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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 MARCH 31, 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 77-0517246
(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 April 30, 2000 was 25,849,868 shares.
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SILICON IMAGE, INC.
QUARTERLY REPORT ON
FORM 10-Q
THREE MONTHS ENDED
MARCH 31, 2000
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Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of March 31, 2000
and December 31, 1999 1
Condensed Statements of Operations for the three
months ended March 31, 2000 and 1999 2
Condensed Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 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 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 26
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON IMAGE, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 37,857 $ 33,648
Short-term investments 23,802 24,499
Accounts receivable 2,383 4,553
Inventory 2,118 765
Prepaid expenses and other current assets 1,626 1,324
----------------- -----------------
Total current assets 67,786 64,789
Property and equipment 2,073 1,809
Other assets 884 903
----------------- -----------------
Total assets $ 70,743 $ 67,501
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,808 $ 2,491
Accrued liabilities 4,619 3,277
Capital lease obligations, current 508 498
Deferred margin on sales to distributors 3,687 3,143
----------------- -----------------
Total current liabilities 11,622 9,409
Capital lease obligations, long-term 401 528
----------------- -----------------
Total liabilities 12,023 9,937
----------------- -----------------
Commitments and contingencies (Note 4)
Stockholders' Equity
Common stock, par value $0.001; 75,000,000 shares
authorized; 25,814,000 and 25,743,000 shares issued
and outstanding 26 26
Additional paid-in capital 88,871 85,415
Notes receivable from stockholders (1,248) (1,455)
Unearned compensation (6,715) (6,021)
Accumulated deficit (22,214) (20,401)
----------------- -----------------
Total stockholders' equity 58,720 57,564
----------------- -----------------
Total liabilities and stockholders' equity $ 70,743 $ 67,501
================= =================
</TABLE>
See accompanying notes to condensed financial statements.
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SILICON IMAGE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Revenue:
Product revenue $ 10,104 $ 3,486
Development and license revenue - 575
----------------- -----------------
Total revenue 10,104 4,061
Cost and operating expenses:
Cost of product revenue 3,689 1,578
Research and development 2,754 1,441
Selling, general and administrative 3,890 1,339
Stock compensation and warrant expense 2,455 1,391
----------------- -----------------
Total cost and operating expenses 12,788 5,749
----------------- -----------------
Loss from operations (2,684) (1,688)
Interest income 977 87
Interest expense and other, net (35) (29)
----------------- -----------------
Net loss before provision for income taxes (1,742) (1,630)
Provision for income taxes (71) -
----------------- -----------------
Net loss $ (1,813) $ (1,630)
================= =================
Net loss per share:
Basic and diluted $ (0.08) $ (0.35)
================= =================
Weighted average shares 24,010 4,658
================= =================
</TABLE>
See accompanying notes to condensed financial statements.
2
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SILICON IMAGE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,813) $ (1,630)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization 232 148
Stock compensation and warrant expense 2,455 1,391
Inventory provision 300 190
Gain on sale of investments (243) -
Interest income on stockholder notes (41) -
Change in assets and liabilities:
Accounts receivable 2,170 290
Inventory (1,653) (389)
Prepaid expenses and other assets (283) (34)
Accounts payable 317 327
Accrued liabilities 1,342 (801)
Deferred margin on sales to distributors 544 234
----------------- -----------------
Net cash provided by (used in) operating activities 3,327 (274)
----------------- -----------------
Cash flows from investing activities:
Purchase of short-term investments (10,563) (3,935)
Proceeds from sale of short-term investments 11,442 -
Purchase of property and equipment (435) (81)
----------------- -----------------
Net cash provided by (used in) investing activities 444 (4,016)
----------------- -----------------
Cash flows from financing activities:
Principal payments on capital lease obligations (117) (49)
Proceeds from issuance of common stock 307 75
Repayment of note receivable 248 -
----------------- -----------------
Net cash provided by financing activities 438 26
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 4,209 (4,264)
Cash and cash equivalents at the beginning of the period 33,648 10,096
----------------- -----------------
Cash and cash equivalents at the end of the period $ 37,857 $ 5,832
================= =================
</TABLE>
See accompanying notes to condensed financial statements.
3
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SILICON IMAGE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
1. Basis of Presentation
In the opinion of management, the unaudited condensed financial statements
of Silicon Image, Inc. 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 financial
statements should be read in conjunction with the December 31, 1999 audited
financial statements and notes thereto included in our Form 10-K for the fiscal
year ended December 31, 1999. The results of operations for the three months
ended March 31, 2000 are not necessarily indicative of future operating results.
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>
MARCH 31,
--------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Numerator (in thousands):
Net loss $ (1,813) $ (1,630)
Denominator (in thousands):
Weighted average shares 25,770 7,385
Less: unvested common shares subject to repurchase (1,760) (2,727)
----------------- -----------------
Denominator for basic and diluted calculation 24,010 4,658
----------------- -----------------
Net loss per share:
Basic and diluted net loss per share $ (0.08) $ (0.35)
================= =================
</TABLE>
As a result of the net losses incurred by the Company during the three
month periods ended March 31, 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>
MARCH 31,
--------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Preferred Stock - 9,560,000
Unvested common shares subject to repurchase 1,661,000 2,727,000
Stock options 3,061,000 1,624,000
Common stock warrants 286,000 318,000
</TABLE>
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3. Balance Sheet Components
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Accounts receivable $ 2,484 $ 4,654
Allowance for doubtful accounts (101) (101)
----------------- -----------------
$ 2,383 $ 4,553
================= =================
Inventory:
Work in process $ 1,101 $ 312
Finished goods 1,017 453
----------------- -----------------
$ 2,118 $ 765
================= =================
Property and equipment:
Furniture and equipment $ 1,447 $ 1,158
Computers and software 2,309 2,163
----------------- -----------------
3,756 3,321
Less: accumulated depreciation (1,683) (1,512)
----------------- -----------------
$ 2,073 $ 1,809
================= =================
Accrued liabilities:
Customer rebates and sales returns $ 1,412 $ 1,259
Payroll and related expenses 1,204 801
Other 2,003 1,217
----------------- -----------------
$ 4,619 $ 3,277
================= =================
</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. Under the terms of these
agreements, the Company issued two warrants, each to purchase 142,857 shares of
the Company's common stock. The first warrant was immediately exercisable at an
exercise price of $3.50 per share. The second warrant became exercisable during
the quarter ended March 31, 1999 at an exercise price of $0.35 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 142,857 shares of common stock at $0.35 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 March 31, 2000 was $10.0
million). All warrants under this agreement will expire on September 16, 2004.
In February 1999 and in connection with a lease line of credit, the Company
granted a warrant to purchase up to 32,142 shares of the Company's Common Stock
at $3.50 per share. This warrant was immediately exercisable and would have
expired on February 17, 2004. The Company did not ascribe any value to the
warrant because the estimated fair market value of the warrant on the date of
grant was insignificant. In March 2000, this warrant was exercised.
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5. Stock Based Compensation
The Company granted options and sold restricted stock to employees during
the three months ended March 31, 2000 and 1999 and recognized unearned stock
compensation of $1.9 million and $2.2 million, 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. Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a model for
accounting for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. SFAS No. 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the statement
of operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. The Company does not hold any
derivative instruments that will be affected by the adoption of SFAS No. 133.
7. Acquisition of DVDO, Inc.
On March 30, 2000, the Company entered into a definitive agreement to
acquire DVDO, Inc., a privately-held provider of digital video processing
semiconductors for the consumer electronics industry. The transaction will be
accounted for as a purchase and is expected to become effective in the quarter
ended June 30, 2000. Upon close of the acquisition, the Company will issue
common stock, currently estimated to total approximately 900,000 shares in
exchange for all outstanding shares and options of DVDO.
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
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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 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 three month period ended March 31, 2000. At March 31, 2000,
we had an accumulated deficit of $22.2 million.
Historically, a relatively small number of customers and distributors have
accounted for a significant portion of our product revenues. For the three
months ended March 31, 2000, sales to World Peace, a Taiwanese distributor,
accounted for 23% of our product revenues, sales to Kanematsu, a Japanese
distributor, accounted for 18% of our product revenues and sales to Maxisum, a
distributor in Hong Kong, accounted for 11% of our product revenues. The
percentage of our revenue attributable to sales to distributors continues to
increase and 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.
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 three months ended March 31, 2000, 88% of our revenues were
from customers located outside of the United States, primarily in Taiwan, Japan
and Hong Kong. Customers in Taiwan accounted for 34% of our revenues in the
three months ended March 31, 2000. Although the percentage of our revenues
derived from some countries 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 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 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 March 31, 2000, the amount of employee unearned
compensation was $6.7 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
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$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 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.
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.
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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 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
MARCH 31,
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue 100.0% 85.8%
Development and license revenue - 14.2
------------ -----------
Total revenue 100.0 100.0
Cost and operating expenses:
Cost of product revenue 36.5 38.9
Research and development 27.3 35.5
Selling, general and administrative 38.5 33.0
Stock compensation and warrant expense 24.3 34.2
------------ -----------
Total cost and operating expenses 126.6 141.6
------------ -----------
Loss from operations (26.6) (41.6)
Interest income 9.7 2.1
Interest expense and other, net (0.3) (0.6)
------------ -----------
Net loss before provision for income taxes (17.2) (40.1)
Provision for income taxes (0.7) -
------------ -----------
Net loss (17.9)% (40.1)%
============ ===========
</TABLE>
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PRODUCT REVENUE. Product revenue increased 190% to $10.1 million for the
three months ended March 31, 2000 from $3.5 million for the three months ended
March 31, 1999. 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 development
and licensing activities in the three months ended March 31, 2000. For the three
months ended March 31, 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) increased to
63.5% for the three months ended March 31, 2000 from 54.7% for the three
months ended March 31, 1999. The increase in product gross margin was due to
higher average selling prices and lower unit product costs. The increase in
average selling prices was due to an increase in unit sales of
higher-bandwidth 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 will decrease from current levels in future
periods as a result of increased volumes and 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 $2.8 million or 27.3% of total revenue for the three months ended March
31, 2000 and $1.4 million or 35.5% of total revenue for the three months ended
March 31, 1999. 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, such as high-bandwidth digital content protection, or HDCP, for
flat panel displays and digital CRTs as well as our development of technology
for data storage and networking applications. Our research and development staff
increased to 35 at March 31, 2000 from 20 at March 31, 1999. 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
$3.9 million or 38.5% of total revenue for the three month period ended March
31, 2000 and $1.3 million or 33.0% of total revenue for the three month period
ended March 31, 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 due to increases in revenue. SG&A staff increased to 55 at March 31,
2000 from 29 at March 31, 1999. 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 $2.5 million or 24.3% of total revenue for the three months ended
March 31, 2000, and $1.4 million, or 34.2% of total revenue for the three months
ended March 31, 1999. A substantial portion of the increase was due to the
recognition of expense on option grants to consultants which fluctuates
depending on our stock price as well as amortization of unearned compensation
related to the vesting of employee stock options.
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Additionally, in the quarter ended March 31, 1999, $595,000 related to the
achievement of a milestone on a warrant issued to Intel is included in stock
compensation and warrant expense.
INTEREST INCOME. Interest income increased to $977,000 in the three months
ended March 31, 2000 from $87,000 in the three months ended March 31, 1999. This
increase was principally due to 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 increased
to $35,000 in the three months ended March 31, 2000 from $29,000 for the three
months ended March 31, 1999.
PROVISION FOR INCOME TAXES. In the three months ended March 31, 2000 we
recorded a provision for income taxes equal to 10% of our net loss before stock
compensation and warrant expense. This rate is lower than the statutory rate due
primarily to utilization of net operating loss carryforwards. 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 March 31, 2000 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 $6.2 million and our state tax carry-forwards
were $1.2 million. These federal and state tax loss carry-forwards are available
to reduce future taxable income and expire at various dates into 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 March 31, 2000, we had $56.2 million in working capital and $61.7 million in
cash, cash equivalents and short-term investments.
Operating activities provided cash in the amount of $3.3 million during the
three months ended March 31, 2000 compared to a use of cash from operating
activities in the amount of $274,000 in the three months ended March 31, 1999.
The cash provided during the three months ended March 31, 2000 was primarily a
result of a decrease in accounts receivable and increase in accrued liabilities
offset by an increase in inventory. Accounts receivable decreased due to the
timing of shipments during the period and accrued liabilities increased 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 use of cash during the three months ended March 31, 1999
was primarily due to our net loss before stock compensation and warrant expense
and a decrease in accrued liabilities. The decrease in accrued liabilities was
primarily due to the timing of disbursements within each period.
For the three months ended March 31, 2000, cash provided by investing
activities was $444,000 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 three months
ended March 31, 1999 cash used by investing activities was $4.0 million and
related primarily to the purchase of short-term investments.
Net cash provided by financing activities of $438,000 for the three
months ended March 31, 2000 was primarily attributable to proceeds from the
issuance of common stock and repayment of several stockholder notes partially
offset by principal payments on capital lease obligations. Net cash provided
by financing activities of $26,000 for the three months ended March 31, 1999
was attributable to proceeds from the issuance of common stock partially
offset by payments on capital lease obligations.
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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 expires in October 2000. On
March 31, 2000, 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 may spend up to
approximately $4.0 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. 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 together with our capital lease line
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 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, our
capital lease line 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.
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 $1.8
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million for the first three months of 2000, and we expect to continue to
incur operating losses. As of March 31, 2000, we had an accumulated deficit
of approximately $22.2 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 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
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 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 the semiconductor foundries
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 the price of our stock.
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
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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 the three months ended March
31, 2000, approximately 53% of our product revenues resulted from the sale of
transmitter products to manufacturers of host systems. 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.
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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.
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
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 COMPLETE 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
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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 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 three
months ended March 31, 2000, sales to World Peace, a Taiwanese distributor,
accounted for 23% of our product revenues, sales to Kanematsu, a Japanese
distributor, accounted for 18% of our product revenues and sales to Maxisum, a
distributor in Hong Kong, accounted for 11% of our product revenues. For the
three months ended March 31, 1999, sales to Mitac, a third party manufacturer,
accounted for 25% of our product revenues and sales to ATI Technologies, a
leading graphics board manufacturer, accounted for 14% of our product 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.
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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 INCREASING DEPENDENCE ON SELLING THROUGH DISTRIBUTORS INCREASES THE RISKS
AND COMPLEXITY OF OUR BUSINESS.
Product revenues attributable to distributors have increased to 71% for the
three months ended March 31, 2000 from 30% for the three months ended March 31,
1999. 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 and semiconductor industries are
intensely competitive. These markets are characterized by rapid technological
change, evolving standards, short product life cycles and decreasing prices. Our
current products face competition from a number of sources including analog
solutions, DVI-compliant solutions and other digital interface solutions. We
expect competition in our market to increase. For example, Genesis Microchip has
introduced a DVI-compliant product that will compete with our PanelLink
Controllers. Other companies that have announced DVI-compliant solutions include
ATI, Analog Devices, Pivotal Technologies, SIS, Smart ASIC, Texas Instruments
and Thine. 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.
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 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
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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 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 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 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 on
Taiwan Semiconductor Manufacturing Company, an outside foundry, to produce all
of our semiconductor products. Our reliance on independent foundries involves a
number of significant risks, including:
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- 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 Taiwan Semiconductor
Manufacturing Company, 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 it 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 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 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 several independent
subcontractors: Anam in Korea and Advanced Semiconductor Engineering in Taiwan,
Malaysia and California, and Singapore Technologies Assembly Test Services in
Singapore. 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 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.
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
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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 HAVE ENTERED INTO A DEFINITIVE AGREEMENT TO ACQUIRE DVDO, INC. AND EXPECT
TO MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND 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 the DVDO acquisition 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. 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 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 and retaining candidates with appropriate
qualifications, our business could be seriously harmed.
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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, and in the three months ended March 31, 2000, 88% of our revenues were
from customers located outside of the United States, primarily in Taiwan, Japan
and Hong Kong. Customers in Taiwan accounted for 34% of our revenues in the
three months ended March 31, 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:
- 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 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
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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.
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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 December 31, 1998 to 108 employees on March 31, 2000. To manage
our growth effectively, we must:
- implement and improve operational and financial systems;
- train and manage our employee base; 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 THIRD-PARTY WAFER FOUNDRIES, THIRD-PARTY ASSEMBLY AND TEST SUBCONTRACTORS
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 is an area susceptible to
earthquakes. In addition, some of our significant customers are located in
Taiwan. Damage caused by earthquakes may result in shortages in water or
electricity or transportation which could limit the production capacity of our
outside foundries and ASE's ability to provide assembly and test services. Any
reduction in the production capacity of our outside foundries or the ability of
ASE to provide assembly and test services could cause delays or shortages in our
product supply, which would seriously harm our business.
Customers located in Taiwan were responsible for 34% of our product revenue
for the three months ended March 31, 2000 and 38% of our product revenue for the
three months ended March 31, 1999. If the facilities or equipment of these
customers have been damaged as a result of prior earthquakes 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
our outside foundries, 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 our outside foundries, 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.
22
<PAGE>
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;
- 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;
- the number of our shares that are available for trading by the public
and the trading volume of our shares; and
- sales of a substantial number of shares previously subject to
underwriters' lock-up restrictions.
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 $28 in one day and 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.
23
<PAGE>
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 March 31, 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 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 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 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
24
<PAGE>
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 three months
ended March 31, 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
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No such reports were filed during the three months ended March 31,
2000.
25
<PAGE>
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: May 15, 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)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ------- -------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<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 MARCH 31, 2000 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 37,857
<SECURITIES> 23,802
<RECEIVABLES> 2,484
<ALLOWANCES> (101)
<INVENTORY> 2,118
<CURRENT-ASSETS> 67,786
<PP&E> 3,756
<DEPRECIATION> (1,683)
<TOTAL-ASSETS> 70,743
<CURRENT-LIABILITIES> 11,622
<BONDS> 0
0
0
<COMMON> 26
<OTHER-SE> 58,694
<TOTAL-LIABILITY-AND-EQUITY> 70,743
<SALES> 10,104
<TOTAL-REVENUES> 10,104
<CGS> 3,689
<TOTAL-COSTS> 9,099
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (35)
<INCOME-PRETAX> (1,742)
<INCOME-TAX> (71)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,813)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
