<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ____________ to ____________ .
Commission file number 000-29513
INSILICON CORPORATION
---------------------
(Exact name of Registrant as specified in its charter)
Delaware 77-0526155
----------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
411 East Plumeria Drive, San Jose, California 95134
---------------------------------------------------
(Address of principal executive offices,
including zip code)
(408) 894-1900
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------------- ------------
As of July 31, 2000 there were 14,085,025 outstanding shares of the
Registrant's common stock, $.001 par value.
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INSILICON CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2000 and September 30, 1999.........................................................3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended June 30, 2000 and 1999...........................................4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 2000 and 1999.....................................................5
Notes to Condensed Consolidated Financial Statements.........................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...................................................14
Item 6. Exhibits and Report on Form 8-K
Exhibits....................................................................................14
Reports on Form 8-K.........................................................................14
</TABLE>
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSILICON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
---------------- -------------------
Assets (unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 36,973 $ -
Accounts receivable, net of allowances of $239 at
June 30, 2000 and $364 at September 30, 1999 7,644 5,104
Other current assets 658 135
---------------- -------------------
Total current assets 45,275 5,239
Other marketable securities 838 838
Property and equipment, net 1,147 1,174
Computer software costs, net 5,419 6,974
Goodwill and other intangible assets, net 8,555 10,220
Other assets 6 36
---------------- -------------------
Total assets $ 61,240 $ 24,481
================ ===================
Liabilities and Stockholder's Net Investment/
Stockholders' Equity
Current liabilities:
Accounts payable $ 1,005 $ 205
Payroll and related liabilities 1,561 1,776
Deferred revenue 2,256 1,589
Payable to Phoenix Technologies Ltd. 344 -
Accrued merger costs 756 1,560
Other accrued liabilities 1,522 502
---------------- -------------------
Total current liabilities 7,444 5,632
Long-term obligations 2,442 45
Commitments and contingencies
Stockholder's net investment /stockholders' equity:
Preferred stock, par value $0.001; 15,000 shares authorized,
none outstanding - -
Common stock, par value $0.001; 100,000 shares authorized,
14,072 shares issued and outstanding at June 30, 2000 14 -
Additional paid-in capital 77,027 -
Net contribution from stockholder - 41,632
Deferred stock-based compensation (1,242) -
Accumulated deficit (24,459) (22,828)
Accumulated translation adjustment 14 -
---------------- -------------------
Total stockholder's net investment/stockholders' equity 51,354 18,804
---------------- -------------------
Total liabilities and stockholder's net
investment/stockholders'
equity $ 61,240 $ 24,481
================ ===================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
Page 3
<PAGE>
INSILICON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ----------------------------
2000 1999 2000 1999
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue:
License fees (1) $5,710 $ 3,270 $ 14,155 $10,950
Services 1,101 882 3,751 2,993
----------- ---------- ----------- ------------
Total revenue 6,811 4,152 17,906 13,943
Cost of revenue:
License fees 606 61 1,466 493
Services 202 267 804 605
Amortization of purchased technology 314 533 942 1,599
----------- ---------- ----------- ------------
Total cost of revenue 1,122 861 3,212 2,697
----------- ---------- ----------- ------------
Gross margin 5,689 3,291 14,694 11,246
Operating expenses:
Research and development 1,797 2,335 5,798 6,874
Sales and marketing 2,669 1,475 6,407 4,807
General and administrative 795 809 2,399 2,386
Amortization of intangible assets 555 555 1,665 1,665
Stock-based compensation 118 - 479 -
Restructuring charge - 188 - 274
----------- ---------- ----------- ------------
Total operating expenses 5,934 5,362 16,748 16,006
Loss from operations (245) (2,071) (2,054) (4,760)
Interest and other income, net 644 - 669 -
----------- ---------- ----------- ------------
Income (loss) before income taxes 399 (2,071) (1,385) (4,760)
Provision for income taxes 362 - 246 -
----------- ---------- ----------- ------------
Net income (loss) $ 37 $ (2,071) $ (1,631) $ (4,760)
=========== ========== =========== ============
Net income (loss) per share (pro forma for the nine-month
period)
Basic $ - $ (0.14)
=========== ===========
Diluted $ - $ (0.14)
=========== ===========
Shares used in per share calculation (pro forma for the
nine-month period):
Basic 14,056 11,756
=========== ===========
Diluted 14,737 11,756
=========== ===========
(1) Includes related party revenue from Phoenix
Technologies Ltd. $ 283 $ - $ 685 $ -
=========== ========== =========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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INSILICON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30
---------------------------
2000 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,631) $ (4,760)
Reconciliation of net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,744 4,052
Stock-based compensation 479 -
Change in operating assets and liabilities:
Accounts receivable (2,540) (2,011)
Other assets (493) 124
Accounts payable 800 (696)
Payroll and related liabilities (215) 245
Deferred revenue 667 230
Payable to Phoenix Technologies Ltd. 344 -
Other accrued liabilities 216 (817)
Long term obligations (339) 51
------------- ------------
Total adjustments 2,663 1,178
------------- ------------
Net cash provided by (used in) operating activities 1,032 (3,582)
------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (418) (209)
Additions to computer software costs (79) (657)
------------- ------------
Net cash used in investing activities (497) (866)
------------- ------------
Cash flows from financing activities:
Increase (decrease) in net contribution from stockholder (1,529) 4,448
Proceeds from stock purchases under stock option and
stock purchase plans 785 -
Proceeds from initial public offering of common stock, net 37,168 -
------------- ------------
Net cash provided by financing activities 36,424 4,448
------------- ------------
Effect of exchange rate changes on cash and cash equivalents 14 -
------------- ------------
Net increase in cash and cash equivalents 36,973 -
Cash and cash equivalents at beginning of period - -
------------- ------------
Cash and cash equivalents at end of period $36,973 $ -
============= ============
Supplemental disclosure of cash flow information:
Deferred stock-based compensation 1,721 -
Issuance of common and preferred stock upon
capitalization, net of deferred taxes 2,736 -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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<PAGE>
INSILICON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of
inSilicon Corporation and its subsidiaries (the "Company") have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The information included in this report
should be read in conjunction with the Company's consolidated financial
statements and related notes thereto included in the Company's Registration
Statement on Form S-1 filed with the SEC on January 13, 2000, as amended.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary to summarize fairly the Company's
financial position, results of operations and cash flows for the interim periods
presented. All significant intercompany accounts and transactions have been
eliminated. The operating results for the three months and nine months ended
June 30, 2000 are not necessarily indicative of the results that may be expected
for the fiscal year ending September 30, 2000 or for any other future period.
The Company was incorporated in November 1999. Prior to that date, the
Company was operated as a division of Phoenix Technologies Ltd. ("Phoenix") and
all cash provided by Phoenix was recorded as equity contributions from Phoenix
in these consolidated financial statements. From November 1999 until the
Company's initial public offering in March 2000, the Company's cash requirements
were provided by Phoenix in the form of a working capital loan. The Company's
condensed consolidated financial statements have been prepared using the
historical basis of accounting and include all of the assets and liabilities
specifically identifiable to the Company and certain liabilities that are not
specifically identifiable, for which estimates have been used to allocate a
portion of Phoenix's liabilities to the Company. Until March 2000, cash
management for the Company was performed by Phoenix on a centralized basis.
NOTE 2. INITIAL PUBLIC OFFERING OF COMMON STOCK
On March 22, 2000, the Company sold 3,500,000 shares of common stock in
an initial public offering at a price of $12.00 per share, raising $42.0 million
in gross proceeds. After underwriters' discounts and commissions of $2.9 million
and $1.9 million in related expenses, net proceeds were $37.2 million.
NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Position 98-9, ("SOP 98-9"),
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions," as of October 1, 1999. The adoption of SOP 98-9 did not have a
material impact on the Company's consolidated financial results.
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. The Company will adopt
SAB 101 no later than the fourth quarter of fiscal 2001. The Company does not
believe that the adoption of SAB 101 will materially impact the Company's
financial position, results of operations or cash flows.
Page 6
<PAGE>
INSILICON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
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 noncompensatory 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 effective July 1,
2000, except requirements regarding certain events that occur after December
15, 1998 or January 12, 2000 but before the effective date should be applied
prospectively. Management does not believe that the adoption of FIN 44 as of
July 1, 2000, will have a material impact on the Company's financial
position, results of operations or cash flows.
NOTE 4. EARNINGS PER SHARE
Prior to November 30, 1999, the Company was not a separate legal entity
and, as a division of Phoenix, had no historical capital structure. Therefore,
fiscal 1999 net loss per share amounts have not been presented in the
consolidated financial statements. Basic loss per share is computed on the basis
of the weighted average number of common shares outstanding. Diluted loss per
share is computed on the basis of the weighted average number of common shares
and outstanding stock options using the "treasury stock" method. In periods in
which a net loss is generated, the Company does not include the effects of
outstanding options and warrants when calculating diluted net loss per share, as
their inclusion would be anti-dilutive. If the Company had reported net income
for the nine month period ended June 30, 2000, diluted earnings per share would
have included the shares used in the computation of basic net loss per share as
well as an additional 778,780 common equivalent shares related to the
outstanding options and warrants (determined using the treasury stock method).
NOTE 5. COMPREHENSIVE INCOME (LOSS)
The Company has adopted Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income or losses (revenue, expenses, gains and
losses) be included in comprehensive income or loss. The Company adopted SFAS
130 effective October 1, 1998. Total comprehensive income (losses) were not
materially different from net income (losses) incurred for all periods
presented.
NOTE 6. SEGMENT REPORTING
The Company evaluates geographic segment performance based on revenue.
Revenue by geographic region for the three months and nine months ended June 30,
2000 and 1999, was as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
-------------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
North America $4,037 $3,059 $ 11,031 $ 10,082
Asia 2,128 819 5,082 2,624
Europe 646 274 1,793 1,237
-------------- ------------ -------------- ------------
Total revenue $6,811 $4,152 $ 17,906 $ 13,943
============== ============ ============== ============
</TABLE>
Page 7
<PAGE>
INSILICON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 7. RELATED PARTY TRANSACTIONS
Following the completion of the Company's initial public offering,
Phoenix owned approximately 74% of the Company's outstanding common stock. The
combined impact on the consolidated statements of operations of all related
party transactions with Phoenix is summarized below (IN THOUSANDS):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- ---------------------------
2000 1999 2000 1999
-------------------------- ------------ --------------
<S> <C> <C> <C> <C>
COSTS AND EXPENSES THROUGH OCTOBER 1999 REPRESENT-
ING ALLOCATIONS FROM PHOENIX:
Research and development $ - $ 396 $ 321 $ 1,323
Sales and marketing - 729 293 2,544
General and administrative - 809 691 2,351
-------------- ------------ ------------ --------------
Total costs and expenses $ - $1,934 $ 1,305 $ 6,218
============== ============ ============ ==============
REVENUE, COSTS AND EXPENSES BASED UPON THE SERVICES
AND COST-SHARING AGREEMENT AND TECHNOLOGY
DISTRIBUTOR AGREEMENT WITH PHOENIX:
Revenue $ 283 $ - $ 685 $ -
Costs and expenses:
Cost of revenue 239 - 545 -
Research and development 212 - 469 -
Sales and marketing 147 - 275 -
General and administrative 333 - 524 -
-------------- ------------ ------------ --------------
Total costs and expenses $ 931 $ - $1,813 $ -
============== ============ ============ ==============
</TABLE>
Page 8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT ON FORM 10-Q, INCLUDING WITHOUT LIMITATION THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
21E AND SECTION 27A OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS THAT INVOLVE RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED HEREIN AND UNDER THE SECTION ENTITLED "RISK FACTORS"
BEGINNING ON PAGE 7 OF THE COMPANY'S FORM S-1 REGISTRATION STATEMENT FILED WITH
THE SEC ON JANUARY 13, 2000, AS AMENDED, AND IN OTHER DOCUMENTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
COMPANY OVERVIEW
inSilicon Corporation ("inSilicon" or the "Company") is 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. The Company provides cores, related
silicon subsystems and firmware to over 400 customers that use its technologies
in hundreds of different 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, Phoenix transferred certain assets to inSilicon
substantially in exchange for 10,400,000 shares of inSilicon's Series A
Preferred Stock and the assumption of certain liabilities. In March 2000,
inSilicon completed its initial public offering in which it sold 3,500,000
shares of common stock, which generated net proceeds of $37.2 million. In
conjunction with the initial public offering, all shares of Series A Preferred
Stock converted on a one-to-one basis into common stock.
The Company has incurred operating and net losses for nearly all
historical periods. 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. The discussion below refers to
the historical operating results and activities and the assets and liabilities
assigned to inSilicon by Phoenix included in the Company's condensed
consolidated financial statements.
Phoenix has provided a number of administrative services to the Company
on which it continues to rely. The Company's condensed consolidated financial
statements prior to November 30, 1999, were derived from the historical books
and records of Phoenix. The consolidated balance sheets include all assets and
liabilities directly attributable to inSilicon. The condensed consolidated
statements of operations include all revenue and expenses attributable to the
Company, including direct charges and allocated costs for shared facilities,
functions and services used by the Company and provided by Phoenix. A
significant amount of expenses have been allocated to the Company based on
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 the historical financial
statements of inSilicon 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 inSilicon been
a separate, stand-alone entity during the periods presented.
The Company entered into a Services and Cost-Sharing Agreement with
Phoenix effective as of November 30, 1999. This agreement covers various
services provided by Phoenix to the Company, and the method by which the Company
and Phoenix share certain costs. The services have included data processing,
telecommunications, information technology support, accounting, financial
management, tax preparation, payroll, stockholder and public relations, legal,
human resources administration,
Page 9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 charged to the
Company is equal to the aggregate cost to Phoenix and inSilicon of the
services and costs multiplied by a percentage representing the number of
inSilicon employees to the total number of Phoenix and inSilicon employees.
The Services and Cost-Sharing Agreement extended to June 30, 2000 for all
services other than accounting which has an initial term that extends to
September 30, 2000. The Services and Cost-Sharing Agreement has been renewed
on a month-to-month basis for all services and costs that would have
terminated as of June 30, 2000. The Company anticipates the extension of the
Services and Cost-Sharing Agreement through the second quarter of fiscal
2001. Phoenix or the Company can generally terminate on 30 days' written
notice.
REVENUE
Revenue for the three and nine months ended June 30, 2000 was $6.8
million and $17.9 million, increases of 64% and 28% from $4.2 million and $13.9
million for the comparable periods of fiscal 1999. These increases consist of
growth in license fees revenue ($2.4 million and $3.2 million for the three and
nine months ended June 30, 2000) and services revenue ($219,000 and $758,000 for
the three and nine months ended June 30, 2000). Contributing to the increase in
license fees 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 the
increased re-use licenses of semiconductor intellectual property by existing
customers and the release of new products during the quarter, including the USB
2.0 device controller. Services revenue also increased due largely to
maintenance revenue generated from the Company's growing installed base of
customers.
Revenue by geographic region for the three months and nine months ended
June, 2000 and 1999 was as follows (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Revenue
------ -------
Three months ended June 30: 2000 1999 % CHANGE 2000 1999
---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
North America $ 4,037 $ 3,059 32% 59% 73%
Asia 2,128 819 160% 31% 20%
Europe 646 274 136% 10% 7%
------- ------- ------- -------
Total revenue $ 6,811 $ 4,152 64% 100% 100%
======= ======= ======= =======
Nine months ended June 30:
North America $11,031 $10,082 9% 62% 72%
Asia 5,082 2,624 94% 28% 19%
Europe 1,793 1,237 45% 10% 9%
------- ------- ------- -------
Total revenue $17,906 $13,943 28% 100% 100%
======= ======= ======= =======
</TABLE>
During the three and nine months ended June 30, 2000, the Company
experienced accelerated revenue growth in both Asia and Europe (160% and 136%,
respectively) and strong growth in North America (32%) over comparable periods
in fiscal 1999. The growth internationally was due to the Company's development
of extended direct and indirect market channels throughout Europe and Asia.
Domestically, the revenue growth was due to increased market acceptance of
intellectual property and an increase in the number of direct sales headcount.
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
GROSS MARGIN
Gross margin is revenue less cost of revenue. License fee cost of
revenue consists primarily of amortization of capitalized software development
costs and costs of licensing certain technologies from third-party developers
and publishers. Services cost of revenue includes internal payroll costs and
third-party consulting costs associated with providing non-recurring engineering
services to customers. Gross margin for the three and nine months ended June 30,
2000 were $5.7 million (or 84% of revenue) and $14.7 million (or 82% of
revenue), increases of 73% and 31% from $3.3 million and $11.2 million for the
comparable periods of fiscal 1999. These increases were principally due to
revenue growth ($2.7 million and $4.0 million in the three- and nine-month
periods, respectively).
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist principally of payroll and
related costs associated with the development of semiconductor intellectual
property and related software, net of amounts capitalized. Research and
development expenses for the three and nine months ended June 30, 2000, declined
$538,000 (23%) and $1.1 million (16%) from the comparable periods in fiscal
1999. The declines were principally attributable to two factors: 1) the
existence of a large outsourced design contract in the prior year period, and 2)
lower headcount. The Company expects research and development expenses to
increase in the next two quarters due to projected headcount increases.
The Company capitalized $79,000 of internal software development costs
for the three- and nine-month periods ended June 30, 2000, as compared to
$286,311 and $657,340 for the same periods in fiscal 1999. The decline in the
amount capitalized was due to an increased proportion of products that have not
yet reached technological feasibility.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist of costs related to advertising,
public relations and other marketing, as well as direct selling, channel
development and other sales activities. These costs include direct out-of-pocket
and payroll expenses. Sales and marketing expenses for the three months and nine
months ended June 30, 2000, increased $1.2 million (81%) and $1.6 million (33%)
from the comparable periods in fiscal 1999. These increases were due to
increases in direct sales headcount, product marketing headcount and increased
variable selling costs due to revenue growth.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist of expenditures for
executive, accounting, legal, personnel, recruiting and other administrative
functions. These costs entirely represent allocations from Phoenix through
October 31, 1999. Beginning November 1, 1999, the date of the Company's
incorporation, these costs include both direct administrative costs incurred by
the Company and an allocation of costs under the Company's Services and
Cost-Sharing Agreement with Phoenix. General and administrative expenses for the
three months and nine months ended June 30, 2000, were approximately unchanged
from the corresponding periods of fiscal 1999.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets represents the straight-line
amortization of goodwill and other intangible assets associated with the
purchase of Sand Microelectronics, Inc. in September 1998. Goodwill is being
amortized over a six-year period, while other intangible assets are being
amortized over three-to six-year periods.
Page 11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
STOCK-BASED COMPENSATION
Stock-based compensation charges for the three months and nine
months ended June 30, 2000, were $118,000 and $479,000, respectively. These
charges were due to stock options granted during the first and second quarter
of fiscal 2000 with exercise prices less than the fair market value of the
Company's common stock on the grant date. Deferred stock compensation of $1.7
million was recorded associated with these grants, the remainder of which
will be amortized by charges to operations over the vesting periods of the
options, generally straight-line over four years.
INCOME TAX BENEFIT
The Company recorded income tax provisions of $362,000 and $246,000 for
the three months and nine months ended June 30, 2000, respectively. For the
nine-month period ended June 30, 2000, the amount includes the benefit to be
realized from Phoenix for the income tax effect of our losses subsequent to
November 30, 1999 but prior to our initial public offering. During this period,
the Company was wholly-owned by Phoenix, and, in accordance with the Tax Sharing
Agreement between the companies, the tax effect of these losses is reimbursable
to the Company by Phoenix.
LIQUIDITY AND CAPITAL RESOURCES
inSilicon's principal capital requirements are to fund working capital
needs and capital expenditures to support our revenue growth. Prior to the
Company's initial public offering in March 2000, Phoenix performed cash
management services and provided the funds necessary to satisfy our working
capital requirements. Subsequent to the initial public offering, the management
of working capital is now the responsibility of the Company. As of June 30,
2000, the Company's sources of liquidity include cash, cash equivalents,
short-term investments and other marketable securities of $37.0 million.
Additionally, the Company has a $5.0 million unsecured line of credit with a
commercial bank that expires in January 2001. There were no borrowings
outstanding under the credit facility at June 30, 2000.
Cash provided by operating activities was $1.0 million for the nine
months ended June 30, 2000, as compared to cash used of $3.6 million for the
nine months ended June 30, 1999. Cash provided by operating activities during
the nine months ended June 30, 2000, included the impact of increases in
accounts payable, deferred revenue, and stock-based compensation, offset by a
net loss, increases in accounts receivable and other assets and a decrease in
payroll and related liabilities. Cash used in operating activities during the
nine months ended June 30, 1999, was primarily attributable to a net loss and an
increase in accounts receivable due to increased revenue, offset in part by
non-cash depreciation and amortization.
Cash used in investing activities was $497,000 and $866,000 for the
nine months ended June 30, 2000 and 1999. Cash used in both periods was
primarily due to purchases of computer equipment and software applications and
additions to computer software costs.
Net cash provided by financing activities was $36.4 million and $4.4
million for the nine months ended June 30, 2000 and 1999. Net cash provided for
the nine months ended June 30, 2000, related to the proceeds from the Company's
initial public offering, partially offset by a decrease in the net contribution
from Phoenix. Net cash provided for the nine months ended June 30, 1999, related
to capital contributions from Phoenix.
The Company believes that its present liquid assets will be sufficient
to meet its operating and capital requirements for at least the next 12 months.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign
currency fluctuations, and change in the market values of our investments.
INTEREST RATE RISK
The Company's exposure to market rate risk for changes in interest
rates relates primarily to its investment portfolio. The Company's 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,
the Company's future investment income may fall short of expectations, or the
Company may suffer a loss in principal if it is forced to sell securities which
have declined in market value due to changes in interest rates.
FOREIGN CURRENCY RISK
Certain international sales are recorded in the Company's 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.
The Company's 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,
the Company's future results could be materially adversely impacted by changes
in these or other factors. The Company's 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 US dollars. The
Company is 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.
INVESTMENT RISK
The Company has invested in equity instruments of privately-held,
information technology companies for business and strategic purposes. These
investments are included in other long-term assets and are accounted for under
the cost method as the Company's ownership is less than 20%. For these
non-quoted investments, the Company's policy is to regularly review the
assumptions underlying the operating performance and cash flow forecasts in
assessing the carrying values. The Company identifies and records 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.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 22, 2000 the Company sold 3,500,000 shares of common stock in
an initial public offering at a price of $12.00 per share, raising $42.0 million
in gross proceeds. After underwriters' discounts and commissions of $2.9 million
and $1.9 million in related expenses, net proceeds were $37.2 million. All
shares of common stock sold in the offering were registered on Form S-1 filed
with the SEC (SEC File No. 333-94573) on January 13, 2000, as amended. The SEC
declared the Registration Statement effective on March 21, 2000. The managing
underwriters were FleetBoston Robertson Stephens Inc., Prudential Securities
Incorporated and Needham & Company, Inc.
During the quarter ended June 30, 2000, the Company used proceeds from
the initial public offering to pay down the majority of its working capital
bridge loan with Phoenix. The remaining net proceeds will be used for general
corporate purposes, including working capital, sales and marketing, and research
and development. Additionally, the Company may use a portion of the net proceeds
to acquire complementary products, technologies or companies. Pending use, the
net proceeds will be invested in short-term securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
---------
See Exhibit Index on page 15 hereof.
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K were filed by the Company during
the quarter ended June 30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSILICON CORPORATION
Date: August 14, 2000 By: /s/ WILLIAM E. MEYER
--------------- --------------------
William E. Meyer
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
-------
<S> <C>
27 Financial Data Schedule
</TABLE>
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