<PAGE>
3,900,000 Shares
[SILICON IMAGE, INC. LOGO]
Common Stock
-----------
Prior to this offering, there has been no public market for our common
stock. The common stock has been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "SIMG."
The underwriters have an option to purchase a maximum of 585,000 additional
shares to cover over-allotments of shares.
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO SILICON
PUBLIC COMMISSIONS IMAGE
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per Share............................................. $12.00 $0.84 $11.16
Total................................................. $46,800,000 $3,276,000 $43,524,000
</TABLE>
Delivery of the shares of common stock will be made on or about October 12,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
The date of this prospectus is October 5, 1999.
<PAGE>
[Description of graphics on inside front cover page]
The inside front cover contains two pages of graphics. The graphic on the
first page is entitled "Proliferating All-Digital Host Systems and Displays."
The background of the entire graphic is a shadowy depiction of an engineering
blueprint. The blueprint background is bordered on top and bottom by a mustard
yellow bar which extends horizontally across the page. The title is centered in
the top mustard yellow bar. Centered above the title is the Silicon Image logo.
In the center of the page is the phrase "High-Speed Digital Communications." The
word "Digital" is in bold letters. Above this phrase, from left to right, are
the words "digital," "high speed" and "technology." Below this phrase, from left
to right, are the words "communication" and "fast." These words are all on the
border of the yellow mist oval, written in a slightly darker shade for a
shadowed effect. Seven tubes curving upwards originate from this phrase in the
center of the page and end at a horizontal series of graphics across the top of
the page. These graphics appear below the title and run from the left side of
the page to the right side of the page. A series of zeroes and ones is depicted
inside each tube. The horizontal series of graphics above the tubes depict
representations of a personal computer, a notebook computer, a set-top box, a
gaming station, a DVD player, a handheld computer and a digital camcorder. The
representations are labeled as follows: "PC," "Notebook," "Set-Top Box," "Gaming
Station", "DVD," "Handheld Computer" and "Digital Camcorder." To the right of
the "PC" and "Notebook" labels are logos depicting Silicon Image's PanelLink
Technology. To the left of the center of the page is Silicon Image's PanelLink
Technology logo. To the right of the logo is the label "PanelLink Digital."
Below the logo and label is the phrase "High-Speed Digital Interconnect
Technology." Below that is Silicon Image's DVC Architecture logo. Below the logo
is the phrase "All-Digital Architecture to Enable Intelligent Displays." Below
that phrase, in a vertical column appears the phrases "High Image Quality," "Low
Cost" and "Ease of Use." From the phrase "High-Speed Digital Communications" in
the center of the page, ten tubular-shaped arrows curve downwards and end at a
horizontal series of graphics across the bottom of the page. A series of zeroes
and ones is depicted inside each arrow. Each arrow ends above a different
graphic. The horizontal series of graphics across the bottom of the page
consists of a series of representations of a LCD monitor, a projector, a plasma
display, a point of sale display, a kiosk, a digital CRT display, a HDTV
display, a microdisplay and an automobile dashboard display. The representations
are labeled as follows: "LCD Monitor," "Projector," "Plasma," "Point of Sale,"
"Kiosk," "Digital CRT," "HDTV," "Microdisplay" and "Automotive." To the right of
the "LCD Monitor," "Projector," "Plasma," "Point of Sale" and "Kiosk" labels are
logos depicting Silicon Image's PanelLink Technology. Under the "LCD Monitor"
label and to the right of the PanelLink Technology logo is a logo depicting
Silicon Image's DVC Architecture. To the right of the graphic labeled
"Automotive," a large circle with smaller circles within it emanates from the
curving tube farthest to the right. Above the circle is the title "The Future
Intelligent Displays." On the left side, inside the circle, is an arrow pointing
toward the inside of the circle and an arrow pointing away from the center of
the circle. Inside the circle is a graphical representation of a flat panel
display with a joystick, remote control and mouse. Centered at the bottom of the
page in the bottom mustard yellow bar is the phrase "Our solution provides a
seamless connection to all types of digital displays and integrates new features
and functionality to enable intelligent displays." Centered below that phrase is
the phrase "The PanelLink Digital logo and DVC symbols indicate host systems and
displays currently shipping that include our high-speed digital communications
products. The other host systems and displays shown represent potential markets
for our products and technology." Within this phrase after the words "PanelLink
Digital logo" appears the PanelLink Digital logo within parentheses.
The graphic on the second page is entitled "Semiconductor Solutions for
High-Speed Digital Communications." The word "Digital" is in bold letters. This
phrase appears on the background of a sunny sky. Below the title and to the left
is a three-dimensional computer chip. The chip is located on top of the sun in
the background. Inside the chip is the Silicon Image logo. Below the logo are
the words "PanelLink." Below the chip is the representation of a highway. The
highway is separated from the sunny sky background with a thick green line. The
left lane and right lane of the highway are also separated by a thick green
line. In the left lane of the highway is the sentence "The connection between
host systems and displays is one of the last remaining analog holdouts." To the
right and slightly above this sentence is a graphic depicting a monitor. The
monitor shows a picture of an old automobile. Below the graphic of the monitor
is the phrase "Limited Functionality." To the right of the monitor, and
connected by a curving line, is a computer with the words "Digital" and "Analog"
inside of it. The words are separated by a series of vertical zeroes and ones.
To the right of the computer graphic is the phrase "Video Data." Below the line
connecting the monitor with the computer picture are the phrases "Flicker,"
"Fuzziness" and "Color Variation," which appear in a bullet list format. In the
right lane of the highway, is a graphic depicting a purple computer, with the
phrase "Pure Digital" on the right side panel and the PanelLink Technology logo
on the front of the computer. To the right of the logo is the label "PanelLink
Digital." To the right of and below the graphic of the computer is another
graphic depicting the label "Storage Networks." Below the label is the phrase "1
Gigabit per second." The graphic labeled "Storage Networks" is connected to the
computer graphic by a curving tube that is filled with a series of zeroes and
ones. To the left and below the computer graphic is a white cloud-shaped
graphic. Inside the cloud is a series of lines that intersect with large points
at the ends of each line. The cloud-shaped graphic is connected to
<PAGE>
the computer graphic by a curving tube that is filled with a series of zeroes
and ones. Below the cloud shape is the label "Local Area Networks." Below that
is the phrase "1 Gigabit per Second." To the right of the cloud-shaped graphic
is a large curving tube, filled with a series of multicolored zeroes and ones,
connecting the computer graphic to a graphic of a purple flat panel video
display. Inside this flat panel display graphic is a picture of a formula one
race car. On the bottom right hand corner of the flat panel display is the
PanelLink Technology logo with the label "PanelLink Digital" to the right of the
logo. To the left of the flat panel display graphic is Silicon Image's PanelLink
Technology logo. To the right of the logo is the label "PanelLink Digital."
Under this label is the phrase "Silicon Image's high-speed digital
communications solutions eliminate the need for analog technology in host
systems and displays." Below this phrase is Silicon Image's DVC Architecture
logo. Below this logo is the phrase "All-Digital Architecture To Enable
Intelligent Displays."
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUMMARY............................. 3
RISK FACTORS................................... 5
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS................................... 16
USE OF PROCEEDS................................ 17
DIVIDEND POLICY................................ 17
CAPITALIZATION................................. 18
DILUTION....................................... 19
SELECTED FINANCIAL DATA........................ 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 21
BUSINESS....................................... 33
<CAPTION>
PAGE
-----
<S> <C>
MANAGEMENT..................................... 50
CERTAIN TRANSACTIONS........................... 61
PRINCIPAL STOCKHOLDERS......................... 65
DESCRIPTION OF CAPITAL STOCK................... 67
SHARES ELIGIBLE FOR FUTURE SALE................ 70
UNDERWRITING................................... 72
NOTICE TO CANADIAN RESIDENTS................... 74
LEGAL MATTERS.................................. 75
EXPERTS........................................ 75
ADDITIONAL INFORMATION......................... 75
INDEX TO FINANCIAL STATEMENTS.................. F-1
</TABLE>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES:
- THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED;
- ALL OUTSTANDING SHARES OF PREFERRED STOCK ARE CONVERTED INTO SHARES OF
COMMON STOCK UPON THE CONSUMMATION OF THIS OFFERING;
- THE REINCORPORATION OF SILICON IMAGE IN DELAWARE; AND
- THE ADOPTION OF VARIOUS NEW EMPLOYEE BENEFIT PLANS.
PanelLink-Registered Trademark- is a federally registered trademark of
Silicon Image, Inc. Titles and logos of Silicon Image, Inc.'s products and
services appearing in this prospectus, including PixelPrecision-TM-, Silicon
Image-TM-, TMDS-TM-, the PanelLink Logo and the Silicon Image Logo, are
trademarks or service marks of Silicon Image, Inc. and may be registered in
other jurisdictions. Fujitsu and the Fujitsu logo are registered trademarks of
Fujitsu Limited. Each trademark or service mark of any other company appearing
in this prospectus belongs to its holder.
DEALER PROSPECTUS DELIVERY OBLIGATIONS
UNTIL OCTOBER 31, 1999, 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.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. THE OUTCOME OF THE
EVENTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS IS SUBJECT TO RISKS AND
ACTUAL RESULTS COULD DIFFER MATERIALLY. THE SECTIONS ENTITLED "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS," AS WELL AS DISCUSSIONS ELSEWHERE IN THIS PROSPECTUS,
CONTAIN A DISCUSSION OF SOME OF THE FACTORS THAT COULD CONTRIBUTE TO THESE
DIFFERENCES.
SILICON IMAGE, INC.
We develop and market semiconductors for applications that require
cost-effective, integrated solutions for high-speed data communications. We are
initially focusing our technology on the local interconnect between host
systems, such as PCs, set-top boxes and DVD players, and digital displays, such
as flat panel displays and CRTs. Our current products enable host systems to
transmit digital video data and enable displays to receive and manipulate
digital video data. As with other consumer electronic devices, such as digital
cellular phones, significant benefits can be achieved by converting displays
from analog to digital and by replacing conventional analog connections between
host systems and displays with digital connections.
Recognizing the need for a cost-effective, high-speed digital display
solution, we developed a digital interconnect technology and began shipping
semiconductors for digital displays in 1997. To provide a worldwide, freely
available specification for an all-digital display solution, we, together with
Intel, Compaq, IBM, Hewlett-Packard, NEC and Fujitsu, formed the Digital Display
Working Group, or DDWG, to define such a specification based on our technology.
In April 1999, the DDWG published the Digital Visual Interface, or DVI,
specification, which defines a high-speed data communications link between host
systems and digital displays. The formation of the DDWG and the release of the
DVI specification have accelerated the shift of display technology to digital.
Our key products are based on our PanelLink digital interface technology and
Digital Visual Controller architecture. PanelLink technology is our proprietary
implementation of the DVI specification. The DVC architecture is our platform
for developing products that integrate PanelLink receiver technology with
additional functionality to enable low-cost, intelligent displays for the mass
market. Our products eliminate the need for analog technology in host systems
and displays, improve image quality and allow display manufacturers to increase
the functionality of their products. Our solutions are:
High-speed--our technology enables data to be transmitted at the multi-gigabit
rates needed to support high resolution displays;
Highly integrated--our products incorporate technology for high speed digital
communications with functions such as digital image processing and display
control; and
Cost-effective--we are able to produce products that provide multi-gigabit data
transmission using standard foundry processes. Because our products integrate a
number of functions in a single semiconductor, they eliminate the need for
multiple components.
Our objective is to be a leading provider of semiconductor solutions that
enable high-speed digital communications for targeted markets. Key elements of
our strategy are to:
- Target the display market first
- Promote open industry standards
- Drive broad adoption of digital-ready host systems
- Increase the intelligence of displays through highly-integrated receiver
solutions
- Maintain technology leadership
- Penetrate new markets and applications
As of June 30, 1999, we had shipped over four million units of our products.
Our products are incorporated in host systems and displays sold by leading
manufacturers such as Apple, ATI, Compaq, Diamond Multimedia, Fujitsu, Gateway,
Hitachi, IBM, LG, NEC, Number Nine, Princeton Graphics, Samsung, Sharp, Toshiba
and ViewSonic.
We incorporated in California on January 1, 1995 and reincorporated in
Delaware in September 1999. Our address is 10131 Bubb Road, Cupertino,
California 95014, and our telephone number is (408) 873-3111.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Silicon Image.......... 3,900,000 shares
Common stock to be outstanding after this 25,137,274 shares
offering.......................................
Use of proceeds................................ For general corporate purposes, including
working capital and capital expenditures, and
for the repayment of the outstanding balance
under our line of credit. See "Use of
Proceeds."
Nasdaq National Market symbol.................. SIMG
</TABLE>
In addition to the 25,137,274 shares of common stock to be outstanding after
the offering, we have outstanding options and warrants to purchase a total of
2,062,819 shares of common stock as of August 31, 1999. We may issue additional
shares under our equity plans and an agreement with Intel as described under
"Management--Employee Benefit Plans" and "Certain Transactions--Transactions
with Intel and its Subsidiary, Chips and Technologies."
SUMMARY FINANCIAL DATA
The as adjusted balance sheet data summarized below reflects the receipt of
the net proceeds from the sale of 3,900,000 shares of common stock offered by us
at the initial public offering price of $12.00 per share after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by us and the application of net proceeds from the offering. See "Use of
Proceeds." The statement of operations data for the six months ended June 30,
1999 summarized below is unaudited.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------- ----------------
1995 1996 1997 1998 1998 1999
----- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Product revenue........................................... $ -- $ 30 $ 1,280 $ 7,703 $ 2,652 $ 7,706
Development and license revenue........................... -- 1,121 1,582 100 25 575
Cost of product revenue................................... -- 5 851 4,314 1,711 3,328
Stock compensation and warrant expense.................... -- -- -- 1,361 184 2,898
Net loss.................................................. (178) (1,944) (4,036) (6,622) (3,103) (3,909)
Basic and diluted net loss per share...................... $(0.51) $ (0.98) $ (1.14) $ (1.39) $ (0.72) $ (0.73)
Weighted-average shares of common stock used to compute
basic and diluted net loss per share.................... 350 1,981 3,533 4,766 4,301 5,327
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------
ACTUAL AS ADJUSTED
--------- -------------
<S> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and short-term investments................................................................ $ 12,647 $ 53,814
Working capital................................................................................ 8,740 50,664
Total assets................................................................................... 16,014 57,181
Line of credit................................................................................. 757 --
Capital lease obligations, long-term........................................................... 773 773
Total stockholders' equity..................................................................... 9,152 51,076
</TABLE>
4
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE MAKING AN
INVESTMENT DECISION. YOU SHOULD CAREFULLY CONSIDER THESE RISK FACTORS, TOGETHER
WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE YOU DECIDE
TO PURCHASE SHARES OF OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT
PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO HARM OUR
BUSINESS.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE
PROSPECTS.
We were founded in 1995 and have a limited operating history, which makes an
evaluation of our future prospects difficult. In addition, the revenue and
income potential of our business and the digital display market are unproven. We
began volume shipments of our first products, the SiI 100 and SiI 101, in the
third quarter of 1997. The Digital Visual Interface specification, which is
based upon technology developed by us and used in many of our products, was
first published in April 1999. Accordingly, we face risks and difficulties
frequently encountered by early-stage companies in new and rapidly evolving
markets. If we do not successfully address these risks and difficulties, our
business would be seriously harmed.
WE HAVE A HISTORY OF LOSSES AND MAY NOT BECOME PROFITABLE.
We incurred net losses of $4.0 million in 1997, $6.6 million in 1998 and
$3.9 million for the first six months of 1999, and we expect to continue to
incur operating losses. As of June 30, 1999, we had an accumulated deficit of
approximately $16.7 million. In the future, we expect research and development
expenses and selling, general and administrative expenses to increase. We will
also incur substantial non-cash charges relating to the amortization of unearned
compensation and issuances of warrants. Although our revenues have increased in
recent quarters, they may not continue to increase, and we may not achieve and
subsequently sustain profitability. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY IN THE FUTURE DUE TO
FACTORS RELATED TO OUR INDUSTRY AND THE MARKETS FOR OUR PRODUCTS.
Our quarterly operating results are likely to vary significantly in the
future based on a number of factors related to our industry and the markets for
our products over which we have little or no control. Any of these factors could
cause our stock price to fluctuate. These factors include:
- the growth of the market for digital-ready host systems and displays;
- the evolution of industry standards;
- the timing and amount of orders from customers;
- the deferral of customer orders in anticipation of new products or
enhancements by us or our competitors; and
- the announcement and introduction of products and technologies by our
competitors.
These factors are difficult to forecast and could seriously harm our
business.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY IN THE FUTURE DUE TO
FACTORS RELATED TO HOW WE MANAGE OUR BUSINESS.
Our quarterly operating results are likely to vary significantly in the
future based on a number of factors related to how we manage our business. Any
of these factors could cause our stock price to fluctuate. These factors
include:
- our ability to manage product transitions;
- the mix of the products we sell and the distribution channels through
which they are sold; and
5
<PAGE>
- the availability of production capacity at the semiconductor foundry that
manufactures our products.
In the past, our introduction of new products and our product mix have
affected our quarterly operating results. We also anticipate that the rate of
orders from our customers may vary significantly from quarter to quarter. Our
expenses and inventory levels are based on our expectations of future revenues,
and our expenses are relatively fixed in the short term. Consequently, if
revenues in any quarter do not occur when expected, expenses and inventory
levels could be disproportionately high, and our operating results for that
quarter and, potentially, future quarters may be harmed, adversely affecting the
price of our stock. "Management's Discussion and Analysis of Financial Condition
and Results of Operation."
GROWTH OF THE MARKET FOR OUR PRODUCTS DEPENDS ON THE WIDESPREAD ADOPTION AND USE
OF THE DVI SPECIFICATION.
Our business strategy is based upon the rapid and widespread adoption of the
DVI specification, which defines a high-speed data communication link between
host systems and digital displays. We have faced challenges related to the
acceptance of our products due to the incompatible technologies used by many
host and display manufacturers. Due to the recent release of the DVI
specification, we cannot predict whether or at what rate the DVI specification
will be adopted by manufacturers of host systems and displays. To date, no
complete DVI-compliant system that includes both a host system and a display has
been shipped. Adoption of the DVI specification may be affected by the
availability of DVI-compliant transmitters, receivers, connectors and cables
necessary to implement the specification. Other specifications may also emerge,
which could adversely affect the acceptance of the DVI specification. For
example, a number of companies have promoted alternatives to the DVI
specification which use other interface technologies, such as LVDS. LVDS, or Low
Voltage Differential Signaling is a technology that is used in high speed data
transmission, primarily for notebook PCs. Any delay in the widespread adoption
of the DVI specification would seriously harm our business.
OUR SUCCESS IS DEPENDENT ON INCREASING SALES OF OUR RECEIVER AND DISPLAY
CONTROLLER PRODUCTS, WHICH DEPENDS ON HOST SYSTEM MANUFACTURERS INCLUDING
DVI-COMPLIANT TRANSMITTERS IN THEIR SYSTEMS.
Our success depends on increasing sales of our receiver and display
controller products to display manufacturers. In 1998, over 75% of our product
revenues resulted from the sale of transmitter products to manufacturers of host
systems. While revenues from the sale of receivers and display controllers have
increased in the past six months, transmitters continue to represent between 50%
and 60% of our product revenues. To increase sales of our receiver and display
controller products, we need manufacturers of host systems to incorporate
DVI-compliant transmitters into their systems, making these systems
digital-ready. Unless host systems are digital-ready, they will not operate with
digital displays. If we are unable to increase revenues from receivers and
display controllers, we would remain dependent on the market for transmitters,
which we expect to become particularly competitive. This would seriously harm
our business. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations."
OUR SUCCESS WILL DEPEND ON THE GROWTH OF THE DIGITAL DISPLAY MARKET.
Our business depends on the growth of the digital display market, which is
at an early stage of development. The potential size of this market and its rate
of development are uncertain and will depend on many factors, including:
- the number of digital-ready host systems;
- the rate at which display manufacturers replace analog interfaces with
DVI-compliant interfaces; and
- the availability of cost-effective semiconductors that implement a
DVI-compliant interface.
6
<PAGE>
In addition, improvements to analog interfaces could slow the adoption of
digital displays. The failure of the digital display market to grow for any
reason would seriously harm our business.
GROWTH OF THE MARKET FOR OUR PRODUCTS DEPENDS ON AN INCREASE IN THE SUPPLY OF
FLAT PANEL DISPLAYS AND A CORRESPONDING DECREASE IN THEIR PRICE.
In order for the market for many of our products to grow, flat panel
displays must be widely available and affordable to consumers. Currently, there
is a limited supply of flat panels, and increasing the supply of flat panels is
a costly and lengthy process requiring significant capital investment.
Accordingly, we do not expect the current shortage of flat panels or their high
prices to change in the near term. In the past, the supply of flat panels has
been cyclical. We expect this pattern to continue. Undercapacity in the flat
panel market may limit our ability to increase our revenues.
WE NEED TO OBTAIN DESIGN WINS IN ORDER TO INCREASE OUR REVENUES.
Our future success will depend on manufacturers of host systems and displays
designing our products into their systems. To achieve design wins--decisions by
those manufacturers to design our products into their systems--we must define
and deliver cost-effective, innovative and integrated semiconductor solutions.
Once a manufacturer has designed a supplier's products into its systems, the
manufacturer may be reluctant to change its source of components due to the
significant costs associated with qualifying a new supplier. Accordingly, the
failure to achieve design wins with key manufacturers of host systems and
displays will seriously harm our business.
OUR LENGTHY SALES CYCLE CAN RESULT IN UNCERTAINTY AND DELAYS IN GENERATING
REVENUES.
Because our products are based on new technology and standards, a lengthy
sales process, typically requiring several months or more, is often required
before potential customers begin the technical evaluation of our products. This
technical evaluation can then exceed six months. It can take an additional six
months before a customer commences volume shipments of systems that incorporate
our products. However, even when a manufacturer decides to design our products
into its systems, the manufacturer may never ship systems incorporating our
products. Given our lengthy sales cycle, we experience a delay between the time
we increase expenditures for research and development, sales and marketing
efforts and inventory and the time we generate revenues, if any, from these
expenditures. As a result, our business could be seriously harmed if a
significant customer reduces or delays orders or chooses not to release products
incorporating our products.
OUR PARTICIPATION IN THE DIGITAL DISPLAY WORKING GROUP REQUIRES US TO LICENSE
SOME OF OUR INTELLECTUAL PROPERTY FOR FREE, WHICH MAY MAKE IT EASIER FOR OTHERS
TO COMPETE WITH US.
We are a member of the DDWG which published and promotes the DVI
specification. We have based our strategy on promoting and enhancing the DVI
specification and developing and marketing products based on the specification
and future enhancements. As a result:
- we must license for free specific elements of our intellectual property to
others for use in implementing the DVI specification; and
- we may license additional intellectual property for free as the DDWG
promotes enhancements to the DVI specification.
Accordingly, companies that implement the DVI specification in their
products can use specific elements of our intellectual property for free to
compete with us.
OUR RELATIONSHIP WITH INTEL DOES NOT GUARANTEE THAT INTEL WILL COOPERATE WITH US
IN THE FUTURE.
In September 1998, Intel agreed to work with us to develop and promote
adoption of the DVI specification and an enhanced version of the DVI
specification. As part of this effort, Intel has been an important founder of,
contributor to and promoter of the DDWG. We have benefited from Intel's
7
<PAGE>
cooperation and support. We cannot be sure that Intel will continue to devote
attention and resources to the DDWG and the Silicon Image relationship. If Intel
were to breach our agreements with them, it is possible that no adequate remedy
would be available to us. For more information regarding our relationship with
Intel, see "Certain Transactions--Transactions with Intel and Its Subsidiary,
Chips and Technologies."
OUR RELATIONSHIP WITH INTEL INVOLVES COMPETITIVE RISKS.
We have entered into a patent cross-license with Intel in which each of us
granted the other a license to use the grantor's patents, except in identified
types of products. We believe that the scope of our license to Intel excludes
our current products and anticipated future products. Intel could, however,
exercise its rights under this agreement to use our patents to develop and
market other products that compete with ours, without payment to us.
Additionally, Intel's rights to our patents could reduce the value of our
patents to any third party who otherwise might be interested in acquiring rights
to use our patents in such products. Finally, Intel could endorse a competing
digital interface, or develop its own proprietary digital interface, which would
seriously harm our business. For more information regarding our relationship
with Intel, see "Certain Transactions--Transactions with Intel and Its
Subsidiary, Chips and Technologies."
WE DEPEND ON A FEW KEY CUSTOMERS AND THE LOSS OF ANY OF THEM COULD SIGNIFICANTLY
REDUCE OUR REVENUES.
Historically, a relatively small number of customers and distributors have
accounted for a significant portion of our product revenues. In 1998, sales of
transmitter products to Mitac, a third party manufacturer, accounted for 54% of
our total revenues, and ATI Technologies, a leading graphics board manufacturer,
accounted for 12% of our total revenues. These manufacturers are significant
suppliers to Compaq, who decided in 1998 to design our transmitters into some of
its desktop personal computer models. In 1999, Compaq reduced the number of its
product models that included our transmitters as a standard part. As a result,
for the six month period ended June 30, 1999, sales to Mitac decreased to 13% of
our total revenues and sales to ATI Technologies decreased to less than ten
percent of our total revenues. Kanematsu, a Japanese distributor, accounted for
13% of our total revenues and Microtek, a Japanese distributor, accounted for
11% of our total revenues. As a result of customer concentration any of the
following factors could seriously harm our business:
- a significant reduction, delay or cancellation of orders from one or more
of our key customers or OEMs; or
- if one or more significant customers selects products manufactured by a
competitor for inclusion in future product generations.
We expect our operating results to continue to depend on sales to or design
decisions of a relatively small number of host system and display OEMs and their
suppliers. See "Business-- Customers."
WE DO NOT HAVE LONG-TERM COMMITMENTS FROM OUR CUSTOMERS, AND WE ALLOCATE
RESOURCES BASED ON OUR ESTIMATES OF CUSTOMER DEMAND.
Our sales are made on the basis of purchase orders rather than long-term
purchase commitments. In addition, our customers may cancel or defer purchase
orders. We manufacture our products according to our estimates of customer
demand. This process requires us to make multiple demand forecast assumptions,
each of which may introduce error into our estimates. If we overestimate
customer demand, we may allocate resources to manufacturing products which we
may not be able to sell. As a result, we would have excess inventory, which
would increase our losses. Conversely, if we underestimate customer demand or if
sufficient manufacturing capacity is unavailable, we would forego revenue
opportunities, lose market share and damage our customer relationships. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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OUR INCREASING DEPENDENCE ON SELLING THROUGH DISTRIBUTORS INCREASES THE RISKS
AND COMPLEXITY OF OUR BUSINESS.
Over the past four quarters, the percentage of our product revenues
attributable to distributors has increased substantially, from less than 10% in
the quarter ended June 30, 1998 to nearly 60% in the quarter ended June 30,
1999. Much of this increase reflects design wins with new OEMs which rely on
third-party manufacturers or distributors to provide inventory management and
purchasing functions. Selling through distributors reduces our ability to
forecast sales and increases the complexity of our business, requiring us to:
- manage a more complex supply chain;
- manage the level of inventory at each distributor;
- provide for credits, return rights and price protection;
- estimate the impact of credits, return rights, price protection and unsold
inventory at distributors; and
- monitor the financial condition and credit worthiness of our distributors.
Any failure to manage these challenges could seriously harm our business.
COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED SALES OF OUR PRODUCTS, INCREASED
LOSSES AND REDUCED MARKET SHARE.
The high-speed communication, display and semiconductor industries are
intensely competitive. These markets are characterized by rapid technological
change, evolving standards, short product life cycles and decreasing prices. Our
current products face competition from a number of sources including analog
solutions, DVI-compliant solutions and other digital interface solutions. We
expect competition in our market to increase. For example, Genesis Microchip has
announced plans to introduce a DVI-compliant product that will compete with our
DVCs and ATI Technologies has recently introduced a graphics controller chip
that includes a DVI-compliant transmitter. We do not offer a graphics controller
chip that includes an integrated transmitter. If host system manufacturers were
to require such a chip, our sales of transmitter products would be harmed. When
ATI Technologies first announced that it would be introducing its chip, we
believed that its chip could adversely affect sales of our transmitter products.
Although we believe that sales of our transmitter products have not been so
affected by ATI Technologies' introduction of its chip, other competitors may
introduce new products that adversely affect sales of our transmitter and other
products.
Many of our competitors have longer operating histories and greater presence
in key markets, greater name recognition, access to large customer bases and
significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than we do. As a result, they may be
able to adapt more quickly to new or emerging technologies and customer
requirements or devote greater resources to the promotion and sale of their
product than we may. In particular, well-established semiconductor companies,
such as Analog Devices, Intel, National Semiconductor and Texas Instruments, may
compete against us in the future. In addition, in the process of establishing
our technology as an industry standard, and to ensure rapid adoption of the DVI
specification, we have agreed to license specific elements of our intellectual
property to others for free. We have also licensed elements of our intellectual
property to Intel and other semiconductor companies and we may continue to do
so. Competitors could use these elements of our intellectual property to compete
against us. We cannot assure you that we can compete successfully against
current or potential competitors, or that competition will not seriously harm
our business by reducing sales of our products, increasing our losses and
reducing our market share. See "Business--Competition" for additional
information about our competitors and competition in our market.
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OUR SUCCESS DEPENDS ON THE DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS, WHICH
WE MAY NOT BE ABLE TO DO IN A TIMELY MANNER BECAUSE THE PROCESS OF DEVELOPING
HIGH-SPEED SEMICONDUCTOR PRODUCTS IS COMPLEX AND COSTLY.
The development of new products is highly complex, and we have experienced
delays in completing the development and introduction of new products on several
occasions in the past, some of which exceeded six months. We expect to introduce
new transmitter, receiver and controller products in the future. We also plan to
develop our initial products designed for high-speed networking and storage
applications. As our products integrate new, more advanced functions, they
become more complex and increasingly difficult to design and debug. Successful
product development and introduction depends on a number of factors, including:
- accurate prediction of market requirements and evolving standards,
including enhancements to the DVI specification;
- development of advanced technologies and capabilities;
- definition of new products which satisfy customer requirements;
- timely completion and introduction of new product designs;
- use of leading-edge foundry processes and achievement of high
manufacturing yields; and
- market acceptance of the new products.
Accomplishing all of this is extremely challenging, time-consuming and
expensive. We cannot assure you that we will succeed. If we are not able to
develop and introduce our products successfully, our business will be seriously
harmed.
WE DEPEND ON A SINGLE THIRD-PARTY WAFER FOUNDRY TO MANUFACTURE ALL OF OUR
PRODUCTS, WHICH REDUCES OUR CONTROL OVER THE MANUFACTURING PROCESS.
We do not own or operate a semiconductor fabrication facility. We rely on
Taiwan Semiconductor Manufacturing Company, an outside foundry, to produce all
of our semiconductor products. Our reliance on an independent foundry involves a
number of significant risks, including:
- reduced control over delivery schedules, quality assurance, manufacturing
yields and production costs;
- lack of guaranteed production capacity or product supply; and
- unavailability of, or delayed access to, next-generation or key process
technologies.
We do not have a long-term supply agreement with Taiwan Semiconductor
Manufacturing Company, or TSMC, and instead obtain manufacturing services on a
purchase order basis. This foundry has no obligation to supply products to us
for any specific period, in any specific quantity or at any specific price,
except as set forth in a particular purchase order. Our requirements represent a
small portion of the total production capacity of this foundry and Taiwan
Semiconductor Manufacturing Company may reallocate capacity to other customers
even during periods of high demand for our products. If Taiwan Semiconductor
Manufacturing Company were to become unable or unwilling to continue
manufacturing our products in the required volumes, at acceptable quality,
yields and costs, in a timely manner, our business would be seriously harmed. As
a result, we would have to identify and qualify substitute foundries, which
would be time consuming and difficult, resulting in unforeseen manufacturing and
operations problems. In addition, if competition for foundry capacity increases,
our product costs may increase, and we may be required to pay significant
amounts to secure access to manufacturing services.
We may qualify additional foundries in the future. If we do not qualify an
additional foundry, we may be exposed to increased risk of capacity shortages
due to our complete dependence on Taiwan Semiconductor Manufacturing Company.
See "Business--Manufacturing."
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WE DEPEND ON THIRD-PARTY SUBCONTRACTORS FOR ASSEMBLY AND TEST, WHICH REDUCES OUR
CONTROL OVER THE ASSEMBLY AND TEST PROCESSES.
Our semiconductor products are assembled and tested by two independent
subcontractors: Anam in Korea and Advanced Semiconductor Engineering in Taiwan
and California. We do not have long-term agreements with either of these
subcontractors and typically obtain services from them on a purchase order
basis. Our reliance on these subcontractors involves risks such as reduced
control over delivery schedules, quality assurance and costs. These risks could
result in product shortages or increase our costs of manufacturing, assembling
or testing our products. If these subcontractors are unable or unwilling to
continue to provide assembly and test services and deliver products of
acceptable quality, at acceptable costs and in a timely manner, our business
would be seriously harmed. We would also have to identify and qualify substitute
subcontractors, which could be time consuming and difficult and result in
unforeseen operations problems.
OUR SEMICONDUCTOR PRODUCTS ARE COMPLEX AND ARE DIFFICULT TO MANUFACTURE
COST-EFFECTIVELY.
The manufacture of semiconductors is a complex process. It is often
difficult for semiconductor foundries to achieve acceptable product yields.
Product yields depend on both our product design and the manufacturing process
technology unique to the semiconductor foundry. Since low yields may result from
either design or process difficulties, identifying yield problems can only occur
well into the production cycle, when actual product exists which can be analyzed
and tested.
We only test our products after they are assembled, as their high-speed
nature makes earlier testing difficult and expensive. As a result, defects are
not discovered until after assembly. This could result in a substantial number
of defective products being assembled and tested, lowering our yields and
increasing our costs. This would seriously harm our business.
DEFECTS IN OUR PRODUCTS COULD INCREASE OUR COSTS AND DELAY OUR PRODUCT
SHIPMENTS.
Although we test our products, they are complex and may contain defects and
errors. In the past we have encountered defects and errors in our products.
Delivery of products with defects or reliability, quality or compatibility
problems may damage our reputation and our ability to retain existing customers
and attract new customers. In addition, product defects and errors could result
in additional development costs, diversion of technical resources, delayed
product shipments, increased product returns, and product liability claims
against us which may not be fully covered by insurance. Any of these could
seriously harm our business.
WE MUST ATTRACT AND RETAIN QUALIFIED PERSONNEL TO BE SUCCESSFUL, AND COMPETITION
FOR QUALIFIED PERSONNEL IS INTENSE IN OUR MARKET.
Our success depends to a significant extent upon the continued contributions
of our key management, technical and sales personnel, many of whom would be
difficult to replace. The loss of one or more of these employees could seriously
harm our business. We do not have key person life insurance on any of our key
personnel. Although we have severance agreements with our Chief Executive
Officer and with our Vice President of Business Strategy, we have employment
agreements with our Executive Vice President of Marketing and Business
Development, our Vice President of Finance and Administration and our Vice
President of Worldwide Sales and customarily enter into employment offer letters
with our new hires, none of such agreements obligates the employee to continue
working for us.
Our success also depends on our ability to identify, attract and retain
qualified technical, sales, marketing, finance and managerial personnel.
Competition for qualified personnel is particularly intense in our industry and
our location in Silicon Valley, California due to a number of factors, including
the high concentration of established and emerging growth technology companies.
This competition makes it difficult to retain our key personnel and to recruit
new highly-qualified personnel.
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We have experienced, and may continue to experience, difficulty in hiring and
retaining candidates with appropriate qualifications. If we do not succeed in
hiring and retaining candidates with appropriate qualifications, our business
could be seriously harmed. See "Management."
OUR DEPENDENCE ON ACADEMIC RESEARCHERS LOCATED IN KOREA COULD ADVERSELY AFFECT
OUR ABILITY TO DEVELOP AND PROTECT KEY TECHNOLOGY.
Some of our key technology is developed by academic researchers at Seoul
National University in Korea whom we have retained as consultants. These
researchers operate under the direction of Dr. Jeong, a founder of Silicon Image
and our Chief Technical Adviser. Since neither Dr. Jeong nor these researchers
are our employees, we have limited control over their activities and can expect
only limited amounts of their time to be dedicated to developing our technology.
These researchers are also not actively involved in managing our business or in
developing our products. They may also have relationships with other commercial
entities, some of which could compete with us. Dr. Jeong and these researchers
sign agreements which require them to keep our proprietary information and the
results of their research confidential. However, we may not be able to keep this
information confidential and its dissemination could seriously harm our
business. Also, we generally obtain an assignment of intellectual property
rights in technology that may result from these researchers' projects. However,
the laws of Korea may not protect our intellectual property rights to the same
extent as the laws of the United States. As a result, our dependence on these
researchers could adversely affect our ability to develop and protect key
technology. For additional information regarding our relationship with academic
researchers located in Korea, see "Certain Transactions--Relationship with Dr.
Jeong."
WE FACE FOREIGN BUSINESS, POLITICAL AND ECONOMIC RISKS BECAUSE A MAJORITY OF OUR
PRODUCTS AND OUR CUSTOMERS' PRODUCTS ARE MANUFACTURED AND SOLD OUTSIDE OF THE
UNITED STATES.
A substantial portion of our business is conducted outside of the United
States and as a result, we are subject to foreign business, political and
economic risks. All of our products are manufactured outside of the United
States. Many of our customers are the manufacturers or suppliers for OEMs who
have designed in our products. Many of these manufacturers and suppliers are
located outside of the United States, primarily concentrated in Japan, Korea and
Taiwan. Sales outside of the United States accounted for 94% of our revenues in
1997, 95% of our revenues in 1998 and 91% of our revenues in the first six
months of 1999. We anticipate that sales outside of the United States will
continue to account for a substantial portion of our revenue in future periods.
Accordingly, we are subject to international risks, including:
- difficulties in managing distributors;
- difficulties in staffing and managing foreign operations;
- political and economic instability;
- adequacy of local infrastructure;
- difficulties in accounts receivable collections;
In addition, OEMs who design our semiconductors into their products sell
them outside of the United States. This exposes us indirectly to foreign risks.
Because sales of our products have been denominated to date exclusively in
United States dollars, increases in the value of the United States dollar will
increase the price of our products so that they become relatively more expensive
to customers in the local currency of a particular country, leading to a
reduction in sales and profitability in that country. A portion of our
international revenues may be denominated in foreign currencies in the future,
which will subject us to risks associated with fluctuations in those foreign
currencies.
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WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY.
We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as nondisclosure agreements and other methods to protect our
proprietary technologies. We have been issued patents and have a number of
pending United States patent applications. However, we cannot assure you that
any patent will issue as a result of any applications or, if issued, that any
claims allowed will be sufficiently broad to protect our technology. In
addition, it is possible that existing or future patents may be challenged,
invalidated or circumvented. It may be possible for a third party to copy or
otherwise obtain and use our products, or technology without authorization,
develop similar technology independently or design around our patents. Effective
copyright, trademark and trade secret protection may be unavailable or limited
in foreign countries.
Disputes may occur regarding the scope of the license of our intellectual
property we have granted to the DDWG participants for use in implementing the
DVI specification in their products. These disputes may result in:
- costly and time consuming litigation; or
- the license of additional elements of our intellectual property for free.
OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD BE TIME-CONSUMING
AND EXPENSIVE TO DEFEND.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. This litigation is
widespread in the high-technology industry and is particularly prevalent in the
semiconductor industry, where a number of companies aggressively use their
patent portfolios by bringing numerous infringement claims. In addition, in
recent years, there has been an increase in the filing of so-called "nuisance
suits" alleging infringement of intellectual property rights, which pressure
defendants into entering settlement arrangements to quickly dispose of such
suits, regardless of their merits. We may become a party to litigation in the
future to protect our intellectual property or as a result of an alleged
infringement of others' intellectual property. These lawsuits could subject us
to significant liability for damages and invalidate our proprietary rights.
These lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation also could force us to do one or more
of the following:
- stop selling products or using technology that contain the allegedly
infringing intellectual property;
- attempt to obtain a license to the relevant intellectual property, which
license may not be available on reasonable terms or at all; and
- attempt to redesign those products that contain the allegedly infringing
intellectual property.
If we are forced to take any of these actions, we may be unable to
manufacture and sell our products, which could seriously harm our business.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY MAY LEAD TO SIGNIFICANT
VARIANCES IN THE DEMAND FOR OUR PRODUCTS.
In the past, the semiconductor industry has been characterized by
significant downturns and wide fluctuations in supply and demand. Also, the
industry has experienced significant fluctuations in anticipation of changes in
general economic conditions, including economic conditions in Asia. This
cyclicality has led to significant variances in product demand and production
capacity. It has also accelerated erosion of average selling prices per unit. We
may experience periodic fluctuations in our future financial results because of
changes in industry-wide conditions.
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WE ARE GROWING RAPIDLY, WHICH STRAINS OUR MANAGEMENT AND RESOURCES.
We are experiencing a period of significant growth that will continue to
place a great strain on our management and other resources. We have grown from
50 employees on January 1, 1999 to 76 employees on August 31, 1999. To manage
our growth effectively, we must:
- implement and improve operational and financial systems;
- train and manage our employee base;
- attract and retain qualified personnel with relevant experience; and
- lease additional facilities within the next six months.
We must also manage multiple relationships with customers, business
partners, the DDWG and other third parties, such as our foundry and test
partners. Moreover, we will spend substantial amounts of time and money in
connection with our rapid growth and may have unexpected costs. Our systems,
procedures or controls may not be adequate to support our operations and we may
not be able to expand quickly enough to exploit potential market opportunities.
Our future operating results will also depend on expanding sales and marketing,
research and development and administrative support. If we cannot attract
qualified people or manage growth effectively, our business would be seriously
harmed.
THE YEAR 2000 PROBLEM MAY ADVERSELY AFFECT US BY CAUSING FAILURES IN OUR
INTERNAL SYSTEMS OR IN SYSTEMS USED BY OUR SUPPLIERS, DISTRIBUTORS OR CUSTOMERS.
The Year 2000 problem is the potential for system and processing failure of
date-related data as a result of computer-controlled systems that use two digits
rather than four to define a year in the date field. Many computer hardware
systems and software applications could fail or create erroneous results unless
corrected so that they can correctly process data related to the year 2000 and
beyond. Failures by our internal systems, or by systems used by our suppliers,
distributors or customers, could seriously harm our business. In particular, the
infrastructure of foreign countries where our products are manufactured or our
customers are located may be subject to disruption or failure as a result of the
Year 2000 problem. For additional information concerning this risk and our
assessment of its impact, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
OUR THIRD-PARTY WAFER FOUNDRY, THIRD-PARTY ASSEMBLY AND TEST SUBCONTRACTOR AND
SIGNIFICANT CUSTOMERS ARE LOCATED IN AN AREA SUSCEPTIBLE TO EARTHQUAKES.
Taiwan Semiconductor Manufacturing Company, the outside foundry that
produces all of our semiconductor products, and Advanced Semiconductor
Engineering, or ASE, one of the subcontractors that assembles and tests our
semiconductor products are located in Taiwan, which recently experienced a major
earthquake and is susceptible to future earthquakes. In addition, some of our
significant customers are located in Taiwan. TSMC, ASE and our Taiwanese
customers have not yet completed their assessments of the damage caused by the
recent earthquake. As a result, we do not yet know the extent to which we will
be adversely affected, if at all, by difficulties experienced by TSMC, ASE or
any of our significant Taiwanese customers due to the earthquake. In addition,
damage caused by the recent earthquake or future earthquakes could result in
shortages in water or electricity, which could in turn limit TSMC's production
capacity and ASE's ability to provide assembly and test services. Any reduction
in TSMC's production capacity or the ability of ASE to provide assembly and test
services could cause delays or shortages in our product supply, which would
seriously harm our business.
Customers located in Taiwan were responsible for 57% of our product revenue
for the year ended December 31, 1998 and 35% of our product revenue for the six
months ended June 30, 1999. If the facilities or equipment of these customers
have been damaged as a result of the recent earthquake or are damaged by future
earthquakes, they could reduce their purchases of our products, which would
seriously harm our business. In addition, the operations of suppliers to TSMC,
ASE and our Taiwanese
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customers could have been disrupted by the recent earthquake and could be
disrupted by future earthquakes. These disruptions could disrupt the operations
of TSMC, ASE and our Taiwanese customers, which could in turn seriously harm our
business by resulting in shortages in our product supply or reduced purchases of
our products.
STOCKHOLDERS MAY NOT AGREE WITH MANAGEMENT REGARDING THE USE OF THE NET PROCEEDS
OF THIS OFFERING.
Our management has broad discretion as to how to spend the net proceeds from
this offering and may spend those proceeds in ways with which our stockholders
may not agree. We cannot assure you that our investments and use of the net
proceeds of this offering will yield favorable returns or results. See "Use of
Proceeds."
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL OF SILICON IMAGE AND MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK.
Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:
- authorizing the issuance of preferred stock without stockholder approval;
- providing for a classified board of directors with staggered, three-year
terms;
- prohibiting cumulative voting in the election of directors;
- requiring super-majority voting to amend some provisions in our
certificate of incorporation and bylaws;
- limiting the persons who may call special meetings of stockholders; and
- prohibiting stockholder actions by written consent.
Provisions of Delaware law also may discourage, delay or prevent someone
from acquiring or merging with us. See "Description of Capital Stock--Preferred
Stock" and "--Anti-takeover Provisions."
EXISTING STOCKHOLDERS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK, WHICH MAY
ALLOW THEM TO CONTROL THE ELECTION OF DIRECTORS AND APPROVAL OR DISAPPROVAL OF
SIGNIFICANT CORPORATE ACTIONS FOLLOWING THIS OFFERING.
Immediately after the offering, it is anticipated that our executive
officers, directors and other principal stockholders will beneficially own or
control, directly or indirectly approximately 49.8% of the outstanding shares of
common stock. As a result, if these persons act together, they will
significantly influence, and will likely control, the election of our directors
and approval or disapproval of our significant corporate actions. This influence
over our affairs might be adverse to the interests of other stockholders. In
addition, the voting power of these stockholders could have the effect of
delaying or preventing a change in control of Silicon Image. See "Principal
Stockholders."
OUR COMMON STOCK HAS NOT BEEN PUBLICLY TRADED AND WE EXPECT THAT THE PRICE OF
OUR STOCK MAY FLUCTUATE SUBSTANTIALLY.
Recently, the stock prices of technology companies similar to Silicon Image
have been quite volatile. Moreover, prior to this offering, there has been no
public market for our common stock. The initial public offering price has been
determined through negotiations between the underwriters and us. You may not be
able to resell your shares at or above the initial public offering price. The
market price of our common stock may fluctuate significantly in response to a
number of factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance;
- changes in financial estimates of securities analysts;
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- changes in market valuations of other technology companies;
- announcements by us or our competitors of significant technical
innovations, design wins, contracts, standards or acquisitions; and
- the operating and stock price performance of other comparable companies.
Due to these factors, the price of our stock may decline and the value of
your investment would be reduced. In addition, the stock market experiences
extreme volatility that often is unrelated to the performance of particular
companies. These market fluctuations may cause our stock price to decline
regardless of our performance.
OUR BUSINESS MAY BE HARMED BY CLASS ACTION LITIGATION DUE TO STOCK PRICE
VOLATILITY.
In the past, securities class action litigation often has been brought
against a company following periods of volatility in the market price of its
securities. Companies in the semiconductor industry and other technology
industries are particularly vulnerable to this kind of litigation due to the
high volatility of their stock prices. Accordingly, we may in the future be the
target of securities litigation. Securities litigation could result in
substantial costs and could divert our management's attention and resources.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS OUR STOCK
PRICE.
After this offering, we will have outstanding 25,137,274 shares of common
stock. Sales of a substantial number of shares of our common stock in the public
market following this offering could cause our stock price to decline. All the
shares sold in this offering will be freely tradable, except for those shares
reserved by the underwriters for sale to employees, directors and other persons
associated with us, which will be subject to the restrictions on sale described
in "Underwriting." Of the remaining 21,237,274 shares of common stock
outstanding after this offering, approximately 19,370,425 shares will be
eligible for sale in the public market beginning 180 days after the effective
date of this offering. The remaining 1,866,849 shares will become freely
tradable at various times thereafter. In addition, the sale of these shares
could impair our ability to raise capital through the sale of additional stock.
See "Shares Eligible for Future Sale."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intend," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. We cannot
guarantee future results, levels of activity, performance or achievements. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including the risk
outlined under "Risk Factors" and elsewhere in this prospectus.
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USE OF PROCEEDS
The net proceeds to us from the sale of the 3,900,000 shares of common stock
offered by us will be approximately $41.9 million or approximately $48.5 million
if the underwriters' over-allotment option is exercised in full, at the initial
public offering price of $12.00 per share and after deducting the underwriting
discounts and commissions and the estimated offering expenses payable by us.
We intend to use the net proceeds from this offering primarily for general
corporate purposes, including working capital and capital expenditures, and for
the repayment of the outstanding balance under our line of credit. As of June
30, 1999, the outstanding balance under our line of credit was $757,000, bearing
interest at a rate of 8.25% per year. We may use a portion of the net proceeds
from this offering to acquire or invest in businesses, technologies or services
that are complementary to our business. However, we have no present plans or
commitments and are not engaged in any negotiations with respect to any
transactions of this type.
The amounts that we use for working capital purposes will vary significantly
depending on a number of factors. We will retain broad discretion in the
allocation and use of the net proceeds of this offering. Pending their use, we
intend to invest the net proceeds in short-term, interest-bearing,
investment-grade securities.
The principal purposes of this offering are to increase our working capital,
create a public market for our stock, increase our visibility and facilitate
future access by us to public equity markets.
DIVIDEND POLICY
We have never declared or paid cash dividends on shares of our capital
stock. We intend to retain any future earnings to finance future growth and do
not anticipate paying cash dividends in the future. In addition, the terms of
our line of credit prohibit us from paying cash dividends on our capital stock
without prior consent of the lender.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all outstanding shares
of preferred stock into 11,657,000 shares of common stock and the filing
of our amended and restated certificate of incorporation upon completion
of this offering; and
- on a pro forma as adjusted basis to reflect the sale of 3,900,000 shares
of common stock in this offering at the initial public offering price of
$12.00 per share, after deducting the underwriting discounts and
commissions and the estimated offering expenses payable by us and the
application of the net proceeds from the offering. See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
Cash and short term investments.............................................. $ 12,647 $ 12,647 $ 53,814
--------- ----------- -----------
--------- ----------- -----------
Line of credit............................................................... $ 757 $ 757 $ --
--------- ----------- -----------
--------- ----------- -----------
Capital lease obligations, long-term......................................... $ 773 $ 773 $ 773
--------- ----------- -----------
Stockholders' equity
Convertible preferred stock, $0.001 par value; 10,065,000 shares
authorized, 9,560,000 shares issued and outstanding, actual; 5,000,000
shares authorized, none issued or outstanding, pro forma and pro forma as
adjusted................................................................. 10 -- --
Common stock, $0.001 par value; 21,500,000 shares authorized, 9,463,000
shares issued and outstanding, actual; 75,000,000 shares authorized,
21,120,000 shares issued and outstanding, pro forma; 75,000,000 shares
authorized, 25,020,000 shares issued and outstanding, pro forma as
adjusted................................................................. 9 21 25
Additional paid-in capital................................................. 34,796 34,794 76,714
Notes receivable from stockholders......................................... (1,461) (1,461) (1,461)
Unearned compensation...................................................... (7,513) (7,513) (7,513)
Accumulated deficit........................................................ (16,689) (16,689) (16,689)
--------- ----------- -----------
Total stockholders' equity............................................... 9,152 9,152 51,076
--------- ----------- -----------
Total capitalization................................................... $ 9,925 $ 9,925 $ 51,849
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- --------------------------
The number of shares of common stock outstanding set forth in the table
above excludes the following:
- 1,149,000 shares issuable upon the exercise of outstanding stock options,
at a weighted average exercise price of $0.53 per share;
- 317,856 shares issuable upon the exercise of outstanding warrants, at a
weighted average exercise price of $2.08 per share, and 142,857 shares
issuable upon exercise of a warrant at an exercise price of $0.35 a share
that we are obligated to issue upon satisfaction of a milestone as
described under "Certain Transactions--Transactions with Intel and Its
Subsidiary, Chips and Technologies;"
- 2,689,000 shares available for future issuance under our 1995 Equity
Incentive Plan, 1999 Equity Incentive Plan and 1999 Employee Stock
Purchase Plan, subject to automatic annual increases each January 1 as
described under "Management--Employee Benefit Plans;" and
- Subsequent to June 30, 1999 and through August 31, 1999, we granted
options to purchase a total of 753,000 shares of common stock at a
weighted average exercise price of $5.60.
18
<PAGE>
DILUTION
As of June 30, 1999, our pro forma net tangible book value was approximately
$9.2 million, or $0.43 per share of common stock. Pro forma net tangible book
value per share represents the amount of our total tangible assets less total
liabilities, divided by 21,120,274 shares of common stock outstanding after
giving effect to the conversion of all outstanding shares of preferred stock
into shares of common stock upon completion of this offering. Dilution in net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of our common stock in this offering and the
net tangible book value per share of our common stock immediately following this
offering.
After giving effect to the receipt of the net proceeds from the sale of the
3,900,000 shares of our common stock at the initial public offering price of
$12.00 per share and after deducting the underwriting discounts and commissions
and the estimated offering expenses, our pro forma net tangible book value as of
June 30, 1999 would have been approximately $51.1 million, or $2.04 per share.
This represents an immediate increase in pro forma net tangible book value of
$1.61 per share to existing stockholders and an immediate dilution of $9.96 per
share to new investors purchasing shares at the initial public offering price.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.............................. $ 12.00
Pro forma net tangible book value per share as of June 30, 1999.... $ 0.43
Increase per share attributable to new investors................... 1.61
---------
Pro forma net tangible book value per share after this offering...... 2.04
---------
Dilution per share to new investors.................................. $ 9.96
---------
---------
</TABLE>
The following table summarizes as of June 30, 1999, on the pro forma basis
described above, the number of shares of common stock purchased from us, the
total consideration paid to us and the average price per share paid by existing
stockholders and by new investors purchasing shares of common stock in this
offering, before deducting underwriting discounts and commissions and the
estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............................. 21,120,274 84% $ 23,043,000 33% $ 1.09
New investors...................................... 3,900,000 16 46,800,000 67 12.00
------------ --- ------------- ---
Total............................................ 25,020,274 100% $ 69,843,000 100%
------------ --- ------------- ---
------------ --- ------------- ---
</TABLE>
The above discussion and tables assume no exercise of any stock options or
warrants for common stock outstanding as of June 30, 1999. As of June 30, 1999,
there were options outstanding to purchase a total of 1,149,000 shares of common
stock at a weighted average exercise price of $0.53 per share and warrants
outstanding to purchase a total of 317,856 shares of common stock with a
weighted average exercise price of $2.08 per share. In addition, upon
satisfaction of a milestone, we are obligated to issue a warrant for an
additional 142,857 shares exercisable at $0.35 per share. Subsequent to June 30,
1999 and through August 31, 1999, we granted options to purchase a total of
753,000 shares of common stock at a weighted average exercise price of $5.60. If
any of these options or warrants are exercised, there will be further dilution
to new public investors. Please see "Capitalization," "Management-- Employee
Benefit Plans," "Certain Transactions--Transactions with Intel and Its
Subsidiary, Chips and Technologies" and Note 8 of Notes to Financial Statements.
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with,
and are qualified by reference to, our financial statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The statement of operations
data for the years ended December 31, 1996, 1997 and 1998 and six months ended
June 30, 1999, and the balance sheet data as of December 31, 1997 and 1998 and
June 30, 1999, are derived from, and are qualified by reference to, our audited
financial statements which are included elsewhere in this prospectus. The
statement of operations data for the year ended December 31, 1995, and the
balance sheet data as of December 31, 1995 and 1996 are derived from our audited
financial statements which are not included in this prospectus. The statement of
operations data for the six months ended June 30, 1998 are derived from our
unaudited financial statements which are included elsewhere in this prospectus.
In the opinion of management, the unaudited financial statements have been
prepared on the same basis as the audited financial statements and contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of our results of operations for these periods and financial
condition at that date. The historical results presented below are not
necessarily indicative of future results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ --------------------
1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue........................................... $ -- $ 30 $ 1,280 $ 7,703 $ 2,652 $ 7,706
Development and license revenue........................... -- 1,121 1,582 100 25 575
--------- --------- --------- --------- --------- ---------
Total revenue............................................... -- 1,151 2,862 7,803 2,677 8,281
Cost and operating expenses:
Cost of product revenue................................... -- 5 851 4,314 1,711 3,328
Research and development.................................. -- 1,307 3,176 4,524 1,956 3,060
Selling, general and administrative....................... 180 1,811 2,990 4,335 1,906 3,052
Stock compensation and warrant expense.................... -- -- -- 1,361 184 2,898
--------- --------- --------- --------- --------- ---------
Total operating expenses.................................... 180 3,123 7,017 14,534 5,757 12,338
--------- --------- --------- --------- --------- ---------
Loss from operations........................................ (180) (1,972) (4,155) (6,731) (3,080) (4,057)
Interest income............................................. 3 32 171 242 31 210
Interest expense and other, net............................. (1) (4) (52) (133) (54) (62)
--------- --------- --------- --------- --------- ---------
Net loss.................................................... $ (178) $ (1,944) $ (4,036) $ (6,622) $ (3,103) $ (3,909)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Net loss per share:
Basic and diluted......................................... $ (0.51) $ (0.98) $ (1.14) $ (1.39) $ (0.72) $ (0.73)
Weighted average shares................................... 350 1,981 3,533 4,766 4,301 5,327
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Pro forma net loss per share(1):
Basic and diluted (unaudited)............................. $ (0.46) $ (0.23)
--------- ---------
--------- ---------
Weighted average shares (unaudited)....................... 14,483 16,984
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------ -----------
1995 1996 1997 1998 1999
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and short-term investments........................................ $ 802 $ 2,271 $ 2,773 $ 11,497 $ 12,647
Working capital........................................................ 715 846 1,530 8,953 8,740
Total assets........................................................... 926 3,175 4,371 14,774 16,014
Line of credit......................................................... -- -- 372 757 757
Capital lease obligations, long term................................... -- 10 -- 300 773
Total stockholders' equity............................................. 839 1,658 2,593 9,852 9,152
</TABLE>
- ------------------------------
(1) Pro forma net loss per share has been calculated assuming the conversion of
our preferred stock into shares of common stock, as if such conversion had
occurred at the beginning of the period.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE NOTES TO THE FINANCIAL STATEMENTS INCLUDED IN THIS
PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY FACTORS,
INCLUDING THOSE DISCUSSED IN "RISK FACTORS," "BUSINESS" AND ELSEWHERE IN THIS
PROSPECTUS. WE ASSUME NO OBLIGATION TO UPDATE THE FORWARD-LOOKING STATEMENTS OR
SUCH FACTORS.
OVERVIEW
We develop and market semiconductors for applications that require
cost-effective integrated solutions for high-speed data communications. We are
initially focusing our technology on the local interconnect between host systems
and digital displays, including flat panel displays and digital CRTs. The
products we have shipped to date enable host systems to transmit digital video
data and displays to receive and manipulate digital video data. These products
are based on our PanelLink digital interface technology and Digital Visual
Controller architecture. They enable our customers to introduce all-digital
displays, thereby eliminating the need for analog technology in both host
systems and displays.
From our inception in 1995 through the first half of 1997, we were primarily
engaged in developing our first generation PanelLink digital transmitter and
receiver products and our high-speed digital interconnect technology,
establishing our digital interface technology as an open standard and building
strategic customer and foundry relationships. During that period, we derived
substantially all of our revenue from development contracts providing for the
joint development of technologies for high-speed digital communication and of
panel controllers for flat panel displays, and license fees from licenses of our
high-speed digital interconnect technology. We have incurred losses in each year
since inception, as well as for the six months ended June 30, 1999. At June 30,
1999, we had an accumulated deficit of $16.7 million.
In the third quarter of 1997, we began shipping our first generation
PanelLink digital transmitter and receiver products in volume. Since that time,
we have derived predominantly all of our revenue from the sale of our PanelLink
products. We have introduced two new generations of transmitter and receiver
products providing higher speed and increased functionality since the first
generation PanelLink products. In the first quarter of 1999, we introduced our
first generation digital display controller product based on our DVC
architecture. Our digital display controller products integrate our receiver
with digital image processing and display controller technology, providing a
solution to enable intelligent displays for the mass-market.
We focus our sales and marketing efforts on achieving design wins with
leading host system and display OEMs worldwide. We rely on a combination of
direct sales personnel, distributors, and manufacturer's representatives
throughout the world to sell our products. We recognize revenue from product
sales to direct customers upon shipment. Reserves for sales returns and
allowances are recorded at the time of shipment. Our sales to distributors are
made under agreements allowing for returns or credits under some circumstances
and we defer recognition of revenue on sales to distributors until we estimate
that the products are resold by the distributor to the end user. These estimates
are based upon reports from these distributors and our analysis of these
distributor reports as well as other information obtained by us.
Development and license revenues have been primarily derived from two
development contracts and a limited number of patent and technology licenses.
Development and license revenues are recognized as development milestones are
met or as license fees are earned. We do not anticipate that development and
license revenue will be material in the future.
21
<PAGE>
Historically, a relatively small number of customers and distributors have
accounted for a significant portion of our product revenue. Our top five
customers, including distributors, accounted for 90.6% of product revenue in
1998 and 57.7% of product revenue in the six-month period ended June 30, 1999.
Recently, the percentage of our revenue attributable to sales to distributors
has increased substantially. Much of this increase reflects revenue from design
wins with new OEMs which rely on third-party manufacturers or distributors to
provide inventory management and purchasing functions. See "Risk Factors--We
depend on a few key customers and the loss of any of them could significantly
reduce our revenue" and "--Our increasing dependence on selling through
distributors increases the risks and complexity of our business."
In addition, a significant portion of our products are sold overseas. Sales
to customers in Asia, including distributors, accounted for 69.1% of product
revenue in 1998 and 72.1% of product revenue in the six-month period ended June
30, 1999. Although the percentage of our revenues derived from some countries,
such as Canada, Korea and Taiwan, has varied significantly from period to
period, this is largely due to design wins with specific customers that
incorporate our products into systems that are sold worldwide. Accordingly, the
variability in our sales in these countries is not necessarily indicative of any
geographic trends. See Note 10 of Notes to Financial Statements. Since many
manufacturers of flat panel displays and personal computers are located in Asia,
we expect that a majority of our product revenues will continue to be
represented by sales to customers in that region. In addition, we have recently
increased our selling efforts in Japan. All revenue to date has been denominated
in U.S. dollars. See "Risk Factors--We face foreign business, political and
economic risks because a majority of our products and our customers' products
are manufactured and sold outside of the United States."
Product gross margin increased over the past several quarters due to
increasing overall average selling prices and decreasing product costs. The
increase in average selling prices was due to increases in sales of
higher-bandwidth products to a broader customer base, and increases in sales of
our receiver products. We anticipate that our product gross margin may fluctuate
and may decline.
We are a "fabless" semiconductor company--that is, we do not own our own
manufacturing, assembly and test facilities. Instead, we use independent
contractors to perform wafer manufacturing and assembly and test operations.
This approach allows us to focus on defining, developing, and marketing our
products and significantly reduces the amount of capital we need to invest in
manufacturing assets. See "Risk Factors--We depend on a single third-party wafer
foundry to manufacture all our products, which reduces our control over the
manufacturing process" and "--We depend on third-party subcontractors for
assembly and test, which reduces our control over the assembly and test
processes."
We will incur substantial stock compensation expense in future periods which
represents non-cash charges incurred as a result of the issuance of stock
options to employees and consultants. With respect to stock options granted to
employees, such charges are recorded based on the difference between the deemed
fair value of the common stock and the option exercise price of such options at
the date of grant, which is amortized under the accelerated method over the
option vesting period. At June 30, 1999, the amount of employee unearned
compensation was $7.5 million which will be amortized in future periods. The
charge related to options granted to consultants is calculated at the end of
each reporting period based upon the Black-Scholes model, which approximates
fair value and is amortized based on the term of the consulting agreement or
service period. The amount of the charge in each period can fluctuate depending
on our stock price and volatility.
Charges associated with the fair value of warrants issued to Intel were
expensed as Intel progressed towards achievement of a milestone. In September
1998, we entered into several agreements with Intel Corporation. Under the terms
of these agreements, we issued to Intel two warrants, each to purchase 142,857
shares of our common stock. The first warrant was issued in September 1998 and
was immediately exercisable at an exercise price of $3.50 per share. The second
warrant was issued in
22
<PAGE>
September 1998 and became exercisable on March 31, 1999 at an exercise price of
$0.35 per share. Charges associated with the fair value of the warrants issued
to Intel were expensed as Intel progressed towards achievement of a milestone.
We are obligated to issue an additional warrant to Intel for 142,857 shares of
our common stock exercisable at $0.35 per share upon satisfaction of a
milestone. In the event that we issue this warrant, we will record an expense
which will be equal to the fair value of the warrant at the time of issuance.
The size of this expense may be significant and will be dependent on the price
and volatility of our stock at that time. Please see "Certain
Transactions--Transactions with Intel and Its Subsidiary, Chips and
Technologies" and "Risk Factors--Our relationship with Intel does not guarantee
that Intel will cooperate with us in the future" and "--Our relationship with
Intel involves competitive risks" for a description of our agreements with Intel
and risks of the relationship.
Substantially all of our sales are made on the basis of purchase orders
rather than long-term agreements. In addition, the sales cycle for our products
is long which may cause us to experience a delay between the time we incur
expenses and the time we generate revenue from these expenditures. We intend to
increase our investment in research and development, selling, general and
administrative functions and inventory as we seek to expand our operations. We
anticipate the rate of new orders may vary significantly from quarter to
quarter. Consequently, if anticipated sales and shipments in any quarter do not
occur when expected, expenses and inventory levels could be disproportionately
high, seriously harming our operating results for that quarter and, potentially,
future quarters. See "Risk Factors--Our quarterly operating results may
fluctuate significantly in the future due to factors related to how we manage
our business" and "--Our lengthy sales cycle can result in uncertainty and
delays in generating revenues."
RESULTS OF OPERATIONS
The following table sets forth statement of operations data expressed as a
percentage of total revenue for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ---------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue................................. 2.6% 44.7% 98.7% 99.1% 93.1%
Development and license revenue................. 97.4 55.3 1.3 0.9 6.9
--------- --------- --------- --------- ---------
Total revenue..................................... 100.0 100.0 100.0 100.0 100.0
--------- --------- --------- --------- ---------
Cost and operating expenses:
Cost of product revenue......................... 0.4 29.7 55.3 63.9 40.2
Research and development........................ 113.6 111.0 58.0 73.1 37.0
Selling, general and administrative............. 157.3 104.5 55.6 71.2 36.8
Stock compensation and warrant expense.......... 0.0 0.0 17.4 6.9 35.0
--------- --------- --------- --------- ---------
Total operating expenses.......................... 271.3 245.2 186.3 215.1 149.0
--------- --------- --------- --------- ---------
Loss from operations.............................. (171.3) (145.2) (86.3) (115.1) (49.0)
Interest income................................... 2.8 6.0 3.1 1.2 2.5
Interest expense and other, net................... (0.4) (1.8) (1.7) (2.0) (0.7)
--------- --------- --------- --------- ---------
Net loss.......................................... (168.9)% (141.0)% (84.9)% (115.9)% (47.2)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
23
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
PRODUCT REVENUE. Product revenue increased 191%, from $2.7 million for the
six months ended June 30, 1998 to $7.7 million for the six months ended June 30,
1999. The increase in product revenue was derived primarily from significantly
higher unit shipments of transmitters and receivers, driven by increased market
acceptance of digital-ready host systems and displays. The increase in unit
volume resulted primarily from new design wins with new customers in Japan as
demand for flat panel displays was particularly strong in that region. In
addition, in the six months ended June 30, 1999, a larger proportion of our
revenue was derived from sales of receiver products, which are generally higher-
priced than transmitter products.
DEVELOPMENT AND LICENSE REVENUE. Development and license revenue increased
from $25,000 for the six months ended June 30, 1998 to $575,000 for the six
months ended June 30, 1999. In the first quarter of 1999, we recognized $550,000
of development revenue, which represented amounts previously recorded as
deferred revenue under a contract for the development of display technology that
was terminated during the period when the other party, a Korean corporation,
decided to reduce its research and development expenses. We do not expect
development and license revenue to represent a material portion of total revenue
in the future.
COST OF PRODUCT REVENUE. Cost of product revenue consists primarily of the
costs of manufacturing, assembly and test of our semiconductor devices and our
related overhead costs. Product gross margin (product revenue minus cost of
product revenue, as a percentage of product revenue) increased from 35.5% for
the six month period ended June 30, 1998 to 56.8% for the six month period ended
June 30, 1999. The increase in product gross margin was due to higher average
selling prices and lower unit product costs. The increase in average selling
prices was due to an increase in sales of higher-speed products, an increase in
sales to customers that were not eligible for volume discounts, and an increase
in sales of our higher-priced receiver products. The reduction in product costs
was primarily the result of more efficient designs and lower manufacturing
costs. We anticipate that our product gross margin may decrease from current
levels in future periods as a result of increased competition in our markets.
RESEARCH AND DEVELOPMENT. R&D consists primarily of compensation and
associated costs relating to development personnel, consultants and prototypes.
R&D was $2.0 million, or 73.1% of total revenue for the six months ended June
30, 1998, and $3.1 million or 37.0% of total revenue for the six months ended
June 30, 1999. The increase in absolute dollars was primarily due to the hiring
of additional development personnel and outside consultants and an increase in
prototyping costs. Our research and development staff increased from 14 at June
30, 1998 to 23 at June 30, 1999. We expect that R&D will continue to
significantly increase in absolute dollars in the future.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A consists primarily of employee
salaries, sales commissions, and marketing and promotional expenses. SG&A was
$1.9 million, or 71.2% of total revenue, for the six months ended June 30, 1998,
and $3.1 million or 36.8% of total revenue for the six months ended June 30,
1999. SG&A increased in absolute dollars due primarily to hiring of additional
personnel, expanded sales and marketing activities related to the further
broadening of our customer and product base in 1999 and increased sales
commissions. Our sales and marketing staff increased from 13 at June 30, 1998 to
23 at June 30, 1999, and administrative and finance staff increased from 10 at
June 30, 1998 to 12 at June 30, 1999. We expect that SG&A will continue to
increase in absolute dollars as we hire additional personnel, expand our sales
and marketing efforts, pay increased sales commissions and incur costs
associated with being a public company.
STOCK COMPENSATION AND WARRANT EXPENSE. Stock compensation and warrant
expense was $184,000, or 6.9% of total revenue for the six months ended June 30,
1998, and $2.9 million, or 35.0% of total revenue for the six months ended June
30, 1999. A substantial portion of the increase was due to the
24
<PAGE>
amortization of unearned compensation related to the vesting of employee stock
options, and additional amounts related to progress made towards the achievement
of a milestone on a warrant issued to Intel.
INTEREST INCOME. Interest income increased from $31,000 in the six months
ended June 30, 1998 to $210,000 for the six months ended June 30, 1999. This
increase was principally due to higher average cash balances resulting from the
net proceeds of the sale of convertible preferred stock in the third quarter of
1998.
INTEREST EXPENSE. Interest expense increased from $54,000 in the six months
ended June 30, 1998 to $62,000 for the six months ended June 30, 1999. This
increase was the result of an increase in the average outstanding debt and an
increase in fixed assets held under a capital lease.
PROVISION FOR INCOME TAXES. We have not recorded a provision for federal or
state income taxes through June 30, 1999 since we have experienced net tax
losses since inception. We have recorded a valuation allowance for the full
amount of our net deferred tax assets, as the future realization of the tax
benefit is not likely.
At June 30, 1999 we had net operating loss carry-forwards for federal and
state tax purposes. For federal tax purposes our net operating loss
carry-forwards were approximately $16.1 million and our state tax carry-forwards
were $5.4 million. These federal and state tax loss carry-forwards are available
to reduce future taxable income and expire at various dates into fiscal 2019.
Under the provisions of the Internal Revenue Code, some substantial changes in
our ownership may limit the amount of net operating loss carry-forwards that
could be utilized annually in the future to offset taxable income.
YEAR ENDED DECEMBER 31, 1996, 1997 AND 1998
PRODUCT REVENUE. Product revenue increased from $30,000 in 1996 to $1.3
million in 1997, and increased to $7.7 million in 1998. In April 1997, we began
shipping our initial PanelLink transmitter and receiver products. Product
revenue increased from 1997 to 1998 primarily as a result of significantly
higher unit shipments of transmitters. The increase was primarily due to sales
to Mitac and ATI. These manufacturers are significant suppliers to Compaq, with
whom we had a major design win for our transmitter in 1998.
DEVELOPMENT AND LICENSE REVENUE. Development and license revenue was $1.1
million in 1996, $1.6 million in 1997 and $100,000 in 1998. Development and
license revenue in 1996 and 1997 was primarily derived from two significant
development contracts entered into in 1996. We also derived revenue from license
fees paid during these years for licenses of our high-speed digital interconnect
technology.
COST OF PRODUCT REVENUE. Product gross margin increased from 33.5% in 1997
to 44.0% in 1998. In 1996 product gross margin was 83.3% on $30,000 of product
revenue. The increase in product gross margin in 1998 was primarily due to
higher average selling prices resulting from the introduction of new products
and a reduction in product costs. Product costs declined due to a general
decrease in the prices charged by contract manufacturers of semiconductors, and
improvements in the yields achieved in manufacturing our products. Cost of
product revenue increased as a percentage of total revenue in each year
primarily due to decreases in our development and license revenue as a
percentage of total revenue.
RESEARCH AND DEVELOPMENT. R&D was $1.3 million, or 114% of total revenue
for 1996, $3.2 million, or 111% of total revenue for 1997, and $4.5 million, or
58.0% of total revenue for 1998. The increases in absolute dollars were
primarily due to the hiring of additional development personnel and outside
consultants and an increase in prototyping costs. Our research and development
staff increased from six at December 31, 1996 to 12 at December 31, 1997 and 17
at December 31, 1998.
25
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. SG&A was $1.8 million, or 157% of
total revenue for 1996, $3.0 million, or 104% of total revenue for 1997, and
$4.3 million, or 55.6% of total revenue for 1998. The year to year increases in
absolute dollars were due primarily to the hiring of additional personnel,
increased sales commissions, expanded marketing activities for our initial
product introductions in 1997 and the broadening of our customer and product
base in 1998. Our sales and marketing staff increased from six at December 31,
1996 to 11 at December 31, 1997 to 16 at December 31, 1998, and our
administrative and finance staff increased from seven at December 31, 1996 to
nine at December 31, 1997 to 11 at December 31, 1998.
STOCK COMPENSATION AND WARRANT EXPENSE. Stock compensation and warrant
expense was $1.4 million, or 17.4% of total revenue in 1998. A substantial
portion of the expense in 1998 was due to the amortization of unearned
compensation related to the vesting of employee stock options, and additional
amounts were related to progress made towards the achievement of milestones on
warrants issued to Intel.
INTEREST INCOME. Interest income was $32,000 in 1996, $171,000 in 1997 and
$242,000 in 1998. In each year, the increase in interest income was primarily
due to interest earned on higher average cash balances.
INTEREST EXPENSE. Interest expense was $4,000 in 1996, $52,000 in 1997 and
$133,000 in 1998. The increases in interest expense were primarily due to higher
average debt balances.
PROVISION FOR INCOME TAXES. We have not recorded a provision for federal or
state income taxes in 1996, 1997 and 1998 as we have experienced net tax losses
since inception.
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected quarterly financial information for
each of the six quarters ended June 30, 1999. This information is unaudited but,
in our opinion, reflects all adjustments, consisting only of normal recurring
adjustments that we consider necessary for a fair presentation of this
information in accordance with generally accepted accounting principles. These
quarterly results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30,
1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue........................................... $ 1,051 $ 1,601 $ 2,014 $ 3,037 $ 3,486 $ 4,220
Development and license revenue........................... -- 25 25 50 575 --
-------- -------- -------- -------- -------- --------
Total revenue............................................... 1,051 1,626 2,039 3,087 4,061 4,220
Cost and operating expenses:
Cost of product revenue................................... 607 1,104 1,140 1,463 1,578 1,750
Research and development.................................. 1,008 948 1,140 1,428 1,441 1,619
Selling, general and administrative....................... 824 1,082 1,165 1,264 1,339 1,713
Stock compensation and warrant expense.................... 38 146 554 623 1,391 1,507
-------- -------- -------- -------- -------- --------
Total operating expenses.................................... 2,477 3,280 3,999 4,778 5,749 6,589
-------- -------- -------- -------- -------- --------
Loss from operations........................................ (1,426) (1,654) (1,960) (1,691) (1,688) (2,369)
Interest income............................................. 22 9 84 127 87 123
Interest expense and other, net............................. (13) (42) (38) (40) (29) (33)
-------- -------- -------- -------- -------- --------
Net loss.................................................... $(1,417) $ (1,687) $ (1,914) $(1,604) $(1,630) $ (2,279)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
Product revenue........................................... 100.0% 98.5% 98.8% 98.4% 85.8% 100.0%
Development and license revenue........................... 0.0 1.5 1.2 1.6 14.2 0.0
-------- -------- -------- -------- -------- --------
Total revenue............................................... 100.0 100.0 100.0 100.0 100.0 100.0
Cost and operating expenses:
Cost of product revenue................................... 57.8 67.9 55.9 47.4 38.9 41.4
Research and development.................................. 95.9 58.3 55.9 46.3 35.5 38.4
Selling, general and administrative....................... 78.4 66.5 57.1 40.9 33.0 40.6
Stock compensation and warrant expense.................... 3.6 9.0 27.2 20.2 34.2 35.7
-------- -------- -------- -------- -------- --------
Total operating expenses.................................... 235.7 201.7 196.1 154.8 141.6 156.1
-------- -------- -------- -------- -------- --------
Loss from operations........................................ (135.7) (101.7) (96.1) (54.8) (41.6) (56.1)
Interest income............................................. 2.1 0.6 4.1 4.1 2.2 2.9
Interest expense and other, net............................. (1.2) (2.6) (1.9) (1.3) (0.7) (0.8)
-------- -------- -------- -------- -------- --------
Net loss.................................................... (134.8)% (103.7)% (93.9)% (52.0)% (40.1)% (54.0)%
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
PRODUCT REVENUE. Product revenue increased from the preceding quarter in
each of the six quarters ended June 30, 1999. The increase in product revenue
was derived primarily from significantly higher unit shipments driven by
increased market acceptance of digital-ready host systems and displays
27
<PAGE>
and the addition of new customers and distributors. We believe that the increase
in market acceptance and expansion of our customer and distributor base in the
first two quarters of 1999 was largely due to the publication of the DVI
specification and the selection of our technology as the basis for this
specification. For more information about market acceptance of our products and
the DVI specification, see "Business--Intellectual Property" and "Risk
Factors--Growth of the market for our products depends on the widespread
adoption and use of the DVI specification." In addition, in these two quarters,
a larger proportion of our product revenue was derived from sales of receiver
products, which are generally higher-priced than transmitter products. Prior to
1999, our products had achieved only limited market acceptance. In the second,
third and fourth quarters of 1998, a majority of our product revenue consisted
of sales of transmitters to Mitac and ATI. These manufacturers are suppliers to
Compaq, with whom we had a design win in early 1998. Our combined product
revenue from Mitac and ATI significantly declined in the first and second
quarters of 1999. See "Risk Factors--We depend on few key customers and the loss
of any of them could significantly reduce our revenue."
DEVELOPMENT AND LICENSE REVENUE. In the first quarter of 1999, we
recognized $550,000 of development revenue, which represented amounts previously
recorded as deferred revenue under a development contract that was terminated
during the period. In addition, we received other revenue from patent licenses
during the last three quarters of 1998 and the first quarter of 1999.
COST OF PRODUCT REVENUE. The following table sets forth product gross
margin for the six quarters ended June 30, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30,
1998 1998 1998 1998 1999 1999
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Product gross margin:................................. 42.2% 31.0% 43.4% 51.8% 54.7% 58.5%
</TABLE>
Product gross margin decreased in the second quarter of 1998 to 31.0%
primarily due to establishing reserves for the return of non-saleable products
under a distribution agreement that expired in that quarter. In the fourth
quarter of 1998, the product margin increase to 51.8% was primarily attributable
to decreases in transmitter product costs. The increases in product margin in
the first two quarters of 1999 are primarily a result of continued increases in
overall average selling prices due to continued increases in the breadth of our
customer base, continued increases in receiver products sold, and product cost
reductions. Cost of product revenue as a percentage of total revenue has varied
from quarter to quarter, primarily due to changes in our product gross margin
and changes in our development and license revenue.
RESEARCH AND DEVELOPMENT. R&D increased, in general, in absolute dollars
primarily due to the hiring of additional development personnel and consultants,
and an increase in prototyping costs.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A has increased quarter to quarter
in absolute dollars primarily due to hiring additional personnel, increased
sales commissions and expanded marketing activities to broaden our customer base
and product mix.
STOCK COMPENSATION AND WARRANT EXPENSE. Stock compensation and warrant
expense increased in each quarter primarily as a result of option grants to
employees and increases in the associated amortization of unearned compensation
related to the vesting of employee stock options. In the third and fourth
quarter of 1998 and the first quarter of 1999, we incurred additional expenses
related to the progress made by Intel towards the achievement of milestones on
warrants issued to them.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed operations through a combination of
private sales of convertible preferred stock, lines of credit and capital lease
financing. At June 30, 1999, we had $8.7 million in working capital and $12.6
million in cash, cash equivalents and short-term investments.
We used cash in our operating activities in the amount of $505,000 in 1996,
$4.5 million in 1997 and $3.7 million in 1998. In 1996, 1997 and 1998, cash used
for operating activities was attributable primarily to the net loss in each
year. Our operating activities provided cash in the amount of $269,000 during
the six months ended June 30, 1999. The increase in cash for this period was
primarily a result of an increase in accounts payable and deferred margin on
sales to distributors, partially offset by the net loss and a decrease in
accrued liabilities and deferred revenue. Accounts payable increased as a result
of an overall increase in our inventory levels and operating expenses, as our
business has grown, as well as the timing of our disbursements within each
period. The deferred margin on sales to distributors increased as a result of an
overall increase in the amount of shipments to distributors, as our revenue
recognition policy is to defer recognition of revenue on sales to distributors
until we estimate that the products are sold by the distributor to the end
customer. The amount of our accounts receivable at each period-end varies,
primarily due to the timing of our shipments within the period. To date, we have
not experienced any material collection difficulties.
We used cash in our investing activities in the amount of $724,000 in 1996,
$300,000 in 1997 and $1.7 million in 1998. In 1996 and 1997, cash used in
investing activities was attributable to purchases of property and equipment. In
1998, the use of cash was attributable to purchases of short-term investments
and property and equipment. For the six months ended June 30, 1999, cash used by
investing activities was $673,000 which was primarily attributable to purchases
of short-term investments.
Net cash provided by financing activities was $2.7 million in 1996, $5.3
million in 1997, $12.8 million in 1998 and $994,000 in the first six months of
1999. In 1996, 1997 and 1998, cash provided by financing activities was
primarily attributable to proceeds from the issuance of convertible preferred
stock. In 1999, cash provided by financing activities was primarily attributable
to proceeds from the financing of property and equipment and the exercise of
stock options.
In December 1998, we entered into a line of credit agreement, which provides
for borrowings of up to $4.0 million based on and secured by eligible accounts
receivable. Borrowings accrue interest at the bank's commercial lending rate
plus 0.25%, which equaled 8.25% at June 30, 1999. On June 30, 1999, we were in
compliance with all line of credit covenants, we had borrowed $757,000 under
this line of credit and an additional $755,000 was available for borrowing. This
line of credit expires in April 2000. In February 1999, we entered into a $2.5
million capital lease line that allows for the leasing of equipment and software
over 33 to 42 month terms. The stated interest rate under this lease line is
8.0%. The lease line expires in October 2000. On June 30, 1999, we were in
compliance with all lease line covenants and we had borrowed $841,000 under this
lease line.
We lease equipment and software under short-term and long-term leases with
terms ranging from one to three years. We intend to exercise purchase options at
the end of the lease terms for a minimal cost. We also plan to spend up to
approximately $3.0 million during the next 12 months for test equipment,
potential tenant improvements and additional equipment and software. We lease
our facility under a noncancelable operating lease which expires in December
2002. We currently intend to relocate our headquarters to larger facilities and
are actively seeking rental space. We will incur additional costs related to any
relocation and may have to pay rent on two leases for a period of time.
We believe that the net proceeds from this offering, together with existing
cash balances and funds available under our existing credit facilities, will be
sufficient to meet our capital requirements for at least the next 12 months.
After this period, capital requirements will depend on many factors, including
29
<PAGE>
the levels at which we maintain inventory and accounts receivable, costs of
securing access to adequate manufacturing capacity and increases in our
operating expenses. To the extent that funds generated by this offering,
together with existing resources and 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. Additional funds may not be available, or
if available, we may not be able to obtain them on terms favorable to us or our
stockholders. See "Use of Proceeds."
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS
INTEREST RATE RISK
Our cash equivalents and short-term investments are exposed to financial
market risk due to fluctuation in interest rates, which may affect our interest
income and the fair market value of our investments. We manage the exposure to
financial market risk by performing ongoing evaluations of our investment
portfolio and investing in short-term investment-grade corporate securities.
These securities are highly liquid and generally mature within 12 months from
our purchase date. Due to the short maturities of our investments, the carrying
value approximates the fair value. In addition, we do not use our investments
for trading or other speculative purposes.
We have performed an analysis to assess the potential effect of reasonably
possible near-term changes in interest and foreign currency exchange rates. The
effect of such rate changes is not expected to be material to our results of
operations, cash flows or financial condition. All transaction to date have been
denominated in United States dollars.
As of June 30, 1999, our cash included money market securities. Due to the
short duration of our investment portfolio, an immediate 10% change in interest
rates would not have a material effect on the fair market value of our
portfolio. Therefore, we would not expect our operating results or cash flows to
be affected to any significant degree by the effect of a sudden change in market
interest rates on our securities portfolio.
FOREIGN CURRENCY EXCHANGE RISK
Substantially all of our sales are denominated in U.S. dollars and as a
result, we have relatively little exposure to foreign currency exchange risk
with respect to any of our sales. We do not currently enter into forward
exchange contracts to hedge exposures denominated in foreign currencies or any
other derivative financial instruments for trading or speculative purposes. The
effect of an immediate 10% change in exchange rates would not have a material
impact on our future operating results or cash flows.
YEAR 2000 COMPLIANCE
We are aware of the widely publicized problems associated with computer
systems as they relate to the Year 2000. Many existing computer hardware systems
and software applications, and embedded computer chips, software and firmware in
control devices use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. Others do
not correctly process "leap year" dates. As a result, such system applications
and devices could fail or create erroneous results unless corrected so that they
can correctly process data related to the Year 2000 and beyond. These problems
are expected to increase in frequency and severity as the Year 2000 approaches.
We have commenced our business risk assessment of the impact that the Year
2000 problem may have on our operations. As business conditions warrant, this
assessment may be revised as new information is made available to us. To date,
we have identified the following key areas of our business that may be affected:
30
<PAGE>
PRODUCTS. We have evaluated each of our products and believe that they do
not contain date sensitive functionality. We cannot determine whether all of our
customers' products into which our products are incorporated will be Year 2000
compliant because we have little or no control over the design, production and
testing of our customers' products.
THIRD-PARTY SUPPLIERS. We rely, directly and indirectly, on external
systems utilized by our suppliers for the management and control of fabrication,
assembly and test of our products. To date, we have received responses from our
key suppliers, including our most significant supplier Taiwan Semiconductor
Manufacturing Company, which indicate that each believes that it has adequately
addressed its Year 2000 issue or is in the process of developing and
implementing mediation plans. In addition, we have identified our key products
and may increase our inventory levels of these products during the fourth
calendar quarter of this year. For such products, we expect increased demand in
2000 and therefore we do not expect the additional inventory to have a material
effect on our business.
INTERNAL INFRASTRUCTURE. We are conducting an assessment of internal
software applications and computer hardware. The Year 2000 compliance of
hardware including networks, telecommunications equipment, workstations and
other items is nearing completion. Most of the software applications used by us
are generally recent versions of vendor supported, commercially available
products. Because most of the software applications used by us are generally
recent versions of vendor supported, commercially available products, we have
not incurred, and do not expect in the future to incur, significant costs to
upgrade these applications as Year 2000 compliant versions are released by the
respective vendors. We will continue to seek certifications that products
installed are Year 2000 ready, and are targeting October 1999 to complete this
process.
FACILITY SYSTEMS. Systems such as utilities, sprinklers, test equipment and
security at our facilities may also be affected by the Year 2000 problem. We
have commenced assessing the business risks and costs of remediating the Year
2000 problem on our facility related systems. We estimate that our total cost of
completing any required modifications, upgrades or replacements of these systems
will not have a material adverse effect on our business or results of
operations. We currently expect to complete the remediation of our facility
systems by October 30, 1999.
DISTRIBUTOR AND CUSTOMER READINESS. Distributor and customer readiness
focuses on Year 2000 compliance of customer support and inventory management
systems including the development of contingency plans where appropriate, as
well as the ability of our distributors and customers to continue to conduct
business. We are working with our distributors and customers in this effort and
anticipate completing this program by October 1999.
We presently estimate that the total cost of addressing our Year 2000 issues
will not exceed $100,000. This estimate was derived utilizing numerous
assumptions, including the assumption that we have already identified our most
significant Year 2000 issues and that the plans of our third party suppliers,
distributors and customers will be fulfilled in a timely manner without cost to
us. However, these assumptions may not be accurate, and actual results could
differ materially and adversely from those anticipated after completion of
remediation, testing, and contingency planning phases.
We are currently developing contingency plans to address those Year 2000
issues that may pose a significant risk to our ongoing operations. We currently
expect to complete these contingency plans by October 1999. Such plans could
include accelerated replacement of affected equipment software and systems, the
use of back up test and assembly suppliers and buffer inventories or the
implementation of manual procedures to compensate for system deficiencies.
However, any contingency plans we implement may not succeed or may not be
adequate to meet our needs without materially impacting our operations. In
addition, the delays and inefficiencies inherent in conducting operations in an
alternative manner could materially and adversely affect our results of
operations. More specifically, if our third party suppliers or our distributors
were to lose power, or the ability to ship product as a
31
<PAGE>
result of Year 2000 related issues, we would be exposed to missing customer
shipments and potentially lose revenues and profits. We believe the likelihood
of losing revenue and profits from difficulties resulting from Year 2000 issues
is low.
INFLATION
The impact of inflation on our business has not been material for the fiscal
years ended December 31, 1996, 1997 and 1998, or the six months ended June 30,
1999.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards, or 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 supersedes 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 derivative. We do not currently enter into
forward exchange contracts to hedge exposures denominated in foreign currencies
or any other derivative financial instruments for trading or speculative
purposes.
32
<PAGE>
BUSINESS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS
DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS."
We develop and market semiconductors for applications that require
cost-effective, integrated solutions for high-speed data communications. We are
initially focusing our technology on the local interconnect between host
systems, such as PCs, set-top boxes and DVD players, and digital displays, such
as flat panel displays and CRTs. Our current products enable host systems to
transmit digital video data and enable displays to receive and manipulate
digital video data. As with other consumer electronic devices, such as digital
cellular phones, significant benefits can be achieved by converting displays
from analog to digital and by replacing conventional analog connections between
host systems and displays with digital connections.
INDUSTRY BACKGROUND
Two prominent trends in the electronics industry are the increasing demand
for bandwidth and the transition of electronic systems from analog to digital.
Bandwidth, which is often measured in terms of megabits per second, represents
the amount of data that can be transmitted across a medium in a given period of
time. In attempts to address the increasing demand for bandwidth, new
communications standards such as Fast Ethernet, SONET and Fibre Channel have
been adopted, and new classes of communications semiconductors have been
developed to implement these standards. The second trend, the shift from analog
to digital, has made information easier to reliably store, transmit and
manipulate. It has also reduced manufacturing costs, improved quality and
enhanced functionality through the addition of new features that were
unavailable or not practical with analog technologies. For example, many
features, such as messaging, paging and security, became more feasible as
wireless phones converted from analog to digital.
As with wireless phones, significant benefits can be achieved by replacing
analog displays with digital displays. To enable this transition, displays
require digital communication with the host system. Until recently, however,
there was no commercially viable standard that addressed the challenges of
enabling digital communications between host systems, such as PCs, set-top boxes
and DVD players, and video displays, such as flat panel displays and CRTs. A
principal reason that such a standard did not exist was the substantial
technical challenge of developing a cost-effective high-bandwidth solution
capable of transmitting data at the multi-gigabit rates needed to link the host
system to a high-resolution display. This rate is 50 times faster than the Fast
Ethernet networking standard and 500 times faster than cable modems. In the
absence of a digital standard, host systems, though processing data in digital
form, have been forced to convert that data to analog form before transmitting
it to the display. Consequently, the functionality of display devices has
changed little since the introduction of analog cathode ray tubes.
Recognizing the need for a cost-effective, high-bandwidth digital display
solution, Silicon Image developed a digital interconnect technology and began
shipping semiconductor products for digital displays in 1997. To provide a
worldwide, open specification for an all-digital display solution, Silicon
Image, together with Intel, Compaq, IBM, Hewlett-Packard, NEC and Fujitsu,
formed the Digital Display Working Group to define such a specification based on
Silicon Image's technology. In April 1999, the DDWG published the Digital Visual
Interface specification, which defines a high-speed serial data communication
link between host systems and displays. Silicon Image authored major portions of
the DVI specification. Today, over 50 companies, including systems
manufacturers, graphics semiconductor companies and monitor manufacturers are
participants in the DDWG, and many are developing hardware and software products
designed to be compliant with the DVI specification.
33
<PAGE>
<TABLE>
<S> <C> <C> <C>
DDWG MEMBERSHIP
DDWG PROMOTERS
Compaq Hewlett-Packard Intel Silicon Image
Fujitsu IBM NEC
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
DDWG PARTICIPANTS
<CAPTION>
HOST SYSTEM ADD-IN BOARD DISPLAY PROJECTOR SEMICONDUCTOR OTHER
<S> <C> <C> <C> <C> <C>
Apple Computer ATI Technologies Amtran Technology Lightware Analog Devices Amphenol
Gateway AVED Display Daewoo Electronics Proxima Ardent Aurora Systems
MaxVision ELSA AG FED Corporation Sanyo Electric Technologies Foxconn (Hon Hai)
Multi Q I-O Data Hitachi Seiko Epson Avance Logic Precision
Toshiba Number Nine Hosiden Chrontel JAE Electronics
S3 LG Electronics Innovative Joinsoon Electronic
STB Systems EIZO Nanao Semiconductors MNC International
VMIC Nokia Display Pixel Fusion Molex Incorporated
Philips Monitors Pixelworks Rainbow Optics
Princeton Graphics Real 3D Tai-Sol Electronics
Van Koevering Rendition
Xerox Sage
Silicon Magic
Silicon Motion
SP3D Chip Design
</TABLE>
The formation of the DDWG and the release of the DVI specification have
accelerated the shift of display technology to digital. The market research firm
DisplaySearch projects that the number of desktop LCD monitors shipped annually
will grow from five million units in 1999 to 18 million units in 2003.
DisplaySearch further estimates that the digital interface will rapidly gain
market share over analog for desktop LCDs, from 14% in the first quarter of 1999
to 69% in the first quarter of 2001. In addition, three of the five largest
desktop CRT manufacturers are developing digital CRTs compliant with the DVI
specification. According to Stanford Resources, Inc., the overall market for
desktop CRTs will grow from 83 million units in 1999 to 115 million units in
2003. In response to projected growth in the market for digital displays,
manufacturers are seeking to differentiate their products by adding
functionality and intelligence to their displays. Consequently, these companies
are looking for semiconductor solutions that combine high-speed digital
communications technology with the functionality required to enable intelligent
displays for the mass market.
THE SILICON IMAGE SOLUTION
Silicon Image designs, develops and markets semiconductor solutions for
high-speed digital communications. Our technology is designed for applications
that require cost-effective, high-speed integrated solutions for data
transmission, such as the local interconnect between host systems and digital
displays, high-speed networking and data storage. Our initial products enable
host systems to transmit digital video data and allow displays to receive and
manipulate digital video data.
Our key products are based on our PanelLink digital interface technology and
Digital Visual Controller architecture. PanelLink technology is our proprietary
implementation of the DVI specification to provide a high-speed serial digital
link between hosts and digital displays. The DVC architecture is our platform
for developing controllers which integrate PanelLink receiver technology with
additional functionality to enable intelligent displays for the mass market. Key
features of our solution include:
- HIGH-SPEED INTERFACE. Our PanelLink technology transmits data over three
high-speed serial channels at up to 1.67 gigabits per second per channel
for an aggregate speed of approximately five gigabits per second. We
believe that this provides the fastest DVI-compliant interface that has
been publicly announced. PanelLink technology supports such speeds over
twisted-pair copper wire at distances of up to 10 meters and permits
direct coupling with fiber optic interconnect modules for longer distance
data transmission.
34
<PAGE>
- LOW COST OF SYSTEM IMPLEMENTATION. PanelLink technology operates at full
speed over inexpensive twisted-pair copper wire. In addition, our products
are manufactured using cost-effective standard foundry processes and
low-cost plastic packaging. Our all-digital interconnect solution
eliminates the need for additional components currently required in
digital displays to convert data from analog to digital and to remove
errors associated with the conversion.
- SYSTEM LEVEL INTEGRATION. Our solution combines high-speed digital
communication technology with system-level functionality, including
digital image processing and display control. Our DVC architecture is
designed to support the integration of additional functions. Furthermore,
all of its elements can be provided using the same CMOS--Complementary
Metal Oxide Semiconductor--manufacturing processes, simplifying this
integration.
- SCALABILITY. We offer products that support a wide range of standard
display resolutions, from VGA (640 x 480 pixels) to SXGA (1280 x 1024
pixels). Support for these resolutions requires our solution to transmit
and receive data at speeds ranging from 250 megabits to 1.12 gigabits per
second per channel. We have recently demonstrated new products that
support the 1.65 gigabit per second per channel speed necessary to support
advanced ultra-high resolution UXGA (1600 x 1200 pixels) flat panel
displays. We plan to commercially introduce these new products in the
fourth quarter of 1999.
Our solution enables our customers to introduce digital display products,
thereby eliminating the need for analog technology in both the host system and
display. This provides a number of benefits to our customers:
- LOWER COST FOR MASS MARKET ADOPTION. The low cost of implementing our
PanelLink technology helps our customers offer intelligent displays
targeting the consumer market.
- EASE OF USE. Use of our all-digital solution enables "plug and play"
connection of any digital display to any digital-ready host system--that
is, no configuration must be done by the end-user.
- IMPROVED VISUAL EXPERIENCE. Our high-bandwidth solution enables the
transmission of data-intensive video images in digital form, without
degradation of image quality. Because our solution is all-digital, it
eliminates the errors associated with the use of an analog interface, such
as flicker, fuzziness and color variation.
- ABILITY TO ADD NEW FEATURES AND DIFFERENTIATE PRODUCTS. Our technology
enables our customers to add new features and functions to their displays
and to offer differentiated products. For example, one of our existing
products enables image quality to be directly controlled in the display
rather than in the host system. In addition, our products are
programmable, allowing our customers to configure image processing and
user interface functions.
- ACCELERATED TIME TO MARKET. By using our products instead of developing
solutions internally, our customers can shorten their design time for
digital display products. The highly integrated nature of our products
simplifies the design of digital displays.
35
<PAGE>
SILICON IMAGE STRATEGY
Our objective is to be a leading provider of semiconductors that enable
high-speed digital communications and optimize cost per bandwidth across
targeted communications markets. Key elements of our strategy are to:
TARGET THE DISPLAY MARKET FIRST
While our technologies are applicable to solving the needs of multiple
markets, we have initially chosen to focus our efforts on being the leading
provider of high-speed solutions for the large and rapidly growing digital
display market. Relative to other data communication applications, the digital
display interface demands a particularly high-speed, low cost solution that
operates over a wide range of transmission speeds. Our technology effectively
addresses these demands and incorporates many additional features and
capabilities. Companies shipping displays which incorporate our products include
Apple, Compaq, Fujitsu, Gateway, Hitachi, IBM, NEC, Princeton Graphics, Sharp
and ViewSonic.
PROMOTE OPEN INDUSTRY STANDARDS
We believe that the widespread acceptance of the DVI specification and
subsequent enhancements to this specification will lead to broader market
penetration of digital displays in many different applications, help us maintain
our leadership position and create new opportunities for us. We are one of the
seven founding members of the DDWG and a member of its governing board. We
authored major portions of the DVI specification and developed the core
technology upon which the specification is based. We intend to continue to
actively participate in defining and promoting open industry standards. We
believe that our participation will provide us with valuable insight and
relationships and assist us in rapidly bringing new standards-based products to
market.
DRIVE BROAD ADOPTION OF DIGITAL-READY HOST SYSTEMS
We believe that broad adoption of digital-ready host systems will drive the
widespread transition to all-digital displays. Accordingly, we aggressively
market our host-based transmitter products and promote the adoption of the DVI
specification, in order to expand the market for our receiver and display
controller products. To date, we have shipped over 3.5 million units of our
PanelLink transmitter products. In the PC industry, we have achieved transmitter
design wins with leading host system OEMs, including Compaq, Fujitsu, Hitachi,
IBM and NEC, and with makers of video graphics accelerators, including ATI
Technologies, Diamond Multimedia and Number Nine. While continuing to focus on
the PC industry, we intend to follow a similar strategy for other host systems,
such as set-top boxes, game consoles and DVD players.
INCREASE THE INTELLIGENCE OF DISPLAYS THROUGH HIGHLY INTEGRATED RECEIVER
SOLUTIONS
We believe the conversion to end-to-end digital displays allows a
significant amount of functionality to shift from the host system to the display
and the addition of new capabilities to the display. Our display controllers
integrate additional functionality with our receiver technology to enable a new
class of intelligent displays and allow display vendors to differentiate and
increase the value of their products. We are focusing a substantial amount of
our product development, marketing and sales efforts on DVI-compliant display
controllers.
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<PAGE>
MAINTAIN TECHNOLOGY LEADERSHIP
We are the inventor of the technology upon which the DVI specification is
based and have substantial experience in the design, manufacture and deployment
of semiconductor products incorporating this high-speed data communications
technology. We are developing our fourth generation of transmitter and receiver
products and believe that this experience provides us with significant
competitive advantages. In particular, our broadband clock and data recovery
technology in our receivers exceeds the reliability specifications established
in various multi-gigabit communication standards. The advanced nature of our
high-speed digital design allows us to integrate significant functionality with
high-speed communications capabilities using industry-standard, low-cost CMOS
processes. We intend to continue to focus significant resources on maintaining
and extending our technology leadership.
PENETRATE NEW MARKETS AND APPLICATIONS
We intend to use our core technical competencies and relationships with key
partners and customers to develop solutions for additional markets. We believe
our technology is well suited to many applications requiring high bandwidth and
system level integration. To address these opportunities, we are focusing on
developing products and technologies for new markets, primarily the gigabit
networking and high-speed serial interface storage markets.
STRATEGIC RELATIONSHIPS
As part of our business strategy, we have established strategic
relationships with key customers and partners.
INTEL RELATIONSHIP
In September 1998, Silicon Image entered into an agreement with Intel
Corporation to work together to develop and promote adoption by the PC industry
of a complete digital display interface based on our PanelLink technology. As
part of the strategic relationship, Intel became an equity investor in Silicon
Image and the companies entered into a patent cross license and other
agreements. See "Certain Transactions--Transactions with Intel and Its
Subsidiary, Chips and Technologies."
DIGITAL DISPLAY WORKING GROUP
Silicon Image, together with Intel, Compaq, IBM, Hewlett-Packard, NEC and
Fujitsu, announced the formation of the DDWG in October 1998. Subsequently, the
parties entered into a Promoter's Agreement in which they agreed to:
- define, establish and support the DVI specification, an open industry
specification for an all-digital display solution;
- encourage broad and open industry adoption of the DVI specification, in
part by creating an implementer's forum that others may join in order to
receive information and support relating to the DVI specification; and
- invite third parties to enter into a Participant's Agreement in order to
consult on the content, feasibility and other aspects of the DVI
specification.
JOINT DEVELOPMENT OF DIGITAL CRTS
We have been collaborating with Acer, ADI Corp. and Samsung, three of the
world's top five CRT monitor manufacturers, in their design and development of
CRTs incorporating DVI-compliant DVCs that we are developing and expect to
introduce commercially in the first half of 2000. These manufacturers, as well
as NEC and ViewSonic, recently demonstrated digital CRTs that incorporate these
DVCs.
BRANDING RELATIONSHIPS
Currently, we have branding relationships with Compaq and NEC. In exchange
for rebates or other consideration, these manufacturers use the PanelLink brand
on their products, product boxes, product collateral and web sites.
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<PAGE>
MARKETS
Our current target markets consist of host systems, including PCs, set-top
boxes and DVD players, and displays, including flat panel displays and CRTs. In
addition, we believe our technologies are well suited to new markets such as
high-speed networking and storage applications.
HOST SYSTEMS
PERSONAL COMPUTERS
Dataquest projects that the desktop personal computer market will grow from
89 million units in 1999 to 150 million units in 2003. Several large PC
manufacturers, including Compaq, Fujitsu, Hitachi and IBM, are shipping
digital-ready desktop PCs which incorporate our semiconductor products. Based on
the number of transmitters we have shipped, we estimate that more than three
million digital-ready PCs have shipped over the last 18 months.
Dataquest projects that the notebook PC market will grow from 17 million
units in 1999 to 29 million units in 2003. We believe that there are two
opportunities for DVI-compliant digital interfaces in the notebook PC market:
replacement of the external analog video-out interface and replacement of the
internal interface to the notebook display.
SET-TOP BOXES AND DVD PLAYERS
Selantek Market Research projects that the digital set-top box market will
grow from 19 million units in 1999 to 56 million units in 2002. High definition
content is driving the demand for higher quality displays, such as
high-definition televisions based on CRTs, digital projectors and flat panel
displays. The interface to such a high definition display/television requires a
digital link that provides high-speed data transmission in order to preserve the
digital image quality. While no digital interface specification has been
defined, the DVI specification is well-suited to the needs of this market. We
believe there is a significant opportunity for DVI-compliant transmitter
products in this market. We also believe that DVD players would similarly
benefit from a single digital interface standard. Selantek Market Research
projects that the DVD player market will grow from four million units in 1999 to
25 million units in 2003.
DISPLAYS
DISPLAYS FOR DESKTOP COMPUTERS
Stanford Resources, Inc. projects that the market for desktop CRTs will grow
from 83 million units in 1999 to 115 million in 2003. The DVI specification is
designed to enable digital CRTs. CRT manufacturers Acer, ADI Corp. and Samsung,
which Stanford Resources, Inc. estimates together shipped over 18 million CRT
monitors in 1998, are developing DVI-compliant digital CRTs. ViewSonic has also
announced plans to market DVI-compliant digital CRTs.
DisplaySearch projects that the market for desktop LCDs will grow from
nearly five million units in 1999 to 18 million units in 2003. DisplaySearch
further projects that the digital interface will rapidly gain market share over
analog for desktop LCDs, from 14% in the first quarter of 1999 to 69% in the
first quarter of 2001.
Until recently, graphics processing capabilities were provided by a separate
semiconductor in the desktop computer. Several major semiconductor companies
have announced that they are developing products that integrate these
capabilities with other system functions such as the computer's central
processing unit. We believe that this trend will limit the display-specific
functionality provided by the host system, and will create an opportunity for
digital display OEMs to provide more advanced or specialized capabilities in the
display. We believe that the market growth for digital desktop displays, as
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<PAGE>
well as the trend towards increasing the capabilities of the display, provides a
significant market opportunity for DVI-compliant display controller products.
DISPLAYS FOR WIDE-SCREEN TV SYSTEMS
Stanford Resources, Inc. projects that the market for wide format display
systems, including HDTV display systems, will grow from eight million units in
1999 to over 14 million units in 2003. We believe wide format display systems
will benefit from use of a digital interface and all-digital image processing.
DISPLAYS FOR OTHER APPLICATIONS
In addition to PC applications, LCD displays are used in automobile
navigation, automobile televisions, industrial displays, kiosks and
point-of-sale displays. DisplaySearch projects that the combined market for
automobile navigation and television displays will grow from three million units
in 1998 to seven million units in 2003. DisplaySearch projects that the market
for industrial displays will grow from five million units in 1998 to nine
million units in 2003. Currently these displays use a variety of interfaces. We
believe the markets for these displays would benefit from a single industry
standard digital interface. We believe that the DVI specification can address
the interface requirements of these markets.
HIGH-SPEED NETWORKING AND STORAGE APPLICATIONS
Dataquest projects that the overall number of Gigabit Ethernet ports for
high-speed networks will grow from over two million in 1999 to over 22 million
in 2003. Dataquest also projects that the market for high-bandwidth hard disk
drive solutions, which use high-speed interfaces such as Serial ATA and Fibre
Channel, will grow from 1.5 million units in 1999 to over 114 million units in
2003. Our core technology allows data transmission at 1.67 gigabits per second
over twisted-pair copper wire in display applications. We believe our technology
is well-suited to address the high bandwidth requirements of the gigabit
networking and high-speed serial interface storage markets.
CUSTOMERS
We have achieved design wins with many leading host system and display
manufacturers. To date, we have shipped over four million semiconductor devices,
including transmitters, receivers and controllers. Our products have been
designed into host systems and displays from the following companies:
<TABLE>
<S> <C> <C>
HOST SYSTEM COMPANIES DISPLAY SYSTEM COMPANIES
- ---------------------------- ----------------------------------- -----------------------------------
PCS LCD DISPLAYS PROJECTORS
ACER* ACER* COMPAQ
COMPAQ APPLE CTX*
FUJITSU COMPAQ NEC
HITACHI FUJITSU PROXIMA
IBM GATEWAY SANYO
MITAC* HITACHI SHARP
NEC IBM -----------------------------------
SHARP LG ELECTRONICS* LCD PANELS
TOSHIBA MATSUSHITA LG LCD
- ----------------------------------- MITAC* SAMSUNG
GRAPHICS ADD-IN BOARDS NEC TOSHIBA
ATI PRINCETON GRAPHICS
DIAMOND MULTIMEDIA SAMSUNG ELECTRONICS*
ELSA VIEWSONIC
LEADTEK
MATROX
NUMBER NINE
3DLABS
</TABLE>
* These companies sell unbranded products to other companies which
incorporate our products.
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<PAGE>
We focus our sales and marketing efforts on achieving design wins with
leading host system and display OEMs. In most cases, these OEMs outsource
manufacturing functions to third parties. Therefore, once we have won the
design, we typically help these third party manufacturers rapidly bring the
design to production. Once the design is complete, we sell our products to these
third party manufacturers either directly or indirectly through distributors. In
1998, sales to Mitac, a third party manufacturer, accounted for 54% of our total
revenues, and ATI, a leading graphics board manufacturer, accounted for 12% of
our total revenues. These manufacturers are significant suppliers to Compaq,
with whom we had a major design win for our transmitter in 1998. For the six
month period ended June 30, 1999, Mitac accounted for 13% of our total revenues,
Kanematsu, a Japanese distributor, accounted for 13% of our total revenues and
Microtek, a Japanese distributor, accounted for 11% of our total revenues. For a
description of the risk of our customer concentration, see "Risk Factors--We
depend on a few key customers and the loss of any of them could significantly
reduce our revenues."
Recently, the percentage of our revenues attributable to sales through
distributors has increased substantially. Much of this increase reflects design
wins with new OEMs which rely on third-party manufacturers or distributors to
provide inventory management and purchasing functions. See "Risk Factors--Our
increasing dependence on selling through distributors increases the risks and
complexity of our business."
PRODUCTS
Silicon Image designs, develops and markets semiconductors for high-speed
digital communications. We have chosen to focus initially on the digital display
market because it is a rapidly growing and potentially large market in which we
are a technology leader. All of our current products are manufactured using
low-cost, standard foundry CMOS processes at Taiwan Semiconductor Manufacturing
Corporation in Taiwan. In addition to our primary products, we develop and sell
reference design kits that represent application examples for incorporation of
our products into our customers' equipment. By providing these reference design
kits, we can assist the manufacturer in achieving easier and faster transitions
from initial prototype designs through final production releases. Our primary
products are transmitters for host systems and receivers and display controllers
for displays. In 1998, over 75% of our product revenues resulted from the sale
of transmitter products to manufacturers of host systems. While revenues from
the sale of receivers and display controllers have increased in the past six
months, transmitters continue to represent between 50% and 60% of our product
revenues.
HOST SYSTEM PRODUCTS
Our PanelLink transmitters reside in the host system and take digital video
data from a graphics source, convert it to DVI-compliant digital output and
transmit that output to a receiver in the display. We market discrete
transmitters to manufacturers of PC motherboards, graphics boards and other
applications such as point-of-sale terminal systems. Our transmitters operate at
speeds of 0.75 to 3.36 gigabits per second, supporting resolutions from VGA to
SXGA, and we have recently demonstrated a transmitter product which operates at
a maximum speed of five gigabits per second, which supports UXGA resolution
(1600 x 1200 pixels) in flat panel displays. Our transmitters directly interface
with video graphics processors from companies such as 3Dfx, 3Dlabs, ATI, Intel,
Matrox, nVidia, S3 and Trident and have been included in PC systems from leading
companies such as Compaq, Fujitsu and NEC. As part of our strategy to drive the
broad adoption of digital-ready host systems, we have licensed our transmitter
technology to other semiconductor companies and we intend to do so in the
future.
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<PAGE>
Our host system products are:
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
PANELLINK TRANSMITTERS
MAXIMUM MAXIMUM TARGET INTRODUCTION
PRODUCT RESOLUTION BANDWIDTH MARKETS DATE
SiI 100 Tx XGA 2.04 Gbps Point-of-sale Q2 1997
(1040x768 pixels) terminals
SiI 140 Tx High-refresh XGA 2.58 Gbps PC motherboards and Q4 1997
(1040x768 pixels) add-in boards
SiI 150 Tx SXGA 3.36 Gbps PC motherboards, add- Q3 1998
(1280x1024 pixels) in boards and flat
panel displays
SiI 154 Tx SXGA 3.36 Gbps PC motherboards and Q1 1999
(1280x1024 pixels) add-in boards
SiI 164 Tx UXGA 5 Gbps PC motherboards and Q4 1999*
(1600x1200 pixels) add-in boards
</TABLE>
* Anticipated commercial introduction date.
DISPLAY SYSTEM PRODUCTS
We have three families of display products: PanelLink receivers, Digital
Visual Controllers and Intelligent Panel Controllers.
PANELLINK RECEIVERS
Our PanelLink receivers reside in the display and receive DVI-compliant
input and restore the digital video data. We market receivers to manufacturers
of flat panel displays, CRTs, projectors and point-of-sale terminals. Our
receivers operate at speeds from 0.75 to 3.36 Gbps, supporting resolutions from
VGA to SXGA, and we have recently demonstrated a receiver product which operates
at a maximum speed of five gigabits per second, which supports UXGA resolution
(1600 x 1200 pixels) in flat panel displays. To ensure reliable data
transmission, our receivers have been designed to exceed many of technical
requirements of the DVI specification, such as having a lower pixel error rate
than the DVI specification. Our receivers have been included in display systems
from leading manufacturers such as Compaq, Fujitsu, Hitachi, IBM, NEC, Princeton
Graphics, Proxima, Sanyo, Sharp and ViewSonic.
Our receiver products are:
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
PANELLINK RECEIVERS
MAXIMUM MAXIMUM TARGET INTRODUCTION
PRODUCT RESOLUTION BANDWIDTH MARKETS DATE
SiI 101 Rx XGA 2.04 Gbps Point-of-sale Q2 1997
(1040x768 pixels) terminals
SiI 141 Rx high-refresh XGA 2.58 Gbps PC motherboards and Q4 1997
(1040x768 pixels) add-in boards
SiI 151 Rx SXGA 3.36 Gbps Flat panel displays Q3 1998
(1280x1024 pixels)
SiI 161 Rx UXGA 5 Gbps PC motherboards and Q1 2000*
(1600x1200 pixels) add-in boards
</TABLE>
* Anticipated commercial introduction date
DIGITAL VISUAL CONTROLLERS
To enable intelligent displays and consistently deliver a high-quality
digital visual experience, we have developed the Digital Visual Controller
architecture. The DVC architecture is our platform for
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<PAGE>
development of system-level semiconductors that can deliver value-added
functionality to our display customers. Our DVC architecture includes three
functional layers:
[CHART]
There is a rectangle comprised of four connected jigsaw puzzle pieces. The
puzzle piece furthest to the left is red and inside the piece is Silicon Image's
PanelLink Technology logo. To the right of the logo is the phrase "PanelLink
Digital." The left side of the graphic contains graphical representations,
arranged from top to bottom, of a personal computer, a notebook computer and a
DVD player. Each of these representations is connected to the "PanelLink" puzzle
piece by a thick line filled with a series of zeroes and ones. The rectangle
labeled "PanelLink" is connected on the right side to another puzzle piece,
which is yellow, labeled "pixelprecision." Inside the puzzle piece and above the
label "pixelprecision" is Silicon Image's PixelPrecision logo. The puzzle piece
labeled "PixelPrecision" is connected on the right side to a blue puzzle piece
with the words "Display Adaption" inside it. The "Display Adaption" puzzle piece
is connected to another red puzzle piece which is horizontally subdivided into
four smaller puzzle pieces. These smaller puzzle pieces are labeled, from top to
bottom, "Flat Panel Monitor," "Projector," "Digital CRT" and "Future." A thick
line filled with zeroes and ones extends from the right of the "Flat Panel
Monitor" puzzle piece to a graphical representation of a flat panel display. A
thick line filled with zeroes and ones extends from the right of the "Projector"
puzzle piece to a graphic labeled "Projector." A thick line filled with zeroes
and ones extends from the right of the "Digital CRT" puzzle piece to a graphical
representation of a digital CRT monitor.
- THE INTERFACE LAYER. This allows the display to receive digital data from
any DVI-compliant host system. This layer includes our PanelLink receiver
technology. We anticipate that in the future this layer will support
additional input and output capabilities to allow the display to
communicate with the host system or other peripherals.
- THE DIGITAL VIDEO PROCESSING LAYER. This includes our PixelPrecision,
all-digital, image processing technology for functions such as on-screen
display and scaling--that is, switching readily from low to high
resolutions. This layer takes advantage of the reliable digital data
delivered from the host system across the PanelLink interface to produce
high image quality at low cost. We anticipate that in the future this
layer will contain functions such as frame rate conversion and support for
multiple video streams.
- THE DISPLAY ADAPTION LAYER. This layer formats and optimizes the output
from the Digital Video Processing Layer for use on multiple display types,
such as LCDs and CRTs. Our development plans are to support additional
display types such as plasma displays and micro displays. In addition, the
display adaption layer provides capabilities such as gamma correction,
which allows the manufacturer to change the image contrast to match the
characteristics of the individual display.
DVCS FOR FLAT PANEL DISPLAYS. In June 1999, we announced the SiI 801-- the
first product implementing our DVC architecture. The SiI 801 is designed
specifically for high-volume, XGA resolution, flat panel displays. With the SiI
801, a flat panel display supports a full range of digital input resolutions
from VGA to XGA, while scaling the input resolutions to the full XGA resolution
of the display, for a high-quality, full-screen visual experience. The SiI 801
is the first single-chip solution that provides all the necessary interface,
image processing and control functions required for an all-digital flat panel
display. In the first quarter of 2000, we expect to introduce the SiI 851, which
is designed to support input resolutions up to SXGA and to enhance the
functionality of our Display Adaption Layer. As single-chip solutions, our DVCs
for flat panel displays lower overall cost, increase reliability, occupy less
board space and simplify board design and layout. Our DVCs are included in
displays from leading manufacturers such as Compaq and NEC.
DVCS FOR CRTS. We have been collaborating with several leading CRT
manufacturers in their design and development of digital CRTs. Using the DVC
architecture, we are focusing on developing products to enable DVI-compliant
digital CRTs.
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<PAGE>
Our DVC products are:
<TABLE>
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
DIGITAL VISUAL CONTROLLER (DVC)
<CAPTION>
MAXIMUM MAXIMUM TARGET INTRODUCTION
PRODUCT RESOLUTION BANDWIDTH KEY FEATURES MARKETS DATE
<S> <C> <C> <C> <C> <C>
SiI 801 DVC XGA 2.58 Gbps - Scaling Flat panel Q2 1999
(1040x768 pixels) - On-screen displays
display
- Power
management
SiI 851 DVC SXGA 3.36 Gbps - Scaling Flat panel Q1 2000*
(1280x1024 pixels) - On-screen displays
display
- Power
management
- Gamma
correction
- Dithering
SiI 901 DVC UXGA 5 Gbps - Integrated Digital CRT Q2 2000*
(1600x1200 pixels) digital- Progressive scan
to-analog TV
converter
</TABLE>
* Anticipated commercial introduction date.
INTELLIGENT PANEL CONTROLLERS
Our IPCs reside on the LCD module and receive digital input that complies
with either the DVI specification or the LVDS standard (a standard which is
commonly used in notebook PCs). Our IPCs then restore the video data format and
directly interface with LCD module electronics. In addition, our IPC products
contain functionality which simplifies the design of LCD modules by providing
programmable timing controls, and support resolutions from VGA to XGA. We market
IPCs to manufacturers of LCDs for use in notebook and flat panel displays.
Our panel controller products are:
<TABLE>
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
INTELLIGENT PANEL CONTROLLER (IPC)
<CAPTION>
MAXIMUM MAXIMUM TARGET INTRODUCTION
PRODUCT RESOLUTION BANDWIDTH KEY FEATURES MARKETS DATE
<S> <C> <C> <C> <C> <C>
SiI 201 IPC XGA 2.04 Gbps - PanelLink LCDs for notebook Q3 1998
(1040x768 pixels) Receiver PCs and flat panel
- LCD timing displays
controller
SiI 211 IPC XGA 2.94 Gbps - LVDS Receiver LCDs for notebook Q4 1999*
(1040x768 pixels) - LCD timing PCs and flat panel
controller displays
</TABLE>
* Anticipated commercial introduction date.
SILICON IMAGE TECHNOLOGY
We believe that our key technical competencies are our high-speed serial
link technology, semiconductor design expertise, display systems expertise and
high-speed applications expertise.
HIGH-SPEED SERIAL LINK TECHNOLOGY
Serial link technology is the basis for the physical layer, which performs
the electrical signalling, in several data communication protocols, including
Ethernet, Fibre Channel and Asynchronous Transfer Mode. This technology converts
data into into a serial stream that is transmitted sequentially at a constant
rate and then reconstituted into its original form. Our high-speed serial link
technology includes a number of proprietary elements designed to address the
significant challenge of ensuring that the data sent to the display can be
accurately recovered after it has been separated and
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<PAGE>
transmitted in serial streams over three separate wires. These include
proprietary oversampling techniques to reduce errors in distinguishing data from
noise and parallel data recovery algorithms to recover data from the serial
streams. In order to enable the display to recognize this data at the proper
time and rate, our digital serial link technology uses a digital phase-locked
loop combined with a unique phase detecting and tracking method in order to
monitor the timing of the data. These circuit techniques allow for mostly
digital implementation of a high speed serial link that can be manufactured
using standard CMOS processes. We can readily apply our high-speed serial link
technology to all three types of serial transmission methods currently used in
communications systems: synchronous, asynchronous, and plesiochronous.
Synchronous systems, which allow data and the clock, which contains timing
information, to be transmitted simultaneously, are appropriate for short-range
communication links such as computer input/output devices and backplane buses.
Asynchronous systems, in which only data is sent, are appropriate for mid- to
long-range communication links or optical communications. Plesiochronous systems
send only data, but adjust the data flow to effectively achieve the result of a
synchronous transmission. These systems are appropriate for applications such as
processor-to-processor links and general input/output where the sender and the
receiver operate at slightly different clock frequencies.
HIGH-SPEED SEMICONDUCTOR DESIGN EXPERTISE
Our circuit designers are skilled in the design of high-speed, low-power and
mixed-signal CMOS semiconductors. We use advanced design techniques, including
low-power serializer, current mode driver and common mode canceler, to develop
high-speed, highly integrated semiconductors which can be manufactured using
conventional low-cost packages and can transmit and receive data using
inexpensive cables and connectors. Our design methodology combines logic
synthesis and full-custom mixed-signal design, allowing us to develop small,
cost-effective semiconductors.
DISPLAY SYSTEMS EXPERTISE
Our display systems expertise ranges from display technology, driver and
system design to display processing, testing and system integration. In addition
to experience in existing display technologies, our active involvement within
the display community contributes to our understanding of emerging display
technologies.
HIGH-SPEED APPLICATIONS EXPERTISE
We have developed extensive expertise, at the semiconductor and system
design levels, in solving problems related to designing systems using high-speed
semiconductor devices such as electromagnetic compliance. Our expertise in
solving electromagnetic compliance-related problems enables us to make our
semiconductor products easier for our customers to design into their systems. In
addition to providing semiconductor solutions, we assist our customers
throughout the system design process, enabling them to reduce their
time-to-market.
RESEARCH AND DEVELOPMENT
We have assembled a core team of engineers and technologists who have
extensive experience in the areas of high-speed circuit design, digital imaging
and LCD panels and LCD panel electronics. As of June 30, 1999, we had 23
employees in the engineering department, including 13 with Ph.Ds.
From our inception until 1998, our internal research and development efforts
focused primarily on the development of our core PanelLink technology and our
initial transmitter and receiver products and we began our first panel
controller product. In 1998, we improved our PanelLink technology and developed
new transmitter and receiver products, focusing on providing both higher speeds
and improved ease of use. We also began development of our DVC architecture. In
1999, we have focused
44
<PAGE>
our internal research and development efforts on further advancing our PanelLink
technology and DVC architecture and adding new features and functionality to our
display products.
Some of our key technology is developed by academic researchers at Seoul
National University in Korea whom we have retained as consultants. These
researchers operate under the direction of Dr. Jeong, a founder of Silicon Image
and our Chief Technical Adviser. Significant portions of our high-speed serial
link technology were developed under the direction of Dr. Jeong. He continues to
direct our research and development efforts in Korea which focus on applying our
core technology to new markets, such as high-speed networking and storage.
We have invested, and expect that we will continue to invest, significant
funds on research and development activities. Our research and development
expenses were approximately $1.3 million in 1996, $3.2 million in 1997, $4.5
million in 1998 and $3.1 million in the first six months of 1999. For more
information regarding the risks of our research and development efforts, see
"Risk Factors--Our success depends on the development and introduction of new
products, which we may not be able to do in a timely manner because the process
of developing high-speed semiconductor products is complex and costly" and
"--Our dependence on academic researchers located in Korea could adversely
affect our ability to develop and protect key technology."
SALES AND MARKETING
We sell our products through a direct sales force and indirectly through
distributors and manufacturer's representatives. As of June 30, 1999, our sales
and marketing organizations included 23 employees in North America, Europe and
Asia, and our network of distributors and manufacturer's representatives
included seven in Asia, seven in Europe and four in North America.
Our sales and marketing strategy is to achieve design wins with key industry
leaders to help accelerate both the adoption of the DVI specification in host
systems and the conversion to end-to-end digital display systems. We believe
that superior field applications and engineering support are key to building
long-term relationships with leading OEMs and third-party manufacturers. Sales
personnel and applications engineers are dedicated to key customers to promote
close communication and provide a high-level of technical support.
Our marketing efforts focus primarily on promoting adoption of the DVI
specification, working closely with other DDWG members, participating in
industry trade shows and forums, and entering into branding relationships to
build awareness of the PanelLink brand.
MANUFACTURING
WAFER FABRICATION
Our semiconductor products are fabricated using standard CMOS processes,
which permits us to engage independent wafer foundries to fabricate our
semiconductors. By outsourcing our manufacturing requirements, we are able to
avoid the high cost of owning and operating a semiconductor wafer fabrication
facility. This allows us to focus our resources on the design and marketing of
our products. We currently outsource all of our wafer manufacturing to Taiwan
Semiconductor Manufacturing Company, or TSMC. However, we do not have a
long-term agreement with Taiwan Semiconductor Manufacturing Company. If Taiwan
Semiconductor Manufacturing Company were unable or unwilling to meet our
requirements, our business would be seriously harmed. See "Risk Factors--We
depend on a single third-party wafer foundry to manufacture all of our products,
which reduces our control over the manufacturing process" and "--Our
semiconductor products are complex and are difficult to manufacture
cost-effectively."
Our devices are currently fabricated using both 0.5 micron, double-layer
metal and 0.35 micron, triple-layer metal processes. We continuously evaluate
the benefits and feasibility of migrating to a smaller geometry process
technology in order to reduce costs and improve performance.
45
<PAGE>
ASSEMBLY AND TEST
After wafer fabrication, die are assembled into packages and the finished
products are tested. Our products are designed to use low-cost standard packages
and to be tested with widely-available semiconductor test equipment. We
outsource all of our packaging and test requirements to Anam in Korea and ASE in
Taiwan and California. For a description of risks presented by our dependence on
third-party subcontractors, see "Risk Factors--We depend on third-party
subcontractors for assembly and test, which reduces our control over the
assembly and test processes."
The high-speed nature of our products makes it difficult to test our
products in a cost-effective manner before they are assembled. Since the
fabrication yields of our products have historically been high and the costs of
our packaging have historically been low, we test our products after they are
assembled. Defects are not discovered until that time. Our operations personnel
closely review the process control monitor information provided to us by our
foundry. To ensure quality, we have firmly established guidelines for rejecting
wafers that we consider unacceptable. To date, bypassing wafer probe testing has
not caused us to experience higher final test failures or lower yields. However,
lack of wafer probe testing could have adverse effects in case there are
problems with the wafer processing. See "Risk Factors--Our semiconductor
products are complex and are difficult to manufacture cost-effectively."
QUALITY ASSURANCE
We focus on product quality through all stages of the design and
manufacturing process. Our designs are subjected to in-depth circuit simulation
at temperature, voltage and processing extremes before being committed to
silicon. We pre-qualify each of our subcontractors. This pre-qualification
process consists of a series of industry standard environmental product stress
tests, as well as an audit and analysis of the subcontractor's quality system
and manufacturing capability. We also participate in quality and reliability
monitoring through each stage of the production cycle by reviewing electrical
parametric data from our wafer foundry and assembly subcontractors. We closely
monitor wafer foundry production to ensure consistent overall quality,
reliability and yield levels. The facilities of our independent foundry and
assembly and test subcontractors have achieved ISO 9000 certification.
INTELLECTUAL PROPERTY
Our success and future revenue growth will depend, in part, on our ability
to protect our intellectual property. We rely on a combination of patent,
copyright, trademark and trade secret laws, as well as nondisclosure agreements
and other methods to protect our proprietary technologies. We have been issued
four United States patents. These patents expire in 2016, subject to our payment
of periodic maintenance fees. We have filed 17 additional United States patent
applications. Three of these 17 applications have been allowed by the U.S.
Patent and Trademark Office. We cannot assure you that any valid patent will
issue as a result of any applications or, if issued, that any claims allowed
will be sufficiently broad to protect our technology. We also generally control
access to and distribution of our documentation and other proprietary
information. Despite our precautions, it may be possible for a third party to
copy or otherwise obtain and use our products, or technology without
authorization, develop similar technology independently or design around our
patents. See "Risk Factors--We may be unable to adequately protect our
intellectual property."
Upon our inception, we licensed serial link technology from Dr. Jeong, a
founder of Silicon Image and our Chief Technical Adviser. Our current license to
this technology is worldwide and, except in case of bankruptcy or material
breach, perpetual and irrevocable. Dr. Jeong granted rights in this technology
to other companies before licensing it to Silicon Image. Dr. Jeong has agreed,
however, not to grant additional rights to any third parties. Under our license,
we can develop and sell products based on the serial link technology, and
sublicense others to do the same. The serial link technology is a high-speed
communication interconnect technology which is an important element of all of
our
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products and enables them to efficiently transmit data in serial stream at high
speeds. See "Certain Transactions" for additional information regarding our
license agreement with Dr. Jeong.
A significant portion of our technology is developed by consultants based in
Korea. While our agreements with these consultants provide for the assignment of
all intellectual property rights in their work product to us, Korean law may not
effectively provide the same level of protection of our intellectual property
rights as United States law. Effective copyright, trademark and trade secret
protection may be unavailable or limited in foreign countries. See "Risk
Factors--Our dependence on academic researchers located in Korea could adversely
affect our ability to develop and protect key technology."
An important part of our strategy has been to participate in the development
of digital display standards, which we believe are critical to broad market
acceptance of digital display technology. In June 1997, the Video Electronics
Standards Association, commonly referred to as VESA, incorporated elements of
our PanelLink technology into its Plug and Display Standard for notebook and
flat panel displays. In 1998, we decided that broad market acceptance of our
technology would require a more comprehensive standard sponsored by leading
semiconductor and display manufacturers. For example, because some host system
manufacturers using our products used a different connector than that specified
in the VESA standard, host and display manufacturers were faced with the
possibility of incompatible connector configurations, which we believe inhibited
adoption of our technology by manufacturers. As a result, we worked with Intel,
Compaq, IBM, Hewlett-Packard, NEC and Fujitsu to form the DDWG.
Our participation in the DDWG requires that we grant the right to others to
use specific elements of our intellectual property in implementing the DVI
specification in their products at no cost, in exchange for an identical right
to use specific elements of their intellectual property for this purpose. This
reciprocal free license covers the external behavior of the host and display. It
does not, however, extend to the internal methods by which such behavior is
created. Although the DVI specification is an open industry standard, we have
developed proprietary methods of implementing the DVI specification. The
intellectual property that we have agreed to license defines the logical
structure of the interface, such as the number of signal wires, the signalling
types (expressed in voltage or current levels), and the data encoding method for
serial communication. Our implementation of this logical structure in integrated
circuits remains proprietary, and includes our techniques to convert data to and
from a serial stream, our signal recovery algorithms and our circuits to reduce
EMI (electromagnetic interference). We cannot be sure, however, that third
parties will not develop equivalent or superior implementations of the DVI
specification, or that we will succeed in protecting our intellectual property
rights in our proprietary implementation. We agreed to grant rights to the
adopters of the DVI specification in order to promote the adoption of our
technology as an industry standard. We thereby limited our ability to rely on
intellectual property law to prevent the adopters of the DVI specification from
using specific elements of our intellectual property for free. See "Risk
Factors--Our participation in the Digital Display Working Group requires us to
license some of our intellectual property for free, which may make it easier for
others to compete with us."
We entered into a patent cross-license agreement with Intel in which each of
us granted the other a license to use the grantor's patents, with specific
exclusions related to the grantor's current products and anticipated future
products, and network devices. This cross-license agreement expires when the
last licensed patent expires, subject to the right of either party to terminate
the agreement earlier upon material breach by the other party, or a bankruptcy,
insolvency or change of control of the other party. We believe that this
cross-license strengthens our business relationship with Intel. We have
forfeited, however, our ability to rely on intellectual property law to prevent
Intel from using our patents to the extent of this license. See "Risk
Factors--Our relationship with Intel involves competitive risks."
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions. This often results in
significant, protracted litigation. For additional
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information on risks we may face as a result of intellectual property disputes,
see "Risk Factors-- Others may bring infringement claims against us which can be
time-consuming and expensive to defend."
COMPETITION
The high-speed communication, display and semiconductor industries are
intensely competitive. These markets are characterized by rapid technological
change, evolving standards, short product life cycles and decreasing prices. We
believe that the principal factors affecting competition in our markets are
levels of product integration, adherence to industry standards, time-to-market,
cost, product capabilities, system design costs, intellectual property, customer
support and reputation. Our current products face competition from a number of
sources including: analog solutions, DVI-compliant solutions and other digital
interface solutions.
- ANALOG SOLUTIONS. Display systems still predominantly employ an analog
interface. Improvements to analog interface display solutions may slow the
adoption of all-digital display systems. We compete with analog solution
vendors such as Analog Devices and Genesis Microchip.
- DVI-COMPLIANT SOLUTIONS. We believe that over time, the DVI specification
may become widely adopted in the digital display industry and attract
additional market entrants that will compete with us. For example, we
believe that a number of providers of video graphics accelerators are
currently integrating DVI-compliant transmitter technology into their
products. ATI Technologies, a major provider of video graphics
accelerators that improve the speed and image quality of video output from
computers, and one of our significant customers in 1998, recently
introduced a product that contains an internally developed DVI-compliant
transmitter capable of supporting very high resolution.
We anticipate that various companies will develop DVI-compliant receivers.
Entrants in this market may include companies currently shipping analog
image processing solutions, such as Arithmos, Genesis Microchip,
Pixelworks and Sage, as well as companies with other digital interface
solutions such as Texas Instruments and National Semiconductor.
- OTHER DIGITAL INTERFACE SOLUTIONS. Texas Instruments and National
Semiconductor offer proprietary digital interface solutions based on LVDS
technology. While LVDS technology has gained broad market acceptance in
notebook PCs, few PC and display manufacturers have adopted this
technology for use outside of the notebook PC market.
The market for our panel controller products is also very competitive. Some
of our panel controller products are designed to be functionally interchangeable
with similar products sold by Texas Instruments, National Semiconductor and
Thine.
We expect competition to increase in our markets. For example, Genesis
Microchip has announced plans to introduce a DVI-compliant product that will
compete with our DVCs.
In the process of establishing our technology as an industry standard, and
to ensure rapid adoption of the DVI specification, we have agreed to license
specific elements of our intellectual property to others for free. In addition,
we have licensed elements of our intellectual property to Intel and other
semiconductor companies, and we may continue to do so. Competitors could use
these elements of our intellectual property to compete against us. Many of our
competitors have longer operating histories and greater presence in key markets,
greater name recognition, access to large customer bases and significantly
greater financial, sales and marketing, manufacturing, distribution, technical
and other resources than we do. As a result, they may be able to adapt more
quickly to new or emerging technologies and customer requirements or devote
greater resources to the promotion and sale of their product than we may. In
particular, well-established semiconductor companies, such as Analog Devices,
Intel, National Semiconductor and Texas Instruments, may compete against us in
the future. We cannot assure you that we can compete successfully against
current or potential competitors or that
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competition will not seriously harm our business. See "Risk Factors--Our
participation in the Digital Display Working Group requires us to license some
of our intellectual property for free, which may make it easier for others to
compete with us."
EMPLOYEES
As of June 30, 1999, we had a total of 66 employees -- 23 in engineering, 23
in sales and marketing, eight in operations and 12 in finance and
administration. Of these employees, 63 were located in the United States. None
of our employees is represented by a collective bargaining agreement, nor have
we experienced any work stoppage. We consider our relations with our employees
to be good.
We depend on the continued service of our key technical, sales and senior
management personnel and our ability to attract and retain additional qualified
personnel. If we are unable to hire and retain qualified personnel in the
future, our business would be seriously harmed.
FACILITIES
Our headquarters, including our principal administrative and marketing
facilities, are located in approximately 18,000 square feet of space we have
leased in Cupertino, California under a lease expiring December 14, 2002 with a
renewal option for an additional five years. We believe that with our planned
increases in personnel and activities, these facilities will become inadequate
to meet our facility requirements in 2000. Accordingly, we will need to lease
additional space and may need to vacate our current location and attempt to
sublease our current facility. There is currently limited office space available
close to our current location. The additional space we will need to lease may
cost substantially more than our current space, and we may incur substantial
capital expenditures for improvements to a new facility. We are currently
negotiating terms to lease a 50,000 square foot facility, but we have no binding
agreement for such a lease, and it is possible that we may not be able to lease
this facility on favorable terms.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND A KEY CONSULTANT
Our executive officers, directors and a key consultant and their ages as of
August 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- -------------------------------------------------------------------------
<S> <C> <C>
David D. Lee..................... 43 Chairman of the Board, Chief Executive Officer and President
Steve Tirado..................... 45 Executive Vice President, Marketing and Business Development
Daniel K. Atler.................. 40 Vice President, Finance and Administration and Chief Financial Officer
Victor M. Da Costa............... 39 Vice President, Engineering
Deog-Kyoon Jeong................. 40 Chief Technical Adviser (consultant)
Parviz Khodi..................... 40 Vice President, Worldwide Sales
Scott A. Macomber................ 42 Vice President, Business Strategy
Jalil Shaikh..................... 45 Vice President, Operations
Herbert Chang(1)................. 37 Director
Sang-Chul Han.................... 44 Director
David A. Hodges(2)............... 62 Director
Andrew S. Rappaport(1)(2)........ 42 Director
Ronald V. Schmidt(1)............. 55 Director
</TABLE>
- ------------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
DAVID D. LEE has served as Chairman of the Board and Chief Executive Officer
since our inception on January 1, 1995, and in addition served as President from
inception until October 1996 and since June 1999. Prior to founding Silicon
Image, Dr. Lee was a principal investigator at Sun Microsystems, Inc., a
computer networking company, where he led advanced development projects from
1993 to 1995, as a Visiting Scientist at Sun's Technology Development Group and
as Senior Staff Engineer at Sun Labs. Before joining Sun, Dr. Lee was a member
of the research staff at Xerox Corporation's Palo Alto Research Center, from
1989 to 1994. Dr. Lee holds Bachelor of Science, Master of Science and Ph.D.
degrees in Electrical Engineering and Computer Sciences from the University of
California at Berkeley.
STEVE TIRADO has served as Silicon Image's Executive Vice President of
Marketing and Business Development since August 1999. From April 1986 to July
1999, Mr. Tirado held various marketing and management positions at Sun
Microsystems, Inc., a computer networking company, serving most recently as Vice
President of Marketing and Business Development for the NC Systems Group. From
1985 to 1986, Mr. Tirado was President of Tirado, Sorrentino Associates, a
consulting firm. From 1984 to 1985, Mr. Tirado held the position of Marketing
Administration Manager at Qualogy, a mass storage disk drive and controller
company. From 1976 to 1984, Mr. Tirado was a public program administrator and
policy analyst within various government agencies. Mr. Tirado holds a Bachelor
of Arts degree in Psychology from the University of California at Santa Barbara,
a Master of Arts Degree in Organizational Planning and Consultation from Boston
University and a Master of Business Administration degree from the University of
California at Berkeley.
DANIEL K. ATLER has served as Silicon Image's Chief Financial Officer and
Vice President of Finance and Administration since June 1998. Mr. Atler served
as Chief Financial Officer and Vice President of Finance and Administration for
Wireless Access, Inc., a two-way wireless communication systems company, from
January 1995 to November 1997, when Wireless Access, Inc., was acquired by
Glenayre Technologies, Inc., a wireless personal communication systems company.
After the merger, Mr. Atler continued in the same position at Wireless Access
Group, a division of Glenayre Technologies, Inc., from November 1997 to June
1998. From July 1992 to December 1994, Mr. Atler served as Corporate Controller
for Global Village Communication, Inc., a designer, developer and marketer of
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communication products for personal computers. From July 1982 to July 1992, Mr.
Atler was with Ernst & Young, a financial accounting firm, most recently as a
Senior Manager. Mr. Atler holds a Bachelor of Science degree in Business
Administration from Colorado State University.
VICTOR M. DA COSTA has served as Silicon Image's Vice President of
Engineering since October 1998. Dr. Da Costa joined Silicon Image as a Senior
Staff Engineer in February 1996. Dr. Da Costa was a member of the research staff
at the Xerox Corporation's Palo Alto Research Center, from 1991 to 1996. Dr. Da
Costa was a principal engineer at Versatec, a maker of electrostatic plotters,
from 1988 to 1991. Dr. Da Costa holds a Bachelor of Science degree in Physics
from California State University of Fresno, a Master of Arts degree in Physics
from the University of California at Davis and a Ph.D. in Experimental Condensed
Matter Physics from the University of California at Davis.
DEOG-KYOON JEONG was a founder of Silicon Image and has served as Chief
Technical Adviser in a consulting capacity since October 1995. Since August
1991, Dr. Jeong has been on the faculty of the School of Electrical Engineering
at Seoul National University. Dr. Jeong holds the position of associate
professor. From June 1989 to August 1991, Dr. Jeong worked at Texas Instruments,
a semiconductor company, as a research scientist. Dr. Jeong holds Bachelor of
Science and Master of Science degrees in Electrical Engineering from Seoul
National University and a Ph.D. in Electrical Engineering and Computer Sciences
from the University of California at Berkeley.
PARVIZ KHODI has served as Silicon Image's Vice President of Worldwide Sales
since August 1998. Mr. Khodi joined Silicon Image in July 1998 as Director of
Asia Pacific Sales. From November 1987 to July 1998, Mr. Khodi worked at Chips
and Technologies, Inc., a maker of semiconductor chips principally for the
graphics market, where he held various technical and managerial sales positions,
most recently Director, Asia Pacific Sales. From 1986 to 1987, Mr. Khodi was a
field applications engineer at Touch Communications, Inc., a software networking
company. From 1984 to 1986, Mr. Khodi was an applications engineer at Intel. Mr.
Khodi holds Bachelor of Science and Master of Science degrees in Electrical
Engineering from the University of Kansas.
SCOTT A. MACOMBER has served as Silicon Image's Vice President of Business
Strategy since June 1999. Mr. Macomber joined Silicon Image in December 1995, as
Vice President, Business Development and a member of the board of directors. Mr.
Macomber served as President of Silicon Image from October 1996 to June 1999 and
as a director from December 1995 until June 1999. From 1989 until 1995, Mr.
Macomber served in various marketing and management capacities at LSI Logic
Corporation, a semiconductor company, most recently as Director of Corporate
Development. Mr. Macomber was one of a founding group of employees at Silicon
Solutions Corporation, a maker of high-performance computers, and was employed
there from 1983 to 1987 in a number of managerial, marketing and engineering
positions. From 1980 until 1982, Mr. Macomber was a member of the technical
staff at Bell Telephone Laboratories, the research and development division of
the American Telephone and Telegraph Company. Mr. Macomber holds a Bachelor of
Science degree in Electrical Engineering from the University of Michigan, a
Master of Science degree in Electrical Engineering from Stanford University and
a Master of Business Administration degree from Stanford University.
JALIL SHAIKH has served as Silicon Image's Vice President of Operations
since September 1996. From August 1994 to August 1996, he served as Director of
Engineering Operations for graphics and multimedia products at Trident
Microsystems, a designer, developer and marketer of digital media. From July
1991 to August 1994, he served as Product Engineering Manager at Micro Linear
Corporation, an analog and mixed signal semiconductor company. Mr. Shaikh holds
a Master of Science degree in Electrical Engineering from Rutgers, The State
University of New Jersey and a Master of Business Administration degree from the
University of Phoenix.
HERBERT CHANG has served as a director of Silicon Image since July 1998.
Since April 1996, Mr. Chang has served as president of InveStar Capital, Inc., a
venture capital fund management company. From July 1994 to March 1996, Mr. Chang
was Senior Vice President at WK Technology
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Fund, a venture capital fund. From September 1991 to June 1994, Mr. Chang was
Vice President of DynaLab, Inc., a developer of fonts for Asian characters. From
July 1986 to August 1991, Mr. Chang was Assistant Vice President at Acer, Inc.,
a Taiwanese manufacturer of personal computers. Mr. Chang holds a Bachelor of
Science degree in Geology from National Taiwan University and a Master of
Business Administration degree from National Chiao-Tung University. Mr. Chang
currently serves as a director of NetIQ Corporation, a developer of applications
management software, and several private companies.
SANG-CHUL HAN has served as a director of Silicon Image since April 1996.
Dr. Han is the founder of KNCS, Inc., a cable system operator in Seoul, Korea,
and has served as a director since 1994. Dr. Han also founded Ewoo Films, a film
production company, and served as its president from 1992 to 1994. Dr. Han has
held the position of director of RK Industrial Co., a trading company in Seoul,
Korea, since 1988. Dr. Han holds a Bachelor of Science degree in Engineering
from Seoul National University and a Ph.D. in Finance from the New York
University.
DAVID A. HODGES has served as a director of Silicon Image since February
1997. Dr. Hodges is a Professor in the Graduate School and the Daniel M. Tellep
Distinguished Professor Emeritus at the University of California at Berkeley,
where he has been a member of the faculty in the department of Electrical
Engineering and Computer Sciences since 1970. From 1990 to 1996, Dr. Hodges
served as Dean of the College of Engineering at the University of California at
Berkeley. From 1966 to 1970, Dr. Hodges worked at Bell Telephone Laboratories,
the research and development division of the American Telephone and Telegraph
Company. Dr. Hodges holds a Bachelor of Electrical Engineering degree from
Cornell University and Master of Science and Ph.D. degrees in Electrical
Engineering from the University of California at Berkeley. Dr. Hodges serves as
a director of Mentor Graphics Corporation, an electronic design automation
company.
ANDREW S. RAPPAPORT has served as a director of Silicon Image since June
1997. Mr. Rappaport has been a partner of August Capital, LLC, a venture capital
firm, since July 1996. Prior to that time, Mr. Rappaport was president of The
Technology Research Group, Inc., a Boston-based strategic management consulting
firm which he founded in August 1984. Mr. Rappaport attended Princeton
University. Mr. Rappaport serves as a director of MMC Networks, Inc., a
developer and supplier of network processors, and several private companies.
RONALD V. SCHMIDT has served as a director of Silicon Image since April
1997. Since 1997, he has held the position of Research Vice President at Lucent
Bell Laboratories Research Silicon Valley, a division of Lucent Technologies,
Inc., a global communications company. From 1994 to 1997, he served as Executive
Vice President and Chief Technical Officer and a director of Bay Networks, Inc.,
a data networking products and services company formed by the merger of
SynOptics Communications, Inc., and Wellfleet Communications, Inc. Dr. Schmidt
was a co-founder of Synoptics in 1985, and served as Senior Vice President,
Chief Technical Officer and a director of SynOptics until the merger. From 1981
to 1985, Dr. Schmidt was a research fellow at Xerox Corporation's Palo Alto
Research Center. Dr. Schmidt holds Bachelor of Science, Master of Science and
Ph.D. degrees in Electrical Engineering and Computer Science from the University
of California at Berkeley. Mr. Schmidt serves as a director of a private
company.
BOARD COMPOSITION
Our bylaws currently provide for a board of directors consisting of six
members. The term of each of our current directors will expire at the next
annual meeting of stockholders. Commencing at the first annual meeting of
stockholders following the date on which we shall have had at least 800
stockholders, the board of directors will be divided into three classes, each
serving staggered three-year terms: Class I, whose term will expire at the first
annual meeting of stockholders following the annual meeting of stockholders when
we shall have had at least 800 stockholders; Class II, whose term will expire at
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the second annual meeting of stockholders following the annual meeting of
stockholders when we shall have had at least 800 stockholders; and Class III,
whose term will expire at the third annual meeting of stockholders following the
annual meeting of stockholders when we shall have had at least 800 stockholders.
As a result, only one class of directors will be elected at each annual meeting
of stockholders of Silicon Image, with the other classes continuing for the
remainder of their respective terms. Messrs. Chang and Han have been designated
as Class I directors; Drs. Hodges and Schmidt have been designated as Class II
directors; and Dr. Lee and Mr. Rappaport have been designated as Class III
directors. We do not expect to have 800 or more stockholders immediately after
this offering. Mr. Chang was elected to the board of directors pursuant to a
voting agreement among Silicon Image and some of its principal stockholders.
This voting agreement will terminate upon completion of this offering.
BOARD COMMITTEES
The audit committee consists of Dr. Hodges and Mr. Rappaport. The audit
committee:
- reviews our financial statements and accounting practices;
- makes recommendations to the board regarding the selection of independent
accountants; and
- reviews the results and scope of the audit and other services provided by
our independent accountants.
The compensation committee consists of Messrs. Chang and Rappaport and Dr.
Schmidt. The compensation committee:
- reviews and recommends to the Board of Directors the compensation and
benefits of all officers, directors and consultants of Silicon Image; and
- reviews general policy relating to compensation and benefits.
Except for grants under the 1995 Equity Incentive Plan made by the
compensation committee at its meeting on November 20, 1998, the board of
directors has continued to administer the issuance of stock options and other
awards under our 1995 Equity Incentive Plan, our 1999 Equity Incentive Plan and
our 1999 Employee Stock Purchase Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of Silicon Image's board of directors is
currently comprised of Messrs. Chang and Rappaport and Dr. Schmidt. None of
these individuals has at any time been an officer or employee of Silicon Image.
For a description of the transactions between Silicon Image and members of the
compensation committee and entities affiliated with the compensation committee
members, see "Certain Transactions." None of our executive officers serves as a
member of the board of directors or compensation committee of any entity which
has one or more executive officers serving as a member of our board of directors
or compensation committee.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
Silicon Image entered into severance agreements with both David Lee and
Scott Macomber on April 22, 1997, and amended and restated these agreements on
August 15, 1997. The agreements provide that if, on or before December 31, 2000,
the executive is terminated by Silicon Image other than for cause, or if the
executive resigns for good reason, the executive will continue to receive salary
at his current rate for six months and vesting of his stock and options will
accelerate, subject to limitations in the event of specified types of
acquisitions of Silicon Image. In addition, if either Dr. Lee or Mr. Macomber is
terminated for cause, or resigns without good reason, then Silicon Image may
elect to continue his salary for six months. During any period when Dr. Lee or
Mr. Macomber is receiving post-termination salary pursuant to the severance
agreement, he will be available to consult with Silicon Image from time to time
as Silicon Image may request, and he may not compete with
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Silicon Image in defined geographical areas. In June 1999, Mr. Macomber's
position at Silicon Image changed from President to Vice President, Business
Strategy, and we anticipate that he will continue with Silicon Image through the
end of the year. Our Board recognized that these changes that had occurred in
Mr. Macomber's title and position constituted good reason as defined in the
severance agreement, and that Mr. Macomber will be entitled to the benefits
described above if he resigns from Silicon Image or if we terminate him without
cause.
Silicon Image entered into an employment agreement with Daniel Atler on June
15, 1998. In addition to describing Mr. Atler's initial title and compensation,
the agreement provides that Mr. Atler will continue to receive salary at his
current rate and benefits for six months in the event that his employment
terminates other than for cause. The agreement further provides that vesting of
Mr. Atler's stock and options will accelerate in part in the event of a change
in control of Silicon Image, subject to specific limitations. If Mr. Atler's
employment continues after a change in control of Silicon Image, his options and
restricted stock grants will continue to vest at an accelerated rate.
Silicon Image entered into an employment agreement with Parviz Khodi on June
10, 1999. In addition to describing Mr. Khodi's title and compensation, the
agreement provides for continuation of salary and commission for six months in
the event that there is a change in control of Silicon Image and Silicon Image
terminates Mr. Khodi's employment other than for cause, disability or death. The
agreement also provides that Mr. Khodi may purchase up to $10,000 of Silicon
Image's common stock at the end of each of eight fiscal quarters, commencing
with the fourth quarter of 1998, at the then current fair market value as
determined by the board of directors. Mr. Khodi has exercised this right by
purchasing a total of $30,000 of Silicon Image's stock to date. This stock
purchase opportunity expires upon the earliest of termination of Mr. Khodi's
employment, the closing of Silicon Image's initial public offering, or a change
in control that results in our common stock (or securities issued in exchange
for our common stock) becoming publicly traded.
Silicon Image entered into a letter agreement with Steve Tirado in 1999. The
agreement sets forth Mr. Tirado's title and provides for an initial salary of
$225,000 per year and a bonus of up to $50,000 in the first year. Pursuant to
the agreement, Silicon Image sold Mr. Tirado 470,175 shares of common stock at
the price of $2.00 per share. All of the shares initially are subject to our
right to repurchase the shares at cost if Mr. Tirado's employment terminates,
and this right lapses over a four-year period. The agreement provides that Mr.
Tirado will continue to receive salary at his current rate and benefits for six
months in the event his employment terminates other than for cause.
DIRECTOR COMPENSATION
Directors of Silicon Image do not receive cash compensation for their
services as directors, but are reimbursed for their reasonable and necessary
expenses for attending board and board committee meetings. All board members are
eligible to receive stock options pursuant to the discretionary option grant
program in effect under Silicon Image's 1995 Equity Incentive Plan and 1999
Equity Incentive Plan. In 1998, each of Dr. Hodges and Dr. Schmidt was granted
an option to purchase 40,000 shares under the 1995 Equity Incentive Plan. Each
option is immediately exercisable, and shares purchased upon exercise are
subject to our right of repurchase, which lapses over four years.
Immediately following each annual meeting of our stockholders, each director
who is not an employee and whose direct pecuniary interest in our common stock
is less than 5% will automatically be granted an option under our 1999 Equity
Incentive Plan to purchase 10,000 shares if the director has served continuously
as a member of the board of directors for a period of at least one year, an
additional option for 5,000 shares if the director has served on the audit
committee, and an additional option for 5,000 shares if the director has served
on the compensation committee. Each option will have an exercise price equal to
the fair market value of our common stock on the date of grant. These annual
grants will be immediately vested in full and will have a two-year term, but
will generally terminate three months following the date the option-holder
ceases to be a director or consultant.
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EXECUTIVE COMPENSATION
The following table shows all compensation awarded to, earned by or paid for
services rendered to Silicon Image in all capacities during 1998 by our chief
executive officer and our other executive officers or former executive officers
who earned at least $100,000 in 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
ANNUAL COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITIONS SALARY BONUS OPTIONS(#)
- -------------------------------------------------------------------------- ---------- ------------- -----------
<S> <C> <C> <C>
David D. Lee(1) .......................................................... $ 144,473 $ -- --
Chairman of the Board and Chief Executive Officer
Scott A. Macomber(2) ..................................................... 143,672 -- --
Vice President, Business Strategy
Scott Slinker ............................................................ 135,579 17,656 --
former Vice President, Sales(3)
Jalil Shaikh ............................................................. 133,289 -- 60,000
Vice President, Operations
Victor Da Costa .......................................................... 120,621 -- 100,000
Vice President, Engineering
Brian Underwood .......................................................... 112,423 -- --
former Vice President, Marketing(4)
</TABLE>
- ------------------------
(1) Silicon Image authorized the sale of 150,000 shares of common stock to Dr.
Lee in October 1998, and the sale was completed in January 1999. The price
per share was $0.35, which the board of directors determined was the fair
market value of our common stock on the date of sale. We have a right to
repurchase these shares upon termination of employment, which right lapses
over a four-year period.
(2) Silicon Image authorized the sale of 250,000 shares of common stock to Mr.
Macomber in October 1998, and the sale was completed in January 1999. The
price per share was $0.35, which the board of directors determined was the
fair market value of our common stock on the date of sale. We have the right
to repurchase these shares upon termination of employment in some
circumstances, which right lapses over a four-year period.
(3) Mr. Slinker resigned from Silicon Image on October 31, 1998. The
compensation information above for Mr. Slinker includes severance pay up to
the end of 1998.
(4) Mr. Underwood is a founder of Silicon Image and our former Vice President,
Marketing.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows information about each stock option granted during
1998 to the officers named in the Summary Compensation Table above.
All options included in the following table are immediately exercisable and
are incentive stock options. We have a right to repurchase the shares issued on
exercise of these options upon termination of the optionee's employment. This
right lapses over four years. We granted the options at an exercise price equal
to the fair market value of our common stock, as determined by our board of
directors on the date of grant. The options generally expire on the earlier of
ten years from the date of grant or
55
<PAGE>
three months after termination of employment. The percentage numbers are based
on an aggregate of 1,068,500 options granted to our employees during fiscal
1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF PERCENTAGE OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS EMPLOYEES PRICE EXPIRATION --------------------------
NAME GRANTED IN 1998 PER SHARE DATE 5% 10%
- ----------------------------------- ----------- ----------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
David D. Lee....................... -- -- -- -- -- --
Scott A. Macomber.................. -- -- -- -- -- --
Scott Slinker...................... -- -- -- -- -- --
Jalil Shaikh....................... 60,000 5.6% $ 0.35 10/21/08 $ 1,151,804 $ 1,846,495
Victor Da Costa.................... 100,000 9.4% 0.35 10/21/08 1,919,674 3,077,491
Brian Underwood.................... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Potential realizable values are computed by (a) multiplying the number of
shares of common stock subject to a given option by the initial public
offering price of $12.00 per share, (b) assuming that the aggregate stock
value derived from that calculation compounds at the annual 5% or 10% rates
shown in the table for the entire ten year term of the option, and (c)
subtracting from that result the aggregate option exercise price. The 5%
and 10% assumed annual rates of compounded stock price appreciation in the
table above are required by the rules of the Securities and Exchange
Commission and do not represent our estimates or projections of our future
stock prices.
In addition, two of our officers joined us in 1998 and therefore were not
included in the tables relating to summary compensation and option grants in
1998. Mr. Atler, our Vice President, Finance and Administration and Chief
Financial Officer, is compensated at an annual rate of $162,751 and was granted
options to purchase 170,000 shares at an exercise price of $0.25 per share in
1998. Mr. Atler's options represented 15.9% of the total options granted to
employees in 1998. Mr. Khodi, our Vice President, Worldwide Sales, is
compensated at an annual rate of $143,838 and earned commissions and bonuses
totaling $25,229 in 1998. Mr. Khodi was granted options to purchase 60,000
shares at $0.25 per share and 60,000 shares at $0.35 per share in 1998, which
represented an aggregate of 11.2% of the total options granted to employees in
1998. The options granted to Mr. Atler and Mr. Khodi were immediately
exercisable. Upon termination of the optionee's employment, we have a right to
repurchase the shares issued upon exercise of these options. Our right to
repurchase the shares lapses over a four-year period.
FISCAL YEAR END OPTION VALUES
The following table provides information about stock option exercises by
each of the executive officers named in the Summary Compensation Table above
that exercised options in 1998. It also provides information about unexercised
options held by these officers at the end of 1998. We have a
56
<PAGE>
right to repurchase the shares issued upon exercise of these options upon
termination of the optionee's employment. Our right to repurchase the shares
lapses over a four-year period.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED VALUE END(#) FISCAL YEAR END($)(2)
ON EXERCISE REALIZED ---------------------------- ---------------------------
NAME (#)(1) ($)(2) EXERCISABLE(3) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- --------------- ------------ ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
David D. Lee........... -- $ -- -- -- $ -- --
Scott A. Macomber...... 100,000 1,187,500 100,000 -- 1,187,500 --
Scott Slinker.......... -- -- 108,750 -- 1,294,219 --
Jalil Shaikh........... 81,000 961,875 133,000 -- 1,565,875 --
Victor Da Costa........ 140,000 1,673,000 120,000 -- 1,402,500 --
Brian Underwood........ -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Of these shares, the following numbers were vested as of December 31, 1998:
Scott A. Macomber--80,000 shares, Jalil Shaikh--81,000 shares; Victor Da
Costa--96,250.
(2) The amount set forth represents the difference between the fair market value
of the underlying common stock at December 31, 1998 (using the initial
public offering price of $12.00 per share as the fair market value) and the
exercise price of the option.
(3) Of the shares issuable upon exercise of these options, the following numbers
were vested as of December 31, 1998: Scott A. Macomber--no shares, Scott
Slinker--108,750 shares, Jalil Shaikh-- no shares, Victor Da Costa--5,000
shares.
EMPLOYEE BENEFIT PLANS
1995 EQUITY INCENTIVE PLAN
Our 1995 Equity Incentive Plan was adopted by our board of directors in
September 1995. As of June 30, 1999, there were outstanding options to purchase
a total of 1,098,963 shares of common stock under this plan, and 1,439,000
shares remained available for future grants of options under this plan. This
plan will terminate immediately prior to this offering and no further options
will be granted. However, the termination of this plan will not affect any
outstanding options, which will remain outstanding until they are exercised,
terminate or expire. As of August 31, 1999, there were outstanding options to
purchase a total of 1,604,963 shares of common stock under this plan, and
866,000 shares remained available for future grants.
1999 EQUITY INCENTIVE PLAN
Our 1999 Equity Incentive Plan will become effective on the date of this
prospectus and will serve as the successor to our 1995 Equity Incentive Plan. We
have reserved 1,000,000 shares of common stock for issuance under this plan. The
number of shares reserved for issuance under this plan will be increased to
include:
- any shares reserved under our 1995 Equity Incentive Plan not issued or
subject to outstanding grants on the date of this prospectus;
- any shares issued under our 1995 Equity Incentive Plan that are
repurchased by us at the original purchase price; and
- any shares issuable upon exercise of options granted under our 1995 Equity
Incentive Plan that expire or become unexercisable without having been
exercised in full.
The number of shares reserved under this plan will be increased
automatically on January 1 of each year by an amount equal to 5% of our total
outstanding shares as of the immediately preceding
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<PAGE>
December 31. Our board of directors or compensation committee may reduce the
amount of the increase in any particular year. The following shares will be
available for grant and issuance under our 1999 Equity Incentive Plan:
- shares issuable upon exercise of an option granted under this plan that is
terminated or cancelled before the option is exercised;
- shares issued upon exercise of an option granted under this plan that are
subsequently repurchased by us at the original purchase price;
- shares subject to awards granted under this plan that are subsequently
forfeited or repurchased by us at the original issue price; and
- shares subject to stock bonuses granted under this plan that otherwise
terminate without shares being issued.
Our 1999 Equity Incentive Plan will terminate in 2009, unless sooner
terminated in accordance with the terms of the plan. Our 1999 Equity Incentive
Plan authorizes the award of options, restricted stock awards and stock bonuses.
No person will be eligible to receive more than 500,000 shares in any calendar
year under this plan (750,000 in the case of new employees). This plan is
administered by the compensation committee of our board of directors, which
currently consists of Mr. Chang, Mr. Rappaport and Mr. Schmidt, all of whom are
"outside directors" as defined under applicable federal tax laws. The committee
has the authority to interpret this plan and any agreement made under the plan,
grant awards and make all other determinations for the administration of this
plan. Our 1999 Equity Incentive Plan provides for the grant of both incentive
stock options that qualify under Section 422 of the Internal Revenue Code, and
nonqualified stock options. Incentive stock options may be granted only to
employees. Nonqualified stock options, and all other awards other than incentive
stock options, may be granted to employees, officers, directors, consultants,
independent contractors and advisors of Silicon Image or subsidiary of Silicon
Image. However, consultants, independent contractors and advisors are only
eligible to receive awards if they render bona fide services not in connection
with the offer and sale of securities in a capital-raising transaction. The
exercise price of incentive stock options must be at least equal to the fair
market value of our common stock on the date of grant. The exercise price of
incentive stock options granted to 10% stockholders must be at least equal to
110% of that value. The exercise price of nonqualified stock options must be at
least equal to 85% of the fair market value of the our common stock on the date
of grant. The maximum term of options granted under our 1999 Equity Incentive
Plan is ten years. Awards granted under this plan may not be transferred in any
manner other than by will or by the laws of descent and distribution and may be
exercised during the lifetime of the optionee only by the optionee. The
compensation committee may allow exceptions to this restriction with respect to
awards that are not incentive stock options. Options granted under our 1999
Equity Incentive Plan generally expire three months after the termination of the
optionee's service to Silicon Image or a parent or subsidiary of Silicon Image.
In the event of a "change in control" of Silicon Image, if the successor does
not assume the options, they will expire upon conditions determined by the
compensation committee. Alternatively, the compensation committee may accelerate
the vesting of awards upon a change in control of Silicon Image.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan will become effective on the first day
on which price quotations are available for our common stock on the Nasdaq
National Market. We have initially reserved 250,000 shares of common stock for
issuance under this plan. The number of shares reserved for issuance under our
1999 Employee Stock Purchase Plan will be increased automatically on January 1
of each year by an amount equal to 1% of our total outstanding shares as of the
immediately preceding December 31. Our board of directors or compensation
committee may reduce the amount of the increase in any particular year. Our
compensation committee will administer our 1999 Employee
58
<PAGE>
Stock Purchase Plan. Employees generally will be eligible to participate in our
1999 Employee Stock Purchase Plan if they are employed by Silicon Image, or any
subsidiaries that Silicon Image designates, for more than 20 hours per week and
more than five months in a calendar year. Employees are not eligible to
participate in our 1999 Employee Stock Purchase Plan if they are 5%
stockholders, or would become 5% stockholders as a result of their participation
in this plan. Under our 1999 Employee Stock Purchase Plan, eligible employees
may acquire shares of our common stock through payroll deductions. Eligible
employees may select a rate of payroll deduction between 1% and 15% of their
cash compensation and are subject to maximum purchase limitations. Participation
in this plan will end automatically upon termination of employment for any
reason. A participant will not be able to purchase shares having a fair market
value of more than $25,000, determined as of the first day of the applicable
offering period, for each calendar year in which the employee participates in
this plan. Each offering period under this plan will be for two years and will
consist of four six-month purchase periods. The first offering period is
expected to begin on the first business day on which price quotations for our
common stock are available on the Nasdaq National Market. The first purchase
period may be more or less than six months long. Offering periods thereafter
will begin on February 1 and August 1. The purchase price for common stock
purchased under this plan will be 85% of the lesser of the fair market value of
our common stock on the first day of the applicable offering period or the last
day of each purchase period. The compensation committee will have the power to
change the duration of offering periods. Our 1999 Employee Stock Purchase Plan
is intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code. This plan will terminate in 2009, unless it is
terminated earlier pursuant to its terms.
401(K) PLAN
We sponsor a defined contribution plan intended to qualify under Section 401
of the Internal Revenue Code. Participants may make pre-tax contributions to the
plan of up to 20% of their eligible earnings, subject to a statutorily
prescribed annual limit. Participants are fully vested in their contributions
and the investment earnings. We may make matching contributions on a
discretionary basis to the 401(k) plan, but have not done so in the past.
Contributions by the participants or us to the 401(k) plan, and the income
earned on such contributions, are generally not taxable to the participants
until withdrawn. Our matching contributions, if any, are generally deductible by
us when made. Contributions are held in trust as required by law. Individual
participants may direct the trustee to invest their accounts in authorized
investment alternatives.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our certificate of incorporation includes a provision that eliminates the
personal liability of a director for monetary damages resulting from breach of
his fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to Silicon Image 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.
Our bylaws provide that:
- we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law, subject to
limited exceptions where indemnification is not permitted by applicable
law;
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<PAGE>
- we are required to advance expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding to the fullest
extent permitted by the Delaware General Corporation Law, subject to
limited exceptions; and
- the rights conferred in the bylaws are not exclusive.
In addition to the indemnification required in our certificate of
incorporation and bylaws, before the completion of this offering, we intend to
enter into indemnity agreements with each of our current directors and officers.
These agreements provide for the indemnification of our officers and directors
for all expenses and liabilities incurred in connection with any action or
proceeding brought against them by reason of the fact that they are or were
agents of Silicon Image. We also intend to obtain directors' and officers'
insurance to cover our directors, officers and some of our employees for
liabilities, including liabilities under securities laws. We believe that these
indemnification provisions and agreements and this insurance are necessary to
attract and retain qualified directors and officers.
The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. They
may also reduce the likelihood of derivative litigation against directors and
officers, even though an action, if successful, might benefit us and other
stockholders. Furthermore, a stockholder's investment may be adversely affected
to the extent we pay the costs of settlement and damage awards against directors
and officers as required by these indemnification provisions. At present, there
is no pending litigation or proceeding involving any of our directors, officers
or employees regarding which indemnification by Silicon Image is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.
60
<PAGE>
CERTAIN TRANSACTIONS
Since we were incorporated in January 1995, there has not been, nor is there
currently proposed, any transaction or series of similar transactions to which
Silicon Image was or is to be a party in which the amount involved exceeds
$60,000 and in which any director, executive officer or holder of more than 5%
of our common stock had or will have a direct or indirect interest, other than
compensation arrangements, which are described where required under
"Management," and the transactions described below.
FORMATION OF SILICON IMAGE. In connection with the formation of Silicon
Image, we issued and repurchased shares of common stock as set forth in the
following table.
<TABLE>
<CAPTION>
DATE OF NUMBER OF NUMBER OF
PURCHASE OR SHARES SHARES PRICE PER
NAME REPURCHASE PURCHASED REPURCHASED SHARE
- --------------------------------------------------------------- ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
David Lee...................................................... 01/01/95 1,735,000 $ 0.0005
03/01/95 800,000 0.0005
10/02/95 335,000* 0.0005
Deog-Kyoon Jeong............................................... 01/01/95 640,000 0.0005
09/05/95 360,000 0.0150
Brian Underwood................................................ 01/01/95 800,000 0.0005
09/05/95 400,000 0.0150
</TABLE>
- ------------------------
* We repurchased shares from Dr. Lee in the course of negotiating the terms of
our Series A preferred stock financing.
All shares were subject to our right of repurchase, which expired in quarterly
increments over a four-year period. This repurchase right has now expired with
respect to all of the shares described above.
RELATIONSHIP WITH DR. JEONG. Effective in May 1995, we entered into a
license agreement with Dr. Jeong, a founder of Silicon Image and our Chief
Technical Adviser, pursuant to which Dr. Jeong granted us a royalty-bearing
license to serial link technology. Dr. Jeong released Silicon Image from the
obligation to pay further royalties as part of the amendment of his consulting
agreement in 1999. At that time, we had paid Dr. Jeong royalties totaling less
than $50,000.
Dr. Jeong has been a consultant to Silicon Image continuously since October
1995, and has managed advanced research and development projects on our behalf.
We paid Dr. Jeong $77,000 for his services in fiscal 1998, and we paid him
$48,000 for his services in the six month period ended June 30, 1999. In
addition, since February 1996, we have entered into four research and
development agreements with the Inter-University Semiconductor Research Center
of Seoul National University for research projects relating to advanced
interconnect technologies. Dr. Jeong is an associate professor of the School of
Electrical Engineering at Seoul National University and is named as the primary
technical and faculty contact under each of these four contracts. We paid the
Inter-University Semiconductor Research Center of Seoul National University a
total of $60,000 under these agreements in fiscal 1998, and we paid it $80,000
for the six months ended June 30, 1999. See "Business--Research and
Development."
PREFERRED STOCK. Since our inception in January 1995, we have issued shares
of preferred stock in private placement transactions as described below. Share
numbers and per share prices for the transactions described below are set forth
on an as-converted basis, adjusted for a change in the conversion ratio of the
Series A preferred stock and Series B preferred stock caused by the issuance of
the Series C Preferred Stock.
- 3,130,000 shares of Series A preferred stock at $0.50 per share from
October 1995 to March 1996.
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<PAGE>
- 932,203 shares of Series B preferred stock at $2.36 per share in September
1996.
- 4,000,000 shares of Series C preferred stock at $1.25 per share in June
1997.
- 3,594,859 shares of Series D preferred stock at $3.50 per share from July
1998 to September 1998.
The investors who negotiated the terms of these transactions were not affiliated
with Silicon Image prior to purchasing the shares. The following table
summarizes the shares of preferred stock purchased by each of the executive
officers named in the Summary Compensation Table above and by directors,
principal stockholders and entities associated with them in the foregoing
private placement transactions:
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF
SERIES A SERIES C SERIES D
PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK
- --------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Entities Affiliated with August Capital, L.P
(Andrew Rappaport)....................................................... -- 3,200,000 1,428,572
Entities Affiliated with InveStar Capital
(Herbert Chang).......................................................... -- -- 857,143
David A. Hodges............................................................ -- 15,000 --
Sang-Chul Han.............................................................. 1,777,850 365,975 --
Ronald Schmidt............................................................. -- 46,068 10,000
Intel Corporation.......................................................... -- -- 857,143
</TABLE>
Shares held by all affiliated persons and entities have been aggregated.
In connection with our issuances of preferred stock, we have entered into an
investors rights agreement granting the holders of the preferred stock
registration rights with respect to the common stock issuable upon conversion of
their preferred stock. Their registration rights are described in more detail
under "Description of Capital Stock--Registration Rights." In addition, we
agreed in the investors rights agreement to provide the investors with periodic
financial information, and granted the investors a right of first refusal on
future issuances by us of equity securities. The right to receive this financial
information and the right of first refusal terminate immediate prior to the
closing of this offering.
RESTRICTED STOCK. The following officers and a key consultant purchased
shares of our common stock in exchange for full recourse promissory notes issued
to us. Except as otherwise noted below, we have a right to repurchase these
shares, which right lapses over a four-year period with respect to 25% of the
shares after one year and 2.0833% each month thereafter. The full principal
amount and accrued interest under each promissory note remain outstanding. The
terms of the restricted stock purchases are summarized below:
<TABLE>
<CAPTION>
PRINCIPAL
DATE OF NUMBER OF PRICE PER AMOUNT OF INTEREST
NAME PURCHASE SHARES SHARE NOTE DATE DUE RATE
- ----------------------------------- ------------------- ----------- ----------- ----------- ------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Daniel K. Atler.................... June 1, 1999 60,000 $ 1.00 $ 60,000 June 1, 2004 5.30%
Deog-Kyoon Jeong................... March 29, 1999 150,000 0.35 52,500 March 29, 2004 4.77
Parviz Khodi....................... June 1, 1999 60,000 1.00 60,000 June 1, 2004 5.30
June 1, 1999 20,000* 1.00 20,000 June 1, 2004 5.30
September 13, 1999 2,000* 5.00 10,000 September 13, 2004 5.98
David Lee.......................... January 29, 1999 150,000 0.35 52,500 January 29, 2004 4.64
Scott Macomber..................... January 29, 1999 250,000 0.35 87,500 January 29, 2004 4.64
Jalil Shaikh....................... June 15, 1999 30,000 1.25 37,500 June 15, 2004 5.30
Steve Tirado....................... June 21, 1999 470,175 2.00 940,350 June 21, 2004 5.30
</TABLE>
- ------------------------
* Indicates shares not subject to a right of repurchase on behalf of Silicon
Image.
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<PAGE>
OPTION GRANTS. We issued nonqualified stock options outside of the 1995
Equity Incentive Plan to the following officers on August 19, 1999. The options
are exercisable for common stock at $5.75 per share. The options vest over four
years as follows: 16% after one year, then an additional 34% in equal monthly
increments over the next two years, then 50% in equal monthly increments over
the last year.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
NAME UNDERLYING OPTIONS
- --------------------------------------------------------------------- -------------------
<S> <C>
Daniel K. Atler...................................................... 30,000
Victor Da Costa...................................................... 40,000
Parviz Khodi......................................................... 30,000
Jalil Shaikh......................................................... 40,000
</TABLE>
TRANSACTIONS WITH INTEL AND ITS SUBSIDIARY, CHIPS AND TECHNOLOGIES. Our
relationship with Intel and its subsidiary, Chips and Technologies, is set forth
in the following agreements:
- In September 1998, we entered into a Business Cooperation Agreement with
Intel. Under this agreement, we worked with Intel to develop and promote
adoption by the personal computer industry of a complete digital display
interface specification based on our existing technology and an advanced
specification based an enhanced version of our technology. The Business
Cooperation Agreement was amended in October 1998 to provide that it would
conform to other agreements that Intel and Silicon Image expected to enter
into with other parties to advance the same goals.
- In January 1999, Silicon Image entered into a Promoter's Agreement with
Intel, Compaq Computer Corporation, Fujitsu Limited, Hewlett-Packard
Company, International Business Machines Corporation, and NEC Corporation.
The parties to this agreement formed the Digital Display Working Group.
They agreed:
- To define, establish and support a digital visual interface
specification for integrating digital display devices in a computer
system environment;
- To encourage broad and open industry adoption of the DVI
specification, in part by creating an implementer's forum that others
may join in order to receive information and support relating to the
DVI specification;
- To invite third parties to enter into a Participant's Agreement in
order to consult on the content, feasibility and other aspects or the
DVI specification;
- To grant to one another, and to any other adopter who agrees in turn
to grant to the promoters and all other adopters, a nonexclusive,
nontransferable, royalty-free, nonsublicenseable, worldwide,
perpetual, irrevocable, reciprocal license under the claims of all
patents filed prior to January 1, 2003 which are necessarily infringed
to comply with that specification or for which infringement is based
on an implementation of any example included in the body of that
specification. Such license will convey the rights to make, have made,
use, import and directly and indirectly, offer to sell, lease, sell,
promote and otherwise distribute portions of products that are fully
compliant with that specification.
- In September 1998, Intel acquired the following equity securities of
Silicon Image in addition to the 857,143 shares of our Series D preferred
stock described above under the heading "-- Preferred Stock":
- a warrant to purchase 142,857 shares of our common stock at a purchase
price of $3.50 per share that expires in September 2004;
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<PAGE>
- a warrant to purchase 142,857 shares of our common stock at a purchase
price of $0.35 per share. This warrant became exercisable on March 31,
1999 and expires in September 2004;
- an agreement that Silicon Image will issue an additional warrant to
purchase 142,857 shares of our common stock at a purchase price of
$0.35 per share when and if Intel ships for revenue a product
supporting an enhanced version of our digital display interface
technology, provided that this takes place by September 2004.
- In September 1998 we entered into a Patent License Agreement with Intel
pursuant to which:
- Silicon Image granted Intel a non-exclusive, nontransferable,
worldwide license, without right to sublicense, to make, have made,
use, import and directly or indirectly sell, offer to sell and
otherwise dispose of, Intel products with specific exclusions related
to Silicon Image's current products, anticipated future products, and
network devices;
- Intel granted Silicon Image a non-exclusive, nontransferable,
worldwide license, without right to sublicense, to make, have made,
use, import, and directly or indirectly sell, offer to sell and
otherwise dispose of, identified types of Silicon Image products with
specific exclusions related to Intel's current products, anticipated
future products, and network devices.
- In August 1999, Silicon Image granted Intel a nonexclusive, perpetual
license (with the right to sublicense) to reproduce, modify, perform,
display, make, have made, use, sell, distribute, offer for sale and import
specifications or products incorporating Silicon Image's technology for
the protection, under the control of a cryptographic key, of the exchange
of data over a high-speed serial link interconnect. A cryptographic key is
a formula for scrambling, or encoding, data so that it can only be
recovered, or decoded, and then used, by a receiver that has the same key.
This prevents the data from being intercepted and copied while it is being
transmitted from one point to another. The license is conditioned on Intel
incorporating this Silicon Image technology in a DVI content protection
specification for host systems and monitors -- that is, a specification
that defines a means of preventing the unauthorized copying of digital
content that is being transmitted from a host system to a display. The
license will be of no effect if Intel does not do so. The parties agreed
to use commercially reasonable efforts to negotiate the remaining terms of
a final agreement incorporating the foregoing terms. Silicon Image granted
this license to allow Intel to use our intellectual property in developing
this content protection specification. Silicon Image believes that this
license could lead to a more formal structure for the development and
licensing of this specification to the industry.
- In December, 1997, Silicon Image entered into a Transmitter Core License
and Product Distribution Agreement with Chips and Technologies. Intel
subsequently acquired Chips and Technologies. Chips and Technologies has
not exercised its right under this agreement to develop and sell a chip
that integrates our transmitter technology with its graphics
functionality. This agreement terminates in December 2002. Mr. Khodi, our
Vice President of Sales, was employed by Chips and Technologies when we
negotiated this agreement. Mr. Khodi did not, however, participate in
these negotiations.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock as of August 31, 1999 and as adjusted to reflect
the sale of the common stock in this offering, by:
- each stockholder known by us to be the beneficial owner of more than 5% of
our common stock;
- each of our directors;
- each executive officer listed in the Summary Compensation Table; and
- all current executive officers and directors as a group.
The percentage of beneficial ownership for the following table is based on
21,237,274 shares of common stock outstanding as of August 31, 1999, assuming
conversion of all outstanding shares of preferred stock into common stock, and
25,137,274 shares of common stock outstanding after the completion of this
offering.
Unless otherwise indicated, the address for each listed stockholder is: c/o
Silicon Image, Inc., 10131 Bubb Road, Cupertino, California 95014. To our
knowledge, except as indicated in the footnotes to this table and under
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
SHARES BENEFICIALLY OWNED
NUMBER OF SHARES -----------------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- --------------------------------------------------------------- ----------------- -------------- -------------
<S> <C> <C> <C>
Directors and Executive Officers:
Andrew Rappaport(1)............................................ 4,776,097 22.5% 19.0%
Sang-Chul Han(2)............................................... 2,143,825 10.1 8.5
David Lee(3)................................................... 2,108,000 9.9 8.4
Herbert Chang(4)............................................... 1,057,143 5.0 4.2
Brian Underwood................................................ 1,000,000 4.7 4.0
Scott A. Macomber(5)........................................... 900,000 4.2 3.6
Victor M. Da Costa............................................. 260,000 1.2 1.0
Jalil Shaikh................................................... 244,000 1.1 1.0
Scott Slinker.................................................. 108,750 * *
David A. Hodges................................................ 95,000 * *
Ronald V. Schmidt.............................................. 136,068 * *
All directors and executive officers as a group (12 persons)... 12,622,308 58.9 49.8
Other 5% Stockholders:
Entities affiliated with August Capital, L.P.(1)............... 4,776,097 22.5 19.0
Intel Corporation(6)........................................... 1,142,857 5.3 4.5
Deog-Kyoon Jeong............................................... 1,130,000 5.3 4.5
Entities affiliated with InveStar Capital, Inc.(4)............. 1,057,143 5.0 4.2
</TABLE>
- ------------------------
* Less than 1%.
(1) Andrew Rappaport is a member of August Capital Management LLC, which is a
general partner of each of August Capital, L.P., August Capital Strategic
Partners, L.P. and August Capital Associates, L.P. Mr. Rappaport shares
voting power with respect to the shares held by these entities with Mr.
David Marquardt and Mr. John Johnston. Mr. Rappaport disclaims beneficial
ownership of shares held by these entities except to the extent of his
pecuniary interest in these entities. The address of Mr. Rappaport and
August Capital is 2480 Sand Hill Road, Suite 101, Menlo Park, CA 94025.
(2) Mr. Han's address is c/o Young Jin Lee, 1115 Huntington Drive, Unit G,
South Pasadena, CA 91030.
(3) Includes 300,000 shares held by David Lee as custodian for his minor
children.
(4) Represents 200,000 shares held by InveStar Dayspring Venture Capital, Inc.,
428,572 shares held by InveStar Semiconductor Development Fund, 285,714
shares held by InveStar Excelsus Venture
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<PAGE>
Capital (Int'l), Inc. and 142,857 shares held by Forefront Venture
Partners, L.P. Herbert Chang is the President of InveStar Capital, Inc.,
which is the investment manager of each of InveStar Dayspring Venture
Capital, Inc., InveStar Semiconductor Development Fund and InveStar
Excelsus Venture Capital (Int'l), Inc. Mr. Chang is also the managing
member of Forefront Associates LLC, which is the general partner of
Forefront Venture Partners, L.P. Mr. Chang disclaims beneficial ownership
of shares held by these entities except to the extent of his pecuniary
interest in these entities. Mr. Chang's address is Room 1201, TWTC Int'l
Trade Building 12F, 333 Keelung Road, Section 1, Taipei, Taiwan.
(5) Excludes 100,000 shares held in trust by George R. Macomber for the benefit
of Scott Macomber's minor children.
(6) Includes 285,714 shares subject to a warrant exercisable on or before
August 29, 1999. Excludes a warrant for 142,857 shares of common stock
exercisable at $0.35 per share that Silicon Image is obligated to issue to
Intel upon satisfaction of a milestone. Intel's address is 2200 Mission
College Boulevard, Santa Clara, CA 95052.
The shares included in the preceding table as beneficially owned by some of
our executive officers and directors include outstanding shares that we have the
right to repurchase upon termination of their employment or status as a director
or consultant. This repurchase right entitles us to repurchase the shares at a
price equal to the initial purchase price paid by the stockholder for the
shares. Our repurchase right lapses over a four-year period, beginning on the
date that the stockholder begins rendering services to Silicon Image or, if the
stockholder already is rendering services, beginning on the date we agreed to
sell the shares or granted an option to acquire the shares.
In addition, the shares included in the preceding table as beneficially
owned by some of our executive officers and directors include shares that are
issuable under stock options or warrants that are exercisable on or before
October 30, 1999. These shares are deemed outstanding for purposes of computing
the percentage held by the person holding the options or warrants but are not
deemed outstanding for purposes of computing the percentage of any other person.
The following table sets forth the number of shares shown in the preceding
table as beneficially owned by any person or entity that were subject to our
repurchase right as of August 31, 1999, or that were issuable under options or
warrants that were exercisable on or before October 30, 1999:
<TABLE>
<CAPTION>
OUTSTANDING SHARES HELD SHARES
SUBJECT TO REPURCHASE ISSUABLE
NAME OF BENEFICIAL OWNER RIGHTS UNDER OPTIONS
- ------------------------------------------------- -------------------------- --------------
<S> <C> <C>
David Lee........................................ 150,000 --
Brian Underwood.................................. 25,000 --
Scott Macomber................................... 438,750 --
Victor M. Da Costa............................... 17,500 120,000(1)
Jalil Shaikh..................................... 148,000 --
David A. Hodges.................................. 50,000 --
Ronald V. Schmidt................................ -- 80,000(2)
All Directors and Executive Officers as a Group 1,610,675 202,000(3)
(12 persons)...................................
Deog-Kyoon Jeong................................. 172,500 --
</TABLE>
- ------------------------
(1) 85,000 of the shares issuable to Mr. Da Costa under options that are
exercisable on or before October 30, 1999 are subject to our right of
repurchase.
(2) 50,000 of the shares issuable to Dr. Schmidt under options that are
exercisable on or before October 30, 1999 are subject to our right of
repurchase.
(3) 135,000 of the shares issuable to our directors and executive officers as a
group under options that are exercisable on or before October 30, 1999 are
subject to our right of repurchase. Includes 2,000 shares that an officer
has the right to purchase under his employment agreement. Excludes
additional shares having an aggregate purchase price of $10,000 that the
officer will have the right to purchase under his employment agreement as of
September 30, 1999 at fair market value.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of 75,000,000 shares of common stock, $0.001 par value per
share, and 5,000,000 shares of preferred stock, $0.001 par value per share. As
of August 31, 1999, and assuming the conversion of all outstanding preferred
stock into common stock, there were outstanding 21,237,274 shares of common
stock held by approximately 120 stockholders, of which 2,636,834 shares were
subject to our right of repurchase, options to purchase 1,744,963 shares of
common stock and warrants to purchase 317,856 shares of common stock.
COMMON STOCK
DIVIDEND RIGHTS. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
at the times and in the amounts as our board or directors may determine.
VOTING RIGHTS. Each holder of common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation. This means that commencing at the first annual
meeting of stockholders following the date on which we shall have had at least
800 stockholders, the holders of a majority of the shares voted can elect all of
the directors then standing for election. Prior to such time however, cumulative
voting in the election of directors will be in effect, meaning that each share
of voting stock will be entitled to a number of votes equal to the number of
votes to which such share would normally be entitled multiplied by the number of
directors to be elected. A stockholder may then cast all of such votes for a
single candidate or may allocate them among as many candidates as the
stockholder may choose. In addition, our certificate of incorporation and bylaws
require the approval of two-thirds, rather than a majority, of the shares
entitled to vote for some matters. For a description of these matters, see
"Description of Capital Stock--Anti-Takeover Provisions."
NO PREEMPTIVE OR SIMILAR RIGHTS. Our common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
RIGHT TO RECEIVE LIQUIDATION DISTRIBUTIONS. Upon a liquidation, dissolution
or winding-up of Silicon Image, the holders of common stock are entitled to
share ratably with holders of any participating preferred stock in all assets
remaining after payment of all liabilities and the liquidation preferences of
any outstanding preferred stock. Each outstanding share of common stock is, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, each outstanding share of preferred stock
will be converted into shares of common stock. See Note 5 of Notes to Financial
Statements for a description of our preferred stock.
Following the offering, we will be authorized, subject to limitations
imposed by Delaware law, to issue preferred stock in one or more series, to
establish from time to time the number of shares to be included in each series,
and to fix the rights, preferences and privileges of the shares of each wholly
unissued series and any of its qualifications, limitations or restrictions. The
board of directors can also increase or decrease the number of shares of any
series, but not below the number of shares of such series then outstanding,
without any further vote or action by the stockholders. The board may authorize
the issuance of preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of the common
stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could,
67
<PAGE>
among other things, have the effect of delaying, deferring or preventing a
change in control of Silicon Image and may adversely affect the market price of
the common stock and the voting and other rights of the holders of common stock.
We have no current plan to issue any shares of preferred stock.
WARRANTS
In September 1998, we issued to Intel a warrant to purchase 142,857 shares
of our common stock at an exercise price of $3.50 per share. In September 1998,
we also issued to Intel a warrant to purchase 142,857 shares of our common stock
at an exercise price of $0.35 per share. Each of these warrants will remain
outstanding after the completion of this offering until September 2004 unless
sooner exercised. In addition, we are obligated to issue an additional warrant
to Intel for 142,857 shares of common stock exercisable at $0.35 per share upon
satisfaction of a milestone. This warrant will entitle Intel to purchase 142,857
shares of our common stock at an exercise price of $0.35 per share.
In February 1999, we issued a warrant to an equipment lease financing
company to purchase 32,142 shares of our Series D preferred stock with an
exercise price of $3.50 per share. This warrant is immediately exercisable and
will remain outstanding after the completion of this offering at which time it
will become exercisable for 32,142 shares of our common stock. The warrant
expires in February 2004.
REGISTRATION RIGHTS
As a result of an investors' rights agreement dated July 28, 1998 between
Silicon Image and some of our stockholders, the holders of 11,785,232 shares of
common stock will be entitled to rights with respect to the registration of
these shares under the Securities Act, as described below.
DEMAND REGISTRATION RIGHTS. At any time after 90 days following this
offering, the holders of at least 50% of the shares of common stock issuable
upon conversion of our Series C and D preferred stock can request that we
register all or a portion of their shares, so long as such registration covers
at least 20% of their shares and the total offering price of the shares to the
public is at least $5,000,000. We will only be required to file two registration
statements in response to their demand registration rights. We may postpone the
filing of a registration statement for up to 90 days once in a 12 month period
if we determine that the filing would be seriously detrimental to Silicon Image
and our stockholders.
PIGGYBACK REGISTRATION RIGHTS. If we register any securities for public
sale, the holders of the shares of common stock issuable upon conversion of our
Series A through D preferred stock will have the right to include their shares
in the registration statement. However, this right does not apply to a
registration statement relating to any of our employee benefit plans or a
corporate reorganization. The managing underwriter of any underwritten offering
will have the right to limit the number of shares registered by these holders to
25% of the total shares covered by the registration statement due to marketing
reasons.
FORM S-3 REGISTRATION RIGHTS. The holders of the shares of common stock
issuable upon conversion of our Series A through D preferred stock can request
that we register their shares if we are eligible to file a registration
statement on Form S-3 and if the total price of the shares offered to the public
is at least $500,000. These holders may only require us to file two registration
statements on Form S-3 in any 12 month period. We may postpone the filing of a
registration statement for up to 120 days once in a 12 month period if we
determine that the filing would be seriously detrimental to Silicon Image and
our stockholders.
We will pay all expenses incurred in connection with the registrations
described above, except for underwriters' and brokers' discounts and
commissions, which will be paid by the selling stockholders.
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<PAGE>
The registration rights described above will expire with respect to a
particular stockholder if it can sell all of its shares in a three month period
under Rule 144 of the Securities Act. In any event, the registration rights
described above will expire seven years after this offering is completed.
Holders of these registration rights have waived the exercise of these
registration rights for 180 days following the date of this prospectus.
ANTI-TAKEOVER PROVISIONS
The provisions of Delaware law, our certificate of incorporation and our
bylaws may have the effect of delaying, deferring or discouraging another person
from acquiring control of our company.
DELAWARE LAW
We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents some
Delaware corporations from engaging, under some circumstances, in a "business
combination," which includes a merger or sale of more than 10% of the
corporation's assets with any "interested stockholder," meaning a stockholder
who owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of the stockholder, for three years following the date
that the stockholder became an "interested stockholder" unless:
- the transaction is approved by the board of directors prior to the date
the interested stockholder attained that status;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
- on or subsequent to such date the business combination is approved by the
board and authorized at an annual or special meeting of stockholders by at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
A Delaware corporation may opt out of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate or incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, we have not opted out of this provision. The statute could prohibit or
delay mergers or other takeover or change-in-control attempts and, accordingly,
may discourage attempts to acquire us.
CHARTER AND BYLAW PROVISIONS
Our certificate of incorporation and bylaws provide that:
- following the completion of this offering, no action shall be taken by
stockholders except at an annual or special meeting of the stockholders
called in accordance with our bylaws and that stockholders may not act by
written consent;
- following the completion of this offering, the approval of holders of
two-thirds of the shares entitled to vote at an election of directors
shall be required to adopt, amend or repeal our bylaws or amend or repeal
the provisions of our certificate of incorporation regarding the election
and removal of directors and ability of stockholders to take action;
- stockholders may not call special meetings of the stockholders or fill
vacancies on the board;
- commencing at the first annual meeting of stockholders following the date
on which we shall have had at least 800 stockholders, our board of
directors will be divided into three classes, each serving staggered
three-year terms, which means that only one class of directors will be
elected
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<PAGE>
at each annual meeting of stockholders, with the other classes continuing
for the remainder of their respective terms, and directors may only be
removed for cause by the holders of two-thirds of the shares entitled to
vote at an election of directors (we do not expect to have 800
stockholders as a result of this offering, and we may not have this many
shareholders for some time, if at all); and
- we will indemnify officers and directors against losses that they may
incur in investigations and legal proceedings resulting from their
services to us, which may include services in connection with takeover
defense measures.
These provisions of our certificate of incorporation and bylaws may have the
effect of delaying, deferring or discouraging another person from acquiring
control of our company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services.
LISTING
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the trading symbol "SIMG."
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock.
A significant public market for our common stock may not develop or be sustained
after this offering. Future sales of substantial amounts of our common stock in
the public market, or the possibility of these sales occurring, could adversely
affect prevailing market prices for our common stock or our future ability to
raise capital through an offering of equity securities.
Upon completion of this offering, we will have 25,137,274 shares of common
stock outstanding, assuming no exercise of options and warrants outstanding as
of August 31, 1999, and the conversion of all outstanding shares of preferred
stock. Of these shares, 3,900,000 shares sold in this offering (4,485,000 if the
underwriters' over-allotment option is exercised in full) will be freely
tradable in the public market without restriction or registration under the
Securities Act, unless the shares are held by "affiliates" of Silicon Image, as
that term is defined in Rule 144 under the Securities Act and except for those
shares reserved by the underwriters for sale to employees, directors and other
persons associated with us, which will be subject to the restrictions on sale
described in "Underwriting.".
The remaining 21,237,274 shares of common stock outstanding upon completion
of this offering will be "restricted securities" as defined in Rule 144. We
issued and sold these restricted securities in private transactions in reliance
on exemptions from registration under the Securities Act. Restricted securities
may be sold in the public market only if they are registered or if they qualify
for an exemption from registration under Rule 144 or Rule 701 under the
Securities Act, as summarized below.
Pursuant to "lock-up" agreements, all the executive officers, directors and
stockholders of Silicon Image, have agreed not to offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of any of these shares for a
period of 180 days from the date of this prospectus, subject to limited
exceptions. However, Credit Suisse First Boston Corporation may in its sole
discretion, at any time without notice, release all or any portion of the shares
subject to lock-up agreements.
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<PAGE>
Taking into account the lock-up agreements, and assuming Credit Suisse First
Boston does not release stockholders from these agreements, the following shares
will be eligible for sale in the public market at the following times:
- On the date of this prospectus, the 3,900,000 shares sold in the offering
will be immediately available for sale in the public market.
- 180 days after the effective date, approximately 19,370,425 shares will be
eligible for sale, of which 12,832,820 will be subject to volume, manner
of sale and other limitations under Rule 144.
- Of the remaining shares, 1,846,849 will be eligible for sale under Rule
701 or Rule 144 upon expiration of our repurchase right with respect to
those shares, and 20,000 will be eligible for sale under Rule 144 upon the
expiration of the one-year holding period.
Following the expiration of the lock-up period, shares issued upon exercise
of options we granted prior to the date of this prospectus will also be
available for sale in the public market pursuant to Rule 701 under the
Securities Act. Rule 701 permits resales of these shares beginning 90 days after
the date of this prospectus. In general, under Rule 144, after expiration of the
lock-up period, a person who has beneficially owned restricted securities for at
least one year would be entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of:
- 1% of the then-outstanding shares of common stock, or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to manner of sale and notice
requirements and the availability of current public information about Silicon
Image. Under Rule 144(k), a person who has not been our affiliate at any time
during the three months before a sale and who has beneficially owned the shares
proposed to be sold for at least two years can sell these shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
After the effective date of this offering, we intend to file registration
statements to register approximately 5,084,538 shares of common stock
outstanding or reserved for issuance under the 1995 Equity Incentive Plan, the
1999 Equity Incentive Plan, the 1999 Employee Stock Purchase Plan and written
compensation contracts with our officers and key employees. The registration
statements will become effective automatically upon filing. Shares issued under
the foregoing employee benefit plans or compensation contracts, after the filing
of the registration statements, may be sold in the open market, subject, in the
case of some holders, to the Rule 144 limitations applicable to affiliates, the
lock-up agreements and repurchase right held by us.
In addition, following this offering, the holders of 11,785,232 shares of
outstanding common stock will, under some circumstances, have right to require
us to register their shares for future sale. See "Description of Capital
Stock--Registration Rights."
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated October 5, 1999, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, BancBoston
Robertson Stephens, Inc. and Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated, are acting as representatives the following respective numbers of
shares of common stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ------------------------------------------------------------------------------------------ ------------
<S> <C>
Credit Suisse First Boston Corporation.................................................... 1,657,500
BancBoston Robertson Stephens, Inc........................................................ 895,050
Dain Rauscher Wessels 762,450
a division of Dain Rauscher Incorporated................................................
Banc of America Securities LLC............................................................ 73,125
Bear, Stearns & Co. Inc................................................................... 73,125
Charles Schwab & Co., Inc................................................................. 73,125
CIBC World Markets Corp................................................................... 73,125
Invemed Associates LLC.................................................................... 73,125
Salomon Smith Barney Inc.................................................................. 73,125
SoundView Technology Group, Inc........................................................... 73,125
U.S. Bancorp Piper Jaffray Inc............................................................ 73,125
------------
Total..................................................................................... 3,900,000
------------
------------
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering price less the
underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $0.50 per share. The
underwriters and selling group members may allow a discount of $0.10 per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------ ------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and Commissions paid by $ 0.84 $ 0.84 $ 3,276,000 $ 3,767,400
us..............................................
Expenses payable by us............................ $ 0.41 $ 0.36 $ 1,600,000 $ 1,600,000
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We, our executive officers and directors, and existing holders of our
securities which holders own or have the right to acquire more than 1% of our
outstanding shares of common stock have agreed that we will not offer, sell,
contract to sell, announce our intention to sell, pledge or otherwise dispose
72
<PAGE>
of, directly or indirectly, or file with the Securities and Exchange Commission
a registration statement under the Securities Act relating to, any shares of our
common stock or securities convertible into or exchangeable or exercisable for
any of our common stock without the prior written consent of Credit Suisse First
Boston Corporation for a period of 180 days after the date of this prospectus,
except in our case issuances pursuant to the exercise of stock options
outstanding on the date hereof, grants of employee stock options or the issuance
of other common stock pursuant to the 1995 Equity Incentive Plan, 1999 Equity
Incentive Plan or 1999 Employee Stock Purchase Plan in effect on the date
hereof, and issuances of common stock pursuant to the exercise of those options.
The underwriters have reserved for sale, at the initial offering price, up
to 195,000 shares of common stock for employees, directors and other persons
associated with us who have expressed an interest in purchasing common stock in
the offering. The number of shares available for sale to the general public in
this offering will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the underwriters
to the general public on the same terms as the other shares. Persons purchasing
such reserved shares will be prohibited from selling or otherwise transferring
such shares for a period of five days from the effective date of the offering,
except for our employees, who will be so restricted until the fourth trading day
after our announcement of earnings for the quarter ended September 30, 1999,
which announcement is expected to occur in mid-October 1999.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
The common stock has been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "SIMG".
Prior to the offering, there has been no public market for the common stock.
The initial public offering price for the common stock has been determined by
negotiation between us and the representatives, and may not reflect the market
price for the common stock following this offering. Among the principal factors
considered in determining the initial public offering price of our common stock
were:
- the information in this prospectus and otherwise available to the
representatives;
- market conditions for initial public offerings;
- the history of and prospects for the industry in which we will compete;
- the ability of our management;
- our prospects for future earnings, the present state of our development
and our current financial condition;
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies;
- the general condition of the securities markets at the time of this
offering and other relevant factors.
We can offer no assurances that the initial public offering price will
correspond to the price at which common stock will trade in the public market
following this offering or that an active trading market for the common stock
will develop and continue after this offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit
bids to purchase the underlying security so long as the stabilizing bids
do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U. S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or these persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
74
<PAGE>
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will pass upon the validity of
the issuance of the shares of common stock offered by this prospectus for
Silicon Image. Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California, will pass upon legal matters in connection with this offering
for the underwriters. An entity affiliated with Fenwick & West LLP holds 14,286
shares of our common stock. In addition, Fenwick & West LLP or an affiliated
entity may purchase up to 4,750 of the shares reserved by the underwriters for
sale to our employees and directors and other persons associated with us, as
described in "Underwriting."
EXPERTS
The financial statements as of December 31, 1998 and 1999 and June 30, 1999
and for each of the three years in the period ended December 31, 1998 and six
month period ended June 30, 1999 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.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules to the
registration statement. For further information with respect to Silicon Image
and our common stock, we refer you to the registration statement and the
exhibits and schedules filed as a part of the registration statement. Statements
contained in this prospectus concerning the contents of any contract or any
other document referred to are not necessarily complete; we refer you to the
copy of each contract or document filed as an exhibit to the registration
statement. Each such statement is qualified in all respects by reference to that
exhibit. The registration statement, including exhibits and schedules, may be
inspected without charge at the public reference facilities maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the SEC located at Seven World Trade Center, 13th Floor, New York, NY
10048, and the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies may be obtained from the SEC upon payment of
fees prescribed by the SEC. Information on the operation of the public reference
room may be obtained by calling the SEC at 1-800-SEC-0330. These reports and
other information may also be inspected without charge at a Web site maintained
by the SEC at http://www.sec.gov.
75
<PAGE>
SILICON IMAGE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999.......................................... F-3
Statements of Operations for the year ended December 31, 1996, 1997 and 1998 and the six months ended June
30, 1998 (unaudited) and 1999............................................................................ F-4
Statements of Stockholders' Equity for the year ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999...................................................................................... F-5
Statements of Cash Flows for the year ended December 31, 1996, 1997 and 1998 and the six months ended June
30, 1998 (unaudited) and 1999............................................................................ F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Silicon Image, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Silicon Image, Inc., at December
31, 1997 and 1998, and June 30, 1999 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998 and
the six month period ended June 30, 1999 in conformity with generally accepted
accounting principles. 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 generally accepted auditing standards 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
July 14, 1999, except as to Note 11,
which is as of September 9, 1999
F-2
<PAGE>
SILICON IMAGE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- ---------
1997 1998 1999
--------- --------- --------- PRO FORMA
STOCKHOLDER'S
EQUITY AT
JUNE 30,
1999
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................... $ 2,773 $ 10,096 $ 10,686
Short-term investments......................................... -- 1,401 1,961
Accounts receivable............................................ 287 1,518 1,581
Inventory...................................................... 129 301 356
Prepaid expenses and other current assets...................... 119 259 245
--------- --------- ---------
Total current assets......................................... 3,308 13,575 14,829
Property and equipment, net...................................... 793 1,125 1,003
Other assets..................................................... 270 74 182
--------- --------- ---------
Total assets................................................. $ 4,371 $ 14,774 $ 16,014
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit................................................. $ 372 $ 757 $ 757
Accounts payable............................................... 626 882 1,272
Accrued liabilities............................................ 181 1,154 1,412
Capital lease obligations, current............................. 17 218 489
Deferred revenue............................................... 582 1,121 155
Deferred margin on sales to distributors....................... -- 490 2,004
--------- --------- ---------
Total current liabilities.................................... 1,778 4,622 6,089
Capital lease obligations, long-term............................. -- 300 773
--------- --------- ---------
Total liabilities................................................ 1,778 4,922 6,862
--------- --------- ---------
Commitments and contingencies (Note 6 and 8)
Stockholders' Equity:
Convertible preferred stock, $0.001 par value; 6,065,000,
10,065,000, and 10,065,000 shares authorized; 5,965,000
9,560,000 and 9,560,000 shares issued and outstanding;
5,000,000 shares authorized, none issued or issued or
outstanding at June 30, 1999 on a pro forma basis
(unaudited).................................................. 6 10 10 $ --
Common stock, par value $0.001; 20,000,000, 21,500,000 and
21,500,000 shares authorized; 5,661,000, 6,786,000, and
9,463,000 shares issued and outstanding; 75,000,000 shares
authorized, 21,120,000 shares issued and outstanding at June
30, 1999 on a pro forma basis (unaudited).................... 6 7 9 21
Additional paid-in capital..................................... 8,739 24,960 34,796 34,794
Notes receivable from stockholders............................. -- (96) (1,461) (1,461)
Unearned compensation.......................................... -- (2,249) (7,513) (7,513)
Accumulated deficit............................................ (6,158) (12,780) (16,689) (16,689)
--------- --------- --------- ------------
Total stockholders' equity................................... 2,593 9,852 9,152 $ 9,152
--------- --------- --------- ------------
------------
Total liabilities and stockholders' equity................... $ 4,371 $ 14,774 $ 16,014
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SILICON IMAGE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- ----------------------
1996 1997 1998 1999
--------- --------- --------- 1998 ---------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue................................................ $ 30 $ 1,280 $ 7,703 $ 2,652 $ 7,706
Development and license revenue................................ 1,121 1,582 100 25 575
--------- --------- --------- ----------- ---------
Total revenue................................................ 1,151 2,862 7,803 2,677 8,281
--------- --------- --------- ----------- ---------
Cost and operating expenses:
Cost of product revenue........................................ 5 851 4,314 1,711 3,328
Research and development....................................... 1,307 3,176 4,524 1,956 3,060
Selling, general and administrative............................ 1,811 2,990 4,335 1,906 3,052
Stock compensation and warrant expense......................... -- -- 1,361 184 2,898
--------- --------- --------- ----------- ---------
Total operating expenses..................................... 3,123 7,017 14,534 5,757 12,338
--------- --------- --------- ----------- ---------
Loss from operations............................................. (1,972) (4,155) (6,731) (3,080) (4,057)
Interest income.................................................. 32 171 242 31 210
Interest expense and other, net.................................. (4) (52) (133) (54) (62)
--------- --------- --------- ----------- ---------
Net loss......................................................... $ (1,944) $ (4,036) $ (6,622) $ (3,103) $ (3,909)
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Net loss per share:
Basic and diluted.............................................. $ (0.98) $ (1.14) $ (1.39) $ (0.72) $ (0.73)
Weighted average shares........................................ 1,981 3,533 4,766 4,301 5,327
Pro forma net loss per share:
Basic and diluted (unaudited).................................. $ (0.46) $ (0.23)
Weighted average shares (unaudited)............................ 14,483 16,984
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SILICON IMAGE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
------------------------ ------------------------ PAID-IN FROM UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS' COMPENSATION
----------- ----------- ----------- ----------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995........................ 985 $ 1 5,381 $ 5 $ 1,011 $ -- $ --
Issuance of Series A
Convertible Preferred Stock
in February 1996, net of
issuance costs.............. 580 1 -- -- 577 -- --
Issuance of Series B
Convertible Preferred Stock
in Sept 1996, net of
issuance costs.............. 400 -- -- -- 2,180 -- --
Common Stock issued for cash
and notes, net.............. -- -- 280 1 14 (10) --
Net loss...................... -- -- -- -- -- -- --
----- --- ----- ----------- ----------- ------------- -------
Balance at December 31,
1996........................ 1,965 2 5,661 6 3,782 (10) --
Issuance of Series C
Convertible Preferred Stock
in June 1997, net of
issuance costs.............. 4,000 4 -- -- 4,957 -- --
Repayment of note
receivable.................. -- -- -- -- -- 10 --
Net loss...................... -- -- -- -- -- -- --
----- --- ----- ----------- ----------- ------------- -------
Balance at December 31,
1997........................ 5,965 6 5,661 6 8,739 -- --
Issuance of Series D
Convertible Preferred Stock
in September 1998, net of
issuance costs.............. 3,595 4 -- -- 12,452 -- --
Common stock issued for cash
and notes................... -- -- 1,125 1 159 (96) --
Unearned compensation......... -- -- -- -- 2,972 -- (2,972)
Amortization of unearned
compensation................ -- -- -- -- -- -- 723
Expense on options to
consultants................. -- -- -- -- 292 -- --
Expense on warrants (Note
8).......................... -- -- -- -- 346 -- --
Net loss...................... -- -- -- -- -- -- --
----- --- ----- ----------- ----------- ------------- -------
Balance at December 31,
1998........................ 9,560 10 6,786 7 24,960 (96) (2,249)
Common stock issued for cash
and notes................... -- -- 2,677 2 1,674 (1,365) --
Unearned compensation......... -- -- -- -- 7,303 -- (7,303)
Amortization of unearned
compensation................ -- -- -- -- -- -- 2,039
Expense on options to
consultants................. -- -- -- -- 264 -- --
Expense on warrants (Note
8).......................... -- -- -- -- 595 -- --
Net loss...................... -- -- -- -- -- -- --
----- --- ----- ----------- ----------- ------------- -------
Balance at June 30, 1999...... 9,560 $ 10 9,463 $ 9 $ 34,796 $ (1,461) $ (7,513)
----- --- ----- ----------- ----------- ------------- -------
----- --- ----- ----------- ----------- ------------- -------
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------ ---------
<S> <C> <C>
Balance at December 31,
1995........................ $ (178) $ 839
Issuance of Series A
Convertible Preferred Stock
in February 1996, net of
issuance costs.............. -- 578
Issuance of Series B
Convertible Preferred Stock
in Sept 1996, net of
issuance costs.............. -- 2,180
Common Stock issued for cash
and notes, net.............. -- 5
Net loss...................... (1,944) (1,944)
------------ ---------
Balance at December 31,
1996........................ (2,122) 1,658
Issuance of Series C
Convertible Preferred Stock
in June 1997, net of
issuance costs.............. -- 4,961
Repayment of note
receivable.................. -- 10
Net loss...................... (4,036) (4,036)
------------ ---------
Balance at December 31,
1997........................ (6,158) 2,593
Issuance of Series D
Convertible Preferred Stock
in September 1998, net of
issuance costs.............. -- 12,456
Common stock issued for cash
and notes................... -- 64
Unearned compensation......... -- --
Amortization of unearned
compensation................ -- 723
Expense on options to
consultants................. -- 292
Expense on warrants (Note
8).......................... -- 346
Net loss...................... (6,622) (6,622)
------------ ---------
Balance at December 31,
1998........................ (12,780) 9,852
Common stock issued for cash
and notes................... -- 311
Unearned compensation......... -- --
Amortization of unearned
compensation................ -- 2,039
Expense on options to
consultants................. -- 264
Expense on warrants (Note
8).......................... -- 595
Net loss...................... (3,909) (3,909)
------------ ---------
Balance at June 30, 1999...... $ (16,689) $ 9,152
------------ ---------
------------ ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SILICON IMAGE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------- ----------------------
1996 1997 1998 1999
--------- --------- --------- 1998 ---------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................... $ (1,944) $ (4,036) $ (6,622) $ (3,103) $ (3,909)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Depreciation and amortization................................ 148 312 649 306 296
Stock compensation and warrant expense....................... -- -- 1,361 184 2,898
Change in assets and liabilities:
Accounts receivable........................................ -- (287) (1,231) 4 (63)
Inventory.................................................. (26) (103) (172) (398) (55)
Prepaid expenses and other assets.......................... (95) (288) 56 210 (94)
Accounts payable........................................... 385 187 256 920 390
Accrued liabilities........................................ 27 151 973 (55) 258
Deferred revenue........................................... 1,000 (418) 539 43 (966)
Deferred margin on sales to distributors................... -- -- 490 -- 1,514
--------- --------- --------- ----------- ---------
Net cash provided by (used in) operating activities...... (505) (4,482) (3,701) (1,889) 269
--------- --------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments............................. -- -- (1,401) -- (3,935)
Proceeds from sale of short-term investments................... -- -- -- -- 3,375
Purchase of property and equipment............................. (724) (300) (340) (9) (113)
--------- --------- --------- ----------- ---------
Net cash used in investing activities.................... (724) (300) (1,741) (9) (673)
--------- --------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations................ (65) (59) (140) (45) (106)
Proceeds from financing of property and equipment.............. -- -- -- -- 789
Borrowings on line of credit, net.............................. -- 372 385 378 --
Proceeds from issuance of Convertible Preferred Stock, net of
issuance costs............................................... 2,758 4,961 12,456 -- --
Proceeds from issuance of Common Stock......................... 5 -- 64 25 311
Repayment of note receivable................................... -- 10 -- -- --
--------- --------- --------- ----------- ---------
Net cash provided by financing activities................ 2,698 5,284 12,765 358 994
--------- --------- --------- ----------- ---------
Net increase (decrease) in cash and cash equivalents............. 1,469 502 7,323 (1,540) 590
Cash and cash equivalents at the beginning of the period......... 802 2,271 2,773 2,773 10,096
--------- --------- --------- ----------- ---------
Cash and cash equivalents at the end of the period............... $ 2,271 $ 2,773 $ 10,096 $ 1,233 $ 10,686
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Acquisition of software and equipment under capital lease...... $ 83 $ 28 $ 641 $ 566 $ 61
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Issuance of common stock in exchange for notes receivable...... $ -- $ -- $ 96 $ -- $ 1,365
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Cash paid for interest......................................... $ 4 $ 6 $ 128 $ 53 $ 59
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Silicon Image, Inc. (the "Company") was incorporated in California in
January 1995. The Company designs, develops and markets semiconductor solutions
for applications that require cost-effective, high-bandwidth, integrated
solutions for high-speed data communications. The Company is initially focusing
its technology on the local interconnect between host systems, such as PCs,
set-top boxes and DVD players, and digital displays, such as flat panel displays
and CRTs. The Company's first products enable host systems to transmit digital
data and allows displays to receive and manipulate digital video data.
BASIS OF PRESENTATION
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.
Certain items previously reported in specific financial statement captions
have been reclassified to conform with the June 30, 1999 presentation.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information for the six month period ended June 30,
1998 is unaudited and has been prepared on the same basis as the audited
financial statements. In the opinion of management, such unaudited information
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim information.
REVENUE RECOGNITION
The Company recognizes revenue from product sales to direct customers upon
shipment. Reserves for sales returns and allowances are recorded at the time of
shipment. The Company's sales to distributors are made under agreements allowing
for returns or credits under certain circumstances and the Company defers
recognition of revenue on sales to distributors until the Company estimates
products are resold by the distributor to the end-user. These estimates are
based upon reports from these distributors and the Company's analysis of these
distributor reports as well as other information obtained by the Company.
Development and license revenues are recognized as milestones are met or as
license fees are earned.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt instruments having a maturity
of three months or less on the date of purchase to be cash equivalents. At
December 31, 1997 and 1998 and June 30, 1999, approximately $0, $7,546,000 and
$7,197,000 of commercial paper and $2,700,000, $1,319,000 and $3,380,000 of
money market funds are included in cash and cash equivalents, respectively, the
fair value of which approximated cost. Short-term investments are comprised of
commercial paper for all periods presented. Short-term investments are held as
securities available for sale in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and
F-7
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Equity Securities" and are reported at amortized cost as of the balance sheet
date which approximates fair market value.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of temporary cash investments, short-term
investments and accounts receivable. The Company may place its short-term
investments in a variety of financial instruments and, by policy, limits the
amount of credit exposure through diversification and by restricting its
investments to highly liquid securities.
The Company performs ongoing credit evaluations of its customers' financial
condition and may require collateral such as letters of credit, whenever deemed
necessary. In 1997, two customers accounted for 56% and 19% of product revenue.
Three customers accounted for 36%, 24% and 12% of gross accounts receivable at
December 31, 1997. In 1998, two customers accounted for 54% and 12% of product
revenue. At December 31, 1998, the same two customers accounted for 65% and 12%
of gross accounts receivable, respectively. In the six months ended June 30,
1999, three customers accounted for 13%, 13% and 11% of product revenue. At June
30, 1999, four customers accounted for 13%, 12%, 12% and 11% of gross accounts
receivable.
INVENTORY
Inventory is stated at the lower of cost or market, cost being determined
under the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from two to five years. Assets held
under capital leases are amortized using the straight-line method over the
shorter of the lease term or the estimated useful life, which range from three
to five years.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in accordance
with the provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Expense associated with stock-based compensation is amortized on
an accelerated basis over the vesting period of the individual award consistent
with the method described in Financial Accounting Standards Board ("FASB")
Interpretation No. 28.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and
F-8
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
display of comprehensive income and its components and is effective for periods
beginning after December 15, 1997. The Company's comprehensive income
approximated net income for all periods presented.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition are less than the asset net book value. No such impairment losses
have been identified by the Company.
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
Effective upon the closing of the Company's initial public offering, the
outstanding shares of Series A, Series B, Series C and Series D Convertible
Preferred Stock will automatically convert into approximately 3,130,000,
932,203, 4,000,000 and 3,594,859 shares, respectively, of Common Stock. Also
effective upon the closing of this offering 75,000,000 shares of Common Stock
and 5,000,000 of undesignated Preferred Stock will be authorized. The pro forma
effects of these transactions are unaudited and have been reflected in the
accompanying pro forma stockholders' equity at June 30, 1999.
NET LOSS PER SHARE
The Company reports both basic net loss per share, which is based on the
weighted average number of common shares outstanding excluding contingently
issuable or returnable shares, and diluted net loss per share, which is based on
the weighted average number of common shares outstanding and dilutive potential
common shares outstanding.
The following tables set forth the computation of basic and diluted net loss
per share of common stock:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- ----------------------
1996 1997 1998 1999
--------- --------- --------- 1998 ---------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator (in thousands):
Net loss....................................................... $ (1,944) $ (4,036) $ (6,622) $ (3,103) $ (3,909)
--------- --------- --------- ----------- ---------
Denominator (in thousands):
Weighted average shares........................................ 5,416 5,661 6,029 5,795 8,054
Less: unvested common shares subject to repurchase............. (3,435) (2,128) (1,263) (1,494) (2,727)
--------- --------- --------- ----------- ---------
Denominator for basic and diluted calculation.................. 1,981 3,533 4,766 4,301 5,327
--------- --------- --------- ----------- ---------
Net loss per share:
Basic and diluted net loss per share........................... $ (0.98) $ (1.14) $ (1.39) $ (0.72) $ (0.73)
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
As a result of the net losses incurred by the Company during fiscal years
1996, 1997 and 1998 and for the six month periods ended June 30, 1998 and 1999,
all potential common shares were anti-dilutive
F-9
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
and have been excluded from the diluted net loss per share calculation. The
following table summarizes securities outstanding as of each period end, on an
as-converted basis, which were not included in the calculation of diluted net
loss per share since their inclusion would be anti-dilutive.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------- ----------------------
1996 1997 1998 1999
--------- --------- --------- ---------
1998
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Preferred Stock...................... 4,062,000 8,062,000 11,657,000 8,062,000 11,657,000
Unvested common shares subject to
repurchase......................... 3,435,000 2,128,000 1,263,000 1,494,000 2,727,000
Stock options........................ 1,199,000 2,174,000 2,175,000 2,412,000 1,149,000
Common stock warrants................ -- -- 286,000 -- 286,000
Preferred stock warrants............. -- -- -- -- 32,000
</TABLE>
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended December 31, 1998 and six
months ended June 30, 1999 is computed using the weighted average number of
common shares outstanding, including the conversion of the Company's Series A,
Series B, Series C and Series D Convertible Preferred Stock outstanding into
shares of the Company's common stock effective upon the closing of the Company's
initial public offering as if such change in conversion rate and conversion
occurred on December 31, 1998 and June 30, 1999, respectively. The calculation
of diluted net loss per share excludes potential common shares as the effect
would be antidilutive.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes a 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 derivative. We do not currently or plan to
enter into forward exchange contracts to hedge exposures denominated in foreign
currencies or any other derivative financial instruments for trading or
speculative purposes.
In March 1999, the FASB issued an exposure draft entitled, "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25." Although the proposed interpretation becomes effective upon its
issuance, certain transactions occurring after December 15, 1998 are subject to
complicated transition rules. If approved, the proposed interpretation may
result in many changes being made to existing practice and may have a
significant impact on the Company's accounting for stock based compensation.
NOTE 2--RELATED PARTY TRANSACTIONS:
In January 1996, 550,000 shares of Common Stock were issued to an officer
for which the Company received cash of $3,750 and a note receivable of $10,000.
This note receivable and accrued interest was repaid in December 1997. In 1998,
551,000 shares of Common Stock were issued upon the
F-10
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--RELATED PARTY TRANSACTIONS: (CONTINUED)
exercise of options to several officers of the Company in exchange for notes
receivable totaling $95,625. During the six months ended June 30, 1999, an
additional 1,483,000 shares were issued to officers in exchange for notes
receivable totaling $1,365,000. These notes bear interest at rates ranging from
4.64% to 7.75% per annum and are due within four to five years. The Company has
recorded compensation expense in connection with option grants and sales of
common stock (Note 8).
NOTE 3--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- ---------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Accounts receivable:
Accounts receivable........................................... $ 317 $ 1,549 $ 1,612
Allowance for doubtful accounts............................... (30) (31) (31)
--------- --------- ---------
$ 287 $ 1,518 $ 1,581
--------- --------- ---------
--------- --------- ---------
Inventory:
Work in process............................................... $ 38 $ 175 $ 295
Finished goods................................................ 91 126 61
--------- --------- ---------
$ 129 $ 301 $ 356
--------- --------- ---------
--------- --------- ---------
Property and equipment:
Furniture and equipment....................................... $ 439 $ 475 $ 522
Computers and software........................................ 818 1,581 1,708
--------- --------- ---------
1,257 2,056 2,230
Less: accumulated depreciation................................ (464) (931) (1,227)
--------- --------- ---------
$ 793 $ 1,125 $ 1,003
--------- --------- ---------
--------- --------- ---------
</TABLE>
Assets acquired under capitalized lease obligations are included in property
and equipment and totaled $145,000, $641,000 and $1,461,000, with related
accumulated depreciation of $50,000, $165,000 and $281,000 at December 31, 1997
and December 31, 1998 and June 30, 1999 respectively.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- ---------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued liabilities:
Accrued payroll and related expenses.......................... $ 79 $ 167 $ 235
Customer rebates and accrued sales returns.................... -- 491 690
Other accrued liabilities..................................... 102 496 487
--------- --------- ---------
$ 181 $ 1,154 $ 1,412
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-11
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INCOME TAXES:
No provision for federal or state income taxes has been recorded for the
years ended December 31, 1996, 1997 and 1998 and for the six month period ended
June 30, 1999, as the Company has incurred net operating losses since inception
(January 1995).
Deferred tax assets relate to the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- ---------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net operating loss carryforwards.............................. $ 1,989 $ 4,996 $ 5,933
Deferred revenue.............................................. 220 690 798
Research and development credit............................... 78 462 651
Other items not currently deductible.......................... 89 197 504
--------- --------- ---------
2,376 6,345 7,886
Less: valuation allowance..................................... (2,376) (6,345) (7,886)
--------- --------- ---------
$ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
These factors include the Company's history of losses, recent increases in
expense levels, the fact that the market in which the Company competes is
characterized by rapidly changing technology, the lack of carryback capacity to
realize deferred tax assets, and the uncertainty regarding continued market
acceptance of the Company's products. The Company will continue to assess the
realizability of the deferred tax assets based on actual and forecasted
operating results.
At June 30, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $16,073,000 and
$5,358,000, respectively, which expire through 2019 and 2004, respectively.
Under the Tax Reform Act of 1986, the amounts of and benefits from net operating
loss carryforwards may be impaired or limited in certain circumstances. Events
which cause limitations in the amount of net operating losses that the Company
may utilize in any one year include, but are not limited to, a cumulative
ownership change of more than 50%, as defined, over a three year period.
NOTE 5--CONVERTIBLE PREFERRED STOCK:
Convertible Preferred Stock at June 30, 1999 consists of the following:
<TABLE>
<CAPTION>
SHARES
-------------------------
SERIES AUTHORIZED OUTSTANDING
- -------------------------------------------------- ------------ ----------- PROCEEDS
NET OF
ISSUANCE
COSTS
--------------
(IN THOUSANDS)
<S> <C> <C> <C>
A................................................. 1,565,000 1,565,000 $ 1,563
B................................................. 400,000 400,000 2,180
C................................................. 4,100,000 4,000,000 4,961
D................................................. 4,000,000 3,594,859 12,456
------------ ----------- -------
10,065,000 9,559,859 $ 21,160
------------ ----------- -------
------------ ----------- -------
</TABLE>
F-12
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--CONVERTIBLE PREFERRED STOCK: (CONTINUED)
The holders of the Convertible Preferred Stock have various rights and
preferences as follows:
Each share of Series A, B, C and D Convertible ("Series A, B, C and D")
Preferred Stock outstanding is convertible into two, 2.3305, one and one
share(s) of Common Stock, respectively, at the option of the holder, subject to
certain adjustments, and automatically converts upon the completion of an
underwritten public offering of Common Stock with gross proceeds of at least
$10,000,000 and a public offering price of not less than $6.00 per share. At
June 30, 1999, the outstanding shares of Series A, B, C and D are convertible
into 3,130,000, 932,203, 4,000,000 and 3,594,859 shares of Common Stock,
respectively.
Each share of Series A, B, C and D entitles its holder to one vote for each
Common Share into which such shares would convert. Dividends at the rate of
$0.05, $0.275, $0.0625 and $0.175 per share for Series A, B, C and D Stock,
respectively, if declared by the Board of Directors, are payable to the
preferred stockholders in preference to any dividends for Common Stock declared
by the Board of Directors. Dividends are noncumulative. No dividends have been
declared by the Board of Directors through June 30, 1999.
The holders of Series A, B, C and D are entitled to receive their original
issuance prices, on an as-converted basis, of $0.50, $2.36, $1.25 and $3.50 per
share, respectively, in liquidation, plus an amount equal to all declared but
unpaid dividends, prior and in preference to any distribution to the holders of
Common Stock. As of June 30, 1999, the aggregate liquidation preference of
Series A, B, C and D was approximately $21,347,000.
NOTE 6--LEASING ARRANGEMENTS AND COMMITMENTS:
The Company leases certain equipment and software under short-term and
long-term lease agreements which are reported as capital leases. The terms of
the leases range from one to three years, with purchase options at the end of
the respective lease terms. The Company intends to exercise such purchase
options, which require minimal payments. The Company's obligation under these
leasing arrangements are secured by the leased equipment.
The Company leases its facility under a noncancelable operating lease which
expires in December 2002. Rent expense is recorded using the straight-line
method and totaled $77,000, $290,000 and $333,000 in 1996, 1997 and 1998,
respectively. Rent expense for the six months ended June 30, 1999 was $225,000.
In February 1999, the Company entered into a $2,500,000 lease line of credit
that allows for the leasing of equipment and software over 33 to 42 month terms.
The stated interest rate under this agreement is 8%. The agreement expires in
October 2000. The Company granted warrants to purchase up to 32,142 shares of
the Company's Series D preferred stock at $3.50 per share to the lessor upon
approval of the lease line of credit (Note 8).
F-13
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--LEASING ARRANGEMENTS AND COMMITMENTS: (CONTINUED)
Future minimum lease payments including capitalized purchase options at June
30, 1999 and future minimum sub-lease rental receipts under non cancelable
operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------------------------------------------------------- --------- -----------
(IN THOUSANDS)
<S> <C> <C>
1999..................................................................... $ 285 $ 237
2000..................................................................... 568 479
2001..................................................................... 416 497
2002..................................................................... 141 494
--------- -----------
Total minimum payments, net of sublease income........................... 1,410 $ 1,707
-----------
-----------
Less interest............................................................ (148)
---------
Present value of payments under current capital lease obligations........ 1,262
Less long term portion................................................... (773)
---------
Short term portion....................................................... $ 489
---------
---------
</TABLE>
NOTE 7--LINE OF CREDIT:
In June 1997, the Company entered into a line of credit agreement with a
financial institution. This line of credit provided for borrowings of up to
$750,000 which were secured by the assets of the Company. Borrowings under the
line of credit accrued interest at the bank's prime rate plus 1.5%. Unpaid
principal and accrued interest were due at the maturity of the line of credit.
At December 31, 1997, $372,000 was outstanding under this line of credit.
In December 1998, the line of credit expired and was paid in full using
proceeds from a second or new line of credit. The new line of credit provides
for borrowings of up to $4.0 million based on and secured by eligible accounts
receivable as defined in the credit agreement. Borrowings accrue interest at the
bank's commercial lending rate plus 0.25% (8.25% at June 30, 1999). Accrued
interest is due monthly. The line of credit agreement requires the Company to
meet certain financial covenants including minimum tangible net worth and quick
ratio requirements. At June 30, 1999, the Company was in compliance with such
covenants and had borrowed $757,000 under this line of credit and an additional
$755,000 was available for borrowing. The agreement expires in April 2000.
NOTE 8--STOCKHOLDER'S EQUITY:
COMMON STOCK
The Company has authorized 21,500,000 shares of Common Stock. The Company
issued to founders and certain executives restricted common stock subject to
repurchase rights. The Company has the right to repurchase all or any portion of
the unvested shares of restricted stock at the original purchase price, which
right lapses over a four year vesting period. During the six months ended June
30, 1999 the Company sold 1,210,000 shares of Common Stock to founders, certain
executives, a consultant and an employee for a total of $1,330,000. At June 30,
1999, 1,409,000 shares of restricted Common Stock were subject to the Company's
repurchase option.
F-14
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDER'S EQUITY: (CONTINUED)
STOCK WARRANTS
In September 1998, the Company and a third party entered into an agreement
to develop and promote the adoption of a digital display interface
specification, which was amended in April 1999. In connection with this
agreement, the Company granted to the manufacturer a warrant to purchase 142,857
shares of the Company's common stock at $3.50 per share. The warrant is
immediately exercisable. Under the same agreement, the Company granted a warrant
to the manufacturer to purchase 142,857 shares of the Company's common stock at
$0.35 per share. The warrant became exercisable during the quarter ended March
31, 1999 when the manufacturer achieved a milestone. The Company recorded
$346,000 in 1998 and $595,000 in the six months ended June 30, 1999 of expense
for these warrants, which expense is included in stock compensation and warrant
expense. In addition, if a milestone are achieved, the Company will grant to the
manufacturer a warrant to purchase 142,857 shares of the Company's common stock
at $0.35 per share. If the milestones are achieved, the Company will record an
expense related to the issuance of this warrant (the estimated fair value of the
warrant at June 30, 1999 was $642,000). All warrants under this agreement will
expire on September 16, 2004.
In February 1999 and in connection with a lease line of credit, the Company
granted a warrant to purchase up to 32,142 shares of the Company's Series D
preferred stock at $3.50 per share. This warrant is immediately exercisable and
expires on February 17, 2004. The Company did not ascribe any value to the
warrant because the estimated fair market value of the warrant on the date of
grant was insignificant. This warrant will remain outstanding after completion
of the Company's initial public offering and will become exercisable for 32,142
shares of the Company's Common Stock.
STOCK OPTION PLAN
In September 1995, the Board of Directors adopted the 1995 Equity Incentive
Plan (the "Plan") which provides for the granting of incentive stock options
("ISOs") and non-qualified stock options ("NSOs") for shares of common stock to
employees, directors and consultants of the Company. In accordance with the
Plan, the stated exercise price shall not be less than 100% and 85% of the
estimated fair market value of Common Stock on the date of grant for ISOs and
NSOs, respectively, as determined by the Board of Directors. The Plan provides
that the options shall be exercisable over a period not to exceed ten years and
shall vest over a period of four years. In September 1998, the Plan was amended
to allow options to be exercised prior to vesting. The Company has the right to
repurchase such shares at their original purchase price if the optionee is
terminated from service prior to vesting. Such rights expire as the options vest
over a four year period.
F-15
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDER'S EQUITY: (CONTINUED)
The following table summarizes the Company's stock option activity and
related weighted average exercise price within each category.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED
AVERAGE
EXERCISE
PRICE
PER SHARE
SHARES -----------
AVAILABLE
FOR ISSUANCE NUMBER OF
--------------- SHARES
(IN THOUSANDS) ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1995........................................... 620 850 $ 0.08
Authorized........................................................... 1,500 -- --
Granted.............................................................. (1,009) 1,009 0.13
Canceled............................................................. 70 (70) 0.02
Exercised............................................................ -- (590) 0.02
------ ------
Balance at December 31, 1996........................................... 1,181 1,199 0.09
Granted.............................................................. (925) 925 0.13
Canceled............................................................. -- -- --
Exercised............................................................ -- -- --
------ ------
Balance at December 31, 1997........................................... 256 2,124 0.11
Authorized........................................................... 1,750 -- --
Granted.............................................................. (1,298) 1,298 0.32
Canceled............................................................. 172 (172) 0.30
Exercised............................................................ -- (1,125) 0.14
------ ------
Balance at December 31, 1998........................................... 880 2,125 0.20
Authorized........................................................... 1,000 -- --
Granted.............................................................. (479) 479 1.10
Canceled............................................................. 38 (38) 0.27
Exercised............................................................ -- (1,467) 0.24
------ ------
Balance at June 30, 1999............................................... 1,439 1,099 0.53
------ ------
------ ------
</TABLE>
At June 30, 1999, 278,000 options were vested, and 1,318,000 unvested shares
had been exercised and remain subject to the Company's repurchase rights.
During 1997, the Company granted 50,000 options to purchase Common Stock to
a founder at an exercise price of $0.125. The options were granted outside of
the plan. The options are outstanding as of June 30, 1999.
F-16
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDER'S EQUITY: (CONTINUED)
Significant option groups outstanding at June 30, 1999, and related weighted
average exercise price and contractual life information are as follows:
<TABLE>
<CAPTION>
OUTSTANDING AND
EXERCISABLE
-------------------------- REMAINING
RANGE OF EXERCISE PRICES PRICE LIFE (YEARS)
- --------------------------------------------------------- SHARES --------- -------------
---------------
(IN THOUSANDS)
<S> <C> <C> <C>
$0.08-$0.125............................................. 370 $ 0.11 7.82
$0.25-$0.35.............................................. 434 $ 0.32 9.17
$0.50-$0.75.............................................. 158 $ 0.64 9.73
$1.00-$3.00.............................................. 187 $ 1.67 9.93
-----
1,149
-----
-----
</TABLE>
The weighted average fair value at the date of grant for options granted was
$0.13, $0.13 and $2.84 per option during 1996, 1997 and 1998, respectively. The
weighted average fair value at the date of grant for options granted during the
six month period ended June 30, 1999 was $5.02. The fair value of options at the
date of grant was estimated on the date of grant based on the fair value method
using the Black-Scholes pricing model and using the following assumptions:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ---------------
1996 1997 1998 1999
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
Expected life (years).............................. 4 4 4 4
Risk-free Interest rate............................ 6.2% 6.0% 5.6% 5.6%
Dividend yield..................................... -- -- -- --
</TABLE>
PRO FORMA EXPENSE
Had compensation cost for the 1995 Plan been determined based on the fair
value at the grant dates for the awards under a method prescribed by SFAS 123,
the Company's net loss would have been adjusted as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -----------
1996 1997 1998 1999
--------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss:
Pro forma...................................... $ (1,949) $ (4,038) $ (7,473) $ (5,762)
Basic and diluted net loss per share:
Pro forma...................................... $ (0.98) $ (1.14) $ (1.57) $ (1.08)
</TABLE>
STOCK COMPENSATION
During the year ended December 31, 1998 and the six months ended June 30,
1999, the Company granted options and sold restricted stock to employees and
recognized unearned stock compensation of $2,972,000 and $7,303,000,
respectively. Such unearned stock compensation will be amortized using an
accelerated method over the vesting period and may decrease due to employees
that terminate service prior to vesting.
F-17
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDER'S EQUITY: (CONTINUED)
OPTIONS TO CONSULTANTS
During 1998 and the six months ended June 30, 1999, the Company granted
options to purchase 120,000 and 115,000 shares of Common Stock to consultants
with a weighted average exercise price of $0.31 and $1.37 per share,
respectively. The charge related to options granted to consultants is calculated
at the end of each reporting period based upon the Black-Scholes model, which
approximates fair value and is amortized based on the term of the consulting
agreement or service period. The amount of the charge in each period can
fluctuate depending on our stock price and volatility.
NOTE 9--BENEFIT PLAN:
Effective January 1, 1995, the Company adopted a 401(k) plan which allows
all employees to participate by making salary deferral contributions to the
401(k) plan ranging from 1% to 20% of their eligible earnings. The Company may
make discretionary contributions to the 401(k) Savings Plan upon approval by the
Board of Directors. No Company contributions were made to the 401(k) Savings
Plan from inception through June 30, 1999.
NOTE 10--SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates in a single industry segment (as defined by SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information")
encompassing the design, development and sale of semiconductor solutions for
applications that require high-bandwidth and integrated system-level
functionality, such as the local interconnect between host systems and digital
displays, including flat panel displays and digital CRTs.
The following is a summary of product revenue by geographic area (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------- JUNE 30,
1996 1997 1998 1999
----- --------- --------- -----------
<S> <C> <C> <C> <C>
Taiwan................................................. $ 30 $ 1 $ 4,391 $ 2,720
Japan.................................................. -- 145 163 1,873
United States.......................................... -- 78 348 724
Canada................................................. -- 14 1,078 516
Korea.................................................. -- 1,021 770 963
Others................................................. -- 21 953 910
--- --------- --------- -----------
$ 30 $ 1,280 $ 7,703 $ 7,706
--- --------- --------- -----------
--- --------- --------- -----------
</TABLE>
All development and license revenues are derived from non-domestic sources.
All sales are denominated in United States dollars. For all periods presented,
substantially all of the Company's assets were located within the United States.
NOTE 11--SUBSEQUENT EVENT:
In September 1999, the Company reincorporated in Delaware. The
reincorporation increased the total number of authorized shares of common stock
to 75,000,000 and authorized 5,000,000 shares of undesignated preferred stock.
In addition the Board of Directors and stockholders approved the adoption of the
1999 Employee Stock Purchase Plan and the 1999 Stock Plan.
F-18
<PAGE>
[Description of graphics on inside back cover page]
This graphic is entitled "Key Relationships." In the center of the page is
the Silicon Image logo. Above the logo is a shaded rectangle. Inside the
rectangle is the word "DDWG." Surrounding the upper half of the rectangle in a
semi-circular form are the following names or logos: "Compaq," "NEC," "Intel,"
"Silicon Image," "IBM," "Fujitsu" and "Hewlett Packard." Directly below the
Silicon Image logo in the center of the page is a rectangle with Silicon Image's
PanelLink Technology logo. To the right of the logo is the label "PanelLink
Digital." To the right of that is Silicon Image's DVC Architecture logo. Below
and outside of the rectangle with the PanelLink Technology logo and the DVC
Architecture logo is the phrase "Core Technologies." Below and to the left of
the phrase is a shaded rectangle. Inside the rectangle is the phrase "Host
Systems." Underneath this rectangle is the following set of names or logos:
"IBM," "Hitachi," "Compaq," "NEC," "Fujitsu," "Sharp," "Toshiba," "ATI," "Number
Nine" and "Diamond Multimedia." Below and to the right of the phrase "Core
Technologies" is a shaded rectangle. Inside the rectangle is the word
"Displays." Underneath this rectangle is the following names or logos: "IBM,"
"Samsung," "LG Electronics Inc.," "Fujitsu," "Compaq," "Sharp," "Princeton,"
"Apple," "Hitachi," "NEC," "Gateway" and "ViewSonic."
<PAGE>
[SILICON IMAGE, INC. LOGO]
