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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 000-26887
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SILICON IMAGE, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 77-0517246
(State of incorporation) (IRS employer
identification number)
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1060 EAST ARQUES AVENUE
SUNNYVALE, CA 94086
(Address of principal executive offices and zip code)
(408) 616-4000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.001 par value
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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), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of common shares held by non-affiliates at
February 29, 2000 was approximately $1,558,476,164, based on the last reported
sale price of our common shares on the Nasdaq Stock Market on that date of
$98.00 per share. We had 25,789,201 common shares outstanding at February 29,
2000.
Part III incorporates by reference information from our proxy statement for
our annual meeting of stockholders' to be held on May 23, 2000.
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TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Securities Holders....... 16
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 16
Item 6. Selected Financial Data..................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 7A. Quantitative and Qualitative Disclosure of Market Risk...... 34
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 35
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 35
Item 11. Executive Compensation...................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 35
Item 13. Certain Relationships and Related Transactions.............. 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 36
POWER OF ATTORNEY...................................................... 54
SIGNATURES............................................................. 54
INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT............... 55
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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-K 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-K ARE IDENTIFIED
BY WORDS SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS," "INTENDS," "MAY," "WILL"
AND OTHER SIMILAR EXPRESSIONS. HOWEVER, THESE WORDS ARE NOT THE EXCLUSIVE MEANS
OF IDENTIFYING SUCH STATEMENTS. IN ADDITION, ANY STATEMENTS WHICH REFER TO
EXPECTATIONS, PROJECTIONS OR OTHER CHARACTERIZATIONS OF FUTURE EVENTS OR
CIRCUMSTANCES ARE FORWARD-LOOKING STATEMENTS. WE CANNOT GUARANTEE FUTURE
RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. 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-K WITH THE SEC. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED
ELSEWHERE IN THIS REPORT. READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE
VARIOUS DISCLOSURES MADE BY SILICON IMAGE, INC. 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.
ITEM 1. BUSINESS
We develop and market semiconductors for applications that require
cost-effective, integrated solutions for high-speed data communications. Our
semiconductors provide multi-gigabit data transfer rates which we believe will
be applicable to multiple mass markets. We are initially focusing our technology
on the local interconnect between host systems, such as PCs, set-top boxes and
DVD players, and digital displays, such as flat panel displays, CRTs and TV's.
Our current products enable host systems to transmit digital video data and
enable displays to receive and manipulate digital video data. As with other
consumer electronic devices, such as digital cellular phones, significant
benefits can be achieved by converting displays from analog to digital and by
replacing conventional analog connections between host systems and displays with
digital connections.
Two prominent trends in the electronics industry are the increasing demand
for bandwidth and the transition of electronic systems from analog to digital.
Bandwidth, which is often measured in terms of gigabits per second, represents
the amount of data that can be transmitted across a medium in a given period of
time. In attempts to address the increasing demand for bandwidth, new
communications standards such as Gigabit Ethernet, SONET and Fibre Channel have
been adopted, and new classes of communications semiconductors have been
developed to implement these standards. The second trend, the shift from analog
to digital, has made information easier to reliably store, transmit and
manipulate. It has also reduced manufacturing costs, improved quality and
enhanced functionality through the addition of new features that were
unavailable or not practical with analog technologies. For example, many
features, such as messaging, paging and security, became more feasible as
wireless phones converted from analog to digital.
As with wireless phones, significant benefits can be achieved by replacing
analog displays with digital displays. To enable this transition, displays
require digital communication with the host system. Until recently, however,
there was no commercially viable standard that addressed the challenges of
enabling digital communications between host systems, such as PCs, set-top boxes
and DVD players, and video displays, such as flat panel displays, CRTs and TV's.
A principal reason that such a standard did not exist was the substantial
technical challenge of developing a cost-effective high-bandwidth solution
capable of transmitting data at the multi-gigabit rates needed to link the host
system to a high-resolution display. This rate is 50 times faster than the Fast
Ethernet networking standard and 500 times faster than cable modems. In the
absence of a digital standard, host systems, though processing data in digital
form, have been forced to convert that data to analog form before transmitting
it to the
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display. Consequently, the functionality of display devices has changed little
since the introduction of analog cathode ray tubes.
Recognizing the need for a cost-effective, high-bandwidth digital display
solution, Silicon Image developed a digital communication technology and began
shipping semiconductor products for digital displays in 1997. To provide a
worldwide, open specification for an all-digital display solution, Silicon
Image, together with Intel, Compaq, IBM, Hewlett-Packard, NEC and Fujitsu,
formed the Digital Display Working Group (DDWG) to define such a specification
based on Silicon Image's technology. In April 1999, the DDWG published the
Digital Visual Interface (DVI) specification, which defines a high-speed serial
data communication link between host systems and displays. Silicon Image
authored major portions of the DVI specification. Today, over 100 companies,
including systems manufacturers, graphics semiconductor companies and monitor
manufacturers are participating in the DDWG, and many are developing hardware
and software products designed to be compliant with the DVI specification.
We believe the formation of the DDWG and the release of the DVI
specification have accelerated the shift of display technology to digital. The
market research firm DisplaySearch projects that the number of desktop LCD
monitors shipped annually will grow from 4.5 million units in 1999 to
19 million units in 2003. DisplaySearch further estimates that the digital
interface will rapidly gain market share over analog for desktop LCDs, from 31%
in 1999 to 91% in 2003. In addition, more than a dozen desktop CRT manufacturers
have demonstrated digital CRTs compliant with the DVI specification using
Silicon Image's PanelLink-Registered Trademark- products. According to Stanford
Resources, Inc., the overall market for desktop CRTs will grow from 92 million
units in 1999 to 128 million units in 2003. In response to projected growth in
the market for digital displays, manufacturers are seeking to differentiate
their products by adding functionality and intelligence to their displays.
Consequently, these companies are looking for semiconductor solutions that
combine high-speed digital communications technology with the functionality
required to enable intelligent displays for the mass market.
A recent example of the value of the digital link is the release of the
High-bandwidth Digital Content Protection specification HDCP 1.0. This
specification was released by Intel on February 17, 2000 with contributions from
Silicon Image. This technology has support from members of the Motion Picture
Industry Association (MPA) and will prevent high-definition movie content from
being copied when transmitted on a digital link from a set-top box or DVD player
to a television or other display. Effective protection for high-definition
content is not possible with an analog connection.
As of December 31, 1999, we had shipped over seven million units of our
products. Our products are incorporated in host systems and displays sold by
leading manufacturers such as Apple, ATI, Compaq, Dell, Fujitsu, Gateway,
Hitachi, Hewlett-Packard, IBM, LG, NEC, Princeton Graphics, S3, Samsung, Sanyo,
Sharp, Toshiba and ViewSonic. We incorporated in California on January 1, 1995
and reincorporated in Delaware in September 1999.
THE SILICON IMAGE SOLUTION
Silicon Image designs, develops and markets semiconductor solutions for
high-speed digital communications. Our technology is designed for applications
that require cost-effective, high-speed integrated solutions for data
transmission, such as the local interconnect between host systems and digital
displays. Our initial products enable host systems to transmit digital video
data and allow displays to receive and manipulate digital video data.
Our key products are based on our PanelLink digital interface technology and
our highly integrated PanelLink Controller architecture. PanelLink is our
proprietary implementation of the DVI specification to provide a high-speed
serial digital link between hosts and digital displays. The PanelLink
architecture is our platform for developing controllers that integrate PanelLink
receiver
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technology with additional functionality to enable intelligent displays for the
mass market. Key features of our solution include:
- High-speed interface. Our PanelLink technology transmits data over three
high-speed serial channels at up to 1.67 gigabits per second per channel
for an aggregate speed of approximately five gigabits per second.
PanelLink technology supports such speeds over twisted-pair copper wire at
distances of up to 10 meters and permits direct coupling with fiber optic
interconnect modules for longer distance data transmission up to several
hundred meters.
- Low Cost of System Implementation. PanelLink technology operates at full
speed over inexpensive twisted-pair copper wire. In addition, our products
are manufactured using cost-effective standard foundry processes and
low-cost plastic packaging. Our all-digital interconnect solution
eliminates the need for additional components currently required in
digital displays to convert data from analog to digital and to remove
errors associated with the conversion.
- System Level Integration. Our solution combines high-speed digital
communication technology with system-level functionality, including
digital image processing and display control. Our PanelLink architecture
is designed to support the integration of additional functions.
Furthermore, all of its elements can be provided using the same
Complementary Metal Oxide Semiconductor, or CMOS, manufacturing processes,
simplifying this integration.
- Scalability. We offer products that support a wide range of standard
display resolutions, from VGA (640 X 480 pixels) to UXGA (1600 X 1200
pixels). Support for these resolutions requires our solution to transmit
and receive data at speeds ranging from 250 megabits to 1.65 gigabits per
second per channel.
Our solution enables our customers to introduce digital display products,
thereby eliminating the need for analog technology in both the host system and
display. This provides a number of benefits to our customers:
- Lower Cost for Mass Market Adoption. Our CMOS implementations in low cost
thin quad flat package, or TQFP, have allowed us to offer industry leading
price/performance with our multi-gigabit bandwidth chips.
- Ease of Use. Use of our all-digital solution enables "plug and play"
connection of any digital display to any digital-ready host system--that
is, no configuration must be done by the end-user.
- Improved Visual Experience. Our high-bandwidth solution enables the
transmission of data-intensive video images in digital form, without
degradation of image quality. Because our solution is all-digital, it
eliminates the errors associated with the use of an analog interface, such
as flicker, fuzziness and color variation.
- Ability to Add New Features and Differentiate Products. Our technology
enables our customers to add new features and functions to their displays
and to offer differentiated products. For example, one of our existing
products enables image quality to be directly controlled in the display
rather than in the host system. In addition, our products are
programmable, allowing our customers to configure image processing and
user interface functions. Additionally the availability of content
protection enables new high-definition media to be displayed while
enhancing the overall security of the PC or consumer electronic
environment.
- Accelerated Time to Market. By using our products and high-speed field
application support and expertise instead of developing solutions
internally, our customers can shorten their design time for digital
display products. The highly integrated nature of our products simplifies
the design of digital displays.
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SILICON IMAGE STRATEGY
Our objective is to be a leading provider of semiconductors that enable
high-speed digital communications and optimize cost per bandwidth across
targeted communications markets. Key elements of our strategy are to:
TARGET THE DISPLAY MARKET FIRST
While our technologies are applicable to solving the needs of multiple
markets, we have initially chosen to focus our efforts on being the leading
provider of high-speed solutions for the large and rapidly growing digital
display market. Relative to other data communications applications, the digital
display interface demands a particularly high-speed, low cost solution that
operates over a wide range of transmission speeds. Our technology effectively
addresses these demands and incorporates many additional features and
capabilities. Companies shipping displays which incorporate our products include
Apple, Compaq, Dell, Fujitsu, Gateway, Hitachi, IBM, NEC, Princeton Graphics,
Sharp and ViewSonic to name a few.
PROMOTE OPEN INDUSTRY STANDARDS
We believe that the widespread acceptance of the DVI specification and
subsequent enhancements to this specification will lead to broader market
penetration of digital displays in many different applications, help us maintain
our leadership position and create new opportunities for us. We are one of the
seven founding members of the DDWG. We authored major portions of the DVI
specification and developed the core technology upon which the specification is
based. We intend to continue to actively participate in defining and promoting
open industry standards. We believe that our participation will provide us with
valuable insight and relationships and assist us in rapidly bringing new
standards-based products to market.
DRIVE BROAD ADOPTION OF DIGITAL-READY HOST SYSTEMS
We believe that broad adoption of digital-ready host systems will drive the
widespread transition to all-digital displays. Accordingly, we aggressively
market our host-based transmitter products and promote the adoption of the DVI
specification, in order to expand the market for our receiver and display
controller products. We have achieved transmitter design wins with leading host
system OEMs, including Compaq, Dell, Fujitsu, Gateway, Hitachi, IBM and NEC, and
with makers of video graphics accelerators, including Acer, ATI Technologies,
I/O Data, Matrox and S3. While continuing to focus on the PC industry, we intend
to follow a similar strategy for other host systems, such as set-top boxes, game
consoles and DVD players. Finalization of the High-bandwidth Digital Content
Protection, or HDCP, specification in February 2000 adds a layer on top of DVI
for high-definition digital content to be transmitted from set-top boxes and DVD
players to digital TV sets. Silicon Image contributed to the development of the
HDCP specification and demonstrated working prototypes implementing HDCP at the
Intel Developer's Forum in February 2000.
INCREASE THE INTELLIGENCE OF DISPLAYS THROUGH HIGHLY INTEGRATED RECEIVER
SOLUTIONS
We believe the conversion to end-to-end digital displays allows a
significant amount of functionality to shift from the host system to the display
and the addition of new capabilities to the display. Our PanelLink display
controllers integrate additional functionality with our receiver technology to
enable a new class of intelligent displays and allow display vendors to
differentiate and increase the value of their products. We are focusing a
substantial amount of our product development, marketing and sales efforts on
PanelLink display controllers.
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MAINTAIN TECHNOLOGY LEADERSHIP
We are the inventor of the technology upon which the DVI specification is
based and have substantial experience in the design, manufacture and deployment
of semiconductor products incorporating this high-speed data communications
technology. We have been shipping our fourth generation of transmitter and
receiver products and believe that this experience provides us with significant
competitive advantages. In particular, our broadband clock and data recovery
technology in our receivers exceeds the reliability specifications established
in various multi-gigabit communication standards. We are currently developing
fifth generation products including our HDCP enabled transmitters and receivers.
The advanced nature of our high-speed digital design allows us to integrate
significant functionality with high-speed communications capabilities using
industry-standard, low-cost CMOS processes. We intend to continue to focus
significant resources on maintaining and extending our technology leadership.
PENETRATE NEW MARKETS AND APPLICATIONS
We intend to use our core technical competencies and relationships with key
partners and customers to develop solutions for additional markets. We believe
our technology is well suited to many applications requiring high-bandwidth and
system level integration. To address these opportunities, we are focusing on
developing products and technologies for new markets, primarily new display
market segments like consumer electronics, and applications in high-speed serial
interface storage and gigabit networking. Our strategy is to provide the best
price performance ratio where the bandwidth is a bottleneck, such as
chip-to-chip or system-to-system communications. We intend to focus on solving
bandwidth problems in local interconnect with low cost implementation,
potentially contributing to or setting another standard for computer or consumer
electronics peripherals, rather than developing low cost solutions for existing
standards.
STRATEGIC RELATIONSHIPS
As part of our business strategy, we have established strategic
relationships with key customers and partners.
INTEL RELATIONSHIP
In September 1998, Silicon Image entered into an agreement with Intel
Corporation to work together to develop and promote adoption by the PC industry
of a complete digital display interface based on our PanelLink technology. As
part of the strategic relationship, Intel became an equity investor in Silicon
Image and the companies entered into a patent cross-license and other
agreements.
DIGITAL DISPLAY WORKING GROUP
Silicon Image, together with Intel, Compaq, IBM, Hewlett-Packard, NEC and
Fujitsu, announced the formation of the DDWG in October 1998. Subsequently, the
parties entered into a Promoter's Agreement in which they agreed to:
- define, establish and support the DVI specification, an open industry
specification for an all-digital display solution;
- encourage broad and open industry adoption of the DVI specification, in
part by creating an implementer's forum that others may join in order to
receive information and support relating to the DVI specification; and
- invite third parties to enter into a Participant's Agreement in order to
consult on the content, feasibility and other aspects of the DVI
specification.
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JOINT DEVELOPMENT OF HDCP
Intel developed the High-bandwidth Digital Content Protection, or HDCP,
specification 1.0 with contributions from Silicon Image that are acknowledged in
the specification. The specification was developed to enable a content protected
link from host devices such as set-top boxes and DVD players to displays such as
HDTV and digital TVs. We demonstrated working prototypes implementing the HDCP
specification at the Intel Developer's Forum in February 2000.
BRANDING RELATIONSHIPS
Currently, we have branding relationships with Compaq and NEC. In exchange
for rebates or other consideration, these manufacturers use the PanelLink brand
on their products, product boxes, product collateral and web sites.
MARKETS AND CUSTOMERS
Our current target markets consist of four host platforms and five display
devices. The host platforms are PCs, notebooks, set-top boxes and DVD players.
The display devices are TVs, CRTs, flat panel monitors, flat panels and
projectors. Dataquest projects that these markets combined will represent over
500 million units in 2002. In addition, we are targeting other high-bandwidth,
mass-market applications such as storage and networking for future
implementations.
We focus our sales and marketing efforts on achieving design wins with
leading host system and display OEMs. Companies shipping displays which
incorporate our PanelLink products include Apple, Compaq, Dell, Fujitsu,
Gateway, Hitachi, IBM, NEC, Princeton Graphics, Sharp and ViewSonic.. In most
cases, these OEMs outsource manufacturing functions to third parties. Therefore,
once we have won the design, we typically help these third party manufacturers
rapidly bring the design to production. Once the design is complete, we sell our
products to these third party manufacturers either directly or indirectly
through distributors. In 1999, sales to Kanematsu, a Japanese distributor,
accounted for 17% of our total revenues, Microtek, a Japanese distributor,
accounted for 11% of our total revenues and World Peace, a Taiwanese
distributor, accounted for 16% of our total revenues. In 1998, sales to Mitac, a
third party manufacturer, accounted for 54% of our total revenues, and ATI, a
leading graphics board manufacturer, accounted for 12% of our total revenues.
Mitac and ATI are significant suppliers to Compaq, with whom we had a major
design win for our transmitter in 1998. In 1997, sales to LG, a Korean OEM,
accounted for 56% of our total revenues and sales to Hyundai, a Taiwanese OEM,
accounted for 19% of our total revenues. Recently, the percentage of our revenue
attributable to sales through distributors has increased substantially. Most of
this increase reflects design wins with new OEMs that rely on distributors to
provide inventory management and purchasing functions.
PRODUCTS
As of December 31, 1999 all of our products are manufactured using low-cost,
standard foundry CMOS processes at Taiwan Semiconductor Manufacturing
Corporation in Taiwan. In addition to our primary products, we develop and sell
reference design kits that represent application examples for incorporation of
our products into our customers' equipment. By providing these reference design
kits, we can assist the manufacturer in achieving easier and faster transitions
from initial prototype designs through final production releases. Our primary
products are transmitters for host systems and receivers and display controllers
for displays. In 1999, approximately 55% of our product revenues resulted from
the sale of transmitter products to manufacturers of host systems.
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Our host system products are:
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PANELLINK TRANSMITTERS
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Maximum Maximum
Product Resolution Bandwidth Target Applications
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SiI 100 Tx XGA 2.04 Gbps Embedded PC/specialty application
(1040x768 pixels)
SiI 140 Tx High-refresh XGA 2.58 Gbps Embedded PC/specialty application
(1040x768 pixels)
SiI 150 Tx SXGA 3.36 Gbps Internal display interface, embedded PC/
(1280x1024 pixels) specialty application
SiI 160 Tx SXGA 3.36 Gbps Internal display interface, embedded PC/
(1280x1024 pixels) specialty application
SiI 164 Tx UXGA 5 Gbps Desktop PC (motherboard add-in boards),
(1600x1200 pixels) notebook PC, set-top box, DVD player
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We have two families of display products: PanelLink receivers and PanelLink
Controllers. Our PanelLink receiver products are:
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PANELLINK RECEIVERS
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Maximum Maximum
Product Resolution Bandwidth Target Applications
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SiI 101 Rx XGA 2.04 Gbps Embedded PC/specialty application
(1040x768 pixels)
SiI 141 Rx High-refresh XGA 2.58 Gbps Flat panel display, microdisplay
(1040x768 pixels) projector, embedded/specialty/retail and
industrial, LCD panel
SiI 151 Rx SXGA 3.36 Gbps Flat panel display, microdisplay plasma,
(1280x1024 pixels) projector, embedded/specialty/retail and
industrial, LCD panel
SiI 161 Rx UXGA 5 Gbps Flat panel display, plasma, HDTV,
(1600x1200 pixels) projector, embedded/specialty/retail and
industrial, LCD panel
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Our PanelLink Controller products are:
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PANELLINK CONTROLLERS
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Maximum Maximum
Product Resolution Bandwidth Key Features Target Applications
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SiI 801 PanelLink XGA 2.58 Gbps -Scaling Flat panel displays
Controller (1040x768 pixels) -On-screen display
-Power
management
SiI 851 PanelLink SXGA 3.36 Gbps -Scaling Flat panel displays
Controller (1280x1240 pixels) -On-screen display
-Power
management
-Gamma correction
-Dithering
SiI 901 PanelLink UXGA 5 Gbps -Integrated digital- Digital CRT, progressive
Controller (1600x1200 pixels) to-analog converter scan TV
SiI 201 IPC XGA 2.04 Gbps -PanelLink LCDs for notebook PCs
(1040x768 pixels) Receiver and flat panel displays
-LCD timing controller
SiI 211 IPC XGA 2.94 Gbps -LVDS Receiver LCDs for notebook PCs
(1040x768 pixels) -LCD timing and flat panel displays
controller
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SILICON IMAGE TECHNOLOGY
We believe that our key technical competencies are our high-speed serial
link technology, semiconductor design expertise, display systems expertise and
high-speed applications expertise.
MULTI-LAYERED SYSTEMS APPROACH TO SOLVING LOCAL HIGH-SPEED INTERCONNECT
PROBLEMS
At the core of our innovation is a multi-layered approach to providing
multigigabit semiconductor solutions. We have developed a complete solution that
addresses issues associated with creating a cost-effective high-bandwidth
solution. PanelLink is an example of a branded implementation of this approach
for PC and consumer electronics hosts and their respective displays including
flat panels, CRTs, notebooks, projectors and TVs. The three layers of our
architecture include the physical layer, the coding layer and the protocol
layer. With PanelLink we have used .35 foundry CMOS technology at the physical
layer and have employed techniques like oversampling to provide signal integrity
as well as the ability to scale performance to 5Gbps. At the coding layer we
have ensured DC balancing and the ability to use transition minimized signaling,
or TMDS, to keep electromagnetic emissions low. This is very important for high
volume consumer manufacturing where emission standards are strict. Our TMDS
protocol also allows for simple robust interoperability. This multi-layered
approach to semiconductor design is applicable to other markets in need of
cost-effective high-bandwidth. We believe our design approach affords us the
opportunity to create solutions, and potentially standards, in other markets
where a complete solution is required. The data storage and gigabit networking
markets are our targets for future application of this multi-layered approach.
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HIGH-SPEED SERIAL LINK TECHNOLOGY
Serial link technology is the basis for the physical layer, which performs
the electrical signaling, in several data communication protocols, including
Ethernet, Fibre Channel and Asynchronous Transfer Mode. This technology converts
data into a serial stream that is transmitted sequentially at a constant rate
and then reconstituted into its original form. Our high-speed serial link
technology includes a number of proprietary elements designed to address the
significant challenge of ensuring that the data sent to the display can be
accurately recovered after it has been separated and transmitted in serial
streams over three separate wires. These include proprietary over sampling
techniques to reduce errors in distinguishing data from noise and parallel data
recovery algorithms to recover data from the serial streams. In order to enable
the display to recognize this data at the proper time and rate, our digital
serial link technology uses a digital phase-locked loop combined with a unique
phase detecting and tracking method in order to monitor the timing of the data.
These circuit techniques allow for mostly digital implementation of a high-speed
serial link that can be manufactured using standard CMOS processes. We can
readily apply our high-speed serial link technology to all three types of serial
transmission methods currently used in communications systems: synchronous,
asynchronous, and plesiochronous. Synchronous systems, which allow data and the
clock, which contains timing information, to be transmitted simultaneously, are
appropriate for short-range communication links such as computer input/output
devices and backplane buses. Asynchronous systems, in which only data is sent,
are appropriate for mid- to long-range communication links or optical
communications. Plesiochronous systems send only data, but adjust the data flow
to effectively achieve the result of a synchronous transmission. These systems
are appropriate for applications such as processor-to-processor links and
general input/output where the sender and the receiver operate at slightly
different clock frequencies. In addition to our serial link technology, we have
developed substantial intellectual property in data coding technology for
high-speed serial communication. Our coding technology simplifies the protocol
for high-speed serial communication and allows tradeoffs made in physical
implementation of the link, which in turn reduces the cost of bandwidth and
simplifies the overall system design.
HIGH-SPEED SEMICONDUCTOR EXPERTISE
Our circuit designers are skilled in the design of high-speed, low-power and
mixed-signal CMOS semiconductors. We use advanced design techniques, including
low-power serializer, current mode driver and common mode canceler, to develop
high-speed, highly integrated semiconductors that can be manufactured using
conventional low-cost packages and can transmit and receive data using
inexpensive cables and connectors. Our design methodology combines logic
synthesis and full-custom mixed-signal design, allowing us to develop small,
cost-effective semiconductors.
DISPLAY SYSTEMS EXPERTISE
Our display systems expertise ranges from display technology, driver and
system design to display processing, testing and system integration. In addition
to experience in existing display technologies, our active involvement within
the display community contributes to our understanding of emerging display
technologies.
HIGH-SPEED APPLICATIONS EXPERTISE
We have developed extensive expertise, at the semiconductor and system
design levels, in solving problems related to designing systems using high-speed
semiconductor devices such as electromagnetic compliance. Our expertise in
solving electromagnetic compliance-related problems enables us to make our
semiconductor products easier for our customers to design into their systems. In
addition to providing semiconductor solutions, we assist our customers
throughout the system design process, enabling them to reduce their
time-to-market.
11
<PAGE>
RESEARCH AND DEVELOPMENT
We have assembled a core team of engineers and technologists who have
extensive experience in the areas of high-speed interconnect architecture,
circuit design, digital imaging and LCD panels and LCD panel electronics. As of
December 31, 1999 we had 27 employees in the engineering department, including
15 with Ph.Ds.
From our inception until 1998, our internal research and development efforts
focused primarily on the development of our core PanelLink technology and our
initial transmitter and receiver products and we began developing our first
panel controller product. In 1998, we improved our PanelLink technology and
developed new transmitter and receiver products, focusing on providing both
higher speeds and improved ease of use. We also began development of our
PanelLink architecture for digital displays. In 1999, we focused our internal
research and development efforts on integrating our PanelLink receiver
technology with additional functionality for flat panel displays and digital
CRTs as well as our anticipated data storage and networking products and
contributing to the development of the content protection specification.
Our research and development efforts continue to focus on developing higher
bandwidth links with different clocking methodologies to be used in various
applications, including storage and networking applications. By utilizing our
patented data coding technology and different clocking methodologies, we believe
our high-speed link can scale with advances in semiconductor manufacturing
process technology and can also simplify the system design.
We have invested, and expect that we will continue to invest, significant
funds on research and development activities. Our research and development
expenses were approximately $7.2 million in 1999, $4.5 million in 1998 and
$3.2 million in 1997.
SALES AND MARKETING
We sell our products through a direct sales force and indirectly through
distributors and manufacturer's representatives. As of December 31, 1999, our
sales and marketing organizations included 30 employees in North America, Europe
and Asia, and our network of distributors and manufacturer's representatives
included eight in Asia, seven in Europe and four in North America.
Our sales and marketing strategy is to achieve design wins with key industry
leaders to help accelerate both the adoption of the DVI specification in host
systems and the conversion to end-to-end digital display systems. We believe
that superior field applications and engineering support are key to building
long-term relationships with leading OEMs and third-party manufacturers. Sales
personnel and applications engineers are dedicated to key customers to promote
close communication and provide a high-level of technical support.
Our marketing efforts focus primarily on promoting adoption of the DVI
specification, working closely with other DDWG members, participating in
industry trade shows and forums, entering into branding relationships to build
awareness of the PanelLink brand and penetrating new markets with digital
solutions such as digital CRTs and digital TVs.
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<PAGE>
MANUFACTURING
WAFER FABRICATION
Our semiconductor products are fabricated using standard CMOS processes,
which permits us to engage independent wafer foundries to fabricate our
semiconductors. By outsourcing our manufacturing requirements, we are able to
avoid the high cost of owning and operating a semiconductor wafer fabrication
facility. This allows us to focus our resources on the design and marketing of
our products. We currently outsource all of our wafer manufacturing to Taiwan
Semiconductor Manufacturing Company, or TSMC. However, we do not have a
long-term agreement with TSMC.
Our devices are currently fabricated using both 0.5 micron, double-layer
metal and 0.35 micron, triple-layer metal processes. We continuously evaluate
the benefits and feasibility of migrating to a smaller geometry process
technology in order to reduce costs and improve performance.
ASSEMBLY AND TEST
After wafer fabrication, die are assembled into packages and the finished
products are tested. Our products are designed to use low-cost standard packages
and to be tested with widely-available semiconductor test equipment. We
outsource all of our packaging and test requirements to Anam in Korea and
Advanced Semiconductor Engineering in Taiwan, Malaysia and California, and
Singapore Technologies Assembly Test Services in Singapore.
The high-speed nature of our products makes it difficult to test our
products in a cost-effective manner before they are assembled. Since the
fabrication yields of our products have historically been high and the costs of
our packaging have historically been low, we test our products after they are
assembled. Defects are not discovered until that time. Our operations personnel
closely review the process control monitor information provided to us by our
foundry. To ensure quality, we have firmly established guidelines for rejecting
wafers that we consider unacceptable. To date, bypassing wafer probe testing has
not caused us to experience higher final test failures or lower yields. However,
lack of wafer probe testing could have adverse effects in case there are
problems with the wafer processing.
QUALITY ASSURANCE
We focus on product quality through all stages of the design and
manufacturing process. Our designs are subjected to in-depth circuit simulation
at temperature, voltage and processing extremes before being committed to
silicon. We pre-qualify each of our subcontractors. This pre-qualification
process consists of a series of industry standard environmental product stress
tests, as well as an audit and analysis of the subcontractor's quality system
and manufacturing capability. We also participate in quality and reliability
monitoring through each stage of the production cycle by reviewing electrical
parametric data from our wafer foundry and assembly subcontractors. We closely
monitor wafer foundry production to ensure consistent overall quality,
reliability and yield levels. The facilities of our independent foundry and
assembly and test subcontractors have achieved ISO 9000 certification.
INTELLECTUAL PROPERTY
Our success and future revenue growth will depend, in part, on our ability
to protect our intellectual property. We rely on a combination of patent,
copyright, trademark and trade secret laws, as well as nondisclosure agreements
and other methods to protect our proprietary technologies. As of December 31,
1999, we have been issued eight United States patents. These patents expire in
2016 or later, subject to our payment of periodic maintenance fees. We have
filed more than 21 additional United States patent applications. Three of these
21 applications have been allowed by the U.S. Patent and Trademark Office. We
cannot assure you that any valid patent will issue as a result of any
applications or, if issued, that any claims allowed will be sufficiently broad
to protect our technology.
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<PAGE>
We also generally control access to and distribution of our documentation and
other proprietary information. Despite our precautions, it may be possible for a
third party to copy or otherwise obtain and use our products, or technology
without authorization, develop similar technology independently or design around
our patents.
Upon our inception, we licensed serial link circuit technology from
Dr. Jeong, a founder of Silicon Image and our Chief Technical Adviser. Our
current license to this technology is worldwide and, except in case of
bankruptcy or material breach, perpetual and irrevocable. Dr. Jeong granted
rights in this technology to other companies before licensing it to Silicon
Image. Dr. Jeong has agreed, however, not to grant additional rights to any
third parties. Under our license, we can develop and sell products based on the
serial link technology, and sublicense others to do the same. The serial link
technology is a high-speed communication interconnect technology which is an
important element of all of our products and enables them to efficiently
transmit data in serial stream at high-speeds.
An important part of our strategy has been to participate in the development
of digital display standards, which we believe are critical to broad market
acceptance of digital display technology. In June 1997, the Video Electronics
Standards Association, commonly referred to as VESA, incorporated elements of
our PanelLink technology into its Plug and Display Standard for notebook and
flat panel displays. In 1998, we decided that broad market acceptance of our
technology would require a more comprehensive standard sponsored by leading
semiconductor and display manufacturers. For example, because some host system
manufacturers using our products used a different connector than that specified
in the VESA standard, host and display manufacturers were faced with the
possibility of incompatible connector configurations, which we believe inhibited
adoption of our technology by manufacturers. As a result, we worked with Intel,
Compaq, IBM, Hewlett-Packard, NEC and Fujitsu to form the DDWG.
Our participation in the DDWG requires that we grant the right to others to
use specific elements of our intellectual property in implementing the DVI
specification in their products at no cost, in exchange for an identical right
to use specific elements of their intellectual property for this purpose. This
reciprocal free license covers the external behavior of the host and display. It
does not, however, extend to the internal methods by which such behavior is
created. Although the DVI specification is an open industry standard, we have
developed proprietary methods of implementing the DVI specification. The
intellectual property that we have agreed to license defines the logical
structure of the interface, such as the number of signal wires, the signaling
types (expressed in voltage or current levels), and the data encoding method for
serial communication. Our implementation of this logical structure in integrated
circuits remains proprietary, and includes our techniques to convert data to and
from a serial stream, our signal recovery algorithms and our circuits to reduce
EMI (electromagnetic interference). We cannot be sure, however, that third
parties will not develop equivalent or superior implementations of the DVI
specification, or that we will succeed in protecting our intellectual property
rights in our proprietary implementation. We agreed to grant rights to the
adopters of the DVI specification in order to promote the adoption of our
technology as an industry standard. We thereby limited our ability to rely on
intellectual property law to prevent the adopters of the DVI specification from
using specific elements of our intellectual property for free.
We entered into a patent cross-license agreement with Intel in which each of
us granted the other a license to use the grantor's patents, with specific
exclusions related to the grantor's current products and anticipated future
products, and network devices. This cross-license agreement expires when the
last licensed patent expires, subject to the right of either party to terminate
the agreement earlier upon material breach by the other party, or a bankruptcy,
insolvency or change of control of the other party. We believe that this
cross-license strengthens our business relationship with Intel. We have
forfeited, however, our ability to rely on intellectual property law to prevent
Intel from using our patents to the extent of this license.
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<PAGE>
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions. This often results in
significant, protracted litigation.
COMPETITION
The high-speed communication, display and semiconductor industries are
intensely competitive. These markets are characterized by rapid technological
change, evolving standards, short product life cycles and decreasing prices. We
believe that the principal factors affecting competition in our markets are
levels of product integration, adherence to industry standards, time-to-market,
cost, product capabilities, system design costs, intellectual property, customer
support and reputation. Our current products face competition from a number of
sources including: analog solutions, DVI-compliant solutions and other digital
interface solutions.
- ANALOG SOLUTIONS. Display systems still predominantly employ an analog
interface. Improvements to analog interface display solutions may slow the
adoption of all-digital display systems. We compete with analog solution
vendors such as Analog Devices and Genesis Microchip.
- DVI-COMPLIANT SOLUTIONS. We believe that over time, the DVI specification
may become widely adopted in the digital display industry and attract
additional market entrants that will compete with us. For example, we
believe that a number of providers of video graphics accelerators are
currently integrating DVI-compliant transmitter technology into their
products. ATI Technologies, a major provider of video graphics
accelerators that improve the speed and image quality of video output from
computers, and one of our significant customers in 1998, introduced a
product that contains an internally developed DVI-compliant transmitter
capable of supporting very high resolution. Genesis Microchip has
introduced a DVI-compliant product that will compete with our PanelLink
Controllers. Other companies that have announced DVI-compliant solutions
include Analog Devices, Pivotal Technologies, SIS, Smart ASIC, Texas
Instruments and Thine.
We anticipate that various companies will develop DVI-compliant solutions.
Entrants in this market may include companies currently shipping analog
image processing solutions, such as, Pixelworks, Sage and ST
Microelectronics as well as companies with other digital interface
solutions such as National Semiconductor.
- OTHER DIGITAL INTERFACE SOLUTIONS. Texas Instruments and National
Semiconductor offer proprietary digital interface solutions based on LVDS,
or low voltage differential signaling, technology. While LVDS technology
has gained broad market acceptance in notebook PCs, few PC and display
manufacturers have adopted this technology for use outside of the notebook
PC market.
The market for our panel controller products is also very competitive. Some
of our panel controller products are designed to be functionally interchangeable
with similar products sold by Texas Instruments, National Semiconductor and
Thine.
In the process of establishing our technology as an industry standard, and
to ensure rapid adoption of the DVI specification, we have agreed to license
specific elements of our intellectual property to others for free. In addition,
we have licensed elements of our intellectual property to Intel and other
semiconductor companies, and we may continue to do so. Competitors could use
these elements of our intellectual property to compete against us. Many of our
competitors have longer operating histories and greater presence in key markets,
greater name recognition, access to large customer bases and significantly
greater financial, sales and marketing, manufacturing, distribution, technical
and other resources than we do. As a result, they may be able to adapt more
quickly to new or emerging technologies and customer requirements or devote
greater resources to the promotion and sale of their product than we may. In
particular, well-established semiconductor companies, such as Analog Devices,
Intel, National Semiconductor and Texas Instruments, may compete against us in
the future. We cannot
15
<PAGE>
assure you that we can compete successfully against current or potential
competitors or that competition will not seriously harm our business.
EMPLOYEES
As of December 31, 1999, we had a total of 85 employees--27 in engineering,
30 in sales and marketing, 12 in operations and 16 in finance and
administration. Of these employees, four were located outside of the United
States. None of our employees are represented by a collective bargaining
agreement, nor have we experienced any work stoppage. We consider our relations
with our employees to be good. We depend on the continued service of our key
technical, sales and senior management personnel and our ability to attract and
retain additional qualified personnel. If we are unable to hire and retain
qualified personnel in the future, our business would be seriously harmed.
ITEM 2. PROPERTIES
Our headquarters, including our principal administrative and marketing
facilities, are located in approximately 50,000 square feet of space we have
leased in Sunnyvale, California under a lease expiring July 31, 2003. We believe
that with our planned increases in personnel and activities, these facilities
will be adequate to meet our facility requirements through at least fiscal 2000.
We also lease approximately 18,000 square feet of space in Cupertino, California
under a lease expiring December 14, 2002 with a renewal option for an additional
five years. We have subleased this space on conventional terms through
December 14, 2002.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common shares have been traded on the Nasdaq Stock Market under the
symbol "SIMG" since our initial public offering on October 6, 1999. Our shares
are not listed on any other markets or exchanges. The following table shows the
high and low closing prices for our common shares as reported by the Nasdaq
Stock Market:
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1999 Calendar Year (from October 6, 1999)................... $75.50 $23.38
Fourth Quarter (from October 6, 1999)....................... $75.50 $23.38
</TABLE>
As of February 29, 2000, we had approximately 221 holders of record of our
common stock and a substantially greater number of beneficial owners.
We filed a Registration Statement on Form S-1 which was declared effective
by the SEC on October 5, 1999. On October 6, 1999 Silicon Image shares commenced
trading and on October 12, 1999 we completed the sale of all 4,485,000
registered shares of common stock at a price of $12.00 per share in the initial
public offering pursuant to the Registration Statement. The net proceeds
received by us after deducting underwriting discounts and commissions of
approximately $3.8 million and estimated offering expenses of approximately
$1.7 million were approximately $48 million. Immediately prior to the closing of
the offering, the shares of convertible preferred stock were automatically
converted into approximately 11,657,062 shares of common stock.
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<PAGE>
None of these offering expenses were paid directly or indirectly to any of
our directors or officers, any person owning 10% or more of any class of our
equity securities, or any of our affiliates. On October 15, 1999 we paid the
balance due under our line of credit which was $757,000. During the fourth
quarter of 1999 we used approximately $900,000 of the proceeds for building
improvements, furniture, computer and equipment purchases. We intend to use the
balance of the proceeds from this offering primarily for general corporate
purposes, including working capital and additional capital expenditures. Pending
such use, we have invested such proceeds in short-term, interest-bearing,
investment-grade securities.
We have never declared of paid cash dividends on shares of our capital
stock. We intend to retain any future earnings to finance future growth and do
not anticipate paying cash dividends in the future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in connection with our
financial statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Form 10-K. Historical results are not necessarily indicative of the results to
be expected in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Product revenue................................ $20,669 $ 7,703 $ 1,280 $ 30 $ --
Development and license revenue................ 575 100 1,582 1,121 --
------- ------- ------- ------- ------
Total revenue.................................... 21,244 7,803 2,862 1,151 --
Cost and operating expenses:
Cost of product revenue........................ 7,985 4,314 851 5 --
Research and development....................... 7,168 4,524 3,176 1,307 --
Selling, general and administrative............ 8,110 4,335 2,990 1,811 180
Stock compensation and warrant expense......... 6,678 1,361 -- -- --
------- ------- ------- ------- ------
Total operating expenses......................... 29,941 14,534 7,017 3,123 180
------- ------- ------- ------- ------
Loss from operations............................. (8,697) (6,731) (4,155) (1,972) (180)
Interest income.................................. 1,250 242 171 32 3
Interest expense and other, net.................. (174) (133) (52) (4) (1)
------- ------- ------- ------- ------
Net loss......................................... $(7,621) $(6,622) $(4,036) $(1,944) $ (178)
======= ======= ======= ======= ======
Net loss per share:
Basic and diluted.............................. $ (0.75) $ (1.39) $ (1.14) $ (0.98) $(0.51)
Weighted average shares........................ 10,096 4,766 3,533 1,981 350
======= ======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and short-term investments..................... $58,147 $11,497 $2,773 $2,271 $802
Working capital..................................... 55,380 8,953 1,530 846 715
Total assets........................................ 67,501 14,774 4,371 3,175 926
Line of credit...................................... -- 757 372 -- --
Capital lease obligations, long term................ 528 300 -- 10 --
Total stockholders' equity.......................... 57,564 9,852 2,593 1,658 839
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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 year ended December 31, 1999. At December 31, 1999, we had an
accumulated deficit of $20.4 million.
Historically, a relatively small number of customers and distributors have
accounted for a significant portion of our product revenue. Our top five
customers, including distributors, accounted for 58.5%, 90.6% and 88.1% of our
product revenue in the years ended December 31, 1999, 1998 and 1997,
respectively. Recently, the percentage of our revenue attributable to sales to
distributors has increased substantially. Much of this increase reflects revenue
from design wins with new OEMs which rely on third-party manufacturers or
distributors to provide inventory management and purchasing functions.
In addition, a significant portion of our products are sold overseas. Sales
to customers in Asia, including distributors, accounted for 85.0%, 69.1% and
91.0% of product revenue in the years ended December 31, 1999, 1998 and 1997,
respectively. Although the percentage of our revenues derived from some
countries, such as Canada, Korea and Taiwan, has varied significantly from
period to period, this is largely due to design wins with specific customers
that incorporate our products into systems that are sold worldwide. Accordingly,
the variability in our sales in these countries is not necessarily indicative of
any geographic trends. Since many manufacturers of flat panel displays and
personal computers are located in Asia, we expect that a majority of our product
revenues will continue to be represented by sales to customers in that region.
In addition, we have recently increased our selling efforts in Japan. All
revenue to date has been denominated in U.S. dollars.
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 December 31, 1999, the amount of employee unearned
compensation was $6.0 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.
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<PAGE>
In September 1998, we entered into several agreements with Intel
Corporation. Under the terms of these agreements, we issued to Intel two
warrants, each to purchase 142,857 shares of our common stock. The first warrant
was issued in September 1998 and was immediately exercisable at an exercise
price of $3.50 per share. The second warrant was issued in September 1998 and
became exercisable on March 31, 1999 at an exercise price of $0.35 per share.
Charges associated with the fair value of the warrants issued to Intel were
expensed as Intel progressed towards achievement of a milestone. We are
obligated to issue an additional warrant to Intel 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.
Substantially all of our sales are made on the basis of purchase orders
rather than long-term agreements. In addition, the sales cycle for our products
is long which may cause us to experience a delay between the time we incur
expenses and the time we generate revenue from these expenditures. We intend to
increase our investment in research and development, selling, general and
administrative functions and inventory as we seek to expand our operations. We
anticipate the rate of new orders may vary significantly from quarter to
quarter. Consequently, if anticipated sales and shipments in any quarter do not
occur when expected, expenses and inventory levels could be disproportionately
high, seriously harming our operating results for that quarter and, potentially,
future quarters.
ANNUAL RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statement of Operations Data:
Revenue:
Product revenue.......................................... 97.3 % 98.7 % 44.7 %
Development and license revenue.......................... 2.7 1.3 55.3
----- ----- ------
Total revenue.............................................. 100.0 100.0 100.0
Cost and operating expenses:
Cost of product revenue.................................. 37.6 55.3 29.7
Research and development................................. 33.7 58.0 111.0
Selling, general and administrative...................... 38.2 55.6 104.5
Stock compensation and warrant expense................... 31.4 17.4 0.0
----- ----- ------
Total operating expenses................................... 140.9 186.3 245.2
----- ----- ------
Loss from operations....................................... (40.9) (86.3) (145.2)
Interest income............................................ 5.9 3.1 6.0
Interest expense and other, net............................ (0.9) (1.7) (1.8)
----- ----- ------
Net loss................................................... (35.9)% (84.9)% (141.0)%
===== ===== ======
</TABLE>
PRODUCT REVENUE. Product revenue increased 168% to $20.7 million for the
year ended December 31, 1999 from $7.7 million for the year ended December 31,
1998. The increase in product revenue from 1998 to 1999 was derived primarily
from significantly higher unit shipments of display system products, driven by
increased market acceptance of digital-ready displays as well as increased unit
shipments of host system products. The increase in unit shipments resulted
primarily from new design wins with new customers in Japan as demand for flat
panel displays was particularly strong.
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<PAGE>
Product revenue increased 502% to $7.7 million for the year ended
December 31, 1998 from $1.3 million for the year ended December 31, 1997. In
April 1997, we began shipping our initial PanelLink host and display system
products. Product revenue increased from 1997 to 1998 primarily as a result of
significantly higher unit shipments of host system products. The increase was
primarily due to sales to Mitac and ATI. These manufacturers are significant
suppliers to Compaq, with whom we had a major design win for our transmitter in
1998.
DEVELOPMENT AND LICENSE REVENUE. Development and license revenue increased
to $575,000 for the year ended December 31, 1999 from $100,000 for the year
ended December 31, 1998. In the first quarter of 1999, we recognized $550,000 of
development revenue, which represented amounts previously recorded as deferred
revenue under a contract for the development of display technology. The contract
was terminated during the first quarter of 1999 when the other party, a Korean
corporation, decided to reduce its research and development expenses.
Development and license revenues decreased from $1.6 million for the year
ended December 31, 1997 to $100,000 for the year ended December 31, 1998.
Development and license revenue in 1997 was primarily derived from two
significant development contracts entered into in 1996. We also derived revenue
from license fees paid during 1997 for licenses of our high-speed digital
interconnect technology. 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 of our semiconductor devices and
our related overhead costs. Product gross margin (product revenue minus cost of
product revenue, as a percentage of product revenue) increased to 61.4% for the
year ended December 31, 1999 from 44.0% for the year ended December 31, 1998 and
from 33.5% for the year ended December 31, 1997. The increase in product gross
margin was due to higher average selling prices and lower unit product costs.
The increase in average selling prices was due to an increase in sales of
higher-speed products, an increase in sales to customers that were not eligible
for volume discounts and an increase in sales of our higher-priced display
system products. The reduction in product costs was primarily the result of more
efficient designs and lower manufacturing costs. We anticipate that our product
gross margin may decrease from current levels in future periods as a result of
increased competition in our markets.
In 1999, cost of product revenue decreased as a percentage of total revenue
compared to 1998 primarily due to an increase in our development and license
revenue as a percentage of total revenue. Cost of product revenue increased as a
percentage of total revenue from 1997 to 1998 primarily due to a decrease in our
development and license revenue as a percentage of total revenue.
RESEARCH AND DEVELOPMENT. R&D consists primarily of compensation and
associated costs relating to development personnel, consultants and prototypes.
R&D was $7.2 million or 33.7% of total revenue for the year ended December 31,
1999, $4.5 million or 58.0% of total revenue for the year ended December 31,
1998 and $3.2 million or 111.0% of total revenue for the year ended
December 31, 1997. The increase in absolute dollars was primarily due to the
hiring of additional development personnel and outside consultants and an
increase in expenses related to integrating our display receiver technology with
additional functionality for flat panel displays and digital CRTs as well as
development of technology related to data storage and networking applications.
Our research and development staff increased to 27 at December 31, 1999 from 17
at December 31, 1998 and from 12 at December 31, 1997. 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, marketing and promotional expenses. SG&A was
$8.1 million or 38.2% of total revenue for the year ended December 31, 1999,
$4.3 million or 55.6% of total revenue for the year ended December 31, 1998 and
$3.0 million or 104.5% of total revenue for the year ended December 31, 1997.
20
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SG&A increased in absolute dollars due primarily to the hiring of additional
personnel and expanded sales and marketing activities related to the further
broadening of our customer and product base in 1998 and 1999 and increased sales
commissions due to increased revenue. Our sales and marketing staff increased to
30 at December 31, 1999 from 16 at December 31, 1998 and from 11 at
December 31, 1997. 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 $6.7 million or 31.4% of total revenue for the year ended
December 31, 1999 and $1.4 million or 17.4% of total revenue for the year ended
December 31, 1998. A substantial portion of the increase was due to the
amortization of unearned compensation related to the vesting of employee stock
options and additional amounts related to the achievement of a milestone on a
warrant issued to Intel.
INTEREST INCOME. Interest income increased to $1.3 million for the year
ended December 31, 1999 from $242,000 for the year ended December 31, 1998 and
from $171,000 for the year ended December 31, 1997. This increase was
principally due to higher average cash balances resulting from the net proceeds
of the sale of convertible preferred stock in the third quarter of 1998 and from
the proceeds of our initial public offering in the fourth quarter of 1999.
INTEREST EXPENSE AND OTHER, NET. Interest expense and other, net increased
to $174,000 in the year ended December 31, 1999 from $133,000 for the year ended
December 31, 1998 and from $52,000 for the year ended December 31, 1997. This
increase was the result of an increase in the average outstanding debt and an
increase in capital lease obligations.
PROVISION FOR INCOME TAXES. We have not recorded a provision for federal or
state income taxes through December 31, 1999 since we have experienced net tax
losses since inception. We have recorded a valuation allowance for the full
amount of our net deferred tax assets, as the future realization of the tax
benefit is not likely.
At December 31, 1999 we had net operating loss carry-forwards for federal
and state tax purposes. For federal tax purposes our net operating loss
carry-forwards were approximately $7.8 million and our state tax carry-forwards
were $2.8 million. These federal and state tax loss carry-forwards are available
to reduce future taxable income and expire at various dates into fiscal 2019.
Under the provisions of the Internal Revenue Code, 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. Due to a cumulative
ownership change, our federal net operating losses have been limited to
approximately $15 million of federal net operating losses that we may utilize in
any one year.
LIQUIDITY AND CAPITAL RESOURCES
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 with net
proceeds of approximately $48.3 million.
Since our inception, we have financed operations through a combination of
our initial public offering, private sales of convertible preferred stock, lines
of credit and capital lease financing. At December 31, 1999, we had
$55.4 million in working capital and $58.1 million in cash, cash equivalents and
short-term investments.
Operating activities used cash in the amount of $491,000 during the year
ended December 31, 1999 compared to a use of cash in the amount of $3.7 million
for the year ended December 31, 1998 and a use of cash for the year ended
December 31, 1997 of $4.5 million. The decrease in use of cash from 1998 to 1999
was primarily the result of a decrease in our net loss before stock compensation
and warrant expense. The decrease in use of cash was also due to an increase in
deferred margin on sales
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to distributors and an increase in accounts payable partially offset by an
increase in accounts receivable and an increase in prepaid expenses and other
current assets. The deferred margin on sales to distributors increased as a
result of an overall increase in the amount of shipments to distributors. Our
policy is to defer recognition of revenue on sales to distributors until we
estimate that the products are sold by the distributor to the end customer.
Accounts payable increased $1.6 million as a result of an overall increase in
our operating expenses and inventory levels, due to the growth of our business
as well as the timing of our disbursements within each period. Accounts
receivable increased $3.0 million due to an increase in revenues. Prepaid
expenses and other assets increased primarily due to interest receivable on the
investment of funds received in our initial public offering. The decrease in use
of cash used in operating activities from 1997 to 1998 was primarily due to an
increase in accrued liabilities due to the significant growth in our business
during that period.
We used cash in our investing activities in the amount of $24.3 million in
1999, $1.7 million in 1998 and $300,000 in 1997. In 1999 the most significant
use of cash was the investment of our initial public offering proceeds in
short-term investments in the amount of $29.4 million which was partially offset
by sales of the same investments in the amount of $6.3 million. In 1998 the use
of cash in investing activities was comprised of purchase of short-term
investments and purchase of property and equipment.
Net cash provided by financing activities was $48.3 million in 1999,
$12.8 million in 1998 and $5.3 million in 1997. Primarily all of the cash
generated from financing activities in 1999 was due to the proceeds of our
initial public offering. In 1998 and 1997 substantially all of the cash from
financing activities was attributable to proceeds from the issuance of
convertible preferred stock as well as borrowings on a line of credit.
In December 1998, we entered into a line of credit agreement which provides
for borrowings of up to $4.0 million based on and secured by eligible accounts
receivable. Borrowings accrue interest at the bank's rate plus 0.25%, which
equaled 8.75% at December 31, 1999. In October 1999 the balance due under this
line of credit was repaid in full. We may not renew this line of credit when it
expires in April 2000. In February 1999, we entered into a $2.5 million capital
lease line that allows for the leasing of equipment and software over 33 to
42 month terms. The stated interest rate under this lease line is 8.0%. The
lease line expires in October 2000. On December 31, 1999, we were in compliance
with all lease line covenants and we had borrowed $841,000 under this lease
line.
We lease equipment and software under short-term and long-term leases with
terms ranging from 12 to 42 months. We intend to exercise purchase options at
the end of the lease terms for a minimal cost. We also plan to spend up to
approximately $3.5 million during the next 12 months for test equipment,
potential tenant improvements and additional furniture, equipment and software.
We lease our facility under a noncancelable operating lease which provides for
average monthly rental payments of approximately $135,000 and expires in
July 2003. The lease is secured by a certificate of deposit in the amount of
$733,000 which will be decreased by $150,000 per year over the next three years.
We also lease some additional office space under a lease expiring in
December 2002 with a renewal option for an additional five years. We have
subleased this space on terms adequate to cover our obligations on this facility
through December 14, 2002.
We believe that our existing cash balances will be sufficient to meet our
capital requirements for at least the next 12 months. After this period, capital
requirements will depend on many factors, including the levels at which we
maintain inventory and accounts receivable, costs of securing access to adequate
manufacturing capacity and increases in our operating expenses. To the extent
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.
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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 and
$7.6 million in 1999, and we expect to continue to incur operating losses. As of
December 31, 1999, we had an accumulated deficit of approximately
$20.4 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
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- 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 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 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 1999, approximately 55% 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. If we
are unable to increase revenues from receivers and display controllers, we would
remain dependent on the market for transmitters, which we expect to become
particularly competitive. This would seriously harm our business.
OUR SUCCESS WILL DEPEND ON THE GROWTH OF THE DIGITAL DISPLAY MARKET.
Our business depends on the growth of the digital display market, which is
at an early stage of development. The potential size of this market and its rate
of development are uncertain and will depend on many factors, including:
- the number of digital-ready host systems;
- the rate at which display manufacturers replace analog interfaces with
DVI-compliant interfaces; and
- the availability of cost-effective semiconductors that implement a
DVI-compliant interface.
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In addition, improvements to analog interfaces could slow the adoption of
digital displays. The failure of the digital display market to grow for any
reason would seriously harm our business.
GROWTH OF THE MARKET FOR OUR PRODUCTS DEPENDS ON AN INCREASE IN THE SUPPLY OF
DIGITAL DISPLAYS AND A CORRESPONDING DECREASE IN THEIR PRICE.
In order for the market for many of our products to grow, digital displays
must be widely available and affordable to consumers. Currently, there is a
limited supply of digital displays, such as flat panels, and increasing the
supply of flat panels is a costly and lengthy process requiring significant
capital investment. Accordingly, we do not expect the current shortage of flat
panels or their high prices to change in the near term. In the past, the supply
of flat panels has been cyclical. We expect this pattern to continue. Under
capacity in the flat panel market may limit our ability to increase our
revenues.
WE NEED TO OBTAIN DESIGN WINS IN ORDER TO INCREASE OUR REVENUES.
Our future success will depend on manufacturers of host systems and displays
designing our products into their systems. To achieve design wins--decisions by
those manufacturers to design our products into their systems--we must define
and deliver cost-effective, innovative and integrated semiconductor solutions.
Once a manufacturer has designed a supplier's products into its systems, the
manufacturer may be reluctant to change its source of components due to the
significant costs associated with qualifying a new supplier. Accordingly, the
failure to achieve design wins with key manufacturers of host systems and
displays will seriously harm our business.
OUR LENGTHY SALES CYCLE CAN RESULT IN UNCERTAINTY AND DELAYS IN GENERATING
REVENUES.
Because our products are based on new technology and standards, a lengthy
sales process, typically requiring several months or more, is often required
before potential customers begin the technical evaluation of our products. This
technical evaluation can then exceed six months. It can take an additional six
months before a customer commences volume shipments of systems that incorporate
our products. However, even when a manufacturer decides to design our products
into its systems, the manufacturer may never ship systems incorporating our
products. Given our lengthy sales cycle, we experience a delay between the time
we increase expenditures for research and development, sales and marketing
efforts and inventory and the time we generate revenues, if any, from these
expenditures. As a result, our business could be seriously harmed if a
significant customer reduces or delays orders or chooses not to release products
incorporating our products.
Our participation in the Digital Display Working Group requires us to
license some of our intellectual property for free, which may make it easier for
others to 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 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.
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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 year ended
December 31, 1998, sales of transmitter products to Mitac, a third party
manufacturer, accounted for 54% of our total revenues, and ATI Technologies, a
leading graphics board manufacturer, accounted for 12% of our total revenues.
These manufacturers are significant suppliers to Compaq, who decided in 1998 to
design our transmitters into some of its desktop personal computer models. In
1999, Compaq reduced the number of its product models that included our
transmitters as a standard part. As a result, for the year ended December 31,
1999, sales to each of Mitac and ATI Technologies decreased to less than 10% of
our total revenues. Also during the year ended December 31, 1999 sales to
Kanematsu, a Japanese distributor, accounted for 17% of our total revenues,
Microtek, a Japanese distributor, accounted for 11% of our total revenues and
World Peace, a Taiwanese distributor, accounted for 16% 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
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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 61% for the
year ended December 31, 1999 from 12% for the year ended December 31, 1998. 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
Analog Devices, Pivotal Technologies, SIS, Smart ASIC, Texas Instruments and
Thine.
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 elements of our intellectual property to
Intel and other semiconductor companies and we may continue to do so.
Competitors could use these elements of our intellectual property to compete
against us. We cannot assure you that we can compete successfully against
current or potential competitors, or that competition will not seriously harm
our business by reducing sales of our products, increasing our losses and
reducing our market share.
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OUR SUCCESS DEPENDS ON THE DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS, WHICH
WE MAY NOT BE ABLE TO DO IN A TIMELY MANNER BECAUSE THE PROCESS OF DEVELOPING
HIGH-SPEED SEMICONDUCTOR PRODUCTS 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 IN THE UPCOMING YEAR DUE
TO THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY.
We are dependent on third party suppliers for all of our foundry, test and
assembly functions. We depend on these suppliers to allocate to us a portion of
their capacity sufficient to meet our needs to produce products of acceptable
quality and with acceptable manufacturing yield and to deliver products to us in
a timely manner. These third party suppliers fabricate, test and assemble
products for other companies. If there is a decrease in available capacity, it
is likely that the lead time required to manufacture, test and assemble our
products will increase, which may result in our inability to meet our customers
demands and loss of customers, which would seriously harm our business.
WE DEPEND ON A THIRD-PARTY WAFER FOUNDRY TO MANUFACTURE NEARLY ALL OR 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:
- 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
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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 either of these
subcontractors and typically obtain services from them on a purchase order
basis. Our reliance on these subcontractors involves risks such as reduced
control over delivery schedules, quality assurance and costs. These risks could
result in product shortages or increase our costs of manufacturing, assembling
or testing our products. If these subcontractors are unable or unwilling to
continue to provide assembly and test services and deliver products of
acceptable quality, at acceptable costs and in a timely manner, our business
would be seriously harmed. We would also have to identify and qualify substitute
subcontractors, which could be time consuming and difficult and result
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. To date, bypassing wafer probe testing has not caused us
to experience higher final test failures or lower yields. However, lack of wafer
probe testing could have adverse effects in case there are problems with the
wafer processing.
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.
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WE 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 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.
WE FACE FOREIGN BUSINESS, POLITICAL AND ECONOMIC RISKS BECAUSE A MAJORITY OF OUR
PRODUCTS AND OUR CUSTOMERS' PRODUCTS ARE MANUFACTURED AND SOLD OUTSIDE OF THE
UNITED STATES.
A substantial portion of our business is conducted outside of the United
States and as a result, we are subject to foreign business, political and
economic risks. All of our products are manufactured outside of the United
States. Many of our customers are the manufacturers or suppliers for OEMs who
have designed in our products. Many of these manufacturers and suppliers are
located outside of the United States, primarily concentrated in Japan, Korea and
Taiwan. Sales outside of the United States accounted for 92% of our revenues for
1999 and 95% of our revenues for 1998. We anticipate that
30
<PAGE>
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 profitability in that country. A portion of our
international revenues may be denominated in foreign currencies in the future,
which will subject us to risks associated with fluctuations in those foreign
currencies.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY. WE RELY ON A
COMBINATION OF PATENT, COPYRIGHT, TRADEMARK AND TRADE SECRET LAWS, AS WELL AS
NONDISCLOSURE AGREEMENTS AND OTHER METHODS TO PROTECT OUR PROPRIETARY
TECHNOLOGIES.
We have been issued patents and have a number of pending United States
patent applications. However, we cannot assure you that any patent will issue as
a result of any applications or, if issued, that any claims allowed will be
sufficiently broad to protect our technology. In addition, it is possible that
existing or future patents may be challenged, invalidated or circumvented. It
may be possible for a third party to copy or otherwise obtain and use our
products, or technology without authorization, develop similar technology
independently or design around our patents. Effective copyright, trademark and
trade secret protection may be unavailable or limited in foreign countries.
Disputes may occur regarding the scope of the license of our intellectual
property we have granted to the DDWG participants for use in implementing the
DVI specification in their products. These disputes may result in:
- costly and time consuming litigation; or
- the license of additional elements of our intellectual property for free.
OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD BE TIME-CONSUMING
AND EXPENSIVE TO DEFEND.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. This litigation is
widespread in the high-technology industry and is particularly prevalent in the
semiconductor industry, where a number of companies aggressively use their
patent portfolios by bringing numerous infringement claims. In addition, in
recent years, there has been an increase in the filing of so-called "nuisance
suits" alleging infringement of intellectual property rights, which pressure
defendants into entering settlement arrangements to quickly dispose of such
suits, regardless of their merits. We may become a party to litigation in the
future to protect our intellectual property or as a result of an alleged
infringement of others' intellectual property. These lawsuits could subject us
to significant liability for damages and invalidate our proprietary rights.
These lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would
31
<PAGE>
divert management time and attention. Any potential intellectual property
litigation also could force us to do one or more of the following:
- stop selling products or using technology that contain the allegedly
infringing intellectual property;
- attempt to obtain a license to the relevant intellectual property, which
license may not be available on reasonable terms or at all; and
- attempt to redesign those products that contain the allegedly infringing
intellectual property.
If we are forced to take any of these actions, we may be unable to
manufacture and sell our products, which could seriously harm our business.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY MAY LEAD TO SIGNIFICANT
VARIANCES IN THE DEMAND FOR OUR PRODUCTS.
In the past, the semiconductor industry has been characterized by
significant downturns and wide fluctuations in supply and demand. Also, the
industry has experienced significant fluctuations in anticipation of changes in
general economic conditions, including economic conditions in Asia. This
cyclicality has led to significant variances in product demand and production
capacity. It has also accelerated erosion of average selling prices per unit. We
may experience periodic fluctuations in our future financial results because of
changes in industry-wide conditions.
WE ARE GROWING RAPIDLY, WHICH STRAINS OUR MANAGEMENT AND RESOURCES.
We are experiencing a period of significant growth that will continue to
place a great strain on our management and other resources. We have grown from
50 employees on January 1, 1999 to 85 employees on January 1, 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.
32
<PAGE>
Customers located in Taiwan were responsible for 35% of our product revenue
for the year ended December 31, 1999 and 57% of our product revenue for the year
ended December 31, 1998. 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.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL OF SILICON IMAGE AND MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK.
Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:
- authorizing the issuance of preferred stock without stockholder approval;
- providing for a classified board of directors with staggered, three-year
terms;
- prohibiting cumulative voting in the election of directors;
- requiring super-majority voting to amend some provisions in our
certificate of incorporation and bylaws;
- limiting the persons who may call special meetings of stockholders; and
- prohibiting stockholder actions by written consent.
Provisions of Delaware law also may discourage, delay or prevent someone
from acquiring or merging with us.
STOCKHOLDERS EXISTING PRIOR TO OUR INITIAL PUBLIC OFFERING OWN A LARGE
PERCENTAGE OF OUR VOTING STOCK, WHICH MAY ALLOW THEM TO CONTROL THE ELECTION OF
DIRECTORS AND APPROVAL OR DISAPPROVAL OF SIGNIFICANT CORPORATE ACTIONS.
As of February 29, 2000, the executive officers, directors and other
principal stockholders beneficially own or control, directly or indirectly
approximately 39% of the outstanding shares of common stock. As a result, if
these persons act together, they will significantly influence, and will likely
control, the election of our directors and approval or disapproval of our
significant corporate actions. This influence over our affairs might be adverse
to the interests of other stockholders. In addition, the voting power of these
stockholders could have the effect of delaying or preventing a change in control
of Silicon Image.
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 may fluctuate significantly in response to
a number of factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance;
33
<PAGE>
- 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;
and
- the number of our shares that are available for trading by the public and
the trading volume of our shares.
Due to these factors, the price of our stock may decline and the value of
your investment would be reduced. Since inception through February 29, 2000 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.
OUR BUSINESS MAY BE HARMED BY CLASS ACTION LITIGATION DUE TO STOCK PRICE
VOLATILITY.
In the past, securities class action litigation often has been brought
against a company following periods of volatility in the market price of its
securities. Companies in the semiconductor industry and other technology
industries are particularly vulnerable to this kind of litigation due to the
high volatility of their stock prices. Accordingly, we may in the future be the
target of securities litigation. Securities litigation could result in
substantial costs and could divert our management's attention and resources.
Future sales of our common stock may depress our stock price.
Of the 25,742,873 shares of our common stock outstanding on December 31,
1999, the 4,485,000 shares sold in our initial public offering on October 6,
1999 are freely tradable. Approximately 7.9 million of the remaining shares were
released from underwriters' lock-up restrictions during the period from
February 1, 2000 through March 7, 2000. The balance of the shares are subject to
lock-up agreements prohibiting their disposition until April 3, 2000. Sales of a
substantial number of these shares in the public market after the lock-up period
ends could cause the market price of our common stock to decline. In addition,
the sale of these shares could impair our ability to raise capital through the
sale of additional stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF 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. All transactions to date have
been denominated in United States dollars.
As of December 31, 1999, our cash included money market securities. Due to
the short duration of our investment portfolio, an immediate 10% change in
interest rates would not have a material effect on the fair market value of our
portfolio. Therefore, we would not expect our operating results or cash
34
<PAGE>
flows to be affected to any significant degree by the effect of a sudden change
in market interest rates on our securities portfolio.
FOREIGN CURRENCY EXCHANGE RISK
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplemental Data of the Company required by
this item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item, which will be set forth under the
captions "Proposal No. 1 Election of Directors," "Executive Officers" and
"Section 16(a) Beneficial Ownership Compliance" in Silicon Image's Proxy
Statement for its 2000 Annual Meeting of Stockholders, is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item, which will be set forth under the
captions "Director Compensation," "Executive Compensation" and "Compensation
Committee Interlocks and Insider Participation" in Silicon Image's Proxy
Statement for its 2000 Annual Meeting of Stockholders, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item, which will be set forth under the
caption "Security Ownership of Certain Beneficial Owners and Management" in
Silicon Image's Proxy Statement for its 2000 Annual Meeting of Stockholders, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item, which will be set forth under the
caption "Certain Relationships and Related Transactions" in Silicon Image's
Proxy Statement for its 2000 Annual Meeting of Stockholders, is incorporated
herein by reference.
35
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form:
1. Financial Statements:
Report of Independent Accountants
Balance Sheets at December 31, 1999 and December 31, 1998
Statements of Operations for the three years ended December 31, 1999
Statements of Stockholders' Equity for the three years ended
December 31, 1999
Statements of Cash Flows for the three years ended December 31, 1999
Notes to Financial Statements
2. Financial Statement Schedules.
Financial statement schedules have been omitted because the required
information is not present or not present in amounts sufficient to
require submission of the schedule, or because the information
required is included in the financial statements or the notes to
those financial statements.
3. Exhibits.
The exhibits listed in the Index to Exhibits Filed Together with this
Annual Report are filed as a part of this Report on Form 10-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Silicon Image, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Silicon Image, Inc., at
December 31, 1999 and 1998 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
January 27, 2000
37
<PAGE>
SILICON IMAGE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 33,648 $ 10,096
Short-term investments.................................... 24,499 1,401
Accounts receivable....................................... 4,553 1,518
Inventory................................................. 765 301
Prepaid expenses and other current assets................. 1,324 259
-------- --------
Total current assets...................................... 64,789 13,575
Property and equipment.................................... 1,809 1,125
Other assets.............................................. 903 74
-------- --------
Total assets............................................ $ 67,501 $ 14,774
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit............................................ $ -- $ 757
Accounts payable.......................................... 2,491 882
Accrued liabilities....................................... 3,277 2,275
Capital lease obligations, current........................ 498 218
Deferred margin on sales to distributors.................. 3,143 490
-------- --------
Total current liabilities............................... 9,409 4,622
Capital lease obligations, long-term........................ 528 300
-------- --------
Total liabilities........................................... 9,937 4,922
-------- --------
Commitments and contingencies (Notes 5, 6 and 7)
Stockholders' Equity:
Convertible preferred stock, $0.001 par value; 5,000,000
and 10,065,000 shares authorized; none and 9,560,000
shares issued and outstanding........................... -- 10
Common stock, par value $0.001; 75,000,000 and 21,500,000
shares authorized; 25,743,000 and 6,786,000 shares
issued and outstanding.................................. 26 7
Additional paid-in capital................................ 85,415 24,960
Notes receivable from stockholders........................ (1,455) (96)
Unearned compensation..................................... (6,021) (2,249)
Accumulated deficit....................................... (20,401) (12,780)
-------- --------
Total stockholders' equity.............................. 57,564 9,852
-------- --------
Total liabilities and stockholders' equity.............. $ 67,501 $ 14,774
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
SILICON IMAGE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Product revenue........................................... $20,669 $ 7,703 $ 1,280
Development and license revenue........................... 575 100 1,582
------- ------- -------
Total revenue............................................... 21,244 7,803 2,862
Cost and operating expenses:
Cost of product revenue................................... 7,985 4,314 851
Research and development.................................. 7,168 4,524 3,176
Selling, general and administrative....................... 8,110 4,335 2,990
Stock compensation and warrant expense.................... 6,678 1,361 --
------- ------- -------
Total operating expenses.................................... 29,941 14,534 7,017
------- ------- -------
Loss from operations........................................ (8,697) (6,731) (4,155)
Interest income............................................. 1,250 242 171
Interest expense and other, net............................. (174) (133) (52)
------- ------- -------
Net loss.................................................... $(7,621) $(6,622) $(4,036)
======= ======= =======
Net loss per share:
Basic and diluted......................................... $ (0.75) $ (1.39) $ (1.14)
======= ======= =======
Weighted average shares................................... 10,096 4,766 3,533
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
SILICON IMAGE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
------------------- ------------------- PAID-IN FROM UNEARNED ACCUMULATED
SHARE AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT
-------- -------- -------- -------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996....................... 1,965 $ 2 5,661 $ 6 $ 3,782 $ (10) $ -- $ (2,122)
Issuance of Series C
Convertible Preferred Stock
in June 1997, net of
issuance costs............. 4,000 4 -- -- 4,957 -- -- --
Repayment of note
receivable................. -- -- -- -- -- 10 -- --
Net loss..................... -- -- -- -- -- -- -- (4,036)
------ ---- ------ --- ------- ------- ------- --------
Balance at December 31,
1997....................... 5,965 6 5,661 6 8,739 -- -- (6,158)
Issuance of Series D
Convertible Preferred Stock
in September 1998, net of
issuance costs............. 3,595 4 -- -- 12,452 -- -- --
Common stock issued for cash
and notes.................. -- -- 1,125 1 159 (96) -- --
Unearned compensation........ -- -- -- -- 2,972 -- (2,972) --
Amortization of unearned
compensation............... -- -- -- -- -- -- 723 --
Expense on options to
consultants................ -- -- -- -- 292 -- -- --
Expense on warrants
(Note 7)................... -- -- -- -- 346 -- -- --
Net loss..................... -- -- -- -- -- -- -- (6,622)
------ ---- ------ --- ------- ------- ------- --------
Balance at December 31,
1998....................... 9,560 10 6,786 7 24,960 (96) (2,249) (12,780)
Common stock issued for cash
and notes.................. -- -- 2,815 3 1,720 (1,385) -- --
Repayment of note
receivable................. -- -- -- -- -- 26 -- --
Proceeds from initial public
offering, net of issuance
costs...................... -- -- 4,485 4 48,287 -- -- --
Conversion of Convertible
Preferred Stock upon
completion of initial
public offering............ (9,560) (10) 11,657 12 (2) -- -- --
Unearned compensation........ -- -- -- -- 9,116 -- (9,116) --
Amortization of unearned
compensation............... -- -- -- -- -- -- 5,344 --
Expense on options to
consultants................ -- -- -- -- 739 -- -- --
Expense on warrants
(Note 7)................... -- -- -- -- 595 -- -- --
Net loss..................... -- -- -- -- -- -- -- (7,621)
------ ---- ------ --- ------- ------- ------- --------
Balance at December 31,
1999....................... -- $ -- 25,743 $26 $85,415 $(1,455) $(6,021) $(20,401)
====== ==== ====== === ======= ======= ======= ========
<CAPTION>
TOTAL
--------
<S> <C>
Balance at December 31,
1996....................... $ 1,658
Issuance of Series C
Convertible Preferred Stock
in June 1997, net of
issuance costs............. 4,961
Repayment of note
receivable................. 10
Net loss..................... (4,036)
-------
Balance at December 31,
1997....................... 2,593
Issuance of Series D
Convertible Preferred Stock
in September 1998, net of
issuance costs............. 12,456
Common stock issued for cash
and notes.................. 64
Unearned compensation........ --
Amortization of unearned
compensation............... 723
Expense on options to
consultants................ 292
Expense on warrants
(Note 7)................... 346
Net loss..................... (6,622)
-------
Balance at December 31,
1998....................... 9,852
Common stock issued for cash
and notes.................. 338
Repayment of note
receivable................. 26
Proceeds from initial public
offering, net of issuance
costs...................... 48,291
Conversion of Convertible
Preferred Stock upon
completion of initial
public offering............ --
Unearned compensation........ --
Amortization of unearned
compensation............... 5,344
Expense on options to
consultants................ 739
Expense on warrants
(Note 7)................... 595
Net loss..................... (7,621)
-------
Balance at December 31,
1999....................... $57,564
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
SILICON IMAGE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (7,621) $(6,622) $(4,036)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization........................... 581 649 312
Stock compensation and warrant expense.................. 6,678 1,361 --
Change in assets and liabilities:
Accounts receivable................................... (3,035) (1,231) (287)
Inventory............................................. (464) (172) (103)
Prepaid expenses and other assets..................... (1,894) 56 (288)
Accounts payable...................................... 1,609 256 187
Accrued liabilities................................... 1,002 1,512 (267)
Deferred margin on sales to distributors.............. 2,653 490 --
-------- ------- -------
Net cash used in operating activities............... (491) (3,701) (4,482)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments........................ (29,420) (1,401) --
Proceeds from sale of short-term investments.............. 6,322 -- --
Purchase of property and equipment........................ (1,204) (340) (300)
-------- ------- -------
Net cash used in investing activities............... (24,302) (1,741) (300)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations........... (342) (140) (59)
Proceeds from financing of property and equipment......... 789 -- --
Proceeds from initial public offering..................... 48,291 -- --
Borrowings on line of credit, net......................... (757) 385 372
Proceeds from issuance of convertible preferred stock, net
of issuance costs....................................... -- 12,456 4,961
Proceeds from issuance of common stock.................... 338 64 --
Repayment of note receivable.............................. 26 -- 10
-------- ------- -------
Net cash provided by financing activities........... 48,345 12,765 5,284
-------- ------- -------
Net increase in cash and cash equivalents................... 23,552 7,323 502
Cash and cash equivalents at the beginning of the period.... 10,096 2,773 2,271
-------- ------- -------
Cash and cash equivalents at the end of the period.......... $ 33,648 $10,096 $ 2,773
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Acquisition of software and equipment under capital
lease................................................... $ 61 $ 641 $ 28
======== ======= =======
Issuance of common stock in exchange for notes
receivable.............................................. $ 1,385 $ 96 $ --
======== ======= =======
Cash paid for interest.................................... $ 168 $ 128 $ 6
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Silicon Image, Inc. (the "Company") was incorporated in California in
January 1995 and reincorporated in Delaware in September 1999. The Company
designs, develops and markets semiconductor solutions for applications that
require cost-effective, high-bandwidth, integrated solutions for high-speed data
communications. The Company is initially focusing its technology on the local
interconnect between host systems, such as PCs, set-top boxes and DVD players,
and digital displays, such as flat panel displays, CRTs and TVs. The Company's
current products enable host systems to transmit digital data and allows
displays to receive and manipulate digital video data.
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain items previously reported in specific financial statement captions
have been reclassified to conform with the current year presentation.
REVENUE RECOGNITION
The Company recognizes revenue from product sales to direct customers upon
shipment. Reserves for sales returns and allowances are recorded at the time of
shipment. The Company's sales to distributors are made under agreements allowing
for returns or credits under certain circumstances and the Company defers
recognition of revenue on sales to distributors until the Company estimates
products are resold by the distributor to the end-user. These estimates are
based upon reports from these distributors and the Company's analysis of these
distributor reports as well as other information obtained by the Company.
Development and license revenues are recognized as milestones are met or as
license fees are earned.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt instruments having a maturity
of three months or less on the date of purchase to be cash equivalents. At
December 31, 1999 and 1998, approximately $26,514,000 and $7,546,000 of
commercial paper, $1,508,000 and $1,319,000 of money market funds and $6,100,000
and $0 of market auction preferred securities are included in cash and cash
equivalents, respectively, the fair value of which approximated cost. At
December 31, 1999 and 1998, short-term investments are comprised of $14,646,000
and $1,401,000 of commercial paper and $9,853,000 and $0 of corporate notes and
bonds. Short-term investments are held as securities available for sale in
accordance with Statement of Financial Accounting Standard ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" and are
reported at amortized cost as of the balance sheet date which approximates fair
market value.
42
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of temporary cash investments, short-term
investments and accounts receivable. The Company may place its short-term
investments in a variety of financial instruments and, by policy, limits the
amount of credit exposure through diversification and by restricting its
investments to highly liquid securities.
The Company performs ongoing credit evaluations of its customers' financial
condition and may require collateral such as letters of credit, whenever deemed
necessary. In 1999, three customers accounted for 17%, 16% and 11% of product
revenue. At December 31, 1999, three customers accounted for 26%, 18% and 11% of
gross accounts receivable. In 1998, two customers accounted for 54% and 12% of
product revenue. At December 31, 1998, the same two customers accounted for 65%
and 12% of gross accounts receivable, respectively. In 1997, two customers
accounted for 56% and 19% of product revenue.
INVENTORY
Inventory is stated at the lower of cost or market, cost being determined
under the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from two to five years. Assets held
under capital leases are amortized using the straight-line method over the
shorter of the lease term or the estimated useful life, which range from three
to five years.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
STOCK BASED COMPENSATION
The Company accounts for stock based compensation arrangements in accordance
with the provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock Based
Compensation." Expense associated with stock based compensation is amortized on
an accelerated basis over the vesting period of the individual award consistent
with the method described in Financial Accounting Standards Board ("FASB")
Interpretation No. 28.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components and is effective for periods beginning after December 15, 1997. The
Company's comprehensive income approximated net income for all periods
presented.
43
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition are less than the asset net book value. No such impairment losses
have been identified by the Company.
NET LOSS PER SHARE
The Company reports both basic net loss per share, which is based on the
weighted average number of common shares outstanding excluding contingently
issuable or returnable shares, and diluted net loss per share, which is based on
the weighted average number of common shares outstanding and dilutive potential
common shares outstanding.
The following tables set forth the computation of basic and diluted net loss
per share of common stock:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Numerator (in thousands):
Net loss....................................... $(7,621) $(6,622) $(4,036)
Denominator (in thousands):
Weighted average shares........................ 12,612 6,029 5,661
Less: unvested common shares subject to
repurchase................................... (2,516) (1,263) (2,128)
------- ------- -------
Denominator for basic and diluted
calculation.................................. 10,096 4,766 3,533
------- ------- -------
Net loss per share:
Basic and diluted net loss per share........... $ (0.75) $ (1.39) $ (1.14)
======= ======= =======
</TABLE>
As a result of the net losses incurred by the Company from its inception,
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>
DECEMBER 31,
----------------------------------
1999 1998 1997
--------- ---------- ---------
<S> <C> <C> <C>
Preferred Stock............................................ -- 11,657,000 8,062,000
Unvested common shares subject to repurchase............... 1,863,000 1,263,000 2,128,000
Stock options.............................................. 2,763,000 2,175,000 2,174,000
Common stock warrants...................................... 318,000 286,000 --
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a model for
accounting for derivatives and hedging activities and
44
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
supercedes and amends a number of existing accounting standards. SFAS No. 133
requires that all derivatives be recognized in the balance sheet at their fair
market value, and the corresponding derivative gains or losses be either
reported in the statement of operations or as a deferred item depending on the
type of hedge relationship that exists with respect to such derivative. We do
not currently or plan to enter into forward exchange contracts to hedge
exposures denominated in foreign currencies or any other derivative financial
instruments for trading or speculative purposes.
In March 1999, the FASB issued an exposure draft entitled, "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25." Although the proposed interpretation becomes effective upon its
issuance, certain transactions occurring after December 15, 1998 are subject to
complicated transition rules. If approved, the proposed interpretation may
result in many changes being made to existing practice and may have a
significant impact on the Company's accounting for stock based compensation.
NOTE 2--RELATED PARTY TRANSACTIONS:
In 1999, 1,485,000 shares of Common Stock were issued upon the exercise of
options to several officers of the Company in exchange for notes receivable
totaling $1,385,000. Principal and accrued interest on certain of the notes
totaling $26,000 were repaid in 1999. In 1998, 551,000 shares of Common Stock
were issued upon the exercise of options to several officers of the Company in
exchange for notes receivable totaling $95,625. These notes bear interest at
rates ranging from 3.82% to 7.75% per annum and are due within three to four
years. The Company has recorded compensation expense in connection with option
grants and sales of common stock (Note 8).
45
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Accounts receivable...................................... $ 4,654 $1,549
Allowance for doubtful accounts.......................... (101) (31)
------- ------
$ 4,553 $1,518
======= ======
Inventory:
Work in process.......................................... $ 312 $ 175
Finished goods........................................... 453 126
------- ------
$ 765 $ 301
======= ======
Property and equipment:
Furniture and equipment.................................. $ 1,158 $ 475
Computers and software................................... 2,163 1,581
------- ------
3,321 2,056
------- ------
Less: accumulated depreciation............................. (1,512) (931)
------- ------
$ 1,809 $1,125
======= ======
</TABLE>
Assets acquired under capitalized lease obligations are included in property
and equipment and totaled $1,461,000 and $641,000, with related accumulated
depreciation of $493,000 and $165,000 at December 31, 1999 and 1998,
respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued liabilities:
Customer rebates and accrued sales returns................ $1,259 $ 491
Accrued payroll and related expenses...................... 801 167
Deferred revenue.......................................... 155 1,121
Other accrued liabilities................................. 1,062 496
------ ------
$3,277 $2,275
====== ======
</TABLE>
NOTE 4--INCOME TAXES:
No provision for federal or state income taxes has been recorded for the
years ended December 31, 1999, 1998 and 1997, as the Company has incurred net
operating losses since inception (January 1995).
46
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INCOME TAXES: (CONTINUED)
Deferred tax assets relate to the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards.......................... $ 2,883 $ 4,996
Deferred revenue.......................................... 1,224 690
Research and development credit........................... 605 462
Other items not currently deductible...................... 630 197
------- -------
5,342 6,345
Less: valuation allowance................................. (5,342) (6,345)
------- -------
$ -- $ --
======= =======
</TABLE>
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
These factors include the Company's history of losses, recent increases in
expense levels, the fact that the market in which the Company competes is
characterized by rapidly changing technology, the lack of carryback capacity to
realize deferred tax assets, and the uncertainty regarding continued market
acceptance of the Company's products. The Company will continue to assess the
realizability of the deferred tax assets based on actual and forecasted
operating results.
At December 31, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $7,779,000 and
$2,751,000, respectively, which expire through 2019 and 2004, respectively.
Under the Tax Reform Act of 1986, the amounts of and benefits from net operating
loss carryforwards may be impaired or limited in certain circumstances. Events
which cause limitations in the amount of net operating losses that the Company
may utilize in any one year include, but are not limited to, a cumulative
ownership change of more than 50%, as defined, over a three year period. Due to
a cumulative ownership change, the Company is currently limited to approximately
$15 million of federal net operating losses that it may utilize in any one year.
NOTE 5--LEASING ARRANGEMENTS AND COMMITMENTS:
The Company leases certain equipment and software under short-term and
long-term lease agreements which are reported as capital leases. The terms of
the leases range from one to three years, with purchase options at the end of
the respective lease terms. The Company intends to exercise such purchase
options, which require minimal payments. The Company's obligation under these
leasing arrangements are secured by the leased equipment.
In October 1999 the Company entered into a noncancelable operating lease
expiring in July 2003 for its principal administrative and marketing facility.
The Company leases office space under a second noncancelable operating lease
which expires in December 2002. The Company has subleased this office space on
conventional terms through December 2002. Rent expense is recorded using the
straight-line method and, net of revenues from subleasing, totaled $685,000,
$333,000 and $290,000 in 1999, 1998 and 1997, respectively.
47
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LEASING ARRANGEMENTS AND COMMITMENTS: (CONTINUED)
In February 1999, the Company entered into a $2,500,000 lease line of credit
that allows for the leasing of equipment and software over 33 to 42 month terms.
The stated interest rate under this agreement is 8%. The agreement expires in
October 2000. The Company granted warrants to purchase up to 32,142 shares of
the Company's common stock at $3.50 per share to the lessor upon approval of the
lease line of credit (Note 7).
Future minimum lease payments including capitalized purchase options at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDED DECEMBER 31, LEASES LEASES
- ----------------------- -------- ---------
(IN THOUSANDS)
<S> <C> <C>
2000....................................................... $ 583 $1,950
2001....................................................... 458 2,011
2002....................................................... 125 2,050
2003....................................................... -- 928
----- ------
Total minimum payments, net of sublease income............. 1,166 $6,939
======
Less interest.............................................. (140)
-----
Present value of payments under capital lease
obligations.............................................. 1,026
Less long term portion..................................... (528)
-----
Short term portion......................................... $ 498
=====
</TABLE>
Future minimum lease payments under operating leases have not been reduced
for sublease rental income of $540,000, $540,000 and $518,000 for the years
ended December 31, 2000, 2001 and 2002, respectively.
NOTE 6--LINE OF CREDIT:
In December 1998, the Company entered into a line of credit which provides
for borrowings of up to $4.0 million based on and secured by eligible accounts
receivable as defined in the credit agreement. Borrowings accrue interest at the
bank's commercial lending rate plus 0.25% (8.75% at December 31, 1999). Accrued
interest is due monthly. The line of credit agreement requires the Company to
meet certain financial covenants including minimum tangible net worth and quick
ratio requirements of which the Company was in compliance. In October 1999 the
balance under the line of credit was paid in full. The agreement expires in
April 2000.
48
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDER'S EQUITY:
CONVERTIBLE PREFERRED STOCK
In October 1999, all of the outstanding convertible preferred shares were
converted into common shares as indicated below.
<TABLE>
<CAPTION>
SERIES OUTSTANDING CONVERTED
- --------------------- ----------- ----------
<S> <C> <C>
A 1,565,000 3,130,000
B 400,000 932,203
C 4,000,000 4,000,000
D 3,594,859 3,594,859
--------- ----------
9,559,859 11,657,062
========= ==========
</TABLE>
COMMON STOCK
The Company has authorized 75,000,000 shares of Common Stock. The Company
issued to founders and certain executives restricted common stock subject to
repurchase rights. The Company has the right to repurchase all or any portion of
the unvested shares of restricted stock at the original purchase price, which
right lapses over a four year vesting period. During the year ended
December 31, 1999 the Company sold 1,222,000 shares of Common Stock to founders,
certain executives, two consultants and an employee for a total of $1,405,000.
At December 31, 1999, 857,000 shares of restricted Common Stock were subject to
the Company's repurchase option.
STOCK WARRANTS
In September 1998, the Company and a third party entered into an agreement
to develop and promote the adoption of a digital display interface
specification, which was amended in April 1999. In connection with this
agreement, the Company granted to the manufacturer a warrant to purchase 142,857
shares of the Company's common stock at $3.50 per share. The warrant is
immediately exercisable. Under the same agreement, the Company granted a warrant
to the manufacturer to purchase 142,857 shares of the Company's common stock at
$0.35 per share. The warrant became exercisable during the quarter ended
March 31, 1999 when the manufacturer achieved a milestone. The Company recorded
$346,000 in 1998 and $595,000 in the year ended December 31, 1999 of expense for
these warrants, which expense is included in stock compensation and warrant
expense. In addition, if a milestone is achieved, the Company will grant to the
manufacturer a warrant to purchase 142,857 shares of the Company's common stock
at $0.35 per share. If the milestones are achieved, the Company will record an
expense related to the issuance of this warrant (the estimated fair value of the
warrant at December 31, 1999 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 is 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, the warrants were exercised.
49
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDER'S EQUITY: (CONTINUED)
STOCK OPTION PLANS
In September 1995, the Board of Directors adopted the 1995 Equity Incentive
Plan (the "1995 Plan") which provides for the granting of incentive stock
options ("ISOs") and non-qualified stock options ("NSOs") for shares of common
stock to employees, directors and consultants of the Company. In accordance with
the 1995 Plan, the stated exercise price shall not be less than 100% and 85% of
the estimated fair market value of Common Stock on the date of grant for ISOs
and NSOs, respectively, as determined by the Board of Directors. The 1995 Plan
provides that the options shall be exercisable over a period not to exceed ten
years and the options generally vest over a period of four years. In
September 1998, the 1995 Plan was amended to allow options to be exercised prior
to vesting. The Company has the right to repurchase such shares at their
original purchase price if the optionee is terminated from service prior to
vesting. Such rights expire as the options vest over the vesting period.
The 1999 Equity Incentive Plan (the "1999 Plan") became the successor to the
1995 Plan in October 1999. The 1999 Plan provides for the granting of incentive
stock options ("ISOs") and non-qualified stock options ("NSOs") for shares of
common stock to employees, directors and consultants of the Company. In
accordance with the 1999 Plan, the stated exercise price shall not be less than
100% and 85% of the estimated fair market value of Common Stock on the date of
grant for ISOs and NSOs, respectively, as determined by the Board of Directors.
The 1999 Plan provides that the options shall be exercisable over a period not
to exceed ten years and the options generally vest over a period of four years.
The following table summarizes the Company's stock option activity and
related weighted average exercise price within each category.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------
SHARES WEIGHTED AVERAGE
AVAILABLE NUMBER OF EXERCISE PRICE
FOR ISSUANCE SHARES PER SHARE
-------------- -------------- ----------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1996........................ 1,181 1,199 $ 0.09
Granted........................................... (925) 925 0.13
Canceled.......................................... -- -- --
Exercised......................................... -- -- --
------ ------
Balance at December 31, 1997........................ 256 2,124 0.11
Authorized........................................ 1,750 -- --
Granted........................................... (1,298) 1,298 0.32
Canceled.......................................... 172 (172) 0.30
Exercised......................................... -- (1,125) 0.14
------ ------
Balance at December 31, 1998........................ 880 2,125 0.20
Authorized........................................ 2,000 -- --
Granted........................................... (2,140) 2,140 14.25
Canceled.......................................... 99 (99) 2.45
Exercised......................................... -- (1,543) 0.27
------ ------
Balance at December 31, 1999........................ 839 2,623 $11.53
====== ======
</TABLE>
50
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDER'S EQUITY: (CONTINUED)
At December 31, 1999, 1,226,000 options were vested, and 1,006,000 unvested
shares had been exercised and remain subject to the Company's repurchase rights.
NON PLAN OPTIONS
In August 1999, the Company granted 140,000 options to purchase common stock
to certain executives at an exercise price of $5.75. The options remain
outstanding as of December 31, 1999. During 1997, the Company granted 50,000
options to purchase common stock to a founder at an exercise price of $0.125
which were exercised in July 1999.
OPTION DATA
Significant option groups outstanding at December 31, 1999, and related
weighted average exercise price and contractual life information are as follows:
<TABLE>
<CAPTION>
OUTSTANDING AND
EXERCISABLE
------------------------- REMAINING
RANGE OF EXERCISE PRICES SHARES PRICE LIFE (YEARS)
- ------------------------ -------------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
$0.08-$0.35..................................... 702 $ 0.24 8.16
$0.50-$5.75..................................... 1,013 $ 4.22 9.53
$6.50-$23.38.................................... 346 $ 8.43 9.74
$33.50-$62.63................................... 702 $33.67 9.86
-----
2,763
=====
</TABLE>
The weighted average fair value at the date of grant for options granted was
$7.83, $2.84 and $0.13 per option during 1999, 1998 and 1997, respectively. The
fair value of options at the date of grant was estimated on the date of grant
based on the fair value method using the Black-Scholes pricing model and using
the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected life (years)...................................... 4.0 4.0 4.0
Risk-free interest rate.................................... 5.7% 5.6% 6.0%
Dividend yield............................................. -- -- --
Volatility................................................. 75% -- --
</TABLE>
51
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDER'S EQUITY: (CONTINUED)
PRO FORMA EXPENSE
Had compensation cost for the Plans been determined based on the fair value
at the grant dates for the awards under a method prescribed by SFAS 123, the
Company's net loss would have been adjusted as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss:
Pro forma...................................... $(11,711) $(7,473) $(4,038)
Basic and diluted net loss per share:
Pro forma...................................... $ (1.16) $ (1.57) $ (1.14)
</TABLE>
STOCK COMPENSATION
During the years ended December 31, 1999 and 1998, the Company granted
options and sold restricted stock to employees and recognized unearned stock
compensation of $9,116,000 and $2,972,000, respectively. Such unearned stock
compensation will be amortized using an accelerated method over the vesting
period and may decrease due to employees that terminate service prior to
vesting.
OPTIONS TO CONSULTANTS
During the years ended December 31, 1999 and 1998, the Company granted
options to purchase 355,000 and 120,000 shares of Common Stock to consultants
with a weighted average exercise price of $17.01 and $0.31 per share,
respectively. The charge related to options granted to consultants is calculated
at the end of each reporting period based upon the Black-Scholes model, which
approximates fair value and is amortized based on the term of the consulting
agreement or service period. The amount of the charge in each period can
fluctuate depending on our stock price and volatility.
EMPLOYEE STOCK PURCHASE PLAN
In October 1999, the Company adopted the 1999 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved 250,000 shares of common stock for issuance
under the Purchase Plan. The Purchase Plan authorizes the granting of stock
purchase rights to eligible employees during two-year offering periods with
exercise dates every six months (with exception to the first purchase which will
be approximately 10 months). Shares are purchased through employee payroll
deductions at purchase prices equal to 85% of the lesser of the fair market
value of the Company's common stock at either the first day of each offering
period or the date of purchase. The Company's first purchase under the Purchase
Plan will take place on July 31, 2000. The number of shares reserved for
issuance under the Purchase Plan will be increased automatically on January 1 of
each year by an amount equal to 1% of the Company's total outstanding common
shares as of the immediately preceding December 31.
52
<PAGE>
SILICON IMAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--BENEFIT PLAN:
Effective January 1, 1995, the Company adopted a 401(k) plan which allows
all employees to participate by making salary deferral contributions to the
401(k) plan ranging from 1% to 20% of their eligible earnings. The Company may
make discretionary contributions to the 401(k) Savings Plan upon approval by the
Board of Directors. No Company contributions were made to the 401(k) Savings
Plan from inception through December 31, 1999.
NOTE 9--SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates in a single industry segment (as defined by SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information")
encompassing the design, development and sale of semiconductor solutions for
applications that require high-bandwidth and integrated system-level
functionality, such as the local interconnect between host systems and digital
displays, including flat panel displays and digital CRTs.
The following is a summary of product revenue by geographic area (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Taiwan............................................. $ 7,151 $4,391 $ 1
Japan.............................................. 5,849 163 145
Korea.............................................. 2,563 770 1,021
United States...................................... 1,654 348 78
Canada............................................. 599 1,078 14
Others............................................. 2,853 953 21
------- ------ ------
$20,669 $7,703 $1,280
======= ====== ======
</TABLE>
All development and license revenues are derived from non-domestic sources.
All sales are denominated in United States dollars. For all periods presented,
substantially all of the Company's assets were located within the United States.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
Dated: March 30, 2000 SILICON IMAGE, INC.
By: /s/ DAVID D. LEE
-----------------------------------------
David D. Lee
CHAIRMAN OF THE BOARD OF DIRECTORS,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints David D.
Lee his attorney-in-fact for him in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman of the Board of Directors,
/s/ DAVID D. LEE Chief Executive Officer and
------------------------------------ President (Principal Executive March 30, 2000
David D. Lee Officer
/s/ DANIEL K. ATLER Vice President, Finance and
------------------------------------ Administration (Principal March 30, 2000
Daniel K. Atler Financial and Accounting Officer)
/s/ HERBERT CHANG
------------------------------------ Director March 30, 2000
Herbert Chang
/s/ SANG-CHUL HAN
------------------------------------ Director March 30, 2000
Sang-Chul Han
/s/ DAVID A. HODGES
------------------------------------ Director March 30, 2000
David A. Hodges
/s/ ANDREW S. RAPPAPORT
------------------------------------ Director March 30, 2000
Andrew S. Rappaport
/s/ RONALD V. SCHMIDT
------------------------------------ Director March 30, 2000
Ronald V. Schmidt
</TABLE>
54
<PAGE>
INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<S> <C>
3.01 Second Amended and Restated Certificate of Incorporation of
the Registrant (Incorporated by reference from
Exhibit 3.03 from the Registrant's Registration Statement
on Form S-1 (File No. 333-83665), as amended, declared
effective by the Securities and Exchange Commission on
October 5, 1999 (the "Form S-1")).
3.02 Restated Bylaws of the Registrant (Incorporated by reference
from Exhibit 3.05 from the Form S-1).
4.01 Form of Specimen Certificate for Registrant's common stock
(Incorporated by reference from Exhibit 4.01 from the
Form S-1).
4.02 Intel Warrant No. 1 to Purchase Common Stock of the
Registrant (Incorporated by reference from Exhibit 4.02
from the Form S-1).
4.03* Intel Warrant No. 2 to Purchase Common Stock of the
Registrant, as amended April 16, 1999 (Incorporated by
reference from Exhibit 4.03 from the Form S-1).
4.04 Third Amended and Restated Investors Rights Agreement dated
July 29, 1998, as amended October 15, 1998 (Incorporated
by reference from Exhibit 4.04 from the Form S-1).
10.01 Form of Indemnity Agreement entered into between the
Registrant and its directors and officers (Incorporated by
reference from Exhibit 10.01 from the Form S-1).
10.02 1995 Equity Incentive Plan, as amended through July 20,
1999, and related forms of stock option agreements and
stock option exercise agreements (Incorporated by
reference from Exhibit 10.02 from the Form S-1).
10.03 1999 Equity Incentive Plan and related forms of stock option
agreements and stock option exercise agreements
(Incorporated by reference from Exhibit 10.03 from the
Form S-1).
10.04 1999 Employee Stock Purchase Plan and related enrollment
form, notice of suspension and notice of withdrawal
(Incorporated by reference from Exhibit 10.04 from the
Form S-1).
10.05 Employment Agreement with Dan Atler dated June 15, 1998
(Incorporated by reference from Exhibit 10.05 from the
Form S-1).
10.06 Employment Agreement with Parviz Khodi dated June 10, 1999
(Incorporated by reference from Exhibit 10.06 from the
Form S-1).
10.07 Amended and Restated Severance Agreement with David Lee
dated August 15, 1997 (Incorporated by reference from
Exhibit 10.07 from the Form S-1).
10.08 Consulting Agreement with Deog-Kyoon Jeong dated March 1,
1999 (Incorporated by reference from Exhibit 10.09 from
the Form S-1).
10.09* License Agreement dated March 15, 1995 between Deog-Kyoon
Jeong and the Registrant, as amended through June 18, 1997
(Incorporated by reference from Exhibit 10.10 from the
Form S-1).
10.10 Lease Agreement dated April 9, 1997 between Elisabeth
Griffinger and the Registrant (Incorporated by reference
from Exhibit 10.11 from the Form S-1).
10.11* Business Cooperation Agreement dated September 16, 1998
between Intel Corporation and the Registrant, as amended
October 30, 1998 (Incorporated by reference from
Exhibit 10.12 from the Form S-1).
10.12* Patent License Agreement dated September 16, 1998 between
Intel Corporation and the Registrant (Incorporated by
reference from Exhibit 10.13 from the Form S-1).
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<S> <C>
10.13 Digital Visual Interface Specification Revision 1.0
Promoter's Agreement dated January 8, 1999 (Incorporated
by reference from Exhibit 10.14 from the Form S-1).
10.14 Revolving Credit Loan & Security Agreement dated
December 17, 1998 between Comerica Bank-California and the
Registrant (Incorporated by reference from Exhibit 10.15
from the Form S-1).
10.15 Research and Development Contract for Gigabit Links and
Multimedia Information Delivery Systems dated July 1, 1998
between Inter-University Semiconductor Research Center of
Seoul National University and the Registrant (Incorporated
by reference from Exhibit 10.16 from the Form S-1).
10.16 Research and Development Contract for 1000BASE-T Gigabit
Ethernet PHY Chip dated July 1, 1999 between
Inter-University Semiconductor Research Center of Seoul
National University and the Registrant (Incorporated by
reference from Exhibit 10.17 from the Form S-1).
10.17 Master Lease Agreement and Addendum with Comdisco, Inc.
dated February 17, 1999 (Incorporated by reference from
Exhibit 10.18 from the Form S-1).
10.18 Letter Agreement between Steve Tirado and the Registrant and
Addendum thereto (Incorporated by reference from
Exhibit 10.19 from the Form S-1).
10.19 Form of Restricted Stock Purchase Agreement and Secured Full
Recourse Promissory Note entered into between Registrant
and its officers and consultants (Incorporated by
reference from Exhibit 10.20 from the Form S-1).
10.20 Form of Nonqualified Stock Option Agreement entered into
between Registrant and its officers (Incorporated by
reference from Exhibit 10.21 from the Form S-1).
10.21 Letter of Intent dated August 26, 1999 between Intel
Corporation and the Registrant (Incorporated by reference
from Exhibit 10.22 from the Form S-1).
10.22 Research and Development Contract for 1000BASE-T Gigabit
Ethernet PHY Chip dated January 1, 2000 between
Inter-University Semiconductor Research Center of Seoul
National University and the Registrant.
10.23 Sublease Agreement with Mitsubishi Electronics America, Inc.
dated October 15, 1999.
10.24 Executive Bonus Plan adopted by the Registrant on
November 11, 1999.
10.25 Letter Agreement between Steve Tirado and the Registrant
dated November 18, 1999.
10.26 Amended and Restated Severance Agreement with David Lee
dated January 24, 2000.
23.02 Consent of Independent Accountants.
24.01 Power of Attorney (included on signature page).
27.01 Financial Data Schedule.
</TABLE>
- ------------------------
* Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
56
<PAGE>
Exhibit 10.22
ISRC / SILICON IMAGE
RESEARCH AND DEVELOPMENT AGREEMENT
This Research and Development Agreement (the "AGREEMENT") is made this 1st
day of January, 2000 (the "EFFECTIVE DATE") between Silicon Image, Inc., a
California corporation with its principal place of business at 10131 Bubb
Road, Cupertino, California 95014 ("SII") and the Inter-University
Semiconductor Research Center of Seoul National University, located in Seoul,
Korea ("ISRC"). (As used herein, "PARTY" or "PARTIES" will refer to SiI,
ISRC, or both, as the case may be).
1. OBJECTIVE.
SiI requests that ISRC conduct research and development on
"Multi-Gigabit Serial Links", Integrated Network and Host Interface
Functions with Multi-Gigabit Serial Link and Embedded DRAM, and on
"1000BASE-T Gigabit Ethernet PHY Chip." The specific objectives of the
research to be conducted are described in the research project proposal
attached as Exhibit A (the "PROJECT").
2. PERIOD OF THE RESEARCH.
This Agreement will provide funding for research activities for a
period of two (2) years commencing January 1, 2000 and ending December
31, 2001.
3. OBLIGATIONS BY ISRC.
3.1. PROJECT LEADER. ISRC will designate Professor Deog-Kyoon Jeong
as the faculty member in charge of the Project. Mr. Jeong will
be the primary technical and university contact for SiI for
all technical and administrative issues related to the Project
for the Term of this Agreement ("PROJECT LEADER"). Should
Professor Jeong's employment with ISRC cease, for any reason,
SiI reserves the right to designate a new Project Leader, if
SiI so desires.
3.2. USE OF RESEARCH FUNDS. The research funds provided by SiI to
ISRC will be under the sole discretion of the Project Leader
and will be used to cover expenses directly or indirectly
related to the Project. ISRC will use its best efforts to
attain the specific objectives of the Project. Should funds be
used to expand ISRC's facilities to perform the Project, ISRC
agrees to provide office and laboratory space equal in value
to the funds utilized to expand ISRC's facilities. The office
and laboratory space will be provided and solely reserved for
SiI to utilize at its discretion for 10 years. In no event
will more than 50% of the research funds be used to expand
ISRC's facilities, without prior written approval from SiI. A
complete accounting of the use of the research funds and
expense reports with receipts for any equipment purchased must
be provided in the final report, described below.
<PAGE>
3.3. PROGRESS REPORTS AND SEMINARS
3.3.1. Progress Reports. Within thirty (30) days of the end
of each calendar quarter, ISRC will submit to SiI the
status and accomplishments of all research and
development activities related to the Project ongoing
during the quarter just ended. Within sixty (60) days
after termination of this Agreement, ISRC will submit
a final report to SiI detailing the overall project
history, accomplishments, success and failures of the
Project.
3.3.2. Seminars. At most twice yearly, the Project Leader
will provide SiI with a technical seminar at SiI's
headquarters in California, USA, covering the
research projects undertaken as part of this
Agreement, as well as other research areas of
interest to both Parties. SiI will cover all travel
expenses associated with the seminar for the Project
Leader and up to 3 students, as identified in Exhibit
B, participating in the Project.
3.4. PRODUCTIZATION COOPERATION. The Project Leader will use its
best efforts to support and help SiI in SiI's efforts to
productize the results of the Project, if SiI chooses to do
so. This support and help includes traveling to SiI to provide
technical assistance to SiI's development programs. SiI agrees
to assume all travel expenses associated with such cooperation
and assistance.
4. OBLIGATIONS BY SII.
4.1. PROJECT FUNDING. SiI will provide a total of $1,000,000 to
ISRC to conduct the research and development associated with
the Project. The funding will be paid as follows:
- $125,000 within forty-five (45) days after the signing of
this Agreement;
- $125,000 by June 1, 2000;
- $125,000 by September 1, 2000;
- $125,000 by December 1, 2000;
- $125,000 by March 1, 2001;
- $125,000 by June 1, 2001;
- $125,000 by September 1, 2001;
- $125,000 by December 1, 2001.
5. INTELLECTUAL PROPERTY OWNERSHIP.
All right, title and interest in and to any and all designs,
discoveries, inventions, products or product ideas, research results,
measurement data, computer programs, test or other reports, system, PCB
or semiconductor prototypes, patents rights, rights of priority,
copyrights, moral rights, trade secrets, know-how and other
intellectual property rights recognized in any country or jurisdiction
in the world conceived or developed as part of the Project (the
"INTELLECTUAL PROPERTY") shall at all times be and remain with SiI.
2
<PAGE>
6. INTELLECTUAL PROPERTY ASSIGNMENT
ISRC represents that to the best of its knowledge, at the Effective
Date, all ISRC faculty (including the Project Leader), employees and
students ("PROJECT STAFF"), have executed invention assignment
agreements or are otherwise under written obligation of assignment
which, inter alia, require the Project Staff to, without further
consideration, in order to carry out the intent of this Agreement, (1)
execute all oaths, assignments, powers of attorney, applications, and
other papers necessary or desirable to fully secure to SiI (either
directly to SiI or indirectly through ISRC to SiI) all rights, titles
and interests in the Intellectual Property; (2) communicate to SiI all
known facts relating to the Intellectual Property; and (3) generally do
all lawful acts that SiI shall consider desirable for securing,
maintaining, and enforcing worldwide patent protection relating to the
Intellectual Property and for vesting in SiI the rights, titles, and
interests of the Intellectual Property. ISRC agrees that during the
Term of this Agreement, it shall use reasonable efforts to ensure that
all additional ISRC faculty, students and employees, who become part of
the Project Staff, will execute ISRC invention assignment agreements
prior to working on the Project covered by this Agreement. ISRC also
agrees that ISRC will execute any assignments, powers of attorney, and
other papers necessary or desirable to fully secure to SiI all rights,
titles and interests in the Intellectual Property. ISRC further agrees
to provide any successor, assign, or legal representative of SiI with
the benefits and assistance provided to SiI hereunder.
7. CONFIDENTIALITY
7.1. DEFINITION. SiI and ISRC acknowledge that, in the course of
performing their obligations hereunder, ISRC will obtain
information and materials from SiI and knowledge about the
SiI's business and technical information, including but not
limited to any information relating to the business, products,
product plans, designs, costs, product prices and names,
finances, marketing plans, business opportunities, personnel,
research, development or know-how, programming techniques,
experimental work, customers, clients and suppliers of SiI and
that all such knowledge, information and materials acquired,
the existence, terms and conditions of this Agreement, and the
Intellectual Property, are and will be the trade secrets of
SiI (collectively "CONFIDENTIAL INFORMATION"). Such
Confidential Information includes without limitation any and
all intermediate and final results and materials from the
Project.
7.2. OBLIGATION. ISRC agrees, for itself, its faculty (including
the Project Leader), students and employees that it will (a)
use SiI's Confidential Information only in connection with
fulfilling its obligations under this Agreement; (b) hold
SiI's Confidential Information in strict confidence and
exercise due care with respect to its handling and protection,
consistent with its own policies concerning protection of its
own Confidential Information of like importance; (c) not
disclose, divulge or publish SiI's Confidential Information
except to such of its responsible faculty, employees and
students who have a bona fide need to know to the extent
3
<PAGE>
necessary to fulfill ISRC's obligations under this Agreement;
and (d) instruct all such persons not to disclose SiI's
Confidential Information to any third parties, without the
prior written permission of SiI.
7.3. EXCEPTIONS. The obligations set forth in Section 7.2 will not
apply to SiI's Confidential Information which (i) is or
becomes public knowledge without the fault or action of ISRC;
(ii) is received by ISRC from a third party, without
restriction as to use or disclosure; (iii) ISRC can document
was independently developed by it; (iv) is required to be
disclosed pursuant to law, provided ISRC uses reasonable
efforts to give SiI reasonable notice of such required
disclosure; or (v) is or becomes available to ISRC on an
unrestricted basis from SiI.
7.4. NON-DISCLOSURE AGREEMENTS. ISRC represents that to the best of
its knowledge, at the Effective Date, all ISRC faculty
(including the Project Leader), employees and students with
access to the SiI Confidential Information have executed ISRC
non-disclosure agreements or are otherwise under written
obligation of non-disclosure which, inter alia, require such
persons to maintain the confidentiality of Confidential
Information of third parties received by ISRC. ISRC agrees
that during the Term of this Agreement, it shall use
reasonable efforts to ensure that all additional ISRC faculty,
students and employees will execute ISRC non-disclosure
agreements prior to having access to the SiI Confidential
Information or working on the Project covered by this
Agreement. ISRC further agrees to provide any successor,
assign, or legal representative of SiI with the benefits and
assistance provided to SiI hereunder.
8. MODIFYING THE AGREEMENT.
The scope, nature, duration and funding of the Project may be modified
at any time if agreed to in writing by both Parties.
9. TERM AND TERMINATION.
9.1. TERM. This Agreement shall commence on the Effective Date and
shall continue in full force and effect for two (2) years,
terminating on December 31, 2001.
9.2. TERMINATION FOR CAUSE.
9.2.1. Material Breach. If either Party materially breaches
any term or condition of this Agreement and fails to
cure that breach within thirty (30) days after
receiving written notice of the breach, the other
Party shall have the right to terminate this
Agreement any time after the end of such thirty (30)
day period.
4
<PAGE>
9.3. EFFECTS OF TERMINATION.
9.3.1. Return of SiI Confidential Information. Within thirty
(30) days upon termination of this Agreement for any
reason, ISRC shall, pursuant to SiI's discretion,
either return or destroy all copies of SiI's
Confidential Information provided hereunder in ISRC's
possession or control. Upon request by SiI, the
Project Leader shall furnish to SiI an affidavit or
declaration signed by the Project Leader certifying
that such delivery or destruction of the Confidential
Information has been fully effected.
9.3.2. No Damages for Termination. Neither Party will be
liable to the other for damages of any kind solely as
a result of exercising its right to terminate this
Agreement in accordance with its terms.
9.3.3. Non-Exclusive Remedy. Termination of this Agreement
by either party will be a non-exclusive remedy for
breach and will be without prejudice to any other
right or remedy of such party.
9.3.4. Survival. The rights and obligations of the parties
under Sections 5 (Intellectual Property Ownership), 6
(Intellectual Property Assignment) and 7
(Confidentiality), will survive the termination or
expiration of this Agreement.
10. GENERAL
10.1 ENTIRE AGREEMENT. This Agreement, including all exhibits,
constitutes the entire agreement between the parties with
respect to the subject matter hereof, and supersedes and
replaces all prior and contemporaneous understandings or
agreements, written or oral, regarding such subject matter,
except for Research and Development Contract: 1000BASE-T
Gigabit Ethernet PHY Chip, which will expire February 29,
2000.
10.2 GOVERNING LAW AND DISPUTES. This Agreement will be governed by
and construed in accordance with the substantive laws of the
United States and the State of California, without regard to
or application of provisions relating to conflicts of law. Any
litigation arising under this Agreement will be brought in the
federal or state courts of the Northern District of California
and the parties hereby consent to the personal jurisdiction
and venue therein.
10.3 WAIVER AND MODIFICATION. Failure by either party to enforce
any provision of this Agreement will not be deemed a waiver of
future enforcement of that or any other provision. Any waiver,
amendment or other modification of any provision of this
Agreement will be effective only if in writing and signed by
the parties.
10.4 SEVERABILITY. If for any reason a court of competent
jurisdiction finds any provision of this Agreement to be
unenforceable, that provision of the Agreement
5
<PAGE>
will be enforced to the maximum extent permissible so as to
effect the intent of the parties, and the remainder of this
Agreement will continue in full force and effect.
10.5 NOTICES. All notices required or permitted under this
Agreement will be in writing and delivered by confirmed
facsimile transmission, by courier or overnight delivery
service, or by certified mail, and in each instance will be
deemed given upon receipt.
10.6 ASSIGNMENT. Neither party may assign its rights or delegate
its obligations hereunder, either in whole or in part, without
the prior written consent of the other party, which shall not
be unreasonably withheld or delayed; provided, however, that
SiI may assign its rights and delegate its duties under this
Agreement to a third party in connection with an acquisition,
merger, or corporate reorganization without the prior written
consent of ISRC. Any other attempted assignment or delegation
without such written consent will be void. The rights and
liabilities of the parties under this Agreement will bind and
inure to the benefit of the parties' respective successors and
permitted assigns.
10.7 RELATIONSHIP OF PARTIES. All current and future Project Staff
are independent contractors for SiI and this Agreement will
not establish any relationship of partnership, joint venture,
employment, franchise, or agency between the Project Staff and
SiI. The Project Staff will not have the power to bind SiI or
incur obligations on the other's behalf without SiI's prior
written consent or unless pursuant to another written
agreement.
10.8 FORCE MAJEURE. Neither party will be deemed in default of this
Agreement to the extent that performance of its obligations is
delayed or prevented by reason of fire, natural disaster,
accident, act of government, shortages of material or supplies
or any other cause beyond the reasonable control of such party
("Force Majeure"), provided that such party gives the other
party written notice thereof promptly and, in any event,
within fifteen (15) days of discovery thereof and uses its
good faith efforts to so perform or cure. In the event of such
a Force Majeure, the time for performance or cure will be
extended for a period equal to the duration of the Force
Majeure but not in excess of thirty (30) days.
6
<PAGE>
10.9 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which will be deemed an original, but both of which
together will constitute one and the same instrument.
EXHIBITS
Exhibit A - Research Project Proposal
Exhibit B - Project Participants
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
SILICON IMAGE, INC. INTER-UNIVERSITY SEMICONDUCTOR
RESEARCH CENTER OF
SEOUL NATIONAL UNIVERSITY
By: /s/ David D. Lee /s/ Young J. Park
------------------------- -------------------------------
Name: David D. Lee Young June Park
----------------------- -------------------------------
Title: CEO Director
---------------------- -------------------------------
Date: 12/9/99 12/9/99
----------------------- -------------------------------
7
<PAGE>
EXHIBIT A
RESEARCH PROJECT PROPOSAL
The research project covered by this Agreement shall focus on the
following areas:
1. High-speed serial communications circuit and protocol
technologies and semiconductor implementations of such
technologies, including Plesiochronous and Asynchronous
multi-gigabit serial links;
2. Implementation of the above technologies as semiconductor
devices, including the migration of such technologies to
multiple semiconductor processes and the testing of all
devices;
3. Applications of the above technologies as the physical layer
of network interface standards including Gigabit Ethernet,
Fiber Channel, Infiniband, and ATM/SONET;
4. High-speed analog and digital circuits for 1000BASE-T PHY
including
- High speed analog-to-digital converter and
digital-to-analog converter.
- Digital Equalizer
- Echo and NEXT (Near-End Crosstalk) canceller
- Timing recovery algorithms and PLL
- Physical Coding Sub-layer (PCS) that includes the
Scrambler, Convolution Encoder, and Viterbi Decoder;
5. Implementation of the above 1000BASE-T technologies as
mixed-signal VLSI semiconductor devices, including the
migration of such technologies to multiple semiconductor
processes and the testing of all devices;
6. NIC-on-a-chip integrating embedded DRAM, multi-gigabit PHY,
MAC layer, DMA memory controller, and the host interface as
semiconductor devices, including the testing of all devices;
7. Implementation of the "NIC-on-a-chip" technologies as
semiconductor devices with embedded DRAM that can be used for
network applications including NIC as well as multi-channel
switching devices.
8
<PAGE>
EXHIBIT B
PROJECT PARTICIPANTS
1. Project Leader:
Deog-Kyoon Jeong, Associate Professor, Seoul National University
2. Researchers:
i) Sungjoon Kim, Postdoc Fellow, Seoul National University
ii) Gijung Ahn, Ph.D. Candidate, Seoul National University
iii) Yongsam Moon, Ph.D. Candidate, Seoul National University
iv) Jinsu Ahn, Ph.D. Candidate, Seoul National University
v) Jongsang Choi, Ph.D. Candidate, Seoul National University
vi) Hyungrok Lee, M.S. Candidate, Seoul National University
vii) Bongjoon Lee, M.S. Candidate, Seoul National University
viii) Others
3. Administration staff:
To hire
9
<PAGE>
Exhibit 10.23
<TABLE>
<CAPTION>
SUBLEASE
<S> <C>
RECITALS
--------
Section 1. Sublease
Section 2. Representations and Warranties by Sublandlord
Section 3. Condition of the Subleased Premises/Early Access
Section 4. Parking/Cafeteria
Section 5. Furniture, Partitions, Office Equipment, etc.
Section 6. Utilities, Janitorial Services, etc.
Section 7. Term
Section 8. Rent
Section 9. Security Deposit
Section 10. Use of Subleased Premises
Section 11. Assignment and Subletting
Section 12. Sublandlord Improvements
Section 13. Subtenant Improvements
Section 14. Tenants Obligations Regarding Subleased Premises
Section 15. Insurance and Indemnity
Section 16. Environmental Obligations
Section 17. Eminent Domain
Section 18. Other Provisions of Sublease
Section 19. Default
Section 20. Waiver
Section 21. Quiet Enjoyment
Section 22. Brokers
Section 23. Notices
Section 24. Successors and Assigns
Section 25. Attornment
Section 26. Entry
Section 27. Miscellaneous
Section 28. Consent by Master Landlord
EXHIBITS
--------
Exhibit A Master Lease
Exhibit B Description of Subleased Premises
Exhibit C Cafeteria Rules
Exhibit D Time Deposit Assignment
</TABLE>
THIS SUBLEASE ("SUBLEASE") dated as of October 15, 1999, is made by
and between MITSUBISHI ELECTRONICS AMERICA, INC., a Delaware Corporation
("SUBLANDLORD"), and SILICON IMAGE, INC., a Delaware Corporation
("SUBTENANT").
1
<PAGE>
RECITALS
A. O'DONNELL, BRIGHAM & PARTNERS/NORTHERN DEVELOPMENTS, a general
partnership ("O'DONNELL ET AL."), as landlord, and Sublandlord, as tenant,
entered into a lease, dated July 15, 1984 for reference purposes only
("ORIGINAL LEASE"), as amended by the following amendments: Amendment No. 1
of Industrial Lease, dated as of March 9, 1988 ("FIRST AMENDMENT"); Second
Amendment to Industrial Lease, made the 31st day of January 1991 ("SECOND
AMENDMENT"); Third Amendment to Industrial Lease, made the 27th day of June
1995 ("THIRD AMENDMENT") and Fourth Amendment to Industrial Lease, dated June
4, 1999 for reference purposes only ("FOURTH AMENDMENT"). The Original Lease
together with the First, Second, Third and Fourth Amendments are hereinafter
collectively referred to as the "MASTER LEASE." A copy of the Master Lease is
attached hereto as EXHIBIT A and is incorporated herein by this reference.
B. Pursuant to Section 4.1 of the Second Amendment, O'DONNELL ET AL.
granted to Sublandlord an option to expand the Subleased Premises under the
Original Lease to include "Building No. 2 of the Project ("1060 E. ARQUES
SPACE") (which 1060 E. Arques Space consists of 50,819 square feet and is
more particularly shown on EXHIBIT "B" attached hereto)." Such expansion
space is hereinafter called the "1060 E. ARQUES SPACE."
C. By means of the Third Amendment, the 1060 E. Arques Space became a
part of the Subleased Premises under the Original Lease.
D. Pursuant to the terms of sale documentation, dated June 27, 1996,
("ASSIGNMENT") O'DONNELL ET AL. assigned all its right, title and interest in
and under the Master Lease to TriNet Sunnyvale Partners, L.P., a California
limited partnership ("MASTER LESSOR") which is the successor-in-interest to
O'DONNELL ET AL.
E. Sublandlord desires to sublease to Subtenant, and Subtenant desires
to sublease from Sublandlord, the entire 1060 E. Arques Space, including
rights to use common areas, which 1060 E. Arques Space is more particularly
shown on EXHIBIT B which is attached hereto and made a part hereof by this
reference ("SUBLEASED PREMISES").
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto agree as follows:
SECTION 1. SUBLEASE.
Sublandlord subleases to Subtenant the Subleased Premises on the
terms and conditions contained in this Sublease.
SECTION 2. REPRESENTATIONS AND WARRANTIES BY SUBLANDLORD.
(a) MASTER LEASE/ASSIGNMENT/OTHER AGREEMENTS. Sublandlord
represents and warrants to Subtenant that to the best of its knowledge: (i)
the Master Lease has not been amended or modified except as expressly set
forth in this Sublease; (ii) Master Lessor is the landlord under the Master
Lease as successor-in-interest to O'DONNELL ET AL. pursuant to the
2
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Assignment and the Assignment has not been amended or modified; and (iii)
that Sublandlord is not now, nor will be as of the commencement of the "Term"
(defined below), in default or breach of any provision of the Master Lease.
To Sublandlord's knowledge, there is no other agreement that would affect
Subtenant's use of the Subleased Premises.
(b) MECHANICAL SYSTEMS; CODES; LAWS. Sublandlord represents and
warrants that as of the "Commencement Date" (defined below) and to the best
of its knowledge (i) the roof and building systems (for example, HVAC,
mechanical, electrical, plumbing, water and gas) are in good working order
and repair; (ii) Sublandlord will leave all telecommunications and computer
network cabling in the Subleased Premises with pre-existing "drops"
throughout the Subleased Premises for Subtenant's use (but Subtenant is
responsible for all interconnection work); and (iii) to the best of
Sublandlord's knowledge, the Subleased Premises are not in violation of any
ordinance, rule, code or regulation of any governmental agency including,
without limitation, the Americans with Disabilities Act, and Sublandlord has
not received any notice of a possible violation. Subtenant acknowledges that
Sublandlord has not made any representations, other than those specified in
this Section, regarding the condition of the Subleased Premises (including,
but not limited to, the zoning thereof, the appurtenances thereto or the
furniture, fixtures and equipment therein) and that Sublandlord expressly
disclaims all warranties, including but not limited to Year 2000 compliance,
habitability, merchantability and fitness for particular purpose.
SECTION 3. CONDITION OF THE SUBLEASED PREMISES/EARLY ACCESS.
Except for the matters covered by Section 2(b), Subtenant hereby
accepts the Subleased Premises in their "as is" condition as of the date
Sublandlord makes the Subleased Premises available to Subtenant to commence
Subtenant's improvements and waives any and all claims against Sublandlord
for latent and patent defects in the Subleased Premises or any part thereof.
Subtenant shall not make any alteration, addition or improvement, including
(i) signage at the entrance to the Subleased Premises; and (ii) building
eyebrow signage, to the Subleased Premises without Sublandlord's prior
written consent in each instance as to each specific improvement, and, when
and as required under the Master Lease, the Master Lessor's consent in each
instance and as to each specific improvement. Sublandlord shall use
commercially reasonable efforts and cooperate with Subtenant to acquire such
rights from Master Lessor including, without limitation, the right to allow
Subtenant to install signage at the entrance to the Subleased Premises as
well as building eyebrow signage and name placement on the monument which
faces E. Arques Avenue. Sublandlord shall provide Subtenant with early access
to the Subleased Premises two (2) weeks prior to the projected Commencement
Date ("EARLY ACCESS PERIOD") to allow Subtenant to install Subtenant's
improvements including cabling. Access, including the scope of Subtenant's
activity, during the Early Access Period shall be coordinated with
Sublandlord so as not to interfere with Sublandlord's business or moving
efforts. Further, any such access shall be subject to all of the provisions
of this Sublease, except that Subtenant shall not be required to pay Rent
during the Early Access Period.
SECTION 4. PARKING/CAFETERIA.
Sublandlord and Subtenant shall have joint access to certain common
areas on the Subleased Premises including, but not limited to, parking
facilities with a parking ratio of 4
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parking spaces per 1000 rented square feet available to Subtenant as stated
under the Master Lease, and the cafeteria at 1080 East Arques Avenue,
provided, however, that access and use of the cafeteria shall be subject to
the terms of this Sublease and the additional terms described on EXHIBIT C
hereto.
SECTION 5. FURNITURE, PARTITIONS, OFFICE EQUIPMENT, ETC.
Prior to the Commencement Date, Sublandlord and Subtenant shall
agree upon which, if any, furniture, partitions, office equipment, etc.
Subtenant shall purchase from Sublandlord. Sublandlord agrees to sell the
agreed upon items at net book value, and Subtenant agrees to buy the
identified items at this price. To the extent, if any, the book value of the
identified items exceeds fair market value, as determined by a mutually
agreeable third party, Sublandlord will reduce Subtenant's Rent by amortizing
the difference between book value and fair market price over the term of the
Sublease. However, in no event shall Rent be less than $2.30 PSF. All items
shall be sold "as is" unless otherwise expressly stated in writing by
Sublandlord. On or before the Commencement Date, Sublandlord shall deliver to
Subtenant a bill of sale (in form reasonably acceptable to Subtenant)
covering the items purchased by Subtenant and Subtenant shall simultaneously
deliver to Sublandlord a bank check (or other form of payment acceptable to
Sublandlord) in the full amount of the aggregate price for the purchased
items, or other acceptable payment terms.
SECTION 6. UTILITIES, JANITORIAL SERVICES, ETC.
Subtenant shall be solely responsible for any and all costs, fees,
charges, and assessments associated with the provision of any security,
janitorial, maintenance, and utility services to the Subleased Premises,
including but not limited to alarm systems, security, janitors, maintenance
and facilities personnel, electricity, telephone, gas, cable television,
water, refuse disposal, sewerage, telecommunications services, and the like
of any type or description whatsoever. Subtenant shall be responsible for
arranging and contracting for any of the foregoing and for paying all amounts
incurred with respect to the foregoing, and shall maintain all billing solely
in Subtenant's name. In the event that Sublandlord incurs any expense related
to the foregoing, Subtenant shall promptly reimburse Sublandlord for such
expense.
SECTION 7. TERM.
Assuming that the Master Lessor's written consent to this Sublease
has been obtained as required by the Master Lease, the term of this Sublease
("TERM") will commence on the "COMMENCEMENT DATE" which means (i) the date
Subtenant takes actual possession of the Subleased Premises if prior to the
"Scheduled Commencement Date," (ii) November 12, 1999 ("SCHEDULED
COMMENCEMENT DATE") if on such date the term has not already begun and
Sublandlord tenders possession of the Subleased Premises to Subtenant with
all tenant improvements, if any, to be constructed by Sublandlord
substantially completed or (iii) such date subsequent to the Scheduled
Commencement Date on which Sublandlord tenders possession of the Subleased
Premises to Subtenant with the tenant improvements, if any, substantially
completed if on such date the Term has not already begun and if on such date
Sublandlord may tender possession to Subtenant in accordance with the
provisions of this Sublease. The Term
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shall end on July 31, 2003 unless terminated earlier in accordance with the
provisions of this Sublease ("TERMINATION DATE"). If for any reason
Sublandlord does not tender possession to Subtenant on the Scheduled
Commencement Date as provided above, Sublandlord will not be subject to any
liability for such failure, the Termination Date will not be extended by the
delay, and the validity of this Sublease will not be impaired. Rent will be
abated until tender of possession. However, if Sublandlord has not tendered
possession to Subtenant within sixty (60) days after the Scheduled
Commencement Date, at any time after that date and before tender of
possession, Subtenant may give written notice to Sublandlord of Subtenant's
intention to cancel this Sublease. The notice will set forth an effective
date for the cancellation, which will be at least ten (10) days after
delivery of written notice to Sublandlord. If Sublandlord tenders possession
to Subtenant on or before this effective date, this Sublease will remain in
full force. If Sublandlord fails to tender possession to Subtenant on or
before such effective date, this Sublease will be canceled. Upon
cancellation, all consideration previously paid by Subtenant to Sublandlord
on account of this Sublease will be returned to Subtenant, this Sublease will
be of no further force and effect, and Sublandlord will have no further
liability to Subtenant because of such delay or cancellation. If Sublandlord
permits Subtenant to take possession prior to the Scheduled Commencement
Date, the early possession will not advance the Termination Date and will be
subject to the provisions of this Sublease, including, without limitation,
the payment of rent, provided, however, that rent shall not be due with
respect to the Early Access Period described in Section 3.
SECTION 8. RENT.
(a) BASE RENT. Subtenant will pay to Sublandlord as monthly base
rent ("BASE RENT"), without deduction, setoff, notice, or demand, (i)
$2.40/rentable square foot ("RSF") for each of the first twelve (12) months
of the Term, (ii) $2.47/RSF for each of months thirteen (13) through
twenty-four (24), (iii) $2.54/RSF for each of months twenty-five (25) through
thirty-six (36), and (iv) $2.61/RSF for each of months thirty-seven (37)
until the end of the Term. Base Rent shall be paid in advance of the first
day of each month of the Term. Subtenant will pay to Sublandlord on execution
of this Sublease an amount equal to the number of RSF multiplied by $2.40 as
Base Rent for the first month. If the Term begins or ends on a day other than
the first or last day of a month, the Base Rent for the partial months will
be prorated on a per diem basis. For all purposes of this Lease, the
Subleased Premises is conclusively deemed to encompass and consist of 50,819
RSF.
(b) ADDITIONAL RENT. Subtenant shall pay to Sublandlord as
additional rent the same amount per RSF of the Subleased Premises that
Sublandlord is required to pay to Master Lessor in accordance with Articles
8, 10 and 11 of the Master Lease excluding, however, late charges, interest,
penalties and the like that Sublandlord is required to pay to Master Lessor
as the result of Sublandlord's failure to make timely payments or failure to
otherwise perform under the Master Lease. Subtenant shall pay each such
amount on or before the later to occur of (i) the date five (5) business days
after delivery to Subtenant of Sublandlord's written notice describing the
amount to be paid in reasonable detail and setting forth the last date on
which Sublandlord's payment thereof to Master Lessor can be made on a timely
basis, or (ii) the date five (5) business days before the last date on which
Sublandlord's payment thereof to Master Lessor would be timely. After
delivery to Sublandlord of at least thirty (30) days prior written notice,
Subtenant
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shall have the right to examine and/or audit the books and records evidencing
such costs and expenses paid to Sublandlord as additional rent during the 365
day period immediately preceding delivery of such written notice. Such right
may only be exercised once in any given 365 day period. If the aggregate
amount so paid exceeds by more than ten percent (10%) the amount that should
have been paid, then (i) Sublandlord shall promptly pay to Subtenant the cost
of such examination or audit, and (ii) Sublandlord shall promptly pay to
Subtenant the amount of such overpayment together with interest at the lower
of ten percent (10%) per annum or the highest legally permissible rate.
SECTION 9. SECURITY DEPOSIT.
Upon execution of this Sublease as and for security for the full and
faithful performance of all the Subtenant's obligations under this Sublease,
Subtenant shall pay to Sublandlord, the first month's Base Rent and shall
deliver or cause to be delivered to Sublandlord an Assignment of Time Deposit
Agreement in the form attached hereto as EXHIBIT D having a "Present Balance"
of $732,862.40 ($245,000 + [4 x 2.40][50,8193]) ("TIME DEPOSIT ASSIGNMENT")
which is incorporated herein by this reference. The Time Deposit Assignment
shall assign to Sublandlord Time Deposit No. 850750000070384 of Subtenant
held by Comerica Bank-California ("TIME DEPOSIT"). The Time Deposit shall (a)
name Sublandlord as beneficiary, (b) be in the amount stated immediately
above, and (c) remain in effect throughout the term of the Sublease and (d)
not be modified, amended, or altered in any manner, except as provided
herein. In the event that Subtenant fails to pay any rent when due or
otherwise defaults with respect to any other of its obligations under this
Sublease, Sublandlord may draw down on the Time Deposit funds sufficient to
remedy such default including any losses, costs, damages and expenses,
including without limitation attorneys' fees and costs, sustained by reason
of Subtenant's default. Funds shall be paid against the Time Deposit to
Sublandlord solely upon presentation by Sublandlord to Comerica
Bank-California at an office of Comerica Bank-California located in Santa
Clara County of (i) Sublandlord's draft of the Time Deposit and (ii) a
written instrument executed by Sublandlord stating that Subtenant has
breached the Sublease. Subtenant shall, within ten (10) days after written
notice from Sublandlord of the amount so drawn down, restore so much of the
Time Deposit as has been drawn down by Sublandlord so as to bring such Time
Deposit up to the original amount. The amount of the Time Deposit shall
reduce in accordance with the following schedule: One year from the
Commencement Date, the parties agree the Time Deposit shall be reduced by
$150,000, all other terms remaining the same, if Sublandlord has not
previously exercised its right to draw down on the Time Deposit. The Time
Deposit shall be reduced by the same amount on the second and third
anniversaries of the Commencement Date if Sublandlord has not previously
exercised its right to draw down as of such dates. On the first business day
business day following the reduction dates set forth in the immediately
preceding sentence, Sublandlord shall take the necessary action to achieve
the specified reduction. Promptly upon termination of the Sublease and
inspection of the Subleased Premises, Sublandlord shall pay, or cause to be
paid, or relinquish or transfer to Subtenant the amount represented by the
Time Deposit, (including accrued interest), less any amounts required to
remedy Subtenant's defaults under this Sublease, or, alternatively, if no
amounts are required to remedy any Tenant defaults upon termination of the
Lease, Landlord shall transfer the Time Deposit to Subtenant by properly
executing and dating the "Release By Assignee" provision in
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the Time Deposit Assignment and delivering the original copy thereof, so
executed and dated, to Subtenant.
SECTION 10. USE OF SUBLEASED PREMISES.
The Subleased Premises will be used and occupied only for the uses
permitted by the Master Lease.
SECTION 11. ASSIGNMENT AND SUBLETTING.
Subtenant will not assign this Sublease or further sublet, transfer
or allow any third party to use or occupy all or any part of the Subleased
Premises without the prior written consent of Sublandlord and Master Landlord
which consent shall not be unreasonably withheld or delayed. Upon receipt of
request from Subtenant to assign, sublease or otherwise divest itself of any
or all of its interest in and to this Sublease or any portion of the
Subleased Premises, Sublandlord shall have the option to exclude from the
Subleased Premises ("recapture"), the space proposed to be sublet or subject
to the assignment, effective as of the proposed commencement date of such
sublease or assignment. Upon receipt of notice from Sublandlord that it
intends to recapture, Subtenant shall have five (5) days to withdraw its
notice, thereby retaining possession of such space for its own use and
enjoyment. If Sublandlord elects to recapture and Subtenant does not withdraw
its notice of proposed assignment, sublease, etc., Subtenant shall surrender
possession of the space proposed to be subleased or subject to the assignment
to the Sublandlord on the effective date of recapture of such space, such
date being the anticipated commencement date of the sublease or assignment
for such space. Effective as of the date of recapture of any portion of the
Subleased Premises pursuant to this section, the Rent and all other
assessments based upon Subtenant's occupancy of the Subleased Premises shall
be adjusted accordingly. Sublandlord shall not have the right to recapture
within six (6) months of the Commencement Date. Further, Sublandlord shall
have no right of recapture as to proposed assigns, subleases, etc. to any
affiliate (as defined by the California Corporations Code) of Subtenant.
In the event Sublandlord opts not to recapture and Subtenant secures all
necessary consent to sublease, assign or any otherwise divest or share any
portion of the Subleased Premises, Subtenant shall pay Sublandlord on the first
day of each month during the term of the sublease or assignment, fifty percent
(50%) of the amount by which the sum of all rent and or other consideration
(direct or indirect) due from the subtenant or assignee, and attributable to the
sublease or assignment, for such month exceeds: (i) that portion of the Rent,
Additional Rent and other costs and charges associated with the Sublease for
said month which is allocable to the space sublet or assigned.
SECTION 12. SUBLANDLORD IMPROVEMENTS.
Prior to the Commencement Date, Sublandlord, at Sublandlord's
sole cost and expense, shall improve the Subleased Premises as follows:
A. Touch up paint on interior walls, if necessary.
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B. Steam clean carpets.
C. Professionally clean Subleased Premises.
SECTION 13. SUBTENANT IMPROVEMENTS.
Any improvements to the Subleased Premises shall be subject to
Sublandlord's and, when and as required by the Master Lease, Master Lessor's
prior review and approval. All costs associated with Subtenant's improvements
shall be borne by Subtenant. Subtenant shall be responsible to Sublandlord and
Master Lessor for any damage and/or loss to or within the Building, including
the Subleased Premises, and for any personal injury, death or other property
damage resulting from or incurred in connection with Subtenant's improvements
and shall indemnify, defend and hold harmless Sublandlord and Master Lessor from
and against all losses, costs, damages and expenses incurred. Upon expiration or
termination of this Sublease, Subtenant's improvements which were intended to
become permanent shall remain installed at the Subleased Premises and shall
become the property of Sublandlord or Master Lessor, as applicable. Subtenant
may remove its other improvements; provided that it restores the Subleased
Premises to their prior condition upon such removal. Subtenant may not be
required to remove any improvements upon the expiration or termination of this
Sublease.
SECTION 14. TENANTS OBLIGATIONS REGARDING SUBLEASED PREMISES.
(a) CODES, ORDINANCES, ETC. Subtenant shall not commence
operation of its business on the Subleased Premises unless and until
Subtenant has complied with all applicable building codes, health and safety
codes, regulations and ordinances applicable to Subtenant's use and occupancy
of the Subleased Premises or Subtenant's business. Subtenant shall not use or
suffer or permit any person to use the Subleased Premises or any part thereof
in violation of any law or regulation of any governmental authority having
jurisdiction over the Subleased Premises, and Subtenant shall at all times
occupy and use the Subleased Premises solely for their intended purposes.
Subtenant shall indemnify, defend and hold harmless Sublandlord, Master
Lessor, their corporate affiliates and their officers, directors,
shareholders, agents, representatives, contractors and employees from and
against the consequences of any violation of such laws, regulations, codes,
ordinances or of any provision of this section.
(b) CONDITION/USE OF SUBLEASED PREMISES. Subtenant shall keep and
maintain the Subleased Premises in a clean and sanitary condition and in such
condition as may be required by any insurance underwriters or carriers
maintaining coverage on the Subleased Premises. Subtenant shall not use or
permit the Subleased Premises to be used in any manner which would impair the
structural integrity, safety or strength of any buildings or improvements on
the Subleased Premises. Subtenant shall not conduct or operate its business
in any manner whatsoever which would violate any such conditions nor conduct
or operate its business so as to constitute a waste on the Subleased Premises
or a nuisance to or interference with the Subleased Premises.
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(c) HAZARDOUS ACTIVITIES. Subtenant shall not do or permit to be
done any hazardous activities and shall comply with all rules, orders,
regulations and requirements of industrial risk insurers or any other
organization performing a similar function. Subtenant shall in no event store
or use explosives, toxic waste or radioactive materials at the Subleased
Premises. Subtenant, shall not dispose of any solvents by pouring them on the
ground or dispose of solvents (treated or untreated) or other hazardous
materials in violation of the rules or regulations promulgated by any
governmental agency or utility having jurisdiction over the sewer system
servicing the Subleased Premises.
(d) TAXES ON SUBTENANT'S PERSONAL PROPERTY. Subtenant shall pay,
at least ten (10) days before delinquency, all taxes, assessments, license
fees and other charges that are levied or assessed against Subtenant's
personal property installed or located in or on the Subleased Premises and
that become due during the term of this Sublease. On demand by Sublandlord,
Subtenant shall furnish Sublandlord with satisfactory evidence of these
payments.
(e) LIENS. Subtenant shall keep the Subleased Premises free
from any liens arising out of the work performed, materials furnished or
obligations incurred by or for the benefit of Subtenant, including but not
limited to its improvements on the Subleased Premises. Notwithstanding the
foregoing, should any such lien arise, Subtenant shall file, within ten (10)
days, an appropriate bond to remove such lien or post other security acceptable
to Sublandlord.
SECTION 15. INSURANCE AND INDEMNITY.
(a) At it sole cost and expense, Subtenant shall at all times
that this Sublease is in effect carry and maintain the following insurance, with
a financially sound and reputable insurance carrier(s) acceptable to
Sublandlord, and to Master Lessor if required under the Master Lease, in the
amounts specified and in the form hereinafter provided for:
(i) Comprehensive general liability insurance insuring
Sublandlord and Subtenant, and Master Lessor as required under the Master
Lease, with respect to occurrences arising on or about the Subleased
Premises, and covering personal injury, death and property damage with a
single combined limit of not less than five million dollars ($5,000,000),
against any and all liability of Subtenant and its authorized
representatives with respect to the Subleased Premises or arising out of
the maintenance, use or occupancy thereof, by Subtenant or any of its
employees, agents, guests or invitees or the performance or non-performance
by Subtenant of the terms and conditions of this Sublease;
(ii) All risk insurance, and sprinkler leakage on the
Subleased Premises and improvements in, on or about the Subleased Premises
to the extent of at least 100% of their full replacement value. In addition
Subtenant shall maintain (i) Boiler and Machinery insurance to the extent
of at least 100% of the full replacement value, and (ii) rent loss
insurance in favor of Master Lessor and Sublandlord insuring them against
any loss of rental from damage or destruction of the Subleased Premises
for a period of at least six months from the date of such damage or
destruction; and
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(iii) Sublandlord, and Master Lessor as required under the
Master Lease, shall be named as an additional insureds in all such
insurance policies and coverages.
(b) Subtenant shall cause its insurers to waive all rights of
recovery by way of subrogation against Sublandlord and Master Lessor in
connection with any damages covered by any such insurance policies and coverages
as set forth in this section. On or before the Sublease Commencement Date,
Subtenant shall furnish to Sublandlord and Master Lessor and maintain
continuously throughout the term of this Sublease certificates of insurance as
evidence of Subtenant's compliance with its insurance obligations contained in
this section.
(c) Each policy of insurance required to be provided by
Subtenant under this section and each certificate therefor shall (i) provide for
at least thirty (30) days' written notice to Sublandlord and Master Lessor prior
to cancellation, expiration, reduction of coverage or other modification; and
(ii) provide that no act or omission of Subtenant shall result in forfeiture or
limit or otherwise affect the obligation of the insurance company to pay to or
on behalf of Sublandlord the amount of any loss sustained. Subtenant shall not
do or permit to be done anything which shall invalidate any of the insurance
policies referred to in this Sublease. If Subtenant shall fail to procure and
maintain any insurance required to be maintained by it by virtue of any
provision of this section, Sublandlord may, but shall not be required to,
procure and maintain such insurance at the expense of Subtenant, and the cost
thereof shall constitute additional rent. All insurance carried by Subtenant
shall be primary to and not contributory with any similar insurance carried by
Sublandlord, whose insurance shall be considered excess insurance only.
(d) Neither Sublandlord, any of its corporate affiliates,
Master Lessor nor any of their respective officers, directors, shareholders,
agents, representatives, contractors and employees shall be liable for any
damage or liability of any kind or for any injury to or death of any persons or
damage to any property of Subtenant or any other person during the term of this
Sublease from any cause whatsoever by reason of the acts and/or omissions of
Subtenant, its employees, agents, representatives, contractors, guests or
invitees. Subtenant shall indemnify, defend and hold harmless Sublandlord, its
corporate affiliates, Master Lessor and their respective officers, directors,
shareholders, agents, representatives, contractors and employees from and
against all liability whatsoever on account of any asserted damage or injury and
from all liens, claims and demands arising out of any such use of the Subleased
Premises, any improvements, repairs or alterations which Subtenant may make or
cause to be made upon the Subleased Premises or the performance or
non-performance by Subtenant of any of the terms and conditions of this
Sublease.
(e) Subtenant acknowledges that its business on the Subleased
Premises will be conducted for Subtenant's sole economic benefit. All risks of
Subtenant's operation at the Subleased Premises shall be borne exclusively by
the Subtenant. Subtenant hereby assumes and shall be liable for, and shall
indemnify, defend and hold harmless Sublandlord, Sublandlord's corporate
affiliates, Master Lessor and their respective officers, directors,
shareholders, agents, representatives, contractors and employees (the
"Indemnitees") in connection with any and all
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losses, costs, damages, expenses and liabilities, including attorneys' fees
and costs, liens, fines and penalties of any kind or nature, civil or
criminal, and special, indirect and consequential damages (collectively,
"Losses"), associated with Subtenant's business operation at the Subleased
Premises and any permits and licenses which may be required therefor.
Subtenant hereby releases the Indemnitees from any and all Losses arising out
of or associated with Subtenant's use of the Subleased Premises and any
permits and licenses which may be required therefor.
(f) Notwithstanding anything to the contrary contained in this
Section 15 or anywhere else in this Sublease, Sublandlord and Subtenant each
hereby releases the other and its respective directors, officers, partners,
agents, shareholders, and employees from any and all claims or demands for
damages, loss, expense or injury to the Subleased Premises, and to the
furnishings, fixtures, equipment, inventory or other property of either
Sublandlord or Subtenant in, about or upon the Subleased Premises caused by
or resulting from perils, events or happenings which are the subject of, but
solely to the extent coverage is actually and concurrently provided, as
obligations arise, by insurance carried by the respective parties.
SECTION 16. ENVIRONMENTAL OBLIGATIONS.
(a) SUBTENANT'S INDEMNITY. Subtenant shall indemnify, defend and
hold harmless Sublandlord, Sublandlord's corporate affiliates, Master Lessor
and their respective officers, directors, shareholders, agents,
representatives, contractors and employees from and against any and all
losses, costs, damages and expenses, including attorneys' fees and costs,
arising from or in connection with or in any manner related to hazardous
materials (i) brought onto the Subleased Premises by Subtenant its employees,
agents, representatives, contractors, guests or invitees, or (ii) negligently
handled by Subtenant or any of its employees, agents, representatives,
contractors, guests or invitees.
(b) SUBLANDLORD'S INDEMNITY. Sublandlord shall indemnify, defend
and hold harmless Subtenant, Subtenant's corporate affiliates, and its
respective officers, directors, shareholders, agents, representatives,
contractors and employees from and against any and all losses, costs, damages
and expenses, including attorneys' fees and costs, arising from or in
connection with or in any manner related to hazardous materials (i) brought
onto the Subleased Premises by Sublandlord its employees, agents,
representatives, contractors, guests or invitees, or (ii) negligently handled
by Sublandlord or any of its employees, agents, representatives, contractors,
guests or invitees.
SECTION 17. EMINENT DOMAIN.
(a) In the event that all or substantially all of the Subleased
Premises are taken or made inaccessible under the power of eminent domain,
this Sublease shall terminate as of the date possession is so taken. If this
Sublease is terminated, all rents shall be paid up to the date of possession
of the Subleased Premises by public authority, and Sublandlord shall make an
equitable refund of any rent paid by Subtenant in advance and not yet earned.
(b) In the event that any taking under the power of eminent
domain does not result in the termination of this Sublease as set forth
above, this Sublease shall remain in full
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force and effect, except that the rent shall be reduced in the same
proportion as the square footage of the Subleased Premises taken bears to the
square footage of the Subleased Premises immediately prior to such taking.
(c) All consideration or damages awarded for any taking under the
power of eminent domain and all consideration received by Sublandlord
pursuant to a voluntary sale by Sublandlord to any public or quasi-public
body, agency or person, corporate or otherwise, having the power of eminent
domain, either under threat or condemnation or while condemnation proceedings
are pending, whether for the whole or a part of the Subleased Premises, shall
belong to and be the property of Sublandlord (or Master Lessor as determined
under the Master Lease) regardless of how denominated. However, Subtenant
shall be entitled to retain any compensation for loss or damage to
Subtenant's trade fixtures and removable property.
SECTION 18. OTHER PROVISIONS OF SUBLEASE.
MASTER LEASE PROVISIONS. This Sublease is subject and
subordinate to all of the terms and conditions of the Master Lease. Except as
provided to the contrary herein, Subtenant shall perform the obligations of
Sublandlord as tenant under the Master Lease which accrue on or after the
commencement of the Term to the extent such obligations are applicable to the
Subleased Premises. Subtenant shall not commit or permit to be committed on the
Subleased Premises any act or omission which would violate any of the terms or
conditions of the Master Lease.
Except as is contrary to the express terms of this Sublease,
all the terms and conditions contained in the Master Lease are hereby
incorporated as terms and conditions of this Sublease (with each reference in
the Master Lease to "Landlord" and "Tenant" to be deemed to refer to Sublandlord
and Subtenant, respectively, hereunder, all references to the term "Lease" to be
deemed to refer to this Sublease and all references to "Premises" to be deemed
to refer to "Subleased Premises"), and along with all of the provisions set
forth herein, shall be the complete terms and conditions of this Sublease.
Notwithstanding the foregoing, Sublandlord shall not be
responsible for the performance or the furnishing of any repair, replacement or
other obligations or services regarding the Subleased Premises which are
required to be performed or provided by Master Lessor under the Master Lease and
Subtenant agrees to look solely to Master Lessor for the performance of such
obligations. Sublandlord shall have no liability to Subtenant for any failure by
Master Lessor to perform its obligations under the Master Lease, nor shall such
failure by Master Lessor excuse performance by Subtenant of its obligations
under this Sublease; provided, however, Sublandlord shall use commercially
reasonable efforts to cause Master Lessor under the Master Lease to perform all
of the obligations of Master Lessor thereunder to the extent said obligations
apply to the Subleased Premises.
Sublandlord shall not voluntarily terminate or amend the
Master Lease to Subtenant's detriment without Subtenant's prior written consent
which shall not be unreasonably withheld. If the Master Lease terminates as a
result of a default or breach by Sublandlord or
12
<PAGE>
Subtenant under this Sublease, the defaulting party will be liable to the
nondefaulting party for the damage suffered as a result of the termination.
In the event of a conflict between any term actually written into
this Sublease and any term hereof resulting from incorporation of Master
Lease terms pursuant to this Section 18., the term actually written into this
Sublease shall take precedence and govern.
SECTION 19. DEFAULT.
(a) Any of the following events shall Constitute a default of this
Sublease by Subtenant:
(i) Failure of Subtenant to pay any rent or any other
charge, or any part thereof, required to be paid under this Sublease when
such failure continues for three (3) days after delivery of written notice
thereof from Sublandlord to Subtenant;
(ii) Failure of Subtenant to observe or perform any
other provision, covenant, obligation or condition of this Sublease to
be observed or performed by Subtenant when such failure continues for
ten (10) days after delivery of written notice thereof from Sublandlord
to Subtenant or if cure cannot reasonably be accomplished within ten
(10) business days if Subtenant has not promptly commenced cure after
delivery of such written notice and prosecuted same to completion;
(iii) Abandonment or vacating of the Subleased Premises by
Subtenant; or
(iv) A general assignment by Subtenant for the
benefit of creditors or the filing by or against Subtenant of any
proceeding under an insolvency or bankruptcy law, unless, in the case
of a proceeding filed against Subtenant, such proceeding is dismissed
within thirty (30) days, the appointment of a trustee or receiver to
take possession of all or substantially all of the assets of Subtenant,
unless possession is restored to Subtenant within thirty (30) days, or
any attachment, execution or other judicially authorized seizure of all
or substantially all of Subtenant's assets located upon the Subleased
Premises or of Subtenant's interest in this Sublease, unless such
seizure is discharged within thirty (30) days.
(b) In the event of any such default by Subtenant, in addition to
any other remedies available to Sublandlord at law or in equity, Sublandlord
may treat the occurrence of any one or more of said events as a breach of
this Sublease. In such event, in addition to any or all other rights or
remedies Sublandlord may have under this Sublease and as provided by law,
Sublandlord shall have the right to declare the term of this Sublease ended
and to re-enter the Subleased Premises and take possession thereof and remove
all persons therefrom, and Subtenant shall have no further claim thereon or
thereunder.
(c) Should Sublandlord elect to terminate this Sublease under
this section, Sublandlord may recover from Subtenant as damages:
13
<PAGE>
(i) The worth at the time of award of any unpaid rent which
had been earned at the time of such termination; plus
(ii) The worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until
the time of award exceeds the amount of such rental loss, if any, that
Subtenant proves could have been reasonably avoided; plus
(iii) The worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss, if any, that Subtenant proves could
be reasonably avoided; plus
(iv) Any other amount necessary to compensate Sublandlord
for all the detriment proximately caused by Subtenant's failure to perform
its obligations under this Sublease or which in the ordinary course of
events would be likely to result therefrom, including but not limited to
any attorneys' fees and costs incurred by Sublandlord as a result of or in
connection with (1) such failure or with the enforcement of any term or
condition contained in this Sublease, (2) any costs and expenses incurred
by Sublandlord in maintaining or preserving the Subleased Premises after
such default or preparing the Subleased Premises for reletting to a new
tenant and (3) any repairs or alterations to the Subleased Premises for
such reletting, leasing commissions or any other costs and expenses
necessary or appropriate to relet the Subleased Premises; plus
(v) At Sublandlord's election, such other amounts in
addition to or in lieu of the foregoing as may be permitted from time to
time by applicable law.
As used in clauses (i) and (ii) above, the "worth at the time of award" is
computed by allowing interest at the maximum rate permissible. As used in
clause (iii) above, the "worth at the time of award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank at
the time of award plus 1%.
(d) Notwithstanding anything to the contrary contained in this
Sublease, in the event of default, Sublandlord may, but shall not be
obligated to, require that all articles of personal property and all business
and trade fixtures, machinery and equipment, furniture and movable partitions
owned by Subtenant or installed by Subtenant on the Subleased Premises remain
on the Subleased Premises, and, in that event and continuing during the
length of such default, Sublandlord shall have the rights, subject to the
rights of prior lienholders, to take possession of and hold such property as
security, to store such property at Subtenant's expense and, upon giving
thirty (30) days' notice to Subtenant, to cause such property to be sold at
private or public sale and apply the net proceeds of sale, after all costs
and expenses of getting the property ready for sale and selling the property,
including attorneys' fees and costs, against Subtenant's obligations to
Sublandlord; provided that Sublandlord may, at its option, require Subtenant
to forthwith remove such property.
14
<PAGE>
(e) The remedies given to Sublandlord in this section are
cumulative and shall be in addition and supplemental to all other rights or
remedies which Sublandlord may have under the laws then in force.
(f) Subtenant hereby acknowledges that late payment by Subtenant
of any rent or any other charge, or any part thereof, required to be paid
under this Sublease will cause Sublandlord to incur costs not contemplated by
this Sublease, the exact amount of which will be extremely difficult to
determine. Such costs include but are not limited to processing and
accounting charges and late charges which may be imposed upon Sublandlord by
any lender. Accordingly, if any such amount shall not be received by
Sublandlord when due, then, without any requirement for notice to Subtenant,
Subtenant shall pay a late charge equal to six percent (6%) of each such
overdue amount. The parties hereby agree that this charge represents a fair
and reasonable estimate of the costs Sublandlord will incur by reason of such
late payment. Acceptance of such late charge by Sublandlord shall in no event
constitute a waiver of Subtenant's default with respect to such overdue
amount, nor prevent the exercise of any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder as
Base Rent or Additional Rent, whether or not collected, for three (3)
consecutive installments, then notwithstanding any provision of this Sublease
to the contrary, such amounts shall at Sublandlord's option become due and
payable quarterly in advance.
SECTION 20. WAIVER
The waiver by Sublandlord or Subtenant of any breach of any term,
covenant or condition contained in this Sublease shall not be deemed a waiver
of any subsequent breach of the same or any other term, covenant or condition
contained in this Sublease. Sublandlord's consent to or approval of any of
Subtenant's conduct shall not be deemed to relieve Subtenant from obtaining
Sublandlord's waiver, consent or approval of any similar act or subsequent
breach by Subtenant. Sublandlord's acceptance of rent shall not be deemed to
be a waiver of any prior breach by Subtenant of any term, covenant or
condition, except as to payment of the rent so accepted by Sublandlord,
regardless of Sublandlord's knowledge of such preceding breach at the time of
acceptance of such rent.
SECTION 21. QUIET ENJOYMENT.
Subject to Subtenant's compliance with the covenants and agreements,
terms, provisions and conditions of this Sublease, Sublandlord covenants that
Subtenant shall quietly enjoy the Subleased Premises without interference by
Sublandlord or any person claiming by, through or under Sublandlord.
SECTION 22. BROKERS.
Sublandlord and Subtenant each warrants that it has not dealt with
any real estate broker in connection with this transaction other than BT
Commercial Real Estate representing Subtenant and Tory Corporate Real Estate
Advisors, Inc. (dba The Staubach Company) representing Sublandlord.
Sublandlord shall pay a real estate brokerage fee to The Staubach Company
which shall divide such fee with BT Commercial. No other payment shall be
15
<PAGE>
otherwise payable to either Broker by Sublandlord or Subtenant. Sublandlord and
Subtenant, as the case may be, shall indemnify, defend, and hold the other
harmless against any damages incurred as a result of a breach of the warranty
contained in this Section 22. by such breaching party.
SECTION 23. NOTICES.
All notices and demands that may be required or permitted by either
party to the other will be in writing. All notices and demands to the
Sublandlord and to the Subtenant will be effective when actually delivered to
the party to whom notice is to be given. Addresses for delivery of notices to
the parties are as follows:
If to Sublandlord: Mitsubishi Electronics America,
Inc.
1050 East Arques Avenue
Sunnyvale, CA 94086
Attention: Senior Vice
President-Administration
with a copy to: Legal Department
If to Subtenant: Silicon Image, Inc.
1060 East Arques Avenue
Sunnyvale, CA 94086
Attention: Dan Atler/Chief
Financial Officer
SECTION 24. SUCCESSORS AND ASSIGNS.
This Sublease will be binding on and inure to the benefit of the
parties to it, their heirs, executors, administrators, successors in
interest, and assigns.
SECTION 25. ATTORNMENT.
If the Master Lease terminates, Subtenant will, if requested, attorn
to Master Landlord and recognize Master Landlord as Sublandlord under this
Sublease.
SECTION 26. ENTRY.
Sublandlord reserves the right to enter the Subleased Premises on
reasonable notice to Subtenant to inspect the Subleased Premises or the
performance by Subtenant of the terms and conditions of this Sublease and,
during the last three (3) months of the Term, to show the Subleased Premises
to prospective subtenants. In an emergency, no notice will be required for
entry but Sublandlord will make commercially reasonable efforts to enter only
during business hours and if entry, in Sublandlord's reasonable judgment,
should be made during non-business hours, Sublandlord shall notify Subtenant
of such entry promptly after it has been made. Sublandlord's rights of entry
pursuant to this section may be exercised without Sublandlord being deemed
guilty of an eviction of Subtenant and without abatement of rent. Sublandlord
shall not unreasonably interfere with the business of Subtenant when
exercising the right of entry under this Sublease and shall be responsible
only for damage caused by any unreasonable entry or
16
<PAGE>
negligent conduct during the entry. Except as otherwise provided in this
Sublease, Subtenant hereby waives any claim for damages for any injury or
inconvenience to or interference with Subtenant's business, any loss or
occupancy or quiet enjoyment of the Subleased Premises and any other loss
occasioned thereby. Any entry to the Subleased Premises by Sublandlord
pursuant to this section, whether by force or otherwise, shall not under any
circumstances be construed or deemed to be forcible or unlawful entry into or
a detainer of the Subleased Premises or an eviction of Subtenant from the
Subleased Premises or any portion thereof.
SECTION 27. MISCELLANEOUS.
(a) This Sublease sets forth all the agreements between
Sublandlord and Subtenant concerning the Subleased Premises, and there are no
other agreements either oral or written other than as set forth in this
Sublease.
(b) All payment and indemnification obligations of Subtenant and
Sublandlord, shall survive the expiration or termination of this Sublease. If
Subtenant fails to pay Sublandlord, or vice versa, any amount payable under
this Sublease when due, such amount shall bear interest at the rate of one
and one-half percent (1.5%) per month or the highest rate permitted by law,
whichever is less, from its due date until paid. In addition, Subtenant shall
pay Sublandlord, and vice versa, for all costs of collection, including
attorneys' fees and costs.
(c) Upon the expiration of earlier termination of this Sublease,
Subtenant shall quit or surrender the Subleased Premises to Sublandlord
"broom-clean" and in good order, condition and repair, except for ordinary
wear and tear and casualty damage not caused by Subtenant, or any of its
employees, invitees, guests, agents or contractors.
(d) If Subtenant remains in possession of the Subleased Premises
after the expiration or earlier termination of this Sublease, Subtenant shall
be deemed to be occupying the Subleased Premises as a Subtenant from month to
month at the sufferance of Sublandlord at 150% of the rental rate in effect
at the time of such expiration or termination, subject to all of the terms
and conditions of this Sublease. The foregoing is in addition to and does not
affect Sublandlord's right to entry or any other rights of Sublandlord under
this Sublease.
(e) The language in all parts of this Sublease shall in all cases
be construed simply according to its fair meaning and not strictly for or
against either Sublandlord or Subtenant.
(f) Captions and headings are for convenience only and shall not
be used in interpreting the terms and provisions of this Sublease.
(g) This Sublease cannot be changed orally, but only in a writing
duly executed by the parties.
(h) The enforceability, interpretation and all other aspects of
this Sublease shall be governed by and construed according to the laws of the
State of California.
17
<PAGE>
(i) Each party represents that it has full power and authority to
enter into and perform this Sublease and that the individual executing this
Sublease on its behalf has been duly authorized and empowered to enter into
this Sublease on its behalf.
SECTION 28. CONSENT BY MASTER LANDLORD.
THIS SUBLEASE WILL HAVE NO EFFECT UNLESS CONSENTED TO BY MASTER
LANDLORD WITHIN 30 DAYS AFTER EXECUTION BY SUBLANDLORD AND SUBTENANT. IN
WITNESS WHEREOF, the parties have executed this Sublease as of the date first
above written.
SUBTENANT: SUBLANDLORD:
SILICON IMAGE, INC., MITSUBISHI ELECTRONICS
a Delaware corporation AMERICA, INC., a Delaware
corporation
By: /s/ Dan Atler By: /s/ Richard D. Schulenburg
------------------------------ ------------------------------
Name: Dan Atler Name: Richard D. Schulenburg
------------------------------- ----------------------------
Its: Its: SR VP - Admin. Group
------------------------------- ------------------------------
18
<PAGE>
Exhibit 10.24
SILICON IMAGE, INC.
EXECUTIVE BONUS PLAN FOR
OCTOBER 1, 1999 TO JUNE 30, 2000
OBJECTIVE: Award executive staff members named below for achievement of
revenue growth and profitability.
SUMMARY: Named executive staff members will be eligible to receive a cash
bonus based on a percentage of their then current base salary.
Executives shall receive a bonus of X% of their base salary earned in the
nine-month period ended June 30, 2000. The X% will be determined based on a
matrix of revenue and income from operations to be approved by the
compensation committee of the Board of Directors.
The maximum payout will be equal to 65% of the base salary and the President
will receive an additional 50% of the calculated percentage (if VP payout
will be 20%, the President payout will be 30%).
DISTRIBUTION.
Bonus amounts will be paid as soon as reasonably possible following public
disclosure of the Company's Q2-2000 financial results. Participants must be
employed at the time of the distribution to be eligible for the payment,
unless otherwise determined by the Compensation Committee.
This Executive Bonus Plan may be modified or cancelled, at any time and for
any reason, at the sole discretion and by a majority of the Compensation
Committee. Eligibility for participation in the Executive Bonus Plan is not
evidence nor does it constitute a contract of employment between the Company
and the Named Executive.
This Executive Bonus Plan is not qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended, and is not subject to any provisions
of the Employee Retirement Income Security Act of 1974 ("ERISA").
NAME EXECUTIVE STAFF MEMBERS ARE:
President and CEO - David Lee
Named Executives reporting to the President: Dan Atler, Victor Da Costa,
Parviz Khodi, Jalil Shaikh, Steve Tirado.
Page 1 of 1
<PAGE>
Exhibit 10.25
[LOGO]
SILICON IMAGE, INC.
10131 Bubb Rd.
Cupertino, CA 95014
Ph: (408) 873-3111
Fax: (408) 873-0446
November 18, 1999
Steve Tirado
18052 Center Street
Castro Valley, CA 94546
Re: FIRST YEAR BONUS
Dear Steve:
This letter is to confirm our understanding regarding your bonus for
your first year of employment with Silicon Image, Inc. (the "Company").
Pursuant the Company's offer letter to you dated June 16,
1999, you are eligible for a special cash bonus of up to $25,000 on the
six-month anniversary of your date of hire and an additional $25,000 on the
one-year anniversary of your date of hire, based on your achieving certain goals
agreed to by you and the Company. Since the date of the offer letter, the
Company has adopted an Executive Bonus Plan for October 1, 1999 to June 30, 2000
(the "Bonus Plan"). You and the Company desire that you, like the other
executives, will be eligible for a bonus under the Bonus Plan if it would exceed
the bonus described in your offer letter. To facilitate this determination and
to transition you to the same compensation schedule as the rest of the Company's
executive management team, you and the Company agree that the second sentence of
the third paragraph of your offer letter will be deleted. Instead, you will be
eligible for a bonus determined after June 30, 2000 as the greater of (a) the
amount due to you under the Bonus Plan, or (b) $45,833 (which is equal to the
$50,000 first-year bonus opportunity described in your offer letter, pro-rated
to reflect the 11 months of full-time employment that you will completed as of
June 30, 2000).
Please countersign this letter to indicate your agreement with its
terms.
Very truly yours,
Silicon Image, Inc. Accepted and agreed:
By: /s/ David D. Lee /s/ Steve Tirado
--------------------------------------- ------------------------------
David D. Lee, President and CEO Steve Tirado
1
<PAGE>
Exhibit 10.26
AMENDMENT NO. 1 TO
AMENDED AND RESTATED SEVERANCE AGREEMENT
This Amendment No. 1, dated January 24, 2000, amends a certain Amended
and Restated Severance Agreement dated as of August 15, 1997 by and between
Silicon Image, Inc., a Delaware corporation (the "COMPANY"), and David D. Lee
("EXECUTIVE") (the "RESTATED AGREEMENT").
WHEREAS, the Restated Agreement aimed to enhance Executive's ability to
perform effectively by providing him with employment security; and
WHEREAS, with a view to that purpose, the Restated Agreement provided
certain benefits to Executive during the period that his equity compensation
continued to vest, that is, until December 31, 2000; and
WHEREAS, Executive has since been awarded additional equity
compensation by the Company that is subject to vesting until November 11, 2003;
NOW, THEREFORE, the parties hereto agree as follows:
1. The Restated Agreement is hereby amended to replace the date,
"December 31, 2000" with the date, "December 31, 2003", each place that it
appears (including, without limitation, Sections 3(i), 3(ii), and 7).
2. Except as amended by this Amendment No. 1, the terms of the Restated
Agreement remain in full force and effect.
IN WITNESS WHEREOF, the undersigned parties have executed this
Amendment No. 1 (or have caused this Amendment No. 1 to be executed by their
duly authorized representatives) as of January 24, 2000.
Silicon Image, Inc.
By: /s/ Steve Tirado /s/ David D. Lee
--------------------------------- -----------------------------------
Steve Tirado David D. Lee
Executive Vice President
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-95713) of Silicon Image, Inc. of our report dated
January 27, 2000 relating to the financial statements, which appears in this
Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
March 29, 2000
<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 PAGE 38 AND 39 OF THE SILICON
IMAGE, INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 33,648
<SECURITIES> 24,499
<RECEIVABLES> 4,654
<ALLOWANCES> (101)
<INVENTORY> 765
<CURRENT-ASSETS> 64,789
<PP&E> 3,321
<DEPRECIATION> (1,512)
<TOTAL-ASSETS> 67,501
<CURRENT-LIABILITIES> 9,409
<BONDS> 0
0
0
<COMMON> 26
<OTHER-SE> 57,538
<TOTAL-LIABILITY-AND-EQUITY> 67,501
<SALES> 20,669
<TOTAL-REVENUES> 21,244
<CGS> 7,985
<TOTAL-COSTS> 7,985
<OTHER-EXPENSES> 21,956
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (174)
<INCOME-PRETAX> (7,621)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,621)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,621)
<EPS-BASIC> (0.75)
<EPS-DILUTED> (0.75)
</TABLE>
