each of our executive officers, directors, stockholders and option holders has agreed, for a period of 180 days after the date of this prospectus, not to offer, sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock, any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for common stock owned by the holder as of the date of this prospectus or acquired directly from us or with respect to which these holders have or may acquire the power of disposition, without the prior written consent of FleetBoston Robertson Stephens Inc. However, FleetBoston Robertson Stephens Inc. may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. There are no agreements between the underwriters and any of our stockholders providing consent by the representatives to the sale of shares before the expiration of the 180-day lock-up period. This restriction terminates after the close of trading of the shares on the 180th day of (and including) the day the shares began trading on the NASDAQ National Market. Future Sales By Us. In addition, we have agreed that for a period of 180 days after the date of this prospectus, we will not, without the prior written consent of FleetBoston Robertson Stephens Inc. (a) consent to the disposition of any shares held by stockholders before the expiration of the 180-day lock-up period or (b) issue, sell, contract to sell or otherwise dispose of any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock, other than our sale of shares in this offering, the issuance of shares of common stock upon the exercise of options outstanding on the date of this prospectus and the grant of options to purchase shares of common stock under existing employee stock option or stock purchase plans. Directed Shares. At our request, the underwriters will reserve up to shares of common stock for sale in this offering, at the initial public offering price, to our customers, partners and business associates. The number of shares of common stock available for sale to the general public will be reduced to the extent that these individuals purchase all or a portion of the reserved shares. Any reserved shares that are not purchased will be offered by the underwriters to the general public on the same basis as the other shares of common stock offered by this prospectus. No Prior Public Market. Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for our common stock will be determined through negotiations between us and the representatives. Among the factors to be considered in these negotiations are prevailing market conditions, our financial information, market valuations of other companies that we and the representatives believe to be comparable to us, estimates of our business potential and the present state of our development. The underwriters do not expect sales of shares of common stock offered by this prospectus to any accounts over which they exercise discretionary authority to exceed 5% of the shares offered. Syndicate Short Sales. The representatives have advised us that, on behalf of the underwriters, they may make short sales of our common stock in connection with this offering, resulting in the sale by the underwriters of a greater number of shares than they are required to purchase pursuant to the underwriting agreement. The short position resulting from those short sales will be deemed a 69 "covered" short position to the extent that it does not exceed the shares subject to the underwriters' over-allotment option and will be deemed a "naked" short position to the extent that it exceeds that number. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the trading price of the common stock in the open market that could adversely affect investors who purchased shares in the offering. The underwriters may reduce or close out their covered short position either by exercising the over-allotment option or by purchasing shares in the open market. In determining which of these alternatives to pursue, the underwriters will consider the price at which shares are available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Any "naked" short position will be closed out by purchasing shares in the open market. Similar to the other stabilizing transactions described below, open market purchases made by the underwriters to cover all or a portion of their short position may have the effect of preventing or retarding a decline in the market price of our common stock following this offering. As a result, our common stock may trade at a price that is higher than the price that otherwise might prevail in the open market. Stabilization. The representatives have advised us that, under Regulation M under the Exchange Act, they may engage in transactions, including stabilizing bids or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the shares of common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "penalty bid" is an arrangement permitting the representatives to claim the selling concession otherwise accruing to an underwriter or syndicate member in connection with the offering if the common stock originally sold by that underwriter or syndicate member is purchased by the representatives in the open market in a stabilizing bid or to cover all or part of a syndicate short position. The representatives have advised us that stabilizing bids and open market purchases may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 70 LEGAL MATTERS The validity of the common stock offered will be passed upon for us by Brobeck, Phleger & Harrison LLP, San Francisco, California. Legal matters will be passed upon for the underwriters by Fenwick & West LLP, Palo Alto, California. EXPERTS The consolidated financial statements of Computer Access Technology Corporation as of December 31, 1999 and June 30, 2000 and for each of the three years in the period ended December 31, 1999 and the six month period ended June 30, 2000 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission, Washington, D.C. 20549, a registration statement on Form S-1 under the Securities Act, relating to the common stock sold in this offering. This prospectus does not contain all of the information contained in the registration statement and its exhibits and schedules. For further information with respect to us and the shares we are offering pursuant to this prospectus, you should refer to the registration statement and its exhibits and schedules. Statements in this prospectus about the contents of any contract, agreement or other document referred to are not necessarily complete and you should refer to the copy of that contract or other document filed as an exhibit to the registration statement. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. You may read or obtain a copy of the registration statement, including exhibits, at the commission's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the commission at 1-800-SEC-0330. The commission maintains a web site that contains reports, proxy information statements and other information regarding registrants that file electronically with the commission. The address of this web site is http://www.sec.gov. As a result of the offering, the information and reporting requirements of the Securities Exchange Act of 1934 will apply to us. We intend to furnish holders of our common stock with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited condensed financial information for the first three quarters of each fiscal year. We intend to furnish other reports as we may determine or as may be required by law. 71 COMPUTER ACCESS TECHNOLOGY CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants.......................................... F-2 Consolidated Balance Sheets................................................ F-3 Consolidated Statements of Income.......................................... F-4 Consolidated Statement of Stockholders' Equity............................. F-5 Consolidated Statements of Cash Flows...................................... F-6 Notes to Consolidated Financial Statements................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Computer Access Technology Corporation The reincorporation described in Note 10 to the consolidated financial statements had not been consummated as of August 16, 2000. When it has been consummated, we will be in a position to furnish the following report: "In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Computer Access Technology Corporation at June 30, 2000, December 31, 1999 and 1998, and the results of their operations and their cash flows for the six month period ended June 30, 2000 and for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above." PricewaterhouseCoopers LLP San Jose, California August 3, 2000 F-2 COMPUTER ACCESS TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
June December 31, 30, --------------- ------- 1998 1999 2000 ------ ------- ------- ASSETS ------ Current assets: Cash and cash equivalents.......................... $2,215 $ 4,195 $ 5,158 Short-term investments............................. -- -- 1,161 Trade accounts receivable, net of allowance for doubtful accounts of $40, $58 and $79 in 1998, 1999 and 2000..................................... 1,046 2,166 2,995 Related party receivable........................... 83 95 71 Inventories........................................ 373 673 959 Deferred tax assets................................ -- 250 976 Other current assets............................... 12 2 339 ------ ------- ------- Total current assets............................. 3,729 7,381 11,659 Property and equipment, net.......................... 179 255 334 Other assets......................................... 18 18 25 ------ ------- ------- $3,926 $ 7,654 $12,018 ====== ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable................................... $ 235 $ 370 $ 538 Accrued expenses................................... 489 1,238 1,470 Deferred revenue................................... -- -- 1,726 ------ ------- ------- Total current liabilities........................ 724 1,608 3,734 Deferred rent........................................ -- 19 15 ------ ------- ------- Total liabilities................................ 724 1,627 3,749 ------ ------- ------- Commitments (Note 8) Stockholders' equity: Common Stock, $0.001 par value, 100,000,000 shares authorized, 11,428,564 shares issued and outstanding as of December 31, 1998 and 1999 and 11,664,064 shares issued and outstanding as of June 30, 2000..................................... 11 11 12 Additional paid-in capital......................... 2,457 5,042 5,694 Deferred stock-based compensation.................. (754) (1,776) (1,442) Retained earnings.................................. 1,488 2,750 4,005 ------ ------- ------- Total stockholders' equity....................... 3,202 6,027 8,269 ------ ------- ------- $3,926 $ 7,654 $12,018 ====== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-3 COMPUTER ACCESS TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share and per share data)
Year Ended December Six Month Period 31, Ended June 30, --------------------- ------------------ 1997 1998 1999 1999 2000 ------ ------ ------- ----------- ------ (unaudited) Revenue............................... $4,169 $6,771 $12,506 $5,289 $8,782 Cost of revenue (inclusive of amortization of deferred stock-based compensation of none, $242, $243, $99 (unaudited) and $112 in 1997, 1998, 1999, and the six month period ended June 30, 1999 and 2000, respectively)........................ 764 1,437 3,136 1,237 2,168 ------ ------ ------- ------ ------ Gross profit.......................... 3,405 5,334 9,370 4,052 6,614 ------ ------ ------- ------ ------ Operating expenses: Research and development (exclusive of amortization of deferred stock- based compensation of none, $290, $656, $266 (unaudited) and $336 in 1997, 1998, 1999, and the six month period ended June 30, 1999 and 2000, respectively)................ 1,210 2,572 3,538 1,751 1,882 Sales and marketing (exclusive of amortization of deferred stock- based compensation of none, $162, $643, $79 (unaudited) and $410 in 1997, 1998, 1999, and the six month period ended June 30, 1999 and 2000, respectively)................ 431 800 1,194 572 1,103 General and administrative (exclusive of non-cash stock-based compensation of none, none, $21, none (unaudited) and $26 in 1997, 1998, 1999, and the six month period ended June 30, 1999 and 2000, respectively)................ 340 345 434 171 433 Amortization of deferred stock-based compensation....................... -- 452 1,320 345 772 ------ ------ ------- ------ ------ Total operating expenses........... 1,981 4,169 6,486 2,839 4,190 ------ ------ ------- ------ ------ Income from operations................ 1,424 1,165 2,884 1,213 2,424 Interest income....................... 56 80 138 54 156 ------ ------ ------- ------ ------ Income before provision for income taxes................................ 1,480 1,245 3,022 1,267 2,580 Provision for income taxes............ 556 708 1,760 656 1,325 ------ ------ ------- ------ ------ Net income............................ $ 924 $ 537 $ 1,262 $ 611 $1,255 ====== ====== ======= ====== ====== Net income per share: Basic............................... $ 0.08 $ 0.05 $ 0.11 $ 0.05 $ 0.11 ====== ====== ======= ====== ====== Diluted............................. $ 0.08 $ 0.04 $ 0.10 $ 0.05 $ 0.10 ====== ====== ======= ====== ====== Weighted average shares outstanding Basic............................... 11,429 11,429 11,429 11,429 11,487 ====== ====== ======= ====== ====== Diluted............................. 11,606 12,063 12,067 12,181 12,406 ====== ====== ======= ====== ======
The accompanying notes are an integral part of these consolidated financial statements. F-4 COMPUTER ACCESS TECHNOLOGY CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Six Month Period Ended June 30, 2000 and Year Ended December 31, 1999, 1998 and 1997 (in thousands, except share data)
Common Stock Additional Deferred ----------------- Paid-In Stock-Based Retained Shares Amount Capital Compensation Earnings Total ---------- ------ ---------- ------------ -------- ------ Balance as of December 31, 1996............... 11,428,564 $11 $1,009 $ -- $ 27 $1,047 Net income............ -- -- -- -- 924 924 ---------- --- ------ ------- ------ ------ Balance as of December 31, 1997............... 11,428,564 11 1,009 -- 951 1,971 Deferred stock-based compensation......... -- -- 1,448 (1,448) -- -- Amortization of deferred stock-based compensation......... -- -- -- 694 -- 694 Net income............ -- -- -- -- 537 537 ---------- --- ------ ------- ------ ------ Balance as of December 31, 1998............... 11,428,564 11 2,457 (754) 1,488 3,202 Deferred stock-based compensation......... -- -- 2,585 (2,585) -- -- Amortization of deferred stock-based compensation......... -- -- -- 1,563 -- 1,563 Net income............ -- -- -- -- 1,262 1,262 ---------- --- ------ ------- ------ ------ Balance as of December 31, 1999............... 11,428,564 11 5,042 (1,776) 2,750 6,027 Exercise of common stock options........ 235,500 1 102 -- -- 103 Deferred stock-based compensation......... -- -- 550 (550) -- -- Amortization of deferred stock-based compensation......... -- -- -- 884 -- 884 Net income............ -- -- -- -- 1,255 1,255 ---------- --- ------ ------- ------ ------ Balance as of June 30, 2000................... 11,664,064 $12 $5,694 $(1,442) $4,005 $8,269 ========== === ====== ======= ====== ======
The accompanying notes are an integral part of these consolidated financial statements. F-5 COMPUTER ACCESS TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December Six Month Period 31, Ended June 30, ----------------------- ------------------- 1997 1998 1999 1999 2000 ------ ------ ------- ----------- ------- (unaudited) Cash flows from operating activities: Net income...................... $ 924 $ 537 $ 1,262 $ 611 $ 1,255 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.. 24 44 88 43 57 Provision for doubtful accounts...................... 40 -- 18 -- 21 Amortization of deferred stock- based compensation............ -- 694 1,563 444 884 Loss on disposal of property and equipment................. -- -- 9 -- -- Changes in assets and liabilities: Accounts receivable.......... 45 (581) (1,150) (981) (826) Inventories.................. (186) (115) (300) (165) (286) Deferred tax assets.......... -- -- (250) (184) (726) Other assets................. 12 5 10 12 (219) Accounts payable............. 49 72 135 275 168 Accrued expenses............. 486 (104) 749 227 232 Deferred revenue............. -- -- -- -- 1,726 Deferred rent................ -- -- 19 19 (4) ------ ------ ------- ------ ------- Net cash provided by operating activities...... 1,394 552 2,153 301 2,282 ------ ------ ------- ------ ------- Cash flows from investing activities: Acquisition of property and equipment...................... (58) (153) (173) (111) (136) Purchase of short-term investments.................... -- -- -- -- (1,161) Other assets.................... -- -- -- -- (125) ------ ------ ------- ------ ------- Net cash used in investing activities................ (58) (153) (173) (111) (1,422) ------ ------ ------- ------ ------- Cash flows from financing activities: Proceeds from exercise of stock options........................ -- -- -- -- 103 ------ ------ ------- ------ ------- Net cash provided by financing activities...... -- -- -- -- 103 ------ ------ ------- ------ ------- Net increase in cash and cash equivalents..................... 1,336 399 1,980 190 963 Cash and cash equivalents at beginning of period............. 480 1,816 2,215 2,215 4,195 ------ ------ ------- ------ ------- Cash and cash equivalents at end of period....................... $1,816 $2,215 $ 4,195 $2,405 $ 5,158 ====== ====== ======= ====== ======= Supplemental information: Cash paid for income taxes....... $ 137 $ 877 $ 1,063 $ 855 $ 1,625 ====== ====== ======= ====== =======
The accompanying notes are an integral part of these consolidated financial statements. F-6 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--THE COMPANY: Computer Access Technology Corporation (the "Company") was incorporated in California in February 1992. The Company will reincorporate in Delaware prior to the effectiveness of its initial public offering (see Note 10). The Company designs, manufactures and markets advanced verification systems and connectivity products for existing and emerging digital communications standards such as Universal Serial Bus and IEEE 1394, Bluetooth wireless technology and Ethernet for semiconductor, device, system and software companies in the United States, Europe and Asia. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany transactions have been eliminated in consolidation. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist principally of investments in money market funds. Short-term investments The Company accounts for short-term investment in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities." Debt and equity securities are classified as available-for-sale securities and are reported at fair market value with any unrealized holding gains and losses excluded from current earnings and reported in stockholders' equity. As of June 30, 2000, there was no significant difference between the cost of investments and their fair market value. Revenue recognition The Company has adopted Statement of Position ("SOP") 97-2, Software Revenue Recognition. Under SOP 97-2, the Company recognizes revenue to re-sellers and end-users upon shipment provided that there is persuasive evidence of an arrangement, the product has been delivered, the fee is fixed and determinable, and collection of the resulting receivable is probable. When the Company has shipped a product but certain elements essential to the functionality of the product have not been completed, revenue and associated cost of revenue are deferred until such time that all remaining elements have been delivered. Provisions for warranty costs are recorded at the time products are shipped. F-7 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Fair value of financial instruments The reported amounts of certain of the Company's financial instruments including cash and cash equivalents, short-term investments, receivables, accounts payable and accrued expenses approximate fair value due to their short maturities. Inventories Inventories are stated at lower of cost, determined using the first-in, first-out method, or market value. Property and equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is three years for computers and software, and five years for all other assets. Research and development Research and development costs are charged to operations as incurred. Software development costs incurred prior to the establishment of technological feasibility are included in research and development and are expensed as incurred. Costs incurred subsequent to the establishment of technological feasibility through the period of general market availability of the product are capitalized, if material. To date, all software development costs have been expensed as incurred. Income taxes The Company accounts for income taxes under the liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax bases of the Company's assets and liabilities and their financial statement reported amounts. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized. Advertising and promotional costs Advertising and promotional costs are charged to operations as incurred. Advertising and promotional costs for the year ended December 31, 1997, 1998 and 1999, and for the six month period ended June 30, 1999 (unaudited) and 2000 were $65,000, $136,000, $156,000, $54,000 and $191,000, respectively. Concentrations of credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The Company limits its exposure to loss by placing its cash and cash equivalents with financial institutions in the United States and Israel. The Company has not experienced any losses on its deposits of cash and cash equivalents. The Company performs ongoing credit evaluations of its customers' financial condition and historically has not experienced significant bad debts related to accounts receivable. F-8 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Revenue and accounts receivable of the customers comprising more than 10% of revenues or receivables are summarized as follows:
Year Ended Six Month Period December 31, Ended June 30, ---------------- ---------------- 1997 1998 1999 1999 2000 ---- ---- ---- ----------- ---- (unaudited) Revenue: Company A.................................. 17% 22% 19% 18% 13% Company B.................................. 17% 12% 7% 17% 6% Accounts receivable: Company A.................................. 21% 29% 15% 41% 15% Company B.................................. 20% 14% 13% 16% 14%
Comprehensive income Comprehensive income is defined as changes in equity of a company from transactions, other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners. There is no difference between net income and comprehensive income for the Company for all periods presented. Foreign currency translation The functional currency of the Company's foreign subsidiary is the U.S. dollar. All assets and liabilities denominated in foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenue, costs and expenses are translated at the average rates of exchange prevailing during the period. Gains and losses resulting from foreign currency translations and transactions are included in the consolidated statements of income and have not been significant. Net income per share The Company computes net income per share in accordance with SFAS No. 128, Earnings per Share, and SEC Staff Accounting Bulletin ("SAB") No. 98. Under the provisions of SFAS No. 128 and SAB No. 98, basic net income per share is computed by dividing the net income available to holders of common stock for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net income per share excludes potential common stock if their effect is antidilutive. Potential common stock consists of incremental common shares issuable upon the exercise of stock options. F-9 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table sets forth the computation of basic and diluted net income per share of the period indicated (in thousands except per share data):
Year Ended December Six Month Period 31, Ended June 30, -------------------- ------------------ 1997 1998 1999 1999 2000 ------ ------ ------ ----------- ------ (unaudited) Numerator: Net income............................ $ 924 $ 537 $1,262 $ 611 $1,255 ====== ====== ====== ====== ====== Denominator: Weighted average shares outstanding... 11,429 11,429 11,429 11,429 11,487 Denominator for basic calculation..... 11,429 11,429 11,429 11,429 11,487 Dilutive effect of stock options...... 177 634 638 752 919 ------ ------ ------ ------ ------ Denominator for diluted calculation... 11,606 12,063 12,067 12,181 12,406 ====== ====== ====== ====== ====== Net income per share: Basic................................. $ 0.08 $ 0.05 $ 0.11 $ 0.05 $ 0.11 ====== ====== ====== ====== ====== Net income per share: Diluted............................... $ 0.08 $ 0.04 $ 0.10 $ 0.05 $ 0.10 ====== ====== ====== ====== ======
Stock-based compensation The Company measures stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and recognizes the related expense in accordance with Financial Accounting Standards Board Interpretation ("FIN") No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. The Company has adopted the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Company's common stock and the exercise price. SFAS 123 defines a "fair value" based method of accounting for an employee stock option or similar equity investment. The pro forma disclosures of the difference between the compensation expense included in net income and the related cost measured by the fair value method are presented in Note 4. Interim results The interim consolidated financial statements as of June 30, 2000 and for the six month period ended June 30, 1999 (unaudited) and 2000 have been prepared on the same basis as the annual consolidated financial statements as of December 31, 1999 and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's consolidated financial position as of June 30, 2000 and its results of operations and cash flows for the six month period ended June 30, 1999 (unaudited) and 2000. The results for the six month period ended June 30, 2000 are not necessarily indicative of the results to be expected for the year ending December 31, 2000. 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 a new model for accounting for derivatives and hedging activities and supercedes and amends a number of existing F-10 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) accounting standards. SFAS No. 133 requires that all derivatives be recognized in the balance sheet at their fair market value and the corresponding derivative gains or losses be either reported in the statement of operations or as a deferred item depending on the type of hedge relationship that exists with respect to such derivatives. In July 1999, the Financial Accounting Standards Board issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133. SFAS No. 137 deferred the effective date until fiscal years commencing after June 15, 2000. In June 2000, the FASB issued SFAS 138 Accounting for Certain Derivative Instruments and Certain Hedging Activities - An Amendment of FASB Statement No. 133 which deferred the effective date of SFAS 133 until the quarter ending March 31, 2001. Accordingly, the Company will adopt SFAS No. 133 in its quarter ending March 31, 2001 and has not determined whether the adoption of this pronouncement will have a material impact on its consolidated financial condition or consolidated results of operations. In December 1999, the Securities and Exchange Commission issued SAB No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. In June 2000, the SEC issued SAB No. 101B to defer the effective date for implementation of SAB 101 until the fourth quarter of fiscal 2000. The Company believes that its current revenue recognition policies comply with SAB 101. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation-an interpretation of APB Opinion No. 25 ("FIN 44"). This Interpretation clarifies the definition of employee for purposes of applying Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. The Company believes that FIN 44 will not have a material effect on the consolidated financial position or consolidated results of operations. Segment information The Company identifies its operating segments based on business activities and geographical location. For all periods presented, the Company operated in three segments: development products, production products and connectivity products. See Note 9 for disclosure of segment information. NOTE 3--BALANCE SHEET COMPONENTS: Inventories consist of the following (in thousands):
December 31, June 30, --------- -------- 1998 1999 2000 ---- ---- -------- Raw materials................................................ $49 $137 $305 Work in progress............................................. 1 79 161 Finished goods............................................... 323 457 493 ---- ---- ---- $373 $673 $959 ==== ==== ====
F-11 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) Property and equipment consists of the following (in thousands):
December 31, --------------------- June 30, 1998 1999 2000 --------- ----------- --------- Computers and equipment......................... $246 $363 $480 Furniture and fixtures.......................... 18 65 84 ----- ------ ------ 264 428 564 Less: Accumulated depreciation.................. (85) (173) (230) ----- ------ ------ $179 $255 $334 ===== ====== ====== Accrued expenses consist of the following (in thousands): December 31, --------------------- June 30, 1998 1999 2000 --------- ----------- --------- Income taxes payable............................ $308 $ 956 $ 658 Employee benefits and other..................... 181 282 812 ----- ------ ------ $489 $1,238 $1,470 ===== ====== ====== NOTE 4--STOCK OPTION PLAN: In 1994, the Company adopted the 1994 Stock Option Plan (the "Plan") under which shares of the Company's common stock are reserved for issuance to employees and consultants. The Company had reserved a total of 2,200,000 shares of common stock for issuance under the Plan. Options issued under the Plan vest over four years (in thousands, except per share data): Weighted- Options Average Available Options Exercise for Grant Outstanding Price --------- ----------- --------- Balance, December 31, 1996.................... 1,978 222 $ 0.36 Options granted............................. (404) 404 $ 0.44 Options granted............................. 60 (60) $ 0.38 ----- ------ Balance, December 31, 1997.................... 1,634 566 $ 0.41 Options granted............................. (461) 461 $ 0.50 Options canceled............................ 13 (13) $ 0.44 ----- ------ Balance, December 31, 1998.................... 1,186 1,014 $ 0.45 Options granted............................. (496) 496 $ 0.74 Options canceled............................ 144 (144) $ 0.46 ----- ------ Balance, December 31, 1999.................... 834 1,366 $ 0.55 Options granted............................. (47) 47 $ 1.00 Options exercised........................... -- (236) $ 0.44 Options canceled............................ 92 (92) $ 0.69 ----- ------ Balance, June 30, 2000........................ 879 1,085 $ 0.58 ===== ======
F-12 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Significant option groups outstanding as of June 30, 2000, and related weighted average exercise price and contractual life information are as follows:
Options Outstanding Options Exercisable -------------------------------------------- ----------------------------- Weighted- Average Remaining Contractual Exercise Number of Life Number of Exercise Price Shares (Years) Shares Price -------- --------- ----------- --------- -------- (in thousands) (in thousands) $0.34 38 5.52 37 $0.34 $0.38 52 6.16 50 $0.38 $0.44 413 7.64 263 $0.44 $0.60 158 8.33 77 $0.60 $0.75 377 9.05 99 $0.75 $1.00 47 10.00 -- $1.00 ----- --- 1,085 526 ===== ===
Stock-based compensation In connection with certain stock option grants in 1998, 1999 and 2000, the Company recorded deferred stock-based compensation costs totaling $4,583,000 being the difference between the exercise price and the deemed fair value at the date of grant, which is being recognized over the vesting period of the related options. Future amortization of deferred compensation expense on grants prior to June 30, 2000 is estimated to be approximately $578,000, $610,000, $222,000, and $32,000 and in the six month period ending December 31, 2000 and the year ending December 31, 2001, 2002 and respectively, and may change due to the granting of additional options in future periods. Fair value disclosures The weighted average fair value of options granted during the year ended December 31, 1997, 1998 and 1999, and the six month period ended June 30, 1999 (unaudited) and 2000, under the Company's stock option plan was $0.10, $2.76, $5.13, $4.55 and $10.55 per option, respectively. In determining the fair value of options granted in each of the periods, the Company used the minimum value option pricing model and assumed the following:
Six Month Period Ended Year Ended December 31, June 30, --------------------------------- ----------------------- 1997 1998 1999 1999 2000 --------- ----------- ----------- ----------- ----------- (unaudited) Expected life (in years)................. 4 4 4 4 4 Risk-free interest rate................... 5.7%-6.6% 4.62%-5.77% 4.18%-5.84% 4.18%-5.44% 5.97%-6.58% Volatility.............. 0% 0% 0% 0% 0% Dividend yield.......... 0% 0% 0% 0% 0%
Had compensation costs been determined based upon the fair value at the grant date for awards under these plans, consistent with the methodology prescribed under SFAS No. 123, the Company's F-13 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) pro forma net income and pro forma basic and diluted net income per share under SFAS No. 123 would have been (in thousands, except per share data):
Year Ended December Six Month Period 31, Ended June 30, -------------------- ------------------ 1997 1998 1999 1999 2000 ------ ------ ------ ----------- ------ (unaudited) Net income As reported....................... $ 924 $ 537 $1,262 $ 611 $1,255 Pro forma......................... $ 910 $ 495 $1,222 $ 590 $1,232 Net income per share, as reported Basic............................. $0.08 $0.05 $ 0.11 $0.05 $ 0.11 Diluted........................... $0.08 $0.04 $ 0.10 $0.05 $ 0.10 Net income per share, pro forma Basic............................. $0.08 $0.04 $ 0.11 $0.05 $ 0.11 Diluted........................... $0.08 $0.04 $ 0.10 $0.05 $ 0.10
NOTE 5--EMPLOYEE BENEFIT PLANS In January 1996, the Company adopted the Computer Access Technology Corporation 401(k) Profit Sharing Plan (the "401(k) Plan") covering full-time employees located in the United States. The 401(k) Plan is intended to qualify under Section 401(a) of the Internal Revenue Code, so that contributions to the 401(k) Plan by employees or by the Company and the investment earnings thereon, are not taxable to employees until withdrawn from the 401(k) Plan and so that the Company can deduct contributions, if any, when made. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($10,500 in 2000) and to have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require, that the Company provides additional matching contributions to the 401(k) Plan on behalf of all participants in the 401(k) Plan. In the year ended December 31, 1997, 1998 and 1999, and the six month period ended June 30, 1999 (unaudited) and 2000 the Company made contributions of $53,000, $104,000, $162,000, $40,000 and $46,000, respectively. NOTE 6--INCOME TAXES: The provision for income taxes included the following (in thousands):
Year Ended Six Month Period December 31, Ended June 30, -------------------- ------------------ 1997 1998 1999 1999 2000 ----- ----- ------ ----------- ------ (unaudited) Federal: Current.......................... $ 527 $ 619 $1,515 $567 $1,620 Deferred......................... 109 116 361 131 431 ----- ----- ------ ---- ------ 636 735 1,876 698 2,051 ----- ----- ------ ---- ------ State: Current.......................... (77) (23) (110) (39) (623) Deferred......................... (3) (4) (6) (3) (103) ----- ----- ------ ---- ------ (80) (27) (116) (42) (726) ----- ----- ------ ---- ------ $ 556 $ 708 $1,760 $656 $1,325 ===== ===== ====== ==== ======
F-14 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The reconciliation between the effective tax rates and statutory federal income tax rates is shown in the following table:
Year Ended Six Month Period December 31, Ended June 30, ---------------- ---------------- 1997 1998 1999 1999 2000 ---- ---- ---- ----------- ---- (unaudited) Statutory federal income tax rate...... 34.0% 34.0% 34.0% 34.0% 34.0% State taxes, net of federal income tax benefit............................... 4.7 3.8 7.7 6.6 7.0 Amortization of deferred stock-based compensation.......................... -- 20.2 17.6 12.4 11.6 Other.................................. (1.1) (1.1) (1.1) (1.2) (1.2) ---- ---- ---- ---- ---- Effective tax rate................... 37.6% 56.9% 58.2% 51.8% 51.4% ==== ==== ==== ==== ==== The significant components of deferred tax assets and liabilities consist of the following (in thousands): December 31, June 30, ---------- ---------------- 1998 1999 1999 2000 ---- ---- ----------- ---- (unaudited) Deferred tax assets: Accrued expenses.......................... $ 5 $234 $168 $269 Allowance for doubtful accounts........... 16 23 20 31 Deferred revenue.......................... -- -- -- 685 ---- ---- ---- ---- 21 257 188 985 ---- ---- ---- ---- Deferred tax liabilities: Depreciation and amortization............. (21) (7) (4) (9) ---- ---- ---- ---- $ -- $250 $184 $976 ==== ==== ==== ====
The Company has not provided a valuation allowance for its net deferred tax assets as it expects such amounts to be realized through taxable income from future operations, or by carryback to prior years' taxable income. NOTE 7--RELATED PARTY TRANSACTIONS: The Company had sales to Philips Semiconductors, a stockholder, and its affiliates totaling $144,000, $49,000, $95,000, $22,000 and $71,000 (deferred at period end) in the year ended December 31, 1997, 1998, 1999 and six month period ended June 30, 1999 (unaudited) and 2000, respectively. At the end of each period the Company had receivable balances with Philips Semiconductors of $26,000, $83,000, $95,000, $22,000 and $71,000, respectively. The stockholder has a right of first refusal to purchase a pro rata share of any new securities issued by the Company at the same price per share offered to any other entity. This right terminates immediately prior to the closing of an initial public offering with aggregate proceeds in excess of $5 million or in the event the stockholder's ownership percentage ceases to be at least 15% of the Company's outstanding common stock. F-15 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 8--COMMITMENTS: Purchase commitments As of June 30, 2000, the Company had approximately $301,000 in noncancelable purchase commitments with suppliers. The Company expects to sell all products which it has committed to purchase from suppliers. Leases The Company leases its office facilities under a noncancelable operating lease which expires in December 2001. Rent expense for the year ended December 31, 1997, 1998 and 1999, and the six month period ended June 30, 1999 (unaudited) and 2000 was $208,000, $220,000, $221,000, $111,000 and $111,000, respectively. Future minimum lease payments under the noncancelable facilities lease are as follows (in thousands):
Operating Period Ending June 30, Leases ---------------------- --------- 2001......................................................... $114 2002......................................................... 235 ---- Total minimum payments..................................... $349 ====
NOTE 9--REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION: The Company has three reportable segments categorized by product type: development products, production products and connectivity products. The development products are advanced verification systems that assist hardware and software manufacturers in the efficient design of reliable and interoperable systems and devices. Production products are production verification systems and connectivity solutions designed to assist hardware and software manufacturers in volume production of reliable devices and systems. Connectivity products are designed to assist both broadband Internet service providers in delivering convenient and dependable service and device manufacturers in producing reliable products. The Company has no inter-segment revenue. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company analyses segment revenue and cost of revenue, but does not allocate operating expenses, including stock-based compensation, or assets to segments. Accordingly, the Company has presented revenue and gross profit by segment only. F-16 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information about segments (in thousands):
Unallocated stock-based Development Production Connectivity compensation Products Products Products expense Total ----------- ---------- ------------ ------------ ------- Year Ended December 31, 1997 Segment revenue from external customers... $2,396 $1,720 $ 53 $ -- $ 4,169 Segment gross profit.. $2,134 $1,256 $ 15 $ -- $ 3,405 Year Ended December 31, 1998 Segment revenue from external customers... $3,708 $2,765 $ 298 $ -- $ 6,771 Segment gross profit.. $3,435 $2,054 $ 87 $(242) $ 5,334 Year Ended December 31, 1999 Segment revenue from external customers... $6,204 $4,593 $1,709 $ -- $12,506 Segment gross profit.. $5,521 $3,476 $ 616 $(243) $ 9,370 Six Month Period Ended June 30, 1999 (unaudited) Segment revenue from external customers... $2,533 $2,371 $ 385 $ -- $ 5,289 Segment gross profit.. $2,295 $1,763 $ 93 $ (99) $ 4,052 Six Month Period Ended June 30, 2000 Segment revenue from external customers... $4,028 $2,757 $1,997 $ -- $ 8,782 Segment gross profit.. $3,554 $2,311 $ 861 $(112) $ 6,614
F-17 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Geographic information (in thousands):
Long-Lived Revenue Assets ------- ---------- Year Ended December 31, 1997 North America.............................................. $ 2,304 $ 70 Europe..................................................... 348 -- Asia....................................................... 1,492 -- Rest of world.............................................. 25 -- ------- ---- Total.................................................... $ 4,169 $ 70 ======= ==== Year Ended December 31, 1998 North America.............................................. $ 3,881 $179 Europe..................................................... 626 -- Asia....................................................... 2,169 -- Rest of world.............................................. 95 -- ------- ---- Total.................................................... $ 6,771 $179 ======= ==== Year Ended December 31, 1999 North America.............................................. $ 7,201 $255 Europe..................................................... 1,509 -- Asia....................................................... 3,562 -- Rest of world.............................................. 234 -- ------- ---- Total.................................................... $12,506 $255 ======= ==== Six Month Period Ended June 30, 1999 (unaudited) North America.............................................. $ 3,172 $248 Europe..................................................... 694 -- Asia....................................................... 1,338 -- Rest of world.............................................. 85 -- ------- ---- Total.................................................... $ 5,289 $248 ======= ==== Six Month Period Ended June 30, 2000 North America.............................................. $ 5,851 $330 Europe..................................................... 1,067 4 Asia....................................................... 1,772 -- Rest of world.............................................. 92 -- ------- ---- Total.................................................... $ 8,782 $334 ======= ====
Revenues are attributed to countries based on delivery locations. Sales to foreign customers accounted for 45%, 43%, 42%, 41% and 33% of revenue during the year ended December 31, 1997, 1998 and 1999, and the six month period ended June 30, 1999 (unaudited) and 2000, respectively. NOTE 10--SUBSEQUENT EVENTS: Initial public offering In August 2000, the Company's Board of Directors authorized management to file a registration statement with the Securities and Exchange Commission to permit the Company to sell shares of its common stock to the public. F-18 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Reincorporation In August 2000, the Company's Board of Directors authorized the reincorporation of the Company in the State of Delaware prior to the effectiveness of the offering referred to above. As a result of the reincorporation, the Company is authorized to issue 100,000,000 shares of $0.001 par value common stock and 25,000,000 shares of $0.001 par value preferred stock. The par value and shares of common stock in the accompanying financial statements have been retroactively adjusted to reflect the reincorporation. In August 2000, the Board of Directors adopted the 2000 Stock Incentive Plan, and the 2000 Employee Stock Purchase Plan. Upon approval of these plans and the signing of the underwriting agreement 3,850,000 and 250,000 shares will be reserved for issuance under the 2000 Stock Incentive Plan and the 2000 Employee Stock Purchase Plan, respectively. F-19 [LOGO] PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable by us in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fees and the Nasdaq National Market listing fee. Securities and Exchange Commission registration fee................. $13,814 NASD filing fee..................................................... 5,733 Nasdaq National Market initial listing fee.......................... 5,000 Printing and engraving expenses..................................... Legal fees and expenses............................................. * Accounting fees and expenses........................................ * Blue sky fees and expenses.......................................... Transfer agent and registrar fees and expenses...................... Miscellaneous....................................................... * ------- Total............................................................. *
- -------- * To be provided by amendment Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). As permitted by the Delaware General Corporation Law, the Registrant's Certificate of Incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach of fiduciary duty as a director, except for liability: . for any breach of the director's duty of loyalty to the Registrant or its stockholders; . for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . under section 174 of the Delaware General Corporation Law regarding unlawful dividends and stock purchases; or . for any transaction from which the director derived an improper personal benefit. As permitted by the Delaware General Corporation Law, the Registrant's Bylaws provide that: . the Registrant is required to indemnify its directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions; . the Registrant may indemnify its other employees and agents to the fullest extent permitted by the Delaware General Corporation Law, subject to very limited exceptions; . the Registrant is required to advance expenses, as incurred, to its directors and officers in connection with a legal proceeding; II-1 . the Registrant may advance expenses, as incurred, to its employees and agents in connection with a legal proceeding; and . the rights conferred in the Bylaws are not exclusive. The Registrant has entered into Indemnification Agreements with each of its current directors and executive officers to give such directors and officers additional contractual assurances regarding the scope of the indemnification set forth in the Registrant's Certificate of Incorporation and to provide additional procedural protections. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Registrant regarding which indemnification is sought, nor is the Registrant aware of any threatened litigation that may result in claims for indemnification. Reference is also made to Section 7 of the Underwriting Agreement, which provides for the indemnification of officers, directors and controlling persons of the Registrant against certain liabilities. The indemnification provision in the Registrant's Certificate of Incorporation, Bylaws and the Indemnification Agreements entered into between the Registrant and each of its directors and officers may be sufficiently broad to permit indemnification of the Registrant's directors and officers for liabilities arising under the Securities Act. The Registrant maintains directors' and officers' liability insurance and expects to obtain a rider to such coverage for securities matters. See also the undertakings set out in response to Item 17. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
Exhibit Document Number - ---------------- ------ Form of Underwriting Agreement........................................... 1.1 Registrant's Certificate of Incorporation................................ 3.1 Registrant's Bylaws...................................................... 3.2 Form of Indemnification Agreement........................................ 10.1
Item 15. Recent Sales of Unregistered Securities In the three years prior to the effective date of this Registration Statement, the Registrant has issued and sold the following unregistered securities: (1) From 1995 through August 2000, we granted stock options to acquire an aggregate of 2,025,500 shares of our common stock at prices ranging from $0.375 to $2.50 per share to employees and directors pursuant to our 1994 stock option plan and 2000 stock option/stock incentive plan. As of August 15, 2000, we have issued 316,447 shares of our common stock to employees and directors pursuant to the exercise of stock options. None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and we believe that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule 701 pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients in each transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection II-2 with any distribution thereof, and appropriate legends were affixed to share certificates and instruments issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. Item 16. Exhibits and Financial Statement Schedules The exhibits listed in the exhibit index are filed as a part of this registration statement. (a) Exhibits
Exhibit No. Description ----------- ----------- 1.1 Form of Underwriting Agreement. 3.1* Form of Amended and Restated Certificate of Incorporation of the Registrant. 3.2* Bylaws of the Registrant. 4.1* Specimen Certificate of the Registrant's common stock. 5.1 Opinion of Brobeck, Phleger & Harrison LLP, counsel to the Registrant. 10.1 Form of Indemnification Agreement entered into between the Registrant and its directors and executive officers. 10.2* 1994 Stock Option Plan, as amended. 10.3* 2000 Stock Option/Stock Issuance Plan. 10.4* 2000 Stock Incentive Plan. 10.5* 2000 Employee Stock Purchase Plan. 10.6* Office Lease for Santa Clara facility, dated October 3, 1996, by and between Talus Corporation, a California corporation, and the Registrant. 10.7* Office Lease for San Diego facility, dated July 20, 2000, by and between Scripps Corporate Plaza, LLC, a Delaware limited liability company, and the Registrant. 10.8* [Office Lease for Israel facility, dated , by and between and the Registrant.] 10.9 Promissory Note, dated May 11, 2000, by and between Albert Lee and the Registrant. 10.10 Security Agreement, dated May 11, 2000, by and between Albert Lee and the Registrant. 10.11* Distributor Agreement, dated August 13, 1997, by and between Toyo Corporation and the Registrant. 10.12* Employment Agreement dated December 5, 1997, by and between Albert Lee and the Registrant. 10.13* Employment Agreement dated January 8, 1998, by and between Shrikumar Chandran and the Registrant. 10.14* Employment Agreement dated March 3, 1999, by and between Joseph Mendolia and the Registrant. 10.15* Employment Agreement dated May 1, 2000, by and between Dennis Evans and the Registrant. 10.16* Common Stock Purchase Agreement dated March 15, 1994, by and between Philips Semiconductors, a division of Philips Electronics North American Corporation, and the Registrant. 23.1 Consent of Independent Accountants 23.2 Consent of Brobeck, Phleger & Harrison LLP, counsel to the Registrant. Reference is made to Exhibit 5.1. 24.1 Power of Attorney (see signature page hereto). 27.1 Financial Data Schedule.
- -------- * To be supplied by amendment. II-3 (b) Financial Statement Schedule S-1 Schedule II--Valuation and Qualifying Accounts Item 17. Undertakings The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provision described under Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, State of California, on this 16th day of August, 2000. COMPUTER ACCESS TECHNOLOGY CORPORATION /s/ Dan Wilnai By: _________________________________ Dan Wilnai, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints, jointly and severally, Dan Wilnai and Dennis Evans and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and to sign any registration statement for the same offering covered by the Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act and all post-effective amendments thereto and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that each of said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Name Title Date ---- ----- ---- Principal Executive Officer: /s/ Dan Wilnai President, Chief Executive August 16, 2000 ____________________________________ Officer, Chairman of the Dan Wilnai Board of Directors Principal Financial Officer and Principal Accounting Officer: /s/ Dennis W. Evans Vice President, Chief August 16, 2000 ____________________________________ Financial Officer and Dennis W. Evans Secretary
II-5
Name Title Date ---- ----- ---- Additional Directors /s/ Peretz Tzarnotsky Director August 16, 2000 ____________________________________ Peretz Tzarnotzky /s/ Philip Pollok Director August 16, 2000 ____________________________________ Philip Pollok
II-6 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE In connection with our audits of the consolidated financial statements of Computer Access Technology Corporation as of December 31, 1997, 1998, 1999 and June 30, 2000, each of the three years in the period ended December 31, 1999, and the six month period ended June 30, 2000, which financial statements are included in the Prospectus, we have also audited the financial statement schedule listed in Item 16 herein. In our opinion, this financial statement schedule when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. PricewaterhouseCoopers LLP San Jose, California August 3, 2000 S-1 COMPUTER ACCESS TECHNOLOGY CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Balance at Charged to Balance at Beginning Costs and End of Description of Period Expenses Deductions Period - ----------- ---------- ---------- ---------- ---------- Year Ended December 31, 1997: Allowance for doubtful accounts....................... -- 40 -- 40 Year Ended December 31, 1998: Allowance for doubtful accounts....................... 40 -- -- 40 Year Ended December 31, 1999: Allowance for doubtful accounts....................... 40 37 (19) 58 Six Month Period Ended June 30, 2000: Allowance for doubtful accounts....................... 58 21 -- 79
S-2 EXHIBIT INDEX
Exhibit No. Description ----------- ----------- 1.1 Form of Underwriting Agreement. 3.1* Form of Amended and Restated Certificate of Incorporation of the Registrant. 3.2* Bylaws of the Registrant. 4.1* Specimen Certificate of the Registrant's common stock. 5.1 Opinion of Brobeck, Phleger & Harrison LLP, counsel to the Registrant. 10.1 Form of Indemnification Agreement entered into between the Registrant and its directors and executive officers. 10.2* 1994 Stock Option Plan, as amended. 10.3* 2000 Stock Option/Stock Issuance Plan. 10.4* 2000 Stock Incentive Plan. 10.5* 2000 Employee Stock Purchase Plan. 10.6* Office Lease for Santa Clara facility, dated October 3, 1996, by and between Talus Corporation, a California corporation, and the Registrant. 10.7* Office Lease for San Diego facility, dated July 20, 2000, by and between Scripps Corporate Plaza, LLC, a Delaware limited liability company, and the Registrant. 10.8* [Office Lease for Israel facility, dated , by and between and the Registrant.] 10.9 Promissory Note, dated May 11, 2000, by and between Albert Lee and the Registrant. 10.10 Security Agreement, dated May 11, 2000, by and between Albert Lee and the Registrant. 10.11* Distributor Agreement, dated August 13, 1997, by and between Toyo Corporation and the Registrant. 10.12* Employment Agreement dated December 5, 1997, by and between Albert Lee and the Registrant. 10.13* Employment Agreement dated January 8, 1998, by and between Shrikumar Chandran and the Registrant. 10.14* Employment Agreement dated March 3, 1999, by and between Joseph Mendolia and the Registrant. 10.15* Employment Agreement dated May 1, 2000, by and between Dennis Evans and the Registrant. 10.16* Common Stock Purchase Agreement dated March 15, 1994, by and between Philips Semiconductors, a division of Philips Electronics North American Corporation, and the Registrant. 23.1 Consent of Independent Accountants. 23.2 Consent of Brobeck, Phleger & Harrison LLP, counsel to the Registrant. Reference is made to Exhibit 5.1. 24.1 Power of Attorney (see signature page hereto). 27.1 Financial Statement Schedule.
- -------- * To be supplied by amendment. EX-1.1 2 0002.txt FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 Draft of July 26, 2000 [Execution Copy] [Conformed Copy] Underwriting Agreement ___________ ___, 2000 FleetBoston Robertson Stephens Inc. CIBC World Markets SG Cowen Securities Needham & Company, Inc. As Representatives of the several Underwriters c/o FleetBoston Robertson Stephens Inc. 555 California Street, Suite 2600 San Francisco, CA 94104 Ladies and Gentlemen: Introductory. Computer Access Technology Corporation, a _________ corporation (the "Company"), proposes to issue and sell to the several underwriters named in Schedule A (the "Underwriters") an aggregate of ---------- ___________ shares (the "Firm Shares") of its Common Stock, par value $_______ per share (the "Common Shares"). In addition, the Company proposes to grant to the Underwriters an option to purchase up to an additional _________ Common Shares (the "Option Shares") as provided in Section 2. The Firm Shares and, if and to the extent such option is exercised, the Option Shares are collectively called the "Shares". FleetBoston Robertson Stephens Inc. ("Robertson Stephens"), CIBC World Markets, SG Cowen Securities and Needham & Company, Inc. have agreed to act as representatives of the several Underwriters (in such capacity, the "Representatives") in connection with the offering and sale of the Shares. As a part of the offering contemplated by this Agreement, Robertson Stephens has agreed to reserve out of the Shares set forth opposite its name on Schedule II to this Agreement, up to _________________ shares, for sale to the Company's employees, officers, and directors [and other parties associated with the Company] (collectively, "Participants"), as set forth in the Prospectus (as defined below) under the heading "Underwriting" (the "Directed Share Program"). The Shares to be sold by Robertson Stephens pursuant to the Directed Share Program (the "Directed Shares") will be sold by Robertson Stephens pursuant to this Agreement at the public offering price. Any Directed Shares not orally confirmed for purchase by any Participants as of 7:00am California time on the first day trading of the Shares commences will be offered to the public by Robertson Stephens as set forth in the Prospectus. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (File No. 333-______), which contains a form of prospectus, subject to completion, to be used in connection with the public offering and sale of the Shares. Each such prospectus, subject to completion, used in connection with such public offering is called a "preliminary prospectus". Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933 and the rules and regulations promulgated thereunder (collectively, the "Securities Act"), including any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A under the Securities Act, is called the "Registration Statement". Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration Statement", and from and after the date and time of filing of the Rule 462(b) Registration Statement the term "Registration Statement" shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first used by the Underwriters to confirm sales of the Shares, is called the "Prospectus". All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the Prospectus or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). The Company hereby confirms its agreement with the Underwriters as follows: Section 1. Representations and Warranties of the Company. The Company hereby represents, warrants and covenants to each Underwriter as follows: (a) Compliance with Registration Requirements. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commission's satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened by the Commission. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission via EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post- effective amendment thereto, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Each preliminary prospectus, as of its date, and the Prospectus, as amended or supplemented, as of its date and at all subsequent times through the 30th day after the date hereof, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment thereto, or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein. There are no contracts or other documents 2 required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required. (b) Offering Materials Furnished to Underwriters. The Company has delivered to the Representatives four complete conformed copies of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and the Prospectus, as amended or supplemented, in such quantities and at such places as the Representatives have reasonably requested for each of the Underwriters. (c) Distribution of Offering Material By the Company. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) and the completion of the Underwriters' distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than a preliminary prospectus, the Prospectus or the Registration Statement. (d) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (e) Authorization of the Shares To Be Sold by the Company. The Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid and nonassessable. (f) No Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have any equity or debt securities of the Company registered for sale under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as have been duly waived in writing, with a copy of such waiver(s) delivered to the Underwriters or their counsel. (g) No Material Adverse Change. Subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity (any such change or effect, where the context so requires, is called a "Material Adverse Change" or a "Material Adverse Effect"); (ii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company or, except for dividends paid to the Company or other subsidiaries, any of its subsidiaries on any class of capital stock or repurchase or redemption by the Company or any of its subsidiaries of any class of capital stock. (h) Independent Accountants. PricewaterhouseCoopers LLP, who have expressed their opinion with respect to the financial statements (which term as used in this Agreement 3 includes the related notes thereto) and supporting schedules filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent public or certified public accountants as required by the Securities Act. (i) Preparation of the Financial Statements. The financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus present fairly the consolidated financial position of the Company and its subsidiaries as of and at the dates indicated and the results of operations and cash flows for the periods specified. The supporting schedules included in the Registration Statement present fairly the information required to be stated therein. Such financial statements and supporting schedules have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements or supporting schedules are required to be included in the Registration Statement. The financial data set forth in the Prospectus under the captions "Summary-- Summary Selected Financial Data", "Selected Financial Data" and "Capitalization" fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement. (j) Company's Accounting System. The Company and each of its subsidiaries maintain a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (k) Subsidiaries of the Company. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21 to the Registration Statement. The subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a "significant subsidiary," as defined in Rule 1-02(v) of Regulation S-X under the Securities Act. (l) Incorporation and Good Standing of the Company and its Subsidiaries. Each of the Company and its subsidiaries has been duly organized and is validly existing as a corporation or limited liability company, as the case may be, in good standing under the laws of the jurisdiction in which it is organized with full corporate power and authority to own its properties and conduct its business as described in the Prospectus, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification. (m) Capitalization of the Subsidiaries. All the outstanding shares of capital stock of each subsidiary have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise set forth in the Prospectus, all outstanding shares of capital stock of the subsidiaries are owned by the Company either directly or through wholly owned subsidiaries free and clear of any security interests, claims, liens or encumbrances. (n) No Prohibition on Subsidiaries from Paying Dividends or Making Other Distributions. No subsidiary of the Company is currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such subsidiary's 4 capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary's property or assets to the Company or any other subsidiary of the Company, except as described in or contemplated by the Prospectus. (o) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus or upon exercise of outstanding options [or warrants] described in the Prospectus). The Common Shares (including the Shares) conform in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding Common Shares have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with all applicable federal and state securities laws. None of the outstanding Common Shares were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its subsidiaries other than those accurately described in the Prospectus. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (p) Stock Exchange Listing. The Shares have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance. (q) No Consents, Approvals or Authorizations Required. No consent, approval, authorization, filing with or order of any court or governmental agency or regulatory body is required in connection with the transactions contemplated herein, except such as have been obtained or made under the Securities Act and such as may be required (i) under the blue sky laws of any jurisdiction in connection with the purchase and distribution of the Shares by the Underwriters in the manner contemplated here and in the Prospectus, (ii) by the National Association of Securities Dealers, LLC and (iii) by the federal and provincial laws of Canada. (r) Non-Contravention of Existing Instruments and/or Agreements. Neither the issue and sale of the Shares nor the consummation of any other of the transactions herein contemplated nor the fulfillment of the terms hereof will conflict with, result in a breach or violation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, (i) the charter or by-laws of the Company or any of its subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company or any of its subsidiaries is a party or by which it or they are bound or to which its or their property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree applicable to the Company or any of its subsidiaries of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or any of its subsidiaries or any of its or their properties. (s) No Defaults or Violations. Neither the Company nor any subsidiary is in violation or default of (i) any provision of its charter or by-laws, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which it is a party or by which it is bound or to which its 5 property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or such subsidiary or any of its properties, as applicable, except any such violation or default which would not, singly or in the aggregate, result in a Material Adverse Change. (t) No Actions, Suits or Proceedings. No action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries or its or their property is pending or, to the best knowledge of the Company, threatened that (i) could reasonably be expected to have a Material Adverse Effect on the performance of this Agreement or the consummation of any of the transactions contemplated hereby or (ii) could reasonably be expected to result in a Material Adverse Effect. (u) All Necessary Permits, Etc. The Company and each subsidiary possess such valid and current certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses, and neither the Company nor any subsidiary has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could result in a Material Adverse Change. (v) Title to Properties. The Company and each of its subsidiaries has good and marketable title to all the properties and assets reflected as owned in the financial statements referred to in Section 1(i) above (or elsewhere in the Prospectus), in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company or such subsidiary. The real property, improvements, equipment and personal property held under lease by the Company or any subsidiary are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such subsidiary. (w) Tax Law Compliance. The Company and its consolidated subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns or have properly requested extensions thereof and have paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(i) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its consolidated subsidiaries has not been finally determined. The Company is not aware of any tax deficiency that has been or might be asserted or threatened against the Company that could result in a Material Adverse Change. (x) Intellectual Property Rights. Each of the Company and its subsidiaries owns or possesses adequate rights to use all patents, patent rights or licenses, inventions, collaborative research agreements, trade secrets, know-how, trademarks, service marks, trade names and copyrights which are necessary to conduct its businesses as described in the Registration Statement and Prospectus; the expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights would not result in a Material Adverse Change that is not otherwise disclosed in the Prospectus; the Company has not received any 6 notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a Material Adverse Change. There is no claim being made against the Company regarding patents, patent rights or licenses, inventions, collaborative research, trade secrets, know-how, trademarks, service marks, trade names or copyrights. The Company and its subsidiaries do not in the conduct of their business as now or proposed to be conducted as described in the Prospectus infringe or conflict with any right or patent of any third party, or any discovery, invention, product or process which is the subject of a patent application filed by any third party, known to the Company or any of its subsidiaries, which such infringement or conflict is reasonably likely to result in a Material Adverse Change. (y) Y2K. There are no Y2K issues related to the Company, or any of its subsidiaries, that (i) are of a character required to be described or referred to in the Registration Statement or Prospectus by the Securities Act which have not been accurately described in the Registration Statement or Prospectus or (ii) might reasonably be expected to result in any Material Adverse Change or that might materially affect their properties, assets or rights. (z) No Transfer Taxes or Other Fees. There are no transfer taxes or other similar fees or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance and sale by the Company of the Shares. (aa) Company Not an "Investment Company". The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after receipt of payment for the Shares will not be, an "investment company" or an entity "controlled" by an "investment company" within the meaning of the Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act. (bb) Insurance. Each of the Company and its subsidiaries are insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for their businesses including, but not limited to, policies covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and earthquakes, general liability and Directors and Officers liability. The Company has no reason to believe that it or any subsidiary will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. Neither of the Company nor any subsidiary has been denied any insurance coverage which it has sought or for which it has applied. (cc) Labor Matters. To the best of the Company's knowledge, no labor disturbance by the employees of the Company or any of its subsidiaries exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, subassemblers, value added resellers, subcontractors, original equipment 7 manufacturers, authorized dealers or international distributors that might be expected to result in a Material Adverse Change. (dd) No Price Stabilization or Manipulation. The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (ee) Lock-Up Agreements. Each officer and director of the company and each beneficial owner of any of the outstanding issued share capital of the Company has agreed to sign an agreement substantially in the form attached hereto as Exhibit A (the "Lock-up Agreements"). The Company has provided to counsel for - --------- the Underwriters a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the Lock-up Agreements presently in effect or effected hereby. The Company hereby represents and warrants that it will not release any of its officers, directors or other stockholders from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of Robertson Stephens. (ff) Related-Party Transactions. There are no business relationships or related-party transactions involving the Company or any subsidiary or any other person required to be described in the Prospectus which have not been described as required. (gg) No Unlawful Contributions or Other Payments. Neither the Company nor any of its subsidiaries nor, to the best of the Company's knowledge, any employee or agent of the Company or any subsidiary, has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any law or of the character required to be disclosed in the Prospectus. (hh) Environmental Laws. (i) The Company and its subsidiaries are in compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable to their business, except where the failure to comply would not result in a Material Adverse Change, (ii) neither the Company nor any of its subsidiaries have received any notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus, (iii) neither the Company nor any of its subsidiaries are currently aware that it will be required to make future material capital expenditures to comply with Environmental Laws and (iv) no property which is owned, leased or occupied by the Company or any of its subsidiaries has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. (S) 9601, et seq.), or otherwise designated as a contaminated site under ------ applicable state or local law. (ii) Periodic Review of Costs of Environmental Compliance. In the ordinary course of its business, the Company conducts a periodic review of the effect of Environmental Laws on the business, operations and properties of the Company and its subsidiaries, in the course of which it identifies and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such review and the amount of its established reserves, the Company has reasonably concluded that such 8 associated costs and liabilities would not, individually or in the aggregate, result in a Material Adverse Change. (jj) ERISA Compliance. The Company and its subsidiaries and any "employee benefit plan" (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, "ERISA")) established or maintained by the Company, its subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA. "ERISA Affiliate" means, with respect to the Company or a subsidiary, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the "Code") of which the Company or such subsidiary is a member. No "reportable event" (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates. No "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates, if such "employee benefit plan" were terminated, would have any "amount of unfounded benefit liabilities" (as defined under ERISA). Neither the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification. (kk) Consents Required in Connection with the Directed Share Program. No consent, approval, authorization or order of, or qualification with, any governmental body or agency, other than those obtained, is required in connection with the offering of the Directed Shares in any jurisdiction where the Directed Shares are being offered. (ll) No Improper Influence in Connection with the Directed Share Program. The Company has not offered, or caused Robertson Stephens to offer, Shares to any person pursuant to the Directed Share Program with the specific intent to unlawfully influence (i) a customer or supplier of the Company to alter the customer's or supplier's level or type of business with the Company or (ii) a trade journalist or publication to write or publish favorable information about the Company or its products. Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters set forth therein. Section 2. Purchase, Sale and Delivery of the Shares. (a) The Firm Shares. The Company agrees to issue and sell to the several Underwriters the Firm Shares upon the terms herein set forth. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company the respective number of Firm Shares set forth opposite their names on Schedule A. The purchase price ---------- per Firm Share to be paid by the several Underwriters to the Company shall be $_______ per share. 9 (b) The First Closing Date. Delivery of the Firm Shares to be purchased by the Underwriters and payment therefor shall be made by the Company and the Representatives at 6:00 a.m. San Francisco time, at the offices of Brobeck, Phleger & Harrison LLP, One Market, Spear Street Tower, San Francisco, CA 94105 (or at such other place as may be agreed upon among the Representatives and the Company), (i) on the third (3/rd/) full business day following the first day that Shares are traded, (ii) if this Agreement is executed and delivered after 1:30 P.M., San Francisco time, the fourth (4/th/) full business day following the day that this Agreement is executed and delivered or (iii) at such other time and date not later than seven (7) full business days following the first day that Shares are traded as the Representatives and the Company may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 8 hereof), such time and date of payment and delivery being herein called the "Closing Date;" provided, however, that if the Company has not made available to the Representatives copies of the Prospectus within the time provided in Section 2(g) and 3(e) hereof, the Representatives may, in their sole discretion, postpone the Closing Date until no later than two (2) full business days following delivery of copies of the Prospectus to the Representatives. (c) The Option Shares; the Second Closing Date. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of ________ Option Shares from the Company at the purchase price per share to be paid by the Underwriters for the Firm Shares. The option granted hereunder is for use by the Underwriters solely in covering any over- allotments in connection with the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time upon notice by the Representatives to the Company, which notice may be given at any time within 30 days from the date of this Agreement. The time and date of delivery of the Option Shares, if subsequent to the First Closing Date, is called the "Second Closing Date" and shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Option Shares are to be purchased, (i) each Underwriter agrees, severally and not jointly, to purchase the number of Option Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Option Shares to be purchased as the number of Firm Shares set forth on Schedule A opposite the name of such Underwriter bears to the total number of ---------- Firm Shares and (ii) the Company agrees to sell the number of Option Shares set forth in the paragraph "Introductory" of this Agreement. The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company. (d) Public Offering of the Shares. The Representatives hereby advise the Company that the Underwriters intend to offer for sale to the public, as described in the Prospectus, their respective portions of the Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representatives, in their sole judgment, have determined is advisable and practicable. (e) Payment for the Shares. Payment for the Shares shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer of immediately available funds to the order of the Company. It is understood that the Representatives have been authorized, for their own account and the accounts of the several Underwriters, to accept delivery of and receipt for, and 10 make payment of the purchase price for, the Firm Shares and any Option Shares the Underwriters have agreed to purchase. FleetBoston Robertson Stephens Inc., individually and not as the Representative of the Underwriters, may (but shall not be obligated to) make payment for any Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. (f) Delivery of the Shares. The Company shall deliver, or cause to be delivered, a credit representing the Firm Shares to an account or accounts at The Depository Trust Company, as designated by the Representatives for the accounts of the Representatives and the several Underwriters at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The Company shall also deliver, or cause to be delivered, a credit representing the Option Shares the Underwriters have agreed to purchase at the First Closing Date (or the Second Closing Date, as the case may be), to an account or accounts at The Depository Trust Company as designated by the Representatives for the accounts of the Representatives and the several Underwriters, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. (g) Delivery of Prospectus to the Underwriters. Not later than 12:00 noon on the second business day following the date the Shares are released by the Underwriters for sale to the public, the Company shall deliver or cause to be delivered copies of the Prospectus in such quantities and at such places as the Representatives shall request. Section 3. Covenants of the Company. The Company further covenants and agrees with each Underwriter as follows: (a) Registration Statement Matters. The Company will (i) use its best efforts to cause a registration statement on Form 8-A (the "Form 8-A Registration Statement") as required by the Securities Exchange Act of 1934 (the "Exchange Act") to become effective simultaneously with the Registration Statement, (ii) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Securities Act is followed, to prepare and timely file with the Commission under Rule 424(b) under the Securities Act a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Securities Act and (iii) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Securities Act. If the Company elects to rely on Rule 462(b) under the Securities Act, the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) under the Securities Act prior to the time confirmations are sent or given, as specified by Rule 462(b)(2) under the Securities Act, and shall pay the applicable fees in accordance with Rule 111 under the Securities Act. (b) Securities Act Compliance. The Company will advise the Representatives promptly (i) when the Registration Statement or any post-effective amendment thereto shall have become effective, (ii) of receipt of any comments from the Commission, (iii) of any request of the Commission for amendment of the Registration Statement or for supplement to the 11 Prospectus or for any additional information and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) Blue Sky Compliance. The Company will cooperate with the Representatives and counsel for the Underwriters in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions (both national and foreign) as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (d) Amendments and Supplements to the Prospectus and Other Securities Act Matters. The Company will comply with the Securities Act and the Exchange Act, and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Representatives or counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission, and furnish at its own expense to the Underwriters and to dealers, an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (e) Copies of any Amendments and Supplements to the Prospectus. The Company agrees to furnish the Representatives, without charge, during the period beginning on the date hereof and ending on the later of the First Closing Date or such date, as in the opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the Prospectus and any amendments and supplements thereto as the Representatives may request. (f) Insurance. The Company shall (i) obtain Directors and Officers liability insurance in the minimum amount of $10 million which shall apply to the offering contemplated hereby, (ii) cause Robertson Stephens to be added to such policy such that up to $500,000 of its expenses pursuant to section 7(a) shall be paid directly by such insurer and (iii) shall cause Robertson Stephens to be added as an additional insured to such policy in respect of the offering contemplated hereby. (g) Notice of Subsequent Events. If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which, in Robertson Stephens opinion, the 12 market price of the Common Shares has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from Robertson Stephens advising the Company to the effect set forth above, forthwith prepare, consult with Robertson Stephens concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to Robertson Stephens, responding to or commenting on such rumor, publication or event. (h) Use of Proceeds. The Company shall apply the net proceeds from the sale of the Shares sold by it in the manner described under the caption "Use of Proceeds" in the Prospectus. (i) Transfer Agent. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Common Shares. (j) Earnings Statement. As soon as practicable, the Company will make generally available to its security holders and to the Representatives an earnings statement (which need not be audited) covering the twelve-month period ending ____________ that satisfies the provisions of Section 11(a) of the Securities Act. (k) Periodic Reporting Obligations. During the Prospectus Delivery Period the Company shall file, on a timely basis, with the Commission and the Nasdaq National Market all reports and documents required to be filed under the Exchange Act. (l) Agreement Not to Offer or Sell Additional Securities. The Company will not offer, sell or contract to sell, or otherwise dispose of or enter into any transaction which is designed to, or could be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company) directly or indirectly, or announce the offering of, any other Common Shares or any securities convertible into, or exchangeable for, Common Shares; provided, however, that the Company may (i) issue and sell Common Shares pursuant to any director or employee stock option plan, stock ownership plan or dividend reinvestment plan of the Company in effect at the date of the Prospectus and described in the Prospectus so long as none of those shares may be transferred and the Company shall enter stop transfer instructions with its transfer agent and registrar against the transfer of any such Common Shares and (ii) the Company may issue Common Shares issuable upon the conversion of securities or the exercise of warrants outstanding at the date of the Prospectus and described in the Prospectus. These restrictions terminate after the close of trading of the Shares on the 180/th/ day of (and including) the day the Shares commenced trading on the Nasdaq National Market (the "Lock-Up Period"). (m) Future Reports to the Representatives. During the five year period following the date of this Agreement, the Company will furnish to the Representatives (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the National Association of Securities Dealers, LLC or any securities exchange; 13 and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock. (n) Directed Share Program. The Company (i) will comply with all applicable securities and other applicable laws, rules and regulations in each jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program and (ii) will pay all reasonable fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Share Program and any stamp duties, similar taxes or duties or other taxes, if any, incurred by the underwriters in connection with the Directed Share Program. Section 4. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein on the First Closing Date and, with respect to the Option Shares, the Second Closing Date, shall be subject to the accuracy of the representations and warranties of the Company set forth in Section 1 hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Option Shares, as of the Second Closing Date as though then made, to the timely performance by the Company of its covenants and other obligations hereunder, and to each of the following additional conditions: (a) Compliance with Registration Requirements; No Stop Order; No Objection from the National Association of Securities Dealers, LLC. The Registration Statement shall have become effective prior to the execution of this Agreement, or at such later date as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' Counsel; and the National Association of Securities Dealers, LLC shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements. (b) Corporate Proceedings. All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) No Material Adverse Change. Subsequent to the execution and delivery of this Agreement and prior to the First Closing Date, or the Second Closing Date, as the case may be, there shall not have been any Material Adverse Change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. (d) Opinion of Counsel for the Company. You shall have received on the First Closing Date, or the Second Closing Date, as the case may be, an opinion of Brobeck, Phleger & Harrison LLP, counsel for the Company, substantially in the form of Exhibit B attached hereto, dated the First Closing Date, or the --------- Second Closing Date, as the case may be, addressed to the 14 Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters. Counsel rendering the opinion contained in Exhibit B may rely as to --------- questions of law not involving the laws of the United States or the State of California [and the State of __________] upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representatives of the Underwriters, and to Underwriters' Counsel. (e) Opinion of Counsel for the Underwriters. You shall have received on the First Closing Date or the Second Closing Date, as the case may be, an opinion of Fenwick & West LLP, substantially in the form of Exhibit C hereto. --------- The Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (f) Accountants' Comfort Letter. You shall have received on the First Closing Date and on the Second Closing Date, as the case may be, a letter from PricewaterhouseCoopers LLP addressed to the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations and based upon the procedures described in such letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than four (4) business days prior to the First Closing Date or the Second Closing Date, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the First Closing Date or the Second Closing Date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from PricewaterhouseCoopers LLP shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their examination of the consolidated balance sheet of the Company as of December 31, 1997, 1998 and 1999 and related consolidated statements of operations, shareholders' equity, and cash flows for the twelve (12) months ended December 31, 1997, 1998 and 1999, (iii) state that PricewaterhouseCoopers LLP has performed the procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim financial information and providing the report of PricewaterhouseCoopers LLP as described in SAS 71 on the financial statements for each of the quarters in the ____- quarter period ended ________________, 2000 (the "Quarterly Financial Statements"), (iv) state that in the course of such review, nothing came to their attention that leads them to believe that any material modifications need to be made to any of the Quarterly Financial Statements in order for 15 them to be in compliance with generally accepted accounting principles consistently applied across the periods presented, and (v) address other matters agreed upon by PricewaterhouseCoopers LLP and you. In addition, you shall have received from PricewaterhouseCoopers LLP a letter addressed to the Company and made available to you for the use of the Underwriters stating that their review of the Company's system of internal accounting controls, to the extent they deemed such review necessary in establishing the scope of their examination of the Company's consolidated financial statements as of December 31, 1999, did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (g) Officers' Certificate. You shall have received on the First Closing Date and the Second Closing Date, as the case may be, a certificate of the Company, dated the First Closing Date or the Second Closing Date, as the case may be, signed by the Chief Executive Officer and Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the First Closing Date or the Second Closing Date, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the First Closing Date or the Second Closing Date, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained all material information required to be included therein by the Securities Act and in all material respects conformed to the requirements of the Securities Act, the Registration Statement and the Prospectus, and any amendments or supplements thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (a) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise, (b) any transaction that is material to the Company and its subsidiaries considered as one enterprise, except transactions entered into in the ordinary course of business, (c) any obligation, direct or contingent, that is material to the Company and its subsidiaries considered as one enterprise, incurred by the Company or its subsidiaries, except obligations incurred in the ordinary course of business, (d) any change in the capital stock or outstanding indebtedness of the Company or any of its subsidiaries that is material to the Company and its subsidiaries considered as one enterprise, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its subsidiaries, or (f) any loss or damage (whether or not insured) to the property of the Company or any of its subsidiaries which has been sustained or will 16 have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. (h) Lock-up Agreement from Certain Stockholders of the Company. The Company shall have obtained and delivered to you an agreement substantially in the form of Exhibit A attached hereto from each officer and director of the --------- Company and each beneficial owner of one or more percent of the outstanding issued share capital of the Company. (i) Stock Exchange Listing. The Shares shall have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance. (j) Compliance with Prospectus Delivery Requirements. The Company shall have complied with the provisions of Sections 2(g) and 3(e) hereof with respect to the furnishing of Prospectuses. (k) Additional Documents. On or before each of the First Closing Date and the Second Closing Date, as the case may be, the Representatives and counsel for the Underwriters shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained. If any condition specified in this Section 4 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company at any time on or prior to the First Closing Date and, with respect to the Option Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 5 (Payment of Expenses), Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification and Contribution) and Section 10 (Representations and Indemnities to Survive Delivery) shall at all times be effective and shall survive such termination. Section 5. Payment of Expenses. The Company agrees to pay all costs, fees and expenses incurred in connection with the performance of its obligations hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel, independent public or certified public accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, (vi) all costs and expenses incurred by Underwriters counsel in connection with the Directed Share Program, (vii) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Shares for offer and sale under the state securities or blue sky laws or the provincial securities laws of Canada or any other country, and, if requested by the Representatives, preparing and printing a "Blue Sky Survey", an "International Blue Sky Survey" 17 or other memorandum, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (viii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Underwriters in connection with, the National Association of Securities Dealers, LLC review and approval of the Underwriters' participation in the offering and distribution of the Common Shares, (ix) the fees and expenses associated with listing the Common Shares on the Nasdaq National Market, (x) all costs and expenses incident to the travel and accommodation of the Company's employees on the "roadshow", and (xi) all other fees, costs and expenses referred to in Item 13 of Part II of the Registration Statement. Except as provided in this Section 5, Section 6, and Section 7 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel. Section 6. Reimbursement of Underwriters' Expenses. If this Agreement is terminated by the Representatives pursuant to Section 4, Section 8 or Section 9, or if the sale to the Underwriters of the Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the Representatives and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally, upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives and the Underwriters in connection with the proposed purchase and the offering and sale of the Shares, including but not limited to fees and disbursements of counsel, printing expenses, travel and accommodation expenses, postage, facsimile and telephone charges. Section 7. Indemnification and Contribution. (a) Indemnification of the Underwriters. The Company agrees to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company, which consent shall not be unreasonably withheld), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of the Company contained herein; or (iv) in whole or in part upon any failure of the Company to perform its obligations hereunder or under law; or (v) any untrue statement or alleged untrue statement of any material fact contained in any audio or visual materials provided by the Company or based upon written information furnished by or on behalf of the Company including, without limitation, slides, videos, films or tape recordings, used in connection with the marketing of the Shares or (vi) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, 18 claim, damage, liability or action arising out of or based upon any matter covered by clause (i), (ii), (iii), (iv) or (v) above, provided that the Company shall not be liable under this clause (vi) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its bad faith or willful misconduct; and to reimburse each Underwriter and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by Robertson Stephens) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto). The indemnity agreement set forth in this Section 7(a) shall be in addition to any liabilities that the Company may otherwise have. (b) Indemnification of the Company, its Directors and Officers. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer or controlling person may become subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use therein; and to reimburse the Company, or any such director, officer or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The indemnity agreement set forth in this Section 7(b) shall be in addition to any liabilities that each Underwriter may otherwise have. (c) Information Provided by the Underwriters. The Company and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, hereby acknowledges that the only information that the Underwriters have furnished to the Company expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth in the table in the first, second and ____________ paragraphs under the caption "Underwriting" in the Prospectus; and the Underwriters confirm that such statements are correct. 19 (d) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 7, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise under the indemnity agreement contained in this Section 7 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (Robertson Stephens in the case of Section 7(b) and Section 8), representing the indemnified parties who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. (e) Settlements. The indemnifying party under this Section 7 shall not be liable for any settlement of any proceeding effected without its written consent, which consent shall not be unreasonably withheld, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 60 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been 20 sought hereunder by such indemnified party, unless such settlement, compromise or consent includes (i) an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (f) Contribution. If the indemnification provided for in this Section 7 is unavailable to or insufficient to hold harmless an indemnified party under Section 7(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party in such proportion as is appropriate to reflect the relative benefits received by such party on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of such party on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 7(f) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7(f). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 7(f) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (f), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 7(f) to contribute are several in proportion to their respective underwriting obligations and not joint. (g) Timing of Any Payments of Indemnification. Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 7 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred, but in all cases, no later than forty-five (45) days of invoice to the indemnifying party. (h) Survival. The indemnity and contribution agreements contained in this Section 7 and the representations and warranties set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its Directors or Officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its 21 Directors or Officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 7. (i) Acknowledgements of Parties. The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 7, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 7 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Securities Act and the Exchange Act. (j) Indemnification for Directed Share Program. The Company agrees to indemnify and hold harmless Robertson Stephens and its affiliates and each person, if any, who controls Robertson Stephens or its affiliates within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act ("Robertson Stephens Entities"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) caused by any untrue statement or alleged untrue statement of a material fact contained in any material prepared by or with the consent of the Company for distribution to participants in connection with the Directed Share Program, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) the failure of any participant to pay for and accept delivery of Directed Shares that the participant has agreed to purchase; or (iii) related to, arising out of, or in connection with the Directed Share Program other than losses, claims, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith of Robertson Stephens Entities. Section 8. Default of One or More of the Several Underwriters. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated, severally, in the proportions that the number of Firm Shares set forth opposite their respective names on Schedule A bears to the aggregate number of Firm Shares set ---------- forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the Representatives with the consent of the non-defaulting Underwriters, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares and the aggregate number of Shares with respect to which such default occurs exceeds 10% of the aggregate number of Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 5, Section 6 and Section 7 shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. 22 As used in this Agreement, the term "Underwriter" shall be deemed to include any person substituted for a defaulting Underwriter under this Section 8. Any action taken under this Section 8 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. Section 9. Termination of this Agreement. This Agreement may be terminated by the Representatives by notice given to the Company if (a) at any time after the execution and delivery of this Agreement and prior to the First Closing Date (i) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by the Nasdaq Stock Market, or trading in securities generally on either the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock markets or exchanges by the Commission or the National Association of Securities Dealers, LLC; (ii) a general banking moratorium shall have been declared by any of federal, New York [, Delaware] or California authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective change in United States' or international political, financial or economic conditions, as in the judgment of the Representatives is material and adverse and makes it impracticable or inadvisable to market the Shares in the manner and on the terms contemplated in the Prospectus or to enforce contracts for the sale of securities; (iv) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Representatives may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured or (b) in the case of any of the events specified 9(a)(i)-(v), such event singly or together with any other event, makes it, in Robertson Stephens judgement, impracticable or inadvisable to market the Shares in the manner and on the terms contemplated in the Prospectus. Any termination pursuant to this Section 9 shall be without liability on the part of (x) the Company to any Underwriter, except that the Company shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 5 and 6 hereof, (y) any Underwriter to the Company or any person controlling the Company, or (z) of any party hereto to any other party except that the provisions of Section 7 shall at all times be effective and shall survive such termination. Section 10. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company or any person controlling the company, of its Officers, and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, Officers or Directors or any controlling person, as the case may be, and will survive delivery of and payment for the Shares sold hereunder and any termination of this Agreement. Section 11. Notices. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Representatives: FLEETBOSTON ROBERTSON STEPHENS INC. 555 California Street San Francisco, California 94104 23 Facsimile: (415) 676-2675 Attention: Deputy General Counsel If to the Company: Computer Access Technology Corporation 2403 Walsh Avenue Santa Clara, California 95051 Facsimile: (408) ________ Attention: ______________ Any party hereto may change the address for receipt of communications by giving written notice to the others. Section 12. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 8 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 7, and to their respective successors, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares as such from any of the Underwriters merely by reason of such purchase. Section 13. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. Section 14. Governing Law Provisions. (a) Governing Law. This agreement shall be governed by and construed in accordance with the internal laws of the state of New York applicable to agreements made and to be performed in such state. (b) Consent to Jurisdiction. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby ("Related Proceedings") may be instituted in the federal courts of the United States of America located in the City and County of San Francisco or the courts of the State of California in each case located in the City and County of San Francisco (collectively, the "Specified Courts"), and each party irrevocably submits to the personal jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party's address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum. Each party not located in the United States irrevocably appoints CT Corporation System, which currently maintains a San Francisco office at 49 Stevenson Street, San Francisco, California 94105, United States of America, as its agent to receive service of process or other legal summons for 24 purposes of any such suit, action or proceeding that may be instituted in any state or federal court in the City and County of San Francisco. Section 15. General Provisions. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. [The remainder of this page has been intentionally left blank.] 25 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. Very truly yours, COMPUTER ACCESS TECHNOLOGY CORPORATION By: _____________________________________ [Title] ------------------------------------- The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives as of the date first above written. FLEETBOSTON ROBERTSON STEPHENS INC. CIBC WORLD MARKETS SG COWEN SECURITIES NEEDHAM & COMPANY, INC. On their behalf and on behalf of each of the several underwriters named in Schedule A hereto. - ---------- By FLEETBOSTON ROBERTSON STEPHENS INC. By: _____________________________________________________ Mitch Whiteford 26 SCHEDULE A Number of Firm Common Shares To Underwriters be Purchased - ------------------------------------------------------------- ---------------- FLEETBOSTON ROBERTSON STEPHENS INC./32/...................... CIBC World Markets........................................... SG Cowen Securities.......................................... Needham & Company, Inc....................................... _______________________...................................... Total................................................... _______________________ S-A Exhibit A Lock-Up Agreement FleetBoston Robertson Stephens Inc. CIBC World Markets SG Cowen Securities Needham & Company, Inc. As Representatives of the Several Underwriters c/o FleetBoston Robertson Stephens Inc. 555 California Street, Suite 2600 San Francisco, California 94104 RE: Computer Access Technology Corporation (the "Company") ------------------------------------------------------ Ladies & Gentlemen: The undersigned is an owner of record or beneficially of certain shares of Common Stock of the Company ("Common Stock") or securities convertible into or exchangeable or exercisable for Common Stock. The Company proposes to carry out a public offering of Common Stock (the "Offering") for which you will act as the representatives (the "Representatives") of the underwriters. The undersigned recognizes that the Offering will be of benefit to the undersigned and will benefit the Company by, among other things, raising additional capital for its operations. The undersigned acknowledges that you and the other underwriters are relying on the representations and agreements of the undersigned contained in this letter in carrying out the Offering and in entering into underwriting arrangements with the Company with respect to the Offering. In consideration of the foregoing, the undersigned hereby agrees that the undersigned will not offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (collectively, a "Disposition") any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or shareholders of such person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, (iii) with respect to sales or purchases of Common Stock acquired on the open market, (iv) with respect to shares received in the Directed Share Program, or (v) with the prior written consent of FleetBoston Robertson Stephens Inc. The foregoing restrictions will terminate after the close of trading of the Common Stock on the 180th day of (and including) the day the Common Stock commenced trading on the Nasdaq National Market (the "Lock-Up Period"). The foregoing restriction has been expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that included, relates to or derives any A-1 significant part of its value from Securities. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of shares of Common Stock or Securities held by the undersigned except in compliance with the foregoing restrictions. This agreement is irrevocable and will be binding on the undersigned and the respective successors, heirs, personal representatives, and assigns of the undersigned. In the event the Offering has not occurred on or before December 1, 2000, this Lock-Up Agreement shall be of no further force or effect. Dated ___________________________________________ _________________________________________________ Printed Name of Holder By: _____________________________________________ Signature _________________________________________________ Printed Name of Person Signing (and indicate capacity of person signing if signing as custodian, trustee, or on behalf of an entity) A-2 Exhibit B Matters to be Covered in the Opinion of Company Counsel (i) The Company and each Significant Subsidiary (as that term is defined in Regulation S-X of the Exchange Act) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; (ii) The Company and each Significant Subsidiary has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (iii) The Company and each Significant Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a Material Adverse Effect. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity other than [list subsidiaries]; (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein, the issued and outstanding shares of capital stock of the Company outstanding prior to the issuance of the Shares have been duly and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, will not have been issued in violation of or subject to any preemptive right arising under the Company's certificate of incorporation or [jurisdiction of incorporation] General Corporation Law, co-sale right, right of first refusal or other similar right, other than any registration rights described in Opinion (xix) hereof; (v) All issued and outstanding shares of capital stock of each Significant Subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, have not been issued in violation of or subject to any preemptive right arising under the certificate of incorporation of the Company or such Significant Subsidiary or [jurisdiction of incorporation] General Corporation Law, co-sale right, right of first refusal or other similar right, other than any registration rights described in Opinion (xix) hereof and are owned by the Company free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; (vi) The Firm Shares or the Option Shares, as the case may be, to be issued by the Company pursuant to the terms of this Agreement have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, and will not have been issued in violation of or subject to any preemptive right, co-sale right, right of first refusal or other similar right, other than any registration rights described in Opinion (xix) hereof. (vii) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by it hereunder; B-1 (viii) This Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by you, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles (whether relief is sought in a proceeding at law or in equity); (ix) The Registration Statement has become effective under the Securities Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Securities Act; (x) The 8-A Registration Statement complied as to form in all material respects with the requirements of the Exchange Act; the 8-A Registration Statement has become effective under the Exchange Act; and the Firm Shares or the Option Shares have been validly registered under the Securities Act and the Rules and Regulations of the Exchange Act and the applicable rules and regulations of the Commission thereunder; (xi) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements (including supporting schedules) and financial data derived therefrom as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Securities Act and the applicable Rules and Regulations; (xii) The information in the Prospectus under the caption "Description of Capital Stock," to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair summary of such matters and conclusions; and the forms of certificates evidencing the Common Stock and filed as exhibits to the Registration Statement comply with [STATE OF COMPANY'S INCORPORATION] law; (xiii) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of statutes are accurate and fairly present the information required to be presented by the Securities Act; (xiv) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which are not described or referred to therein or filed as required; (xv) The performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification obligations hereunder, concerning which no opinion need be expressed) will not (a) result in any violation of the Company's charter or bylaws or (b) to such counsel's knowledge, result in a material breach or violation of any of the terms and provisions of, or constitute a default under, any bond, debenture, note or other evidence of indebtedness, or any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument known to such counsel to which the Company is a party or by which its properties are bound, or any applicable B-2 statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations; (xvi) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except (i) such as have been obtained under the Securities Act, (ii) such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Shares by the Underwriters, (iii) such as may be required by the National Association of Securities Dealers, LLC and (iv) such as may be required under the federal or provincial laws of Canada; (xvii) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company or any of its subsidiaries of a character required to be disclosed in the Registration Statement or the Prospectus by the Securities Act, other than those described therein; (xviii) To such counsel's knowledge, neither the Company nor any of its subsidiaries is presently (a) in material violation of its respective charter or bylaws, or (b) in material breach of any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations; and (xix) To such counsel's knowledge, except as set forth in the Registration Statement and Prospectus, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights known to such counsel to registration of such shares of Common Stock or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement or have included securities in the Registration Statement pursuant to the exercise of and in full satisfaction of such rights. (xx) The Company is not and, after giving effect to the offering and the sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (xxi) To such counsel's knowledge, the Company owns or possesses sufficient trademarks, trade names, patent rights, copyrights, licenses, approvals, trade secrets and other similar rights (collectively, "Intellectual Property Rights") reasonably necessary to conduct their business as now conducted; and the expected expiration of any such Intellectual Property Rights would not result in a Material Adverse Effect. The Company has not received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject of an unfavorable decision, would result in a Material Adverse Effect. To such counsel's knowledge, the Company's B-3 discoveries, inventions, products, or processes referred to in the Registration Statement or Prospectus do not infringe or conflict with any right or patent which is the subject of a patent application known to the Company. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the First Closing Date or Second Closing Date, as the case may be, the Registration Statement and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the First Closing Date or the Second Closing Date, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. B-4 Exhibit C Matters to be Covered in the Opinion of Underwriters' Counsel (i) The Firm Shares have been duly authorized and, upon issuance and delivery and payment therefor in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and non- assessable. (ii) The Registration Statement complied as to form in all material respects with the requirements of the Act; the Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order proceedings with respect thereto have been instituted or threatened or are pending under the Securities Act. (iii) The 8-A Registration Statement complied as to form in all material respects with the requirements of the Exchange Act; the 8-A Registration Statement has become effective under the Exchange Act; and the Shares have been validly registered under the Securities Act and the Rules and Regulations of the Exchange Act and the applicable rules and regulations of the Commission thereunder; (iv) The Underwriting Agreement has been duly authorized, executed and delivered by the Company. Such counsel shall state that such counsel has reviewed the opinions addressed to the Representatives from Brobeck, Phleger & Harrison LLP, each dated the date hereof, and furnished to you in accordance with the provisions of the Underwriting Agreement. Such opinions appear on their face to be appropriately responsive to the requirements of the Underwriting Agreement. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the First Closing Date or Second Closing Date, as the case may be, the Registration Statement and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the First Closing Date or the Second Closing Date, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. EX-5.1 3 0003.txt OPINION OF BROBECK PHLEGER & HARRISON LLP [LETTERHEAD OF BROBECK, PHLEGER & HARRISON LLP] EXHIBIT 5.1 August 16, 2000 Computer Access Technology Corporation 2403 Walsh Avenue Santa Clara, CA 95051 Re: Computer Access Technology Corporation Registration Statement on Form S-1 for _________ Shares of Common Stock Ladies and Gentlemen: We have acted as counsel to Computer Access Technology Corporation, a Delaware corporation (the "Company"), in connection with the proposed issuance and sale by the Company of up to _________ shares of the Company's Common Stock (the "Shares") pursuant to the Company's Registration Statement on Form S- 1 (the "Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"). This opinion is being furnished in accordance with the requirements of Item 16(a) of Form S-1 and Item 601(b)(5)(i) of Regulation S-K. We have reviewed the Company's charter documents and the corporate proceedings taken by the Company in connection with the issuance and sale of the Shares. Based on such review, we are of the opinion that the Shares have been duly authorized, and if, as and when issued in accordance with the Registration Statement and the related prospectus (as amended and supplemented through the date of issuance) will be legally issued, fully paid and nonassessable. We consent to the filing of this opinion letter as Exhibit 5.1 to the Registration Statement and to the reference to this firm under the caption "Legal Matters" in the prospectus which is part of the Registration Statement. In giving this consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Act, the rules and regulations of the Securities and Exchange Commission promulgated thereunder, or Item 509 of Regulation S-K. Computer Access Technology Corporation August 16, 2000 Page 2 This opinion letter is rendered as of the date first written above and we disclaim any obligation to advise you of facts, circumstances, events or developments which hereafter may be brought to our attention and which may alter, affect or modify the opinion expressed herein. Our opinion is expressly limited to the matters set forth above and we render no opinion, whether by implication or otherwise, as to any other matters relating to the Company or the Shares. Very truly yours, BROBECK, PHLEGER & HARRISON LLP EX-10.1 4 0004.txt FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.1 INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered into this __th day of August, 2000, by and between Computer Access Technology Corporation, a Delaware corporation (the "Company"), and ______ ("Indemnitee"). WHEREAS, Indemnitee, a member of the Board of Directors or an officer, employee or agent of the Company, performs a valuable service in such capacity for the Company; WHEREAS, the stockholders of the Company have adopted Bylaws (the "Bylaws") providing for the indemnification of the officers, directors, employees and agents of the Company to the maximum extent authorized by Section 145 of the Delaware General Corporation Law, as amended (the "Code"); WHEREAS, the Bylaws and the Code, by their non-exclusive nature, permit contracts between the Company and the members of its Board of Directors, officers, employees or agents with respect to indemnification of such directors, officers, employees or agents; WHEREAS, in accordance with the authorization as provided by the Code, the Company either has purchased and presently maintains or intends to purchase and maintain a policy or policies of Directors and Officers Liability Insurance ("D&O Insurance") covering certain liabilities which may be incurred by its directors and officers in the performance of their duties as directors and officers of the Company; WHEREAS, as a result of developments affecting the terms, scope and availability of D&O Insurance there exists general uncertainty as to the extent of protection afforded members of the Board of Directors or officers, employees or agents by such D&O Insurance and by statutory and bylaw indemnification provisions; and WHEREAS, in order to induce Indemnitee to continue to serve as a member of the Board of Directors, officer, employee or agent of the Company, the Company has determined and agreed to enter into this contract with Indemnitee. NOW, THEREFORE, in consideration of Indemnitee's continued service as a director, officer, employee or agent after the date hereof, and for other good and valid consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Indemnification of Indemnitee. The Company hereby agrees to hold ----------------------------- harmless and indemnify Indemnitee to the fullest extent authorized or permitted by the provisions of the Code, as may be amended from time to time. 2. Additional Indemnity. Subject only to the exclusions set forth in -------------------- Sections 3 and 6(c) hereof, the Company hereby further agrees to hold harmless and indemnify Indemnitee: (a) against any and all expenses (including attorneys' fees), witness fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of the Company) to which Indemnitee is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Indemnitee is, was or at any time becomes a director, officer, employee or agent of the Company or any subsidiary of the Company, or is or was serving or at any time serves at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and (b) otherwise to the fullest extent as may be provided to Indemnitee by the Company under the non-exclusivity provisions of Article __, Section __ of the Bylaws of the Company and the Code. 3. Limitations on Additional Indemnity. ----------------------------------- (a) No indemnity pursuant to Section 2 hereof shall be paid by the Company: (i) in respect to remuneration paid to Indemnitee if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; (ii) on account of any suit in which judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or similar provisions of any federal, state or local statutory law; (iii) on account of Indemnitee's conduct which is finally adjudged to have been knowingly fraudulent or deliberately dishonest or to constitute willful misconduct; (iv) on account of Indemnitee's conduct which is the subject of an action, suit or proceeding described in Section 6(c)(ii) hereof; (v) on account of any action, claim or proceeding (other than a proceeding referred to in Section 7(b) hereof) initiated by the Indemnitee unless such action, claim or proceeding was authorized in the specific case by action of the Board of Directors; (vi) if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful (and, in this respect, both the Company and Indemnitee have been advised that the Securities and Exchange Commission (the "SEC") believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication); and 2 (vii) except to the extent the aggregate of losses to be indemnified thereunder exceeds the sum of (a) such losses for which the Indemnitee is indemnified pursuant to Section 1 hereof and (b) any additional amount paid to the Indemnitee pursuant to any D&O Insurance purchased and maintained by the Company. (b) No indemnity pursuant to Section 1 or 2 hereof shall be paid by the Company if the action, suit or proceeding with respect to which a claim for indemnity hereunder is made arose from or is based upon any of the following: (i) Any solicitation of proxies by Indemnitee, or by a group of which he was or became a member consisting of two or more persons that had agreed (whether formally or informally and whether or not in writing) to act together for the purpose of soliciting proxies, in opposition to any solicitation of proxies approved by the Board of Directors. (ii) Any activities by Indemnitee that constitute a breach of or default under any agreement between Indemnitee and the Company. 4. Contribution. If the indemnification provided in Sections 1 ------------ and 2 hereof is unavailable by reason of a court decision described in Section 3(a)(vi) hereof based on grounds other than any of those set forth in paragraphs (i) through (v) of Section 3(a) hereof, then in respect of any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in such proportion as is appropriate to reflect (a) the relative benefits received by the Company on the one hand and Indemnitee on the other hand from the transaction from which such action, suit or proceeding arose, and (b) the relative fault of the Company, on the one hand, and of Indemnitee, on the other, in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and of Indemnitee, on the other, shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. The Company agrees that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. 5. Notification and Defense of Claim. Not later than thirty --------------------------------- (30) days after receipt by Indemnitee of notice of the commencement of any action, suit or proceeding, Indemnitee shall, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof; but Indemnitee's omission so to notify the Company will not relieve the Company from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Indemnitee notifies the Company of the commencement thereof: (a) The Company will be entitled to participate therein at its own expense. 3 (b) Except as otherwise provided below, to the extent that it may wish, the Company shall, jointly with any other indemnifying party similarly notified, be entitled to assume the defense thereof, with counsel reasonably satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election to assume the defense thereof, the Company will not be liable to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof, other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ its own counsel in such action, suit or proceeding, but the fees and expenses of such counsel incurred after notice from the Company of the Company's assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by the Company, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of the defense of such action, or (iii) the Company shall not in fact have employed counsel to assume the defense of such action; in each of which cases the fees and expenses of Indemnitee's separate counsel shall be paid by the Company. The Company shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Company or as to which Indemnitee shall have made the conclusion provided for in clause (ii) above. (c) The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall be permitted to settle any action except that it shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither the Company nor Indemnitee will unreasonably withhold its consent to any proposed settlement. 6. Advancement and Repayment of Expenses. ------------------------------------- (a) In the event that Indemnitee employs his or her own counsel pursuant to Sections 5(b)(i) through (iii) above, the Company shall advance to Indemnitee, prior to any final disposition of any threatened or pending action, suit or proceeding, whether civil, criminal, administrative or investigative, any and all reasonable expenses (including legal fees and expenses) incurred in investigating or defending any such action, suit or proceeding within ten (10) days after receiving from Indemnitee copies of invoices presented to Indemnitee for such expenses. (b) Indemnitee agrees that Indemnitee will reimburse the Company for all reasonable expenses paid by the Company in investigating or defending any civil or criminal action, suit or proceeding against Indemnitee in the event and only to the extent it shall be ultimately determined by a final judicial decision (from which there is no right of appeal) that Indemnitee is not entitled, under the provisions of the Code, the Bylaws, this Agreement or otherwise, to be indemnified by the Company for such expenses. (c) Notwithstanding the foregoing, the Company shall not be required to advance such expenses to Indemnitee in respect of any action arising from or based upon any of the matters set forth in subsection (b) of Section 3 or if Indemnitee (i) commences any action, suit or proceeding as a plaintiff unless such advance is specifically approved by a majority of the Board of Directors or (ii) is a party to an action, suit or proceeding brought by the Company and 4 approved by a majority of the Board of Directors which alleges willful misappropriation of corporate assets by Indemnitee, disclosure of confidential information in violation of Indemnitee's fiduciary or contractual obligations to the Company, or any other willful and deliberate breach in bad faith of Indemnitee's duty to the Company or its shareholders. 7. Enforcement. ----------- (a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on the Company hereby in order to induce Indemnitee to continue as a director, officer, employee or other agent of the Company, and acknowledges that Indemnitee is relying upon this Agreement in continuing in such capacity. (b) In the event Indemnitee is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, the Company shall reimburse Indemnitee for all Indemnitee's reasonable fees and expenses, including attorney's fees, in bringing and pursuing such action. 8. Subrogation. In the event of payment under this agreement, ----------- the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 9. Continuation of Obligations. All agreements and obligations --------------------------- of the Company contained herein shall commence upon the date that Indemnitee first became a member of the Board of Directors or an officer, employee or agent of the Company, as the case may be, and shall continue during the period Indemnitee is a director, officer, employee or agent of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative, by reason of the fact that Indemnitee was a director, officer, employee or agent of the Company or serving in any other capacity referred to herein. 10. Survival of Rights. The rights conferred on Indemnitee by ------------------ this Agreement shall continue after Indemnitee has ceased to be a director, officer, employee or other agent of the Company and shall inure to the benefit of Indemnitee's heirs, executors and administrators. 11. Non-Exclusivity of Rights. The rights conferred on Indemnitee ------------------------- by this Agreement shall not be exclusive of any other right which Indemnitee may have or hereafter acquire under any statute, provision of the Company's Certificate of Incorporation or Bylaws, agreement, vote of stockholders or directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding office; provided, however, that this Agreement shall supersede and replace any prior indemnification agreements entered into by and between the Company and Indemnitee and that any such prior indemnification agreement shall be terminated upon the execution of this Agreement. 12. Separability. Each of the provisions of this Agreement is a ------------ separate and distinct agreement and independent of the others, so that if any or all of the provisions hereof 5 shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof or the obligation of the Company to indemnify the Indemnitee to the full extent provided by the Bylaws or the Code. 13. Governing Law. This Agreement shall be interpreted and ------------- enforced in accordance with the laws of the State of Delaware. 14. Binding Effect. This Agreement shall be binding upon -------------- Indemnitee and upon the Company, its successors and assigns, and shall inure to the benefit of Indemnitee, his or her heirs, personal representatives and assigns and to the benefit of the Company, its successors and assigns. 15. Amendment and Termination. No amendment, modification, ------------------------- termination or cancellation of this Agreement shall be effective unless it is in writing and is signed by both parties hereto. (This space intentionally left blank) 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on date set forth above. "Company" "Indemnitee" COMPUTER ACCESS TECHNOLOGY CORPORATION, a [____________] Delaware corporation By: _______________________________________ ____________________________ Name: _____________________________________ Title:_____________________________________ Address: ___________________ ___________________ 7 EX-10.9 5 0005.txt PROMISSORY NOTE BETWEEN ALBERT LEE AND REGISTRANT EXHIBIT 10.9 PROMISSORY NOTE $125,000.00 Santa Clara, CA May 11, 2000 FOR VALUE RECEIVED, Albert Lee promises to pay to Computer Access Technology Corporation, a California corporation (the "Company"), or order, the principal sum of One Hundred Twenty-Five Thousand Dollars ($125,000.00), together with interest on the unpaid principal hereof from the date hereof at the rate of 6.42% per annum. Principal and interest shall be due and payable on May 11, 2002. Payment of principal and interest shall be made in lawful money of the United States of America. The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder. This Note is secured in part by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. The holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. In the event the undersigned shall cease to be an employee, director or consultant of the Company for any reason, this Note shall, at the option of the Company, be accelerated, and the whole unpaid balance on this Note of principal and accrued interest shall be immediately due and payable. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. /s/ Albert Lee ----------------- Albert Lee EX-10.10 6 0006.txt SECURITY AGREEMENT BETWEEN ALBERT LEE AND REGISTRANT EXHIBIT 10.10 SECURITY AGREEMENT This Security Agreement is made as of May 11, 2000 between Computer Access Technology Corporation, a California corporation ("Pledgee"), and Albert Lee ("Pledgor"). Recitals -------- Pursuant to Pledgor's election to purchase Shares under the Option Agreement dated December 1, 1997 (the "Option"), between Pledger and Pledgee under Pledgee's 1994 Stock Plan, and Pledgor's election under the terms of the Option to pay for such shares with his promissory note (the "Note"), Pledgor has purchased 70,000 shares of Pledgee's Common Stock (the "Shares") at a price of $0.44 per share, for a total purchase price of $30,800.00. NOW, THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In consideration of the --------------------------------------------- transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant to the California Commercial Code, hereby pledges all of such Shares (herein sometimes referred to as the "Collateral") represented by certificate number 27, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the Option, and the Pledgeholder shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. Pledgor's Representations and Covenants. To induce Pledgee to enter --------------------------------------- into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: (a) Payment of Indebtedness. Pledgor will pay the principal sum of ----------------------- the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. (b) Encumbrances. The Shares are free of all other encumbrances, ------------ defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. (c) Margin Regulations. In the event that Pledgee's Common Stock is ------------------ now or later becomes margin-listed by the Federal Reserve Board and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. Voting Rights. During the term of this pledge and so long as all ------------- payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. Stock Adjustments. In the event that during the term of the pledge any ----------------- stock dividend, reclassification, readjustment or other changes are declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. Options and Rights. In the event that, during the term of this pledge, ------------------ rights or options shall be issued in connection with the pledged Shares, such rights and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares pledged. 6. Default. Pledgor shall be deemed to be in default of the Note and of ------- this Security Agreement in the event: (a) Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or (b) Pledgor fails to perform any of the covenants set forth in the Option or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the California Commercial Code. 7. Release of Collateral. Subject to any applicable contrary rules under --------------------- Regulation G, there shall be released from this pledge a portion of the pledged Shares held by Pledgeholder hereunder upon payments of the principal of the Note. The number of the pledged Shares which shall be released shall be that number of full Shares which bears the same proportion to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. 8. Withdrawal or Substitution of Collateral. Pledgor shall not sell, ---------------------------------------- withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee unless Pledgor shall default on the Note. 9. Term. The within pledge of Shares shall continue until the payment of ---- all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency ---------- proceeding is instituted by or against him, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 11. Pledgeholder Liability. In the absence of willful or gross negligence, ---------------------- Plegdeholder shall not be liable to any party for any of its acts, or omissions to act, as Pledgeholder. 12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that ----------------------------------- the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 13. Successors or Assigns. Pledgor and Pledgee agree that all of the --------------------- terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 14. Governing Law. This Security Agreement shall be interpreted and ------------- governed under the internal substantive laws, but not the choice of law rules, of California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGOR" /s/ Albert Lee ---------------------------------------- Albert Lee Address: 723 HIBISCUS PL ---------------------------------------- SAN JOSE, CA 95117 ---------------------------------------- "PLEDGEE" COMPUTER ACCESS TECHNOLOGY CORPORATION a California corporation /s/ Dan Wilnai ---------------------------------------- Signature /s/ Dan Wilnai ---------------------------------------- Print Name PRESIDENT ---------------------------------------- Title "PLEDGEHOLDER" /s/ Dan Wilnai ---------------------------------------- Secretary of COMPUTER ACCESS TECHNOLOGY CORPORATION ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, ______________________, hereby sell, assign and transfer unto Computer Access Technology Corporation ________ shares of the Common Stock of Computer Access Technology Corporation standing in my name of the books of said corporation represented by Certificate No. _____ herewith and do hereby irrevocably constitute and appoint ________________________ to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. This Stock Assignment may be used only in accordance with the Security Agreement (the "Agreement") of Computer Access Technology Corporation and the undersigned dated ____________, _______. Dated:______________, ________ Signature: /s/ [ILLEGIBLE]^^ ------------------------- INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise its "repurchase option," as set forth in the Agreement, without requiring additional signatures on the part of the Purchaser. EX-23.1 7 0007.txt CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 We hereby consent to the use in this Registration Statement on Form S-1 of our report dated August 3, 2000, relating to the consolidated financial statements and financial statement schedule of Computer Access Technology Corporation, which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. PricewaterhouseCoopers LLP San Jose, California August 16, 2000 EX-27.1 8 0008.txt FINANCIAL DATA SCHEDULE
5 1,000 YEAR 6-MOS DEC-31-1999 DEC-31-2000 JAN-01-1999 JAN-01-2000 DEC-31-1999 JUN-30-2000 4,195 5,158 0 1,161 2,319 3,145 58 79 673 959 7,381 11,659 428 564 173 230 7,654 12,018 1,608 3,734 0 0 0 0 0 0 11 12 6,016 8,257 7,654 12,018 12,506 8,782 12,506 8,782 3,136 2,168 0 0 6,486 4,190 0 0 (138) (156) 3,022 2,580 1,760 1,325 1,262 1,255 0 0 0 0 0 0 1,262 1,255 0.11 0.11 0.10 0.10
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