<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to ___________.
Commission file number: 000-26887
Silicon Image, Inc.
(Exact name of registrant as specified in its charter)
Delaware 77-0517246
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10131 Bubb Rd.
Cupertino, California 95014
(Address of principal executive offices and zip code)
(408) 873-3111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(D) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) Yes X No and (2) has been subject
to such filing --- ---
requirements for the past 90 days Yes No X
--- ---
The number of shares of the registrant's Common Stock, $0.001 par value per
share, outstanding as of October 31, 1999 was 25,752,873 shares.
<PAGE>
Silicon Image, Inc.
Quarterly Report on
Form 10-Q
Three and Nine Months Ended
September 30, 1999
Index
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 1999
and December 31, 1998 1
Condensed Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and 1998 2
Condensed Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 3
Notes to Unaudited Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Change in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Silicon Image, Inc.
Condensed Balance Sheets
(in thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 9,950 $ 10,096
Short-term investments 2,446 1,401
Accounts receivable 2,057 1,518
Inventory 502 301
Prepaid expenses and other current assets 1,218 259
--------- ---------
Total current assets 16,173 13,575
Property and equipment, net 1,038 1,125
Other assets 182 74
--------- ---------
Total assets $ 17,393 $ 14,774
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit $ 757 $ 757
Accounts payable 1,744 882
Accrued liabilities 2,843 1,154
Capital lease obligations, current 487 218
Deferred revenue 155 1,121
Deferred margin on sales to distributors 2,016 490
--------- ---------
Total current liabilities 8,002 4,622
Capital lease obligations, long-term 652 300
--------- ---------
Total liabilities 8,654 4,922
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
10,065,000 shares authorized; 9,560,000
shares issued and outstanding 10 10
Common stock, $0.001 par value; 75,000,000 and
21,500,000 shares authorized; 9,596,000 and
6,786,000 shares issued and outstanding 10 7
Additional paid-in capital 36,745 24,960
Notes receivable from stockholders (1,471) (96)
Unearned compensation (7,830) (2,249)
Accumulated deficit (18,725) (12,780)
--------- ---------
Total stockholders' equity 8,739 9,852
--------- ---------
Total liabilities and stockholders'
equity $ 17,393 $ 14,774
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
1
<PAGE>
Silicon Image, Inc.
Condensed Statements of Operations
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Product revenue $ 5,341 $ 2,014 $ 13,047 $ 4,666
Development and license revenue -- 25 575 50
-------- -------- -------- --------
Total revenue 5,341 2,039 13,622 4,716
Cost and operating expenses:
Cost of product revenue 1,921 1,140 5,249 2,851
Research and development 1,955 1,140 5,015 3,096
Selling, general and administrative 2,105 1,165 5,157 3,071
Stock compensation and warrant expense 1,496 554 4,394 738
-------- -------- -------- --------
Total cost and operating expenses 7,477 3,999 19,815 9,756
-------- -------- -------- --------
Loss from operations (2,136) (1,960) (6,193) (5,040)
Interest income 178 84 388 115
Interest expense and other, net (78) (38) (140) (93)
-------- -------- -------- --------
Net loss $ (2,036) $ (1,914) $ (5,945) $ (5,018)
======== ======== ======== ========
Net loss per share:
Basic and diluted $ (0.29) $ (0.36) $ (1.01) $ (1.09)
======== ======== ======== ========
Weighted average shares 6,946 5,255 5,867 4,619
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
Silicon Image, Inc.
Condensed Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,945) $ (5,018)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization 437 472
Stock compensation and warrant expense 4,394 738
Change in assets and liabilities:
Accounts receivable (549) (366)
Inventory (201) (285)
Prepaid expenses and other assets (1,067) 118
Accounts payable 862 659
Accrued liabilities 1,689 (42)
Deferred revenue (966) 43
Deferred margin on sales to distributors 1,526 256
-------- --------
Net cash provided by (used in) operating
activities 180 (3,425)
-------- --------
Cash flows from investing activities:
Purchase of short-term investments (6,381) --
Proceeds from sale of short-term investments 5,336 --
Purchase of property and equipment (289) (35)
-------- --------
Net cash used in investing activities (1,334) (35)
-------- --------
Cash flows from financing activities:
Principal payments on capital lease obligations (229) (90)
Proceeds from financing of property and equipment 789 --
Borrowings on line of credit, net -- 378
Proceeds from issuance of convertible preferred
stock, net of issuance costs -- 12,508
Proceeds from issuance of common stock 448 30
-------- --------
Net cash provided by financing activities 1,008 12,826
-------- --------
Net increase (decrease) in cash and cash equivalents (146) 9,366
Cash and cash equivalents at beginning of period 10,096 2,773
-------- --------
Cash and cash equivalents at end of period $ 9,950 $ 12,139
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
Silicon Image, Inc.
Notes to Unaudited Condensed Financial Statements
September 30, 1999
1. Basis of Presentation
The condensed financial statements included herein are unaudited (except for
the balance sheet as of December 31, 1998), however, they contain all normal
recurring accruals and adjustments which, in the opinion of management, are
necessary to present fairly the financial position of Silicon Image, Inc. at
September 30, 1999, the results of its operations for the three and nine months
ended September 30, 1999 and 1998 and cash flows for the nine months ended
September 30, 1999 and 1998. The results of operations for the three and nine
months ended September 30, 1999 are not necessarily indicative of the results to
be expected for the full year.
The accompanying unaudited condensed financial statements do not include
footnotes and certain financial presentations normally required under generally
accepted accounting principles. Therefore, these financial statements should be
read in conjunction with the audited financial statements and notes thereto for
the year ended December 31, 1998, included in our Registration Statement on Form
S-1 (File No. 333-83665) filed with the Securities and Exchange Commission.
2. Net Loss Per Share
The following tables set forth the computation of basic and diluted net loss
per share of common stock:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (2,036) $ (1,914) $ (5,945) $ (5,018)
========== ========== ========== ==========
Denominator:
Weighted average shares 9,558 6,055 8,555 5,882
Less: unvested common shares
subject to repurchase (2,612) (800) (2,688) (1,263)
---------- ---------- ---------- ----------
Denominator for basic and diluted
net loss per share 6,946 5,255 5,867 4,619
---------- ---------- ---------- ----------
Net loss per share:
Basic and diluted net loss per
share $ (0.29) $ (0.36) $ (1.01) $ (1.09)
========== ========== ========== ==========
</TABLE>
As a result of the net losses incurred by the Company during the three and
nine month periods ended September 30, 1999 and 1998, all potential common
shares were anti-dilutive 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>
September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Preferred stock 11,657,000 11,657,000
Unvested common shares subject
to repurchase 2,493,000 800,000
Stock options 2,047,000 2,295,000
Common stock warrants 286,000 --
Preferred stock warrants 32,000 --
</TABLE>
4
<PAGE>
3. Balance Sheet Components
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
(in thousands)
<S> <C> <C>
Inventory:
Work in process $ 175 $ 175
Finished goods 327 126
------------- -------------
$ 502 $ 301
============= =============
Accrued liabilities:
Accrued payroll and related expenses $ 265 $ 167
Customer rebates and accrued sales returns 992 491
Accrued offering expenses 727 --
Other accrued liabilities 859 496
------------- -------------
$ 2,843 $ 1,154
============= =============
</TABLE>
4. 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 this third party 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 this third party 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 third party achieved a milestone. The Company recorded
$346,000 in 1998 and $595,000 in the nine months ended September 30, 1999 of
expense for these warrants which is included in stock compensation and warrant
expense. In addition, if a milestone is achieved, the Company will grant to this
third party a warrant to purchase 142,857 shares of the Company's common stock
at $0.35 per share. If this milestone is achieved, the Company will record an
expense related to the issuance of this warrant (the estimated fair value of the
warrant at September 30, 1999 was $1.1 million). All warrants under this
agreement will expire on September 16, 2004.
5. Stock Based Compensation
The Company granted options and sold restricted stock to employees and
during the three months ended September 30, 1999 and 1998 recognized unearned
stock compensation of $1.8 million and $608,000, 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.
6. Subsequent Events
Initial Public Offering. The Company filed a Registration Statement on Form
S-1 which was declared effective by the SEC on October 5, 1999. On October 6,
1999 Silicon Image shares commenced trading and on October 12, 1999 the Company
completed the sale of all 4,485,000 registered shares of common stock at a price
of $12.00 per share in the initial public offering pursuant to the Registration
Statement. The net proceeds received by the Company after deducting underwriting
discounts and commissions and estimated offering expenses was approximately $48
million. Offering costs of approximately $1.0 million have been deferred and are
included in prepaid expenses and other current assets as of September 30, 1999.
Immediately prior to the closing of the offering, the shares of convertible
preferred stock were automatically converted into approximately 11,657,062
shares of common stock.
Severance costs. On October 15, 1999, Scott Macomber, Vice President of
Business Strategy, resigned to pursue new opportunities. As a result, in October
1999 the Company will record a one-time charge of approximately $700,000
primarily due to the accelerated vesting of Mr. Macomber's stock options. The
majority of this charge will be non-cash related.
5
<PAGE>
Building Lease. On October 15, 1999 the Company entered into an operating
lease for corporate office space. The lease provides for average monthly
rental payments of approximately $135,000 through July 2003. The lease is
secured by a certificate of deposit in the amount of $733,000 which will be
decreased by $150,000 per year over the next three years. The Company will
incur additional costs related to the relocation and leasehold improvements
and may have to pay rent on two leases for a period of time.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
This report 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 report.
The section entitled "Risk Factors" set forth in this Form 10-Q and similar
discussions in our other Securities and Exchange Commission ("SEC") filings,
discuss some of the important risk factors that may affect our business, results
of operations and financial condition. You should carefully consider those
risks, in addition to the other information in this Report and in our other
filings with the SEC, before deciding to invest in our company or to maintain or
increase your investment. We undertake no obligation to revise or update
publicly any forward-looking statements for any reason.
The information contained in this Form 10-Q is not a complete description of
our business or the risks associated with an investment in our Common Stock. We
urge you to carefully review and consider the various disclosures made by us in
this Report and in our other filings with the SEC including our final prospectus
filed in connection with our Registration Statement on Form S-1 (File No.
333-83665), that discuss our business in greater detail and advise interested
parties of certain risks, uncertainties and other factors that may affect our
business, results of operations or financial condition.
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 ("DVC") 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, developing 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
development of panel controllers for flat panel displays and license fees from
licenses of our high-speed digital interconnect technology.
6
<PAGE>
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. In the third
quarter of 1999 we began shipping two new products which provide comprehensive
end-to-end all-digital capability from host system to display system for all
volume resolutions shipping in the market at that time.
In October 1999 we completed an initial public offering raising
approximately $48 million. We have incurred losses in each year since inception,
as well as for the nine months ended September 30, 1999. At September 30, 1999,
we had an accumulated deficit of $18.7 million.
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 57.5% and 84.0% of our product
revenue in the nine month periods ended September 30, 1999 and 1998,
respectively. 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 81.5% and 71.7% of
product revenue in the nine month periods ended September 30, 1999 and 1998,
respectively. 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. 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."
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 September 30, 1999, the amount of employee unearned
compensation was $7.8 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.
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 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
7
<PAGE>
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
"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."
For a further overview of our accounting policies and risk factors, please
refer to the additional disclosures made in our Registration Statement on Form
S-1 (File No. 333-83665) filed with the SEC.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
The following table sets forth certain statement of operations data
expressed as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Product revenue 100.0 % 98.8 % 95.8 % 98.9 %
Development and license revenue 0.0 1.2 4.2 1.1
-------- -------- -------- --------
Total revenue 100.0 100.0 100.0 100.0
Cost and operating expenses:
Cost of product revenue 36.0 55.9 38.5 60.5
Research and development 36.6 55.9 36.8 65.6
Selling, general and administrative 39.4 57.1 37.9 65.2
Stock compensation and warrant expense 28.0 27.2 32.3 15.6
-------- -------- -------- --------
Total operating expenses 140.0 196.1 145.5 206.9
-------- -------- -------- --------
Loss from operations (40.0) (96.1) (45.5) (106.9)
Interest income and other, net 1.9 2.3 1.8 0.5
-------- -------- -------- --------
Net loss (38.1)% (93.9)% (43.6)% (106.4)%
======== ======== ======== ========
</TABLE>
PRODUCT REVENUE. Product revenue increased 165.2% to $5.3 million for the
three months ended September 30, 1999 from $2.0 million for the three months
ended September 30, 1998. Product revenue increased 179.6% to $13.0 million for
the nine months ended September 30, 1999 from $4.7 million for the nine months
ended September 30, 1998. The increase in product revenue was derived primarily
from significantly higher unit shipments of display system products, driven by
increased market acceptance of digital-ready displays. The increase in unit
shipments resulted primarily from new design wins with new customers in Japan as
demand for flat panel displays was particularly strong.
8
<PAGE>
DEVELOPMENT AND LICENSE REVENUE. There were no revenues from development and
licensing activities in the three months ended September 30, 1999 and
development and license revenues were $25,000 for the three months ended
September 30, 1998. Development and license revenue increased to $575,000 for
the nine months ended September 30, 1999 from $50,000 for the nine months ended
September 30, 1998. 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. The contract
was terminated during the first quarter of 1999 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 to 64.0% for the
three months ended September 30, 1999 from 43.4% for the three months ended
September 30, 1998. Product gross margin was 59.8% for the nine month period
ended September 30, 1999 up from 38.9% for the nine month period ended September
30, 1998. 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 display system 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 36.6% of total revenue for the three months ended
September 30, 1999 and $1.1 million or 55.9% of total revenue for the three
months ended September 30, 1998. R&D was $5.0 million, or 36.8% of total revenue
for the nine months ended September 30, 1999 and $3.1 million or 65.6% of total
revenue for the nine months ended September 30, 1998. The increase in absolute
dollars was primarily due to the hiring of additional development personnel and
outside consultants and an increase in expenses related to integrating our
display receiver technology with additional functionality for flat panel
displays and digital CRTs as well as our anticipated networking and data storage
products. Our research and development staff increased to 26 at September 30,
1999 from 14 at September 30, 1998. We expect that R&D will continue to increase
in the future.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A consists primarily of employee
salaries, sales commissions, and marketing and promotional expenses. SG&A was
$2.1 million or 39.4% of total revenue for the three month period ended
September 30, 1999 and $1.2 million or 57.1% of total revenue for the three
month period ended September 30, 1998. SG&A was $5.2 million, or 37.9% of total
revenue, for the nine months ended September 30, 1999, and $3.1 million or 65.2%
of total revenue for the nine months ended September 30, 1998. SG&A increased in
absolute dollars due primarily to hiring of additional personnel and expanded
sales and marketing activities related to the further broadening of our customer
and product base in 1999 and increased sales commissions due to increases in
revenue. Our sales and marketing staff increased to 30 at September 30, 1999
from 14 at September 30, 1998, and administrative and finance staff increased to
10 at September 30, 1999 from 7 at September 30, 1998. We expect that SG&A will
continue to increase in absolute dollars as we hire additional personnel, expand
our sales and marketing efforts and incur costs associated with being a public
company.
STOCK COMPENSATION AND WARRANT EXPENSE. Stock compensation and warrant
expense was $1.5 million or 28.0% of total revenue for the three months ended
September 30, 1999, and $554,000, or 27.2% of total revenue for the three months
ended September 30, 1998. Stock compensation and warrant expense was $4.4
million or 32.3% of total revenue for the nine months ended September 30, 1999
and $738,000, or 15.6% of total revenue, for the nine months ended September 30,
1998. A substantial portion of the increase was due to the amortization of
unearned compensation related to the vesting of employee stock options and
additional amounts related to the achievement of a milestone on a warrant issued
to Intel.
9
<PAGE>
INTEREST INCOME. Interest income increased to $178,000 in the three months
ended September 30, 1999 from $84,000 in the three months ended September 30,
1998. Interest income increased to $388,000 in the nine months ended September
30, 1999 from $115,000 for the nine months ended September 30, 1998. 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 AND OTHER, NET. Interest expense and other, net increased
to $78,000 in the three months ended September 30, 1999 from $38,000 for the
three months ended September 30, 1998. Interest expense and other, net increased
to $140,000 in the nine months ended September 30, 1999 from $93,000 for the
nine months ended September 30, 1998. This increase was the result of an
increase in the average outstanding debt and an increase in capital lease
obligations.
PROVISION FOR INCOME TAXES. We have not recorded a provision for federal or
state income taxes through September 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 September 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 $17.3 million and our state tax
carry-forwards were $6.0 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.
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 September 30, 1999, we had $8.2 million in working capital and
$12.4 million in cash, cash equivalents and short-term investments.
We filed a Registration Statement on Form S-1 (File No. 333-83665) which was
declared effective by the SEC on October 5, 1999. On October 6, 1999 our shares
commenced trading and on October 12, 1999 we completed the sale of all 4,485,000
registered shares of common stock at a price of $12.00 per share in our initial
public offering pursuant to the Registration Statement. The net proceeds we
received after deducting underwriting discounts and commissions and estimated
offering expenses were approximately $48 million.
Operating activities provided cash in the amount of $180,000 during the nine
months ended September 30, 1999 compared to a use of cash from operating
activities in the amount of $3.4 million in the nine months ended September 30,
1998. The increase in cash for this period was primarily a result of an increase
in accrued liabilities and deferred margin on sales to distributors, partially
offset by the net loss and an increase in prepaid expenses and other assets.
Accrued expenses increased $1.7 million as a result of an overall increase in
our operating expenses and inventory levels, due to the growth of our business
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. Our 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. Prepaid expenses and other assets increased
as costs related to our initial public offering were incurred. These deferred
costs will be offset against the proceeds of the offering during the fourth
quarter of 1999.
For the nine months ended September 30, 1999, cash used by investing
activities was $1.3 million which was primarily attributable to purchases of
short-term investments. For the nine months ended September 30, 1998 cash used
by investing activities was $35,000 and related to the purchase of property and
equipment.
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Net cash provided by financing activities of $1.0 million for the nine
months ended September 30, 1999 was primarily attributable to proceeds from the
financing of property and equipment and the exercise of stock options. Net cash
provided by financing activities of $12.8 million for the nine months ended
September 30, 1998 was attributable to proceeds from the issuance of convertible
preferred stock as well as to borrowings on a line of credit.
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 8.50% at September 30, 1999. On September 30, 1999, we
were in compliance with all line of credit covenants and had borrowed $757,000
under this line of credit and an additional $1.2 million was available for
borrowing. On October 15, 1999 the outstanding balance under this line of credit
was paid in full. 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 September
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 twelve to 42 months. 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 $3.5 million during the next 12 months for test equipment,
potential tenant improvements and additional furniture, equipment and software.
We lease our facility under a noncancelable operating lease which expires in
December 2002. On October 15, 1999 we entered into an operating lease for
corporate office space. The lease provides for average monthly rental payments
of approximately $135,000 through July 2003. The lease is secured by a
certificate of deposit in the amount of $733,000 which will be decreased by
$150,000 per year over the next three years. We will incur additional costs
related to the relocation and leasehold improvements and may have to pay rent on
two leases for a period of time.
We believe that the net proceeds from our initial public 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 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 our
initial public 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.
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:
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 due to our having little or no control over the design, production and
testing of our customers' products.
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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 remediation 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 have conducted an assessment of internal
software applications and computer hardware and our plan to upgrade all hardware
including networks, telecommunications equipment, workstations and other items
is complete. Our plan to upgrade the critical software applications used by us
is nearly complete. Since most of the software applications we use are generally
recent versions of vendor supported, commercially available products, we have
not incurred, and do not expect to incur, significant costs to upgrade these
applications as Year 2000 compliant versions are released by the respective
vendors. We have received certifications that products installed are Year 2000
ready. We expect our software upgrade plan to be completed in November 1999.
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 assessed the business risks and costs of remediating the Year 2000 problem
on our facility related systems and have completed our related remediation
plans. We believe that our facility related remediation plans have been adequate
to prevent any material Year 2000 problems. The total cost of completing the
required modifications, upgrades or replacements of these systems did not have a
material adverse effect on our business or results of operations.
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 have completed our remediation plan and have received written
assurances from our key distributors and suppliers that their systems are Year
2000 ready.
We 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 November 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 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.
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RISK FACTORS
In future periods our business, financial condition and results of
operations may be affected in a material and adverse manner by many factors,
including, but not limited to, the following:
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
$5.9 million for the first nine months of 1999, and we expect to continue to
incur operating losses. As of September 30, 1999, we had an accumulated deficit
of approximately $18.7 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 "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
- the availability of production capacity at the semiconductor foundry that
manufactures our products.
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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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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, very few
complete DVI-compliant systems that include both a host system and a display
have 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 nine months, transmitters represented approximately 48% of
our product revenues in the third quarter of 1999. 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.
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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. Under capacity 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
IS 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
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of the DDWG. We have benefited from Intel's 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.
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.
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. For the nine months
ended September 30, 1998, sales of transmitter products to Mitac, a third party
manufacturer, accounted for 50.1% of our total revenues, and ATI Technologies, a
leading graphics board manufacturer, accounted for 15.2% 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 nine month period ended
September 30, 1999, sales to Mitac decreased to 10.5% of our total revenues and
sales to ATI Technologies decreased to less than 10.0% of our total revenues.
Also during the nine month period ended September 30, 1999 sales to Kanematsu, a
Japanese distributor, accounted for 14.2% of our total revenues, Microtek, a
Japanese distributor, accounted for 13.3% of our total revenues and World Peace,
a Taiwanese distributor, accounted for 11.9% 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.
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.
Product revenues attributable to distributors have increased to 54.2% for
the nine months ended September 30, 1999 from 11.0% for the nine months ended
September 30, 1998. 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,
Inc. has announced that their customers are sampling a DVI-compliant product
that will compete with our DVCs and ATI Technologies, Inc. and Silicon
Integrated Systems Corporation are selling graphics controller chips that
include DVI-compliant transmitters. We do not offer a graphics controller chip
that includes an integrated transmitter.
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.
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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 IN 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.
OUR FOUNDRY, TEST AND ASSEMBLY CAPACITY MAY BE LIMITED IN THE UPCOMING YEAR DUE
TO THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY.
We are dependent on third party suppliers for all of our foundry, test and
assembly functions. We depend on these suppliers to allocate to us a portion of
their capacity sufficient to meet our needs to produce products of acceptable
quality and with acceptable manufacturing yield and to deliver products to us in
a timely manner. These third party suppliers fabricate, test and assemble
products for other companies. If there is a decrease in available capacity, it
is likely that the lead time required to manufacture, test and assemble our
products will increase, which may result in our inability to meet our customers
demands and loss of customers, which would seriously harm our business.
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.
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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. This qualification
process may also require significant effort by our customers. 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.
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.
19
<PAGE>
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 a severance agreement with our Chief Executive
Officer, 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. 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.
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.
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 92.4% of our revenues
for the first nine months of 1999 and 96.9% of our revenues for the first nine
months of 1998. 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;
20
<PAGE>
- adequacy of local infrastructure; and
- 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.
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.
21
<PAGE>
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.
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 83 employees on September 30, 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
- build out and make our newly leased facilities operational.
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. 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.
22
<PAGE>
Customers located in Taiwan were responsible for 22.1% of our product
revenue for the nine months ended September 30, 1999 and 53.1% of our product
revenue for the nine months ended September 30, 1998. 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 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.
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.
STOCKHOLDERS EXISTING PRIOR TO OUR INITIAL PUBLIC OFFERING 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.
The executive officers, directors and other principal stockholders
beneficially own or control, directly or indirectly approximately 45% 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.
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. 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;
- changes in market valuations of other technology companies;
- announcements by us or our competitors of significant technical
innovations, design wins, contracts, standards or acquisitions;
23
<PAGE>
- the operating and stock price performance of other comparable companies;
and
- the number of our shares that are available for trading by the public and
the trading volume of our shares.
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 MAY DEPRESS OUR STOCK PRICE.
Of the 25,752,873 shares of our common stock outstanding on October 31,
1999, the 4,485,000 shares sold in our initial public offering on October 6,
1999 are freely tradable. Almost all of the remaining shares of common stock are
subject to lock-up agreements prohibiting their disposition until April 3, 2000.
Sales of a substantial number of these shares in the public market after the
lock-up period ends could cause the market price of our common stock to decline.
In addition, the sale of these shares could impair our ability to raise capital
through the sale of additional stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. Substantially all transactions to
date have been denominated in United States dollars.
As of September 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.
We have invested the initial public offering proceeds received in October
1999 in short-term, interest-bearing investment-grade securities. We plan to
invest these funds in longer term investment-grade securities which may have a
material effect on the fair market value of our portfolio in future periods.
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
24
<PAGE>
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 1999, we and Silicon Image, Inc.
("Silicon Image California"), our California predecessor, made the following
offers and sales of its securities, all in reliance on the exemptions from
registration indicated:
<TABLE>
<CAPTION>
PURCHASER SECURITY DATE OF SALE CONSIDERATION EXEMPTION
<S> <C> <C> <C> <C>
Former employee and his spouse 50,000 shares of 7/14/99 $ 6,250 Section 4(2)/ Rule
Common Stock 506
Parviz Khodi (Silicon Image Vice 2,000 shares of 9/13/99 $10,000 Section 4(2)/ Rule
President of Worldwide Sales) and Common Stock 506
Kathy Khodi
Consultants 20,000 shares of 7/1/99 - 9/23/99 $68,500 Section 4(2)/ Rule
Common Stock 506 and Section
4(2)/Rule 701
Employees option holders 60,500 shares of 7/1/99 - 9/30/99 $68,125 Section 4(2)/ Rule
Common Stock 701
</TABLE>
On October 12, 1999 all shares of our convertible preferred stock were
automatically converted into approximately 11,657,062 shares of common stock.
We filed a Registration Statement on Form S-1 (File No. 333-83665) with the
Securities and Exchange Commission registering a total of 4,485,000 shares of
our common stock with a maximum aggregate offering price of $53.8 million, which
Registration Statement was declared effective by the SEC on October 5, 1999. On
October 6, 1999 our shares commenced trading and on October 12, 1999 we
completed the sale of all 4,485,000 registered shares of common stock at a price
of $12.00 per share in its initial public offering pursuant to the Registration
Statement. The principal underwriters for the offering were Credit Suisse First
Boston Corporation, BancBoston Robertson Stephens, Inc. and Dain Rauscher
Wessels, a division of Dain Rauscher Incorporated.
In connection with the Offering, we paid an aggregate of approximately $3.8
million in underwriting discounts and commissions and paid other expenses of
approximately $1.7 million, none of which were paid directly or indirectly to
any director or officer of the Company, any person owning 10% or more of any
class of equity securities of the Company, or any affiliate of the Company.
After deducting the underwriting discounts and commissions and other expenses,
we received aggregate proceeds from the Offering of approximately $48 million.
On October 15, 1999 we paid the balance due under our line of credit which was
$757,000. We intend to use the balance of the proceeds from this offering
primarily for general corporate purposes, including working capital and capital
expenditures. Pending such use, we have invested such proceeds in short-term,
interest-bearing, investment-grade securities. None of the net proceeds of the
offering were paid directly or indirectly to any director or officer of the
Company, any person owning 10% or more of any class of equity securities of the
Company, or any affiliate of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
25
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In September 1999, Silicon Image California solicited the written consent of
its shareholders to approve the following matters:
(a) changing the state of incorporation of Silicon Image California from
California to Delaware by means of a merger of Silicon Image California with and
into us, including approval of the Agreement and Plan of Merger and our First
Amended and Restated Certificate of Incorporation and Restated Bylaws;
(b) the form of Indemnity Agreement for use between us and each of our
officers and directors;
(c) our adoption of the 1999 Equity Incentive Plan and reservation of
1,000,000 shares, plus any shares remaining unissued under Silicon Image
California's 1995 Equity Incentive Plan or issuable upon the exercise of options
granted under the 1995 Equity Incentive Plan that expire or become unexercisable
without having been exercised in full, for issuance under the 1999 Equity
Incentive Plan, subject to automatic annual increases each January 1 by an
amount equal to 5% of our total outstanding shares;
(d) our adoption of the 1999 Employee Stock Purchase Plan and reservation of
250,000 shares for issuance under the 1999 Employee Stock Purchase Plan, subject
to automatic annual increases each January 1 by an amount equal to 1% of our
total outstanding shares; and
(e) our Second Amended and Restated Certificate of Incorporation, to be
filed with the Secretary of State of the State of Delaware following the closing
of our initial public offering of common stock.
Silicon Image California received the written consent of the number of
shares indicated below for the matters listed above.
<TABLE>
<CAPTION>
For* Against* Abstain*
<S> <C> <C> <C>
Matter (a) 18,345,756 0 60,000
Matter (b)** 18,325,756 0 80,000
Matter (c) 18,325,756 0 80,000
Matter (d) 18,345,756 0 60,000
Matter (e) 18,345,756 0 60,000
</TABLE>
* The holders of common stock and preferred stock voted on each of the
matters listed above, with preferred stock voting on an as-converted to
common basis.
** With respect to Matter (b), we sought approval of the majority of the
outstanding shares of common stock and preferred stock not held my
members of our Board of Directors or their affiliates and received the
affirmative vote of 8,242,480 shares, which constituted such a majority.
In July 1999, we solicited the written consent of Silicon Image California,
our then sole stockholder, to approve the matters listed above. We received
Silicon Image California's written consent approving each of such matters as to
all of the 1,000 shares of our common stock then outstanding.
Upon the consummation of the our initial public offering, our stockholders
may no longer act by written consent.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
26
<PAGE>
(b) Reports on Form 8-K
No such reports were filed during the three months ended September 30,
1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SILICON IMAGE, INC.
A DELAWARE CORPORATION
(Registrant)
November 19, 1999 /s/ Daniel K. Atler
-------------------------------------------
Daniel K. Atler
Vice President Finance and Administration
and Chief Financial Officer (duly authorized
officer and principal financial officer)
27
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS AS FOUND ON PAGES 1 AND 2 OF THE SILICON
IMAGE, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,950
<SECURITIES> 2,446
<RECEIVABLES> 2,057
<ALLOWANCES> (101)
<INVENTORY> 502
<CURRENT-ASSETS> 16,173
<PP&E> 2,406
<DEPRECIATION> (1,368)
<TOTAL-ASSETS> 17,393
<CURRENT-LIABILITIES> 8,002
<BONDS> 0
0
10
<COMMON> 10
<OTHER-SE> 8,719
<TOTAL-LIABILITY-AND-EQUITY> 17,393
<SALES> 13,047
<TOTAL-REVENUES> 13,622
<CGS> 5,249
<TOTAL-COSTS> 19,815
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (126)
<INCOME-PRETAX> (5,945)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,945)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,945)
<EPS-BASIC> (1.01)
<EPS-DILUTED> (1.01)
</TABLE>
