14.11.2002: Meldung: Transmeta Corp: Quarterly Report (engl.)
Caution Regarding Forward-Looking Statements
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the related notes contained in this report and with the information included in the Company"s Annual Report on Form 10-K for the year ended December 31, 2001 and subsequent reports filed with the Securities and Exchange Commission. The information contained in this report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed regularly with the SEC, some of which reports discuss our business in greater detail.
This report contains forward-looking statements that are based upon our current expectations, estimates and projections about our industry, and that reflect our beliefs and certain assumptions based upon information made available to us at the time of this report. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "could," "will" and variations of these words or similar expressions are intended to identify forward-looking statements. Such statements include, but are not limited to, statements concerning anticipated trends or developments in our business and the markets in which we operate, the competitive nature and anticipated growth of those markets, our expectations for our future performance and the market acceptance of our products, our ability to migrate our products to smaller process geometries, and our future gross margins, operating expenses and need for additional capital.
Investors are cautioned that such forward-looking statements are only predictions, which may differ materially from actual results or future events. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Some of the important risk factors that may affect our business, results of operations and financial condition are set out and discussed below in the section entitled "Risks That May Affect Future Results." You should carefully consider those risks, in addition to the other information in this report and in our other filings with the SEC, before deciding to invest in our company or to maintain or change your investment. Investors are cautioned not to place reliance on these forward-looking statements, which reflect management"s analysis only as of the date of this report. We undertake no obligation to revise or update any forward-looking statement for any reason.
We develop and sell software-based microprocessors and develop additional hardware and software technologies that enable computer manufacturers to build mobile Internet computers, which are portable computing and communication devices that are
Table of Contents
compatible with PC software and deliver the high performance required to run standard PC and Internet applications while also offering long battery life. We rely on independent, third party contractors to perform manufacturing, assembly and test functions. Our fabless approach allows us to focus on designing, developing and marketing our products and to significantly reduce the amount of capital needed to invest in manufacturing products.
From our inception in March 1995 through September 2000, we were engaged primarily in research and development. In 1999, we began focusing on achieving design wins with original equipment manufacturers, or OEMs, in addition to our ongoing development activities. In January 2000, we introduced our Crusoe family of microprocessors and began recognizing product revenue from sales of these microprocessors in the first half of 2000. Through June 30, 2000, product shipments consisted of development systems and prototypes. We expect to be dependent on sales of Crusoe microprocessors and successive generations of these products for the foreseeable future.
We sell our products directly to OEMs and, to a lesser extent, through distributors. We are currently in the process of adding sales representatives and distributors in Europe, and sales representatives in North America. Siltrontech Electronics and Edom Technology Company are our primary distributors in Taiwan, Hong Kong and China, and All American Semiconductor is our exclusive distributor in North America. Siltrontech, Edom and All American are restricted from selling to certain OEMs and major notebook manufacturers and have provisions in their agreements specifying inventory levels, price protection policies and rights of return policies for non end-of-life products.
We derive a significant portion of our net revenues from Asia. Sales to two customers located in Japan accounted for 41% and 30%, respectively, of our net revenue during the first nine months of fiscal 2002. This compares to four customers in Japan accounting for 28%, 18% 12% and 11%, respectively, of our net revenue during the same period last year. The loss of a major customer, or the delay of significant orders from these customers could reduce or delay our recognition of revenue. All of our sales to date have been denominated in U.S. dollars, and we expect that most of our sales in the future will be denominated in U.S. dollars. Our sales during the first nine months of fiscal years 2002 and 2001 were primarily made to the notebook computer market. If our Crusoe products fail to achieve widespread acceptance in the notebook computer market we may not achieve revenue sufficient to sustain our business.
Cost of revenue consists primarily of the costs of manufacturing, assembly and test of our silicon chips, and compensation and associated costs related to manufacturing support, logistics and quality assurance personnel. Our gross margin each quarter is affected by a number of factors, including competitive pricing, mix, foundry pricing, yields, production flow costs and speed distribution of our products. Research and development expenses consist primarily of salaries and related overhead costs associated with employees engaged in research, design and development activities, as well as the cost of masks, wafers and other materials and related test services and equipment used in the development process. Selling, general and administrative expenses consist of salaries and related overhead costs for sales, marketing and administrative personnel and legal and accounting services.
We recorded deferred stock compensation representing the difference between the deemed fair value of our common stock at the date of grant for accounting purposes and the exercise price of these options. Deferred stock compensation is presented as a reduction of stockholders" equity and is amortized on the graded vesting method. As of September 30, 2002, approximately $4.2 million was recorded on our balance sheet, which will be amortized through 2004 using an accelerated graded method.
Historically we have incurred significant losses. As of September 30, 2002, we had an accumulated deficit of $433.2 million. We expect to incur substantial losses for the foreseeable future. We also expect to incur significant research and development and selling, general and administrative expenses. As a result, if our revenue does not increase substantially, our operating results will be adversely affected, and we will not achieve profitability. During the fourth quarter of fiscal 2001 and into the first quarter of fiscal 2002 our revenue was primarily impacted by production difficulties. Additionally, beginning in the second quarter of fiscal 2001 and continuing through the third quarter of fiscal 2002 our net revenues have been impacted by the slow worldwide and Japanese economies. If we experience additional production constraints or if economic conditions do not improve, or worsen, we would continue to experience adverse impacts on our revenue and operating results.
For ease of presentation, the accompanying financial information has been shown as of December 31 and calendar quarter ends for all annual and quarterly financial statement captions. The three-month period ended September 30, 2002 and September 30, 2001 each consisted of 13 weeks. The first nine months of fiscal 2001 and 2002 each consisted of 39 weeks.
New Accounting Pronouncements
In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" (EITF 94-3). The principal difference between SFAS 146 and EITF 94-3 relates to the timing of the recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as generally defined in EITF 94-3 is to be recognized at the date of an entity"s commitment to an exit plan. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We accounted for our restructuring activity during fiscal 2002 under EITF 94-3. We do not expect the adoption of SFAS 146 to have a material impact on our financial position or results of operations.
Critical Accounting Policies
The process of preparing financial statements requires the use of estimates on the part of our management. The estimates used by management are based on our historical experiences combined with management"s understanding of current facts and circumstances. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial condition and results and require significant or complex judgment on the part of management.
We believe that our most critical accounting policies are as follows:
• Estimation of inventory valuations;
• Valuation of long-lived and intangible assets;
• Restructuring charges; and
• Revenue recognition.
Estimation of Inventory Valuations. In accordance with several accounting pronouncements, including Accounting Research Bulletin 43, our inventory valuation policy stipulates that at the end of each reporting period we write-down or write-off our inventory for estimated obsolescence or unmarketable inventory. The amount of the write-down or write-off is equal to the difference between the cost of the inventory and the estimated market value of the inventory based upon reasonable assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs or write-offs may be required. Additionally, as we introduce product enhancements and new products, and improve our manufacturing processes, demand for our existing products in inventory may decrease. At the end of the second quarter of 2001, consistent with this policy, we recorded a charge of $28.1 million primarily to write-off certain older inventory products as a result of an actual decrease of future demand for these older products. In the future, we may find that similar assessments may warrant another write-down or write-off of inventory.
Valuation of Long-Lived and Intangible Assets. Our accounting policy related to the valuation and impairment of long-lived assets is in accordance with the Financial Accounting Standards Board"s (FASB) Statement of Financial Accounting Standards (SFAS) 144, Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed of. In accordance with our policy, at the end of each accounting period we evaluate our long-lived and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. Recoverability of assets to be held and used is determined by comparing the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds the future undiscounted cash flows the asset is considered to be impaired and the impairment charge recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. During the fourth quarter of 2001, consistent with this policy, we recorded an impairment write-off charge of $16.6 million related to deferred charges under certain license agreements with IBM and Toshiba. Although we do not now believe that our existing long-lived assets will be impaired in the future, we continue to periodically evaluate our long-lived assets for impairment in accordance with SFAS 144 and acknowledge it is at least reasonably possible that such evaluation might result in future adjustments for impairment. Such an impairment might adversely affect our operating results.
Restructuring Charges. We accrue for restructuring costs when we make a commitment to a firm exit plan that specifically identifies all significant actions to be taken in conjunction with our response to a change in our strategic plan, product demand, increased costs or other environmental factors. Our assumptions used in determining the estimation of restructuring expenses include the determination of the period that it will take to sublet our vacated premises, the market price that we will be able to command for the subleased space and the discounted interest rate that we are using to determine the present value of our future lease obligations. Any significant variation in these estimates compared to actual results may have a material impact on our restructuring expenses and our operating results. We reassess the prior restructuring accruals on a quarterly basis to reflect changes in the costs of the restructuring activities, and we record new restructuring accruals as commitments are incurred. During the second quarter of fiscal 2002, we recorded restructuring charges of $10.6 million primarily related to lease costs and equipment write-offs. We recorded restructuring charges of $4.1 million related to a reduction in workforce during the third quarter of fiscal 2002.
Revenue Recognition. In accordance with several accounting pronouncements, including Securities and Exchange Commission Staff Accounting Bulletin 101, our revenue recognition policy stipulates that we recognize revenue from product sales no sooner than transfer of title, which is typically upon shipment, and that we provide for expected returns and warranty costs at that time. Prior to 2000, we primarily generated license revenue. Such license revenue was recognized when earned, which occurred when agreed-upon deliverables were provided, or milestones were met and confirmed by our licensees. Also, we recognized license revenue only if payments received were non-refundable and not subject to any future performance obligation. Our revenue policy also incorporates FASB"s SFAS 48, which governs revenue recognition when the right of return exists, such as the case with most products shipped to our distributors. With respect to products shipped to distributors, we generally defer recognition of product revenue until the distributors sell our products to their customers. On occasion, however, we will sell products with "End of Life" status to our distributors under special arrangements without any price protection or return privileges for which we recognize revenue upon transfer of title, typically upon shipment.
At the end of each accounting period, we make a determination of certain factors including sales returns and allowances, which could affect the amount of revenue recorded for the period. Sales returns provisions include considerations for known but unprocessed sales returns and estimation for unknown returns. At September 30, 2002, consistent with this policy, the reserve balance for sales returns was $299,000. Revenue in earlier periods did not include material provisions for sales returns or allowances. We do not expect sales returns or allowances to be significant in the future; however, if our recorded provisions are not adequate, our revenues could be negatively impacted.
Results of Operations
Net Revenue. Net revenue for the third quarter of fiscal 2002 was $6.4 million, compared to $5.0 million for the same period last year. Net revenue for the first nine months of fiscal 2002 was $18.1 million compared to $34.1 for the same period last year. The decrease for the nine month periods year over year are due to several factors, including production difficulties at the beginning of fiscal 2002, as well as unfavorable global economic conditions and reduced capital spending, particularly in Japan. Demand for our products continues to depend in large part upon sales by our OEM customers of notebook computers that incorporate our products. Sales to two customers accounted for more than 10% each and for 71% in the aggregate of net revenue for the first nine months of fiscal 2002 compared to four customers accounting for more than 10% each and 72% in the aggregate of net revenue for the same period last year.
Gross Profit. Gross margin is the percentage derived from dividing gross profit by net revenue. Our gross margin each quarter is affected by a number of factors, including competitive pricing, mix, foundry pricing, yields, production flow costs and speed distribution of our products. Gross margin in the third quarter of fiscal 2002 was 38.0%, compared to 43.6% for the same period last year. Gross margin for the first nine months of fiscal 2002 was 31.3% compared to (38.4)% for the same period last year. The decrease in gross margin in the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001 is primarily the result of lower average selling prices due to a more competitive economic environment, as well as under-absorbed overhead costs, both of which were partially offset by our reversal of previously recorded inventory-related charges. The increase in gross margin for the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001 is primarily a result of the $28.1 million charge to cost of product revenue during the second quarter of fiscal 2001 primarily related to the write off of excess inventory.
Research and Development. Research and development (R&D) expenses in the third quarter of fiscal 2002 were $13.7 million, compared to $17.0 million for the same period last year. R&D expenses for the first nine months of fiscal 2002 were $51.0 million compared to $51.4 million for the same period last year. The decrease in the quarter to quarter comparison is primarily the result of decreased headcount and expenditures during the third quarter of fiscal 2002 resulting from our decision to cease development and productization of the TM6000 microprocessor.
In-Process Research and Development. In April 2001, we licensed certain computing technologies and intellectual property from Advanced Micro Devices, Inc. (AMD), including AMD"s HyperTransport interconnect technology for our future products and technology initiatives. As initial consideration for the patents and patent rights licensed under the agreement, we issued unregistered shares of our common stock valued at $13.6 million. This amount has been expensed as in-process research and development during the second quarter of fiscal 2001 because the HyperTransport technology is designed for use in products that are currently in research and development that are not anticipated to be available until fiscal 2003.
Selling, General and Administrative. Selling, general and administrative (SG&A) expenses in the third quarter of fiscal 2002 were $6.3 million, compared to $8.8 million for the same period last year. SG&A expenses were $22.9 million for the first nine months of fiscal 2002 compared to $26.6 million for the same period last year. The decreases for both comparative periods is primarily the result of decreased compensation and related costs associated with lower headcount resulting from our restructuring program, which was implemented in the third quarter of fiscal 2002. In addition, we reduced our spending at industry trade-shows during the first nine months of fiscal 2002 compared to the same period last year.
Restructuring Charges. On July 18, 2002 and in connection with our decision to cease the development and productization of the TM6000 microprocessor, we terminated approximately 195 employees and contractors. As a result, we recorded severance and termination charges of $4.1 million in the third quarter of fiscal 2002, which excludes a credit of $1.7 million to deferred compensation expense related to stock option cancellations for terminated employees. Additionally, we paid approximately $531,000 for previously accrued compensation in the third quarter of fiscal 2002 in connection with the employee terminations. Of the approximately 195 employees and contractors that were terminated on July 18, 2002, approximately 44 were sales, marketing, and administrative employees and approximately 151 were research and development personnel. Our workforce reduction was completed in the third quarter of fiscal 2002. Additionally, we vacated all excess facilities as of September 30, 2002.
Amortization of Deferred Charges, Patents and Patent Rights. In connection with amortization of certain patents and patent rights acquired during the first and second quarter of fiscal 2001, we recorded amortization of $2.8 million in the third quarter of fiscal 2002, compared to $2.7 million for the same period last year. We recorded amortization of $8.5 million for the first nine months of fiscal 2002 compared to $4.5 million for the same period last year. Increased amortization expense for the first nine months of fiscal 2002 compared to the same period last year is a result of acquiring other patents and patent rights during the first and second quarter of fiscal 2001 and not realizing the full amortization expense until thereafter.
In connection with the amortization of deferred charges as a result of entering into technology license agreements with IBM in 1997 and Toshiba in 1998, we amortized $2.3 million in the third quarter of fiscal 2001 and $8.0 million in the first nine months of fiscal 2001. Amortization of the IBM and Toshiba deferred charges ceased at the end of the fourth quarter of fiscal 2001 when, as a result of applying our accounting policies related to long-lived assets, we wrote down the value of these assets to zero. As a result of writing off these deferred charges, we will not incur future amortization expense of approximately $2.3 million per quarter.
Stock Compensation. Amortization of deferred stock compensation associated with options granted prior to November 2000, net of cancellation, was $422,000 in the third quarter of fiscal 2002 compared to $4.0 million for the same period last year. Net amortization for the first nine months of fiscal 2002 was $2.6 million compared to $15.8 million for the same period last year. The decrease is primarily a result of amortizing the deferred charge on an accelerated graded method, as well as a credit recorded to stock compensation expense of $1.7 million in the third quarter of fiscal 2002 related to our workforce reduction. The total credit to deferred stock expense for all cancellations for the nine month period ended September 30, 2002 was $3.2 million.
We apply variable accounting for certain stock option grants, which is included in deferred stock compensation. Stock compensation for the third quarter of fiscal 2002 included a credit of $2.1 million recorded to stock compensation expense due to a lower market price of our stock at the end of the third quarter of fiscal 2002 compared to the market price of our stock at the end of the second quarter of fiscal 2002. Net stock compensation charges for the first nine months of fiscal 2002 included a credit of $2.0 million related to variable stock compensation. We account for variable stock compensation awards because, during the fourth quarter of fiscal 2001, we did not enforce the recourse provisions of certain employee notes associated with option exercises. Therefore, we account for all outstanding notes as if they had terms equivalent to non-recourse notes, even though the terms of these notes were not in fact changed from recourse to non-recourse. As a result, we have and will continue to record variable stock compensation expense on the associated stock awards until the notes are paid. This variable stock compensation charge is based on the excess, if any, of the current market price of our stock as of period-end over the purchase price of the stock award, adjusted for vesting and prior stock compensation expense recognized on the stock award.
Interest Income. Interest income in the third quarter of fiscal 2002 was $1.1 million, compared to $3.3 million for the same period last year. Interest income for the first nine months of fiscal 2002 was $4.4 million compared to $12.4 million for the same period last year. The decrease is primarily due to lower average yields as a result of re-investing matured securities at lower rates of return than originally invested. Further, the decrease is due to lower cash balances as a result of funding operations. We invest in highly liquid securities, which have been affected by declining interest rates.
Interest Expense. Interest expense for the third quarter of fiscal 2002 was $90,000, compared to $227,000 for the same period last year. Interest expense was $534,000 for the first nine months of fiscal 2002 compared to $820,000 for the same period last year.
Provision for Income Taxes. We recorded a benefit for income taxes of $2,000 for the third quarter of fiscal 2002, compared to a provision of $5,000 recorded for same period last year. We recorded a provision for income taxes of $23,000 for the first nine months of fiscal 2002 compared to $22,000 for the same period last year. All tax provisions recorded relate to state, local and foreign taxes, and tax refunds.
Liquidity and Capital Resources
As of September 30, 2002 we had $155.8 million in cash and cash equivalents and short-term investments, a decrease of $85.9 million from December 31, 2001.
Net cash used in operating activities during the first nine months of fiscal 2002 was $75.1 million, compared to $62.3 million used during the same period last year. Although our net loss for the first nine months of fiscal 2002 was $33.3 million lower than the same period last year, our net cash used to fund operating activities during the first nine months of fiscal 2002 was net $12.8 million more than that of the same period last year. This is a result of several factors, such as a decrease in net non-cash adjustments to cash used during the first nine months of fiscal 2002 of $24.2 million compared to $47.6 million for the same period last year. Significant decreases in non-cash adjustments for the first nine months of fiscal 2002 compared to the same period last year include $15.2 million in stock compensation, $13.6 million of in-process research and development and $4.0 million related to the amortization of deferred charges, which were partially offset by the $10.6 million increase related to restructuring charges recorded in the second quarter of fiscal 2002. The decrease in non-cash adjustments were partially offset by an increase in changes in operating assets and liabilities of approximately $11.0 million in the first nine months of fiscal 2002 compared to a decrease of $11.7 million for the same period last year. Significant changes to operating assets and liabilities for the first nine months of fiscal 2002 include $6.9 million used for inventory purchases compared to a $13.4 million reduction in inventory balances for the same period last year as a result of the inventory write-offs.
Net cash provided by investing activities during the first nine months of fiscal 2002 was $55.1 million, compared to $158.9 million used during the same period last year. Net cash provided by investing activities in the first nine months of fiscal 2002 consisted primarily of $67.5 million net proceeds from the maturity of available-for-sale investments, partially offset by the $9.0 million partial settlement of long-term payable obligations for patents and patent rights and purchases of property and equipment of $3.2 million. Net cash used in investing activities during the same period last year was primarily the net result of investing $141.6 million in excess cash in available-for-sale investment securities and the partial payment obligations of $16.0 million related to the purchase of patents and patent rights, as well as purchases of property and equipment of $6.7 million.
Net cash provided by financing activities during the first nine months of fiscal 2002 was $2.0 million, compared to $1.5 million used during the same period last year. Net cash provided by financing activities during the first nine months of fiscal 2002 was primarily due to proceeds from option exercises and employee stock purchase plan purchases of $4.4 million, partially offset by the repayment of debt and lease obligations of $2.4 million. Net cash used in financing activities during the same period last year is primarily attributable to the repayment of debt and lease obligations of $3.8 ,million, partially offset by proceeds from option exercises and employee stock purchase plan purchases of $2.6 million.
Uses of Liquidity
At September 30, 2002, we had $39.8 million in cash and cash equivalents and $116.0 million in available-for-sale investments. We lease our facilities under non-cancelable operating leases expiring in 2008, and we lease certain equipment and software under non-cancelable leases with terms ranging from 36 to 48 months. At September 30, 2002, we had the following contractual obligations:
Payments Due by Period
Contractual Obligations Total Less Than 1 Year 1-3 Years After 4 Years
Long Term Debt $ 157 $ 157 — —
Capital Lease Obligations $ 483 $ 483 — —
Operating Leases $ 25,488 $ 4,156 $ 13,096 $ 8,236
Unconditional Purchase Obligations $ 7,089 $ 7,089 — —
Other Long Term Obligations $ 45,500 $ 15,000 $ 30,500 —
We believe that existing cash and cash equivalents and short-term investments balances will be sufficient to fund our operations for the next twelve months. After this period, capital requirements will depend on many factors, including general economic conditions, the rate of sales growth, market acceptance of our products, costs of securing access to adequate manufacturing capacity, the timing and extent of research and development projects and increases in our operating expenses. To the extent that existing cash and cash equivalents and short-term investments balances and any cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Although we are currently not a party to any agreement or letter of intent with respect to a potential acquisition or business combination, we may enter into acquisitions or business combinations in the future, which also could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.
Risks That May Affect Future Results
The factors discussed below are cautionary statements that identify important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements in this Form 10-Q. If any of the following risks actually occurs, our business, financial condition and results of operations would suffer. In that case, the trading price of our common stock could decline and investors might lose all or part of their investment in our common stock.
We Have a History of Losses, Expect to Incur Further Significant Losses and May Never Achieve or Maintain Profitability.
We have a history of substantial losses and expect to incur further significant losses. We incurred net losses of $88.3 million in the first nine months of fiscal 2002, $171.3 million in 2001, $97.7 million in 2000 and $41.1 million in 1999. As of September 30, 2002, we had an accumulated deficit of $433.2 million. Historically, we have increased our research and development, sales and marketing, and administrative expenses over time. Although we have recently taken steps to reduce operating expenses, we cannot assure you that our operating expenses will not increase in future periods. We also expect to incur substantial non-cash charges relating to the amortization of deferred charges, patents and patent rights and deferred stock and variable stock compensation, which will serve to increase our net losses further. Our net revenue must increase if we are to achieve profitability under our current business model. We cannot assure you that our revenue will increase, so we may never achieve profitability. Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or an annual basis.
Our Business Is Difficult to Evaluate Because We Recognized Our First Product Revenue in the First Half of 2000.
We introduced our first Crusoe microprocessors in January 2000 and recognized our first product revenue from these products in the first half of 2000. Through June 30, 2000, we had manufactured only limited quantities of our products. In September 2000, we began volume shipments. Thus, we have only a very limited operating history with our products. This limited history makes it difficult to evaluate our business. Until 2000, we derived substantially all of our revenue from license fees, but we do not expect any license fee revenue in the foreseeable future. We need to generate substantial future revenue from product sales, but our ability to manufacture our products in production quantities and the revenue and income potential of our products and business are unproven. You should consider our chances of financial and operational success in light of the risks, uncertainties, expenses, delays and difficulties associated with new businesses in highly competitive technology fields, many of which may be beyond our control. If we fail to address these risks, uncertainties, expenses, delays and difficulties, the value of an investment in our common stock would decline further.
We Depend Upon Increasing Demand for Our Crusoe Microprocessors.
We expect to derive virtually all of our revenue for the foreseeable future from the sale of our Crusoe microprocessors, which we only began to ship in volume in September 2000. Since September 2000 we have recognized substantially all of our revenue from sales of our Crusoe microprocessors. Therefore, our future operating results will depend on the demand for Crusoe products by existing and future customers. If our Crusoe microprocessors are not widely accepted by the market due to performance, price, compatibility or any other reason, or if, following acceptance, we fail to enhance our Crusoe products in a timely manner, demand for our products may fail to increase, or may diminish. If demand for our Crusoe products does not increase, our revenue will not increase and the value of an investment in our common stock would likely decline further.
We Are Subject to General Economic and Market Conditions.
Our business is subject to the effects of general economic conditions in the United States and worldwide, and, in particular, market conditions in the semiconductor and notebook computer industries. In fiscal 2001 and through the third quarter of fiscal 2002, our operating results were adversely affected by unfavorable global economic conditions and reduced capital spending, particularly in Japan, where we currently generate the majority of our revenue. These adverse conditions resulted in decreased demand for notebook computers and, as a result, our products, which are components of notebook computers. Further, demand for our products decreases as computer manufacturers seek to manage their component and finished product inventory levels. If the economic conditions in Japan and worldwide do not improve, or worsen, we may continue to experience material adverse effects on our business, operating results, and financial condition.
If We Experience Continued Difficulties in Transitioning to New Manufacturing Technologies, We Could Experience Reduced Manufacturing Yields, Delays in Product Deliveries and Increased Expenses.
Transitioning to new manufacturing technologies involves extensive redesigning of products and modifying the manufacturing processes for the products. Difficulties in shifting to smaller geometry process technologies and other new manufacturing processes have led to delays in product deliveries and increased expenses. In particular, during the third and fourth quarters of fiscal 2001 and to a lesser extent the first quarter of fiscal 2002, we experienced difficulties in bringing our products into volume production and distribution. As a result, in part, of these delays, our net revenue in 2001 declined from $10.5 million in the second quarter to $5.0 million in the third quarter and then to $1.5 million in the fourth quarter. In addition, if we experience continued delays in product deliveries, our target customers could design a competitor"s microprocessor into their product, which would lead to lost sales and impede our ability to increase our revenue. Further, problems associated with manufacturing processes divert engineering personnel from product development and other tasks.
Our Future Revenue Depends in Part Upon Our Ability to Penetrate the Notebook Computer Market.
Our success depends upon our ability to sell our Crusoe microprocessors in volume to the small number of OEMs that manufacture notebook computers. Due to our software-based approach to microprocessor design, we have been required, and expect to continue to be required, to devote substantial resources to educate prospective customers in the notebook computer market about the benefits of our Crusoe products and to assist potential customers with their designs. In addition, since computer products generally are designed to incorporate a specific microprocessor, OEMs must design new products to utilize different microprocessors such as our Crusoe products. Given the complexity of these computer products and their many components, designing new products requires significant investments. For instance, OEMs may need to design new computer casings, basic input/output system software and motherboards. Our target customers may not choose our products for technical, performance, packaging, novelty, design cost or other reasons. If our Crusoe products fail to achieve widespread acceptance in the notebook computer market, we would likely never achieve revenue sufficient to sustain our business and the value of an investment in our common stock would likely decline significantly.
The Growth of Our Business Depends in Part upon the Development of Emerging Markets and Our Ability to Meet the Needs of These Markets.
The growth of our business depends in part on acceptance and use of our products in new markets such as the high-density server and Internet appliance markets. We depend on the ability of our target customers to develop new products and enhance existing products for these markets that incorporate our products and to introduce and promote their products successfully. These new markets often rely on newly developed technologies, which will require extensive development and marketing before widespread acceptance is achieved, so the new markets may grow slowly, if at all. If the new markets do not grow as we anticipate, our target customers do not incorporate our products into theirs, or our products are not widely accepted by end users, our growth would be impeded and we will not be able to factor the related revenues into our growth in the future. In addition, manufacturers within emerging markets may have widely varying requirements. To meet the requirements of different manufacturers and markets, we may be required to change our product design or features, sales methods or pricing policies. The costs of addressing these requirements could be substantial and could delay or prevent any improvement in our operating results.
The Cyclical Nature of the Semiconductor Industry Could Create Fluctuations in Our Operating Results.
The semiconductor industry has historically been cyclical, and characterized by wide fluctuations in product supply and demand. From time to time, the industry has also experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. Industry downturns have been characterized by diminished product demand, production overcapacity and accelerated decline of average selling prices, and in some cases have lasted for more than a year. The industry experienced a downturn of this type in 1997 and 1998, and has been experiencing a downturn again since 2001. Our net revenue has decreased in response to industry-wide fluctuations, and could decrease further. In addition, we may determine to lower our prices of our products to increase or maintain market share, which would likely decrease our operating results.
Our Operating Results Are Difficult to Predict and Fluctuate Significantly, and a Failure to Meet the Expectations of Securities Analysts or Investors Has Resulted in a Substantial Decline in Our Stock Price.
Our operating results fluctuate significantly from quarter to quarter and we expect our results to fluctuate in the future. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. Our stock price declined substantially since our stock began trading publicly in November of 2000. If our future operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price would likely decline further in the future.
Our results could fluctuate because of the amount of revenue we recognize or the amount of cash we spend in a particular period. For example, our results could fluctuate due to the following factors:
• the gain or loss of significant customers, or significant changes in their
• the amount and timing of our operating expenses and capital expenditures;
• pricing concessions that we might grant on volume sales;
• the effectiveness of our product cost reduction efforts and those of our
• changes in the average selling prices of our microprocessors or the products
that incorporate them;
• charges to earnings for workforce reductions;
• our ability to specify, develop, complete, introduce and market new products and technologies, and bring them to volume production in a timely manner; and
• changes in the mix of products that we sell.
Our reliance on third parties for wafer fabrication, assembly, test and warehouse services also could contribute to fluctuations in our quarterly results, based upon factors such as the following:
• fluctuations in manufacturing yields;
• cancellations, changes or delays of deliveries to us by our manufacturer;
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• the cost and availability of manufacturing, assembly and test capacity;
• delays in deliveries to customers of our products; and
• problems or delays resulting from shifting our products to smaller geometry process technologies or from designing our products to achieve higher levels
of design integration.
In addition, our results could fluctuate from quarter to quarter due to factors in our industry that are outside of our control, including the following factors:
• the timing, rescheduling or cancellation of customer orders;
• the varying length of our sales cycles;
• the availability and pricing of competing products and technologies, and the
resulting effect on sales and pricing of our products;
• the availability and pricing of products that compete with products that
incorporate our microprocessors;
• fluctuations in the cost and availability of complementary components that
our customers require to build systems that incorporate our products;
• fluctuations in the cost and availability of raw materials, such as wafers,
chip packages and chip capacitors;
• the rate of adoption and acceptance of new industry standards in our target
• seasonality in some of our target markets;
• changes in demand by the end users of our customers" products;
• variability of our customers" product life cycles; and
• economic and market conditions in the semiconductor industry and in the industries served by our customers.
A large portion of our expenses, including rent, salaries and capital leases, is fixed and difficult to reduce. Our expenses are based in part on expectations for our revenue. If our revenue does not meet our expectations, the adverse effect of the revenue shortfall upon our operating results may be acute in light of the fixed nature of our expenses. We make many shipments of our products at or near the end of the fiscal quarter, which makes it difficult to estimate or adjust our operating activities quickly in response to a shortfall in expected revenue.
Our Recent Reduction In Workforce May Adversely Affect The Morale And Performance Of Our Personnel, Our Ability To Hire New Personnel And Our Operations.
In July 2002, as part of our effort to reduce operating expenses, we announced a restructuring and related reduction in our workforce. Our restructuring plan included the termination of approximately 195 employees and contractors, which constituted approximately 40 percent of our workforce. As a result of the recent workforce reduction, we have incurred substantial costs related to severance and other employee-related costs. Our workforce reduction may also subject us to litigation risks and expenses. In addition, our restructuring plan may yield unanticipated consequences, such as attrition beyond our planned reduction in workforce. As a result of these reductions, our ability to respond to unexpected challenges may be impaired and we may be unable to take advantage of new opportunities. In addition, some of the employees who were terminated had specific and valuable knowledge or expertise, the loss of which may adversely affect our operations. Further, the reduction in force may reduce employee morale and may create concern among existing employees about job security, which may lead to increased attrition or turnover. As a result of these factors, our remaining personnel may decide to seek employment with more established companies, and we may have difficulty attracting new personnel that we might wish to hire in the future.
We Might Not Be Able to Execute on Our Business Plan if We Lose Key Management or Technical Personnel, on Whose Knowledge, Leadership and Technical Expertise We Rely, or if We Fail to Work Effectively With New Members of Our Management Team.
Our success depends heavily upon the contributions of our key management and technical personnel, whose knowledge, leadership and technical expertise would be difficult to replace. Many of these individuals have been with us for several years and have developed specialized knowledge and skills relating to our technology and business. Others, including our president and chief executive officer, have joined us in these management roles only very recently. In April 2002, Matthew R. Perry joined us as chief executive officer and president, replacing Murray A. Goldman and R. Hugh Barnes, who served in positions of chief executive officer and president and chief operating officer, respectively, from October 2001 to April 2002. Svend-Olav Carlsen, our vice president of finance and corporate controller, began serving as acting chief financial officer in June 2002. In August 2002, Ray Holzworth joined us as vice president of operations. Our success will depend in part upon the ability of these new executives to work effectively together and with the rest of our employees to continue to develop our technology and manage the operation and growth of our business. All of our executive officers and key personnel are employees at will. We have no employment contracts and do not maintain key person insurance on any of our personnel. We might not be able to execute on our business plan if we were to lose the services of any of our key personnel. If any of these individuals were to leave Transmeta unexpectedly, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any such successor develops the necessary training and experience.
The Price of our Common Stock Has Been Volatile and is Subject to Wide Fluctuations.
The market price of our common stock has been volatile and is likely to remain to be subject to wide fluctuations in the future. Many factors could cause the market price of our common stock to fluctuate, including:
• variations in our quarterly results;
• market conditions in our industry, the industries of our customers and the
economy as a whole;
• announcements of technological innovations by us or by our competitors;
• introductions of new products or new pricing policies by us or by our
• acquisitions or strategic alliances by us or by our competitors;
• recruitment or departure of key personnel;
• the gain or loss of significant orders;
• the gain or loss of significant customers; and
• changes in the estimates of our operating performance or changes in recommendations by securities analysts.
In addition, the stock market generally and the market for semiconductor and other technology-related stocks in particular has experienced a decline during 2000, 2001 and through the third quarter of 2002, and could decline further, which could cause the market price of our common stock to fall for reasons not necessarily related to our business, results of operations or financial condition. The market price of our stock also might decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid. Securities class action litigation is often brought against a company following a period of volatility in the market price of its securities, and we are defending several purported securities class action lawsuits. Further, certain of our management and directors have also been sued in purported shareholder derivative actions. Although we believe that the lawsuits lack merit, an adverse determination could have a significant effect upon our business and materially affect the price of our stock. Moreover, regardless of the ultimate result, it is likely that the lawsuits will divert management"s attention and resources from other matters, which could also adversely affect our business and the price of our stock.
We Face Intense Competition in the Semiconductor Market; Our Competitors Are Much Larger Than We Are and Have Significantly Greater Resources; We May Not Be Able to Compete Effectively.
The market for microprocessors is dominated by established firms and subject to rapid technological change. We face particularly strong competitive pressure in the United States and we believe that such pressure is increasing on a worldwide basis. Competition may cause price reductions, reduced gross margins and loss of market share, any one of which could significantly reduce our future revenue and increase our losses. For example, we may determine to lower the prices of our products in order to increase or maintain market share, which would likely increase our losses. Significant competitors include Intel and Advanced Micro Devices and licensees of technology from ARM Holdings and MIPS Technologies.
Our current and potential competitors have longer operating histories, significantly greater financial, technical, product development and marketing resources, greater name recognition and significantly larger customer bases than we do. Our competitors may be able to develop products comparable or superior to those we offer, adapt more quickly than we do to new technologies, evolving industry trends and customer requirements, and devote greater resources to the development, promotion and sale of their products than we can. Many of our competitors also have well-established relationships with our existing and prospective customers and suppliers. As a result of these factors, many of our competitors, either alone or with other companies, have significant influence in our target markets that could outweigh any advantage that we may possess. For example, negotiating and maintaining favorable customer and strategic relationships are and will continue to be critical to our business. If our competitors use their influence to negotiate strategic relationships on more favorable terms than we are able to negotiate, or if they structure relationships that impair our ability to form strategic relationships, our competitive position and our business would be substantially damaged.
Furthermore, our competitors may merge or form strategic relationships that might enable them to offer, or bring to market earlier, products that are superior to ours in terms of features, quality, pricing or other factors. We expect additional competition from other established and emerging companies and technologies. We may not be able to compete effectively against current and potential competitors, especially those with significantly greater resources and market leverage.
Our Products May Have Defects, Which Could Damage Our Reputation, Decrease Market Acceptance of Our Products, Cause Us to Lose Customers and Revenue, and Result in Liability to Us.
Highly complex products such as our microprocessors may contain hardware or software defects or bugs for many reasons, including design issues or defective materials or manufacturing processes. Often, these defects and bugs are not detected until after the products have been shipped. If any of our products contain defects, or has reliability, quality or compatibility problems, our reputation might be damaged significantly and customers might be reluctant to buy our products, which could result in the loss of or failure to attract customers. In addition, these defects could interrupt or delay sales. We may have to invest significant capital and other resources to correct these problems. If any of these problems are not found until after we have commenced commercial production of a new product, we might incur substantial additional development costs. If we fail to provide solutions to the problems, such as software upgrades or patches, we could also incur product recall, repair or replacement costs. These problems might also result in claims against us by our customers or others. In addition, these problems might divert our technical and other resources from other development efforts. Moreover, we would likely lose, or experience a delay in, market acceptance of the affected product or products, and we could lose credibility with our current and prospective customers. This is particularly significant as we are a new entrant to a market dominated by large well-established companies.
We Derive a Substantial Portion of Our Revenue From a Small Number of Customers, and Our Revenue Would Decline Significantly if Any Major Customer Were to Cancel, Reduce or Delay a Purchase of Our Products.
Sales to two customers in the aggregate accounted for 71% of net revenue in the first nine months of fiscal 2002. These customers are located in Japan, which subjects us to economic cycles in that country. We expect that a small number of OEM customers and distributors will continue to account for a significant portion of our revenue. Our future success will depend upon the timing and size of future purchase orders, if any, from these customers and new customers and, in particular:
• the success of our customers in marketing products that incorporate our
• the product requirements of our customers; and
• the financial and operational success of our customers.
We have entered into distributor agreements and rely in part on distributors for sales of our products in large territories, including Taiwan, Hong Kong, China and North America. These agreements do not contain minimum purchase commitments. Additionally, we are in the process of entering into agreements with sales representatives in North America and Europe. Any distributor or sales representative that fails to emphasize sales of our products, chooses to emphasize alternative products or devices to promote products of our competitors might not sell a significant amount or any of our products. We expect that our sales to OEM customers will continue to be made on the basis of purchase orders rather than long-term commitments. In addition, customers can delay, modify or cancel orders without penalty. Many of our customers and potential customers are significantly larger than we are and have sufficient bargaining power to demand reduced prices and favorable nonstandard terms. The loss of any major customer, or the delay of significant orders from these customers, could reduce or delay our recognition of net revenue.
Our Dependence on TSMC to Fabricate Wafers Limits Our Control Over the Production, Supply and Delivery of Our Products.
The cost, quality and availability of third-party manufacturing operations are essential elements to the successful production of our products. We currently rely exclusively on TSMC to fabricate our wafers. We do not have a manufacturing agreement with TSMC that guarantees any particular production capacity or any particular price from TSMC. We place orders on a purchase order basis and TSMC may allocate capacity to other companies" products while reducing deliveries to us on short notice. The absence of dedicated capacity means that, with little or no notice, TSMC could refuse to continue to fabricate all or some of the wafers that we require or change the terms under which it fabricates wafers. If TSMC were to stop manufacturing for us, we would likely be unable to replace the lost capacity in a timely manner. Transferring to another manufacturer would require a significant amount of time and money, and a smooth and timely transition would be unlikely. As a result, we could lose potential sales and fail to meet existing obligations to our customers. In addition, if TSMC were to change the terms under which it manufactures for us, our manufacturing costs could increase.
Our reliance on third-party manufacturers exposes us to the following risks outside our control:
• unpredictability of manufacturing yields and production costs;
• interruptions in shipments;
• potential lack of adequate capacity to fill all or part of the services we
• inability to control quality of finished products;
• inability to control product delivery schedules; and
• potential lack of access to key fabrication process technologies.
If We Fail to Forecast Demand for Our Products Accurately, We Could Lose Sales and Incur Inventory Losses.
Because we only introduced our products in January 2000 and did not start volume shipments of commercial products until September 2000, we have little historical information about demand for our products. Many shipments of our products are made near the end of the fiscal quarter, which also makes it difficult to estimate demand for our products. The demand for our products depends upon many factors and is difficult to forecast. We expect that it will become more difficult to forecast demand as we introduce a larger number of products and as competition in the markets for our products intensifies. Significant unanticipated fluctuations in demand have caused, and in the future could cause, problems in our operations.
The lead-time required to fabricate large volumes of wafers is often longer than the lead-time our customers provide to us for delivery of their product requirements. Therefore, we often must place our orders in advance of expected purchase orders from our customers. As a result, we have only a limited ability to react to fluctuations in demand for our products, which could cause us to have either too much or too little inventory of a particular product. If demand does not develop as we expect, we could have excess production. Excess production would result in excess inventories of finished products, which would use cash and could result in inventory write-downs and write-offs. We have limited capability to reduce ongoing production once wafer fabrication has commenced. For example, due to the sudden and significant decrease in actual and forecasted demand for our products during the second and third quarters of 2001, we recorded a net charge of $25.6 million to cost of net revenue related to excess inventory and related purchase commitments. Further, as we introduce product enhancements and new products, and improve our manufacturing processes, demand for our existing products decreases. Conversely, if demand exceeds our expectations, TSMC, might not be able to fabricate wafers as quickly as we need them. Also, ASE, which provides our assembly and test services, might not be able to increase assembly functions in a timely manner. In that event, we would need to increase production and assembly rapidly at TSMC and ASE or find, qualify and begin production and assembly at additional manufacturers, which may not be possible within a time frame acceptable to our customers. The inability of TSMC and ASE to increase production rapidly enough could cause us to fail to meet customer demand. In addition, rapid increases in production levels to meet unanticipated demand could result in higher costs for manufacturing and other expenses. These higher costs could lower our gross margins.
We May Experience Manufacturing Difficulties That Could Increase the Cost and Reduce the Supply of Our Products.
The fabrication of wafers for our microprocessors is a highly complex and precise process that requires production in a tightly controlled, clean room environment. Minute impurities, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer or other factors can cause numerous die on each wafer to be nonfunctional. The proportion of functional die expressed as a percentage of total die on a wafer is referred to as product "yield." Semiconductor companies frequently encounter difficulties in achieving expected product yields. During 2001, we experienced yield problems as we migrated our manufacturing processes to smaller geometries, which caused increases in our product costs, delays in product availability and diversion of engineering personnel. Even with functional die, normal variations in wafer fabrication can cause some die to run faster than others. Variations in speed yield could lead to excess inventory, a resulting unfavorable impact on gross margins and insufficient inventory of faster products, depending upon customer demand. Yield problems may not be identified and resolved until a product has been manufactured and can be analyzed and tested, if ever. As a result, yield problems are often difficult, time consuming and expensive to correct. Yield problems have in the past and could in the future hamper our ability to deliver our products to our customers in a timely manner.
Our Dependence on ASE to Provide Assembly and Test Services Limits Our Control Over Production Costs and Product Supply.
We rely on ASE for substantially all of our assembly and test services. As a result, we do not directly control our product delivery schedules. This lack of control could result in product shortages, which could increase our costs or delay delivery of our products. We do not have a contract with ASE for test and assembly services, and we typically procure these services from ASE on a per order basis. ASE could cease to perform all of the services that we require, or could change the terms upon which it performs services for us. Therefore, we may not be able to obtain assembly and testing services for our products on acceptable terms, or at all. If we are required to find and qualify alternative assembly or testing services, we could experience delays in product shipments, increased product costs or a decline in product quality.
Our California Facilities and the Facilities of Third Parties Upon Which We Rely to Provide Us Critical Services are Located in Regions that are Subject to Earthquakes and Other Natural Disasters.
Our California facilities, including our principal executive offices, are located near major earthquake fault lines. If there is a major earthquake or any other natural disaster in a region where one of our facilities is located, our business could be materially and adversely affected. In addition, TSMC, upon which we currently rely to fabricate our wafers, and ASE, upon which we currently rely for substantially all of our assembly and test services, are located in Taiwan. Taiwan has experienced significant earthquakes and could be subject to additional earthquakes in the future. Any earthquake or other natural disaster in Taiwan could materially disrupt TSMC"s production capabilities and ASE"s assembly and test capabilities and could result in our experiencing a significant delay in delivery, or substantial shortage, of wafers and possibly in higher wafer prices.
If We Fail to Establish and Maintain Relationships With Key Participants in Our Target Markets, We May Have Difficulty Selling Our Products.
In addition to our customers, we will need to establish and maintain relationships with companies that develop technologies that work in conjunction with our microprocessors. These technologies include operating systems, basic input/output systems, graphics chips, dynamic random access memory, or DRAM, and other hardware components and software that are used in computers. If we fail to establish and maintain these relationships, it would be more difficult for us to develop and market products with features that address emerging market trends.
If Our Products Are Not Compatible With the Other Components That Our Customers Design Into Their Systems, Sales of Our Products Could Be Delayed or Cancelled and a Substantial Portion of Our Products Could Be Returned.
Our products are designed to function as components of a system. Our customers use our products in systems that have differing specifications and that require various other components, such as dynamic random access memory, or DRAM, and other semiconductor devices. If our customers" systems are to function properly, all of the components must be compatible with each other. If our customers experience system-level incompatibilities between our products and the other components in their systems, we could be required to modify our products to overcome the incompatibilities or delay shipment of our products until the manufacturers of other components modify their products or until our customers select other components. These events would delay purchases of our products, cause orders for our products to be cancelled or result in product returns. System-level incompatibilities that are significant, or are perceived to be significant could also result in negative publicity and could significantly damage our business.
If Our Customers Are Not Able to Obtain the Other Components Necessary to Build Their Systems, Sales of Our Products Could Be Delayed or Cancelled.
Suppliers of other components incorporated into our customers" systems may experience shortages, which could reduce the demand for our products. For example, from time to time, the computer and semiconductor industries have experienced shortages of some materials and devices, such as memory components, displays, and storage devices. Our customers could defer or cancel purchases of our products if they are not able to obtain the other components necessary to build their systems.
There May Be Software Applications or Operating Systems That Are Not Compatible With Our Products, Which May Prevent Our Products from Achieving Market Acceptance and Prevent Us From Receiving Significant Revenue.
Software applications, games or operating systems with machine-specific routines programmed into them can result in specific incompatibilities. If a particular software application, game or operating system is programmed in a manner that makes it unable to respond correctly to our microprocessor, it will appear to users of that software that our microprocessor is not compatible with PC software. We might encounter incompatibilities in the future. If any incompatibilities are significant or are perceived to be significant, our products might never achieve market acceptance and we might not receive significant revenue from product sales.
The Evolution of Our Business Could Place Significant Strain on Our Management Systems, Infrastructure and Other Resources, and Our Business May Not Succeed if We Fail to Manage Effectively.
Our ability to implement our business plan in a rapidly evolving market requires effective planning and management process. Changes in our business plans could place significant strain on our management systems, infrastructure and other resources. In addition, we expect that we will continue to improve our financial and managerial controls and procedures. We will also need to expand, train and manage our workforce worldwide. Furthermore, we expect that we will be required to manage an increasing number of relationships with suppliers, manufacturers, customers and other third parties. This will be more difficult as a result of our reduction in force in July 2002, since we will need to operate with fewer employees and the existing employees may need to perform new tasks previously performed by former employees. If we fail to manage change effectively, our employee-related costs and employee turnover could increase and our business may not succeed.
Our Lengthy and Variable Sales Cycles Make It Difficult for Us to Predict When and if a Design Win Will Result in Volume Shipments.
We depend upon other companies designing our microprocessors into their products, which we refer to as design wins. Many of our targeted customers consider the choice of a microprocessor to be a strategic decision. Thus our targeted customers may take a long time to evaluate our products, and many individuals may be involved in the evaluation process. We anticipate that the length of time between our initial contact with a customer and the time when we recognize revenue from that customer will vary. We expect our sales cycles to range from six to twelve months from the time we achieve a design win to the time the customer begins volume production of products that incorporate our microprocessors. We do not have historical experience selling our products that is sufficient for us to determine how our sales cycles will affect the timing of our revenue. Variations in the length of our sales cycles could cause our revenue to fluctuate widely from period to period. While potential customers are evaluating our products and before they place an order with us, we may incur sales and marketing expenses and expend significant management and engineering resources without any assurance of success. The value of any design win depends upon the commercial success of our customers" products. If our customers cancel projects or change product plans, we could lose anticipated sales. We can offer no assurance that we will achieve further design wins or that the products for which we achieve design wins will ultimately be introduced or will, if introduced, be commercially successful.
If We Do Not Keep Pace With Technological Change, Our Products May Not Be Competitive and Our Revenue and Operating Results May Suffer.
The semiconductor industry is characterized by rapid technological change, frequent new product introductions and enhancements, and ongoing customer demands for greater performance. In addition, the average selling price of any particular microprocessor product has historically decreased substantially over its life, and we expect that trend to continue. As a result, our products may not be competitive if we fail to introduce new products or product enhancements that meet evolving customer demands. It may be difficult or costly for us or we may not be able to enhance existing products to fully meet customer demands. For instance, in order to meet the demands of our customers for enhancement of our existing products, we may incur manufacturing or other costs that would harm our operating margins and financial condition. Further, we may not achieve further design wins with current customers unless we continue to meet their evolving needs by developing new products. The development of new products is complex, and we may not be able to complete development in a timely manner, or at all. To introduce and improve products on a timely basis, we must:
• accurately define and design new products to meet market needs;
• design features that continue to differentiate our products from those of our
• transition our products to new manufacturing process technologies;
• identify emerging technological trends in our target markets;
• anticipate changes in end-user preferences with respect to our customers"
• bring products to market on a timely basis at competitive prices; and
• respond effectively to technological changes or product announcements by
We believe that we will need to continue to enhance our products and develop new products to keep pace with competitive and technological developments and to achieve market acceptance for our products.
Our Products May Infringe the Intellectual Property Rights of Others, Which May Cause Us to Become Subject to Expensive Litigation, Cause Us to Incur Substantial Damages, Require Us to Pay Significant License Fees or Prevent Us From Selling Our Products.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. We cannot be certain that our products do not and will not infringe issued patents, patents that may be issued in the future, or other intellectual property rights of others. In addition, leading companies in the semiconductor industry have extensive intellectual property portfolios with respect to semiconductor technology. From time to time, third parties, including these leading companies, may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies and related methods that are important to us. We expect that we may become subject to infringement claims as the number of products and competitors in our target markets grows and the functionality of products overlaps. We have received, and may in the future receive, communications from third parties asserting patent or other intellectual property rights covering our products. Litigation may be necessary in the future to defend against claims of infringement or invalidity, to determine the validity and scope of the proprietary rights of others, to enforce our intellectual property rights, or to protect our trade secrets. We may also be subject to claims from customers for indemnification. Any resulting litigation, regardless of its resolution, could result in substantial costs and diversion of resources.
If it were determined that our products infringe the intellectual property rights of others, we would need to obtain licenses from these parties or substantially reengineer our products in order to avoid infringement. We might not be able to obtain the necessary licenses on acceptable terms, or at all, or to reengineer our products successfully. Moreover, if we are sued for infringement and lose the suit, we could be required to pay substantial damages or be enjoined from licensing or using the infringing products or technology. Any of the foregoing could cause us to incur significant costs and prevent us from selling our products.
If We Are Unable to Protect Our Proprietary Rights Adequately, Our Competitors Might Gain Access to Our Technology and We Might Not Compete Successfully In Our Market.
We believe that our success will depend in part upon our proprietary technology. We rely on a combination of patents, copyrights, trademarks, trade secret laws and contractual obligations with employees and third parties to protect our proprietary rights. These legal protections provide only limited protection and may be time consuming and expensive to obtain and enforce. If we fail to protect our proprietary rights adequately, our competitors might gain access to our technology. As a result, our competitors might offer similar products and we might not be able to compete successfully in our market. Moreover, despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. Also, our competitors may independently develop similar, but not infringing, technology, duplicate our products, or design around our patents or our other intellectual property. In addition, other parties may breach confidentiality agreements or other protective contracts with us, and we may not be able to enforce our rights in the event of these breaches. Furthermore, we expect that we will increase our international operations in the future, and the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. We may be required to spend significant resources to monitor and protect our intellectual property rights.
Our pending patent and trademark applications may not be approved. Our patents, including any patents which may result from our patent applications may not provide us with any competitive advantage or may be challenged by third parties. If challenged, our patents might not be upheld or their claims could be narrowed. Any litigation surrounding our rights could force us to divert important financial and other resources from our business operations.
We Will Not Be Able to Grow Our Business if We Are Unable to Hire, Train and Retain Sales, Marketing, Operations, Engineering and Finance Personnel.
To grow our business successfully and maintain a high level of quality, we will need to recruit, train, retain and motivate highly skilled sales, marketing, engineering and finance personnel. We will need to develop our sales and marketing organizations in order to increase market awareness of our products and to increase revenue. In addition, as a company focused on the development of complex products, we will need to hire skilled engineering staff of various experience levels in order to meet our product roadmap. We may not be able to hire on a timely basis a sufficient number of skilled employees, which could lead to delays in product deliveries or the development of new products. Competition for skilled employees, particularly in the San Francisco Bay Area, is intense. We may have difficulty recruiting potential employees and retaining our key personnel if prospective or current employees perceive the equity component of our compensation package to be less valuable than that of other employers.
If We Fail to Meet the Continued Listing Requirements of the Nasdaq Stock Market, Our Common Stock Could be Delisted, Which Would Likely Result in a Further Decrease in the Trading Price and Liquidity of Our Common Stock.
Our common stock is listed on the Nasdaq National Market. The Nasdaq Stock Market"s Marketplace Rules impose requirements for companies listed on the Nasdaq National Market to maintain their listing status. One of these requirements is that we must maintain a minimum closing bid price of $1.00 per share for our common stock. If we fail to meet this requirement for 30 consecutive business days, we will receive a "deficiency notice" from Nasdaq. Upon receipt of this notice, we would then have 90 calendar days to comply, and during this period the minimum closing bid price per share must be above $1.00 per share for 10 consecutive business days during this period to comply. Following this period, we could appeal to Nasdaq for a hearing regarding the determination to delist our common stock from the Nasdaq National Market. On November 8, 2002, the closing bid price of our common stock was $1.05 per share. Delisting could reduce the ability of holders of our common stock to purchase or sell shares as quickly and as inexpensively as they have done historically. For instance, failure to obtain listing on another market or exchange may make it more difficult for traders to sell our securities. Broker-dealers may be less willing or able to sell or make a market in our common stock. Not maintaining a listing on a major stock market may result in a decrease in the trading price of our common stock due to a decrease in liquidity, reduced analyst coverage and less interest by institutions and individuals in investing in our common stock.
We May Make Acquisitions, Which Could Put a Strain on Our Resources, Cause Dilution to Our Stockholders and Adversely Affect Our Financial Results.
We may acquire companies and technology to expand our business and for other strategic reasons. Integrating newly acquired organizations and technologies into our company could put a strain on our resources and be expensive and time consuming. We may not be successful in integrating acquired businesses or technologies and may not achieve anticipated revenue and cost benefits. In addition, future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or incurrence of charges related to goodwill and other intangible assets, any of which could adversely affect our balance sheet and operating results. Moreover, we may not be able to identify future suitable acquisition candidates or, if we are able to identify suitable candidates, we may not be able to make these acquisitions on commercially reasonable terms or at all.
We Plan to Expand Our International Operations, and the Success of Our International Expansion Is Subject to Significant Uncertainties.
We believe that we must expand our international sales and distribution operations to be successful. We have sold, and in the future we expect to sell a significant portion of our products to customers in Asia. As part of our international expansion, we have personnel in Taiwan, Japan and Europe who provide sales and customer support. In addition, we have appointed distributors to sell products in Taiwan, Hong Kong and China, and are currently in the process of adding sales representatives in Europe. In attempting to conduct and expand business internationally, we are exposed to various risks that could adversely affect our international operations and, consequently, our operating results, including:
• difficulties and costs of staffing and managing international operations;
• fluctuations in currency exchange rates;
• unexpected changes in regulatory requirements, including imposition of
currency exchange controls;
• longer accounts receivable collection cycles;
• import or export licensing requirements;
• potentially adverse tax consequences;
• political and economic instability; and
• potentially reduced protection for intellectual property rights.
In addition, because we have suppliers that are located outside of the United States, we are subject to risks generally associated with contracting with foreign suppliers and may experience problems in the timeliness and the adequacy or quality of product deliveries. Our Certificate of Incorporation and Bylaws, Stockholder Rights Plan and Delaware Law Contain Provisions That Could Discourage or Prevent a Takeover, Even if an Acquisition Would Be Beneficial to Our Stockholders. Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, 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:
• establishing a classified board of directors so that not all members of our board may be elected at one time;
• providing that directors may be removed only "for cause" and only with the vote of 66 2/3% of our outstanding shares;
• requiring super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
• authorizing the issuance of "blank check" preferred stock that our board could issue to increase the number of outstanding shares and to discourage a takeover attempt;
• limiting the ability of our stockholders to call special meetings of stockholders;
• prohibiting stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
• eliminating cumulative voting in the election of directors; and
• establishing advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.
In addition, the stockholder rights, which we implemented in 2002, and Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control.
If We Need Additional Financing, We May Not Be Able to Raise Further Financing or It May Only Be Available on Terms Unfavorable to Us or Our Stockholders.
We believe that our available cash resources are sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months. We might need to raise additional funds, however, to respond to business contingencies, which could include the need to:
• fund expansion;
• fund marketing expenditures;
• develop new products or enhance existing products;
• enhance our operating infrastructure;
• fund working capital if our revenue does not increase, or declines;
• hire additional personnel;
• respond to competitive pressures; or
• acquire complementary businesses or technologies.
If we were to raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders would be reduced, and these newly issued securities might have rights, preferences or privileges senior to those of our then-existing stockholders. Additional financing might not be available on terms favorable to us, or at all. If adequate funds were not available or were not available on acceptable terms, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products or otherwise respond to competitive pressures would be significantly limited.
Transmeta Corporate Office
3990 Freedom Circle
Santa Clara, CA 95054 USA