<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________________to__________________.
Commission file number __________.
NOGATECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0525268
(State of Incorporation) (I.R.S. Employer Identification No.)
5201 GREAT AMERICA PARKWAY
SANTA CLARA, CALIFORNIA 95054
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (408) 562-6200
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 the number of each of the issuer's classes of common stock, as of
the latest practicable date.
Title of Each Class Outstanding at July 31, 2000
------------------- ----------------------------
Common Stock, par value $0.001 per share 15,094,671
<PAGE>
NOGATECH, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements........................................................................... 3
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999................ 3
Condensed Consolidated Statements of Operations for the Three Months
Ended June 30, 2000 and 1999 and for the Six Months Ended June 30, 2000
and 1999....................................................................................... 4
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the Three Months Ended June 30, 2000 and 1999 and for the Six
Months Ended June 30, 2000 and 1999............................................................ 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999......................................................................... 7
Notes to Condensed Consolidated Financial Statements, June 30, 2000............................ 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 20
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 21
Item 2. Changes in Securities and Use of Proceeds...................................................... 21
Item 3. Defaults upon Senior Securities................................................................ 21
Item 4. Submission of Matters to a vote of Security Holders............................................ 21
Item 5. Other Information.............................................................................. 21
Item 6. Exhibits and Reports on Form 8-K............................................................... 21
SIGNATURES.............................................................................................. 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOGATECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------------- ------------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 46,521 $ 2,475
Trade accounts receivable 2,132 1,019
Inventories 1,805 2,109
Other current assets 425 366
----------------- ------------------
Total current assets 50,883 5,969
Fixed assets 422 352
Other assets 292 256
----------------- ------------------
$ 51,597 $ 6,577
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 1,693 $ 1,967
Other accounts payable 983 891
----------------- ------------------
Total current liabilities 2,676 2,858
Employee rights upon retirement 462 362
Series A redeemable convertible preferred stock,
at redemption value - 8,243
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Common stock 16 1
Additional paid-in capital 63,719 6,157
Note receivable from a stockholder - (57)
Deferred compensation (193) (392)
Accumulated deficit (15,083) (10,595)
----------------- ------------------
Total stockholders' equity (capital deficiency) 48,459 (4,886)
----------------- ------------------
$ 51,597 $ 6,577
================= ==================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE>
NOGATECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Sales $ 3,043 $ 1,953 $ 5,988 $ 2,823
Cost of sales 1,746 1,167 3,407 1,685
--------------- -------------- -------------- ---------------
Gross profit 1,297 786 2,581 1,138
OPERATING EXPENSES:
Research and development 637 520 1,322 1,108
Sales and marketing 375 511 665 894
General and administrative 386 183 590 378
--------------- -------------- -------------- ---------------
Total operating expenses 1,398 1,214 2,577 2,380
Operating income (loss) (101) (428) 4 (1,242)
Other income, net 342 9 330 6
--------------- -------------- -------------- ---------------
Net income (loss) 241 (419) 334 (1,236)
Charge for beneficial conversion
feature of series B preferred stock - - (4,570) -
Accretion of redemption value of
series A redeemable convertible
preferred stock (87) (107) (252) (214)
---------------- -------------- -------------- ---------------
Net income (loss) applicable to
common stock $ 154 $ (526) $(4,488) $(1,450)
================ ============== ============== ===============
Net income (loss) per share of
common stock - Basic and diluted $ 0.02 $ (1.69) $ (1.13) $ (4.66)
================ ============== ============== ===============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE>
NOGATECH, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTE
ADDITIONAL RECEIVABLE
COMMON STOCK PAID-IN FROM A DEFERRED ACCUMULATED
NUMBER AMOUNT CAPITAL STOCKHOLDER COMPENSATION DEFICIT TOTAL
----------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2000
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 2000 728,040 $1 $11,024 $(343) $(15,237) $(4,555)
Issuance of common stock in connection
with stock options and warrants exercised 1,573,321 2 1,946 1,948
Amortization of deferred compensation
related to stock option grants 150 150
Accretion to redemption value of series A
redeemable convertible preferred stock (87) (87)
Issuance of common stock in IPO, net of
issuance costs 3,500,000 4 37,263 37,267
Conversion of series A and B redeemable
convertible preferred stock into
common stock 9,293,310 9 13,486 13,495
Net income 241 241
----------------------------------------------------------------------------------
Balance at June 30, 2000 15,094,671 $16 $63,719 $(193) $(15,083) $48,459
==================================================================================
THREE MONTHS ENDED JUNE 30, 1999
Balance at April 1, 1999 310,995 $ 1 $ 5,882 $(57) $(243) $ (9,996) $(4,413)
Amortization of deferred compensation
related to stock option grants 28 28
Accretion to redemption value of series A
redeemable convertible preferred stock (107) (107)
Net loss (419) (419)
----------------------------------------------------------------------------------
Balance at June 30, 1999 310,995 $ 1 $ 5,882 $(57) $(215) $(10,522) $(4,911)
==================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE>
NOGATECH, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTE
ADDITIONAL RECEIVABLE
COMMON STOCK PAID-IN FROM A DEFERRED ACCUMULATED
NUMBER AMOUNT CAPITAL STOCKHOLDER COMPENSATION DEFICIT TOTAL
----------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2000
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 (audited) 419,370 $1 $6,157 $(57) $(392) $(10,595) $(4,886)
Issuance of common stock in connection
with stock options and warrants exercised 1,881,991 2 2,550 2,552
Deferred compensation related to employee
stock option grants 35 (35) -
Deferred compensation related to employee
stock option forfeited (40) 40 -
Repayment of note receivable from a
stockholder 57 57
Amortization of deferred compensation
related to stock option grants 194 194
Accretion to redemption value of series A
redeemable convertible preferred stock (252) (252)
Beneficial conversion feature - relating to
series B convertible preferred stock 4,570 (4,570) -
Issuance costs related to series B redeemable
convertible preferred stock issued (302) (302)
Issuance of common stock in IPO, net of
issuance cost 3,500,000 4 37,263 37,267
Conversion of series A and B redeemable
convertible preferred stock into common stock 9,293,310 9 13,486 13,495
Net income 334 334
----------------------------------------------------------------------------------
Balance at June 30, 2000 (unaudited) 15,094,671 $16 $63,719 - $(193) $(15,083) $48,459
==================================================================================
SIX MONTHS ENDED JUNE 30, 1999
Balance at January 1, 1999 (audited) 310,995 $1 $5,882 (57) (271) $ (9,072) $(3,517)
Amortization of deferred compensation
related to stock option grants 56 56
Accretion to redemption value of Series A
redeemable convertible preferred stock (214) (214)
Net loss (1,236) (1,236)
----------------------------------------------------------------------------------
Balance at June 30, 1999 (unaudited) 310,995 $1 $5,882 $(57) $(215) $(10,522) $(4,911)
==================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
6
<PAGE>
NOGATECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 334 $(1,236)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Employee rights upon retirement 64 46
Depreciation and amortization 76 54
Compensation relating to stock options 194 56
Changes in operating asset and liability items:
(Increase) in accounts receivable:
Trade (1,113) (408)
Other (59) (93)
Decrease (increase) in inventories 304 (367)
Increase (decrease) in accounts payable:
Trade (274) 944
Other 92 (51)
------------------ ----------------
Net cash used in operating activities (382) (1,055)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of fixed assets (146) (136)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock in IPO, net of issuance costs of
$4,733 37,267
Repayment of note receivable from a stockholder 57
Issuance of series B redeemable convertible preferred stock,
net of issuance costs of $302 4,698
Issuance of common stock in connection with stock options and
warrants exercised 2,552
Receipt of short-term credit 74
------------------ ----------------
Net cash provided by financing activities 44,574 74
Increase (decrease) in cash and cash equivalents 44,046 (1,117)
Balance of cash and cash equivalents at
beginning of period 2,475 3,791
------------------ ----------------
Balance of cash and cash equivalents at
end of period $46,521 $2,674
================== ================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
7
<PAGE>
NOGATECH, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements of
Nogatech, Inc. (the "Company" or "Nogatech") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instruction to form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six months ended June 30, 2000, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000.
NOTE B - INVENTORIES
Inventories are recorded at the lower of cost or market value. Cost is
determined using a "first-in, first out" basis method. The Company periodically
evaluates the quantities on hand relative to current and historical selling
prices and historical and projected sales volume. Based on these evaluations,
provisions are made in each period to write inventory down to its net realizable
value. Inventories are composed of the following (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Finished goods 1,070 1,266
Raw materials 735 843
----- -----
1,805 2,109
===== =====
</TABLE>
NOTE C - NET INCOME (LOSS) PER SHARE OF COMMON STOCK
Basic net income (loss) per share of common stock is computed based on the
weighted average number of shares of common stock outstanding during the period.
For the same period, diluted net income (loss) per share of common stock further
includes the effect of dilutive stock options outstanding during the year, all
in accordance with the Financial Accounting Standards Board Statement No. 128,
"Earnings per Share" ("SFAS 128"). The following table sets forth the
computation of basic and diluted net income (loss) per share of common stock (in
thousands of U.S. dollars, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NUMERATOR:
Net income (loss) applicable to common stock-
numerator for basic net income (loss) per share
of common stock 154 (526) (4,488) (1,450)
Deemed dividend for beneficial conversion feature
of preferred stock - - 4,570 -
Accretion of redemption value of series A
redeemable convertible preferred stock 87 107 252 214
--- ----- ------ -------
Numerator for diluted net income (loss) per share
of common stock 241 (419) 334 (1,236)
=== ===== ====== =======
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
DENOMINATOR:
Denominator for basic net income (loss) per share
of common stock - weighted average number of
shares of common stock 7,378,329 310,995 3,974,443 310,995
Incremental shares from assumed conversions:
Series A and B redeemable convertible
preferred stock 4,799,842 8,609,783 6,989,615 8,609,783
Stock options 1,883,137 807,936 2,149,072 792,482
---------- ---------- ---------- ----------
Denominator for diluted net income (loss) per
share of common stock - adjusted weighted
average number of shares 14,061,308 9,728,714 13,113,130 9,713,260
========== ========== ========== ==========
</TABLE>
NOTE D - CONTINGENCIES
We are involved in certain claims arising in the normal course of business. We
are unable to foresee the extent to which these matters will be pursued by the
claimants or predict with certainty the eventual outcome. However, we believe
that the ultimate resolution of these matters will not have a material adverse
effect on our financial position, results of operations or cash flow.
By letter dated June 27, 2000, the Company received a demand from a former
customer of the Company for the return of $392,400 as an avoidable
preference pursuant to 11 U.S.C. Section 547 of the United States Bankruptcy
Code. The law firm of Kornfield, Paul, Bupp and Nyburg of Oakland, California
is reviewing this matter for the Company. The Company believes it has
received this amount in the normal course of business and without any
preference and accordingly has not set aside any reserve for this matter at
this time.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE DISCUSSION IN THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT THAT
ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS
REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES
REGARDING THE FUTURE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE
HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH
FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "FACTORS AFFECTING FUTURE RESULTS" AS WELL AS THOSE DISCUSSED IN
THIS SECTION AND ELSEWHERE IN THIS REPORT, AND THE RISKS DISCUSSED IN THE
COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS.
RESULTS OF OPERATIONS
SALES. Our sales increased approximately 56%, from $2.0 million in the second
quarter of 1999 to $3.0 million in the second quarter of 2000. This increase
primarily reflects the increase in unit sales of our NT1003 chip, on both a
stand-alone basis and as incorporated in our video devices.
COST OF SALES. Our cost of sales consists of component costs, warranty costs,
royalties and overhead related to manufacturing our products. Cost of sales
increased from $1.2 million in the second quarter of 1999 to $1.7 million in the
second quarter of 2000. This increase was primarily due to increased shipments
of our products. Gross margins were 43% in the second quarter of 2000 and 40% in
the second quarter of 1999. The increase was primarily due to our higher margin
video compression chip business and to our technology development related
business this quarter.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses consist
of personnel, equipment, software tools and supplies for our research and
development activities. Substantially all of our research and development
activities occur in our facility in Israel. These expenses are charged to
operations as incurred. Our research and development expenses increased from
$520,000 in the second quarter of 1999 to $637,000 in the second quarter of
2000. The increase was primarily due to increased levels of research and
development activities and related cost of personnel.
Research and development expenses as a percentage of sales were 21% for the
second quarter of 2000 and 27% for the second quarter of 1999. The decrease as a
percentage of sales was due to a substantial increase in sales in the second
quarter of 2000 compared to the second quarter of 1999. We believe that
significant investment in research and development is essential to our future
success. We plan to increase our research and development activities, including
recruiting and hiring additional personnel, and we expect to incur non-recurring
engineering expenses associated with the manufacture of our next generation
chips, which will result in increased expenses in absolute dollars.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses consist of
salaries and related costs of sales and marketing, employees, consulting fees,
and expenses for travel and promotional activities. Sales and marketing expenses
decreased from $511,000 in the second quarter of 1999 to $375,000 in the second
quarter of 2000. The decrease was attributable to our transition to an OEM
business in the second quarter of 2000. Sales and marketing expenses as a
percentage of sales decreased from 26% in the second quarter of 1999 to 12% in
the second quarter of 2000. The decrease as a percentage of sales was also due
to the transition into the OEM business, which involves lower advertising
expenses and fewer sales people, as well as the substantial increase in sales in
the second quarter of 2000 compared to the second quarter of 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative expenses
consist primarily of personnel and related costs for general corporate
functions, including finance, accounting, strategic and business development,
human resources, investor relations, director and officer insurance and legal
expenses. General and administrative expenses increased from $183,000 in the
second quarter of 1999 to $386,000 in the second quarter of 2000. The increase
was primarily due to expenses related to our operations as a public company and
amortization of deferred compensation related to stock options. General and
administrative expenses as a percentage of sales increased from 9% in the second
quarter of 1999 to 13% in the second quarter of 2000. The increase as a
percentage of sales was due to expenses related to our operations as a public
company and amortization of deferred compensation related to stock options.
10
<PAGE>
OTHER INCOME. Other income consists of interest earned on cash and cash
equivalents. Net interest income was $9,000 in the second quarter of 1999 and
$342,000 in the second quarter of 2000. The increase was mainly due to interest
earned on the net proceeds of approximately $37.5 million raised in our May 2000
initial public offering.
INCOME TAXES. As of June 30, 2000, we had approximately $2.1 million
(unaudited) of Israeli net operating loss carryforwards, approximately $4.8
million (unaudited) of U.S. federal tax net operating loss carryforwards and
approximately $1.3 million (unaudited) of state net operating loss
carryforwards. The Israeli net operating loss carryforwards have no
expiration date. The U.S. net operating loss carryforwards expire in various
amounts between the years 2004 and 2019.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the period of six months ended June 30, 2000, we
incurred a loss of $382,000 in cash and cash equivalents from our operating
activities as compared to a loss of $1.0 million in the six month period ended
June 30, 1999. This decrease is mainly due to a profit of $334,000 for the six
month period ended June 30, 2000, compared to a loss of $1.2 million for the six
month period ended June 30, 1999.
INVESTING ACTIVITIES. We invest excess cash in short-term cash deposits of
varying maturity, depending on our projected cash needs. Our capital equipment
purchases in the six months ended June 30, 2000, consisting primarily of
research and development software and computers, totaled $146,000.
FINANCING ACTIVITIES. On May 23, 2000, we closed our initial public offering of
3.5 million shares. Net proceeds from the sale of the shares were approximately
$37.5 million. On January 15, 2000, we closed a private placement with Nomura
International plc. Net proceeds from this transaction were approximately $4.7
million.
We believe that our current cash and cash equivalents will be sufficient to meet
our cash requirements through at least the next twelve months. In addition, as
part of our business strategy, we occasionally evaluate potential acquisitions
of businesses, products and technologies. Accordingly, a portion of our
available cash may be used at any time for the acquisition of complementary
products or businesses. Such potential transactions may require substantial
capital resources, which may require us to seek additional debt or equity
financing. There can be no assurance that we will consummate any such
transactions.
FACTORS AFFECTING FUTURE RESULTS
EFFECTIVE CORPORATE TAX RATE
Our tax rate will reflect a mix of the U.S. federal and state tax on our U.S.
income and Israeli tax on non-exempt income. The majority of our Israeli
subsidiary's income is derived from our capital investment program with
"Approved Enterprise" status under the Israeli Law for the Encouragement of
Capital Investments-1959, and therefore is eligible for certain tax benefits.
Under these benefits, we will enjoy a tax exemption on income derived during the
first four years in which this investment program produces taxable income,
provided that our Israeli subsidiary does not distribute this income to us as a
dividend, and reduced tax rates of 10% to 15% for the remaining term of the
program. All of these tax benefits are subject to various conditions and
restrictions. Since we have incurred tax losses through June 30, 2000, we have
not yet used tax benefits for which we are eligible.
In May 2000, a special committee appointed by the Israeli Minister of Finance
issued a report relating in part to taxes to which we are subject. Although the
recommendations set forth in the report have been accepted by the Israeli
government, they will not be binding unless and until they are adopted by the
Israeli Parliament. Any legislation that may be enacted as a result of this
report is not expected to take effect until at least January 1, 2001. In
addition, substantial changes, which may be beneficial or adverse to us, may be
made to the recommendations set forth in the report before these recommendations
are enacted into law. If, however, the recommendations in the report are adopted
without further modifications, there would be two primary effects upon the tax
laws to which we are subject: (i) the exemption that we enjoy for income on our
Israeli subsidiary that is not distributed as a dividend would be revoked, and
this undistributed income would initially be taxed at the reduced rate of 10%;
and (ii) after the initial period of reduced taxation, the income of our Israeli
subsidiary would generally be subject to the standard 25% rate of income tax
applicable to Approved Enterprise companies.
YEAR 2000 ISSUES
We are not currently aware of any Year 2000 problems in any of our critical
systems and products. However, the success to date of our Year 2000 efforts
cannot guarantee that a Year 2000 problem affecting third parties upon which we
rely will not become apparent in the future and interfere with our operations or
otherwise harm our business.
11
<PAGE>
OUR SALES WILL BE REDUCED IF WE ARE UNABLE TO KEEP PACE WITH TECHNOLOGICAL
CHANGES.
The emerging video compression and video image processing industry is
characterized by:
- rapidly changing technologies;
- frequent new product introductions; and
- rapid changes in customer requirements.
Video compression and video image processing technologies have reached
commercially acceptable levels only in the last several years and continue to
experience numerous changes. As a result, we must be able to sell products that
incorporate the technological advances in our industry in order to ensure that
they remain commercially viable.
Our future success will depend on our ability to enhance our existing
products and to develop and introduce new products and product features. These
products and features must be cost-effective and keep pace with technological
developments and address the increasingly sophisticated needs of our customers.
We may not be successful at these tasks. We may also experience difficulties
that could delay or prevent the successful development, introduction and
marketing of these new products and features. In either case, our sales would be
reduced.
WE MAY NOT BE ABLE TO TIMELY ADOPT EMERGING INDUSTRY STANDARDS, WHICH MAY MAKE
OUR PRODUCTS UNACCEPTABLE TO POTENTIAL CUSTOMERS, DELAY OUR PRODUCT
INTRODUCTIONS OR INCREASE OUR COSTS.
Our products must comply with a number of current industry standards and
practices established by various international bodies. Our failure to comply
with evolving standards, including video compression and computer interface
standards, will limit acceptance of our products by market participants. In
particular, the MPEG-4 standard is becoming the primary standard for PC
applications requiring video compression, but we have not yet completed our
development of any products that are based upon MPEG-4. Although we expect to
introduce products based upon MPEG-4 during the second half of 2001, we may not
succeed in doing so either within that time frame, or at all. If new standards
are adopted in our industry, we may be required to adopt those standards in our
products. It may take us a significant amount of time to develop and design
products incorporating these new standards, and we may not succeed in doing so.
We may also become dependent upon products developed by third parties and have
to pay royalty fees, which may be substantial, to the developers of the
technology that constitutes the newly adopted standards.
IF WE DO NOT DEVELOP NEW PRODUCTS OR NEW PRODUCT FEATURES IN RESPONSE TO
CUSTOMER REQUIREMENTS OR IN A TIMELY WAY, CUSTOMERS MAY NOT BUY OUR PRODUCTS.
Our customers' products tend to have short life cycles, which require both
them and us to design and introduce new products within a relatively limited
period of time. We must, therefore, coordinate our sales cycle with the
sales and development cycles of our customers. If we experience development,
design or manufacturing difficulties that delay or prevent our timely
introduction or marketing of a new chip, we would miss the opportunity to
have the chip incorporated into a customer's new product, which would cause
us to lose sales.
12
<PAGE>
WE RELY UPON OUR SALES OF A SMALL NUMBER OF PRODUCTS, AND THE FAILURE OF ANY ONE
OF OUR PRODUCTS TO BE SUCCESSFUL IN THE MARKET COULD SUBSTANTIALLY REDUCE OUR
SALES.
We currently rely upon sales from two products, our NT1003 and NT1004
chips, to generate most of our sales. Sales of these products amounted to 41%
of our sales in 1999, and 54% of our sales in the six months ended June 30,
2000. We are developing additional chips, but there can be no assurance that
we will be successful in doing so. Consequently, if our existing products are
not successful, our sales could decline substantially, which would adversely
affect our financial performance, and could cause us to incur significant
losses.
THE LOSS OF ANY OF OUR LARGE CUSTOMERS, OR THE FAILURE OF ONE OF THESE CUSTOMERS
TO SELL A SUBSTANTIAL AMOUNT OF ITS PRODUCTS INCORPORATING OUR CHIPS, COULD
SUBSTANTIALLY REDUCE OUR SALES.
Historically, a substantial portion of our sales has come from purchases by
a few large customers. We expect this trend to continue. For example, our top
three customers accounted for approximately 51% of our sales in 1999, and 53% of
our sales in the six months ended June 30, 2000. Accordingly, our future
operating results depend on the ability of our largest customers to sell
products incorporating our chips and on our success in selling large quantities
of our products to them. We have not entered into long-term agreements with any
of our customers, nor have we obtained their commitment to purchase any specific
quantities of our products. Our customers may cancel or reschedule orders on
short notice or may discontinue using our products at any time. If we lose a
large customer and fail to add new customers to replace lost sales, our
operating results may not recover.
The concentration of our sales with a few customers makes us particularly
dependent on commercial factors affecting those customers. For example, if
demand for their products decreases, or if they identify alternative sources for
our chips, they may stop purchasing our products and our operating results will
suffer. These customers often have the resources to design and/or manufacture
products like ours internally, and if they elect to do so, they may cease to do
business with us. Additionally, if our target markets undergo a consolidation,
we may lose existing customers or have difficulties in obtaining new ones.
WE RELY ON OTHERS TO MANUFACTURE OUR CHIPS AND THEREFORE HAVE ONLY A LIMITED
ABILITY TO CONTROL MANUFACTURING COSTS, CHIP DELIVERY SCHEDULES OR MANUFACTURING
QUALITY.
Our chips are manufactured and tested by subcontractors located in Korea and
Japan, each of which provides a single type of chip. An affiliate of Hyundai in
Korea manufactures our NT1003 chip, and an affiliate of Fujitsu in Japan
manufactures our NT1004 chip. As a result of our reliance on subcontractors, we
cannot directly control chip delivery schedules. Recently, chip fabricating
subcontractors have not had sufficient capacity to keep up with chip fabrication
demand. This has led to longer chip manufacturing cycles and longer lead times
on orders. Any problems that occur and persist in connection with the delivery,
quality or costs of assembly of our chips could cause us to lose customers or
increase the expenses that we incur. Our reliance on subcontractors could lead
to product shortages or quality assurance problems. In addition, these
manufacturers could significantly increase the prices that they charge us, and
we may be unable to obtain alternative sources of supplies. We may need to hold
more inventory than is immediately required to compensate for potential
component shortages or discontinuation. These factors could lead to an increase
in the costs of manufacturing or assembling our chips.
We are in the process of qualifying additional subcontractors in order to
satisfy the demand for our products. However, qualification of new
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subcontractors will require a significant period of time. Therefore, we may not
be able to obtain new subcontractors within a period of time that is sufficient
to respond to the needs of our customers.
WE ACCUMULATE INVENTORY TO MINIMIZE THE IMPACT OF SHORTAGES FROM MANUFACTURERS,
AND MAY HAVE OBSOLETE INVENTORY THAT WE HAVE TO WRITE OFF AND SUFFER RESULTING
LOSSES.
Managing our inventory is complicated by fluctuations in the demand for our
products; however, we must have sufficient quantities of our products available
to satisfy our customers' demand. As a result, we generally accumulate inventory
for a period of time to minimize the impact of undercapacity at our suppliers'
plants. Although we expect to sell the inventory within a short period of time,
products may remain in inventory for extended periods of time and may become
obsolete because of the passage of time and the introduction of new products. In
these situations, we would be required to write off obsolete inventory and would
suffer losses accordingly.
OUR INABILITY TO MANAGE EFFECTIVELY OUR RECENT GROWTH, AND OUR EXPECTED
CONTINUING INCREASED GROWTH, COULD INCREASE OUR COSTS AND IMPAIR OUR ABILITY TO
MAINTAIN OR INCREASE OUR CUSTOMER BASE.
The growth in our business has placed, and is expected to continue to place,
a significant strain on our management and operations. To manage our growth, we
must continue to implement and improve our operational, financial and management
information systems and expand, train and manage our employees. We may not have
made adequate allowances for the costs and risks associated with this expansion,
and our systems, procedures or controls may not be adequate to support our
operations. Our failure to manage growth effectively could cause us to incur
substantial additional costs, lose opportunities to generate sales or impair our
ability to maintain our customers.
WE RELY ON A SINGLE DISTRIBUTOR FOR MOST OF OUR SALES IN JAPAN, AND THE LOSS OF
THIS DISTRIBUTOR COULD SUBSTANTIALLY REDUCE OUR SALES.
Our future performance depends on our ability to compete successfully in
Japan, where all of our sales to date have been made through a single
distributor, Tomen Electronics Corporation. Tomen owns approximately 8.5% of
our common stock. We do not have a distribution agreement with Tomen, and
Tomen could terminate its relationship with us at any time. In addition,
Tomen is free to distribute the products of our competitors as well as our
products, and it is not required to maintain any minimum sales levels. The
loss of our relationship with Tomen, or any inability or failure by Tomen to
sell our products, could substantially reduce our sales. In addition, we may
not succeed in attracting new distributors for the Japanese market or in
replacing Tomen in the event that we do not continue our relationship.
WE DEPEND ON A LIMITED NUMBER OF KEY PERSONNEL, IN PARTICULAR NATHAN HOD, OUR
CHAIRMAN, AND ARIE HEIMAN, OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, AND THE
LOSS OF ANY OF THEIR SERVICES COULD ADVERSELY AFFECT OUR FUTURE GROWTH AND
PROFITABILITY AND COULD SUBSTANTIALLY INTERFERE WITH OUR OPERATIONS.
Because our products are complex and our market is new and evolving, the
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success of our business depends in large part upon the continuing contributions
of our management and technical personnel. The loss of the services of several
of our key officers, including Nathan Hod, our Chairman of the Board, and Arie
Heiman, our President and Chief Executive Officer, could adversely affect our
future growth and profitability and could substantially interfere with our
operations. Our dependence upon these officers is increased by the fact that
they are responsible for our sales and marketing efforts, as well as our overall
operations. We do not have key person life insurance policies covering any of
our employees other than Arie Heiman. The insurance coverage that we have on Mr.
Heiman is likely to be insufficient to compensate us for any loss of his
services.
WE WILL NOT INCREASE OUR SALES OR GROW OUR BUSINESS IF WE ARE UNABLE TO ATTRACT,
TRAIN AND RETAIN QUALIFIED ENGINEERS AND SALES AND MARKETING AND TECHNICAL
SUPPORT PERSONNEL.
We will need to hire additional engineers and highly trained technical
support personnel in order to succeed. We will need to increase our technical
staff to support new customers and the expanding needs of existing customers, as
well as our continued research and development operations. We will need to hire
additional sales and marketing personnel to target our potential customers.
Hiring engineers and sales and marketing and technical support personnel is very
competitive in our industry because of the limited number of people available
with the necessary skills and understanding of our products. This is
particularly true in Israel and California, where the competition for qualified
personnel is intense. If we are unable to hire and retain necessary personnel,
our business will not develop, we may lose customers and we may incur
substantial losses.
IF WE FAIL TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY, IT MAY BE
MISAPPROPRIATED BY OTHERS, INVALIDATED OR CHALLENGED, WHICH WOULD MATERIALLY
HARM OUR ABILITY TO SELL OUR PRODUCTS.
Our success and ability to compete depend primarily upon our proprietary
technology. We rely on a combination of trade secrets, copyright and trademark
laws, nondisclosure and other contractual agreements and technical measures to
protect our proprietary rights. Currently, we have three U.S. patents pending
that relate to our video technology. However, we have not obtained patent
protection for our proprietary algorithms, and the absence of patent protection
may increase the risk that those algorithms will be misappropriated.
We are subject to a number of risks relating to intellectual property
rights, including the following:
- the means by which we seek to protect our proprietary rights may not be
adequate to prevent others from misappropriating our technology or from
independently developing or selling technology or products with features
based on or similar to ours;
- our products may be sold in foreign countries that provide less protection
to intellectual property than is provided under U.S., Japanese or Israeli
laws;
- our intellectual property rights may be challenged, invalidated, violated
or circumvented and may not provide us with any competitive advantage; and
- our patents pending may not be approved or may be only partially approved.
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IF OUR PROPRIETARY TECHNOLOGY INFRINGES UPON THE INTELLECTUAL PROPERTY RIGHTS OF
OTHERS, OUR COSTS COULD INCREASE AND OUR ABILITY TO SELL OUR PRODUCTS COULD BE
LIMITED.
Other companies may hold or obtain patents or may otherwise claim
proprietary rights to technology that is necessary to our business. Particular
aspects of our technology could be found to violate the intellectual property
rights of other parties. The resulting risks include the following:
- if we violate the intellectual property rights of other parties, we may be
required to modify our products or intellectual property or to obtain a
license to permit their continued use; and
- any future litigation to defend us against allegations that we have
infringed upon the rights of others could result in substantial costs to
us, even if we ultimately prevail.
There are a number of companies that hold patents for various aspects of the
technology incorporated in our industry's standards. We expect that companies
seeking to gain competitive advantages will increase their efforts to enforce
any patent rights that they may have. The holders of patents from which we have
not obtained licenses may take the position that we are required to obtain a
license from them. We cannot be certain that we would be able to negotiate any
license at an acceptable price. Our inability to do so could substantially
increase our operating expenses or require us to seek and obtain alternative
sources of technology necessary to produce our products.
WE HAVE ONLY RECORDED NET INCOME DURING THE LAST FOUR QUARTERS, AND MAY NOT
BE PROFITABLE IN THE FUTURE.
As of June 30, 2000, we had an accumulated deficit of $15.1 million. Our
sales may not grow or even continue at their current level. Although we have
recorded net income for the last four quarters, if our sales do not increase
or if our expenses increase at a greater pace than our sales, we will not
remain profitable. In addition, we recognized a beneficial conversion charge
of $4.6 million in the first three months of 2000 on account of our issuance
of Series B preferred stock, which increased our net loss applicable to our
common stock in that period, and which will adversely affect our operating
results during the fiscal year ending December 31, 2000. Any losses that we
incur could be substantial.
WE ARE SUBJECT TO RISKS FROM INTERNATIONAL SALES, INCLUDING THE RISK
THAT THE PRICES OF OUR PRODUCTS MAY BECOME LESS COMPETITIVE BECAUSE OF
FOREIGN EXCHANGE FLUCTUATIONS.
Sales to customers located outside the U.S. accounted for a substantial
portion of our total sales. We expect that international sales will continue
to be significant. International sales are subject to a variety of risks,
including risks arising from currency fluctuations, trading restrictions,
tariffs, trade barriers and taxes.
Because most of our sales are denominated in dollars, our products become
less price competitive in countries with currencies that are low or are
declining in value against the dollar. In addition, our international
customers may not continue to place orders denominated in dollars. If they
do not, our reported sales and earnings will be subject to foreign exchange
fluctuations.
WE MAY EXPERIENCE FLUCTUATIONS IN OUR FUTURE OPERATING RESULTS, WHICH WILL MAKE
PREDICTING OUR FUTURE RESULTS DIFFICULT.
Historically, our quarterly and annual operating results have varied
significantly from period to period, and we expect that they will continue to
do so. These fluctuations result from a variety of factors, including:
- market acceptance of our products, including changes in order flow
from our largest customers, and our customers' ability to forecast
their needs;
- the timing of new product announcements by us and our competitors,
such as chips that are compatible with the MPEG-4 standard;
- the lengthy sales cycle of our products;
- increased competition between chip manufacturers, including changes
in pricing by us or our competitors; and
- delays in deliveries by our limited number of suppliers and
subcontractors.
In addition, we expect that our revenues will be higher in the last two
quarters of each fiscal year than in the first two fiscal quarters of each
fiscal year, because our customers tend to purchase greater quantities of
components such as chips towards the end of each year. Accordingly, any sales
or net income in any particular period may be lower than our sales and net
income in a preceding or comparable period. Period-to-period comparisons of
our results of operations may not be meaningful, and you should not rely upon
them as indications of our future performance. In addition, our operating
results may be below the expectations of securities analysts and investors in
future periods. Our failure to meet these expectations will likely cause our
share price to decline.
OUR STOCK PRICE MAY BE VOLATILE
Announcements of developments related to our business, announcements by
competitors, quarterly fluctuations in our financials results, changes in the
general conditions of the highly dynamic industry in which we compete or the
national economies in which we do business and other factors could cause the
price of our common stock to fluctuate, perhaps substantially.
OUR PRODUCTS COULD CONTAIN DEFECTS, WHICH COULD RESULT IN DELAYS IN
RECOGNITION OR LOSS OF SALES, LOSS OF MARKET SHARE OR MARKET ACCEPTANCE, OR
CLAIMS AGAINST US.
We develop complex chips and related software for video compression and
video image processing. Despite testing by our subcontractors and our
customers, errors may be found in our existing or future products. This
could result in, among other things, a delay in recognition or loss of
sales, loss of market share, failure to achieve market acceptance or
substantial damage to our reputation. We could be subject to material claims
by customers, and we may need to incur substantial expenses to correct any
product defects. We do not have product liability insurance to protect us
against losses caused by defects in our products, and we do not have "errors
and omissions" insurance. As a result, any payments that we may need to
make to satisfy our customers may be substantial.
FUTURE ACQUISITIONS BY US COULD DIVERT SUBSTANTIAL MANAGEMENT
RESOURCES, GIVE RISE TO UNKNOWN OR UNANTICIPATED LIABILITIES AND LEAD TO
ADVERSE MARKET CONSEQUENCES FOR OUR STOCK.
We may acquire or make substantial investments in other companies or
businesses in order to maintain our technological leadership or to obtain
other commercial advantages. Identifying and negotiating these transactions
may divert substantial management resources. An acquisition could require us
to expend substantial cash resources, to incur or assume debt obligations, or
to issue additional common or preferred stock. These additional equity
securities could dilute existing stockholders, and could have rights that are
senior to or greater to our common stock. We have no experience in making
acquisitions and we may not be successful in executing an acquisition
transaction or integrating an acquired entity into our operations. An
acquisition could involve significant one-time non-cash write offs, or could
involve the amortization of goodwill over a number of years, which would
adversely affect earnings in those years. Acquisitions outside our current
business may be viewed by market analysts as a diversion of our focus. For
these and other reasons, the market for our stock may react negatively to the
announcement of any acquisition. An acquisition will continue to require
attention from our management to integrate the acquired entity into our
operations, may require us to develop expertise in fields outside our current
area of focus, and may result in departures of management of the acquired
entity. An acquired entity may have unknown liabilities, and its business
may not achieve the results anticipated at the time of the acquisition.
IF VIDEO COMPRESSION TECHNOLOGY OR OUR IMPLEMENTATION OF THIS TECHNOLOGY IS
NOT ACCEPTED, WE WILL NOT BE ABLE TO SUSTAIN OR EXPAND OUR BUSINESS.
Our future success depends on the growing use and acceptance of video
applications for PCs, including the growth of video on the Internet. The
market for these applications is new and is still evolving, and may not
develop to the extent necessary to enable us to expand our business. We have
recently invested and expect to continue to invest significant time and
resources in the development of new products for this market. Our dependence
on sales of chips and lack of product diversification
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exposes us to a substantial risk of loss in the event that the video
compression market does not develop or if a competing technology replaces our
chips. If the target market for our products does not grow, we may not obtain
any benefits from these investments.
WE ARE HEAVILY DEPENDENT ON THE U.S. AND ASIAN MARKETS FOR SALES OF OUR
PRODUCTS, AND ADVERSE CHANGES IN THESE MARKETPLACES COULD REDUCE OUR SALES.
Our future performance will be dependent, in large part, on our ability
to continue to compete successfully in the U.S. and Asian markets,
particularly Japan and Taiwan, where a large portion of our current and
potential customers are located. Our ability to compete in these markets
will depend on several factors, including:
- the state of trade relations among Japan, Taiwan, Israel and the United
States;
- the imposition of tariffs by the U.S., Taiwan or Japan on products of
the type that we develop;
- adverse changes in the political, economic or regulatory environments of
Taiwan, Japan or the U.S.;
- adverse changes in the relationships between major Asian countries;
- our ability to develop video compression products that meet the
technical requirements of Japanese, Taiwanese and American customers;
- our ability to maintain satisfactory relationships with our Japanese,
Taiwanese and American customers and distributors; and
- our ability to enforce our agreements and other rights in Japan or
Taiwan.
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE, AND MANY OF OUR
COMPETITORS HAVE MUCH GREATER RESOURCES THAN WE DO, WHICH MAY MAKE IT
DIFFICULT FOR US TO REMAIN PROFITABLE.
Competition in our industry is intense, and we expect competition to
increase. Competition could force us to charge lower prices for our
products, reduce demand for our products and reduce our ability to recover
development and manufacturing costs.
Some of our competitors:
- have greater financial, personnel and other resources than we have;
- offer a broader range of products and services than we offer;
- may be able to respond faster to new or emerging technologies or
changes in customer requirements than we can;
- may have a more substantial distribution network than we do;
- benefit from greater purchasing economies than we do;
- offer more aggressive pricing than we offer; and
- devote greater resources to the promotion of their products than we do.
We will not be able to compete effectively if we are not able to develop
and implement appropriate strategies to address these factors.
INTERNAL DEVELOPMENT EFFORTS BY OUR CUSTOMERS AND NEW ENTRANTS TO THE
MARKET MAY INCREASE COMPETITION, AND MAKE IT MORE DIFFICULT FOR US TO
INCREASE OUR PROFITABILITY.
In the future, some of our customers may internally develop products that
will replace the products that we currently sell to them. In addition, some
leading companies, with substantially greater resources than we have, may
attempt to enter our market. The recent substantial growth in the market for
video compression and related technologies is attracting large entrants. We
believe that some large companies may have already begun to develop internally
the technology that we provide. Furthermore,
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alliances between semiconductor companies and companies providing software to
them could increase our competition. These factors could make it more
difficult for us to increase our profitability.
WE HAVE EXPERIENCED, AND EXPECT TO CONTINUE TO EXPERIENCE, INTENSE
DOWNWARD PRICING PRESSURE ON OUR PRODUCTS, WHICH COULD SUBSTANTIALLY IMPAIR
OUR OPERATING PERFORMANCE.
We are experiencing, and are likely to continue to experience, downward
pricing pressure on our chips. As a result, we have experienced, and
expect to continue to experience, declining average sales prices for our
products. Increases in the number of units that we are able to sell or
reductions in per unit costs may not be sufficient to offset reductions in
per unit sales prices, in which case our net income could be reduced or we
could incur losses. Since we must typically negotiate supply arrangements
far in advance of delivery dates, we may need to commit to price reductions
for our products before we are aware of how, or if, these cost reductions can
be obtained. As a result, any current or future price reduction commitments
and any inability of our company to respond to increased price competition
could result in substantially reduced revenues and significant losses.
OUR PRODUCTS GENERALLY HAVE LONG SALES CYCLES AND IMPLEMENTATION
PERIODS, WHICH INCREASE OUR COSTS IN OBTAINING ORDERS AND REDUCES THE
PREDICTABILITY OF OUR EARNINGS, AND WE MAY NOT BE ABLE TO RECOUP COSTS FOR
PROPOSALS THAT ARE NOT ACCEPTED.
Our products are technologically complex and are typically designed into
applications and products that may be critical to the business of our
customers. Prospective customers generally must make a significant commitment
of resources to test and evaluate our chips and to integrate them into their
products. As a result, our sales process is often subject to delays
associated with lengthy approval processes that typically accompany the
design and testing of new computer accessories. For these and other reasons,
the sales cycles of our products to new customers are often lengthy, recently
averaging approximately six to nine months.
Long sales cycles are also subject to a number of significant risks over
which we have little or no control. These risks include our customers'
budgetary constraints, internal acceptance reviews and cancellations. In
addition, orders expected in one quarter could shift to another because of
the timing of our customers' procurement decisions. This complicates our
planning process and reduces the predictability of our financial results. We
could incur costs that might not be recouped if we respond to a request for
proposals from a potential customer who does not purchase our chips.
WE MAY NEED ADDITIONAL FINANCING, AND MAY NOT BE ABLE TO RAISE ADDITIONAL
FINANCING ON FAVORABLE TERMS OR AT ALL, WHICH COULD LIMIT OUR ABILITY TO GROW
AND INCREASE OUR COSTS.
We anticipate that we may need to raise additional capital in the future
to continue our longer term expansion plans, to respond to competitive
pressures or to respond to unanticipated requirements. We cannot be certain
that we will be able to obtain additional financing on commercially
reasonable terms or at all. Our failure to obtain additional financing or our
inability to obtain financing on acceptable terms could require us to limit
our plans for expansion, incur indebtedness that has high
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rates of interest or substantial restrictive covenants, issue equity
securities that will dilute existing stockholders or discontinue a portion of
our operations.
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BECAUSE OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS HAVE
SUBSTANTIAL CONTROL OVER MOST MATTERS SUBMITTED TO A VOTE OF THE
STOCKHOLDERS, STOCKHOLDERS' ABILITY TO CONTROL OUR MANAGEMENT IS LIMITED, AND
ANY PREMIUM OVER MARKET PRICE THAT AN ACQUIROR MIGHT OTHERWISE PAY MAY BE
REDUCED AND ANY MERGER OR TAKEOVER MAY BE DELAYED.
Our officers, directors and principal stockholders beneficially own 76.2%
of our common stock. As a result, these stockholders, acting together, have
the power to control the outcome of most matters submitted to a vote of
stockholders, including the election of members of our board, and the
approval of significant corporate transactions. This concentration of
ownership may also impede a merger, consolidation, takeover or other business
consolidation involving us, or discourage a potential acquiror from making a
tender offer for our shares. This concentration of our ownership could also
negatively affect our stock's market price or decrease any premium over
market price that an acquiror might otherwise pay.
THE EFFECTS OF ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION
AND BYLAWS MAY DISCOURAGE, DELAY OR PREVENT AN ACQUISITION OF US THAT A
STOCKHOLDER MAY CONSIDER FAVORABLE.
Several provisions of our certificate of incorporation and bylaws could
discourage potential acquisition proposals and could delay or prevent a
change in control of our company even if that change in control would be
beneficial to our stockholders. For example, only one-third of our board of
directors will be elected at each of our annual meetings of stockholders,
which will make it more difficult for a potential acquirer to change the
management of our company, even after acquiring a majority of the shares of
our common stock. These provisions, which cannot be amended without the
approval of two-thirds of our stockholders, could diminish the opportunities
for a stockholder to participate in tender offers, including tender offers at
a price above the then current market value of our common stock. In
addition, our board of directors, without further stockholder approval, may
issue preferred stock, with such terms as the board of directors may
determine, that could have the effect of delaying or preventing a change in
control of our company. The issuance of preferred stock could also adversely
affect the voting powers of the holders of common stock, including the loss
of voting control to others. We are also afforded the protections of Section
203 of the Delaware General Corporation Law, which could delay or prevent a
change in control of our company or could impede a merger, consolidation,
takeover or other business combination involving our company or discourage a
potential acquirer from making a tender offer or otherwise attempting to
obtain control of our company.
POLITICAL OR ECONOMIC INSTABILITY OR MILITARY HOSTILITIES IN ISRAEL COULD
RESULT IN A LOSS OF SALES OR THE DISRUPTION OF OUR OPERATIONS.
The offices of our principal operating subsidiary are located in Israel.
This facility is the location of, among other things, our research and
development efforts. As a result, political, economic and military
conditions in Israel directly affect our operations. Accordingly, any major
hostilities involving Israel, the interruption or curtailment of trade
between Israel and its present trading partners or a significant downturn in
the economic or financial condition of Israel could result in a loss of sales
or the disruption of our operations. Despite the progress towards peace
among Israel, neighboring countries and the Palestinians, the future of these
peace efforts is uncertain. A number of countries continue to restrict or ban
business with Israel or Israeli companies. Restrictive laws or policies
directed towards Israel or Israeli businesses could impair our ability to
increase our international sales. Additionally, some of our officers and
employees in Israel are obligated to perform up to 39 days of military
reserve duty annually. The absence of these employees for significant
periods during the workweek may cause us to operate inefficiently during
these periods.
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CURRENCY FLUCTUATIONS AND THE RATE OF INFLATION IN ISRAEL MAY INCREASE
OUR EXPOSURE TO VOLATILITY IN INTERNATIONAL MARKETS AND NEGATIVELY IMPACT OUR
FINANCIAL PERFORMANCE.
Most of our sales are in dollars or linked to dollars, and a portion of
our expenses are incurred in New Israeli Shekels (NIS). As a result, we bear
the risk that the rate of inflation in Israel will differ from the rate of
devaluation of the NIS in relation to the dollar. We may incur losses in the
future if the rate of inflation in Israel exceeds the devaluation of the NIS
against the dollar or if the timing of a devaluation lags behind increases in
inflation in Israel.
To date, we have not engaged in hedging transactions. In the future, we
may enter into currency hedging transactions to decrease the risk of
financial exposure from fluctuations in the exchange rate of the dollar
against the NIS. These measures may not adequately protect us against these
risks.
THE GOVERNMENT PROGRAMS AND TAX BENEFITS THAT WE CURRENTLY PARTICIPATE IN OR
RECEIVE REQUIRE US TO MEET SEVERAL CONDITIONS AND MAY BE TERMINATED OR
REDUCED IN THE FUTURE, WHICH WOULD INCREASE OUR COSTS.
We benefit from a variety of government programs and tax benefits,
particularly as a result of exemptions and reductions resulting from the
"Approved Enterprise" status of our existing facility in Israel. To be
eligible for these programs and tax benefits, we must continue to meet
specific conditions, including making specified investments in fixed assets
and financing a percentage of investments with share capital. If we fail to
meet these conditions in the future, the tax benefits would be canceled and
we could be required to refund the tax benefits to which we are entitled.
Israeli governmental authorities have indicated that these programs and tax
benefits may not be continued in the future at their current levels or at any
level. For example, the Israeli Ministry of Finance issued a report in
May 2000 recommending legislation that would substantially reduce the tax
benefits that are currently enjoyed by our Israeli subsidiary. The
termination or reduction of these programs and tax benefits could increase
our expenses substantially.
Prior to 1995, we obtained royalty-bearing grants from the Office of the
Chief Scientist in Israel's Ministry of Industry and Trade to fund a portion
of our research and development. The terms of the grants from the Chief
Scientist prohibit the transfer of technology developed under these grants to
any person without the prior written consent of the Chief Scientist. We may
apply for such grants for the development of new products in the future.
IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OUR OFFICERS AND
DIRECTORS AND SOME OF THE EXPERTS NAMED IN THIS PROSPECTUS, OR TO ASSERT U.S.
SECURITIES LAWS CLAIMS IN ISRAEL.
Substantially all of our executive officers and directors and some of the
experts named in this prospectus are nonresidents of the U.S., and a
substantial portion of our assets and the assets of these persons are located
outside the U.S. Therefore, it may be difficult to enforce a judgment
obtained in the U.S. against us or any of those persons or to effect service
of process on them outside the U.S. Additionally, it may be difficult to
enforce civil liabilities under U.S. federal securities laws in original
actions instituted in Israel.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including changes in interest
rates affecting the return on its investments and some foreign currency
fluctuations. The Company has established policies and procedures to manage its
exposure to such fluctuations.
FOREIGN CURRENCY RATE RISK
Substantially all of our sales and a major part of our expenses are denominated
in U.S. dollars, we have experienced only insignificant foreign exchange gain
and losses to date, and do not expect to incur significant gains and losses in
2000. We did not engage in foreign currency hedging activities during the three
months ended June 30, 2000.
INTEREST RATE RISK
Substantially all of our cash and cash equivalents consist of short-term
deposits and therefore are not subject to significant interest rate risk.
Notwithstanding the foregoing analysis of the direct effects of interest rate
and foreign currency fluctuations on the value of certain of the Company's
investments and accounts, the indirect effects of such fluctuations could have a
material adverse effect on the Company's business, financial condition and
results of operations. For example, international demand for our products is
affected by foreign currency exchange rates. In addition, interest rate
fluctuations may affect the buying patterns of our customers. Furthermore,
interest rate and currency exchange rate fluctuations have broad influence on
the general condition of the U.S., foreign and global economies, which could
materially adversely affect the Company.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On May 23, 2000, we completed an initial public offering of shares of
our common stock, $0.001 par value. The managing underwriters in the offering
were WR Hambrecht & Co., ING Barings and DLJdirect Inc. The shares of common
stock sold in the offering were registered under the Securities Act of 1933, as
amended, on a Registration Statement on Form S-1 (No. 333-32372). The Securities
and Exchange Commission declared the Registration Statement effective on May 17,
2000.
The offering was commenced on May 17, 2000 and terminated on May 25,
2000, after we had sold 3,500,000 shares of common stock registered under the
Registration Statement. The initial public offering price was $12.00 per share
for an aggregate initial public offering of $42 million. After deducting
underwriting discounts and commissions of $2,730,000, and the estimated offering
expenses, the net proceeds to us from the offering were approximately $37.5
million.
The Registration Statement was declared effective after March 31, 2000,
and we financed our operations through March 31, 2000, from cash available prior
to the initial public offering. Our temporary investments of the net proceeds to
us from the offering have been in cash, cash equivalents and investment grade
short-term interest bearing securities.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
A current member of the Company's Board of Directors, Mr. Davidi
Gilo, has submitted his resignation as a Class III director of the Company
effective August 14, 2000.
ITEM 6. (a) EXHIBITS.
27.1 Financial Data Schedules
(b) REPORTS ON FORM 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date August 14, 2000 NOGATECH, INC.
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/s/ Arie Heiman
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Arie Heiman
President and Chief Executive Officer
/s/ Yaron Garmazi
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Yaron Garmazi
Chief Financial Officer
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