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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended September 30, 2000
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period __________ to __________.
Commission file number 000-29513
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INSILICON CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 77-0526155
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 East Plumeria Drive, San Jose, California 95134
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(Address of principal executive offices, including zip code)
(408) 894-1900
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
-----------------------------
(Title of each Class)
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 the voting stock held by non-affiliates of the
registrant as of November 30, 2000, was $21,784,588 based upon the last reported
sales price of the common stock on the Nasdaq National Market.
The number of shares of the registrant's Common Stock outstanding as of November
30, 2000 was 14,188,624.
Documents Incorporated by Reference
-----------------------------------
Portions of the registrant's definitive proxy statement to be filed pursuant to
Regulation 14A in connection with the 2001 annual meeting of its stockholders
are incorporated by reference into Part III of this Form 10-K.
<PAGE>
PART I
FORWARD-LOOKING STATEMENTS
This report on Form 10-K, including without limitation the Business
section and Management's Discussion and Analysis of Financial Condition and
Results of Operations, contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21(E) of the
Securities Exchange Act of 1934, as amended. These statements include, but are
not limited to, statements concerning expected price erosion, our plans to make
acquisitions or strategic investments, our expectation of increased sales to
original equipment manufacturers, and our plans to improve and enhance existing
products and develop new products.
The forward-looking statements of inSilicon are subject to risks and
uncertainties. Some of the factors that could cause future results to materially
differ from our recent results or those projected in the forward-looking
statements include, but are not limited to, significant increases or decreases
in demand for our products, increased competition, lower prices and margins,
failure to successfully develop and market new products and technologies,
competitor introductions of superior products, continued industry consolidation,
increased costs as a result from our separation from Phoenix, instability and
currency fluctuations in international markets, product defects, failure to
secure intellectual property rights, results of litigation, failure to integrate
acquisitions and failure to retain and recruit key employees. For a more
detailed discussion of certain risks associated with our business, see the
"Business Risks" section of this Form 10-K. We undertake no obligation to update
forward-looking statements to reflect events or circumstances occurring after
the date of this Form 10-K.
ITEM 1. BUSINESS
Overview
inSilicon Corporation ("inSilicon") is a leading provider of
communications platforms that are used by semiconductor and systems companies to
design the complex semiconductors called systems-on-a-chip that are critical
components of digital devices. Over 450 customers use our communications
technology in hundreds of different digital devices ranging from network routers
to cellular phones. Our modular approach emphasizes customer-proven reusable
semiconductor intellectual property that focus on communications and
connectivity, and are compatible with a wide range of microprocessor designs.
Semiconductor and systems companies integrate our communications technology into
their overall semiconductor designs, saving time and money and allowing them to
focus on their core competencies that differentiate their products. By
integrating our communications technology into their complex designs, our
customers are better able to solve the widening "design gap" caused by the
difficulty of designing complex systems-on-a-chip in the time necessary to get
to market with their products.
Prior to our incorporation on November 1, 1999, we operated as a division
of Phoenix Technologies Ltd. ("Phoenix"). As of November 30, 1999, Phoenix
transferred certain assets to us substantially in exchange for shares of our
Series A Preferred Stock and the assumption of certain liabilities. We
successfully completed an initial public offering in March of 2000, which
generated net proceeds of $37.0 million. At that time, all shares of Series A
Preferred Stock converted on a one-to-one basis into shares of common stock. As
of September 30, 2000, Phoenix owned 10.4 million shares of our common stock
(73.6% of our total outstanding shares).
Recent Developments
In November 2000, we entered into an agreement to acquire Xentec. Inc.
("Xentec"), a privately-held developer of analog and mixed-signal intellectual
property. Under the terms of the Xentec agreement, we issued 634,056 shares of
common stock and assumed options to purchase an additional 96,004 shares of
common stock in exchange for all outstanding Xentec shares and options as of the
date of closing, which was December 18, 2000. Also, we will issue up to an
additional
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415,000 shares of common stock to the selling stockholders over a two-year
period, contingent upon the achievement of certain performance-based milestones.
The Xentec acquisition will be accounted for as a purchase.
Also in November 2000, we entered into an agreement to acquire the
wireless design group of HD Lab, K.K. ("HD Lab"). Under the terms of the HD Lab
agreement, we will pay $1,530,000 over a 12-month period to acquire certain
Bluetooth baseband technology under development by HD Lab. We also entered into
employment agreements to hire the team of Bluetooth development employees from
HD Lab.
Industry Background
The internet is creating the demand for all digital devices to be
connected. This demand is generating a proliferation of communications standards
and connectivity requirements. Examples of current and emerging standards
include Ethernet, USB, IEEE 1394, PCI, HPNA, DSL and Bluetooth. Products that
use these standards include corporate networks that use Ethernet; printers and
scanners that use USB; digital video cameras that use IEEE 1394; routers,
personal computers and notebooks that use PCI; home networks that use HPNA; high
speed internet modems that use DSL; and next-generation cellular phones that use
Bluetooth.
The proliferation of these products and their many communications
standards is driving the demand for complex semiconductors. Improvements in
semiconductor design and manufacturing processes have enabled the integration of
entire systems, including microprocessor, communications, logic and memory
elements, on a single chip, thus creating a system-on-chip solution.
A designer of a complex system-on-a-chip needs to design each technology
separately and then must ensure that each communicates with each other as well
as externally with other devices. Due to the complexity of designing such
systems-on-a-chip, the multiplicity of communications standards and
time-to-market requirements, the design capabilities of semiconductor and
systems companies have not kept pace with the increase in the number of
transistors that can be placed on a single chip. Consequently, a significant
"design gap" has developed.
To address the design gap, semiconductor and systems companies are
increasingly licensing proven and reusable intellectual property such as
microprocessor, communications, logic and memory blocks from merchant
semiconductor intellectual property, or SIP, suppliers. The emergence of a
merchant SIP market allows semiconductor and systems companies to create
differentiated products, reduce development costs, increase functionality and
improve time to market. For example, in a report dated August 2000, Dataquest,
an independent research firm, estimated that the merchant SIP market as a whole
will grow from approximately $600 million in 2000 to nearly $3 billion in 2004.
Semiconductor and systems companies divert significant time and resources
from their core competencies to develop system-on-chip technologies. Moreover,
the wide variety of communications standards that have emerged due to the
specific requirements of various devices makes it increasingly difficult for
these companies to successfully design these crucial communications technologies
for their systems-on-a-chip. Consequently, they are unable to develop new
products in a cost- and time-effective manner.
The inSilicon Solution
We provide communications platforms that allow semiconductor and systems
companies to focus their development resources on their core competencies that
differentiate their products. This improves time to market and reduces risk and
development costs in the design of complex systems-on-a-chip, thus narrowing the
design gap. We offer:
o Proven Solutions. We estimate more than 450 companies have
implemented our technology in more than 600 integrated circuit
designs. Millions of individual products include inSilicon
technology. Our technologies have been implemented in over 25
semiconductor fabrication
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facilities using some of the most advanced semiconductor processing
technology, including 0.18 micron process technology. The customer
and systems-proven nature of our technologies makes less likely the
substantial interoperability issues and costly development delays
that our customers might experience from in-house or other
third-party designs, thereby reducing risk.
o A Broad Portfolio of Communications Technology. We provide
semiconductor and systems companies with a broad portfolio of
communications and connectivity technology. We believe our
semiconductor intellectual property fulfills many of the
communications technology needs of those companies.
o Integrated Platform-Based Solutions. We partner with other
intellectual property suppliers, which enable us to sell more
complete system-on-chip IP platforms. For example, we have
redistribution agreements with MIPS Technologies and ARM Holdings
that allows us to bundle and sell MIPS processor and ARM integration
IP together with our communications technology. With these
agreements, we are able to offer more complete IP solutions that
enable customers to get to market sooner with fewer suppliers.
o Integrated Software Solution. For the USB and IEEE 1394
communications standards, we partner with software suppliers for
essential software that allow operating systems to communicate with
our USB and IEEE 1394 technology. By using this software,
semiconductor and systems companies may integrate our technology
into their designs in a cost-effective and timely manner.
o Extensive Test and Verification Tools. We provide our customers with
extensive verification and test modules to ensure the functionality
of our technology within their designs. This allows our customers to
implement our communications technology into their designs with a
higher degree of first time success.
o Portability and Flexibility. We design our semiconductor
intellectual property to be foundry independent and easy to use. We
use popular hardware languages that fit readily into our customers'
design flows, which provides our customers significant manufacturing
flexibility. Our Rapidscript(TM) configuration tool and our adoption
of VCI facilitate customer integration of our semiconductor property
into their system-on-a-chip designs.
o Standards Leadership. We were the first to market with merchant
semiconductor intellectual property solutions for many
communications standards including PCI, AGP, USB, IrDA, IEEE 1394
and VCI. We are members of numerous industry standards bodies,
including the IEEE 1394 trade association, USB Implementator Forum,
Infrared Data Association and PCI Special Interest Group. Our
involvement with these bodies helps us stay on the leading edge of
evolving standards.
Markets and Applications
We target high growth markets requiring high performance, quick time to
market, design flexibility and compliance with industry standards. The following
represent our four primary end user markets, including representative
applications using our products within each:
o Telecommunications and Data Communications. Telecommunications and
data communications equipment companies design and manufacture
equipment that must comply with many industry standards. For
example, communications technologies such as Ethernet, UTOPIA, PCI
and USB are used in network switches and routers, network adapters,
concentrators, public switched telephone network central office
equipment, cable set-top boxes and modems.
o Consumer Electronics. Consumer electronics devices are rapidly
converting to digital methods of signal transmission, processing and
storage, and they require standard connectivity interfaces such as
IEEE 1394, IrDA, USB, and PCI. For example, digital still cameras,
digital video cameras, video games, digital video cassette recorders
and DVD players all use such
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digital transmission technology. New application of this technology
is anticipated in digital audio equipment and emerging video devices
such as personal video recorders. Additionally, mobile phone and
wireless Internet applications are creating the demand for
performance enhanced Java technologies.
o Computers. Computation equipment such as personal computers,
workstations and servers require implementation of standard
interfaces such as PCI, USB, AGP, IrDA and Ethernet. Our
communications technology can be found in standard products and
application specific implementations for these types of platforms.
o Office Automation. Computer peripherals require a means of
connection to both their host computer and to larger networks. These
connections are generally made with standard interfaces, including
USB, Ethernet, IEEE 1394 and IrDA. These interface technologies are
used in printers, scanners, keyboards, display terminals, pointing
devices, and mass storage devices such as hard disk drives, floppy
disk drives, removable media disk drives, tape drives and optical
drives.
Products
Our communications technology includes semiconductor intellectual property
and related software. Our semiconductor intellectual property includes a wide
variety of standards-based, in addition to proprietary, communications
technology. Our semiconductor intellectual property platforms vertically combine
many of these technologies into functional blocks tailored for ease of use and
faster integration by our customers.
We supply our technology as Verilog, VHDL or C source code, which are the
primary chip design languages in use today. Semiconductor and systems companies
then integrate our communications technology into their overall semiconductor
designs using electronic design automation tools, such as those provided by
Synopsys and Cadence. We use a modular approach that emphasizes silicon-proven
reusable, licensable technology and software that are compatible with a wide
range of processor designs.
inSilicon's technologies are outlined in the following chart. Each family
consists of our technologies that relate to a specific industry standard.
<TABLE>
<CAPTION>
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Communications
Standards Technology Families Technology Applications
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<S> <C> <C>
AGP AGP Master, AGP Host and Accelerated Graphics Port is an interconnect
AGP Simulation Models standard used in high performance graphics for
personal computers.
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Ethernet 10/100 Ethernet Media Access Ethernet is a widely used local area
Controller and Ethernet networking communications standard, used
Simulation Model in such devices such as modems, cable modems, home
networking, routers and switches.
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IEEE 1394 1394 Device Controller Link, 1394 IEEE 1394 is a high-speed digital interface
A/V Link, 1394 Cable Phy and 1394 standard used in digital cameras, audio-visual
Simulation Model. disk drives and scanners.
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IrDA VFIR and VFIR Simulation Model, IrDA is a wireless standard that enables
IrDA and IrDA Simulation Model communication between appliances across short
distances. It is used in mobile phones, handheld
and laptop computers and electronic games.
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Java(TM) JVX(TM) Java Accelerator JVX is a proprietary hardware and software
Technology solution that accelerates applications written in
the Java programming language. JVX is primarily
targeted for wireless Internet
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</TABLE>
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<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Communications
Standards Technology Families Technology Applications
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
applications.
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PCI PCI Suite and PCI Simulation Model Peripheral Component Interconnect is an internal
communications standard that connects various
elements of computer systems to each other. It is
used in many computers as well as in embedded
systems.
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PCI-X PCI-X and PCI-X Simulation Model PCI-X is the latest revision of the PCI standard.
It is used in many high performance computing
applications, including multiprocessor servers,
communications switches and routers and storage
area networks.
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USB USB PHY, USB OHCI Host Universal Serial Bus is a standard designed to
Controller, USB Hub, USB simplify connections between personal
Device Controller computers and peripheral devices, such as
printers, digital cameras and scanners.
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UTOPIA DMA UTOPIA Controller and UTOPIA is a broadband interface widely used in
Simulation Model Asynchronous Transfer Mode (ATM) communications,
network processors, and DSL chipsets.
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VCI TymeWare(TM) VCI Virtual Component Interface is a standard
interface that simplifies the mix-and-match of
semiconductor intellectual property. Our
TymeWare(TM) VCI enables integration of multiple
communications standards.
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</TABLE>
Research and Development
Our research and development costs in fiscal years 2000, 1999, and 1998
were $7.8 million, $9.1 million, and $2.9 million, respectively. Research and
development expenditures decreased in fiscal year 2000 as a result of a decrease
in compensation and related benefits due to decreased personnel and the
completion of a significant outsource design contract, partially offset by a
decrease in research and development cost capitalized under Statement of
Financial Accounting Standards, or SFAS, 86. In order to maintain a leading
position as a merchant semiconductor intellectual property provider in emerging
communications and connectivity standards, we expect that these costs will
increase in the future. At October 31, 2000, we had 41 employees engaged in
research and development. We expect to identify and hire additional highly
skilled technical personnel in fiscal year 2001 to staff our anticipated
research and development activities.
Sales and Marketing
We focus our sales efforts in the following areas: direct sales; indirect
sales through application specific integrated circuit, or ASIC, manufacturers
and authorized design centers; and internet distribution. For further discussion
on financial information about geographic areas and segments, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 11 to the Consolidated Financial Statements.
Direct Sales. We maintain a direct worldwide sales network consisting of
our own employees and a limited number of sales representatives and field
applications engineers. The sales force's primary responsibility is to secure
and maintain direct account relationships with semiconductor and systems
companies. We have over 450 customers for which the sales force maintains the
relationship. We document these relationships with a technology license
agreement for the first purchase. For subsequent purchases from existing
customers, we generally obtain a customer purchase order for the desired
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technology under the terms of the license agreement or an amendment to the
license agreement. The sales force is distributed in key geographic areas around
the world with employees in the following locations: Atlanta; Austin; Boston;
Irvine; San Jose; Geneva, Switzerland; London, England; Munich, Germany; and
Tokyo, Japan. In addition, we have a distribution agreement with Phoenix
covering Hong Kong, Japan, Korea, Singapore and Taiwan.
Indirect Sales. In addition to the direct sales force, we also use a
number of indirect sales channels. As of September 30, 2000, we entered into
thirty-seven indirect channel partnership agreements. Our channel partners
include:
o ASIC Manufacturers. Application specific integrated circuit, or
ASIC, manufacturers provide customized build-to-order chips to their
customers. Several ASIC manufacturers have access to our technology
and are able to license our products directly to their customers and
include our communications technology in their complex
semiconductors. We receive revenues from the ASIC vendors for each
of our technologies that are used in a customer chip.
o Authorized Design Centers. Our authorized design center program
provides access to our communications technologies to enable design
houses to develop expertise with our semiconductor intellectual
property. This encourages design houses to incorporate our
semiconductor intellectual property when they design custom
semiconductors for their customers. We receive revenue from
customers who are referred to us by our design center partners.
Internet Distribution. In addition, we allow semiconductor designers to
download and test, via the internet, encrypted versions of our technology before
committing to any economic arrangement.
Revenue Model. We currently generate the majority of our revenue from four
sources:
o Initial License Fees. Initial fees are generally associated with the
license of our technology to a customer at a specified design
location for a single customer semiconductor design. The amount of
the initial fee depends on the type and number of our technologies
included in the design, generally ranging from $50,000 to $1,000,000
per customer design.
o Reuse License Fees. Reuse fees are associated with the license of
one or more of our technologies for a follow-on design at a customer
location that has incurred and paid an initial license fee. The
amount of the reuse fee generally ranges from 20% to 40% of the
amount of the initial license fee.
o Maintenance Fees. Maintenance fees entitle the customer to periodic
bug fixes and code updates over the term of the maintenance
contract, generally one year. The amount of maintenance fee averages
15% of the associated license fee.
o Royalties. Royalties are per copy fees due by customers within a
specified period after customer shipment of semiconductors that
include our technology. The semiconductor design cycles of our
customers are sometimes two years or longer, and therefore royalties
may not be collected until two or more years after the signing of a
customer contract and the billing and collection of the related
initial fee.
Customers
We have developed a strong customer base among semiconductor and systems
companies that use our communications technology to design complex
semiconductors. Our top ten customers for fiscal year 2000, listed
alphabetically, excluding related party revenue from Phoenix were as follows:
Agilent Technologies, Alchemy, Broadcom, C-Cube, Fujitsu, Hewlett-Packard,
Hitachi, Intel, Pitney Bowes, and ST Microelectronics. These top customers
represented less than four percent of our total revenue in fiscal year 2000. The
following chart provides a representative list of our major customers and some
of the applications in each industry in which customers use our technology.
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<TABLE>
<CAPTION>
-------------------------- ---------------------------- -----------------------------------------
Industry Example Application Selected Customers
-------------------------- ---------------------------- -----------------------------------------
<S> <C> <C>
Communications ATM Traffic Processor, Alcatel
Backbone Router, Cable Broadcom
Modem, DSL Modem, Cisco
Encryption Processor, Intel
Gigabit Servicer Adapter, Maker Communications
Gigabit Switch, Multilayer NEC
Communications Switch, Siemens
Network Adapter, Satellite Telocity
Receiver and Terabit Router
-------------------------- ---------------------------- -----------------------------------------
Consumer AutoPC, Cell Phone, Agilent
Digital Still Camera, Alchemy
Digital Video Camera, C-Cube
Internet Audio, Personal Motorola
Digital Assistant, Set-top Qualcomm
Box and Smart Card Reader Sony
ST Microelectronics
WebTV (Microsoft)
-------------------------- ---------------------------- -----------------------------------------
Computer Embedded Microprocessor, AMD
Laptop Computer, RISC Fujitsu
Processor, Server Hitachi
Processor Interconnect, Intel
Super I/O Chip, Lucent
Microprocessor and USB SMSC
Controller Toshiba
-------------------------- ---------------------------- -----------------------------------------
Office Automation 3-D Digital Audio, Floppy Creative Labs
Disk Drive, Inkjet Hewlett-Packard
Printer, Laser Printer, iOmega
Page Scanner, PC Audio Pitney Bowes
Card, PC Video Camera and Yamaha
Removable Disk Drive
-------------------------- ---------------------------- -----------------------------------------
</TABLE>
Competition
We are one of the top five merchant IP companies, according to an October
2000 report by Dataquest, holding a leading position in the highest volume
segment of system-on-chip technology. The other top vendors include ARM
Holdings, Aware, Inc., MIPS Technologies and Rambus, Inc. Our industry is very
competitive and is characterized by constant technological change, rapid rates
of product obsolescence, and frequently emerging new suppliers. Our existing
competitors include other merchant semiconductor intellectual property, or SIP,
suppliers, such as the Mentor Graphics' Inventra Division, Synopsys, Enthink and
VAutomation; and suppliers of application specific integrated circuits, or
ASICs, such as LSI Logic, and the ASIC divisions of IBM, Lucent, Toshiba and
NEC. We also compete with the internal development groups of large, vertically
integrated semiconductor and systems companies, such as Intel, Motorola, Cisco
and Hewlett-Packard. In these companies, SIP developed for an individual project
sometimes is subject to efforts by the company to re-use the SIP in multiple
projects. Companies whose principal business is providing design services as
work-for-hire, such as Intrinsix, Sican and the Tality service division of
Cadence, also provide competition. These companies generally build a portfolio
of internally developed SIP over time and then re-use that SIP as applicable in
new service projects in order to gain productivity leverage. For firmware, our
primary competitors are in-house research and development departments of system
companies and small privately-held companies. As we introduce new SIP
technologies, we will face competition from both existing SIP suppliers and new
SIP suppliers that we anticipate will enter the market. We also may face
competition from new suppliers of technologies based on new or emerging
standards.
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We believe that important competitive factors in our market include:
performance; functionality; customizability; length of development cycle; price;
compatibility with prevailing design methodologies; interoperability with other
devices or subsystems; ease of use; reputation for successful designs and
installed base; technical service and support; technical training;
configurability of technologies for specific designs; and regional sales and
technical support.
Proprietary Technology and Intellectual Property
We rely primarily on a combination of nondisclosure agreements and other
contractual provisions, as well as patent, trademark, trade secret, and
copyright law to protect our proprietary rights. Our general policy has been to
seek patent protection for those inventions and improvements likely to be
incorporated in our products or otherwise expected to be of value. We have an
active program to protect our proprietary technology through the filing of
patents.
As of October 31, 2000, we had applications for six U.S. patents on file
with the United States Patent and Trademark Office, or USPTO, and nine draft
applications in the various stages of review in preparation for filing with the
USPTO. To date, the USPTO has issued three patents. Also as of October 31, 2000,
we had filed three foreign applications under the Patent Cooperation Treaty and
had two national filings in place for those countries which are not members. We
intend to continue to file patent applications as appropriate in the future. We
cannot be sure, however, that our pending patent applications will be approved,
that any issued patents will protect our intellectual property or will not be
challenged by third parties, or that the patents of others will not seriously
harm our ability to do business. In addition, others may independently develop
similar or competing technology or design around any of our patents.
We protect the source code of our products as both trade secrets and
unpublished copyrighted works. We license the source code to our customers for
limited uses and maintain contractual controls over the use of our software
products. Wide dissemination of our software products makes protection of our
proprietary rights difficult, particularly outside the United States.
We protect our trade secrets and other proprietary information through
nondisclosure agreements with our employees and customers and other security
measures, although others may still gain access to our trade secrets or discover
them independently.
From time to time, third parties, including our competitors, may assert
patent, copyright and other intellectual property rights to technologies that
are important to us. Although we believe that our products do not infringe on
any copyright or other proprietary rights of third parties, there are currently
significant legal uncertainties relating to the application of copyright and
patent law in the field of software.
Employees
As of October 31, 2000, we had 91 employees, including 20 in sales, 15 in
marketing, 41 in research and development and 15 in general and administrative
functions. We believe that our future success will depend in part on our
continued ability to attract, hire and retain qualified personnel. None of our
employees is represented by a labor union and we believe our employee relations
are good.
ITEM 2. PROPERTIES
Our executive, administrative and technical offices currently occupy
approximately 22,000 square feet in a building leased by Phoenix in San Jose,
California, pursuant to a month-to-month service agreement. In November 2000,
our sales and marketing functions relocated to a small office facility in San
Jose, California under a sublease of less than two years. We expect in the
future to move to separate offices in the Silicon Valley area. We believe these
facilities will be adequate to meet our needs for the foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
inSilicon is not a party to any pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
None.
EXECUTIVE OFFICERS OF INSILICON CORPORATION
The executive officers of inSilicon, each of whom serve at the discretion
of the Board of Directors, as of the filing date of this Form 10-K are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Wayne C. Cantwell 35 President and Chief Executive Officer
Barry A. Hoberman 42 Executive Vice President and Chief Technical Officer
William E. Meyer 38 Executive Vice President and Chief Financial Officer
Joseph Hustein 53 Vice President and General Counsel
Anand C. Naidu 47 Vice President of Internet Products
Robert G. Nalesnik 42 Vice President of Marketing
Matthew Raggett 40 Vice President, Worldwide Sales
Allan Strong 42 Vice President of Engineering
</TABLE>
WAYNE C. CANTWELL has served as our President and Chief Executive Officer since
our incorporation in November 1999. Mr. Cantwell served as Senior Vice President
and General Manager of Phoenix's Semiconductor IP Division from July 1999 to
November 1999. He was Vice President and General Manager, Worldwide Field
Operations, for Phoenix from November 1998 to July 1999; Vice President and
General Manager, North American Operations, from March 1998 to October 1998;
Vice President, Asia/America Operations, from September 1997 to March 1998; and
General Manager, Asia Operations, from January 1996 to August 1997. Prior to
that, Mr. Cantwell held various sales, sales management and general management
roles with Phoenix since joining Phoenix in March 1991. Prior to that, Mr.
Cantwell held various roles in sales and engineering at Intel and NEC
Technologies. He received a B.S. in Electrical Engineering from DeVry Institute
of Technology.
BARRY A. HOBERMAN has served as our Executive Vice President and Chief Technical
Officer since November 1999. Prior to November 1999, Mr. Hoberman was Vice
President of Phoenix's Semiconductor IP Division from April 1999 to November
1999, and the Senior Director of the same division from May 1996 to March 1999.
Prior to that, he was Product Line Director at Advanced Micro Devices, a
semiconductor manufacturer, from October 1987 to May 1996. Previously, he held
various roles in product management and development at Advanced Micro Devices
and Monolithic Memories. Mr. Hoberman has been issued 13 U.S. patents. He
received a B.S. in Electrical Engineering and a B.S. in Biology from the
Massachusetts Institute of Technology, and has done graduate work in Electrical
Engineering at Stanford University.
WILLIAM E. MEYER has served as our Executive Vice President and Chief Financial
Officer since December 1999. He was also a Director of inSilicon from our
incorporation in November 1999 until February 2000. He was Phoenix's Chief
Financial Officer from June 1999 to December 1999. He served as Phoenix's Vice
President of Finance and Controller from February 1998 to June 1999. Mr. Meyer
was Vice President and Corporate Controller for Microprose, a developer of
entertainment software, from November 1995 to February 1998. He served as Vice
President of Finance and Chief Financial Officer for SBT Accounting Systems, a
developer of accounting software applications, from 1992 to 1995. Prior to that,
Mr. Meyer held various positions with Arthur Andersen. He is a Certified Public
Accountant and received a B.S. in Accounting from California State University at
Sacramento.
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JOSEPH E. HUSTEIN has served as our Vice President, General Counsel and
Corporate Secretary since October 2000. Prior to joining inSilicon, he was in
his own private law practice from October 1999 to September 2000; was a founder
and Vice President of Vivasmart.com from April 1999 to October 1999. He was the
Vice President of Business Development and General Counsel at GEC Plessey
Semiconductors, Inc. from 1993 until 1998, and continued as Vice President and
General Counsel of Mitel Semiconductor Inc. after its acquisition of GEC Plessey
until January 1999. Prior experience includes private law practice at Fenwick &
West in Palo Alto and engineering in the US Space Program. He received a B.F.A.
in Industrial Design from the University of Kansas, a B.S. in Electrical
Engineering equivalency certificate through the US Air Force, an M.S. in Systems
Management from the University of Southern California, and a J.D. in Law from
the University of the Pacific.
ANAND C. NAIDU has served as our Vice President of Internet Products since
November 1999. He has also served as the Vice President of Internet Products of
Phoenix's Semiconductor IP Division from October 1999 to November 1999; was the
Senior Director of Worldwide Sales in Phoenix's Semiconductor IP Division from
July 1999 to October 1999; and Director of Business Development from September
1998 to July 1999. Mr. Naidu was a co-founder of Sand Microelectronics, Inc. in
1991 and served as Sand's President and Chief Executive Officer until Phoenix
acquired Sand in September 1998. Prior to founding Sand, he was President of
Silicon Platforms. Mr. Naidu also held key marketing and development management
positions at Western Digital, STC, Intersil, and Rolm. He holds a B.S. and an
M.S. in Electrical Engineering from the University of California at Berkeley and
an M.B.A. from the University of Santa Clara.
ROBERT G. NALESNIK has served as our Vice President of Marketing since November
1999 and had held the same position at Phoenix's Semiconductor IP Division from
October 1999 to November 1999. Prior to that, he was Director of Marketing of
the Semiconductor IP Division since joining Phoenix in September 1998. He was
Vice President of Marketing at Sand from March 1998 until Phoenix acquired it in
September 1998. Prior to joining Sand, he was Director of Product Marketing at
Actel, a semiconductor manufacturer, from October 1995 to March 1998. Prior to
that, he spent five years at VLSI Technology, a semiconductor manufacturer, in
various marketing and engineering management roles. He has also held management
positions at Compass Design Automation and Fairchild Semiconductor. Mr. Nalesnik
holds a B.S. in Electrical Engineering from the Georgia Institute of Technology.
MATTHEW RAGGETT has served as our Vice President, Worldwide Sales and Field
Operations since November 1999, and held various sales positions for Phoenix's
Semiconductor IP Division since August 1997, most recently Director, North
America Sales. Prior to that, he was Director, Western Area Sales for Virtual
Chips Corporation, a semiconductor IP company that was acquired by Phoenix, from
August 1995 to August 1997. Prior to joining Virtual Chips, he was Director,
Business Development at Cadence Design Systems and held various other sales and
marketing roles from January 1990 to August 1995. He has also held various sales
and marketing positions at National Semiconductor, Fairchild Semiconductor and
STC Telecommunications. Mr. Raggett holds a B.S. in Electrical Engineering from
Brighton Technical College in the UK.
ALLAN STRONG has served as our Vice President of Engineering since April 2000.
Prior to joining inSilicon, he held various management and engineering positions
at Hewlett-Packard Co., focusing on server and workstation VLSI design including
CPUs, cache controllers, IO controller, bus bridges, and memory controllers.
These included Acting Lab Manager, 1999; Section Manager, 1994-1999; Project
Manager, 1988-1993; Engineer/Scientist, 1987; various Hardware Development
Engineer, 1980-1986. He holds a B.S. in Electrical Engineering from
Massachusetts Institute of Technology and a Masters in Computer Science from
Stanford University.
There is no family relationship between any of our executive officers.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
INSN. Prior to our initial public offering on March 23, 2000, there was no
public market for our common stock. On the effective date of our initial public
offering, the reported last sale price of our common stock was $19.63 per share.
The following table presents the quarterly high and low bid quotations in the
over-the-counter market, as quoted by the Nasdaq National Market. These
quotations reflect the inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
High Low
---- ---
Fiscal Year 2000:
------------------
Fourth quarter $ 25.00 $ 14.00
Third quarter 16.38 5.75
Second quarter 21.88 15.13
We had 53 stockholders of record as of November 30, 2000. Because most of
our common stock is held by brokers and other institutional investors on behalf
of stockholders, we are unable to estimate a number of stockholders represented
by these record holders. To date, we have paid no cash dividends on our common
stock. We currently intend to retain all earnings for use in our business and do
not anticipate paying any dividends in the foreseeable future. In addition,
inSilicon's line of credit agreement restricts the payment of cash dividends.
See Note 13 to the Consolidated Financial Statements, included herein, for the
terms of exercise of stock options and warrants to purchase shares of common
stock.
Uses of Proceeds from Registered Securities
In March 2000, we completed our initial public offering of 3,500,000
shares of our common stock pursuant to a registration statement on Form S-1
(File No. 333-94573) declared effective by the Securities and Exchange
Commission on March 21, 2000. We have used the net proceeds from our initial
public offering to fund working capital and general corporate purposes. The
funds that are not being used to fund short-term needs have been placed in
temporary investments pending future use.
Recent Sales of Unregistered Securities
Since its incorporation, inSilicon has sold and issued the following
unregistered securities:
1. On November 15, 1999, inSilicon issued 10 shares of its common stock to
Phoenix for an aggregate cash consideration of $1,000.
2. As of November 30, 1999, inSilicon issued 10,400,000 shares of Series A
preferred stock and a warrant to purchase 50,000 shares of common stock at $0.01
per share to Phoenix in consideration for Phoenix's contribution of assets to
inSilicon, which shares are warrant were subsequently issued.
3. As of December 21, 1999, inSilicon issued options to purchase 2,348,844
shares of common stock of inSilicon with a weighted average price of $6.14 per
share to a number of employees, directors and consultants of inSilicon.
4. As of February 10, 2000, inSilicon issued options to purchase 20,000
shares of common stock of inSilicon with a weighted average price of $6.14 per
share to a number of employees, directors and consultants of inSilicon.
5. As of February 29, 2000, inSilicon issued options to purchase 87,950
shares of common stock of inSilicon with a weighted average price of $8.59 per
share to a number of employees, directors and consultants of inSilicon.
12
<PAGE>
6. As of March 1, 2000, inSilicon issued options to purchase 80,900 shares
of common stock of inSilicon at $9.00 per share to a number of employees of
inSilicon.
7. As of March 1, 2000, inSilicon issued options to purchase 7,600 shares
of common stock of inSilicon at $7.65 per share to a number of an employee of
inSilicon.
8. As of March 13, 2000, inSilicon issued options to purchase 115,800
shares of common stock of inSilicon at $9.00 per share to a number of employees
of inSilicon.
9. As of March 15, 2000, inSilicon issued options to purchase 84,000
shares of common stock of inSilicon at $9.00 per share to a number of employees
of inSilicon.
10. Between March 3, 2000 and March 13, 2000, inSilicon issued 151,320
shares of common stock upon the exercise of options included in paragraph 3 of
this item 5 for aggregate cash consideration of $666,462.49.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
In addition, certain issuances described in Item 2 were deemed exempt from
registration under the Securities Act in reliance upon Rule 701 promulgated
under the Securities Act. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with inSilicon, to information about inSilicon.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with the consolidated financial statements, the notes thereto and
the other information contained here-in. The selected consolidated balance sheet
data as of September 30, 2000, 1999, 1998 and 1997 and the selected consolidated
statement of operations data for the years ended September 30, 2000, 1999, 1998
and 1997 have been derived from the audited consolidated financial statements of
inSilicon. The selected consolidated balance sheet data as of September 30, 1996
and the selected consolidated statement of operations data for the year ended
September 30, 1996, have been derived from unaudited consolidated financial
statements of inSilicon. In the opinion of management, these unaudited
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
accruals, that we consider necessary for a fair presentation of our financial
position and results of operations for these periods.
The historical financial information includes the operations of Sand
Microelectronics from September 1998, the date of acquisition. For further
discussion on the comparability of the financial information, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Furthermore, the historical financial information may not be indicative of our
future performance and does not necessarily reflect what our financial position
and results of operations would have been had we been a separate, stand-alone
entity during the periods covered.
13
<PAGE>
Selected Annual Consolidated Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Years ended September 30,
------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
License fees $ 20,411 $ 14,973 $ 7,304 $ 4,272 $ 2,832
Services 5,017 3,982 1,488 839 498
-------- -------- ------- ------- -------
Total revenue 25,428 18,955 8,792 5,111 3,330
Gross margin 21,558 14,994 6,835 3,501 2,666
Merger, acquisition and restructuring -- 6,050 5,778 -- 318
charges
Loss from operations (1,903) (12,082) (7,101) (1,986) (1,232)
Net loss (1,265) (12,082) (7,101) (1,986) (1,232)
Basic earnings per share (0.10) (1.16)*
Diluted earnings per share (0.10) (1.16)*
</TABLE>
* calculated based upon 10.4 million pro forma shares outstanding
<TABLE>
<CAPTION>
As of September 30,
--------------------------------------------------
2000 1999 1998 1997 1996
------- -------- -------- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $38,181 $ -- $ -- $ -- $ --
Working capital (deficit) 39,298 (393) (3,340) 974 (405)
Total assets 63,710 24,481 31,331 4,505 1,807
Long-term obligations 2,955 45 16 15 35
Stockholders' equity 52,127 18,804 25,412 3,554 491
</TABLE>
Selected Unaudited Quarterly Consolidated Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year 2000, Quarters ended
--------------------------------------
Sep 30 Jun 30 Mar 31 Dec 31
------ ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $7,522 $ 6,811 $ 5,838 $ 5,257
Gross margin 6,864 5,689 4,823 4,182
Income (loss) from operations 151 (245) (750) (1,059)
Net income (loss) 367 37 (677) (992)
Earnings (loss) per share - basic 0.03 0.00 (0.06) (0.10)*
Earnings (loss) per share - diluted 0.02 0.00 (0.06) (0.10)*
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1999, Quarters ended
----------------------------------------
Sep 30 Jun 30 Mar 31 Dec 31
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $ 5,012 $ 4,152 $ 4,925 $ 4,866
Gross margin 3,748 3,291 3,807 4,148
Merger, acquisition and restructuring charges 5,776 188 -- 86
Loss from operations (7,322) (2,071) (1,374) (1,315)
Net loss (7,322) (2,071) (1,374) (1,315)
Earnings (loss) per share - basic (0.70) * (0.20) * (0.13) * (0.13) *
Earnings (loss) per share - diluted (0.70) * (0.20) * (0.13) * (0.13) *
</TABLE>
* calculated based upon 10.4 million pro forma shares outstanding prior to our
capitalization in November 1999
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this section has been derived from our
consolidated financial statements and should be read together with our
consolidated financial statements and related notes included elsewhere in this
report. The discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from those expressed
or implied in these forward-looking statements as a result of various factors.
Overview
We are a leading provider of communications technology that is used by
semiconductor and systems companies to design complex semiconductors called
systems-on-a-chip that are critical components of digital devices. We provide
cores, related silicon subsystems and firmware to over 450 customers that use
our technologies in hundreds of different digital devices ranging from network
routers to cellular phones.
Prior to our incorporation on November 1, 1999, we operated as a division
of Phoenix Technologies Ltd. ("Phoenix"). As of November 30, 1999, Phoenix
transferred certain assets to us in exchange for shares of our Series A
Preferred Stock and the assumption of certain liabilities. We successfully
completed an initial public offering in March of 2000, which generated net
proceeds of $37.0 million. At that time, all shares of Series A Preferred Stock
converted on a one-to-one basis into common stock. As of September 30, 2000,
Phoenix owned 10.4 million shares of our common stock (73.6% of our total
outstanding shares).
We have incurred operating and net losses for all fiscal years. These
losses have primarily resulted from two factors: research and development and
marketing costs incurred in order to generate market share and revenue growth;
and charges for restructurings, merger costs, and amortization of acquired
intangible assets. See further discussion included in "Business Risks."
Our consolidated financial statements prior to November 30, 1999, were
derived from the historical books and records of Phoenix as follows:
o The consolidated balance sheets included all assets and liabilities
directly attributable to us.
o The condensed consolidated statements of operations included all
revenue and expenses attributable to our operations, including
direct charges and allocated costs for shared facilities, functions
and services used by us and provided by Phoenix. Our expenses
included a significant amount allocated to us based upon Phoenix
management's estimate of the proportional benefit of services
provided by it. These allocations were generally based on pro rata
personnel, revenue generated or costs incurred.
You should not consider our historical financial statements prior to our
capitalization to be representative of the operating results, financial position
or cash flows to be expected in future periods or what the results of
operations, financial position or cash flows would have been had we been a
separate, stand-alone entity during the periods presented.
At the time of separation from Phoenix, we entered into a Services and
Cost-Sharing Agreement with Phoenix effective as of November 30, 1999. The
services have included data processing, telecommunications, information
technology support, accounting, financial management, tax preparation, payroll,
stockholder and public relations, legal, human resources administration,
procurement, real estate management and other administrative functions. The
shared costs include the costs of the office space that we occupy at Phoenix's
headquarters and insurance premiums. Our portion of the costs is equal to the
aggregate cost of the services for both companies multiplied by a percentage
representing the number of our employees to the total number of employees for
both companies. The Services and Cost-Sharing Agreement initially extended to
June 30, 2000 for all services other than accounting; the term for accounting
services initially extended to September 30, 2000. The Services and Cost-Sharing
Agreement
15
<PAGE>
has been renewed on a month-to-month basis for all services and costs, and we
anticipate the further extension of the agreement through fiscal year 2001.
Generally, either party can terminate on 30 days' written notice.
In September 1998, Phoenix acquired Sand Microelectronics, Inc., a leading
supplier of standards-based semiconductor intellectual property, which
represented a portion of the business transferred to us. The purchase price
consisted of approximately $18.6 million in cash, 464,000 shares of Phoenix
common stock with a fair value of $2.7 million, approximately 264,000 stock
options to purchase Phoenix common stock with a fair value of $1.6 million
issued in exchange for Sand stock options, and up to $3.7 million in performance
incentives through fiscal year 2001 that we may be required to pay. This
transaction was accounted for using the purchase method of accounting and
therefore Sand's results of operations are not included within ours before the
date of acquisition. Our consolidated balance sheets include the financial
position of Sand as of September 30, 1998, and our consolidated operating
results include the operating results of Sand after the date of acquisition.
In connection with the acquisition of Sand, $12.8 million of capitalized
software development costs, $9.6 million of goodwill and $2.8 million of other
intangible assets were recorded. Amortization of these assets is being
recognized on a straight-line basis over three- to six-year periods. See Note 7
of Notes to Consolidated Financial Statements.
Also in September 1998, Phoenix completed a merger with Award Software
International, Inc. As part of Phoenix's transfer to us, we acquired the
operations of Award associated with the development and marketing of
standards-based firmware. The Award transaction was accounted for as a
pooling-of-interests, and the firmware operations of Award were therefore
included in our results of operations for all periods presented. These
operations accounted for less than 10% of our revenue and operating costs for
all periods prior to the merger.
Results of Operations
The following table includes Consolidated Statements of Operations data as
a percentage of total revenue:
Years ended September 30,
2000 1999 1998
----- ----- -----
Revenue:
License fees 80.3% 79.0% 83.1%
Services 19.7 21.0 16.9
----- ----- -----
Total revenue 100.0 100.0 100.0
Cost of revenue:
License fees 6.4 5.3 13.9
Services 3.9 4.4 8.4
Amortization of purchased technology 4.9 11.2 --
----- ----- -----
Total cost of revenue 15.2 20.9 22.3
----- ----- -----
Gross margin 84.8 79.1 77.7
Operating expenses:
Research and development 30.5 48.0 33.5
Sales and marketing 37.4 33.5 43.7
General and administrative 13.1 17.7 15.6
Amortization of intangible assets 8.7 11.7 --
Stock-based compensation 2.5 -- --
Merger and restructuring charges -- 31.9 65.7
----- ----- -----
Total operating expenses 92.2 142.8 158.5
----- ----- -----
Loss from operations (7.4) (63.7) (80.8)
Interest income, net 4.8 -- --
----- ----- -----
Loss before income taxes (2.6) (63.7) (80.8)
Provision for income taxes 2.3 -- --
----- ----- -----
Net loss (4.9)% (63.7)% (80.8)%
===== ===== =====
16
<PAGE>
Revenue. We license software under non-cancelable license agreements and
provide related services, including training, non-recurring engineering and
product maintenance. License fee revenues are generally recognized when a
non-cancelable license agreement has been signed, the software has been shipped,
there are no uncertainties surrounding acceptance, the fees are fixed or
determinable, and collection is considered probable. For customer license
agreements which meet these recognition criteria, the portion of the fees
related to software licenses are generally recognized in the current period,
while the portion of the fees related to services is recognized as the services
are performed. When we enter into a license agreement with a customer requiring
significant customization of the software, we recognize revenue related to the
license agreement using contract accounting. Revenue from engineering services
is generally recognized on a time-and-materials basis or when contractual
milestones are met. Maintenance, which is included in service revenue, consists
of support services and periodic updates. Revenue from maintenance agreements is
generally recognized ratably over the maintenance period, which is typically one
year.
We adopted the American Institute of Certified Public Accountants'
Statement of Position, or SOP, 97-2, "Software Revenue Recognition," as of
October 1, 1998. We adopted the American Institute of Certified Public
Accountants' SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition,
with Respect to Certain Transactions," as of October 1, 1999. SOP 98-9 extended
the deferral of the application of certain passages of SOP 97-2 with respect to
the fair value of elements in multiple element arrangements. The adoption of SOP
97-2 and SOP 98-9 did not have a material impact on our consolidated financial
statements and results of operations, and such adoption is not expected to
significantly impact future periods. However, full implementation guidelines for
these pronouncements have not been issued. Once available, the current revenue
recognition accounting practices may need to change and such changes could
affect the timing of our future revenue recognition.
Revenue for the year ended September 30, 2000, was $25.4 million, an
increase of 34.1% from fiscal year 1999. This increase consisted of growth in
license fees revenue ($5.4 million) and services revenue ($1.0 million). Revenue
for the year ended September 30, 1999, was $19.0 million, an increase of 115.6%
from fiscal year 1998. Contributing to the increases in license fees in both
years was the growth in the licensing of semiconductor intellectual property by
semiconductor and systems companies for their system-on-a-chip designs to meet
time-to-market demands. Also contributing to the growth was an increase in
re-use licenses of semiconductor intellectual property by existing customers and
the release of new products during the year, including follow-on products for
both the USB and PCI standards released in fiscal year 2000. Services revenue
increased in both years due to maintenance revenue generated from our growing
installed base of customers. Contributing to the fiscal year 1999 revenue
increase was the fact that fiscal year 1998 revenue generated by Sand of $6.3
million was not included in the fiscal year 1998 historical operating results.
Fiscal year 1999 results reflected a full year of combined operations following
the acquisition of Sand.
No customer accounted for more than 10% of revenue in fiscal years 2000,
1999, or 1998.
Revenue by geographic region for the three years ended September 30, 2000,
1999 and 1998 was as follows (dollars in thousands):
<TABLE>
<CAPTION>
Amount % Change % of Consolidated Revenue
2000 1999 1998 2000 1999 2000 1999 1998
--------------------------- --------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America $16,313 $13,515 $ 6,977 20.7% 93.7% 64.2% 71.3% 79.4%
Asia 6,661 3,106 1,313 114.5% 136.6% 26.2% 16.4% 14.9%
Europe 2,454 2,334 502 5.1% 364.9% 9.6% 12.3% 5.7%
--------------------------- ------------------------
Total revenue $25,428 $18,955 $ 8,792 34.1% 115.6% 100.0% 100.0% 100.0%
=========================== ========================
</TABLE>
During the year ended September 30, 2000, we experienced accelerated
revenue growth in Asia and strong growth in North America. The growth in Asia
was due to the our development of extended direct and indirect market channels
throughout the region, and the growing market acceptance of outsourced
intellectual property by Asia customers. Domestically, the revenue growth was
due to
17
<PAGE>
increased market acceptance, the new product introductions referred to above and
an increase in the number of direct sales resources in the region.
Gross Margin. Gross margin is revenue less cost of revenue. License fee
cost of revenue consisted primarily of amortization of capitalized software
development costs and costs of licensing certain technologies from third-party
developers and publishers. Services cost of revenue included internal payroll
costs and third-party consulting costs associated with providing non-recurring
engineering services to customers.
Gross margin was $21.6 million, $15.0 million and $6.8 million in fiscal
years 2000, 1999 and 1998, respectively, increases of 43.8% from fiscal year
1999 to fiscal year 2000 and 119.4% from fiscal year 1998 to fiscal year 1999.
The increases in both years were primarily the result of higher revenue ($6.5
million in fiscal year 2000 and $10.2 million in fiscal year 1999). Partially
offsetting the fiscal year 1999 increase was $2.1 million of amortization of
purchased technology from the acquisition of Sand. The fiscal year 1999 increase
also reflects the fact that fiscal year 1998 gross margin of $6.1 million
generated by Sand was not included in our fiscal year 1998 historical operating
results.
Research and Development Expenses. Research and development expenses
consisted principally of payroll and related costs associated with the
development of our semiconductor intellectual property and related software, net
of amounts capitalized.
Research and development expenses were $7.8 million, $9.1 million and $2.9
million in fiscal years 2000, 1999 and 1998, respectively, a decrease of 14.7%
from fiscal year 1999 to fiscal year 2000 and an increase of 208.5% from fiscal
year 1998 to fiscal year 1999. As a percentage of revenue, research and
development expenses were 30.5% in fiscal year 2000, 48.0% in fiscal year 1999
and 33.5% in fiscal year 1998. The fiscal year 2000 decrease primarily reflected
a decrease in compensation and related benefits due to decreased personnel and
the completion of a significant outsource design contract, partially offset by a
decrease in research and development cost capitalized under Statement of
Financial Accounting Standards, or SFAS, 86. The fiscal year 1999 increase
primarily reflected increases in compensation and related benefits due to
increased personnel, allocations from Phoenix, consulting services and
depreciation, and a reduction of research and development costs capitalized
under SFAS 86. The fiscal year 1999 increase also related to the fact that
fiscal year 1998 Sand research and development expenses of $2.2 million were not
included in our fiscal year 1998 historical operating results.
Sales and Marketing Expenses. Sales and marketing expenses consisted of
costs related to advertising, public relations, and other marketing, selling and
distribution activities. These costs included direct out-of-pocket and payroll
expenses, and an allocation from Phoenix of costs associated with corporate
marketing programs and field selling activities.
Sales and marketing expenses were $9.5 million, $6.4 million and $3.8
million in fiscal years 2000, 1999 and 1998, respectively, increases of 50.0%
from fiscal year 1999 to fiscal year 2000 and 65.2% from fiscal year 1998 to
fiscal year 1999. As a percentage of revenue, sales and marketing expenses
amounted to 37.4% in fiscal year 2000, 33.5% in fiscal year 1999 and 43.7% in
fiscal year 1998. The fiscal year 2000 increase primarily reflects increases in
compensation and related benefits due to increased personnel and increased
commissions due to increased revenue. The fiscal year 1999 increase primarily
reflected increases in compensation and related benefits due to increased
personnel and allocations from Phoenix, partially offset by a decrease in
marketing costs and firmware-related sales and marketing costs. The fiscal year
1999 increase also related to the fact that fiscal year 1998 Sand sales and
marketing expenses of $1.4 million were not included in our fiscal year 1998
historical operating results.
General and Administrative Expenses. General and administrative expenses
consisted of expenditures for executive, accounting, legal, personnel,
recruiting and other administrative functions. These expenses included costs
incurred and allocated by Phoenix for all historical periods.
General and administrative expenses were $3.3 million, and $3.4 million
and $1.4 million in fiscal years 2000, 1999 and 1998, respectively, a decrease
of 0.8% from fiscal year 1999 to fiscal year 2000 and an
18
<PAGE>
increase of 145.9% from fiscal year 1998 to fiscal year 1999. As a percentage of
revenue, general and administrative expenses amounted to 13.1% in fiscal year
2000, 17.7% in fiscal year 1999 and 15.6% in fiscal year 1998. The increase in
fiscal year 1999 was due to an increase in the headcount-based allocations from
Phoenix. The fiscal year 1999 increase also reflects the fact that $793,000 of
fiscal year 1998 general and administrative expenses attributable to Sand were
not included in our fiscal year 1998 historical operating results.
Merger and Restructuring Costs. Merger and restructuring charges during
the years ended September 30, 1999 and 1998, were as follows:
Years ended
September 30,
---------------------
(in thousands) 1999 1998
------------------------------------------------------ ------ ------
Restructuring $1,195 $ 50
Asset write-offs 4,855 1,478
In-process research and development -- 4,250
------ ------
$6,050 $5,778
====== ======
Included in fiscal year 1999 was a restructuring charge of $6.1 million
due to the write-off of $4.9 million of capitalized software development costs
and approximately $1.2 million of severance and other costs allocated from
Phoenix. The capitalized software development cost write-off was calculated
based upon the excess of carrying value over the difference between the gross
expected future revenue to be generated and the projected future costs of such
revenue, and was related primarily to reduced revenue expectations due to
changing market conditions. The severance and other costs allocated from Phoenix
related to the elimination of nine Phoenix corporate management positions and
three inSilicon positions. The severance costs incurred for the Phoenix
positions were allocated to us based upon relative headcount, consistent with
the allocation of our other costs incurred by Phoenix.
Approximately $200,000 of the fiscal year 1999 restructuring charges was
unpaid as of September 30, 2000. The remaining unpaid charges will mostly be
paid in fiscal year 2001.
Included in the fourth quarter of fiscal year 1998 was a charge of $5.8
million related to the acquisition of Sand. The $4.2 million in-process research
and development charge was an allocation of a portion of the purchase price for
Sand for projects that were not yet capitalizable under the provisions of SFAS
86. The $1.5 million asset write-off related to software development costs that
were capitalized on our historical balance sheet under SFAS 86. The write-off
was calculated based upon the excess of carrying value over the difference
between the gross expected future revenue to be generated and the projected
future costs of such revenue, and related primarily to projects that were
redundant between us and Sand.
All of the fiscal year 1998 merger and restructuring charges were paid as
of September 30, 2000.
Stock-Based Compensation. Stock-based compensation expense of $642,000 was
recorded in fiscal year 2000. These charges were primarily due to the
amortization of deferred stock compensation associated with stock options
granted in December 1999 at an exercise price less than the fair market value of
our common stock on the grant date. The total deferred stock-based compensation
recorded was approximately $1.7 million, and the remaining compensation will be
amortized by charges to operations over the remaining vesting periods of the
options, which are generally four years.
Amortization of Goodwill and Other Intangible Assets. Charges recorded in
fiscal years 2000 and 1999 related to the amortization of goodwill and other
intangible assets from the acquisition of Sand in September 1998. The $9.6
million of recorded goodwill is being amortized on a straight-line basis over
six years, and the $2.8 million of other intangible assets is being amortized on
a straight-line basis over three to six years.
Interest and Other Income, Net. Net interest income was derived primarily
from cash, short- and long-term investments and marketable securities. The
income generated each period was highly
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dependent on available cash and fluctuations in government interest rates. In
addition, certain trade balances were denominated in foreign currencies, and
therefore were subject to fluctuations in foreign currency exchange rates.
Net interest income was $1.2 million in fiscal year 2000. The increase
from fiscal year 1999 to fiscal year 2000 was primarily due to interest received
on higher cash balances as a result of proceeds we received from the initial
public offering of our stock. The average interest rate earned in fiscal year
2000 was approximately 6.3%. Net interest income was $0 in fiscal years 1999 and
1998 because, as a division of Phoenix, we had no cash balances.
Provision for Income Taxes. The net losses we incurred through November
30, 1999 were attributable to our operations as a division of Phoenix and were
or will be included in income tax returns filed by Phoenix. Because we will not
receive any benefit for our historical operating losses incurred through
November 30, 1999, no income tax benefit has been reflected for the periods
presented through September 30, 1999, and because our operating losses for tax
purposes have been used by Phoenix, we have no net operating loss carryforwards
as of November 30, 1999 to apply against future taxable income, if any.
In conjunction with our capitalization as of November 30, 1999, a net
deferred tax liability of $2.7 million was transferred from Phoenix to us,
representing the future tax effect of historical temporary book/tax differences.
Further, we have entered into a tax-sharing agreement with Phoenix under which
we are responsible for federal and state income taxes for the periods subsequent
to November 30, 1999.
We recorded an income tax provision of $0.6 million in fiscal year 2000.
Excluding non-deductible goodwill and stock-based compensation charges, our
fiscal year 2000 effective tax rate was 26.1%. Our effective tax rate (excluding
non-deductible acquisition charges and transaction costs) was lower than the
statutory rate due to various federal and state tax credits and lower tax rates
imposed on foreign earnings in certain jurisdictions. We expect our effective
tax rate in fiscal year 2001 to increase due to a decreased proportion of
research and development tax credits.
New Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101") which outlines the
Staff's position on various revenue recognition issues. We believe that the
adoption of SAB 101 as of October 1, 2000, will not have a material impact on
our financial position, results of operations or cash flows.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions involving
Stock Compensation," an interpretation of Accounting Principles Board Opinion
No. 25 ("Opinion 25"). FIN 44 clarifies (a) the definition of "employee" for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 was generally effective July 1, 2000, and the effects of
applying FIN 44 are recognized on a prospective basis from that date. In fiscal
year 2000, FIN 44 did not have a material impact on our financial position,
results of operations or cash flow.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which we will be required to adopt for the
year ending September 30, 2001. SFAS 133 establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Because we currently are not a
party to any derivative financial instruments, and do not currently engage in
hedging activities, adoption of SFAS 133 is not expected to have a material
impact on our financial condition or results of operations.
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Financial Condition
Liquidity and Capital Resources
In the second quarter of fiscal year 2000, we raised net proceeds of $37.0
million from our initial public offering. In addition, we have a secured bank
line of credit with Silicon Valley Bank, which will provide up to $5.0 million
in working capital. Borrowings, if any, will bear interest at prime plus 0.25%.
This line of credit expires in January 2001 and requires us to comply with
various financial covenants, including a minimum quick ratio and a maximum on
aggregate annual losses. As of September 30, 2000, we were in compliance and
there were no borrowings outstanding under this line of credit.
Changes in Financial Condition
Cash provided by operating activities was $2.5 million and $3.6 million
for fiscal years 2000 and 1998, respectively. Cash used in operating activities
was $4.3 million in fiscal year 1999. Cash provided in fiscal years 2000 and
1998 was due to depreciation and amortization in excess of net operating loss,
net of increases in certain short-term liabilities. Cash used in fiscal year
1999 was primarily due to a net loss and an increase in accounts receivable due
to increased revenue, offset in part by depreciation and amortization and a
write-off of capitalized software costs.
Cash used in investing activities was $28.4 million, $1.1 million and
$18.9 million in fiscal years 2000, 1999 and 1998, respectively. Cash used in
fiscal year 2000 was attributable to purchases of short-term investments,
additions to computer software costs and purchases of property and equipment.
Cash used in fiscal year 1999 was attributable to additions to computer software
costs and purchases of property and equipment. Cash used in fiscal year 1998 was
attributable to additions to computer software costs, purchases of property and
equipment and a $15.6 million investment in Sand.
Cash provided by financing activities was $36.6 million, $5.5 million and
15.3 million for fiscal years 2000, 1999 and 1998. Cash provided in fiscal year
2000 related primarily to proceeds from the initial public offering of our
common stock. Cash provided in fiscal years 1999 and 1998 related to capital
contributions from Phoenix.
As a portion of the consideration for the acquisition of Sand, we entered
into an earn-out agreement with the selling stockholders. Under the terms of the
agreement, the selling stockholders may earn additional purchase price
consideration for each of the three years ending September 30, 2001, contingent
upon our financial performance. The maximum contingent consideration is $3.7
million, of which approximately $1.6 million represents minimum anticipated
payments that were recorded as accrued merger costs at the time of the
acquisition. Future payments are due subsequent to the end of each of the three
fiscal years ending September 2001, and payments in excess of amounts accrued,
if any, will be recorded as additional goodwill and amortized over the remaining
life of the original goodwill recorded. Approximately $800,000 was earned in
fiscal year 2000 and is scheduled to be paid in the first quarter of fiscal year
2001. Approximately $867,000 was earned in fiscal year 1999 and paid in fiscal
year 2000.
We expect our future liquidity and capital requirements to vary greatly
from quarter to quarter, depending on numerous factors, including the cost,
timing and success of product development efforts, the cost and timing of sales
and marketing activities, the extent to which our existing and new technologies
gain market acceptance, the number and complexity of communications standards,
the level and timing of revenues, competing technological and market
developments and the costs of maintaining and enforcing patent claims and other
intellectual property rights. We believe that our present liquid assets,
together with cash generated by our operations, if any, will be sufficient to
meet our operating and capital requirements for at least the next 12 months.
Thereafter, we believe we will be able to raise any additional funds required
through public or private financings, strategic relationships or other
arrangements. However, we cannot be certain that any such financing will be
available on acceptable terms, or at all, and our failure to raise capital when
needed could seriously harm our business.
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Additional equity financing may be dilutive to the holders of our common stock,
and debt financing, if available, may involve restrictive covenants. Moreover,
strategic relationships, if necessary to raise additional funds, may require
that we relinquish our rights to certain technology.
Business Risks
The additional following factors should be considered carefully when
evaluating us and our business.
The unpredictability of our quarterly operating results may cause the price of
our common stock to decline.
We expect our quarterly operating results to fluctuate significantly due
to a variety of factors, many of which are outside of our control. Our revenue
is difficult to predict and may fluctuate significantly from period to period.
Because our expenses are largely independent of our revenue in any particular
period, it is difficult to accurately forecast our operating results. Our
operating expenses are based, in part, on anticipated future revenue and a high
percentage of our expenses are fixed in the short term. As a result, if our
revenue is below expectations in any quarter, the negative effect may be
magnified by our inability to adjust spending in a timely manner to compensate
for the revenue shortfall.
Factors that could cause our revenue and operating results to vary from
quarter to quarter include:
o shifts in demand for and average selling prices of semiconductors
that incorporate our technology;
o large orders or regional spending patterns unevenly spaced over
time;
o the financial terms of our contractual arrangements with our
licensees and partners that may provide for significant up-front
payments or payments based on the achievement of certain milestones;
o the relative mix of license revenues, royalties and services;
o the impact of competition on license revenue or royalty rates;
o establishment or loss of strategic relationships with semiconductor
or systems companies;
o timing of new technologies and technology enhancements by us and our
competitors;
o seasonality of demand; and
o changes in development schedules, research and development
expenditure levels and product support by us and semiconductor and
systems companies.
As a result, we believe that period-to-period comparisons of our results
of operations are not necessarily meaningful and, accordingly, that these
comparisons should not be relied upon as indications of future performance. Due
to these and other factors, it is likely that our operating results will be
below market analysts' expectations in some future quarters, which would cause
the market price of our stock to decline.
We have incurred net losses since our inception, and we may not achieve or
sustain annual profitability.
We incurred net losses of $1.3 million for fiscal year 2000, $12.1 million
for fiscal year 1999 and $7.1 million for fiscal year 1998, and had an
accumulated deficit of $24.1 million as of September 30, 2000. Although we have
experienced revenue growth in recent periods, we cannot assure you that we will
be able to sustain the growth in our revenue. If we do achieve annual
profitability, we cannot be certain that we can sustain or increase
profitability on a quarterly or annual basis in the future or at all. This may
in turn cause our stock price to decline. In addition, if we do not achieve or
sustain profitability in the future, we may be unable to continue our
operations.
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If semiconductor and systems companies do not adopt our semiconductor
intellectual property and use it in the products they sell, our revenues will
not grow.
The adoption and continued use of our semiconductor intellectual property
by semiconductor and systems companies and an increasing demand for products
requiring complex semiconductors, such as portable computing devices and
cellular phones, is important to our continued success. The market for merchant
semiconductor intellectual property has only recently begun to emerge. Our
ability to achieve sustained revenue growth and profitability in the future will
depend on the continued development of this market and, to a large extent, on
the demand for complex semiconductors. There can be no assurance that the
merchant semiconductor intellectual property and complex semiconductor markets
will continue to develop or grow at a rate sufficient to support our business.
If either of these markets fails to grow or develops slower than expected, our
business, operating results and financial condition would be seriously harmed.
We face numerous risks in obtaining agreements with semiconductor and
systems companies on terms beneficial to our business, including:
o the lengthy and expensive process of building a relationship with a
potential licensee or prospective partner;
o the fact that we may compete with the internal development groups of
semiconductor and systems companies;
o the fact that we may be unable to persuade semiconductor and systems
companies to rely on us for critical technology;
o the fact that we may be unable to persuade potential licensees and
partners to bear development costs associated with our
communications technology;
o the risk that even after our customers select our communications
technology, they may not produce semiconductors using our
communications technology; and
o the risk that even if a particular semiconductor or systems company
adopts our communications technology, that the customer may fail due
to competition or lack of market acceptance of its products that use
our communications technology.
We cannot assure you that we will be able to maintain our current
relationships or establish new relationships with additional licensees or
partners, and any failure by us to do so could seriously harm our business. None
of our current licensees or partners is obligated to license new or future
generations of our communications technology.
If we are not able to protect our intellectual property adequately, we will have
less proprietary technology to license, which will reduce our revenues and
profits.
Our patents, copyrights, trademarks, trade secrets and similar
intellectual property are critical to our success. We rely on a combination of
patent, trademark, copyright, mask work and trade secret laws to protect our
proprietary rights. We own three U.S. patents on various aspects of our
technology and have several pending U.S. patent applications. We cannot be sure
that patents will be issued from any patent applications submitted, that any
patents we hold will not be challenged, invalidated or circumvented or that any
claims allowed from our patents will be of sufficient scope or strength to
provide meaningful protection or any commercial advantage to us. In addition,
the laws of foreign countries may not adequately protect our intellectual
property as well as the laws of the United States.
We use various agreements including licenses, employee assignments,
independent contractor, third-party nondisclosure, and assignments, to limit
access to and distribution of our proprietary information and to obtain license
rights or ownership of technology prepared on a work-for-hire or other basis.
Even though we have taken all customary industry precautions, we cannot be sure
that the steps we take to protect our intellectual property rights will be
adequate to deter misappropriation of the rights or
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that we will be able to detect unauthorized uses and take immediate or effective
steps to enforce our rights. We also cannot be sure that the steps we may take
to obtain ownership of any contributed intellectual property will be sufficient
to assure our ownership of all proprietary rights. We also rely on unpatented
trade secrets to protect our proprietary technology, however, we cannot be
certain that others will not independently develop or otherwise acquire the same
or substantially equivalent technologies or otherwise gain access to our
proprietary technology or disclose that technology. We also cannot be sure that
we can ultimately protect our rights to our unpatented proprietary technology.
In addition, third parties might obtain patent rights which could be used to
assert infringement claims against us.
Third parties may claim we are infringing their intellectual property rights,
and we could suffer significant litigation or licensing expenses or be prevented
from licensing our technology.
Third parties may claim that we are infringing their intellectual property
rights, and we may be found to infringe those intellectual property rights.
While we do not believe that any of our technologies infringe the valid
intellectual property rights of third parties, we may be unaware of intellectual
property rights of others that may cover some of our technology and services.
Any litigation regarding patents or other intellectual property could be
costly and time-consuming, and divert our management and key personnel from our
business operations. The complexity of the technology involved and the
uncertainty of the outcome of intellectual property litigation increase these
risks. Claims of intellectual property infringement also might require us to
enter into costly royalty or license agreements. However, we may not be able to
obtain royalty or license agreements on terms acceptable to us, or at all. We
also may be subject to significant damages or injunctions against development
and licensing of certain of our technologies.
Any acquisitions we make could disrupt our business and harm our financial
condition and results of operation.
As part of our growth strategy, we pursue the acquisition of other
companies, assets and product lines that either complement or expand our
existing business. Following the end of fiscal year 2000, we entered into
agreements to acquire two companies. Acquisitions involve a number of special
risks, including the diversion of management's attention to the assimilation of
the operations and personnel of the acquired companies, adverse short-term
effects on our operating results, integration of financial reporting systems and
the amortization of acquired intangible assets. There can be no assurance that
we can successfully integrate acquired businesses or that such businesses will
enhance our business. We are unable to predict the likelihood of a material
acquisition being completed in the future. We may seek to finance any such
acquisition through additional debt or equity financings, which could result in
dilution and additional risk for the holders of our common stock.
We anticipate that one or more potential acquisition opportunities,
including those that would be material, may become available in the near future.
If and when appropriate acquisition opportunities become available, we intend to
pursue them actively. No assurance can be given that any acquisition by us will
or will not occur, that if an acquisition does occur that it will not materially
and adversely affect us or that any such acquisition will be successful in
enhancing our business. Our future results of operations will also depend in
part on our ability to successfully expand internally by increasing the number
of new product lines, and to manage any future growth. No assurance can be given
that we will be able to obtain or integrate additional product lines or manage
any future growth successfully.
The semiconductor intellectual property market is highly competitive, and we may
lose market share to larger competitors with greater resources and to companies
that develop their own semiconductor intellectual property using internal design
teams.
We will face competition from both existing and new suppliers of
semiconductor intellectual property that we anticipate will enter the market. We
also compete with the internal development groups of large, vertically
integrated semiconductor and systems companies. We also may face competition
from suppliers of technologies based on new or emerging technology standards.
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We must also differentiate our communications technology from those
available or under development by other suppliers or the internal development
groups of semiconductor and systems companies, including some of our current and
prospective licensees. Many of these internal development groups have
substantial programming and design resources and are part of larger
organizations with substantial financial and marketing resources. These internal
development groups may develop technologies that compete directly with ours or
may actively seek to license their own technologies to third parties.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater brand recognition and
larger customer bases, as well as greater financial and marketing resources,
than we do. This may allow them to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. It may also allow
them to devote greater resources than we can to the development and promotion of
their technologies.
If we are unable to develop enhancements and new generations of our intellectual
property, we may be unable to attract or retain customers.
Our future success will depend on our ability to develop enhancements and
new generations of our communications technology that satisfy the requirements
of new and evolving standards and introduce these new technologies to the
marketplace in a timely manner. If our development efforts are not successful or
are significantly delayed, or if the characteristics of our communications
technology are not compatible with the requirements of specific product
applications, we may be unable to attract or retain customers.
Technical innovations of the type critical to our success are inherently
complex and involve several risks, including:
o our ability to anticipate and respond in a timely manner to changes
in the requirements of semiconductor and systems companies;
o the emergence of new standards by semiconductor and systems
companies;
o the significant research and development investment that is often
required before market acceptance, if any, of a particular standard;
o the possibility that even after a significant investment of our
resources, the standard will not become accepted by the industry;
and
o the introduction of products by our competitors embodying new
technologies or features.
Our failure to adequately address these risks could render our existing or
future communications technology obsolete and could seriously harm our business.
In addition, we cannot assure you that we will have the financial and other
resources necessary to develop communications technology in the future, or that
any enhancements or new generations of the technology that we develop or procure
will generate revenue in excess of the costs of development or procurement.
Rapid product transitions or introductions of new standards may cause our
technologies to become obsolete.
From time to time, we or our competitors may announce new technologies or
capabilities that may replace or shorten the life cycles of our existing
technologies. Announcements of currently planned or other new technologies may
cause customers to defer or stop licensing our technologies until those new
technologies become available. In addition, announcements of a new standard may
cause customers to defer or stop licensing our technologies until that standard
becomes available or accepted.
If we do not compete effectively with others to attract and retain key
personnel, we may be unable to develop the new communications technology
necessary to expand our business.
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Our ability to continue to grow successfully requires an effective
planning and management process. Since October 31, 1998, we increased our
headcount substantially, from 51 employees at that date to 91 employees at
October 31, 2000.
Our growth has placed, and the recruitment and integration of additional
employees will continue to place, a strain on our resources. Semiconductor and
systems company licensees typically require significant engineering support in
the design, testing and manufacture of products incorporating our technology.
Accordingly, increases in the adoption of our technology can be expected to
increase the strain on our personnel, particularly our engineers.
We believe our future success will depend upon our ability to successfully
manage our growth, including attracting and retaining engineers, other highly
skilled personnel and senior managers. Our employees are "at will" and are not
hired for a specified term. Hiring qualified sales and technical personnel will
be difficult due to the limited number of qualified professionals. Competition
for these types of employees is intense. We have, in the past, experienced
difficulty in recruiting and retaining qualified sales and technical personnel.
Our employees are recruited aggressively by our competitors and by start-up
companies. We believe our salaries are competitive, but under certain
circumstances, start-up companies can offer more attractive stock option
packages. As a result, we have experienced, and may continue to experience,
significant employee turnover. Failure to attract and retain personnel,
particularly sales and technical personnel, would materially harm our business.
As we seek to expand our operations, we may also significantly strain our
financial and management systems and other resources. We cannot be certain that
our systems, procedures, controls and facilities will be adequate to support our
operations.
RISKS RELATED TO THE SEMICONDUCTOR INDUSTRY
A downturn in the semiconductor or electronics businesses would reduce our
sales.
Our business has benefited from the rapid worldwide growth of the
semiconductor industry, which in turn has been fueled by growth in
telecommunications, computers and consumer electronics. Continued licenses of
our technologies are largely dependent upon the commencement of new design
projects by semiconductor and systems companies. However, the semiconductor
industry is highly cyclical and subject to rapid technological change. It also
has been subject to significant economic downturns at various times,
characterized by diminished demand, accelerated erosion of average selling
prices and production overcapacity. In addition, the semiconductor industry also
periodically experiences increased demand and production capacity constraints.
As a result, we may experience substantial period-to-period fluctuations in
future operating results due to general semiconductor industry conditions,
overall economic conditions or other factors. A number of semiconductor and
systems companies have announced layoffs of their employees or the suspension of
investment plans, and although we have not seen a significant drop-off in demand
from these customers, their budgets could be reduced, alone or as part of
overall expense control efforts. In addition, there have been a number of
mergers in the electronics industry, which may reduce the aggregate level of
licenses of our technologies and purchases of our services by the merged
companies. Potential slower growth in the electronics industry, a reduced number
of design starts, tightening of customers' operating budgets or continued
consolidation among our customers may seriously harm our business.
RISKS RELATED TO OUR RECENT SEPARATION FROM PHOENIX TECHNOLOGIES LTD.
We depend on agreements with Phoenix for many important services that may be
hard to replace on a cost-effective basis if Phoenix terminates the agreements.
We have entered into agreements with Phoenix that have defined and will
continue to define our business relationship. These agreements include a
Services and Cost-Sharing Agreement, under which Phoenix provides various,
primarily administrative, services to us, including accounting, treasury, tax
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and information services, and we share with Phoenix certain costs, including
facilities and insurance. The Services and Cost-Sharing Agreement initially
extended to June 30, 2000 for all services other than accounting; the term for
accounting services initially extended to September 30, 2000. The Services and
Cost-Sharing Agreement has been renewed on a month-to-month basis for all
services and costs, and we anticipate the further extension of the agreement
through fiscal year 2001. Generally, either party can terminate on 30 days'
written notice. Consequently, we cannot be sure how long Phoenix will continue
to provide us services under the Services and Cost-Sharing Agreement and, if it
does not, whether or on what terms we could obtain these services. If we cannot
perform these services ourselves or obtain them on acceptable terms, this could
materially harm our business. In addition, we have entered into a distribution
agreement under which Phoenix acts as a non-exclusive sales representative for
us in certain Asian countries and this service will be difficult to replace if
Phoenix terminates this agreement.
Since Phoenix can elect all our directors and influence our business for its
benefit for at least as long as it owns 50% or more of our shares, Phoenix can
take actions beneficial to it at our expense.
For at least as long as Phoenix continues to own more than 50% of our
common stock, Phoenix can direct the election of all our directors and exercise
a controlling influence over our business, including any mergers or other
business combinations, acquisitions or dispositions of assets, future issuances
of our common stock or other equity securities, the incurrence of debt and the
payment of dividends. Phoenix also can determine matters submitted to a vote of
our stockholders without the consent of our other stockholders, prevent or cause
a change in who controls us and take other actions that might be favorable to
Phoenix.
We may have conflicts of interest with Phoenix that are not resolved in our
favor.
We may have conflicts of interest with Phoenix in areas relating to our
past and ongoing relationships, including potential competitive business
activities, indemnity arrangements, tax and intellectual property matters,
registration rights, potential acquisitions or financing transactions, sales or
other dispositions by Phoenix of our shares of common stock it holds and the
exercise by Phoenix of its ability to control our management and affairs. We
also cannot be sure that any conflicts that may arise between us and Phoenix
will be resolved in a manner that does not seriously harm us, even if Phoenix
does not intend that result.
In addition, the ownership interests of our directors or officers in
Phoenix common stock or service as both a director of inSilicon and an officer
or director of Phoenix could create or appear to create potential conflicts of
interest when directors and officers are faced with decisions that could have
different implications for us and Phoenix. One of our current directors is a
director and officer of Phoenix.
Loss of the Phoenix affiliation as a result of our separation from Phoenix may
damage our relationships with existing licensees or partners or their
perceptions of us, which could reduce our revenues.
Licensees of our communications technology or our strategic partners may
have chosen our technologies because of the positive reputation of Phoenix or
their economic ties to Phoenix. For example, Phoenix may also be a customer for
their products. As a separate, stand-alone entity, we may not enjoy these
advantages with those customers and partners and it may be harder for us to
compete for their continued business. For example, our company name is not as
well recognized as the Phoenix brand in certain markets, and as a result our
technology licensing could suffer. The loss of the "Phoenix" brand name may
hinder our ability to establish new relationships with potential customers and
partners, particularly in Asia. In addition, our current customers, suppliers
and partners may react negatively to the separation. Although we believe we have
all necessary rights to use the brand name "inSilicon," our rights to use it may
be challenged by others.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes, foreign currency
fluctuations, and change in the market values of our investments.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates
primarily to its investment portfolio. Our investments are in debt instruments
of the U.S. Government and its agencies and in high-quality corporate issuers.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if there is a decline in
interest rates. Due in part to these factors, our future investment income may
fall short of expectations, or we may suffer a loss in principal if we are
forced to sell securities which have declined in market value due to changes in
interest rates. The Company has the ability to hold its fixed income investments
until maturity and, therefore, the Company would not expect its operating
results or cash flows to be affected to any significant degree by a sudden
change in market interest rates on its short-term investment portfolio.
Foreign Currency Risk
Certain international sales are recorded in our foreign sales subsidiaries
and are denominated in the local currency of each country. These subsidiaries
incur most of their expenses in the local currency and correspondingly all
foreign subsidiaries use the local currency as their functional currency.
Our international business is subject to risks typical of an international
business, including, but not limited to, differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in these or other
factors. Exposure to foreign exchange rate fluctuations arises in part from
intercompany accounts in which license fees or commissions are paid from the
United States company to the foreign sales subsidiaries. Generally, these
amounts are due and payable in U.S. dollars. We are also exposed to foreign
exchange rate fluctuations as the financial results of foreign subsidiaries are
translated into U.S. dollars at current rates of exchange on consolidation. As
exchange rates vary, these results, when translated at current rates, may vary
from expectations and adversely impact overall expected profitability. A
hypothetical 10 percent appreciation / depreciation of the U.S. Dollar from
September 30, 2000 market rates would not have a significant affect on net
income.
Investment Risk
We have invested in equity instruments of privately-held, information
technology companies for business and strategic purposes. These investments were
included in other long-term assets and were accounted for under the cost method
as our ownership is less than 20%. For these non-quoted investments, our policy
is to regularly review the assumptions underlying the operating performance and
cash flow forecasts in assessing the carrying values. We identify and record
impairment losses on long-lived assets when events and circumstances indicate
that such assets might be impaired. To date, no such impairment has been
recorded.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the consolidated financial statements and
supplementary financial information attached hereto.
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to our directors will
be contained in our definitive proxy statement to be filed pursuant to
Regulation 14A in connection with the 2001 annual meeting of our stockholders
(the "Proxy Statement") and is incorporated herein by this reference. The
information required by this item with respect to our executive officers is
contained in Part I in the section captioned, "Executive Officers of inSilicon
Corporation."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this section is incorporated by reference from
the information contained in the section captioned, "Compensation of Directors
and the Named Executive Officers" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this section is incorporated by reference from
the information contained in the section captioned, "Beneficial Ownership of
Certain Stockholders, Directors and Executive Officers" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this section is incorporated by reference from
the information contained in the section captioned, "Related Party Transactions"
in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Index to Consolidated Financial Statements
The following Consolidated Financial Statements of inSilicon and its
subsidiaries are filed as part of this report on Form 10-K:
Page
----
Report of Ernst & Young LLP, Independent Auditors ......................... 32
Consolidated Balance Sheets as of September 30, 2000 and 1999 ............. 33
Consolidated Statements of Operations for the years ended
September 30, 2000, 1999, and 1998 ...................................... 34
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 2000, 1999, and 1998 ...................................... 35
Consolidated Statements of Cash Flows for the years ended
September 30, 2000, 1999, and 1998 ...................................... 36
Notes to Consolidated Financial Statements ................................ 37
2. Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto. The consolidated financial statements and financial
statement schedules follow the signature page hereto.
3. See Item 14(c).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by us during the year ended September
30, 2000.
(c) Exhibits.
See attached Exhibits Index.
(d) See Item 14(a)2.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INSILICON CORPORATION
By: /s/ Wayne C. Cantwell
---------------------------------
Wayne C. Cantwell
President and Chief Executive Officer
Date: December 21, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Wayne C. Cantwell /s/ William E. Meyer
---------------------------------------- ------------------------------------
Wayne C. Cantwell William E. Meyer
Director and Principal Executive Officer Principal Financial and Accounting Officer
Date: December 21, 2000 Date: December 21, 2000
/s/ Raymond J. Farnham /s/ John R. Harding
---------------------------------------- ------------------------------------
Raymond J. Farnham John R. Harding
Director Director
Date: December 21, 2000 Date: December 21, 2000
/s/ E. Thomas Hart /s/ Albert E. Sisto
---------------------------------------- ------------------------------------
E. Thomas Hart Albert E. Sisto
Director Director
Date: December 21, 2000 Date: December 21, 2000
</TABLE>
30
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
inSilicon Corporation
We have audited the accompanying consolidated balance sheets of inSilicon
Corporation as of September 30, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended September 30, 2000. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These
consolidated financial statements and schedule are the responsibility of
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
inSilicon Corporation at September 30, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
October 17, 2000
31
<PAGE>
INSILICON CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30,
--------------------
2000 1999
-------- --------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,798 $ --
Short-term investments 27,383 --
Accounts receivable, net of allowances for doubtful accounts
of $149 and $364 at September 30, 2000 and 1999 6,699 5,104
Receivable from Phoenix 1,054 --
Other current assets 1,992 135
-------- --------
Total current assets 47,926 5,239
Investments 838 838
Property and equipment, net 1,231 1,174
Computer software costs, net 5,385 6,974
Goodwill and other intangible assets, net 8,000 10,220
Other assets 330 36
-------- --------
Total assets $ 63,710 $ 24,481
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,243 $ 205
Payroll and related liabilities 2,307 1,776
Deferred revenue 2,692 1,589
Accrued merger costs 756 1,560
Other accrued liabilities 1,630 502
-------- --------
Total current liabilities 8,628 5,632
Long-term obligations 2,955 45
-------- --------
Total liabilities 11,583 5,677
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.001; 15,000 shares authorized;
none issued or outstanding -- --
Common stock, par value $0.001; 100,000 shares authorized;
14,129 shares issued and outstanding at September 30, 2000 14 --
Additional paid-in capital 77,232 --
Net contribution from stockholder -- 41,632
Deferred stock-based compensation (1,078) --
Accumulated deficit (24,093) (22,828)
Accumulated other comprehensive income 52 --
-------- --------
Total stockholders' equity 52,127 18,804
-------- --------
Total liabilities and stockholders' equity $ 63,710 $ 24,481
======== ========
</TABLE>
See notes to consolidated financial statements
32
<PAGE>
INSILICON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue:
License fees $ 20,411 $ 14,973 $ 7,304
Services 5,017 3,982 1,488
-------- -------- --------
Total revenue 25,428 18,955 8,792
Cost of revenue:
License fees 1,613 1,003 1,223
Services 1,001 826 734
Amortization of purchased technology 1,256 2,132 --
-------- -------- --------
Total cost of revenue 3,870 3,961 1,957
-------- -------- --------
Gross margin 21,558 14,994 6,835
Operating expenses:
Research and development 7,753 9,092 2,947
Sales and marketing 9,510 6,350 3,843
General and administrative 3,336 3,364 1,368
Amortization of goodwill and other intangible assets 2,220 2,220 --
Stock-based compensation 642 -- --
Merger and restructuring charges -- 6,050 5,778
-------- -------- --------
Total operating expenses 23,461 27,076 13,936
-------- -------- --------
Loss from operations (1,903) (12,082) (7,101)
Interest income, net 1,225 -- --
-------- -------- --------
Loss before income taxes (678) (12,082) (7,101)
Provision for income taxes 587 -- --
-------- -------- --------
Net loss $ (1,265) $(12,082) $ (7,101)
======== ======== ========
Net loss per share:
Basic $ (0.10) $ (1.16)
======== ========
Diluted $ (0.10) (1.16)
======== ========
Weighted average number of shares used in computation:
Basic 12,338 10,400
======== ========
Diluted 12,338 10,400
======== ========
Transactions with Phoenix
Revenue $ 752 $ -- $ --
======== ======== ========
Cost of revenue $ 798 $ -- $ --
======== ======== ========
</TABLE>
See notes to consolidated financial statements
33
<PAGE>
INSILICON CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Net Accumulated
Preferred Stock Common Stock Additional Contribution Deferred Other
--------------- ------------ Paid-In From Stock-Based Accumulated Comprehensive
Shares Amount Shares Amount Capital Stockholder Compensation Deficit Income
------ ------ ------ ------ ------- ----------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 -- $ -- -- $ -- $ -- $ 7,199 $ -- $ (3,645) $ --
Net increase in contribution
from stockholder -- -- -- -- -- 28,959 -- -- --
Net loss and comprehensive
loss -- -- -- -- -- -- -- (7,101) --
--------------------------------------------------------------------------------------------------
Balance, September 30, 1998 -- -- -- -- -- 36,158 -- (10,746) --
Net increase in contribution
from stockholder -- -- -- -- -- 5,474 -- -- --
Net loss and comprehensive
loss -- -- -- -- -- -- -- (12,082) --
--------------------------------------------------------------------------------------------------
Balance, September 30, 1999 -- -- -- -- -- 41,632 -- (22,828) --
Net decrease in contribution
from stockholder -- -- -- -- -- (1,529) -- -- --
Issuance of common and
preferred stock upon
capitalization, net
of deferred taxes 10,400 10 -- -- 37,357 (40,103) -- -- --
Deferred stock-based
compensation -- -- -- -- 1,720 -- (1,720) -- --
Amortization of deferred
stock-based compensation -- -- -- -- -- -- 642 -- --
Initial public offering of
common stock, net of
offering expenses (10,400) (10) 13,900 14 36,972 -- -- -- --
Stock purchased under
option and purchase plans -- -- 229 -- 1,183 -- -- -- --
Net loss -- -- -- -- -- -- -- (1,265) --
Translation adjustment -- -- -- -- -- -- -- -- 52
--------------------------------------------------------------------------------------------------
Balance, September 30, 2000 -- $ -- 14,129 $ 14 $77,232 $ -- $(1,078) $(24,093) $ 52
==================================================================================================
<CAPTION>
Total
Stockholders Comprehensive
Equity Income (Loss)
------ -------------
<S> <C> <C>
Balance, September 30, 1997 $ 3,554
Net increase in contribution
from stockholder 28,959
Net loss and comprehensive
loss (7,101) (7,101)
------------------------
Balance, September 30, 1998 25,412 (7,101)
========
Net increase in contribution
from stockholder 5,474
Net loss and comprehensive
loss (12,082) (12,082)
------------------------
Balance, September 30, 1999 18,804 (12,082)
========
Net decrease in contribution
from stockholder (1,529)
Issuance of common and
preferred stock upon
capitalization, net
of deferred taxes (2,736)
Deferred stock-based
compensation --
Amortization of deferred
stock-based compensation 642
Initial public offering of
common stock, net of
offering expenses 36,976
Stock purchased under
option and purchase plans 1,183
Net loss (1,265) (1,265)
Translation adjustment 52 52
------------------------
Balance, September 30, 2000 $ 52,127 $ (1,213)
========================
</TABLE>
See notes to consolidated financial statements
34
<PAGE>
INSILICON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,265) $(12,082) $ (7,101)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 4,780 5,787 1,411
Write-off of in-process research and development -- -- 4,250
Write-off of capitalized software -- 4,855 1,478
Stock-based compensation 642 -- --
Changes in operating assets and liabilities:
Accounts receivable (1,595) (2,688) (402)
Related party receivable (1,054) -- --
Other assets (2,151) 34 546
Accounts payable 1,038 (625) 675
Payroll and related liabilities 531 553 328
Other accrued liabilities 1,601 (171) 2,438
--------- -------- --------
Total adjustments 3,792 7,745 10,724
--------- -------- --------
Net cash provided by (used in) operating activities 2,527 (4,337) 3,623
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (188,132) -- (338)
Proceeds from maturities of short-term investments 160,749 -- --
Additions to computer software costs (359) (712) (2,359)
Purchases of property and equipment (669) (425) (625)
Acquisition of Sand, net of cash acquired -- -- (15,573)
--------- -------- --------
Net cash provided by (used in) investing activities (28,411) (1,137) (18,895)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering of common stock, net of issuance 36,976 -- --
Expenses
Net proceeds from stock purchases under option plans
and purchase plan 1,183 -- --
Increase (decrease) in net contribution from stockholder (1,529) 5,474 15,272
--------- -------- --------
Net cash provided by financing activities 36,630 5,474 15,272
--------- -------- --------
Effect of exchange rate changes on cash and cash equivalents 52 -- --
--------- -------- --------
Change in cash and cash equivalents 10,798 -- --
Cash and cash equivalents at beginning of year -- -- --
--------- -------- --------
Cash and cash equivalents at end of year $ 10,798 $ -- $ --
========= ======== ========
Supplemental disclosure of cash flow information:
Non-cash portion of Sand acquisition contributed by stockholders $ -- $ -- $ 13,687
Issuance of common and preferred stock upon capitalization, net
of deferred taxes 2,736 -- --
Income taxes paid 1,275 -- --
</TABLE>
See notes to consolidated financial statements
35
<PAGE>
INSILICON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Operations
inSilicon Corporation ("inSilicon" or the "Company") provides
communications semiconductor technology, or SIP, that is used by semiconductor
and systems companies to design complex semiconductors called systems-on-a-chip,
or SOCs, which are critical components of digital devices. The Company provides
SIP cores, related silicon subsystems and firmware to customers that use its
technologies in digital devices ranging from network routers to cellular phones.
The Company was incorporated on November 1, 1999. Prior to that date, the
Company was operated as a division of Phoenix Technologies Ltd. ("Phoenix"). As
of November 30, 1999, the assets, liabilities and operations of the Company were
contributed by Phoenix to inSilicon in exchange for 10.4 million shares of
inSilicon's Series A preferred stock and a warrant to purchase 50,000 shares of
common stock. See Note 6. The Company successfully completed an initial public
offering in March of 2000, which generated net proceeds of $37.0 million. At
that time, all shares of Series A Preferred Stock converted on a one-to-one
basis into shares of common stock. As of September 30, 2000, Phoenix owned 10.4
million shares of our common stock (73.6% of our total outstanding shares).
Note 2. Summary of Significant Accounting Policies
FINANCIAL STATEMENT PRESENTATION. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries after the
elimination of all significant inter-company balances.
The consolidated balance sheet as of September 30, 1999 has been prepared
using the historical basis of accounting and included all of the assets and
liabilities of Phoenix specifically identifiable to the Company and certain
liabilities that were not specifically identifiable, for which estimates have
been used to allocate a portion of Phoenix's liabilities to the Company. Until
December 1999, cash management for the Company was performed by Phoenix on a
centralized basis and all cash provided by Phoenix was recorded as equity
contributions from Phoenix in these consolidated financial statements.
The consolidated statements of operations through November 30, 1999,
include allocations by Phoenix of certain facilities, employee benefits,
corporate administration, finance and management costs. As of December 1, 1999,
these costs have been allocated by Phoenix to the Company in a similar manner
pursuant to the Services and Cost Sharing Agreement between the companies.
Management believes that all cost allocations included in the historical
financial statements of the Company are reasonable under the circumstances. See
Note 6.
FOREIGN CURRENCY TRANSLATION. The Company has determined that the
functional currency of its foreign operations is the local currency. Therefore,
assets and liabilities are translated at year-end exchange rates and
transactions are translated at average exchange rates prevailing during each
period. Translation gains and losses are recorded as a component of
stockholders' equity and transaction gains and losses are recorded in the
consolidated statements of income in the period in which they occur.
USE OF ESTIMATES. The presentation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
REVENUE RECOGNITION. The Company's revenue is derived from license fees,
royalties, engineering service fees and maintenance and support service fees
generated primarily from systems and semiconductor companies. Revenue from
software license fees is generally recognized when a non-
36
<PAGE>
INSILICON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
cancelable license agreement has been signed, the software product has been
shipped, there are no uncertainties surrounding product acceptance, the fees are
fixed and determinable, and collection of the receivable is considered probable.
Royalties are recognized in the quarter in which the royalty payment is either
received from the customer or may be reasonably estimated. Engineering services
revenue is generally recognized on a time-and-materials basis or when
contractual milestones are met. Maintenance revenue, which relates principally
to maintenance and support contracts, is generally recognized ratably over the
contract period, which is typically one year. Deferred revenue consists mostly
of billings under maintenance contracts in advance of revenue recognition.
The Company adopted the American Institute of Certified Public
Accountants' Statement of Position, or SOP, 97-2, "Software Revenue
Recognition," as of October 1, 1998. The Company adopted the American Institute
of Certified Public Accountants' SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions," as of October 1,
1999. SOP 98-9 extended the deferral of the application of certain passages of
SOP 97-2 with respect to the fair value of elements in multiple element
arrangements. The adoption of SOP 97-2 and SOP 98-9 did not have a material
impact on the consolidated financial statements and results of operations.
Allowances for estimated returns and customer credits are recorded in the
same period as the related revenue.
No customer accounted for more than 10% of revenue in fiscal years 2000,
1999 and 1998.
CASH EQUIVALENTS. All highly liquid securities purchased with a maturity
of less than three months are considered cash equivalents.
SHORT-TERM INVESTMENTS. Short-term investment securities consist of U.S.
government agency obligations and commercial paper with original maturities
generally ranging from three months to one year. Short-term investments are
classified as held-to-maturity, as inSilicon has the intent and the ability to
hold them until maturity. Such investments are recorded at amortized cost. At
September 30, 2000, the fair value of such short-term investments approximated
amortized cost and gross unrealized holding gains and losses were not material.
FAIR VALUE OF FINANCIAL INSRUMENTS. The carrying values of the Company's
financial instruments, including accounts receivable, accounts payable and
accrued liabilities, approximate their fair values due to their short
maturities. The estimated fair values may not be representative of actual values
of the financial instruments that could be realized as of the period end or that
will be realized in the future.
BUSINESS AND CREDIT RISK. The Company's product revenues are concentrated
in the computer industry, which is highly competitive and rapidly changing.
Significant changes in the industry, customer requirements, customer buying
behavior or the emergence of competitive products with new capabilities or
technologies could adversely affect operating results.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
receivables. The Company places its cash investments with high credit qualified
financial institutions. The Company extends credit on open accounts to its
customers and does not require collateral. The Company performs ongoing credit
evaluations of all customers and establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers, historical
trends and other information. At September 30, 2000, one customer accounted for
11% of accounts receivable, whereas at September 30, 1999, no customer accounted
for 10% or more of accounts receivable.
37
<PAGE>
INSILICON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INVESTMENTS. Investments consist of non-controlling interests in private
companies, which are recorded at cost. At September 30, 2000 and 1999, the fair
value of such securities approximated cost and unrealized holding gains or
losses were not material.
PROPERTY AND EQUIPMENT. Property and equipment are carried at cost and
depreciated using the straight-line method over the estimated useful life of the
assets, which is typically three to five years. Leasehold improvements are
recorded at cost and amortized over the lesser of the useful life of the assets
or the remaining term of the related lease.
COMPUTER SOFTWARE COSTS. Computer software costs consist of internally
developed and purchased software under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 86, "Computer Software to be Sold, Leased or
Otherwise Marketed" ("SFAS 86"). Costs incurred in the research and development
of new software products and enhancements to existing products are expensed as
incurred until technological feasibility has been established, at which time,
such costs are capitalized. Capitalized computer software costs are amortized
over the economic life of the product, generally three to six years, using the
straight-line method or a ratio of current revenue to total anticipated revenue.
The Company evaluates the net realizable value and amortization periods of
computer software costs on an ongoing basis and records charges to reduce
carrying value to net realizable value, as necessary. In assessing net
realizable value, the Company relies on a number of factors, including operating
results, business plans, budgets and economic projections. In addition, the
Company's evaluation considers non-financial data such as market trends and
customer relationships, buying patterns and product development cycles.
GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill and other intangible assets
are amortized using the straight-line method over the estimated life of the
assets, which is typically from three to six years. Goodwill and other
intangible assets were $8.0 million and $10.2 million, net, as of September 30,
2000 and 1999, respectively. Accumulated amortization amounted to $4.4 million
at September 30, 2000, and $2.2 million at September 30, 1999.
INCOME TAXES. Income taxes are accounted for in accordance with SFAS No.
109 "Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability
method of SFAS 109, deferred tax assets and liabilities are recognized for
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities, and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period of enactment.
The net losses incurred for fiscal years 1998 and 1999 are attributable to
the operations of the Company as a division of Phoenix and were included in the
income tax returns filed by Phoenix. See Note 6.
STOCK-BASED COMPENSATION. The Company accounts for its stock option plans
and employee stock purchase plan in accordance with provisions of the Accounting
Principles Board's Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has adopted the disclosure only criteria,
described in SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). See Note 14.
The Company accounts for stock options and other equity instruments issued
to consultants and other non-employees under the provisions of Emerging Issues
Task Force Issue No. 98-16. The Company generally measures the fair value of
such equity instruments as of the date at which the non-employee's performance
under the grant is complete, with interim measurements of fair value as of dates
prior to the measurement date. Such amounts are charged to operations over the
period of performance.
38
<PAGE>
INSILICON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NET LOSS PER SHARE. Through November 30, 1999, the Company was not a
separate legal entity and, as a division of Phoenix, had no historical capital
structure. Therefore, net loss per share amounts have not been presented in the
consolidated financial statements for fiscal year 1998.
Pro forma net loss per share amounts for fiscal year 1999 have been
computed in accordance with SFAS 128, "EARNINGS PER SHARE" to reflect the pro
forma effect of the Company's capitalization. Pro forma net loss per share has
been computed by dividing the pro forma net loss by the pro forma number of
common shares outstanding, giving effect to the issuance of preferred shares
upon the capitalization of the Company and the conversion of those preferred
shares to common shares upon completion of the Company's initial public offering
of common stock.
NEW ACCOUNTING PRONOUNCEMENTS. In December 1999, the SEC issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") which outlines the Staff's position on various revenue recognition issues.
We believe that the adoption of SAB 101 as of October 1, 2000, will not have a
material impact on our financial position, results of operations or cash flows.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions involving
Stock Compensation," an interpretation of Accounting Principles Board Opinion
No. 25 ("Opinion 25"). FIN 44 clarifies (a) the definition of "employee" for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 was generally effective July 1, 2000, and the effects of
applying FIN 44 are recognized on a prospective basis from that date. In fiscal
year 2000, FIN 44 did not have a material impact on our financial position,
results of operations or cash flow.
In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which we will be required to adopt for the
year ending September 30, 2001. FAS 133 establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Because we currently are not a
party to any derivative financial instruments, and do not currently engage in
hedging activities, adoption of FAS 133 is not expected to have a material
impact on our financial condition or results of operations.
Note 3. Short-term Investments
Short-term investments as of September 30, 2000, is as follows (in
thousands):
U.S. government agency obligations $19,218
Commercial paper 8,165
-------
$27,383
=======
39
<PAGE>
INSILICON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 4. Property and Equipment
Property and equipment consist of the following:
September 30,
(in thousands) 2000 1999
------------------------------------------------------- ------- -------
Equipment $ 3,446 $ 2,799
Furniture and fixtures 187 165
------- -------
3,633 2,964
Less accumulated depreciation and amortization (2,402) (1,790)
------- -------
$ 1,231 $ 1,174
======= =======
Depreciation and amortization expense related to property and equipment
totaled $612,000, $728,000 and $406,000 for fiscal years 2000, 1999 and 1998,
respectively.
Note 5. Computer Software Costs
Costs associated with purchased and internally developed computer software
of $359,000, $712,000 and $2.4 million, were capitalized during fiscal years
2000, 1999 and 1998, respectively. In addition, the Company capitalized
approximately $12.8 million of software costs in conjunction with its September
1998 acquisition of Sand Microelectronic, Inc. ("Sand"), a leading supplier of
standards-based system software and semiconductor intellectual property for PCs
and information appliances. Amortization charged to cost of revenue was $1.9
million , $2.8 million and $1.0 million, during fiscal years 2000, 1999 and
1998, respectively. Accumulated amortization of capitalized computer software
costs was $3.5 million, $5.0 million and $3.2 million at September 30, 2000,
1999 and 1998, respectively.
Note 6. Related Party Transactions
Prior to November 1999, the Company was operated as a division of Phoenix
and the Company's operations were funded entirely by Phoenix. Net financing
provided to the Company by Phoenix in fiscal years 1999 and 1998 was
approximately $5.5 million and $29.0 million, respectively.
Through November 30, 2000, Phoenix allocated a portion of its domestic
corporate expenses to its divisions and subsidiaries, including the Company, in
accordance with SEC Staff Accounting Bulletin No. 55, "Allocation of Expenses
and Related Disclosure in Financial Statements of Subsidiaries, Divisions or
Lesser Business Components of Another Entity." As of December 1, 1999, corporate
expenses were similarly allocated from Phoenix to the Company in accordance with
the provisions of the Services and Cost Sharing Agreement between the companies
(see below). These corporate expenses have included facilities, employee
benefits, corporate administration, finance and management costs. Allocations
and charges were based on either a direct cost pass-through or a percentage
allocation for such services provided based on factors such as net revenue,
headcount and relative expenditure levels. Such allocations and corporate
charges totaled $4.9 million, $8.3 million and $3.3 million for fiscal years
2000, 1999 and 1998, respectively.
Management believes that the basis used for allocating corporate services
is reasonable. While the terms of these transactions may differ from those that
would result from transactions among unrelated parties, management does not
believe such differences would be material.
The Company has entered into certain agreements with Phoenix effective
November 30, 1999 for the purpose of defining their ongoing relationship.
40
<PAGE>
INSILICON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONTRIBUTION AGREEMENT. Pursuant to the Contribution Agreement, Phoenix
transferred to the Company ownership of all assets reflected on the Company's
consolidated balance sheet, specified intellectual property and technology
related to and necessary for inSilicon to conduct its business, as well as
customer and supplier contracts related primarily to the semiconductor
intellectual property business. As of November 30, 1999, the Company also
assumed all liabilities from Phoenix primarily resulting from operations of the
business or resulting from any asset that Phoenix transferred to the Company.
For its contribution, Phoenix received 10,400,000 shares of inSilicon Series A
Preferred Stock that converted to an equal number of shares of common stock at
the completion of the initial public offering of common stock and assumed
certain liabilities. The Company also issued to Phoenix a warrant to purchase
50,000 shares of inSilicon common stock at $.01 per share, exercisable at any
time until May 31, 2002.
SERVICES AND COST-SHARING AGREEMENT. The Services and Cost-Sharing
Agreement covers various services that Phoenix provides to the Company and the
method by which certain costs are shared by the companies. The services include
data processing, telecommunications and information technology support services,
accounting, financial management, tax preparation, payroll, stockholder and
public relations, legal, human resources administration, procurement, real
estate management and other administrative functions. The shared costs include
the costs of the office space the Company occupies at Phoenix's headquarters and
insurance premiums.
The amount the Company pays for services and shared costs is generally
equal to the aggregate cost to Phoenix and inSilicon of the services and costs
multiplied by a percentage representing the number of the Company's employees to
the total number of Phoenix and inSilicon employees. The Services and
Cost-Sharing Agreement is renewed on a month-to-month basis. Phoenix may
terminate this agreement on 30 days' written notice. The Company may terminate
any one or more of the services at any time on 30 days' written notice. Through
September 30, 2000, Phoenix has allocated to the Company total costs of $3.1
million under this Services and Cost Sharing Agreement.
TAX-SHARING AGREEMENT. The Company entered into a Tax-Sharing Agreement
with Phoenix concerning each party's obligations for various tax liabilities.
The Tax-Sharing Agreement provides that Phoenix generally pays or receives
benefit for, as applicable, all federal, state, local and foreign taxes relating
to the Company's business before November 30, 1999. For any taxable period after
that date in which the Company is included in a Phoenix consolidated or combined
tax return, the agreement provides that the Company make payments to Phoenix
based upon the amount of U.S. federal and state income taxes that would have
been paid by the Company had it and each of its subsidiaries filed separate
federal and state income tax returns, subject to specific adjustments. Further,
if the Company incurs losses on either a federal or state basis that reduce
Phoenix's consolidated or combined tax liability, Phoenix will pay the Company
an amount equal to the tax savings generated by the Company's losses.
TECHNOLOGY DISTRIBUTOR AGREEMENT. The Company entered into arrangements
with Phoenix to act as its sales representative and distributor of its firmware
technology in Japan and inSilicon's full line of technology and related services
in the rest of Asia. During fiscal year 2000, the Company generated revenue of
$752,000 and incurred distribution fees of $798,000 under this Technology
Distributor Agreement.
The Company has entered into an Independent Contractor Agreement with a
company in India of which an officer of the Company is a significant stockholder
for the provision of hardware and software development consulting services.
During fiscal years 2000 and 1999, the Company paid or accrued $230,558 and
$365,000, respectively, for services to that company.
41
<PAGE>
INSILICON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 7. Business Combinations
In September 1998, Phoenix completed a merger with Award Software
International, Inc. ("Award"), a leading provider of system enabling and
management software for personal computers. Phoenix exchanged approximately 8.8
million shares of its common stock for all of the common stock of Award. Each
share of Award was exchanged for 1.225 shares of Phoenix common stock. In
addition, outstanding Award employee stock options were converted at the same
exchange ratio into options to purchase approximately 2.3 million shares of
Phoenix common stock. The merger was accounted for as a pooling of interests.
Certain of Award's operations were merged with inSilicon's operations, and
accordingly, inSilicon's consolidated financial statements include the combined
results of operations and financial position for all periods and dates
presented. The Award operations accounted for less than 10% of the Company's
revenue and operating costs for all periods prior to the merger.
Prior to the Award merger, Award's fiscal year ended on December 31. The
Award statement of income for the year ended December 31, 1997 has been combined
with the Company's statement of income for the year ended September 30, 1997. In
order to conform Award's year-end to the Company's year-end, the fiscal year
1997 operating results include a three-month period (ended December 31, 1997)
that is also included in the fiscal year 1998 operating results. During this
three-month period, Award generated revenue of $105,000 and a net loss of
$118,000 related to the Company's operations.
The results of operations for the separate companies prior to the merger
and the combined amounts included in the consolidated financial statements were
as follows:
Nine months
ended
(in thousands) June 30, 1998
---------------------------------------------------------------- -------------
(unaudited)
Revenue:
inSilicon $ 6,001
Award 180
-------
Combined $ 6,181
=======
Net Loss:
inSilicon $ (707)
Award (523)
-------
Combined $(1,230)
=======
42
<PAGE>
INSILICON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Also in September 1998, Phoenix acquired Sand Microelectronics, Inc., a
leading supplier of standards-based semiconductor intellectual property. The
purchase price consisted of approximately $18.6 million in cash, 464,000 shares
of Phoenix's common stock with a fair value of $2.7 million, options to purchase
approximately 264,000 shares of Phoenix's common stock with a fair value of $1.6
million in exchange for Sand stock options, and up to $3.7 million in
performance incentives that inSilicon may be required to pay through fiscal year
2001. Of the total performance incentives, approximately $1.6 million of minimum
anticipated payments were recorded by the Company as accrued merger costs.
Approximately $867,000 was paid during fiscal year 2000.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the assets and liabilities of the acquired business were included
in the Company's consolidated balance sheet as of September 30, 1998. The
results of operations of Sand from the date of acquisition through September 30,
1998 were included in the Company's accompanying consolidated statement of
income for the year ended September 30, 1998.
The total purchase cost of approximately $33.7 million exceeded the assets
acquired as follows (in thousands):
Total consideration $ 24,494
Liabilities assumed 7,749
Acquisition costs 1,465
--------
Total purchase cost 33,708
Less: Assets acquired (19,831)
Less: Acquired in-process research and development (4,250)
--------
Excess of purchase cost over assets acquired $ 9,627
========
The assets acquired include $12.8 million of software development costs
(that are being amortized on a straight-line basis over six years) and $2.8
million of other intangible assets (that are being amortized on a straight-line
basis over three to six years). The other intangible assets capitalized
represents the value of the distribution channel, assembled workforce and
related agreements acquired. The $9.6 million of excess of purchase cost over
assets acquired was recorded as goodwill, and is being amortized on a
straight-line basis over six years.
The in-process research and development charge in fiscal year 1998 was an
allocation of a portion of the Sand purchase price for development projects that
were not yet capitalizable under the provisions of Statement of Financial
Accounting Standards No. 86, "Computer Software to be Sold, Leased or Otherwise
Marketed." The Sand projects under development upon acquisition related to the
development of semiconductor intellectual property technology designed for
various communications standards. The value of the in-process charge associated
with each project is the responsibility of Company management, and was
determined by estimating the future net cash flows from the project and
discounting the net cash flows back to their present value. If these projects
are not successfully developed and/or marketed, future revenue and profitability
of the Company may be adversely affected. Additionally, the value of other
intangible assets acquired may become impaired.
The following unaudited pro forma information shows the results of
operations for the year ended September 30, 1998 as if the Sand acquisition had
occurred at the beginning of the period and at the purchase price established in
September 1998. The results are not necessarily indicative of those which would
have occurred had the acquisition actually been made at the beginning of the
period presented or of future operations of the combined companies. The pro
forma results for fiscal year 1998 combine inSilicon's results for the year
ended September 30, 1998, with the results of Sand for the period from January
1, 1998 through the date of acquisition and includes the $4.3 million write-off
of acquired in-
43
<PAGE>
INSILICON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
process research and development discussed above. The following unaudited pro
forma results for the year ended September 30, 1998, include the straight-line
amortization of intangibles, primarily over a period of six years (in
thousands).
Revenue $ 15,128
Net loss (9,761)
Note 8. Merger and Restructuring Charges
Merger and restructuring charges during the years ended September 30,
1999, and 1998, were as follows:
Years ended September 30,
(in thousands) 1999 1998
--------------------------------------------------- ------ ------
Restructuring $1,195 $ 50
Asset write-offs 4,855 1,478
In-process research and development -- 4,250
------ ------
$6,050 $5,778
====== ======
These charges were mostly related to the integration of Sand into
inSilicon and severance costs allocated to inSilicon from Phoenix related to the
elimination of certain corporate management positions.
1999 Charges
Included in fiscal year 1999 was a restructuring charge of $6.1 million
due to the write-off of $4.9 million of capitalized software development costs
and approximately $1.2 million of severance and other costs allocated from
Phoenix. The capitalized software development cost write-off was calculated
based upon the excess of carrying value over the difference between the gross
expected future revenue to be generated and the projected future costs of such
revenue, and was related primarily to reduced revenue expectations due to
changing market conditions. The severance and other costs allocated from Phoenix
related to the elimination of nine Phoenix corporate management positions ($1.1
million) and three inSilicon positions ($90,000). The severance costs incurred
for the Phoenix positions were allocated to the Company based upon relative
headcount, consistent with the allocation of other Company costs incurred by
Phoenix.
Approximately $200,000 of the fiscal year 1999 restructuring charges was
unpaid as of September 30, 2000. The remaining unpaid charges will mostly be
paid in fiscal year 2001.
1998 Charges
Included in the fourth quarter of fiscal year 1998 was a charge of $5.8
million related to the acquisition of Sand. Included in this charge was a $1.5
million write-off of software development costs associated with semiconductor
intellectual property that were capitalized on the historical balance sheet of
inSilicon under SFAS 86. The write-off was calculated based upon the excess of
carrying value over the difference between the gross expected future revenue to
be generated and the projected future costs of such revenue, and related
primarily to projects that were redundant between inSilicon and Sand.
The in-process research and development charge in fiscal year 1998 was an
allocation of a portion of the purchase price for Sand for projects that were
not yet capitalizable under the provisions of SFAS 86.
All of the fiscal year 1998 merger and restructuring charges were paid as
of September 30, 2000.
44
<PAGE>
INSILICON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 9. Unsecured Line of Credit
At September 30, 2000, there were no borrowings outstanding on inSilicon's
$5 million revolving bank line of credit. Borrowings on the line bear interest
at the bank's prime rate of interest plus 0.25% (9.5% at September 30, 2000).
The line of credit agreement contains various covenants that require inSilicon
to meet certain financial ratios, and it restricts the payment of cash
dividends. The line of credit expires in January 2001. As of September 30, 2000,
the Company was in compliance.
Note 10. Income Taxes
The components of the provision for income taxes for the year ended
September 30, 2000, are as follows (in thousands):
Current:
Federal $ 754
State 189
Foreign 790
-------
Total current 1,733
Deferred:
Federal (922)
State (224)
-------
Total deferred (1,146)
-------
Provision for income taxes $ 587
=======
The reconciliation of the United States federal statutory rate to the
Company's effective tax rate for the year ended September 30, 2000, is as
follows (in thousands):
Tax at U.S. federal statutory rate $(230)
State taxes, net of federal tax benefit (24)
Research and development tax credits (103)
Nondeductible merger and acquisition costs 546
Deferred compensation 218
Other 180
-----
Provision for income taxes $ 587
=====
The components of net deferred tax assets and liabilities as of September
30, 2000, are as follows (in thousands):
Deferred tax assets:
Foreign tax credits $ 111
Non-deductible accruals 1,129
Depreciation 32
Other 22
------
Total deferred tax assets 1,294
Deferred tax liabilities:
Capitalized software and other intangible assets, net 2,775
Prepaid assets 302
------
Total deferred tax liabilities 3,077
------
Net deferred tax liabilities $1,783
======
45
<PAGE>
INSILICON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
At September 30, 1999 and 1998, the Company's deferred tax assets and the
related valuation allowances were immaterial.
The net losses incurred for the fiscal years ended prior to December 1,
1999, are attributable to the operations of the Company as a division of Phoenix
and were included in the income tax returns filed by Phoenix. Because the
Company will not receive any benefit for its historical operating losses
incurred through September 30, 1999, no income tax benefit has been reflected
for the periods presented.
The Company and Phoenix entered into a tax-sharing agreement. See Note 6.
Under this agreement, the Company is responsible for federal and state income
taxes subsequent to December 1, 1999. For consolidated and combined returns
filed after December 1, 1999, payments will be due to or from Phoenix based upon
the tax impact of the Company's operations as if the Company were to file
separate federal, state and local income tax returns.
Note 11. Geographic Reporting
The Company records geographic information, which is categorized into
three regions: North America, Asia and Europe. The Company attributes revenues
based on shipment or product delivery location.
Years ended September 30,
--------------------------------------
(in thousands) 2000 1999 1998
-------------------------------------- ------- ------- ------
Revenue:
North America $16,313 $13,515 $6,977
Asia 6,661 3,106 1,313
Europe 2,454 2,334 502
------- ------- ------
Total $25,428 $18,955 $8,792
======= ======= ======
No customer accounted for more than 10% of revenue in fiscal years 2000,
1999 or 1998.
Long-lived assets located in individual countries exceeding 10% of total
long-lived assets as of fiscal years ended September 30, 2000, 1999 and 1998
were as follows:
As of September 30,
--------------------------
(in thousands) 2000 1999
-------------------------------------------------- ------- -------
Long-lived assets:
United States $14,584 $18,368
Other 32 --
------- -------
Total $14,616 $18,368
======= =======
Note 12. Employee Benefit Plans
Prior to November 1999, the Company was operated as a division of Phoenix
and the Company's employees participated in stock-based compensation and savings
plans that were administered through Phoenix and involved options to acquire
Phoenix's common stock. During fiscal year 2000, inSilicon authorized its own
stock-based compensation and savings plans.
STOCK OPTION PLAN. In December 1999 and January 2000, the Company's
stockholder authorized the 1999 Stock Option Plan and the 2000 Stock Plan,
respectively, for the issuance of up to 4,000,000 share of common stock to
employees, officers, directors and independent contractors. Commencing October
2000, on the first day of each fiscal year, shares will be added to the 2000
stock plan
46
<PAGE>
INSILICON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
equal to the lesser of (a) 5% of the outstanding shares on the last day of the
prior fiscal year and (b) 2,000,000 shares. Incentive stock options may be
granted under these plans at a price not less than 100% (110% in some cases) of
the fair market value of the shares on the date of grant. Non-qualified options
may be granted at a price not less than 85% of the fair value of the shares on
the date of grant. Options vest over a period determined by the board of
directors, generally four years, and have a term not exceeding ten years.
Phoenix has various incentive stock option plans for employees, officers,
consultants and independent contractors. Incentive stock options may not be
granted at a price less than 100% (110% in certain cases) of the fair market
value of the shares on the date of grant. Nonqualified options may not be
granted at a price less than 85% of the fair value of the shares on the date of
grant. Options vest over a period determined by the board of directors,
generally four years, and have a term not exceeding ten years.
In December 1999, the Company implemented a program under which options to
purchase shares of Phoenix common stock held by inSilicon employees could be
exchanged for options to purchase the Company's common stock under the 1999
Stock Option Plan. The exchange was based upon a ratio of 1.862 shares of
inSilicon common stock for each share of Phoenix common stock. Options to
purchase 1,358,779 shares of inSilicon common stock with an average exercise
price of $5.25 per share were issued under this exchange program. The new
options have comparable terms and vesting schedules and, at the date of the
exchange, had equivalent intrinsic value and ratio of exercise price to fair
value of common stock as the exchanged Phoenix options.
In December 1999, the Company granted options to employees, director and
consultants to purchase 990,065 shares of common stock under the 1999 Stock
Option Plan. These options have exercise prices that were less than the per
share value of the Company's common stock on the date of grant, and therefore
the Company recorded deferred stock compensation associated with these grants of
approximately $1.4 million. In addition, the Company recorded deferred
compensation of $219,000 related to certain performance-based options held by an
officer of the Company to acquire 65,170 shares of common stock issued in
exchange for similar options granted by Phoenix. This deferred stock
compensation will be amortized over the vesting period of the underlying
options, generally straight-line over four years.
The following table sets forth the option activity under Phoenix and
inSilicon's option plans for all employees of the Company. Phoenix shares have
been restated to equivalent inSilicon shares based upon the appropriate exchange
ratio.
47
<PAGE>
INSILICON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
---------------------------
<S> <C> <C>
Shares under option, September 30, 1997 735,773 $4.94
Options granted 494,128 2.78
Options exercised (28,029) 0.17
Options canceled (57,798) 6.98
---------------------------
Shares under option, September 30, 1998 1,144,074 4.02
Options granted 639,390 5.33
Options exercised (156,767) 0.80
Options canceled (154,749) 6.00
---------------------------
Shares under option, September 30, 1999 1,471,948 4.72
Options granted 1,737,505 8.24
Options exercised (215,008) 4.78
Options canceled (471,097) 4.92
---------------------------
Shares under option, September 30, 2000 2,523,348 7.10
===========================
</TABLE>
As of September 30, 2000, options to purchase 1,261,644 shares were
available for future grants under the 2000 Stock Plan.
The following table summarizes information about stock options outstanding
at September 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------
Weighted
Average
Range Number Remaining Weighted Number Weighted
Of of Contractual Life Average of Average
Exercise Prices Shares (years) Exercise Price Shares Exercise Price
--------------------------------- --------------------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C>
$ 0.0591 - $ 4.5650 380,204 7.62 $2.9818 148,320 $2.8692
$ 4.6026 - $ 6.0083 386,578 8.66 5.6763 153,511 5.3364
$ 6.1090 - $ 7.1831 118,765 8.39 6.5790 38,253 6.6584
$ 7.3600 - $ 7.3600 792,332 9.22 7.3600 177,630 7.3600
$ 7.3750 - $ 8.7500 248,385 8.84 8.1565 59,043 8.0447
$ 9.0000 - $ 9.1971 448,845 9.40 9.0029 72,274 9.0179
$ 10.5000 - $ 20.3750 148,239 6.85 12.9168 87,402 10.7486
----------- --------------------- -------------- --------- -------------
$ 0.0591 - $ 20.3750 2,523,348 8.71 $7.1027 736,433 $6.6170
=========== ===================== ============== ========= =============
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN. In January 2000, the Company's stockholders
authorized the 2000 employee stock purchase plan. Under the terms of the plan,
employees may elect to deduct up to 10% of their total compensation to purchase
the Company's common stock. The plan contains consecutive, overlapping,
twenty-four month offering periods, and each offering period includes four
six-month purchase periods. Purchases of Company stock are made at the end of
each purchase period at a price generally equal to 85% of the lower of the fair
market value of the common stock either at the beginning of the offering period
or at the end of the purchase period. A total of 250,000 shares of common stock
have been reserved for issuance under the 2000 purchase plan, plus annual
increases equal to the lesser of (a) 0.3125% of the outstanding shares on the
last day of the prior fiscal year and (b) 100,0000 shares. During fiscal year
2000, employees of the Company purchased approximately 14,062 shares under the
2000 purchase plan at an average price of $5.525 per share. As of September 30,
2000, 14,062 shares had been issued under the plan and 235,938 shares remained
reserved for future issuance.
48
<PAGE>
INSILICON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Phoenix has an employee stock purchase plan for all eligible employees.
Under the terms of the plan, shares of Phoenix's common stock may be purchased
at six-month intervals at 85% of the lower of the fair market value on the first
or the last day of each six-month period. Employees may purchase shares having a
value not exceeding 10% of their gross compensation during an offering period.
During fiscal years 1999 and 1998, employees of the Company purchased
approximately 61,000 and 20,000 shares under the Phoenix plan at average prices
of $5.92 and $9.96 per share, respectively.
401(K) SAVINGS PLAN. In February 2000, the Company established a 401(k)
retirement plan that is intended to qualify under Section 401(k) of the Internal
Revenue Code. This plan covers U.S. employees who meet minimum age and service
requirements and allows participants to defer a portion of their annual
compensation on a pre-tax basis. In addition, Company contributions to the plan
may be made at the discretion of the board of directors. Company matching
contributions are made at 100% up to the first 3% of salary contributed to the
plan and 50% on the next 3% of salary up to a maximum of $3,000 annually.
Matching contributions vest over a four-year period which starts with the
participant's employment start date with inSilicon. inSilicon's matching
contributions were approximately $148,000 in fiscal year 2000.
Phoenix has a retirement plan 401(k) Plan that is intended to qualify
under Section 401(k) of the Internal Revenue Code. This plan covers U.S.
employees who meet minimum age and service requirements and allows participants
to defer a portion of their annual compensation on a pre-tax basis. In addition,
Company contributions to the 401(k) Plan may be made at the discretion of the
board of directors. Phoenix has historically made matching contributions of 25%
of each participant's contribution, up to a match of $1,000 per year per
participant. Matching contributions vest over a four-year period which starts
with the participant's employment start date with Phoenix. Phoenix's matching
contributions for employees of the Company were approximately $30,000 and
$29,000 in fiscal years 1999 and 1998, respectively.
DISCLOSURES OF STOCK-BASED COMPENSATION PLAN. Pro forma information
regarding net income and earnings per share is required by SFAS No. 123. This
information is required to be determined as if the Company had accounted for its
employee stock options granted subsequent to September 30, 1995 under the fair
value method of that statement. The fair value of options granted in fiscal
years 2000, 1999 and 1998 reported below has been estimated as of the date of
the grant using a Black-Scholes multiple option pricing model with the following
assumptions for the years ended September 30, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
Employee Stock Options Employee Stock Purchase Plan
----------------------- -----------------------------
2000 1999 1998 2000 1999 1998
-------- ------ ------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Expected life from vest date (in 0.90 0.70 0.70 0.50 0.50 0.50
years)
Risk-free interest rate 6-7% 5-6% 6-7% 6-7% 5-6% 6-7%
Volatility 1.54 0.56 0.57 1.54 0.56 0.57
Dividend yield None None None None None None
</TABLE>
The weighted average estimated fair value of employee stock options
granted during fiscal years 2000, 1999 and 1998, was $7.75, $2.35 and $4.03 per
share, respectively. The weighted average estimated fair value of shares granted
under the Purchase Plan during fiscal years 2000, 1999 and 1998 was $5.39, $1.15
and $1.97, respectively. For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the vesting period of the
options. Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair value at the grant date for awards under those
plans consistent with the method of SFAS 123, the Company's net income and net
income per share would have been as follows:
49
<PAGE>
INSILICON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Years ended September 30,
-------------------------------------
(in thousands, except per share amounts) 2000 1999 1998
---------------------------------------- -------- --------- --------
Net loss:
As reported $(1,265) $ (12,082) $ (7,101)
Pro forma (5,559) (12,193) (7,665)
Basic loss per share:
As reported $ (0.10) n/a n/a
Pro forma (0.46) n/a n/a
Diluted loss per share:
As reported $ (0.10) n/a n/a
Pro forma (0.46) n/a n/a
Note 13. Subsequent Events
In November 2000, the Company entered into an agreement to acquire Xentec.
Inc. ("Xentec"), a privately-held developer of analog and mixed-signal
intellectual property. Under the terms of the Xentec agreement, the Company
issued 634,056 shares of common stock and assumed options to purchase an
additional 96,004 shares of common stock in exchange for all outstanding Xentec
shares and options as of the date of closing, which was December 18, 2000. Also,
the Company will issue up to an additional 415,000 shares of common stock to the
selling stockholders over a two-year period, contingent upon the achievement of
certain performance-based milestones. The Xentec acquisition will be accounted
for as a purchase.
Also in November 2000, the Company entered into an agreement to acquire
the wireless design group of HD Lab, K.K. ("HD Lab"). Under the terms of the HD
Lab agreement, the Company will pay $1,530,000 over a 12-month period to acquire
certain Bluetooth baseband technology under development by HD Lab. The Company
also entered into employment agreements to hire the team of Bluetooth
development employees from HD Lab.
50
<PAGE>
SCHEDULE II
INSILICON CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS ENDED SEPTEMBER 30, 2000
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance at
Beginning End of
Year Ended of Year Provisions Deductions (1) Year
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
-------------------------------
September 30, 2000 $364 $ -- $(215) $149
September 30, 1999 198 224 (58) 364
September 30, 1998 224 (21) (5) 198
</TABLE>
(1) Deductions primarily represent the write-off of uncollectable accounts
receivable.
51
<PAGE>
EXHIBIT INDEX
Set forth below is a list of exhibits that are being filed or incorporated
by reference to this Form 10-K:
Exhibit
Number Description
--------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of inSilicon Corporation
(incorporated herein by reference to Exhibit 3.1 to inSilicon's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000,
File No. 000-29513).
3.2 By-laws of inSilicon Corporation (incorporated herein by reference
to Exhibit 3.1 to inSilicon's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000, File No. 000-29513).
4.1 Specimen Stock Certificate (incorporated herein by reference to
Exhibit 4.1 to the Registration Statement on Form S-1, Registration
No. 333-94573 (the "Registration Statement")).
4.2 Common Stock Purchase Warrant (incorporated herein by reference to
Exhibit 4.2 to the Registration Statement).
10.1 Agreement and Plan of Reorganization dated as of September 17, 1998
by and among Phoenix Technologies Ltd., Phoenix Sub Corporation,
Sand Microelectronics, Inc. and Babu Chilukuri, Anand C. Naidu and
Ajit Deora (incorporated herein by reference to Exhibit 10.1 to the
Registration Statement).
10.2 Contribution Agreement dated as of November 30, 1999, between
inSilicon Corporation and Phoenix Technologies Ltd. (incorporated
herein by reference to Exhibit 10.2 to the Registration Statement).
10.3 Form of Indemnification Agreement between inSilicon Corporation and
each of its Officers and Directors (incorporated herein by reference
to Exhibit 10.3 to the Registration Statement).
10.4 + 1999 Stock Option Plan (incorporated herein by reference to Exhibit
10.4 to the Registration Statement).
10.5 + 2000 Stock Plan (incorporated herein by reference to Exhibit 10.5 to
the Registration Statement).
10.6 + Amendment of 2000 Employee Stock Purchase Plan.
10.7 Amended and Restated Initial Public Offering Agreement dated as of
March 15, 2000 by and between inSilicon Corporation and Phoenix
Technologies Ltd. (incorporated herein by reference to Exhibit 10.7
to the Registration Statement).
10.8 Registration Rights Agreement dated as of November 30, 1999 by and
between inSilicon Corporation and Phoenix Technologies Ltd.
(incorporated herein by reference to Exhibit 10.8 to the
Registration Statement).
10.9 Services and Cost-Sharing Agreement dated as of November 30, 1999 by
and between inSilicon Corporation and Phoenix Technologies Ltd.
(incorporated herein by reference to Exhibit 10.9 to the
Registration Statement).
10.10 Employee Matters Agreement dated as of November 30, 1999 by and
between inSilicon Corporation and Phoenix Technologies Ltd.
(incorporated herein by reference to Exhibit 10.10 to the
Registration Statement).
52
<PAGE>
Exhibit
Number Description
--------------------------------------------------------------------------------
10.11 Tax-sharing Agreement dated as of November 30, 1999 by and between
inSilicon Corporation and Phoenix Technologies Ltd. (incorporated
herein by reference to Exhibit 10.11 to the Registration Statement).
10.12 Technology Distributor Agreement dated as of November 30, 1999 by
and between inSilicon Corporation and Phoenix Technologies Ltd.
(incorporated herein by reference to Exhibit 10.12 to the
Registration Statement).
10.13 + Key Executive Officer Severance Agreement with Wayne Cantwell
(incorporated herein by reference to Exhibit 10.13 to the
Registration Statement).
10.14 + Key Executive Officer Severance Agreement with William Meyer
(incorporated herein by reference to Exhibit 10.14 to the
Registration Statement).
10.15 + Key Executive Officer Severance Agreement with Barry Hoberman
(incorporated herein by reference to Exhibit 10.15 to the
Registration Statement).
10.16 + Key Executive Officer Severance Agreement with Robert Nalesnik
(incorporated herein by reference to Exhibit 10.16 to the
Registration Statement).
10.17 Loan and Security Agreement dated January 18, 2000 between Silicon
Valley Bank and inSilicon Corporation (incorporated herein by
reference to Exhibit 10.17 to the Registration Statement).
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney. [if applicable]
27 Financial Data Schedule.
-------------
+ Management contract or compensatory plan or arrangement.
53
