<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, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________.
Commission file number: 000-26887
SILICON IMAGE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0396307
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1060 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086
(Address of principal executive offices and zip code)
(408) 616-4000
(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 [X] No [ ]
The number of shares of the registrant's Common Stock, $0.001 par value per
share, outstanding as of October 31, 2000 was 53,829,441 shares.
<PAGE>
SILICON IMAGE, INC.
QUARTERLY REPORT ON
FORM 10-Q
THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 1
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999 2
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 3
Notes to Unaudited Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Change in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 25
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON IMAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 42,731 $ 33,648
Short-term investments 20,212 24,499
Accounts receivable, net 7,631 4,553
Inventory 3,147 765
Prepaid expenses and other current assets 2,024 1,324
------------- ------------
Total current assets 75,745 64,789
Property and equipment, net 3,806 1,809
Goodwill and intangible assets, net 23,419 -
Other assets 1,011 903
------------- ------------
Total assets $ 103,981 $ 67,501
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,793 $ 2,491
Accrued liabilities 5,266 3,277
Capital lease obligations, current 433 498
Deferred margin on sales to distributors 5,461 3,143
------------- ------------
Total current liabilities 18,953 9,409
Capital lease obligations, long-term 243 528
------------- ------------
Total liabilities 19,196 9,937
------------- ------------
Commitments and contingencies (Note 5)
Stockholders' Equity
Common stock, par value $0.001; 75,000,000 shares
authorized; 53,800,000 and 51,486,000 shares issued
and outstanding 54 51
Additional paid-in capital 135,925 85,390
Notes receivable from stockholders (214) (1,455)
Unearned compensation (12,779) (6,021)
Accumulated deficit (38,201) (20,401)
------------- ------------
Total stockholders' equity 84,785 57,564
------------- ------------
Total liabilities and stockholders' equity $ 103,981 $ 67,501
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
SILICON IMAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2000 1999 2000 1999
-------- ------- --------- --------
<S> <C> <C> <C> <C>
Revenue:
Product revenue $ 14,462 $ 5,341 $ 36,976 $13,047
Development and license revenue - 575
-------- ------- --------- --------
Total revenue 14,462 5,341 36,976 13,622
Cost and operating expenses:
Cost of product revenue 5,449 1,921 13,675 5,249
Research and development 3,210 1,955 8,878 5,015
Selling, general and administrative 5,785 2,105 14,160 5,157
Amortization of goodwill and
intangible assets 2,157 - 2,157 -
In-process research and development 8,410 - 8,410 -
Stock compensation and warrant expense 4,801 1,496 10,127 4,394
-------- ------- --------- --------
Total cost and operating expenses 29,812 7,477 57,407 19,815
-------- ------- --------- --------
Loss from operations (15,350) (2,136) (20,431) (6,193)
Interest income 1,064 178 3,069 388
Interest expense and other, net (29) (78) (97) (140)
-------- ------- --------- --------
Net loss before provision for income taxes (14,315) (2,036) (17,459) (5,945)
Provision for income taxes (98) - (341) -
-------- ------- --------- --------
Net loss $(14,413) $(2,036) $(17,800) $(5,945)
========= ======== ========= ========
Net loss per share:
Basic and diluted $ (0.28) $ (0.15) $ (0.36) $ (0.51)
========= ======== ========= ========
Weighted average shares 50,652 13,892 49,126 11,734
========= ======== ========= ========
</TABLE>
See accompanying notes toensed consolidated financial statements.
2
<PAGE>
SILICON IMAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(17,800) $(5,945)
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation and amortization 658 437
Gain on sale of investments (349) -
Amortization of investment premium 203 -
Amortization of goodwill and intangible assets 2,157 -
In-process research and development 8,410 -
Stock compensation and warrant expense 10,127 4,394
Interest income on stockholder notes (81) -
Change in assets and liabilities:
Accounts receivable (2,893) (549)
Inventory (2,027) (201)
Prepaid expenses and other assets (1,059) (1,067)
Accounts payable 4,531 862
Accrued liabilities 210 723
Deferred margin on sales to distributors 2,318 1,526
--------- --------
Net cash provided by operating activities 4,405 180
--------- --------
Cash flows from investing activities:
Purchase of short-term investments (10,563) (6,381)
Proceeds from sale of short-term investments 14,996 5,336
Cash obtained in acquisition 13 -
Purchase of property and equipment (2,476) (289)
--------- --------
Net cash provided by (used in) investing activities 1,970 (1,334)
--------- --------
Cash flows from financing activities:
Principal payments on capital lease obligations (309) (229)
Proceeds from financing of property and equipment - 789
Proceeds from issuance of common stock 1,695 448
Proceeds from repayment of note receivable from stockholders 1,322 -
--------- --------
Net cash provided by financing activities 2,708 1,008
--------- --------
Net increase (decrease) in cash and cash equivalents 9,083 (146)
Cash and cash equivalents at the beginning of the period 33,648 10,096
--------- --------
Cash and cash equivalents at the end of the period $ 42,731 $ 9,950
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SILICON IMAGE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. Basis of Presentation
In the opinion of management, the unaudited condensed consolidated
financial statements of Silicon Image, Inc. (the "Company") included herein have
been prepared on a basis consistent with the December 31, 1999 audited financial
statements and include all material adjustments, consisting of normal recurring
adjustments, necessary to fairly present the information set forth therein.
These interim condensed consolidated financial statements should be read in
conjunction with the December 31, 1999 audited financial statements and notes
thereto included in the Company's Form 10-K for the fiscal year ended December
31, 1999. The results of operations for the three and nine months ended
September 30, 2000 are not necessarily indicative of future operating results.
The accompanying financial statements have been restated to give effect to a
two-for-one stock split effective August 18, 2000.
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,
--------------------- ---------------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Numerator (in thousands):
Net loss $(14,413) $(2,036) $(17,800) $(5,945)
========= ======== ========= ========
Denominator (in thousands):
Weighted average shares 53,288 19,116 52,193 17,110
Less: unvested common shares
subject to repurchase (2,636) (5,224) (3,067) (5,376)
--------- -------- --------- --------
Denominator for basic and diluted
calculation 50,652 13,892 49,126 11,734
--------- -------- --------- --------
Net loss per share:
Basic and diluted net loss per share $ (0.28) $ (0.15) $ (0.36) $ (0.51)
========= ======== ========= ========
</TABLE>
As a result of the net losses incurred by the Company during the three and
nine month periods ended September 30, 2000 and 1999, 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,
---------------------
2000 1999
--------- ----------
<S> <C> <C>
Preferred Stock - 23,314,000
Unvested common shares subject to repurchase 2,476,000 4,986,000
Stock options 7,803,000 4,094,000
Common stock warrants 571,000 636,000
</TABLE>
4
<PAGE>
SILICON IMAGE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
3. Balance Sheet Components
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Accounts receivable $ 7,846 $ 4,654
Allowance for doubtful accounts (215) (101)
------------- ------------
$ 7,631 $ 4,553
============= ============
Inventory:
Work in process $ 1,635 $ 312
Finished goods 1,512 453
------------- ------------
$ 3,147 $ 765
============= ============
Property and equipment:
Furniture and equipment $ 3,008 $ 1,158
Computers and software 2,968 2,163
------------- ------------
5,976 3,321
Less: accumulated depreciation (2,170) (1,512)
------------- ------------
$ 3,806 $ 1,809
============= ============
Accrued liabilities:
Customer rebates and sales returns $ 1,389 $ 1,259
Payroll and related expenses 1,716 801
Other 2,161 1,217
------------- ------------
$ 5,266 $ 3,277
============= ============
</TABLE>
4. Business Combinations
DVDO, INC. ("DVDO")
The Company acquired DVDO, a privately held provider of digital video
processing semiconductors for the consumer electronics industry, on July 6, 2000
for a total purchase price of $32.8 million in a transaction to be accounted for
as a purchase. The Company exchanged approximately 1,288,000 shares of common
stock and stock options with a fair value of $31.9 million for all of the
outstanding stock of DVDO. In addition, the Company issued approximately 166,000
shares of restricted stock subject to repurchase rights. The common stock was
valued using the Company's average stock price for the five-day period ending
July 6, 2000. The average price was $24.66. The Company also assumed outstanding
stock options to purchase approximately 52,000 shares of Silicon Image common
stock of which the fair value component of the options of $163,000 is included
in the purchase price. Direct transaction costs related to the merger,
consisting primarily of investment advisory, legal and other professional
service fees, were approximately $860,000. In addition, the Company recorded
$4.9 million of unearned compensation related to the approximately 166,000
shares of restricted stock and the intrinsic value of assumed unvested stock
options to purchase approximately 52,000 shares of common stock.
5
<PAGE>
SILICON IMAGE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
4. Business Combinations (continued)
The acquisition has been accounted for under the purchase method of
accounting in accordance with APB Opinion No. 16. The purchase price has been
allocated to the assets acquired and liabilities assumed based on their
estimated fair value as determined by an independent appraisal. The purchase
price allocation is as follows:
<TABLE>
<S> <C>
Inventory $ 355
Other current assets 271
Fixed assets 179
In-process research and development 8,410
Intangibles 12,615
Goodwill 12,982
--------
Total assets acquired 34,812
Current liabilities 2,049
--------
Net assets acquired $32,763
========
</TABLE>
In-process research and development, which has not reached technological
feasibility and therefore has no alternative future use, has been expensed
during the quarter ended September 30, 2000. Intangible assets consist of
current technology, acquired workforce, trade name and patents. The acquired
workforce and trade name are being amortized over an estimated useful life of
two years, and the current technology, patents and goodwill are being amortized
over an estimated useful life of three years.
The intrinsic value of the assumed stock options to purchase
approximately 52,000 shares of common stock, totaling $803,000, has been
recorded as unearned compensation. The options were valued using the
Black-Scholes option pricing model, applying an average expected life of 2.75
years, a weighted average risk-free interest rate of 6.28%, an expected dividend
yield of zero percent, a volatility of 75% and a deemed fair value of $24.66. In
addition, the Company issued approximately 166,000 shares of restricted stock
subject to repurchase rights. In the event of a termination of employment for
cause by the Company or voluntary termination by the employee, the Company has
the right to repurchase a specified portion of the unvested shares at the
original purchase price, with such right expiring over a 33-month vesting
period. The value of these restricted shares of approximately $4.1 million has
been recorded as unearned compensation. All unearned compensation recorded as
part of this transaction is being amortized over the vesting period using an
accelerated method.
The following unaudited pro forma information gives effect to the
acquisition of DVDO as if it had occurred on January 1, 2000 and January 1, 1999
by consolidating the results of operations of DVDO with the results of
operations of the Company for the nine months ended September 30, 2000 and 1999,
respectively. The pro forma results exclude the $8.4 million nonrecurring
write-off of in-process research and development.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenues $ 38,248 $ 14,356
Net loss (25,766) (16,998)
Net loss per share:
Basic and diluted net loss per share $ (0.51) $ (1.31)
Weighted average shares 50,056 13,021
</TABLE>
6
<PAGE>
SILICON IMAGE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
4. Business Combinations (continued)
The above unaudited pro forma consolidated information is not necessarily
indicative of the actual results of operations that would have been reported if
the acquisition had actually occurred as of the beginning of the periods
described above, nor does such information purport to indicate the results of
the Company's future operations. In the opinion of management, all adjustments
necessary to present fairly such pro forma information have been made.
ZILLION TECHNOLOGIES, LLC ("ZILLION")
During the quarter ended June 30, 2000, the Company completed its
acquisition of Zillion, a privately held developer of high-speed transmission
technology for data storage applications. In exchange for all of the membership
interests in Zillion, the Company agreed to issue 300,000 shares of its common
stock ratably over a four-year vesting period. The total value of the shares
issued was $5.5 million which is being expensed over the vesting period using an
accelerated method. A total of $1.6 million has been amortized as of September
30, 2000. Net assets of Zillion were immaterial. The related acquisition costs
were immaterial and expensed during the period.
5. 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. Under the terms of these
agreements, the Company issued two warrants, each to purchase 285,714 shares of
the Company's common stock. The first warrant was immediately exercisable at an
exercise price of $1.75 per share. The second warrant became exercisable during
the quarter ended March 31, 1999 at an exercise price of $0.175 per share when
the third party achieved a milestone. The Company recorded $346,000 in 1998 and
$595,000 in 1999 of expense for these warrants which is included in stock
compensation and warrant expense. We are obligated to issue an additional
warrant for 285,714 shares of common stock at $0.175 per share upon satisfaction
of a milestone. If this milestone is achieved, the Company will record an
expense which will be equal to the fair value of the warrant at the time of
issuance (the estimated fair value of the warrant at September 30, 2000 was $3.5
million). All warrants under this agreement will expire on September 16, 2004.
6. Stock Based Compensation
The Company granted options and sold restricted stock to employees during
the three months ended September 30, 2000 and 1999 and recognized unearned stock
compensation of $5.6 million ($4.9 million in connection with the DVDO
acquisition - see Note 4) and $1.8 million, respectively. Such unearned stock
compensation will be amortized using an accelerated method over the vesting
period and may decrease due to employees who terminate service prior to vesting.
7. Recent Accounting Pronouncements
In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137
and No. 138, establishes a model for accounting for derivatives and hedging
activities and supercedes and amends a number of existing accounting standards.
As amended, SFAS No. 133 requires that all derivatives be recognized in the
balance sheet at their fair market value, and the corresponding derivative gains
or losses be either reported in the statement of operations or as a deferred
item depending on the type of hedge relationship that exists with respect to
such derivative. The Company does not hold any derivative instruments that will
be affected by the adoption of SFAS No. 133.
7
<PAGE>
SILICON IMAGE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
7. Recent Accounting Pronouncements (continued)
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, as amended, which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with
the SEC. As amended, SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The Company does not expect the adoption of SAB 101 to
have a material effect on its consolidated financial position or results of
operations.
8. Subsequent Events
In October 2000, the Company entered into a financing agreement for the
purchase of equipment which requires annual payments of approximately $430,000
through October 2003. The agreement is secured by a certificate of deposit
totaling $1.3 million and bears interest at the rate in effect under this
certificate of deposit plus 2%.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES AND EXCHANGE ACT OF 1934 AND SECTION 27A OF THE
SECURITIES ACT OF 1933. THESE FORWARD-LOOKING STATEMENTS INVOLVE A NUMBER OF
RISKS AND UNCERTAINTIES, INCLUDING THOSE IDENTIFIED IN THE SECTION OF THIS FORM
10-Q ENTITLED, "FACTORS AFFECTING FUTURE RESULTS," WHICH MAY CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING
STATEMENTS. THE FORWARD-LOOKING STATEMENTS WITHIN THIS FORM 10-Q ARE IN MANY
CASES IDENTIFIED BY WORDS SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS,"
"INTENDS," "MAY," "WILL" AND OTHER SIMILAR EXPRESSIONS IN ADDITION, ANY
STATEMENTS WHICH REFER TO EXPECTATIONS, PROJECTIONS OR OTHER CHARACTERIZATIONS
OF FUTURE EVENTS OR CIRCUMSTANCES ARE FORWARD-LOOKING STATEMENTS. WE UNDERTAKE
NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES
OCCURRING SUBSEQUENT TO THE FILING OF THIS FORM 10-Q WITH THE SEC. READERS ARE
URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY US IN
THIS REPORT AND IN OUR OTHER REPORTS FILED WITH THE SEC THAT ATTEMPT TO ADVISE
INTERESTED PARTIES OF THE RISKS AND FACTORS THAT MAY AFFECT OUR BUSINESS.
OVERVIEW
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.
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 three new generations of transmitter
and receiver products providing higher-speed and increased functionality
since the first generation PanelLink products. In 1999, we began shipping
seven new PanelLink products including our first generation digital display
controller product. 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 2000, we demonstrated technology that is applicable to
both the storage and networking markets. We have not yet completed
development of our first products in these markets.
8
<PAGE>
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 month period ended September 30, 2000. At September 30,
2000, we had an accumulated deficit of $38.2 million.
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, 2000, sales to a Taiwanese distributor accounted for 20% of
our product revenues and sales to a Japanese distributor accounted for 17% of
our product revenues. The percentage of our revenue attributable to sales to
distributors continues to be a significant portion of our revenues and is
related to revenue from design wins with OEMs which rely on third-party
manufacturers or distributors to provide inventory management and purchasing
functions.
In addition, a substantial portion of our business is conducted outside of
the United States. All of our products are manufactured outside of the United
States, and in the nine months ended September 30, 2000, 84% of our revenues
were from customers located outside of the United States, primarily in Taiwan,
Japan and Hong Kong. Customers in Taiwan and Japan accounted for 36% and 26%,
respectively, of our revenues in the nine months ended September 30, 2000.
Although the percentage of our revenues derived from some countries has varied
significantly from period to period, it 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
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. All revenue to date has been denominated in U.S. dollars.
We have incurred and will continue to incur substantial stock compensation
expense in future periods which represents non-cash charges incurred as a result
of the issuance of stock and stock options to employees and consultants and
shares issued in connection with the acquisitions of Zillion Technologies, LLC,
in the quarter ended June 30, 2000, and DVDO, Inc., in the quarter ended
September 30, 2000. 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, 2000, the amount of employee unearned compensation was
$12.8 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 the price and
volatility of our stock.
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 285,714 shares of our common stock. The first warrant
was issued in September 1998 and was immediately exercisable at an exercise
price of $1.75 per share. The second warrant was issued in September 1998 and
became exercisable on March 31, 1999 at an exercise price of $0.175 per share.
Charges associated with the fair value of the warrants issued to Intel were
expensed as Intel progressed towards achievement of a milestone. We are
obligated to issue an additional warrant to Intel for 285,714 shares of our
common stock exercisable at $0.175 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.
All of our sales are made on the basis of cancelable 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 continue 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.
For a further overview of our accounting policies and risk factors, please
refer to the additional disclosures made in our Form 10-K for the year ended
December 31, 1999 filed with the SEC.
9
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999.
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,
------------------- -----------------
2000 1999 2000 1999
------------------- -----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue 100.0 % 100.0 % 100.0 % 95.8 %
Development and license revenue - - - 4.2
------ ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost and operating expenses:
Cost of product revenue 37.7 36.0 37.0 38.5
Research and development 22.2 36.6 24.0 36.8
Selling, general and administrative 40.0 39.4 38.3 37.9
Amortization of goodwill and intangible
assets 14.9 - 5.8 -
In-process research and development 58.2 - 22.7 -
Stock compensation and warrant expense 33.2 28.0 27.4 32.3
------ ----- ----- -----
Total cost and operating expenses 206.2 140.0 155.2 145.5
------ ----- ----- -----
Loss from operations (106.2) (40.0) (55.2) (45.5)
Interest income and other, net 7.2 1.9 8.0 1.9
------ ----- ----- -----
Net loss before provision for income taxes (99.0) (38.1) (47.2) (43.6)
Provision for income taxes (0.7) - (0.9) -
------ ----- ----- -----
Net loss (99.7)% (38.1)% (48.1)% (43.6)%
====== ===== ===== =====
</TABLE>
PRODUCT REVENUE. Product revenue increased 170.8% to $14.5 million for the
three months ended September 30, 2000 from $5.3 million for the three months
ended September 30, 1999. For the nine month period ended September 30, 2000,
product revenue increased 183.4% to $37.0 million from $13.0 million for the
comparable period in the prior year. The increase in product revenue was
primarily the result of a significant increase in unit shipments of our
higher-bandwidth products. The increase in unit shipments of these products was
driven by increased market transition to higher resolution displays and the
preference for our high-bandwidth PanelLink products for DVI-compliant systems.
We expect that the rate of growth in our product revenue will slow in future
periods.
DEVELOPMENT AND LICENSE REVENUE. There were no revenues from product
development and licensing activities in the three and nine months ended
September 30, 2000. For the nine months ended September 30, 1999, we recognized
$575,000 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 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, assembling and testing our semiconductor devices and our
related overhead costs. Product gross margin (product revenue minus cost of
product revenue, as a percentage of product revenue) decreased to 62.3% for the
three months ended
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September 30, 2000 from 64.0% for the three months ended September 30, 1999.
The decrease in product gross margin during the three month periods was due
to a decrease in average selling prices as well as an increase in product
costs. The decrease in average selling prices was due to pricing pressures as
a result of an anticipated increase in competition and an increase in volumes
sold through distributors. For the nine months ended September 30, 2000,
product gross margin increased to 63.0% from 59.8% for the nine months ended
September 30, 1999. The increase in product gross margin during the nine
month periods was primarily due to more efficient designs and lower overhead
costs. We anticipate that our product gross margin will decrease from current
levels in future periods as a result of increased competition in our markets
and our desire to increase the penetration of our products into these markets.
RESEARCH AND DEVELOPMENT. R&D consists primarily of compensation and
associated costs relating to development personnel, consultants and prototypes.
R&D was $3.2 million, or 22.2% of total revenue, for the three months ended
September 30, 2000 and $2.0 million, or 36.6% of total revenue, for the
comparable period in the prior year. R&D was $8.9 million, or 24.0% of total
revenue, for the nine months ended September 30, 2000 and $5.0 million, or 36.8%
of total revenue, for the nine months ended September 30, 1999. The increase in
absolute dollars during these periods was primarily due to the hiring of
additional development personnel and outside consultants, an increase in
expenses related to integrating our display receiver technology with additional
functionality, such as high-bandwidth digital content protection, or HDCP, for
flat panel displays and digital CRTs, integration of PanelLink technology with
DVDO technology and our development of technology for data storage and
networking applications such as serial ATA. We expect that R&D will continue to
increase in absolute dollars in the future.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A consists primarily of employee
salaries, sales commissions, and marketing and promotional expenses. SG&A was
$5.8 million, or 40.0% of total revenue, for the three month period ended
September 30, 2000 and $2.1 million, or 39.4% of total revenue, for comparable
period in the prior year. SG&A was $14.2 million, or 38.3% of total revenue for
the nine months ended September 30, 2000 and $5.2 million, or 37.9% of total
revenue, for the nine month period ended September 30, 1999. 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 and increased sales commissions attributable to increases in
revenue. We expect that SG&A will continue to increase in absolute dollars as we
hire additional personnel and continue to expand our sales and marketing
efforts.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS. In the quarter ended
September 30, 2000 we recorded amortization of goodwill and intangible assets
related to the acquisition of DVDO of $2.2 million. Amortization charges will
continue through June 2003.
IN-PROCESS RESEARCH AND DEVELOPMENT. In the quarter ended September 30,
2000 a one time in-process research and development charge related to the
acquisition of DVDO was recorded in the amount of $8.4 million. In-process
research and development represents the value assigned in a purchase business
combination to research and development activities of the acquired business that
had not yet reached technological feasibility and therefore have no alternative
future use. We expect to make future acquisitions where advisable and may record
additional charges as in-process research and development in connection with
those acquisitions.
STOCK COMPENSATION AND WARRANT EXPENSE. Stock compensation and warrant
expense was $4.8 million, or 33.2% of total revenue, for the three months ended
September 30, 2000 and $1.5 million, or 28.0% of total revenue, for the three
months ended September 30, 1999. Stock compensation and warrant expense was
$10.1 million, or 27.4% of total revenue for the nine months ended September 30,
2000 and $4.4 million, or 32.3% of total revenue, for the comparable period in
the prior year. A substantial portion of the increase in absolute dollars during
these periods was due to the recognition of expense on option grants, the amount
of which increased as our stock price increased, as well as amortization of
unearned compensation related to the vesting of restricted stock and employee
stock options. In addition, in the nine months ended September 30, 1999,
$595,000 related to the achievement of a milestone on a warrant issued to Intel
was included in stock compensation and warrant expense. In the nine months ended
September 30, 2000, $1.6 million related to the acquisition of Zillion
Technologies, LLC and $1.4 million related to the acquisition of DVDO, Inc. were
included in stock compensation and warrant expense.
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<PAGE>
INTEREST INCOME. Interest income increased to $1.1 million, or 7.4% of
total revenue, in the three months ended September 30, 2000 from $178,000, or
3.3% of total revenue, in the three months ended September 30, 1999. For the
nine months ended September 30, 2000, interest income increased to $3.1 million,
or 8.3% of total revenue, from $388,000, or 2.8% of total revenue, in the
comparable period in the prior year. This increase was principally due to
interest earned on higher average cash balances resulting from the net proceeds
of our initial public offering in October 1999.
INTEREST EXPENSE AND OTHER, NET. Interest expense and other, net for the
three months ended September 30, 2000 and September 30, 1999 was $29,000 and
$78,000, respectively. For the nine months ended September 30, 2000, interest
expense and other, net decreased to $97,000 from $140,000 in the comparable
period in the prior year.
PROVISION FOR INCOME TAXES. For the nine months ended September 30, 2000,
the provision for income taxes was equal to 10.5% of our net income before
non-cash charges including in-process research and development, amortization of
goodwill and intangible assets and stock compensation and warrant expense. This
rate is lower than the statutory rate due primarily to utilization of net
operating loss carry-forwards. Prior to March 31, 2000 we had not recorded a
provision for federal or state income taxes 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, 2000 we had net operating loss carry-forwards for federal
tax purposes of $1 million. These federal tax loss carry-forwards are available
to reduce future taxable income and expire at various dates through fiscal 2020.
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
From our inception through October 1999, we have financed operations
through a combination of private sales of convertible preferred stock, lines of
credit and capital lease financing. In October 1999 we completed the sale of
4,485,000 shares of our common stock at a price of $12.00 per share in our
initial public offering, receiving net proceeds of approximately $48.3 million.
At September 30, 2000, we had $56.8 million in working capital and $62.9 million
in cash, cash equivalents and short-term investments.
Operating activities provided cash in the amount of $4.4 million during the
nine months ended September 30, 2000 and $180,000 in the nine months ended
September 30, 1999. The cash provided by operating activities during the nine
months ended September 30, 2000 was primarily a result of our net income before
non-cash charges that include amortization of goodwill and intangible assets,
in-process research and development and stock compensation and warrant expense
and an increase in accounts payable and deferred margin on sales to distributors
partially offset by an increase in inventory and accounts receivable. The net
cash provided by operating activities for the nine months ended September 30,
1999 was primarily a result of an increase in accounts payable and deferred
margin on sales to distributors, partially offset by our net loss before
non-cash charges and an increase in prepaid expenses and other assets. Accounts
payable increased as a result of an overall increase in our inventory levels and
operating expenses, as our business grew, as well as the timing of our
disbursements within the period. Deferred margin on sales to distributors
increased due to the increase in the amount of product estimated to be held by
our distributors and not sold to end customers, as our revenue recognition
policy is to defer recognition of revenue on sales to distributors until sold by
the distributor to the end customer. For the nine months ended September 30,
1999, prepaid expenses and other assets increased as costs related to our
initial public offering were incurred and deferred. These costs were offset
against the proceeds of the offering in the fourth quarter of 1999.
For the nine months ended September 30, 2000, cash provided by investing
activities was $2.0 million which was primarily attributable to proceeds from
the sale of short-term investments partially offset by the purchase of
short-term investments and the purchase of property and equipment. For the nine
months ended September 30, 1999 cash used in investing activities was $1.3
million and related primarily to the purchase of short-term investments.
Net cash provided by financing activities was $2.7 million for the nine
months ended September 30, 2000 was primarily attributable to proceeds from the
issuance of common stock and repayment of stockholder notes partially
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<PAGE>
offset by principal payments on capital lease obligations. Net cash provided by
financing activities was $1.0 million for the nine months ended September 30,
1999 and was primarily attributable to proceeds from the financing of property
and equipment and the cash received from exercise of stock options for common
stock, partially offset by principal payments on lease obligations.
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%. On October 15, 1999 the outstanding balance under this line of
credit was paid in full. This line of credit expired 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 expired in October 2000. On
September 30, 2000, we were in compliance with all lease line covenants and had
borrowed $841,000 under this lease line. In October 2000, we entered into a
financing agreement for the purchase of equipment which requires annual payments
of approximately $430,000 through October 2003. The agreement is secured by a
certificate of deposit totaling $1.3 million and bears interest at the rate in
effect under this certificate of deposit plus 2%.
We lease equipment and software under short-term and long-term leases
with terms ranging from 12 to 42 months. We intend to exercise purchase
options at the end of the lease terms for a minimal cost. We may spend
approximately $3.0 million during the next 12 months for test equipment,
potential tenant improvements and additional furniture, equipment and
software. 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 beginning in 2000. In addition,
we lease a second facility under a noncancelable operating lease which
expires in December 2002. We have subleased this facility on conventional
terms through December 14, 2002.
We believe that existing cash balances will be sufficient to meet our
capital requirements for at least the next 12 months. After the next 12
months, our capital requirements will depend on many factors, including
revenue, 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 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.
FACTORS AFFECTING FUTURE RESULTS
You should carefully consider the following factors, together with all of
the other information contained or incorporated by reference in this report,
before you decide to purchase or trade shares of our common stock. These factors
could cause our future results to differ materially from those expressed or
implied in forward-looking statements made by us. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also harm our business. The trading price of our common stock could decline due
to any of these risks, and you may lose all or part of your investment.
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 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.
13
<PAGE>
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, $7.6
million in 1999 and $17.8 million for the first nine months of 2000, and we
expect to continue to incur operating losses. As of September 30, 2000, we had
an accumulated deficit of approximately $38.2 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, amortization of goodwill and
intangible assets from acquisitions 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.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY IN THE FUTURE DUE TO
FACTORS RELATED TO OUR INDUSTRY, THE MARKETS FOR OUR PRODUCTS AND 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 our industry and the markets
for our products over which we have little or no control. Any of these
factors could adversely affect our business and cause our stock price to
fluctuate. These factors include:
- the growth of the markets for digital-ready host systems and displays and
storage and networking devices;
- the strength or weakness in demand for PCs and the number of new PC
designs released into the marketplace;
- 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;
- competitive pressures resulting in lower than expected selling prices;
- the announcement, introduction and the ability of competitors to ship
products that are substitutes for our PanelLink products;
- the availability of other semiconductors that are capable of
communicating with our products; and
- the cost of components for our products and prices charged by the third
parties who manufacture, assemble and test our products.
These factors are difficult to forecast and could seriously harm our
business.
Our quarterly operating results are also likely to vary 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 our suppliers that manufacture
our products.
IN THE PAST, OUR INTRODUCTION OF NEW PRODUCTS AND OUR PRODUCT MIX HAVE AFFECTED
OUR QUARTERLY OPERATING RESULTS.
We also anticipate that the rate of orders from our customers may vary
significantly from quarter to quarter. Our expenses and inventory levels are
based on our expectations of future revenues and our expenses are relatively
fixed in the short term. Consequently, if revenues in any quarter do not occur
when expected, expenses and inventory levels could be disproportionately high,
and our operating results for that quarter and, potentially, future quarters may
be harmed, adversely affecting our business and the price of our stock.
14
<PAGE>
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. 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 host systems components able to communicate
signals 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. 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 thus limiting the demand for digital receiver and display
controller products. This would seriously harm our business.
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.
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 ADEQUATE SUPPLY OF DIGITAL
DISPLAYS AT A PRICE THAT IS AFFORDABLE TO CONSUMERS.
In order for the market for many of our products to grow, digital displays
must be widely available and affordable to consumers. In the past, the supply of
digital displays, such as flat panels, has been cyclical and consumers have been
sensitive to display prices. We expect this pattern to continue. In addition,
while there has been initial interest in CRTs with a digital interface, to date
only a few manufacturers have announced intentions to manufacture digital CRTs
and only two manufacturers have made such displays available for purchase. Our
ability to sustain or increase our revenues may be limited should there not be
an adequate supply of or demand for affordable digital displays.
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
15
<PAGE>
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 nine months. It can take an additional nine
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 may experience a delay between the
time we increase expenditures for research and development, sales and marketing
efforts and inventory and the time we generate revenues, if any, from these
expenditures. As a result, our business could be seriously harmed if a
significant customer reduces or delays orders or chooses not to release products
incorporating our products.
OUR PARTICIPATION IN THE DIGITAL DISPLAY WORKING GROUP REQUIRES US TO LICENSE
SOME OF OUR INTELLECTUAL PROPERTY FOR FREE, WHICH MAY MAKE IT EASIER FOR OTHERS
TO COMPETE WITH US.
We are a member of the DDWG which published and promotes the DVI
specification. We have based our strategy on promoting and enhancing the DVI
specification and developing and marketing products based on the specification
and future enhancements.
As a result:
- we must license for free specific elements of our intellectual property
to others for use in implementing the DVI specification; and
- we may license additional intellectual property for free as the DDWG
promotes enhancements to the DVI specification.
Accordingly, companies that implement the DVI specification in their
products can use specific elements of our intellectual property for free to
compete with us.
OUR RELATIONSHIP WITH INTEL DOES NOT GUARANTEE THAT INTEL WILL COOPERATE WITH US
IN THE FUTURE.
In September 1998, Intel agreed to work with us to develop and promote
adoption of the DVI specification and an enhanced version of the DVI
specification. As part of this effort, Intel has been an important founder of,
contributor to and promoter of the DDWG. We have benefited from Intel's
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 agreement 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, 2000, sales to a Taiwanese distributor accounted for 20% of
our product revenues and sales to a Japanese distributor accounted for 17% of
our product revenues. For the nine months ended September 30, 1999, sales to a
third party manufacturer accounted for 11% of our total revenues, sales to two
Japanese distributors accounted for 14% and 13% of our total revenues and sales
to a Taiwanese
16
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distributor accounted for 12% 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.
OUR DEPENDENCE ON SELLING THROUGH DISTRIBUTORS INCREASES THE RISKS AND
COMPLEXITY OF OUR BUSINESS.
Product revenues attributable to distributors continue to be a significant
portion of our product revenue and increased to 68% of our product revenues for
the nine months ended September 30, 2000 from 54% of our product revenues for
the comparable period in the prior year. Much of this increase reflects design
wins with new OEMs that 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, semiconductor networking and
storage industries are intensely competitive. These markets are characterized
by rapid technological change, evolving standards, short product life cycles
and decreasing prices. Our current display products face competition from a
number of sources including analog solutions, DVI-compliant solutions and
other digital interface solutions. We expect competition in the display
market to increase. For example, Analog Devices, ATI, Broadcom, Chrontel,
Genesis Microchip, nVidia, Pixelworks, Sage, SIS, Smart ASIC, Texas
Instruments and Thine have all begun shipping DVI-compliant products or
announced their intentions to introduce a DVI-compliant product that will
compete with our PanelLink products. This list may not be complete. There may
be other companies that have announced DVI-compliant solutions and we expect
that additional companies are likely to enter the market. Similarly, we have
recently demonstrated technology that is applicable to the storage market
where we will face competition from
17
<PAGE>
companies already established in this market such as Texas Instruments,
Vitesse and Infineon as well as new entrants into this market. We cannot be
sure that our first storage product or subsequent storage products will
become accepted solutions in this market.
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 addition, in the process of establishing our technology
as a display 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.
OUR SUCCESS DEPENDS ON THE DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS, WHICH
WE MAY NOT BE ABLE TO DO IN A TIMELY MANNER BECAUSE THE PROCESS OF DEVELOPING
HIGH-SPEED SEMICONDUCTOR PRODUCTS IS COMPLEX AND COSTLY.
The development of new products is highly complex, and we have experienced
delays in completing the development and introduction of new products on several
occasions in the past, some of which exceeded nine months. We expect to
introduce new transmitter, receiver and controller products in the future. We
also are developing our initial products designed for high-speed networking and
storage applications, including Serial ATA, our first product designed for the
storage market. 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 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. Therefore, it is likely that the lead time
required to manufacture, test and assemble our products will increase in times
of decreasing capacity, which may result in our inability to meet our customers
demands and loss of customers, which would seriously harm our business.
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WE DEPEND ON A THIRD-PARTY WAFER FOUNDRY TO MANUFACTURE NEARLY ALL OF OUR
PRODUCTS, WHICH REDUCES OUR CONTROL OVER THE MANUFACTURING PROCESS.
We do not own or operate a semiconductor fabrication facility. We rely
almost entirely on Taiwan Semiconductor Manufacturing Company ("TSMC"), an
outside foundry, to produce all of our semiconductor products. Our reliance on
independent foundries 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
- lack of availability of, or delayed access to, next-generation or key
process technologies.
We do not have a long-term supply agreement with TSMC or other foundries
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 they may reallocate capacity to
other customers even during periods of high demand for our products. If this
foundry 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 or make
significant purchase commitments to secure access to manufacturing services.
We may qualify additional foundries in the future. If we do not qualify
additional foundries, we may be exposed to increased risk of capacity shortages
due to our nearly complete dependence on TSMC.
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 several independent
subcontractors: Amkor Technology in Korea and Advanced Semiconductor Engineering
in Taiwan and Malaysia, Fujitsu in Japan and ISE in the United States. We do not
have long-term agreements with 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.
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DEFECTS IN OUR PRODUCTS COULD INCREASE OUR COSTS AND DELAY OUR PRODUCT
SHIPMENTS.
Although we test our products, they are complex and may contain defects and
errors. In the past we have encountered defects and errors in our products.
Delivery of products with defects or reliability, quality or compatibility
problems may damage our reputation and our ability to retain existing customers
and attract new customers. In addition, product defects and errors could result
in additional development costs, diversion of technical resources, delayed
product shipments, increased product returns, and product liability claims
against us which may not be fully covered by insurance. Any of these could
seriously harm our business.
WE RECENTLY COMPLETED THE ACQUISITIONS OF ZILLION TECHNOLOGIES, LLC AND DVDO,
INC. WE EXPECT TO MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND THESE
ACQUISITIONS INVOLVE NUMEROUS RISKS.
Our growth is dependent upon market growth and our ability to enhance our
existing products and introduce new products on a timely basis. One of the ways
we expect to address this need to develop new products is through acquisitions
of other companies. Acquisitions involve numerous risks, including the
following:
- We may experience difficulty in assimilating the acquired operations and
employees;
- We may be unable to retain the key employees of the acquired operation;
- The acquisition may disrupt our ongoing business;
- We may not be able to incorporate successfully the acquired technology
and operations into our business and maintain uniform standards,
controls, policies and procedures; and
- We may lack the experience to enter into new markets, products or
technologies.
Acquisitions of high-technology companies are inherently risky, and no
assurance can be given that our acquisitions of Zillion or DVDO or our future
acquisitions, if any, will be successful and will not adversely affect our
business, operating results or financial condition. We must also maintain our
ability to manage any such growth effectively. Failure to manage growth
effectively and successfully integrate acquisitions made by us could materially
harm our business and operating results.
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. 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 in our location in the Silicon Valley area in 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
candidates with appropriate qualifications and retaining our key executives and
employees, our business could be seriously harmed.
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. Nearly all of our products are manufactured in Taiwan, and in
the nine months ended September 30, 2000, 84% of our revenues were from
customers located outside of the United States, primarily in Taiwan, Japan and
Hong Kong. Customers in Taiwan and Japan accounted for 36% and 26% of our
revenues, respectively, in the nine months ended September 30, 2000. 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:
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- difficulties in managing distributors;
- difficulties in staffing and managing foreign operations;
- political and economic instability;
- 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 profits 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 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, we do not file patent
applications on a worldwide basis, meaning no patent protection will be obtained
in some jurisdictions. We have also acquired intellectual property, including
patent applications, in our acquisitions of DVDO and Zillion. 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 in the United States and in other
jurisdictions. Effective patent, 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
and in other jurisdictions 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 to bring 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;
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- attempt to obtain a license to the relevant intellectual property, which
license may not be available on reasonable terms or at all; and
- attempt to redesign those products that contain the allegedly infringing
intellectual property.
If we are forced to take any of these actions, we may be unable to
manufacture and sell our products, which could seriously harm our business.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY MAY LEAD TO SIGNIFICANT
VARIANCES IN THE DEMAND FOR OUR PRODUCTS.
In the past, the semiconductor industry has been characterized by
significant downturns and wide fluctuations in supply and demand. Also, the
industry has experienced significant fluctuations in anticipation of changes in
general economic conditions, including economic conditions in Asia. This
cyclicality has led to significant variances in product demand and production
capacity. It has also accelerated erosion of average selling prices per unit. We
may experience periodic fluctuations in our future financial results because of
changes in industry-wide conditions.
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 at December 31, 1998 to 140 employees on September 30, 2000. To
manage our growth effectively, we must:
- implement and improve operational and financial systems;
- train and manage our employee base;
- successfully integrate operations and employees of businesses we have
acquired; and
- attract and retain qualified personnel with relevant experience.
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.
OUR OPERATIONS AND THE OPERATIONS OF OUR SIGNIFICANT CUSTOMERS, THIRD-PARTY
WAFER FOUNDRIES AND THIRD-PARTY ASSEMBLY AND TEST SUBCONTRACTORS ARE LOCATED IN
AREAS SUSCEPTIBLE TO NATURAL DISASTERS.
Our operations are headquartered in the San Francisco bay area, which is
susceptible to earthquakes. Taiwan Semiconductor Manufacturing Company, the
outside foundry that produces all of our semiconductor products, is located in
Taiwan. Advanced Semiconductor Engineering, or ASE, one of the subcontractors
that assembles and tests our semiconductor products, is also located in Taiwan.
For the nine months ending September 30, 2000, customers located in Taiwan were
responsible for 36% of our product revenue and customers located in Japan were
responsible for 26% of our product revenues. Both Taiwan and Japan are
susceptible to earthquakes and typhoons and potentially other unforeseen natural
disasters.
Our business would be seriously harmed if any of the following occurred:
- an earthquake in the San Francisco bay area damaged our headquarters or
disrupted the supply of water and electricity to our headquarters;
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- an earthquake or typhoon in Taiwan or Japan resulted in shortages of
water, electricity or transportation, limiting the production capacity
of our outside foundries or the ability of ASE to provide assembly and
test services;
- an earthquake or typhoon in Taiwan or Japan damaged the facilities or
equipment of our customers, resulting in reduced purchases of our
products; or
- an earthquake or typhoon in Taiwan or Japan disrupted the operations of
our suppliers to our Taiwanese or Japanese customers, our outside
foundries or ASE, which in turn disrupted the operations of these
customers or foundries or this subcontractor and resulted in reduced
purchases or our products or shortages in our product supply.
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.
THE PRICE OF OUR STOCK FLUCTUATES SUBSTANTIALLY AND MAY CONTINUE TO DO SO.
The stock market has experienced extreme price and volume fluctuations that
have affected the market price of many technology companies in particular and
that have often been unrelated to the operating performance of these companies.
These factors, as well as general economic and political conditions, may
materially adversely affect the market price of our common stock in the future.
The market price of our common stock has fluctuated significantly and may
continue to fluctuate 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;
- changes in key executives, technical personnel and other employees that
we need to implement our business and product plans;
- announcements by us or our competitors of significant technical
innovations, design wins, contracts, standards or acquisitions;
- the operating and stock price performance of other comparable companies;
and
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- 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. Since our initial public offering in October
1999 our common stock has fluctuated as much as 40% from the prior day's closing
price. In addition, the stock market experiences 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.
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, 2000, 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 may 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 due to
fluctuations in interest rates.
FOREIGN CURRENCY EXCHANGE RISK
All of our sales are denominated in U.S. dollars and as a result, we have
relatively little exposure to foreign currency exchange risk with respect to any
of our sales. We do not currently enter into forward exchange contracts to hedge
exposures denominated in foreign currencies or any other derivative financial
instruments for trading or speculative purposes. The effect of an immediate 10%
change in exchange rates would not have a material direct 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
In connection with our initial public offering, 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 common stock with a
maximum aggregate offering price of $53.8 million. The Registration Statement
was declared effective by the SEC on October 5, 1999, and on October 12, 1999,
we completed the sale of all 4,485,000 registered shares at a price per share of
$12.00. After deducting underwriting discounts and commissions and other
offering expenses, we received aggregate proceeds from the offering of
approximately $48.3 million. During the nine months ended
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September 30, 2000, we generated cash from operations sufficient to meet our
needs for working capital and capital expenditures and did not draw on the
proceeds from our initial public offering.
We intend to use the balance of the offering proceeds 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. In the future, we may invest such proceeds in interest-bearing,
investment-grade securities with longer terms. None of the net proceeds of the
offering were paid directly or indirectly to any director or officer of Silicon
Image, any person owning 10% or more of any class of equity securities of
Silicon Image or any affiliate of Silicon Image.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.28 Variable Rate Installment Note and Security Agreement dated
October 18, 2000 between Comerica Bank-California and the
Registrant.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On July 21, 2000 the Company filed a report on Form 8-K to provide audited
financial statements of DVDO, Inc. and selected unaudited pro forma combined
financial data giving effect to the business combination between the Company and
DVDO, Inc.
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.
Dated: November 14, 2000 Silicon Image, Inc.
/s/ Daniel K. Atler
----------------------------------------
Daniel K. Atler
Vice President Finance and Administration
and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<S> <C>
10.28 Variable Rate Installment Note and Security Agreement dated
October 18, 2000 between Comerica Bank-California and the
Registrant.
27.1 Financial Data Schedule
</TABLE>
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